U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
one)


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





For the
Quarterly Period Ended June 30, 2010


or


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





Commission
File Number 333-141384





Kun Run Biotechnology,
Inc.


(Name of
registrant in its charter)




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





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





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





(Former
name and former address, if applicable)





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


Yes
   þNo 
o





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


Yes  oNo o





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




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





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




As of
August 13, 2010, the Registrant had 25,000,000 shares of common stock
outstanding.








Kun
Run Biotechnology, Inc.




Table of
Contents




PagePART
      I -
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements:Condensed
      Consolidated Statements of Income and Comprehensive
      Income
                
                1-2Condensed
      Consolidated Balance Sheets
                
                3-4Condensed
      Consolidated Statements of Cash Flows
                
                5-6Condensed
      Consolidated Statements of Change in Equity
                
                7Notes
      to Financial Statements
                
                8-20Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                21Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                33Item
      4.
                Controls
      and Procedures
                
                33PART
      II -
                OTHER
      INFORMATION
                
                34Item
      1.
                Legal
      Proceedings
                
                34Item
      1A.
                Risk
      Factors
                
                34Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                34Item
      3.
                Defaults
      upon Senior Securities
                
                34Item
      4.
                (Removed
      and Reserved)
                
                34Item
      5.
                Other
      Information
                
                34Item
      6.
                Exhibits
                
                34








PART
I - FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS





Kun
Run Biotechnology, Inc.





Condensed
Consolidated Financial Statements


For the
three and six months ended


June 30,
2010 and 2009


(Stated
in US dollars)








Kun
Run Biotechnology, Inc.


Condensed
Consolidated Financial Statements


Three
and six months ended June 30, 2010 and 2009





Index
to Condensed Consolidated Financial Statements





PagesCondensed
      Consolidated Statements of Income and Comprehensive Income
                
                1 -
      2Condensed
      Consolidated Balance Sheets
                
                3 -
      4Condensed
      Consolidated Statements of Cash Flows
                
                5 -
      6Condensed
      Consolidated Statements of Change in Equity
                
                7Notes
      to Condensed Consolidated Financial Statements
                
                8 -
      20








Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Income and Comprehensive Income


For
the three and six months ended June, 2010 and 2009


(Unaudited)


(Stated
in US Dollars)


Three
      months ended
                      
                      
                      Six
      months endedJune
      30,
                      
                      
                      June
      30,(Unaudited)
                      
                      
                      (Unaudited)2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Sales
      revenue
                      
                      $
                      3,371,170
                      
                      
                      $
                      3,661,398
                      
                      
                      $
                      6,072,307
                      
                      
                      $
                      6,090,666Cost
      of sales
                      
                      
                      1,053,453
                      
                      
                      
                      1,019,830
                      
                      
                      
                      1,948,127
                      
                      
                      
                      1,765,523Gross
      profit
                      
                      
                      2,317,717
                      
                      
                      
                      2,641,568
                      
                      
                      
                      4,124,180
                      
                      
                      
                      4,325,143Operating
      expensesAdministrative
      expenses
                      
                      
                      300,323
                      
                      
                      
                      199,517
                      
                      
                      
                      523,463
                      
                      
                      
                      392,425Research
      and development costs
                      
                      
                      185,499
                      
                      
                      
                      39,428
                      
                      
                      
                      388,610
                      
                      
                      
                      99,312Selling
      expenses
                      
                      
                      194,851
                      
                      
                      
                      74,830
                      
                      
                      
                      401,414
                      
                      
                      
                      217,543680,673
                      
                      
                      
                      313,775
                      
                      
                      
                      1,313,487
                      
                      
                      
                      709,280Income
      from operations
                      
                      
                      1,637,044
                      
                      
                      
                      2,327,793
                      
                      
                      
                      2,810,693
                      
                      
                      
                      3,615,863Interest
      income
                      
                      
                      18,039
                      
                      
                      
                      66,735
                      
                      
                      
                      63,766
                      
                      
                      
                      66,960Other
      income
                      
                      
                      191,058
                      
                      
                      
                      146,504
                      
                      
                      
                      243,870
                      
                      
                      
                      199,244Government
      subsidy income
                      
                      
                      86,680
                      
                      
                      
                      -
                      
                      
                      
                      86,680
                      
                      
                      
                      7,325Change
      in fair value of warrant liabilities - Note 12
                      
                      
                      20,443
                      
                      
                      
                      -
                      
                      
                      
                      20,443
                      
                      
                      
                      -Finance
      costs
                      
                      
                      (23,665
                      )
                      
                      
                      (135,696
                      )
                      
                      
                      (146,518
                      )
                      
                      
                      (257,818
                      )Income
      before income taxes and noncontrolling interest
                      
                      
                      1,929,599
                      
                      
                      
                      2,405,336
                      
                      
                      
                      3,078,934
                      
                      
                      
                      3,631,574Income
      taxes - Note 4
                      
                      
                      (254,865
                      )
                      
                      
                      (354,062
                      )
                      
                      
                      (448,807
                      )
                      
                      
                      (549,008
                      )Net
      income before noncontrolling interest
                      
                      
                      1,674,734
                      
                      
                      
                      2,051,274
                      
                      
                      
                      2,630,127
                      
                      
                      
                      3,082,566Net
      income attributable to noncontrolling interest
                      
                      
                      (14,710
                      )
                      
                      
                      (18,116
                      )
                      
                      
                      (23,133
                      )
                      
                      
                      (27,205
                      )Net
      income attributable to Kun RunBiotechnology,
      Inc. common stockholders
                      
                      $
                      1,660,024
                      
                      
                      $
                      2,033,158
                      
                      
                      $
                      2,606,994
                      
                      
                      $
                      3,055,361Net
      income before noncontrolling interest
                      
                      $
                      1,674,734
                      
                      
                      $
                      2,051,274
                      
                      
                      $
                      2,630,127
                      
                      
                      $
                      3,082,566Other
      comprehensive income (loss)Foreign
      currency translation adjustments
                      
                      
                      151,115
                      
                      
                      
                      (1,131
                      )
                      
                      
                      151,134
                      
                      
                      
                      (25,101
                      )Comprehensive
      income
                      
                      
                      1,825,849
                      
                      
                      
                      2,050,143
                      
                      
                      
                      2,781,261
                      
                      
                      
                      3,057,465Comprehensive
      income attributable to noncontrolling interest
                      
                      
                      (15,710
                      )
                      
                      
                      (18,103
                      )
                      
                      
                      (24,133
                      )
                      
                      
                      (26,968
                      )Comprehensive
      income attributable to KunRun
      Biotechnology, Inc. common stockholders
                      
                      $
                      1,810,139
                      
                      
                      $
                      2,032,040
                      
                      
                      $
                      2,757,128
                      
                      
                      $
                      3,030,497




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, 2010 and 2009


(Unaudited)


(Stated
in US Dollars)





Three months ended
                
                
                Six months endedJune 30,
                
                
                June 30,(Unaudited)
                
                
                (Unaudited)2010
                
                
                2009
                
                
                2010
                
                
                2009Earnings
      per share attributable to Kun RunBiotechnology,
      Inc. common stockholders:-
      Note 15basic
                
                $
                0.06
                
                
                $
                0.08
                
                
                $
                0.10
                
                
                $
                0.12diluted
                
                $
                0.06
                
                
                
                N/A
                
                
                $
                0.10
                
                
                
                N/AWeighted
      average number of shares outstanding:
                  basic
                
                
                28,677,368
                
                
                
                25,000,000
                
                
                
                26,848,843
                
                
                
                25,000,000diluted
                
                
                29,238,616
                
                
                
                N/A
                
                
                
                27,131,017
                
                
                
                N/A





See the
accompanying notes to condensed consolidated financial
statements


-2-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Balance Sheets


As
of June 30, 2010 and December 31, 2009


(Stated
in US Dollars)





June 30,
                
                
                December 31,2010
                
                
                2009(Unaudited)
                
                
                (Audited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                7,379,222
                
                
                $
                810,809Trade
      receivables, net
                
                
                4,258,427
                
                
                
                4,284,515Bills
      receivable
                
                
                162,030
                
                
                
                360,360Other
      receivables, prepayments and deposits - Note 5
                
                
                3,444,060
                
                
                
                2,338,971Inventories
      - Note 6
                
                
                2,718,305
                
                
                
                2,248,420Amounts
      due from related companies - Note 7
                
                
                198,233
                
                
                
                4,656,801Total
      current assets
                
                
                18,160,277
                
                
                
                14,699,876Intangible
      assets
                
                
                75,491
                
                
                
                86,551Property,
      plant and equipment, net - Note 8
                
                
                10,056,291
                
                
                
                10,098,529Land
      use rights - Note 9
                
                
                3,685,382
                
                
                
                3,704,660Deposit
      for acquisition of property, plant and equipment
                
                
                664,592
                
                
                
                418,594Deposit
      paid to a related company for acquisition of an intangible asset - Note
      10
                
                
                9,844,059
                
                
                
                7,921,800TOTAL
      ASSETS
                
                $
                42,486,092
                
                
                $
                36,930,010





See the
accompanying notes to condensed consolidated financial
statements


-3-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Balance Sheets (Cont’d)


As
of June 30, 2010 and December 31, 2009


(Stated
in US Dollars)





June 30,
                
                
                December 31,2010
                
                
                2009(Unaudited)
                
                
                (Audited)LIABILITIES
      AND EQUITYLIABILITIESCurrent
      liabilitiesTrade
      payables
                
                $
                530,262
                
                
                $
                452,139Other
      payables and accrued expenses
                
                
                5,640,336
                
                
                
                3,961,125Dividend
      payable to Zhonghe’s former/existing noncontrolling
      stockholders
                
                
                7,238
                
                
                
                7,209Income
      tax payable
                
                
                256,409
                
                
                
                815,435Secured
      borrowings - Note 11
                
                
                662,850
                
                
                
                6,051,375Total
      current liabilities
                
                
                7,097,095
                
                
                
                11,287,283Deferred
      taxes
                
                
                22,382
                
                
                
                17,215Secured
      borrowings - Note 11
                
                
                -
                
                
                
                330,075Warrant
      liabilities - Note 12
                
                
                901,365
                
                
                
                -TOTAL
      LIABILITIES
                
                
                8,020,842
                
                
                
                11,634,573COMMITMENTS AND CONTINGENCIES- Note 13STOCKHOLDERS’
      EQUITYSeries
      A preferred stock : par value of $0.001 per share, authorized 10,000,000
      shares in 2010and 2009; issued and outstanding 5,228,758 shares in 2010
      and none issued and outstanding in 2009 - Note 14
                
                
                5,229
                
                
                
                -Common
      stock : par value of $0.001 per share, authorized 100,000,000 shares,
      issued and outstanding 25,000,000 shares in 2010 and 25,000,000 shares in
      2009
                
                
                25,000
                
                
                
                25,000Additional
      paid-in capital - Note 14
                
                
                15,287,288
                
                
                
                8,903,965Statutory
      and other reserves
                
                
                3,743,028
                
                
                
                3,743,028Accumulated
      other comprehensive income
                
                
                1,757,652
                
                
                
                1,607,518Retained
      earnings
                
                
                13,396,074
                
                
                
                10,789,080TOTAL
      KUN RUN BIOTECHNOLOGY, INC.STOCKHOLDERS’
      EQUITY
                
                
                34,214,271
                
                
                
                25,068,591NONCONTROLLING
      INTEREST
                
                
                250,979
                
                
                
                226,846TOTAL
      EQUITY
                
                
                34,465,250
                
                
                
                25,295,437TOTAL
      LIABILITIES AND EQUITY
                
                $
                42,486,092
                
                
                $
                36,930,010





See the
accompanying notes to condensed consolidated financial
statements


-4-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Cash Flows


For
the six months ended June 30, 2010 and 2009


(Unaudited)


(Stated
in US Dollars)





Six months ended June 30,(Unaudited)2010
                
                
                2009Cash
      flows from operating activitiesNet
      income before noncontrolling interest
                
                $
                2,630,127
                
                
                $
                3,082,566Adjustments
      to reconcile net income before noncontrolling interest to net cash
      provided by operating activities :-Depreciation
                
                
                479,282
                
                
                
                349,782Amortization
      of intangible assets and land use rights
                
                
                45,657
                
                
                
                47,091Deferred
      taxes
                
                
                5,076
                
                
                
                15,252Loss
      on disposal of property, plant and equipment
                
                
                871
                
                
                
                183Recovery
      of doubtful debts
                
                
                (48,955
                )
                
                
                (16,106
                )Change
      in fair value of warrant liabilities
                
                
                (20,443
                )
                
                
                -Changes
      in operating assets and liabilities:Trade
      receivables
                
                
                92,389
                
                
                
                (231,840
                )Bills
      receivables
                
                
                198,990
                
                
                
                (311,132
                )Other
      receivables, prepayments and deposits
                
                
                (1,124,069
                )
                
                
                (2,067,910
                )Amounts
      due from related companies
                
                
                417,569
                
                
                
                83,244Inventories
                
                
                (458,812
                )
                
                
                (739,379
                )Trade
      payables
                
                
                75,963
                
                
                
                (574,072
                )Other
      payables and accrued expenses
                
                
                1,656,967
                
                
                
                701,740Income
      tax payable
                
                
                (560,070
                )
                
                
                306,822Net
      cash flows provided by operating activities
                
                
                3,390,542
                
                
                
                646,241Cash
      flows from investing activitiesPayments
      to acquire and deposit for acquisition of property, plant and
      equipment
                
                
                (640,517
                )
                
                
                (81,585
                )Proceeds
      from sale of property, plant and equipment
                
                
                273
                
                
                
                2,059,306Deposit
      for acquisition of intangible asset
                
                
                (1,882,161
                )
                
                
                (322,520
                )Amounts
      due from related parties
                
                
                4,042,143
                
                
                
                (5,244,274
                )Net
      cash flows provided by (used in) investing activities
                
                $
                1,519,738
                
                
                $
                (3,589,073
                )


-5-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Cash Flows (Cont’d)


For
the six months ended June 30, 2010 and 2009


(Unaudited)


(Stated
in US Dollars)





Six months ended June 30,(Unaudited)2010
                      
                      
                      2009Cash
      flows from financing activitiesAmounts
      due to related parties
                      
                      $
                      -
                      
                      
                      $
                      12,116Proceeds
      on issuance of preferred stock, net
                      
                      
                      6,388,552
                      
                      
                      
                      -New
      bank loans
                      
                      
                      -
                      
                      
                      
                      2,932,000Repayment
      of bank loans
                      
                      
                      (5,721,300
                      )
                      
                      
                      (146,500
                      )Proceeds
      on issuance of warrant
                      
                      
                      921,808
                      
                      
                      
                      -Net
      cash flows provided by financing activities
                      
                      
                      1,589,060
                      
                      
                      
                      2,797,616Effect
      of foreign currency translation on cash and cash
    equivalents
                      
                      
                      69,073
                      
                      
                      
                      (256
                      )Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      6,568,413
                      
                      
                      
                      (145,472
                      )Cash
      and cash equivalents - beginning of period
                      
                      
                      810,809
                      
                      
                      
                      433,599Cash
      and cash equivalents - end of period
                      
                      $
                      7,379,222
                      
                      
                      $
                      288,127Supplemental
      disclosures for cash flow information:Cash
      paid for:Interest
                      
                      $
                      129,025
                      
                      
                      $
                      264,708Income
      taxes
                      
                      $
                      1,003,801
                      
                      
                      $
                      226,935Non-cash
      investing and financing activities:Deposit
      for acquisition of intangible asset settled by offsetting amounts due from
      related companies
                      
                      $
                      -
                      
                      
                      $
                      7,589,000





See the
accompanying notes to condensed consolidated financial
statements


-6-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Change in Equity


(Unaudited)


(Stated
in US Dollars)




Kun Run Biotechnology, Inc. common stockholdersAccumulatedAdditional
                                                                
                                                                
                                                                Statutory
                                                                
                                                                
                                                                otherCommon stock
                                                                
                                                                
                                                                Series A preferred stock
                                                                
                                                                
                                                                paid-in
                                                                
                                                                
                                                                and other
                                                                
                                                                
                                                                comprehensive
                                                                
                                                                
                                                                Retained
                                                                
                                                                
                                                                NoncontrollingNo. of shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                No. of shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                capital
                                                                
                                                                
                                                                reserves
                                                                
                                                                
                                                                income
                                                                
                                                                
                                                                earnings
                                                                
                                                                
                                                                interest
                                                                
                                                                
                                                                TotalBalance,
      December 31, 2009
                                                                
                                                                
                                                                25,000,000
                                                                
                                                                
                                                                $
                                                                25,000
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                8,903,965
                                                                
                                                                
                                                                $
                                                                3,743,028
                                                                
                                                                
                                                                $
                                                                1,607,518
                                                                
                                                                
                                                                $
                                                                10,789,080
                                                                
                                                                
                                                                $
                                                                226,846
                                                                
                                                                
                                                                $
                                                                25,295,437Net
      income
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2,606,994
                                                                
                                                                
                                                                
                                                                23,133
                                                                
                                                                
                                                                
                                                                2,630,127Foreign
      currency translation adjustments
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                150,134
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,000
                                                                
                                                                
                                                                
                                                                151,134Private
      placement - Note 14
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                5,228,758
                                                                
                                                                
                                                                
                                                                5,229
                                                                
                                                                
                                                                
                                                                6,383,323
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                6,388,552Balance,
      June 30, 2010
                                                                
                                                                
                                                                25,000,000
                                                                
                                                                
                                                                $
                                                                25,000
                                                                
                                                                
                                                                
                                                                5,228,758
                                                                
                                                                
                                                                $
                                                                5,229
                                                                
                                                                
                                                                $
                                                                15,287,288
                                                                
                                                                
                                                                $
                                                                3,743,028
                                                                
                                                                
                                                                $
                                                                1,757,652
                                                                
                                                                
                                                                $
                                                                13,396,074
                                                                
                                                                
                                                                $
                                                                250,979
                                                                
                                                                
                                                                $
                                                                34,465,250




See the
accompanying notes to condensed consolidated financial
statements.


-7-





Kun
Run Biotechnology, Inc.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)


(Stated
in US Dollars)





1.
            Basis
      of presentation





The
accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the “SEC”) including the
instructions to Form 10-Q and Regulation S-X.  Certain information and
note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted from these statements pursuant to such
rules and regulation and, accordingly, they do not include all the information
and notes necessary for comprehensive consolidated financial statements and
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2009, included in our Annual Report on Form 10-K
for the year ended December 31, 2009.





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





2.
            Corporate
      information





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





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





As of
June 30,2010, the Company has two subsidiaries:





Company name
                                      
                                      Place/date of
                                        incorporation or
                                        establishment
                                      
                                      The Company's
                                        effective ownership
                                        interest
                                      
                                      Common stock/
                                        registered capital
                                      
                                      Principal activitiesKun
      Run Biotechnology Limited
                                      
                                      Hong
      Kong /   May 6, 2006
                                      
                                      
                                      100
                                      %
                                      Ordinary
      shares: Authorized and fully paid up: 10,000 shares of HK$1
      each
                                      
                                      Investment
      holdingHanian
      Zhonghe Pharmaceutical Co, Ltd. (“Zhonghe”)
                                      
                                      The
      PRC /     April 17, 1995
                                      
                                      
                                      99.12
                                      %
                                      Registered
      and fully paid up capital of RMB60,000,000
                                      
                                      Manufacture,
      marketing, sale and distribution of
drugs


-8-





3.
            Summary
      of significant accounting policies





Principles of
consolidation





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





Concentrations of credit
risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade and
bills receivables.  As of June 30, 2010, substantially all of the
Company’s cash and cash equivalents were held by major financial institutions
located in the People’s Republic of China (the “PRC”), which management believes
are of high credit quality.  With respect to trade and bills
receivables, the Company extends credit based on an evaluation of the customer’s
financial condition.  The Company generally does not require
collateral for trade receivables and maintains an allowance for doubtful
accounts of trade receivables.





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





Three months ended June
                    30
                  
                  
                  Six months ended
                    June 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009HeNan
      WanLong Medical Co., Ltd.
                  
                  $
                  353,585
                  
                  
                  $
                  -
                  
                  
                  $
                  722,968
                  
                  
                  $
                  -JiangXi
      JinSheng Medical Co., Ltd.
                  
                  
                  269,602
                  
                  
                  $
                  400,155
                  
                  
                  
                  593,220
                  
                  
                  $
                  454,410$
                  623,187
                  
                  
                  $
                  400,155
                  
                  
                  $
                  1,316,188
                  
                  
                  $
                  454,410


-9-





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





Fair value of financial
instruments





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





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





AsofJune30,2010(Unaudited)
                          
                          
                          AsofDecember31,2009
                            (Audited)Carrying
                          
                          
                          
                          
                          
                          Carryingamount
                          
                          
                          Fair value
                          
                          
                          amount
                          
                          
                          Fair valueSecured
      borrowings
                          
                          $
                          662,850
                          
                          
                          $
                          646,159
                          
                          
                          $
                          6,381,450
                          
                          
                          $
                          6,362,757





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





Recently issued accounting
pronouncements





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


-10-





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





Recently issued accounting
pronouncements (Cont’d)





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





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





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


-11-





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





Recently issued accounting
pronouncements (Cont’d)





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





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





4.
            Income
      taxes





United
States





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





Hong
Kong





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


-12-





4.
            Income
      taxes (Cont’d)





PRC





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





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





5.
            Other
      receivables, prepayments and
deposits





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)Other
      deposits paid
                  
                  $
                  1,118
                  
                  
                  $
                  5,486Other
      prepayments
                  
                  
                  579,015
                  
                  
                  
                  596,198Other
      receivables
                  
                  
                  490,752
                  
                  
                  
                  302,272Trade
      deposits paid to suppliers
                  
                  
                  2,373,175
                  
                  
                  
                  1,435,015$
                  3,444,060
                  
                  
                  $
                  2,338,971





6.
            Inventories





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)Raw
      materials
                  
                  $
                  515,852
                  
                  
                  $
                  471,577Work-in-progress
                  
                  
                  1,206,379
                  
                  
                  
                  1,302,181Finished
      goods
                  
                  
                  996,074
                  
                  
                  
                  474,662$
                  2,718,305
                  
                  
                  $
                  2,248,420





-13-


7.
            Amounts
      due from related companies





June 30,
                          
                          
                          December 31,2010
                          
                          
                          2009(Unaudited)
                          
                          
                          (Audited)Amounts
      due from related parties :-Hainan
      Zhonghe Group Co., Ltd. (“Hainan Zhonghe Group”) - Note
    7(b)
                          
                          $
                          198,233
                          
                          
                          $
                          4,239,232Hainan
      Heyi Pharmaceutical Co., Ltd. (“Hainan Heyi”) - Note 7(c)
                          
                          
                          -
                          
                          
                          
                          417,569$
                          198,233
                          
                          
                          $
                          4,656,801





Notes
:-





(a)
            Mr.
      Xueyun Cui (“Mr. Cui”), the Company’s Chairman, sole director and the
      beneficial owner of approximately 90.09% of the Company’s outstanding
      common stock, is the ultimate controlling party of Hainan Zhonghe Group
      and Hainan Heyi.





(b)
            The
      amounts are interest bearing at a benchmark rate in the PRC per annum,
      unsecured and repayable on demand.





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





8.
            Property,
      plant and equipment, net


June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)Costs
      :-Buildings
                  
                  $
                  7,041,210
                  
                  
                  $
                  6,825,521Plant
      and machinery
                  
                  
                  5,857,367
                  
                  
                  
                  5,439,929Furniture,
      fixtures and equipment
                  
                  
                  299,210
                  
                  
                  
                  290,140Leasehold
      improvements
                  
                  
                  119,130
                  
                  
                  
                  118,645Motor
      vehicles
                  
                  
                  698,569
                  
                  
                  
                  714,28114,015,486
                  
                  
                  
                  13,388,516Accumulated
      depreciation
                  
                  
                  (4,153,845
                  )
                  
                  
                  (3,675,288
                  )Construction
      in progress
                  
                  
                  194,650
                  
                  
                  
                  385,301Net
                  
                  $
                  10,056,291
                  
                  
                  $
                  10,098,529





As of
June 30, 2010, buildings with carrying value of $2,856,004 acquired from the
former shareholder of Zhonghe on December 31, 2007, have been pledged for a bank
loan granted to Zhonghe (Note 11a(i)).  Accordingly the legal title of
the buildings cannot be transferred to Zhonghe until the bank loan is fully
repaid in 2010.  Pursuant to two separate trust agreements, both
parties agreed that the former shareholder of Zhonghe will continue to hold the
legal title of the abovementioned pledged buildings for Zhonghe until the full
settlement of related bank loan has been made by Zhonghe.  The related
bank loan was fully settled in April, 2010 and the transfer of legal title to
Zhonghe is in progress.


-14-





9.
            Land
      use rights





The
carrying amount of land use rights as of June 30, 2010 represents two separate
land use rights acquired from Hainan Zhonghe Group on September 29, 2007 and
December 31, 2007 respectively.  The land use right with carrying
value of $2,236,728 as of June 30, 2010 was pledged to the bank for the loans
granted to Zhonghe (Note 11a(ii)).  The legal title of the pledged
land use right has not been transferred to Zhonghe after the acquisition as such
transfer can only be done after the related bank loans granted to Zhonghe are
fully settled.  Pursuant to a trust agreement, both parties agreed
that Hainan Zhonghe Group will continue to hold the legal title of the pledged
land for Zhonghe until the full settlement of related bank loans has been made
by Zhonghe.  The related bank loan was fully settled in April, 2010
and the transfer of legal title to Zhonghe is in progress.





10.
            Deposit
      paid to a related company for acquisition of an intangible
      asset





On March
23, 2009, Zhonghe entered into an agreement with Hainan Zhonghe Peptide Drugs
Research & Development Co., Ltd (“Zhonghe Peptide”), a related company under
the common control of Mr. Cui, to acquire a technology know-how in relation to
the production of a new drug at a total consideration of RMB60
million.  As of June 30, 2010, RMB60 million (equivalent to $8.84
million) was paid to Zhonghe Peptide as a deposit, which was settled by
offsetting the amount due from Zhonghe Peptide of $7.59 million and by cash of
$1.25 million. The transaction is expected to be completed in September
2010.





On April
19, 2010, Zhonghe entered into an agreement with Hainan Zhonghe Group, a related
company under the common control of Mr. Cui, to acquire a technology know-how in
relation to the production of a new drug at a total consideration of RMB3.6
million.  As of June 30, 2010, RMB3.6 million (equivalent to $0.53
million) was paid to Hainan Zhonghe Group as a deposit, which was settled by
cash.  The transaction is expected to be completed in
2011.





On April
19, 2010, Zhonghe entered into an agreement with Zhonghe Peptide, a related
company under the common control of Mr. Cui, to acquire a technology know-how in
relation to the production of a new drug at a total consideration of RMB3.2
million.  As of June 30, 2010, RMB3.2 million (equivalent to $0.47
million) was paid to Zhonghe Peptide as a deposit, which was settled by
cash.  The transaction is expected to be completed in
2011.


-15-




11.
            Secured
      borrowings


June 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Audited)Short-term
      loansBank
      loan and other loanLong-term
      loans - current portion
                    
                    $
                    662,850
                    
                    
                    $
                    6,051,375Long-term
      loansBank
      loan (Note a)-
      due 2010, interest bearing at 8.28% per annum
                    
                    
                    -
                    
                    
                    
                    5,721,300Other
      loan (Note b)-
      overdue, interest free (Note c)
                    
                    
                    331,425
                    
                    
                    
                    --
      due 2010, interest free
                    
                    
                    -
                    
                    
                    
                    330,075-
      due 2011, interest free
                    
                    
                    331,425
                    
                    
                    
                    330,075662,850
                    
                    
                    
                    6,381,450Less:
      current maturities
                    
                    
                    (662,850
                    )
                    
                    
                    (6,051,375
                    )-
                    
                    
                    
                    330,075$
                    662,850
                    
                    
                    $
                    6,381,450





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





(i)       Buildings with carrying value of
$2,856,004 (Note 8); and





(ii)
            Land
      use rights with carrying value of $2,236,728 (Note
  9).





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





(c)
            The
      other loan amounted to RMB2,250,000 (equivalent to $331,425) was overdue
      as at June 30, 2010. According to the loan agreement dated December 31,
      2006, a monthly surcharge of 0.6% will be levied on the overdue balance.
      The Company is in the course of negotiation with the PRC local government
      authority.





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


-16-


12.
            Warrant
      liabilities





In
accordance with ASC 815, the six-year warrants, which were issued in a private
placement completed as of April 30, 2010 as stated in Note 14(a), to purchase up
to 1,568,627 shares of Series A Preferred Stock are not considered indexed to
the Company’s own equity and should be classified as derivative financial
liability at fair value for each reporting period.  Accordingly, a part of
the net proceed from the private placement amounting to $921,808 representing
the fair value at initial recognition, was allocated to warrant
liabilities.





The fair
value of theses warrants was calculated using trinomial model.  The
assumptions that were used to calculate fair value of the warrants as of June
30, 2010 are as follows:





-
Expected volatility of 92.431%


-
Expected dividend yield of 0%


-
Risk-free interest rate of 2.065%


-
Expected lives of 5.8 years


-
Exercise price of $1.53 per share





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





Fair
value accounting:      ASC 820 establishes a
valuation hierarchy for disclosure of the inputs to fair value measurement. This
hierarchy prioritizes the inputs into three broad levels as follows
:-





Level 1
-      Quoted prices in active markets for
identical assets or liabilities.





Level 2
-      Observable inputs other than quoted prices
in active markets for identical assets or liabilities.





Level 3
-      Unobservable inputs to the valuation
methodology that are significant to the measurement of fair value of assets or
liabilities.





The
warrant liabilities are determined by using Level 3 inputs. The following tables
summarize the changes in Level 3 items measured at fair value on a recurring
basis on our balance sheet during the period ending June 30, 2010
:-


WarrantliabilitiesBalance,
      January 1, 2010
                  
                  $
                  -Purchase,
      issuances and settlements
                  
                  
                  921,808Total
      gains (realized/unrealized)
                  
                  
                  (20,443
                  )Transfer
      in and/or out of Level 3
                  
                  
                  -Balance,
      June 30, 2010
                  
                  $
                  901,365


-17-




13.
            Commitments
      and contingencies





(a)
            Capital
      commitment





As of
June 30, 2010, the Company had capital commitments amounting to $267,355 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, 2010, the Company had no non-cancellable operating lease.





(c)
            Contingencies





As of June 30, 2010, the Company had
no contingencies.





14.
            Series
      A Preferred Stock and additional paid-in
capital


AdditionalNumber of
                  
                  
                  
                  
                  
                  paid-inshares
                  
                  
                  Amount
                  
                  
                  capitalBalance,
      January 1, 2010
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  8,903,965Private
      Placement - Note 14(a)
                  
                  
                  5,228,758
                  
                  
                  
                  5,229
                  
                  
                  
                  6,383,323Balance,
      June 30, 2010
                  
                  
                  5,228,758
                  
                  
                  $
                  5,229
                  
                  
                  $
                  15,287,288





(a)
            As
      of April 30, 2010, the Company completed a private placement of 5,228,758
      Series A Preferred Stock and warrants to purchase up to 1,568,627 shares
      of Series A Preferred Stock at an exercise price of $1.53 per share for a
      gross proceed of $8,000,000 with related issuance expenses of
      $689,640.  The warrants may be exercised if the Company fails to
      achieve certain net income thresholds for the fiscal year
      2010.  In accordance with ASC 815, these warrants are not
      considered indexed to the Company’s own stock and should be classified as
      derivative financial liability at fair value for each reporting period.
      Part of the net proceeds amounting to $921,808, representing the fair
      value at initial recognition, was allocated to warrant liabilities with
      remaining balance of $6,388,552 recorded in the Company’s equity at
      initial recognition. The Series A Preferred Stockholder has
      to right to vote on an as converted basis together with holders of
      the Company's common stock as a as a single class, except that the Company
      shall not, without the affirmative vote or consent of the holders of a
      majority of the shares of the Series A Preferred Stock outstanding at the
      time, separately as a class, (i) increase or decrease the authorized
      amount of the Common Stock or any class or series of preferred stock, (ii)
      authorize or designate any new class or series of stock or
      other securities convertible into equity securities of the Company
      ranking on a parity with or senior to the Series A Preferred Stock
      or increase the authorized or designated number of any such
      new class or series, (iii) amend, alter or repeal the provisions of
      the Series A Preferred Stock, (iv) consummate an acquisition or asset
      transfer (as such terms are defined in the Company's Series A Preferred
      Stock Certificate of Designation, (v) repurchase or redeem shares of
      the Company's Common Stock, (vi) amend or waive any provision of
      the Company's Articles of Incorporation or By-Laws so as to
      affect materially and adversely any right, preference, privilege or voting
      power of the Series A Preferred Stock, (vii) increase or decrease the
      authorized size of the Company's Board of Directors, (viii) pay or declare
      dividends on or make any distribution, or (ix) issue debt in excess of
      $250,000 (unless such issuance of debt has been approved by a
      majority of the Company's Board of Directors). Regarding dividend rights,
      Series A Preferred Stockholders shall receive dividends in preference to
      common stockholders,  and are entitled to a cash dividend
      of 6% per annum payable only when, as and if declared by the board of
      directors and is non-cumulative. The management considers it unlikely
      that the Series A Preferred Stockholders will have the put
      right pursuant to Section 4.15 of the Securities Purchase Agreement dated
      as of April 17, 2010 by and among the Company,
      each purchaser and the key stockholder and accordingly
      classified it as equity.


-18-




15.
            Earnings
      per share





The
following table sets forth the computation of basic and diluted earnings per
share (“EPS”) for the periods indicated:





Three months ended
                    
                    
                    Six months endedJune 30,
                    
                    
                    June 30,(Unaudited)
                    
                    
                    (Unaudited)2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Numerator:Net
      income attributable to Kun Run Biotechnology, Inc. common
      stockholders
                    
                    $
                    1,660,024
                    
                    
                    $
                    2,033,158
                    
                    
                    $
                    2,606,994
                    
                    
                    $
                    3,055,361Less
      : Change in fair value of warrant liabilities
                    
                    
                    (20,443
                    )
                    
                    
                    -
                    
                    
                    
                    (20,443
                    )
                    
                    
                    -$
                    1,639,581
                    
                    
                    $
                    2,033,158
                    
                    
                    $
                    2,586,551
                    
                    
                    $
                    3,055,361Denominator:Weighted
      average common shares used to compute basic EPS - Note a
                    
                    
                    28,677,368
                    
                    
                    
                    25,000,000
                    
                    
                    
                    26,848,843
                    
                    
                    
                    25,000,000Dilutive
      potential from assumed conversions of warrant
                    
                    
                    561,248
                    
                    
                    
                    N/A
                    
                    
                    
                    282,174
                    
                    
                    
                    N/AWeighted
      average common shares used to compute diluted EPS
                    
                    
                    29,238,616
                    
                    
                    
                    N/A
                    
                    
                    
                    27,131,017
                    
                    
                    
                    N/AEarnings
      per share - Basic
                    
                    $
                    0.06
                    
                    
                    $
                    0.08
                    
                    
                    $
                    0.10
                    
                    
                    $
                    0.12Earnings
      per share - Diluted
                    
                    $
                    0.06
                    
                    
                    
                    N/A
                    
                    
                    $
                    0.10
                    
                    
                    
                    N/A





Note a :
The weighted average common shares used to compute basic EPS include the
outstanding Series A Preferred Stock as it has common stock feature (Note
14).


-19-




16.
            Defined
      contribution plan





Pursuant
to the relevant PRC regulations, the Company is required to make contributions
at a rate of 29% of the average salaries for the latest fiscal year-end of
Hainan Province Haikou Shi to a defined contribution retirement scheme organized
by a state-sponsored social insurance plan in respect of the retirement benefits
for the Company's employees in the PRC.  The only obligation of the
Company with respect to retirement scheme is to make the required contributions
under the plan.  No forfeited contribution is available to reduce the
contribution payable in the future years.  The defined contribution
plan contributions were charged to the condensed consolidated statements of
income and comprehensive income. The Company contributed $52,813 and $36,580 for
the six months ended June 30, 2010 and 2009 respectively.





17.
            Segment
      information





The
Company is solely engaged in the manufacture, marketing, sale and distribution
of drugs.  Since the nature of the products, their production
processes, the type of their customers and their distribution methods are
substantially similar, they are considered as a single reportable segment under
ASC 280 “Segments Reporting” (previously SFAS 131).





18.
            Related
      party transactions





Apart
from the transactions as disclosed in notes 7, 8, 9, and 10 to the financial
statements, the Company has entered into the following transactions with its
related parties which are subject to the common control of the Company’s
management :-





Related parties
                      
                      Type of
                        transactions
                      
                      Three months ended
                        June 30,
                        (Unaudited)
                      
                      
                      Six months ended
                        June 30,
                        (Unaudited)2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Hainan
      Heyi
                      
                      Sales
                      
                      $
                      10,733
                      
                      
                      $
                      58,583
                      
                      
                      $
                      10,733
                      
                      
                      $
                      306,168Hainan
      Zhonghe Group
                      
                      Interest
      income
                      
                      $
                      16,843
                      
                      
                      $
                      66,511
                      
                      
                      $
                      62,105
                      
                      
                      $
                      66,511





19.
            Subsequent
      events





The
Company evaluated all events or transactions that occurred through the date the
financial statements were issued and has determined that there is no material
recognizable nor subsequent events or transactions which would require
recognition or disclosure in the financial statements.


-20-


ITEM
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.




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




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




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





Overview




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




Corporate
History




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





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





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


-21-




Summary
of significant accounting policies




Principle
of consolidation





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





Concentrations
of credit risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade and
bills receivables.  As of June 30, 2010, substantially all of the
Company’s cash and cash equivalents were held by major financial institutions
located in the People’s Republic of China (the “PRC”), which management believes
are of high credit quality.  With respect to trade and bills
receivables, the Company extends credit based on an evaluation of the customer’s
financial condition.  The Company generally does not require
collateral for trade receivables and maintains an allowance for doubtful
accounts of trade receivables.




Use of
estimates





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





Fair
value of financial instruments




ASC 820
requires the disclosure of the estimated fair value of financial instruments
including those financial instruments for which fair value option was not
elected. The Company’s financial instruments carried at fair value include
warrant liabilities only. The required disclosure is set out in Note
12.
 
 Except
for secured borrowings disclosed as below, the carrying amounts of the financial
assets and liabilities approximate to their fair values due to short maturities
or the applicable interest rates approximate the current market rates
:-
 
 AsofJune30,2010(Unaudited)
                            
                            
                            AsofDecember31,2009
                              (Audited)Carrying
                            
                            
                            
                            
                            
                            Carryingamount
                            
                            
                            Fair value
                            
                            
                            amount
                            
                            
                            Fair valueSecured
      borrowings
                            
                            $
                            662,850
                            
                            
                            $
                            646,159
                            
                            
                            $
                            6,381,450
                            
                            
                            $
                            6,362,757
 
 The fair
values of secured borrowings are estimated using discounted cash flow analysis,
based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.


-22-




Results
of Operations





Three
months ended June 30, 2010 and 2009





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




Three months ended June 30,(unaudited)2010
                  
                  
                  2009% as of total
                    revenue
                  
                  
                  
                  
                  
                  % as of total
                    revenue
                  
                  
                  % ChangeSales
      revenue
                  
                  $
                  3,371,170
                  
                  
                  
                  100
                  %
                  
                  $
                  3,661,398
                  
                  
                  
                  100
                  %
                  
                  
                  -8
                  %Cost
      of sales
                  
                  
                  1,053,453
                  
                  
                  
                  31
                  %
                  
                  
                  1,019,830
                  
                  
                  
                  28
                  %
                  
                  
                  3
                  %Gross
      profit
                  
                  $
                  2,317,717
                  
                  
                  
                  69
                  %
                  
                  $
                  2,641,568
                  
                  
                  
                  72
                  %
                  
                  
                  -12
                  %




Sales
Revenue





Revenues
for the three months ended June 30, 2010 were $3.37 million, representing a
decrease of $290,228, or 8% over revenues for the same period of 2009. This
decrease was mainly attributable to the decrease in sales of our products and
services. Revenues by product categories were as follows:




Three months ended June 30,(unaudited)2010
                                    
                                    
                                    2009as of total
                                    
                                    
                                    
                                    
                                    
                                    as of total
                                    
                                    
                                    %Product
                                    
                                    
                                    
                                    
                                    sales%
                                    
                                    
                                    
                                    
                                    
                                    sales%
                                    
                                    
                                    ChangesTP-5
      ProductsTP-5
      for injection (1mg)
                                    
                                    $
                                    394,848
                                    
                                    
                                    
                                    12
                                    %
                                    
                                    $
                                    444,640
                                    
                                    
                                    
                                    12
                                    %
                                    
                                    
                                    -11
                                    %TP-5
      for injection (10mg)
                                    
                                    
                                    197,832
                                    
                                    
                                    
                                    6
                                    %
                                    
                                    
                                    311,150
                                    
                                    
                                    
                                    9
                                    %
                                    
                                    
                                    -36
                                    %TP-5
      pre-filled injection 1ml:1mg
                                    
                                    
                                    129,874
                                    
                                    
                                    
                                    4
                                    %
                                    
                                    
                                    346,502
                                    
                                    
                                    
                                    9
                                    %
                                    
                                    
                                    -63
                                    %TP-5
      pre-filled injection 1ml:10mg
                                    
                                    
                                    424,603
                                    
                                    
                                    
                                    12
                                    %
                                    
                                    
                                    628,967
                                    
                                    
                                    
                                    17
                                    %
                                    
                                    
                                    -32
                                    %Sub-total
      ( TP-5 products)
                                    
                                    
                                    1,147,157
                                    
                                    
                                    
                                    34
                                    %
                                    
                                    
                                    1,731,259
                                    
                                    
                                    
                                    47
                                    %
                                    
                                    
                                    -34
                                    %Other
      productsSomatostatin
      for injection 3mg
                                    
                                    
                                    123,428
                                    
                                    
                                    
                                    4
                                    %
                                    
                                    
                                    144,488
                                    
                                    
                                    
                                    4
                                    %
                                    
                                    
                                    -15
                                    %Thymosin
      Alpha 1 for injection 1.6mg
                                    
                                    
                                    1,657,554
                                    
                                    
                                    
                                    49
                                    %
                                    
                                    
                                    1,380,153
                                    
                                    
                                    
                                    38
                                    %
                                    
                                    
                                    20
                                    %DDAVP
      Injection 1ml:4ug
                                    
                                    
                                    305,407
                                    
                                    
                                    
                                    9
                                    %
                                    
                                    
                                    307,499
                                    
                                    
                                    
                                    8
                                    %
                                    
                                    
                                    -1
                                    %DDAVP
      Injection 1ml:15ug
                                    
                                    
                                    97,800
                                    
                                    
                                    
                                    3
                                    %
                                    
                                    
                                    58,735
                                    
                                    
                                    
                                    2
                                    %
                                    
                                    
                                    67
                                    %Granisetron
      Hydrochloride Injection 3ml:3mg
                                    
                                    
                                    31,279
                                    
                                    
                                    
                                    1
                                    %
                                    
                                    
                                    30,894
                                    
                                    
                                    
                                    1
                                    %
                                    
                                    
                                    1
                                    %Ozagrel
      Sodium for Injection 80mg/40mg
                                    
                                    
                                    8,545
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    7,017
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    22
                                    %Others
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,353
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    -100
                                    %In
      Total
                                    
                                    $
                                    3,371,170
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    $
                                    3,661,398
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    -8
                                    %




For the
three months ended June 30, 2010, the sales of our major products, TP-5
products, were $1.15 million, accounting for 34% of total sales, decreased by
$584,102, or 34% from $1.73 million for the three months ended June 30, 2009.
This decrease was due to increased market competition which resulted in lower
total TP-5 sales volumes and average selling price.


-23-




Thymosin
Alpha 1 for injection gradually became our best selling product because
of  its superior curative effects and strong market acceptance,
contributing $1,657,554 in revenue (49% of total sales) for the three months
ended June 30, 2010, representing a 20% increase from the same period of
2009.





Meanwhile,
DDAVP generated $403,207, or 12% of total sales for the three months ended June
30, 2010, representing an increase of 10% from $366,234 for the same period in
2009. The   increase was mainly due to the product’s acceptance due to
its effective clinical performance. We believe the product will continue to
generate more revenue in the near future. Sales of Somatostatin for injection
(3mg) contributed $123,428 in revenue, accounting for 4% of total sales for the
three months ended June 30, 2010. Greater market competition resulted in lower
sales unit sales price of Somatostatin.





Cost of Sales and Gross
Profit





Cost of
goods sold was $1,053,453 for the three months ended June 30, 2010, as compared
to $ 1,019,830 for the same period in 2009. Cost of goods sold was 31% of
total revenue for the three months ended June 30, 2010, as compared to 28% of
total revenue for the same period in 2009. The increase in cost of sales as a
percentage of revenue was mainly due to the increased sales of lower profit
margin products including Thymosin Alpha 1 for injection 1.6mg and
DDAVP.





The gross
margin for the three months ended June 30, 2010 was 69%,  representing
a decrease  from 72% for the same period of 2009. As a result of increased
market competition, the average selling price for many of the Company’s products
were lower.




Three months ended June 30,(unaudited)2010
                      
                      
                      2009as of total
                        revenue %
                      
                      
                      
                      
                      
                      as of total
                        revenue %
                      
                      
                      %
                        ChangesOperating
      expenses:Administrative
      expenses
                      
                      $
                      300,323
                      
                      
                      
                      9
                      %
                      
                      $
                      199,517
                      
                      
                      
                      5
                      %
                      
                      
                      51
                      %Research
      and development costs
                      
                      
                      185,499
                      
                      
                      
                      5
                      %
                      
                      
                      39,428
                      
                      
                      
                      1
                      %
                      
                      
                      370
                      %Selling
      expenses
                      
                      
                      194,851
                      
                      
                      
                      6
                      %
                      
                      
                      74,830
                      
                      
                      
                      2
                      %
                      
                      
                      160
                      %680,673
                      
                      
                      
                      20
                      %
                      
                      
                      313,775
                      
                      
                      
                      8
                      %
                      
                      
                      117
                      %Income
      from operations
                      
                      $
                      1,637,044
                      
                      
                      
                      49
                      %
                      
                      $
                      2,327,793
                      
                      
                      
                      64
                      %
                      
                      
                      -30
                      %




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 taxes.
Administrative expenses for the three months ended June 30, 2010 and 2009 were
$300,323 (9% of total sales) and $199,517 (5% of total sales), respectively,
representing an increase of $100,806. The increase in administrative
expenses was primarily  attributable to an increase in consultancy
fees related to the Company’s Sarbanes-Oxley compliance and other non
operating expenses.





Research and Development
Costs





Research
and development costs consist primarily of expenses incurred in clinical
trials, drug registration and usage of trial specimens for our new products.
Research and development expenses for the three months ended June 30, 2010 were
$185,499, or 5% of total sales,  representing an
$146,071 increase from $39,428 for the same period of 2009. The increase of
R&D cost is related to launching and preparation expenses for products
in the Company’s pipeline.


-24-




Selling
Expenses





Selling
expenses, including distribution expenses, were $194,851, or 6% of total sales,
for the three months ended June 30, 2010, as compared to $74,830, or 2% of the
total sales for the same period in 2009, representing an increase of
$120,021. The  increase in sales expenses  is mainly due to
promotion for pipeline products which will be soon launched to the market
and other non-operation expenses.





Income from Operations





Income
from operations was $1.64 million for the three months ended June 30, 2010,
representing a decrease of 30% from $2.33 million for the same period in 2009.
The decrease was mainly due to the increase of the above described costs and
expenses.




Three months ended June 30,(unaudited)2010
                          
                          
                          2009as of total
                          
                          
                          
                          
                          
                          as of total
                          
                          
                          %revenue %
                          
                          
                          
                          
                          
                          revenue %
                          
                          
                          ChangesIncome
      from operations
                          
                          $
                          1,637,044
                          
                          
                          
                          49
                          %
                          
                          $
                          2,327,793
                          
                          
                          
                          64
                          %
                          
                          
                          -30
                          %Interest
      income
                          
                          
                          18,039
                          
                          
                          
                          0
                          %
                          
                          
                          66,735
                          
                          
                          
                          2
                          %
                          
                          
                          -73
                          %Other
      income
                          
                          
                          191,058
                          
                          
                          
                          6
                          %
                          
                          
                          146,504
                          
                          
                          
                          4
                          %
                          
                          
                          30
                          %Government
      subsidy income
                          
                          
                          86,680
                          
                          
                          
                          3
                          %
                          
                          
                          -
                          
                          
                          
                          0
                          %
                          
                          
                          100
                          %Change
      in fair value of warrant liabilities
                          
                          
                          20,443
                          
                          
                          
                          0
                          %
                          
                          
                          -
                          
                          
                          
                          0
                          %
                          
                          
                          100
                          %Finance
      costs
                          
                          
                          (23,665
                          )
                          
                          
                          -1
                          %
                          
                          
                          (135,696
                          )
                          
                          
                          -4
                          %
                          
                          
                          -83
                          %Income
      before income taxes and noncontrolling interest
                          
                          
                          1,929,599
                          
                          
                          
                          57
                          %
                          
                          
                          2,405,336
                          
                          
                          
                          66
                          %
                          
                          
                          -20
                          %Income
      taxes
                          
                          
                          (254,865
                          )
                          
                          
                          -8
                          %
                          
                          
                          (354,062
                          )
                          
                          
                          -10
                          %
                          
                          
                          -28
                          %Net
      income before noncontrolling interest
                          
                          
                          1,674,734
                          
                          
                          
                          49
                          %
                          
                          $
                          2,051,274
                          
                          
                          
                          56
                          %
                          
                          
                          -18
                          %Net
      income attributable to noncontrolling interest
                          
                          
                          (14,710
                          )
                          
                          
                          0
                          %
                          
                          
                          (18,116
                          )
                          
                          
                          0
                          %
                          
                          
                          -19
                          %N
      Net income attributable to Kun Run Biotechnology, Inc. common
      stockholders
                          
                          
                          1,660,024
                          
                          
                          
                          49
                          %
                          
                          
                          2,033,158
                          
                          
                          
                          56
                          %
                          
                          
                          -18
                          %Earnings
      per share:Basic
                          
                          $
                          0.06
                          
                          
                          
                          
                          
                          
                          $
                          0.08Diluted
                          
                          $
                          0.06
                          
                          
                          
                          
                          
                          
                          
                          N/AWeighted
      average number of shares outstanding :Basic
                          
                          
                          28,677,368
                          
                          
                          
                          
                          
                          
                          
                          25,000,000Diluted
                          
                          
                          29,238,616
                          
                          
                          
                          
                          
                          
                          
                          N/A


-25-




Interest
income





Interest
income decreased by $48,696 to $18,039 for the three months ended June 30, 2010
from $66,735 for the same period of 2009. The  reduction was mainly
due to that the amount due from Zhonghe  Group has been paid off, at a
interest rate of 5.31% per annum.





Other
Income





For the
three months ended June 30, 2010, other income was $191,058,  as compared
to $146,504 for the same period in 2009.   The Increase is mainly
due to the reversal of accounts receivable for bad debts.





Change in fair value of
warrant liabilities





For the
three months ended June 30, 2010, change in fair value of warrant liabilities
was $20,443,  as compared to $0.00 for the same period in 2009. As of April
30, 2010, the Company completed a private placement of Series A Preferred Stock
and warrants. These warrants are classified as derivative financial liability
with initial fair value $921,808. As of June 30, 2010, the fair value of warrant
liabilities was $901,365, and corresponding gain on change in fair value of
warrant liabilities is $20,443.





Finance Costs





Three months ended June 30,(unaudited)2010
                            
                            
                            2009
                            
                            
                            % ChangesBank
      charges
                            
                            
                            662
                            
                            
                            
                            470
                            
                            
                            
                            41
                            %Discounting
      charges
                            
                            
                            -
                            
                            
                            
                            458
                            
                            
                            
                            -100
                            %Interest
      expenses
                            
                            
                            15,049
                            
                            
                            
                            142,647
                            
                            
                            
                            -89
                            %Exchange
      (gain) loss
                            
                            
                            7,954
                            
                            
                            
                            (7,879
                            )
                            
                            
                            201
                            %$
                            23,665
                            
                            
                            $
                            135,696
                            
                            
                            
                            -83
                            %




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, 2010, we incurred interest expenses of
$15,049, as compared to $142,647 for the same period in 2009. Except $
662,850 of the government interest-free loan, the Company has paid off  all
existing loans before June 30, 2010. Thus the interest expense has
decreased sharply.





Net
Income





Net
income decreased by 18% to $1.66 million for the three months ended June 30,
2010 from $2.03 million for the same period of 2009, due to increased
costs and expenses as described above.





Earnings per
share





Earnings
per share for the three months ended June 30, 2010 was $0.06 per share for both
basic and diluted shares, as compared with $0.08 per share for both basic and
diluted shares for the same period of 2009.





Six
months ended June 30, 2010 and 2009




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


-26-




Six months ended June 30,(unaudited)2010
                  
                  2009% as of total
                    revenue
                  
                  
                  
                  
                  % as of total
                    revenue
                  
                  
                  % ChangesSales
      revenue
                  
                  $
                  6,072,307
                  
                  
                  
                  100
                  %
                  
                  $
                  6,090,666
                  
                  
                  
                  100
                  %
                  
                  
                  0
                  %Cost
      of sales
                  
                  
                  1,948,127
                  
                  
                  
                  32
                  %
                  
                  
                  1,765,523
                  
                  
                  
                  29
                  %
                  
                  
                  10
                  %Gross
      profit
                  
                  $
                  4,124,180
                  
                  
                  
                  68
                  %
                  
                  $
                  4,325,143
                  
                  
                  
                  71
                  %
                  
                  
                  -5
                  %




Sales
Revenue





Revenues
for the six months ended June 30, 2010 were $6.07 million, as compared to $6.09
million for the same period in 2009. Revenues by product categories were as
follows:




Six months ended June 30,
                      (unaudited)2010
                    
                    
                    2009as of total
                    
                    
                    
                    
                    
                    as of totalProduct
                    
                    
                    
                    
                    sales %
                    
                    
                    
                    
                    
                    sales %
                    
                    
                    % ChangesTP-5
      ProductsTP-5
      for injection (1mg)
                    
                    $
                    790,118
                    
                    
                    
                    13
                    %
                    
                    $
                    773,403
                    
                    
                    
                    13
                    %
                    
                    
                    2
                    %TP-5
      for injection (10mg)
                    
                    
                    438,896
                    
                    
                    
                    7
                    %
                    
                    
                    426,766
                    
                    
                    
                    7
                    %
                    
                    
                    3
                    %TP-5
      pre-filled injection 1ml:1mg
                    
                    
                    227,172
                    
                    
                    
                    4
                    %
                    
                    
                    477,614
                    
                    
                    
                    8
                    %
                    
                    
                    -52
                    %TP-5
      pre-filled injection 1ml:10mg
                    
                    
                    677,209
                    
                    
                    
                    11
                    %
                    
                    
                    1,070,583
                    
                    
                    
                    17
                    %
                    
                    
                    -37
                    %Sub-total
      ( TP-5 products)
                    
                    
                    2,133,395
                    
                    
                    
                    35
                    %
                    
                    
                    2,748,366
                    
                    
                    
                    45
                    %
                    
                    
                    -22
                    %Other
      productsSomatostatin
      for injection 3mg
                    
                    
                    273,070
                    
                    
                    
                    4
                    %
                    
                    
                    427,535
                    
                    
                    
                    7
                    %
                    
                    
                    -36
                    %Thymosin
      Alpha 1 for injection 1.6mg
                    
                    
                    2,778,154
                    
                    
                    
                    46
                    %
                    
                    
                    2,151,277
                    
                    
                    
                    35
                    %
                    
                    
                    29
                    %DDAVP
      Injection 1ml:4ug
                    
                    
                    660,316
                    
                    
                    
                    11
                    %
                    
                    
                    554,010
                    
                    
                    
                    9
                    %
                    
                    
                    19
                    %DDAVP
      Injection 1ml:15ug
                    
                    
                    166,260
                    
                    
                    
                    3
                    %
                    
                    
                    130,163
                    
                    
                    
                    2
                    %
                    
                    
                    28
                    %Granisetron
      Hydrochloride Injection 3ml:3mg
                    
                    
                    46,197
                    
                    
                    
                    1
                    %
                    
                    
                    50,991
                    
                    
                    
                    1
                    %
                    
                    
                    -9
                    %Ozagrel
      Sodium for Injection 80mg/40mg
                    
                    
                    14,915
                    
                    
                    
                    0
                    %
                    
                    
                    26,745
                    
                    
                    
                    1
                    %
                    
                    
                    -44
                    %Others
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,579
                    
                    
                    
                    0
                    %
                    
                    
                    -100
                    %In
      Total
                    
                    $
                    6,072,307
                    
                    
                    
                    100
                    %
                    
                    $
                    6,090,666
                    
                    
                    
                    100
                    %
                    
                    
                    0
                    %




For the
six months ended June 30, 2010, the sales of our major products, TP-5
products, were $2.13 million, accounting for 35% of total sales,
decreased by $614,971, or 22% from $2.75 million for the six months ended
June 30, 2009. This decrease was due to increased market competition which
resulted in lower total TP-5 sales volumes and average selling price. Within the
TP-5 product category, specially the revenue from TP-5 for pre-filled injection
decreased $0.6 million, representing a 42% decrease from the same period of
2009.





Thymosin
Alpha 1 for injection was still our best selling product with increased brand
recognition and market acceptance, contributing $2,778,154 in revenue
(46% of total sales) for the six months ended June 30, 2010, representing a 29%
increase from the same period of 2009. The Company continued to benefit from the
fact that there were few competitors in this drug category.


-27-




Meanwhile,
DDAVP generated $826,576, or 14% of total sales for the six months ended June
30, 2010, representing an increase of 21% from $684,173 for the same period in
2009. The increase was mainly due to   the product’s  
gradually becoming 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 $1,948,127 for the six months ended June 30, 2010, as compared to
$1,765,523 for the same period in 2009. Cost of goods sold was 32% of total
revenue for the six months ended June 30, 2010, as compared to 29% of total
revenue for the same period in 2009. The increase in cost of sales as a
percentage of revenue was mainly due to the increased sales of lower profit
margin products including Thymosin Alpha 1 for injection 1.6mg and
DDAVP.




Gross
profit as a percentage of net revenue was 68% in the six months ended June
30, 2010, representing a decrease from 71% for the same period of
2009. As a result of increased market competition, the average selling price for
many of the Company’s products were lower.




Six months ended June 30,(unaudited)2010
                      
                      
                      2009as of total
                        revenue %
                      
                      
                      
                      
                      
                      as of total
                        revenue %
                      
                      
                      % ChangeOperating
      expenses:Administrative
      expenses
                      
                      $
                      523,463
                      
                      
                      
                      9
                      %
                      
                      $
                      392,425
                      
                      
                      
                      6
                      %
                      
                      
                      33
                      %Research
      and development costs
                      
                      
                      388,610
                      
                      
                      
                      6
                      %
                      
                      
                      99,312
                      
                      
                      
                      2
                      %
                      
                      
                      291
                      %Selling
      expenses
                      
                      
                      401,414
                      
                      
                      
                      7
                      %
                      
                      
                      217,543
                      
                      
                      
                      4
                      %
                      
                      
                      85
                      %1,313,487
                      
                      
                      
                      22
                      %
                      
                      
                      709,280
                      
                      
                      
                      12
                      %
                      
                      
                      85
                      %Income
      from operations
                      
                      $
                      2,810,693
                      
                      
                      
                      46
                      %
                      
                      $
                      3,615,863
                      
                      
                      
                      59
                      %
                      
                      
                      -22
                      %




Administrative
Expenses





Administrative
expenses consist primarily 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
taxes. Administrative expenses for the six months ended June 30, 2010 and 2009
were $523,463, accounting for 9% of total sales, and $392,425, accounting for 6%
of total sales, respectively.  The increase in administrative expenses
was primarily attributable to an increase in consultancy fees related to the
Company’s Sarbanes-Oxley compliance and other non operating
expenses.





Research and Development
Costs





Research
and development costs consist primarily of expenses incurred in clinical
trials, drug registration and usage of trial specimens for our new products.
Research and development expenses for the six months ended June 30, 2010 were
$388,610, or 6% of total sales, representing a  $289,298 increase from
$99,312 for the same period of 2009. The spike in R&D costs is directly
related to launching and preparation expenses for 4 products in the Company’s
pipeline that are expected to commence production in 2010.


-28-




Selling Expenses





Selling
expenses, including distribution expenses, were $401,414, or 7% of
total sales, for the six months ended June 30, 2010 as compared to $217,543 for
the six months ended June 30, 2009. This represents an increase of $183,871, or
85% from the same  period of 2009. An increased number of customer
meetings resulted in higher travel and other related costs and non operating
expenses.





Income from
Operations





Income
from operations was $2.81 million for the six months ended June 30, 2010,
representing  a decrease of 22% from $3.62 million for the same period
in 2009.




Six months ended June 30,(unaudited)2010
                        
                        
                        2009as of total
                        
                        
                        
                        
                        
                        as of total
                        
                        
                        %revenue
      %
                        
                        
                        
                        
                        
                        revenue
      %
                        
                        
                        ChangesIncome
      from operations
                        
                        $
                        2,810,693
                        
                        
                        
                        46
                        %
                        
                        $
                        3,615,863
                        
                        
                        
                        59
                        %
                        
                        
                        -22
                        %Interest
      income
                        
                        
                        63,766
                        
                        
                        
                        1
                        %
                        
                        
                        66,960
                        
                        
                        
                        1
                        %
                        
                        
                        -5
                        %Other
      income
                        
                        
                        243,870
                        
                        
                        
                        4
                        %
                        
                        
                        199,244
                        
                        
                        
                        3
                        %
                        
                        
                        22
                        %Government
      subsidy income
                        
                        
                        86,680
                        
                        
                        
                        1
                        %
                        
                        
                        7,325
                        
                        
                        
                        0
                        %
                        
                        
                        1083
                        %Change
      in fair value of warrant liabilities
                        
                        
                        20,443
                        
                        
                        
                        0
                        %
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100
                        %Finance
      costs
                        
                        
                        (146,518
                        )
                        
                        
                        -2
                        %
                        
                        
                        (257,818
                        )
                        
                        
                        -4
                        %
                        
                        
                        -43
                        %Income
      before income taxes and noncontrolling interest
                        
                        
                        3,078,934
                        
                        
                        
                        50
                        %
                        
                        
                        3,631,574
                        
                        
                        
                        59
                        %
                        
                        
                        -15
                        %Income
      taxes
                        
                        
                        (448,807
                        )
                        
                        
                        -7
                        %
                        
                        
                        (549,008
                        )
                        
                        
                        -9
                        %
                        
                        
                        -18
                        %Net
      income before noncontrolling interest
                        
                        
                        2,630,127
                        
                        
                        
                        43
                        %
                        
                        $
                        3,082,566
                        
                        
                        
                        50
                        %
                        
                        
                        -15
                        %Net
      income attributable to noncontrolling interest
                        
                        
                        (23,133
                        )
                        
                        
                        0
                        %
                        
                        
                        (27,205
                        )
                        
                        
                        0
                        %
                        
                        
                        -15
                        %Net
      income attributable to Kun Run Biotechnology, Inc. common
      stockholders
                        
                        
                        2,606,994
                        
                        
                        
                        43
                        %
                        
                        
                        3,055,361
                        
                        
                        
                        50
                        %
                        
                        
                        -15
                        %Earnings
      per share:Basic
                        
                        $
                        0.10
                        
                        
                        
                        
                        
                        
                        $
                        0.12Diluted
                        
                        $
                        0.10
                        
                        
                        
                        
                        
                        
                        
                        N/AWeighted
      average number of shares outstanding :Basic
                        
                        
                        26,848,843
                        
                        
                        
                        
                        
                        
                        
                        25,000,000Diluted
                        
                        
                        27,131,017
                        
                        
                        
                        
                        
                        
                        
                        N/A




Interest
income





Interest
income decreased by $3,194 to $63,766 for the six months ended June 30, 2010
from $66,960 for the same period of 2009. The 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, 2010, other income was $243,870,  as
compared to $199,244 for the same period in 2009. The increase is mainly
due to the reversal of accounts receivable for bad
debts.


-29-




Finance
Costs




Six months ended June 30,(unaudited)2010
                                
                                
                                2009
                                
                                Changes
      %Bank
      charges
                                
                                1,385
                                
                                
                                1,073
                                
                                29
                                %Discounting
      charges
                                
                                8,117
                                
                                
                                3,034
                                
                                168
                                %Interest
      expenses
                                
                                129,062
                                
                                
                                261,590
                                
                                -51
                                %Exchange
      (gain) loss
                                
                                7,954
                                
                                
                                (7,879
                                )
                                201
                                %$
                                146,518
                                
                                $
                                257,818
                                
                                -43
                                %




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, 2010, we incurred interest expenses of
$129,062, as compared to $261,590 for the same period in 2009. The
interest expenses were related primarily to the secured borrowings which
balance decreased approximately $8.64 million as of June 30, 2010 , as
compared to that of June 30, 2009.  By the end  of June 30,
2010, the Company has paid off all existing loans, with the exception of
$662,850, the government interest-free loan.





Income
taxes





Income
taxes decreased by $100,201 to $448,807 for the six months ended June 30, 2010
from $549,008 for the same period of 2009. The main reason was the decrease of
operating profit.





Net
Income





Net
income decreased by 15% to $2.61 million for the six months ended June 30, 2010
from $3.06 million for the same period of 2009, due to increased costs
and expenses described above.





Earnings per
share





Earnings
per share for the six months ended June 30, 2010 was $0.10 per share for both
basic and diluted shares, as compared with $0.12 per share for both basic and
diluted shares for the same period of 2009.




Liquidity
and Capital Resources





Cash





As of
June 30, 2010, our principal sources of liquidity consisted of cash and cash
equivalents of $7,379,222, representing an increase of $7,091,095, or 2461%, as
compared with our cash balance of $288,127 as of June 30, 2009, since the
Company completed a private placement with net proceeds of $7.3 million in April
2010. 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:


-30-




Cash Flow
                            
                            Six Months Ended June 30,
                              (Unaudited)2010
                            
                            
                            2009Net
      cash provided by operating activities
                            
                            $
                            3,390,542
                            
                            
                            $
                            646,241Net
      cash provided by (used in) used in investing activities
                            
                            
                            1,519,738
                            
                            
                            
                            (3,589,073
                            )Net
      cash provided by financing activities
                            
                            
                            1,589,060
                            
                            
                            
                            2,797,616Effect
      of foreign currency translation on cash and cash
      equivalents
                            
                            
                            69,073
                            
                            
                            
                            (256
                            )Net
      cash flow
                            
                            $
                            6,568,413
                            
                            
                            $
                            (145,472
                            )




Operating
Activities





Net cash
provided by operating activities was $3.39 million for the six months ended
June 30, 2010, an increase of $2.74 million from the net cash provided by
operating activities of $646,241 for the same period in 2009. The increased cash
flow was primarily attributable to the decrease of  both
account  receivables and account payables.





Investing
Activities





Net cash
used in investing activities for the six months ended June 30, 2010 was $1.52
million, an increase of $5.11 million from net cash used in investing activities
of $3.59 million for the same period of 2009. The increase in net cash used in
investing activities was mainly due to the  pay-off of the amount due
from Zhonghe  Group.





Financing
Activities





Net cash
provided in financing activities for the six months ended June 30, 2010 was
$1.59 million, as compared to $2.80 million provided in financing
activities in the same period of 2009. Since the Company completed a
private placement with net proceeds of $7.3 million,   we also paid
off $5.7 million existing loans and did not borrow  any new
loan   during the period of January 1 to June 30 ,
2010.





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.





Off-Balance
Sheet Arrangements




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





Recently
issued accounting pronouncements





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


-31-




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





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





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





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


-32-




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




Item
3. Quantitative and Qualitative Disclosures about Market Risk.




Not
required.




Item
4. Controls and Procedures.




Evaluation of disclosure controls
and procedures.




Disclosure
controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act”)) are designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms. This information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. Our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on the evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.




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


-33-




PART
II - OTHER INFORMATION




Item
1. Legal Proceedings





None.





Item
1A. Risk Factors





Not
required.




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





None.




Item
3. Defaults Upon Senior Securities





None.




Item
4. (Removed and Reserved)




Item
5. Other Information





None.




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.




-34-




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





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


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