UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010Oro
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________ to _________
 
 Commission File Number: 000-20936
 
 GULF RESOURCES, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware

13-3637458(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)99 Wenchang Road, Chenming Industrial Park, Shouguang City, Shandong, China

262714(Address of principal executive offices)

(Zip Code)
 
 Registrant’s telephone number, including area code: +86 (536) 567 0008
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 xNo 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 o
Accelerated filer oNon-accelerated filer (Do not check if a smaller reporting company) x
Smaller reporting company o
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes oNo x
 
 As of August 15, 2010, the registrant had outstanding 34,640,007 shares of common stock.
 
 
 
 Table of Contents
 
 Part I – Financial InformationItem 1. Financial Statements
2Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
26Item 3. Quantitative and Qualitative Disclosures about Market Risk
34Item 4. Controls and Procedures
34Part II – Other InformationItem 1. Legal Proceedings
35Item 1A. Risk Factors
35Item 2. Unregistered Shares of Equity Securities and Use of Proceeds
35Item 3. Defaults Upon Senior Securities
35Item 4. Reserved and Removed
35Item 5. Other Information
35Item 6. Exhibits
35
 
 Table of Contents
 
 FORWARD-LOOKING STATEMENTS
 
 This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
 
 Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
 
 Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
 
 1
 Table of Contents
 
 PARTI—FINANCIAL INFORMATION
 Item 1. Financial Statements
  GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Expressed in U.S. dollars)(UNAUDITED)  June 30,

2010


December 31,

2009Current AssetsCash

$
55,197,372


$
45,536,735Accounts receivable


25,057,316



14,960,002Inventories


630,835



650,332Prepayment and deposit


918,354



233,330Prepaid land lease


58,850



46,133Deferred tax asset


107,205



85,672Other receivable


-



2,195,208Total Current Assets


81,969,932



63,707,412Property, plant and equipment, net


99,462,015



81,993,894Prepaid land lease, net of current portion


716,858



721,862Total Assets

$
182,148,805


$
146,423,168Liabilities and Stockholders’ EquityCurrent LiabilitiesAccounts payable and accrued expenses

$
10,642,759


$
5,823,745Retention payable


1,104,750



660,150Due to related parties


232,400



1,190Taxes payable


8,889,490



5,555,113Total Current Liabilities


20,869,399



12,040,198Total Liabilities


20,869,399



12,040,198Stockholders’ EquityPREFERRED STOCK ; $0.001 par value; 1,000,000 sharesauthorized none outstanding

$
-


$
-COMMON STOCK; $0.0005 par value; 100,000,000 sharesauthorized; 34,640,007 and 34,541,066 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively


17,320



17,271Additional paid in capital


66,533,170



64,718,026Retained earnings unappropriated


84,226,870



59,808,289Retained earnings appropriated


5,679,769


5,679,769Cumulative translation adjustment


4,822,277



4,159,615Total Stockholders’ Equity


161,279,406



134,382,970Total Liabilities and Stockholders’ Equity

$
182,148,805


$
146,423,168
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 2
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009NET REVENUENet revenue

$
46,751,809


$
29,590,897


$
76,445,227


$
53,224,436OPERATING EXPENSESCost of net revenue


(23,689,903
)


(16,445,804
)


(39,925,402
)


(29,986,744
)Sales, marketing and other operating expenses


(75,687
)


(5,902
)


(75,687
)


(10,783
)Research and development cost


(377,220
)


(125,095
)


(502,422
)


(250,065
)General and administrative expenses


(731,593
)


(990,539
)


(3,009,084
)


(2,085,038
)(24,874,403
)


(17,567,340
)


(43,512,595
)


(32,332,630
)INCOME FROM OPERATIONS


21,877,406



12,023,557



32,932,632



20,891,806OTHER INCOME (EXPENSES)Interest expense


(52
)


(33
)


(226
)


(27,043
)Interest income


59,824



23,762



113,584



45,792Sundry income


-



-



21,998



-INCOME BEFORE TAXES


21,937,178



12,047,286



33,067,988



20,910,555INCOME TAXES


(5,510,733
)


(3,075,682
)


(8,649,407
)


(5,405,837
)NET INCOME

$
16,426,445


$
8,971,604


$
24,418,581


$
15,504,718EARNINGS PER SHARE:BASIC

$
0.47


$
0.29


$
0.71


$
0.52DILUTED

$
0.47


$
0.29


$
0.70


$
0.52WEIGHTED AVERAGE NUMBER OF SHARES:BASIC


34,587,479



30,542,211



34,574,514



29,860,581DILUTED


34,738,667



30,542,211



34,750,714



29,860,581
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 3
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009NET INCOME

$
16,426,445


$
8,971,604


$
24,418,581


$
15,504,718OTHER COMPREHENSIVE INCOMEForeign currency translation adjustment


682,398



(6,200
)


662,662



(55,638
)COMPREHENSIVE INCOME

$
17,108,843


$
8,965,404


$
25,081,243


$
15,449,080
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 4
 Table of Contents
 
 GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYSIX MONTHS ENDED JUNE 30, 2010(Expressed in U.S. dollars)(UNAUDITED)  StatutoryAdditional


common





CumulativeNumber


Common


paid-in


reserve


Retained


translationof shares


stock


capital


fund


earnings


adjustment


Total$


$


$


$


$


$BALANCE AT DECEMBER 31, 2009


34,541,066



17,271



64,718,026



5,679,769



59,808,289



4,159,615



134,382,970Translation adjustment

-


-


-


-


-



662,662



662,662Common stock issued for  exercising stock option


12,500



6



17,994



-



-



-



18,000Common stock issuance for exercising warrants


15,881



8



(8
)

-


-


-



-Common stock issuance for acquiring assets


70,560



35



608,192



-



-



-



608,227Issuance of warrants to non-employees


-



-



193,428



-



-



-



193,428Issuance of stock options to employees


-



-



995,538



-



-



-



995,538Net income for six months ended June 30, 2010

-


-


-


-



24,418,581


-



24,418,581BALANCE AT JUNE 30, 2010


34,640,007



17,320



66,533,170



5,679,769



84,226,870



4,822,277



161,279,406
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 5
 Table of Contents
 
 GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in U.S. dollars)(UNAUDITED)  Six Months Ended June 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
24,418,581


$
15,504,718Adjustments to reconcile net incomeAmortization of warrants


-



309,500Amortization of prepaid expenses


46,379



7,983Amortization of prepaid expenses by shares issued for consulting fee


-



32,232Depreciation and amortization


4,787,674



3,026,880Stock-based compensation expense


1,188,966



-Deferred tax asset


(21,445
)

-Bad debt provision


-



61,455Changes in assets and liabilitiesAccounts receivable


(10,055,752
)


(475,162
)Inventories


19,405



88,034Prepayment and deposit


(682,423
)


(410,997
)Accounts payable and accrued expenses


4,920,174



419,562Taxes payable


3,320,663



691,379Net cash provided by operating activities


27,942,222



19,255,584CASH FLOWS USED IN INVESTING ACTIVITIESAdditions of prepaid land lease


(50,940
)


-Purchase of property, plant and equipment


(20,283,022
)

(15,663,051
)Construction in progress


(551,699
)


(3,299,175
)Net cash used in investing activities


(20,885,661
)


(18,962,226
)CASH FLOWS PROVIDED BY FINANCING ACTIVITIESProceeds from exercising stock options


18,000



-Proceeds from private placement


2,192,919


-Advance from a related party


231,210



6,829,785Net cash provided by financing activities


2,442,129



6,829,785EFFECTS OF EXCHANGE RATE CHANGE ON CASH


161,947



(43,992
)NET INCREASE IN CASH & CASH EQUIVALENT


9,660,637



7,079,151CASH & CASH EQUIVALENT - BEGINNING OF PERIOD


45,536,735



30,878,044CASH & CASH EQUIVALENT - END OF PERIOD

$
55,197,372


$
37,957,195
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 6
 Table of Contents
 
 GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(Expressed in U.S. dollars)(UNAUDITED)  Six Months Ended June 30,2010


2009SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Income taxes

$
6,157,079


$
4,615,907Interest paid

$
226


$
27,009SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIESIssuance of common stock for settlement of stockholder’s notes payable

$
-


$
21,287,493Issuance of common stock for acquiring property, plant and equipment

$
608,227


$
615,000Issuance of common stock for exercising warrants

$
8


$
-
 
 The accompanying notes are an integral part of these consolidated financial statements.
  7
 Table of Contents
  GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation
 
 The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. The balance sheet at December 31, 2009 is derived from the audited balance sheet at that date which is not presented herein.
 
 In the opinion of management, the unaudited financial information for the quarter ended June 30, 2010 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the quarter ended June 30, 2010 are not necessarily indicative of operating results for an entire fiscal year.
 
 All relevant share data have been adjusted retrospectively to reflect a 1 for 4 reverse stock split effective on October 12, 2009.
 
 Nature of the Business
 The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), and manufactures chemical products for use in the oil industry and paper manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI").
 
 Basis of Consolidation
 The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiaries, Upper Class Group Limited, a company incorporated in the British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”), which owns 100% of SCHC and SYCI, which is 100% owned by SCHC.  All material intercompany transactions have been eliminated on consolidation.
 
 The consolidated financial statements have been restated for all periods prior to the mergers to include the financial position, results of operations and cash flows of the commonly controlled companies.
 
 Use of Estimates
 The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  The most significant accounting estimates with regard to these consolidated financial statements that require the most significant and subjective judgments include, but are not limited to, useful lives of property, plant and equipment, recoverability of long-lived assets, determination of impairment losses, assessment of market value of inventories and provision for inventory obsolescence, allowance for doubtful accounts, recognition and measurement of current and deferred income taxes, valuation allowance for deferred tax assets, and assumptions used for the valuation of share based payments.Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions
 
 Cash and Cash Equivalents
 Cash and cash equivalents consist of all cash balances and highly liquid investments with maturities of three months or less. Because of short maturity of these investments, the carrying amounts approximate their fair values.
  8
 Table of Contents
  GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 Accounts Receivable and Allowance for Doubtful Accounts
 Accounts receivable is stated at cost, net of allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectivity of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance and the Company considers the historic level of credit losses and applies certain percentage to accounts receivable balance. The Company makes judgments about the credit worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customer begins to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
 
 As of June 30, 2010 and 2009, allowance for doubtful accounts was nil and $61,455, respectively. Nil and $61,455 allowances for doubtful accounts were charged to the income statement for six months ended June 30, 2010 and 2009, respectively.
 
 Concentration of Credit Risk
 Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and due to the generally short payment terms.
 
 Inventories
 Inventories are stated at the lower of cost, determined on a first-in first-out cost basis, or market. Costs of work-in-progress and finished goods comprise direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated selling price less costs to complete and selling expenses.
 
 Property, Plant and Equipment
 Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives.
 
 Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.
 
 Construction in progress primarily represents the renovation costs of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences. Cost of repairs and maintenance is expensed as incurred.
 
 The Company’s depreciation and amortization policies on fixed assets other than mineral rights and construction in progress are as follows:
  Useful life

(in years)Buildings
20Plant and machinery
8Motor vehicles
5Furniture, fixtures and office equipment
8
 
 9
 Table of Contents
  GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 Asset Retirement Obligation
 The Company follows FASB ASC 410, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. FASB ASC 410 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded.
 
 Currently, there are no reclamation or abandonment obligations associated with the land being utilized for exploitation.
 
 Recoverability of Long Lived Assets
 Long-lived and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material.
 
 Retirement Benefits
 Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement scheme at the applicable rate based on the employees’ salaries.  The required contributions under the retirement plans are charged to the consolidated income statement on an accrual basis when they are due.  The Company’s contributions totaled $132,964 and $79,038 for the three months ended June 30, 2010 and 2009, respectively, and the Company’s contributions totaled $242,966 and $151,588 for the six months ended June 30, 2010 and 2009, respectively
 
 Mineral Rights
 The Company follows that certain mineral rights are considered tangible assets and that mineral rights should be accounted for based on their substance. Mineral rights are included in property, plant and equipment.
 
 Reporting Currency and Translation
 The financial statements of the Company’s foreign subsidiaries are measured using the local currency as the functional currency; however, the reporting currency is the United States dollar (“USD”).  Assets and liabilities of the Company have been translated into dollars using the exchange rate at the balance sheet date. The average exchange rate for the period has been used to translate revenues and expenses.  Translation adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).
 
 Foreign Operations
 All of the Company’s operations and assets are located in China.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.
 
 10
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 Revenue Recognition
 The Company recognizes revenue, net of any taxes, when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible.  Subject to these criteria, the Company generally recognizes revenue at the time of shipment or delivery to the customer, and when the customer takes ownership and assumes risk of loss based on shipping terms.
 
 Income Taxes
 The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
 Shipping and Handling Fees and Costs
 The Company does not charge its customers for shipping and handling.  The Company classifies shipping and handling costs as part of the cost of net revenue, for the three months ended June 30, 2010 and 2009 shipping and handling costs were $164,440 and $132,152, respectively, and for the six months ended June 30, 2010 and 2009, shipping and handling costs were $285,311 and $241,730 respectively.
 
 Stock-based Compensation
 Common stock, stock options and stock warrants issued to employees or directors are recorded at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period.
 
 Common stock, stock options and stock warrants issued to other than employees or directors are recorded on the basis of their fair value using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts the measurement date is the date that the service is complete. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
 
 Basic and Diluted Net Income per Share of Common Stock
 Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period.
 
 11
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 The following table sets forth the computation of basic and diluted earnings per share:
  Three Months Ended June 30,2010


2009NumeratorNet income

$
16,426,445


$
8,971,604DenominatorBasic: Weighted-average common shares outstanding during the period


34,587,479



30,542,211Add: Dilutive effect of stock options


151,188



-Diluted


34,738,667



30,542,211Net income per shareBasic

$
0.47


$
0.29Diluted

$
0.47


$
0.29
 
 Six months ended June 30,2010


2009NumeratorNet income

$
24,418,581


$
15,504,718DenominatorBasic: Weighted-average common shares outstanding during the period


34,574,514



29,860,581Add: Dilutive effect of stock options


176,200



-Diluted


34,750,714



29,860,581Net income per shareBasic

$
0.71


$
0.52Diluted

$
0.70


$
0.52
 
 12
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES– Continued
 
 Recently Adopted Accounting Pronouncements
 
 In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and DisclosureRequirements. The amendments in the ASU remove the requirement for a Securities and Exchange Commission filer to disclose a date throughwhich subsequent events have been evaluated in both issued and revised financial statements. This amendment was effective upon issuance.
 
 Recent Accounting Pronouncements Not Yet Adopted
 
 In April 2010, the FASB issued ASU No. 2010-13, Compensation—Stock Compensation (Topic 718): Effect of Denominating the ExercisePrice of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update providesamendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of amarket in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. Theupdate is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Management doesnot anticipate significant effect of the amendment to the Group as the Group has accounted for share-based payment award as equity.
 
 NOTE 2 – ASSETS ACQUISITIONS
 
 On January 7, 2009, the Company  acquired substantially all of the assets owned by Fenqiu Yuan, Han Wang and Yufen Zhang in theShouguang City Renjiazhuangzi Village North Area (the “Fenqiu Yuan, Han Wang & Yufen Zhang property” or Factory No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang property includes a 50-year mineral rights (as of date acquisition) and land lease covering 1,611 acres of real property, with the related production facility, the pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was $10,615,000, consisting of $10,000,000 in cash and 375,000 shares of the Company’s Common Stock valued at $615,000 (fair value).
 
 On September 7, 2009, the Company acquired substantially all of the assets owned by Yuliang Gao, Han Wang and Qing Yang in the Shouguang City Yingli Township Beishan Village (the “Yuliang Gao, Han Wang & Qing Yang property” or Factory No. 8”).  Fengxia Yuan acted as Attorney-in-Fact for one of the owners of Factory 8, Yuliang Gao, and entered into the acquisition agreement relating to Factory 8 on behalf of Yuliang Gao.The Yuliang Gao, Han Wang and Qing Yang property includes a 50-year mineral rights (as of date acquisition) and land lease covering 2,723 acres of real property, with the related production facility, the pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was $16,930,548, consisting of $11,516,960 in cash and 1,057,342 shares of the Company’s Common Stock valued at $5,413,588 (fair value).
 
 13
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 2 – ASSETS ACQUISITIONS– Continued
 
 On June 7, 2010, the Company acquired substantially all of the assets owned by Jinjin Li and Qiuzhen Wang in the Shouguang City Yangkou Township Yangzhuang Village (the “Jinjin Li and Qiuzhen Wang property” or Factory No. 9”). Jinjin Li was acting individually and as Attorney-in-Fact for four other owners of Factory 9, Yueliang Wang, Kunming Tian, Gaoming Tian and Zhiqiang Wei.The Jinjin Li and Qiuzhen Wang property includes a 50-year mineral rights (as of date acquisition) and land lease covering 759 acres of real property, with the related production facility, the pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was $13,905,719, consisting of $13,297,492 in cash and 70,560 shares of the Company’s Common Stock valued at $608,227 (fair value).
 
 Each of the asset acquisitions described above was not in operation when the Company acquired the assets.  The owners of each of the assets did not hold the proper license for the exploration and production of bromine, and production at each of the assets acquired had previously been halted by the government. With respect to Factory No. 7, the assets had not been operational for twelve months. With respect to Factory No. 8, the assets had not been operational for thirteen months. With respect to Factory No. 9, the assets had not been operational for eleven months The Company recorded the above transactions as purchase of assets.
 
 NOTE 3 – INVENTORIES
 
 Inventory consists of:
 
 June 30,

2010


December 31, 2009Raw material

$
293,805


$
298,359Finished goods


341,681



356,605Allowance for obsolete and slow moving inventory


(4,651
)


(4,632
)$
630,835


$
650,332
 
 NOTE 4 – PREPAID LAND LEASES
 
 The Company prepaid for land leases for a period of fifty years to use the land on which the office premises, production facilities and warehouse of the Company are situated. The prepaid land lease is amortized on a straight line basis. During the three months ended June 30, 2010, amortization of prepaid land lease totaled $24,322, of which $24,175 and $147 were recorded as cost of net revenue and administrative expenses respectively.  During the three months ended June 30, 2009, amortization of prepaid land lease totaled $3,961, of which $3,814 and $147 were recorded as cost of net revenue and administrative expenses respectively. During the six months ended June 30, 2010, amortization of prepaid land lease totaled $46,379, of which $46,085 and $294 were recorded as cost of net revenue and administrative expenses respectively.  During the six months ended June 30, 2009, amortization of prepaid land leases totaled $7,918, of which $7,625 and $293 were recorded as cost of net revenue and administrative expenses respectively.
 
 14
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
 
 Property, plant and equipment, net consist of the following:
 
 June 30,

2010


December 31, 2009At cost:Mineral rights

$
5,864,482


$
5,840,594Buildings


29,267,535



21,651,379Plant and machinery


78,885,399



63,270,428Furniture, fixtures and office equipment


3,617,844



3,602,676Motor vehicles


6,519



-Construction in progress


553,848



1,467,000Total


118,195,627



95,832,077Less: accumulated depreciation and amortization


18,733,612



13,838,183Net book value

$
99,462,015


$
81,993,894
 
 During the three months ended June 30, 2010, depreciation and amortization expense totaled $2,410,053, of which $2,348,969 and $61,084 were recorded as cost of net revenue and administrative expenses respectively. During the three months ended June 30, 2009, depreciation and amortization expense totaled $1,555,677, of which $1,516,080 and $39,597 were recorded as cost of sales and administrative expenses respectively.
 
 There were no impairment provisions made at June 30, 2010 and 2009.
 
 In August 2009, the Company completed a sewage treatment project at a total cost of Renminbi 45,000,000 (equivalent to $6,628,500).  A retention amount of $662,850, representing 10% of the total cost will be paid to Xuzhou Bishui Environmental Science Technology Co., Ltd. upon one year after the completion date.
 
 In June 2010, the Company completed the construction of a production line for wastewater treatment chemical additives at a total cost of Renminbi 60,000,000 (equivalent to $8,838,000).  A retention amount of $441,900, representing 5% of the total cost will be paid to Shouguang City Shengkun Construction Co., Ltd. upon one year after the completion date.
  15
 Table of Contents
  GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts payable and accrued expenses consist of the following:
 
 June 30,


December 31,2010


2009Accounts payable

$
10,136,676


$
5,348,638Salary payable


193,864



177,194Social security insurance contribution payable


60,616



19,132Other payable


251,603



278,781Total

$
10,642,759


$
5,823,745
 
 NOTE 7 – DUE TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS
 
 The amount consists of the following:  June 30,


December 31,2010


2009Due to a key management

$
1,190


$
1,190Due to a related company – Hong Kong Jiaxing Lighting Limited

$
231,210


$
-
 
 The amount of $1,190 represents advance from a key management of the Company which is unsecured, and interest free and repayable on demand.
 
 The amount due to a related company represents funds received from Hong Kong Jiaxing Lighting Limited which is unsecured, interest free and repayable on demand for the purpose of paying the Company’s daily operating expenses such as audit fees and legal fees etc., which are incurred by Gulf Resources.
 
 16
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 8 – TAXES PAYABLE
 
 Taxes payable consists of the following:  June 30,


December 31,2010


2009Income tax payable
$
5,616,118


$
3,079,233Mineral resource compensation fee payable

641,873



333,928Value added tax payable and others

2,631,499



2,141,952Total
$
8,889,490


$
5,555,113
 
 NOTE 9 – COMMON STOCK
 
 Effective October 12, 2009 the Company affected a one for four reverse stock split.  All shares and per share amount for all periods presented have been adjusted to reflect the reverse stock split.
 
 In March 2009, the Company issued 5,250,000 shares of its common stock as payment for $21,287,493 of Notes and Loan Payable-Related Party.
 
 In March 2009, the Company issued 375,000 shares of its common stock, valued at $615,000, to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen Zhang.
 
 In September 2009, the Company issued 1,057,342 shares of its common stock, valued at $5,413,588, to acquire assets owned by Han Wang, Qing Yang and Yuliang Gao.
 
 In December 2009, the Company issued 2,941,182 shares of its common stock at a price of $8.50 per share in a private placement. A portion of the proceeds were received by the Company in January 2010.
 
 In August 2008, the Company granted to one investor relations firm a warrant to purchase a total of 25,000 shares of the Company’s common stock at an exercise price of $4.80 per share and the options vested immediately. In January 2010, the investor relations firm made a cashless exercise for the warrant.  The Company issued 15,881 shares based on the fair market price of $13.16.
 
 In the fourth quarter of 2008, the Company granted to one Board member options to purchase a total of 12,500 shares of the Company’s common stock at an exercise price of $1.44 per share and the options vested immediately. In February 2010, the Company issued 12,500 shares of its common stock upon the exercise of such stock options by the Board member.
 
 In June 2010, the Company issued 70,560 shares of its common stock, valued at $608,227, to acquire assets owned by Mr Jinjin Li, Ms Qiuzhen Wang, Yueliang Wang, Kunming Tian, Gaoming Tian and Zhiqiang Wei.
 
 17
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 10 – STOCK-BASED COMPENSATION
 
 Pursuant to the 2007 Equity Incentive Plan, the aggregate number of stock options available for grant and issuance is 2,500,000 shares.
 
 In March 2009, the Company granted to 9 management staff (including 4 directors of the Company) options to purchase a total of 150,000 shares (25,000 for each of the executive directors, and 12,500 each for one non executive independent director and 5 other management staff) of the Company’s common stock at an exercise price of $4.80 per share and the options vested immediately. The options were valued at $143,820 fair value, using the Black-Scholes option pricing model with assumed 174% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $143,820 was recognized as general and administrative expenses.
 
 In May 2009, the Company granted to a director options to purchase 12,500 shares of the Company’s common stock at an exercise price of $4.80 per share and the options vested immediately. The options were valued at $20,486 fair value, using the Black-Scholes option pricing model with assumed 170% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $20,486 was recognized as general and administrative expenses.
 
 In June 2009, the Company granted to a director options to purchase 25,000 shares of the Company’s common stock at an exercise price of $4.80 per share and the options vested immediately. The options were valued at $39,534 fair value, using the Black-Scholes option pricing model with assumed 167% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $39,534 was recognized as general and administrative expenses.
 
 In October 2009, the Company granted to 2 management staff options to purchase 37,500 shares of the Company’s common stock at an exercise price of $6.44 per share and the options vested immediately. The options were valued at $219,656 fair value, using the Black-Scholes option pricing model with assumed 161% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $219,656 was recognized as general and administrative expenses.
 
 In October 2009, the Company granted to an independent director options to purchase 12,500 shares of the Company’s common stock at an exercise price of $9.65 per share and the options vested immediately. The options were valued at $90,648 fair value, using the Black-Scholes option pricing model with assumed 160% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $90,648 was recognized as general and administrative expenses.
 
 In November 2009, the Company granted to an independent director options to purchase 12,500 shares of the Company’s common stock at an exercise price of $10.14 per share and the options vested immediately. The options were valued at $92,315 fair value, using the Black-Scholes option pricing model with assumed 152% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $92,315 was recognized as general and administrative expenses.
 
 In December 2009, the Company granted to an investment bank warrants to purchase 176,471 shares of the Company’s common stock at an exercise price of $10.2 per share and the warrants vested immediately. The warrants were valued at $1,367,156 fair value, using the Black-Scholes option pricing model with assumed 156% volatility, a three-year expiration term, a risk free rate of 1.43% and no dividend yield. For the year ended December 31, 2009, $1,367,156 was recognized as general and administrative expenses.
 
 18
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 10 – STOCK-BASED COMPENSATION – Continued
 
 In February 2010, the Company granted to 8 management staff options to purchase 132,500 shares of the Company’s common stock at an exercise price of $8.25 per share and the options vested immediately. The options were valued at $995,539 fair value, using the Black-Scholes option pricing model with assumed 154% volatility, a three-year expiration term, a risk free rate of 1.60% and no dividend yield. For the three months ended March 31, 2010, $995,539 was recognized as general and administrative expenses.
 
 In February 2010, the Company granted to the investing relationship firm warrants to purchase 25,000 shares of the Company’s common stock at an exercise price of $12 per share and the warrants vested immediately. The warrants were valued at $193,428 fair value, using the Black-Scholes option pricing model with assumed 155% volatility, a four-year expiration term, a risk free rate of 1.60% and no dividend yield. For the three months ended March 31, 2010, $193,428 was recognized as general and administrative expenses.
 
 The following table summarizes all Company stock option transactions between January 1, 2010 and June 30, 2010.
  Number of Option

&Warrants

Outstanding


Number of Option

&Warrants

Vested


Range of

Exercise Price per Common ShareBalance, December 31, 2009


501,471



501,471


$
0.84 - $10.20Granted or vested during the six months ended June 30, 2010


157,500



157,500


$
8.25-12.0Exp Exercised during the six months ended June 30, 2010


(37,500)



(37,500)


$
1.44-$4.8Balance, June 30, 2010


621,471



621,471


$
0.84 - $12.0
 
 Stock and Warrants Options OutstandingOutstanding and

Weighted Average

Weighted AverageRange of

Currently Exercisable

Remaining

Exercise Price of OptionsExercise Prices

at June 30, 2010

Contractual Life (Years)

Currently Exercisable$0.84-$12.0

621,471

3.99

$   7.72
 
 The weighted average grant-date fair values as at June 30, 2010 and December 31, 2009 were $6.99 and $6.84, respectively.
 
 At June 30, 2010, the aggregate intrinsic value of the stock options and warrants was nil.
 
 19
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 11– INCOME TAXES
 
 The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.
 
 United States
 Gulf Resources, Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the period ended June 30, 2010 and 2009, and management believes that its earnings are permanently invested in the PRC. As of June 30, 2010 and 2009, the accumulated undistributed PRC earnings are $101,140,677 and $57,440,850, respectively.
 
 BVI
 Upper Class Group Limited was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the periods ended June 30, 2010 and 2009.
 
 Hong Kong
 Hong Kong Jiaxing Industrial Limited was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for profits tax has been made as the Company has no assessable income for the period.  The applicable statutory tax rates for the periods ended June 30, 2010 and 2009 are 16.5%.
 
 PRC
 Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.
 
 The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.
 
 On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempt from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT.
 
 20
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 11– INCOME TAXES– Continued
 
 June 30,


December 31,2010


2009Deferred tax liabilities

$
-


$
-Deferred tax assets:Allowance for obsolete and slow-moving inventories

$
1,163


$
1,158Property, plant and equipment


102,952



81,437Net operating loss


7,638,095



6,692,426Other assets


3,090



3,077Total deferred tax assets


7,745,300



6,778,098Valuation allowance


(7,638,095
)


(6,692,426
)Net deferred tax asset

$
107,205


$
85,672Current deferred tax asset

$
107,205


$
85,672Long-term deferred tax asset

$
-


$
-
 
 There was no unrecognized tax benefits and accrual for uncertainty tax positions as of June 30, 2010 and 2009.
 
 Tax returns filed regarding tax years from 2005 through 2009 are subject to review by the respective tax authorities.
  21
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 12– BUSINESS SEGMENTS
 
 The Company has two reportable segments:  bromine and crude salt and chemical products.
 
 Three Months Ended

June 30, 2010

Bromine and


Chemical


Segment





ConsolidatedCrude Salt
Products
Total
Corporate
TotalNet revenue

$
34,984,070


$
11,767,739


$
46,751,809


$
-


$
46,751,809Income (loss) from operations


18,678,688



3,389,772



22,068,460



(191,054
)


21,877,406Total assets


146,629,445



35,466,253



182,095,698



53,107



182,148,805Depreciation and amortization


1,988,208



421,845



2,410,053



-



2,410,053Capital expenditure


14,621,645



2,641,140



17,262,785



-



17,262,785
 
 Three Months Ended

June 30, 2009

Bromine and


Chemical


Segment





ConsolidatedCrude Salt


Products


Total


Corporate


TotalNet revenue

$
20,529,449


$
9,061,448


$
29,590,897


$
-


$
29,590,897Income (loss) from operations


9,199,179



3,072,202



12,271,381



(247,824
)


12,023,557Total assets


87,743,342



25,773,119



113,516,461



115,627



113,632,088Depreciation and amortization


1,333,847



221,830



1,555,677



-



1,555,677Capital expenditure


5,638,785



3,299,175



8,937,960



-



8,937,960
 
 Six Months Ended

June 30, 2010

Bromine and


Chemical


Segment





ConsolidatedCrude Salt
Products
Total
Corporate
TotalNet revenue

$
54,880,528


$
21,564,699


$
76,445,227


$
-


$
76,445,227Income (loss) from operations


27,804,516



6,753,287



34,557,803



(1,625,171
)


32,932,632Total assets


146,629,445



35,466,253



182,095,698



53,107



182,148,805Depreciation and amortization


3,944,214



843,460



4,787,674



-



4,787,674Capital expenditure


14,621,645



7,040,639



21,662,284



-



21,662,284


22
 Table of Contents
 
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
  – Continued
  Six Months Ended

June 30, 2009

Bromine and


Chemical


Segment





ConsolidatedCrude Salt
Products
Total
Corporate
TotalNet revenue

$
36,059,724


$
17,164,712


$
53,224,436


$
-


$
53,224,436Income (loss) from operations


15,740,780



5,826,524



21,567,304



(675,498)



20,891,806Total assets


87,743,342



25,773,119



113,516,461



115,627



113,632,088Depreciation and amortization


2,585,859



441,021



3,026,880



-



3,026,880Capital expenditure


15,663,051



3,299,175



18,962,226



-



18,962,226
 
 Three Months Ended


Six Months EndedJune 30,


June 30,Reconciliations

2010


2009


2010


2009Total segment operating income

$
22,068,460


$
12,271,381


$
34,557,803


$
21,567,304Corporate overhead expenses


(191,054)



(247,824)



(1,625,171)



(675,498)Other income


59,772



23,729



135,356



18,749Income tax expense


(5,510,733)



(3,075,682)



(8,649,407)



(5,405,837)Total consolidated net income

$
16,426,445


$
8,971,604


$
24,418,581


$
15,504,718
 
 The following table shows the major customer(s) (10% or more) for the six months ended June 30, 2010.
 
 Number

Customer

Bromine and Crude Salt

(000’s)

Chemical Products

(000’s)

Total

Revenue

(000’s)

Percentage of

Total Revenue (%)1

Shouguang City Rongyuan Chemical Company Limited

$8,258

$-

$8,258

10.8%TOTAL



$8,258

$-

$8,258

10.8%
 
 The following table shows the major customer(s) (10% or more) for the six months ended June 30, 2009.


Number

Customer

Bromine and
Crude Salt(000’s)

Chemical
Products(000’s)

TotalRevenue(000’s)

Percentage ofTotal Revenue (%)1

Shandong Morui Chemical Company Limited

$5,943

$-

$5,943

11.2%2

Shouguang City Rongyuan Chemical Company Limited

$5,936

$-

$5,936

11.2%TOTAL



$11,879

$-

$11,879

22.4%
  23
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 13 – MAJOR SUPPLIERS
 
 During the six months period ended June 30, 2010, the Company purchased 91.16% of its raw materials from its top five suppliers.  At June 30, 2010, amounts due to those suppliers included in accounts payable were $9,403,022. During the period ended June 30, 2009, the Company purchased  49.9% of its raw material from top five suppliers.  At June 30, 2009, amounts due to those suppliers included in accounts payable were $2,758,587. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
 
 NOTE 14 – CUSTOMER CONCENTRATION
 
 The Company sells a substantial portion of its products to a limited number of customers.  During the six month period ended June 30, 2010, the Company sold 41.7% of its products to its top five customers. At June 30, 2010, amounts due from these customers were $11,616,499. During the period ended June 30, 2009, the Company sold 40.6% of its products to its top five customers.  At June 30, 2009, amounts due from these customers was $4,968,208. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated
 
 NOTE 15– ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER AND RESEARCH FOR NEW PRODUCTION LINE
 
 On September 6, 2007, the Company’s wholly-owned subsidiary, SYCI, and East China University of Science and Technology formally opened a Co-Op Research and Development Center. The research center is equipped with state of the art chemical engineering instruments for the purpose of pursuing targeted research and development of refined bromide compounds and end products. According to the Co-Op Research Agreement, any research achievement or patents will become assets of the Company. The Company will provide $500,000 annually until June 2012 to East China University of Science and Technology for research.
 
 In the second quarter of 2010, the Company’s wholly-owned subsidiary, SYCI conducted research for the new production line of waste water treatment additives, the research is for the purpose of testing the manufacturing routine and samples, the research and development expense incurred for the new production line from outside parties and internal company were $252,018 and $218,931, respectively.
 
 The total research and development expense recognized during the three months and six months ended June 30, 2010 was $377,200 and $502,422. The research and development expense recognized during the three months and six months ended June 30, 2009 was $125,095 and $250,065.
 
 24
 Table of Contents
  GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 16 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS
 
 The Company has committed approximately $5,538,480 for construction of new channel and wells for bromine facilities as of June 30, 2010.
 
 The Company has leased three pieces of land under non-cancelable operating leases, which are fixed in rentals and expired through February, August 2059 and June 2060, respectively. The Company accounts for the leases as operating leases. Future minimum lease payments consist of the following at June 30, 2010:
 
 Less than 1 year

$
37,3571 -3 years

$
222,5293 -5 years

$
220,162More than 5 years

$
9,195,491Total

$
9,675,539
 
 Rental expense amounted to $46,379 and $7,983 were charged to the income statements for the six months period ended June 30, 2010 and 2009 respectively.
  25
 Table of Contents





Item2. Management’s Discussion and Analysis of Financial Condition and Results of Operations





This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.





Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.





Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.





Overview





Gulf Resources conducts operations through its two wholly-owned China subsidiaries, SCHC and SYCI. Our business is also reported in these two segments, Bromine and Crude salts, and Chemical Products.





Through SCHC, we produce and sell bromine and crude salt. We are one of the largest producers of bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of brominated compounds used in industry and agriculture. Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines, and disinfectants.





Through SYCI, we manufacture and sell chemical products that are used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents and inorganic chemicals.





On December 12, 2006, Gulf Resources acquired, through a share exchange, Upper Class Group Limited, a British Virgin Islands holding corporation which then owned all of the outstanding shares of SCHC. Under accounting principles generally accepted in the United States, this share exchange is considered to be a capital transaction, rather than a business combination, with the share exchange equivalent to the issuance of stock by Upper Class for the net assets of Gulf Resources, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Gulf Resources, are those of the legal acquiree, Upper Class Group Limited and its subsidiary, SCHC, which together are considered to be the accounting acquirer. Share and per share amounts reflected in this report have been retroactively adjusted to reflect the merger.





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On February 5, 2007, Gulf Resources, through its subsidiary SCHC, acquired SYCI. Since prior to the acquisition the ownership of Gulf Resources and SYCI was substantially the same, the transaction was accounted for as a transaction between entities under common control, whereby the assets and liabilities of SYCI were recognized at their carrying amounts.





As a result of our acquisitions of SCHC and SYCI, the historical financial statements and the information presented below reflects the accounts of SCHC and SYCI. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.





RESULTS OF OPERATIONS





The following table presents certain information derived from the consolidated statements of operations, cash flows and shareholders equity for the three months and six months ended June 30, 2010 and 2009.





Three months

ended

June 30, 2010

Three months

ended

June 30, 2009

Percentage

ChangeNet revenue
$
46,751,809


$
29,590,897



58
%Cost of net revenue
$
23,689,903


$
16,445,804



44
%Gross profit
$
23,061,906


$
13,145,093



75
%Sales, marketing and other operating expenses
$
75,687


$
5,902



1,182
%Research and development costs
$
377,220


$
125,095



202
%General and administrative expenses
$
731,593


$
990,539



-26
%Income from operations
$
21,877,406


$
12,023,557



82
%Other income net
$
59,772


$
23,729



152
%Income before taxes
$
21,937,178


$
12,047,286



82
%Income taxes
$
5,510,733


$
3,075,682



79
%Net income
$
16,426,445


$
8,971,604



83
%





27
 Table of Contents





Six months

ended

June 30, 2010

Six months

ended

June 30, 2009

Percentage

ChangeNet revenue
$
76,445,227


$
53,224,436



44
%Cost of net revenue
$
39,925,402


$
29,986,744



33
%Gross profit
$
36,519,825


$
23,237,692



57
%Sales, marketing and other operating expenses
$
75,687


$
10,783



602
%Research and development costs
$
502,422


$
250,065



101
%General and administrative expenses
$
3,009,084


$
2,085,038



44
%Income from operations
$
32,932,632


$
20,891,806



58
%Other income net
$
135,356


$
18,749



622
%Income before taxes
$
33,067,988


$
20,910,555



58
%Income taxes
$
8,649,407


$
5,405,837



60
%Net income
$
24,418,581


$
15,504,718



57
%





Net revenueNet revenue was $46,751,809 for three months ended June 30, 2010, an increase of $17,160,912 (or approximately 58.0%) as compared to the same period in 2009. This increase was primarily attributable to strong growth in our bromine and crude salt segment, in which revenue increased from $20,529,449 for the three months ended June 30, 2009 to $34,984,070 for the same period in 2010, an increase of approximately 70.4%.





The increase in revenue from our bromine and crude salt segment was mainly due to the increase in the average selling price of bromine. The average selling price of bromine increased from $1,669 per tonne for the three months ended June 30, 2009 to $2,801 per tonne for the same period in 2010, an increase of 67.8%. The sales volume of bromine slightly increased from 10,895 tonnes for the three months ended June 30, 2009 to 11,045 tonnes for the same period in 2010. The increase in average selling price was a result of strong demand for brominated flame retardants, fumigants, water purification compounds, dyes, medicines, and disinfectants in the China market following the recovery of business and economic conditions. The sales volume of crude salt increased from 95,540 tonnes for the three months ended June 30, 2009 to 100,101 tonnes for the same period in 2010. The average selling price of crude salt increased from $25 per tonne for the three months ended June 30, 2009 to $40 per tonne for the same period in 2010. Revenues from our chemical products segment increased from $9,061,448 for three months ended June 30, 2009 to $11,767,739 for the same period in 2010, an increase of approximately 29.9%. The increase was mainly due to the strong demand for environmentally friendly oil and gas exploration chemicals and agricultural intermediaries.




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 Table of Contents


Net revenue for the six months ended June 30, 2010, was $76,445,227, representing an increase of $23,220,791 or 43.6% over the same period in 2009. For the six months ended June 30, 2010, net revenue from our bromine and crude salts segment grew by $18,820,804 to $54,880,528, an increase of 52.2% compared to the same period in 20009. The increase was mainly due to the increase in the average selling price of bromine from $1,700 per tonne for the six months ended June 30, 2009 to $2,642 per tonne for the same period in 2010, an increase of 55.4%. Sales volume of bromine decreased from 18,343 tonnes for the six months ended June 30, 2009 to 18,169 tonnes for the same period in 2010. The increase in average selling price was a result of strong demand for bromine in the China market due to business and economic conditions continuing to recover for many of our customers. The sales volume of crude salt increased from 165,540 tonnes for the six months ended June 30, 2009 to 178,101 tonnes for the same period in 2010, and the average selling price of crude salt increased from $29 per tonne to $39 per tonne. Net revenue from our chemical products segment was $21,564,699 for the six months ended June 30, 2010, an increase of $4,399,987 or 25.6% over the same period in 2009. The increase was mainly due to the strong demand for environmentally friendly oil and gas exploration chemicals and agricultural intermediaries.
 
 Net Revenue by SegmentThree Months Ended


Three Months EndedJune 30, 2010


June 30, 2009Segments




Percent of total





Percent of totalBromine and crude salt

$
34,984,070



74.8
%

$
20,529,449



69.4
%Chemical products

$
11,767,739



25.2
%

$
9,061,448



30.6
%Total revenues

$
46,751,809



100
%

$
29,590,897



100
%
 
 Three Months Ended June 30,2010 vs. 2009Segments
Percent Increase of Net RevenueBromine and crude salt
70.4%Chemical products
29.9%
 
 Net Revenue by SegmentSix months ended


Six months endedJune 30, 2010


June 30, 2009Segments




Percent of total





Percent of totalBromine and crude salt

$
54,880,528



71.8%


$
36,059,724



67.8%Chemical products

$
21,564,699



28.2%


$
17,164,712



32.2%Total revenues

$
76,445,227



100.0%


$
53,224,436



100.0%
 
 Six Months Ended June 302010 vs. 2009Segments
Percent Increase of Net RevenueBromine and Crude salt
52.2%Chemical Products
25.6%
 
 Bromine and crude salt segment product sold in tonnes

Three Months Ended

June 30, 2010


Three Months Ended

June 30, 2009


Percentage ChangeBromine


11,045



10,895



1.3
%Crude salt


100,101



95,540



4.8
%
 
 Bromine and crude salt segment product sold in tonnes

Six Months

Ended

June 30, 2010


Six Months

Ended

June 30, 2009


Percentage ChangeBromine


18,169



18,343



(0.9)
%Crude salt


178,101



165,540



7.6
%


29
 Table of Contents
 
 Due to the diverse product mix and varying values, management does not believe that the tonnes sold by the chemical product division is a meaningful metric.
 
 Cost of Net revenueCost of net revenue reflects the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity and other manufacturing costs. Our cost of net revenue was $23,689,903 for three months ended June 30, 2010, an increase of $7,244,099 (or approximately 44.0%) compared to the same period in 2009. Our cost of net revenue was $39,925,402 for the six months ended June 30, 2010, an increase of $9,938,658 (or approximately 33.1%) compared to the same period in 2009. This increase resulted primarily from the production increase in both bromine and crude salt and chemical products. Production increase was due to the increase in net revenue. The rate of increase for cost of net revenue was lower than that of net revenue because the rate of inflation relating to cost of net revenue was lower than the percentage increase in selling price of our products, as well as leverage due to economies of scale.
 
 Gross ProfitGross profit was $23,061,906, or 49.3% of net revenue for three months ended June 30, 2010 compared to $13,145,093, or 44.4% of net revenue for the same period in 2009. Gross profit was $36,519,825, or 47.8% of net revenue for the six months ended June 30, 2010 compared to $23,237,692, or 43.7% of net revenue for the same period in 2009. The increase in gross profit percentage was primarily attributable to a rise of margin percentage in our bromine and crude salt segment. For the six months ended June 30, 2010 as compared to the same period in 2009, the average selling price of bromine increased from $1,700 per tonne to $2,642 per tonne with an increase of 55.4%, while the inflation rate for cost of net revenue in our bromine and crude salt segment was lower than the increase rate of selling price.
 
 Research and Development Costs Research and development costs result from the agreement that SYCI and East China University of Science and Technology entered in September 2007 to establish a Co-Op Research and Development Center to develop new bromine-based chemical compounds and products to be utilized in the pharmaceutical industry. All research findings and patents developed by this center will belong to Gulf Resources.
 
 In the second quarter of 2010, the Company’s wholly-owned subsidiary, SYCI conducted research for the new production line of waste water treatment additives. The research is for the purpose of testing the manufacturing routine and samples, and the expense incurred for the new production line for the three months ended June 30, 2010 was $251,949. Research and development costs incurred for the three months ended June 30, 2010 and 2009 was $377,220 and $125,095 respectively. The research and development costs incurred for six months ended June 30, 2010 and 2009 was $502,422 and $250,065 respectively.
 
 General and Administrative ExpensesGeneral and administrative expenses were $731,593 for three months ended June 30, 2010, a decrease of $258,946 (or approximately 26.1%) compared to $990,539 for the same period in 2009. The decrease was mainly due to the reclassification of certain compensation fees which were treated as general and administrative expenses for three months ended June 30, 2009 but were treated as cost of net revenue for the same period in 2010. General and administrative expenses were $3,009,084 for the six months ended June 30, 2010, an increase of $924,046 (or approximately 44.3%) from $2,085,038 for the same period in 2009. This significant increase in general and administrative expenses was primarily due to non-cash expenses related to options granted to our employees of $995,538 and a warrant issued to our investor relations firm of $193,428 resulting from the service agreement signed in February 2010. The increase in stock options was primarily for the purpose of incentivizing our employees.
 Income from Operations
  Income from Operation by SegmentThree months ended

June 30, 2010


Three months ended

June 30, 2009Percent of total





Percent of totalSegmentBromine and crude salt

$
18,678,688



84.6
%

$
9,199,179



75.0
%Chemical products


3,389,772



15.4
%


3,072,202



25.0
%Income from operations before corporate costs


22,068,460



100.0
%


12,271,381



100.0
%Corporate costs


(191,054
)






(247,824
)Income from operations


21,877,406







12,023,557


30
 Table of Contents
 
 Income from Operation by SegmentSix months ended

June 30, 2010


Six months ended

June 30, 2009Percent of total





Percent of totalSegmentBromine and crude salt

$
27,804,516



80.5
%

$
15,740,780



73.0
%Chemical products


6,753,287



19.5
%


5,826,524



27.0
%Income from operations before corporate costs


34,557,803



100.0
%


21,567,304



100.0
%Corporate costs


(1,625,171
)






(675,498
)Income from operations


32,932,632







20,891,806
 
 Income from operations before corporate costs was $22,068,460 for the three months ended June 30, 2010 (or 47.2% of net revenue), an increase of $9,797,079 (or approximately 79.8%) compared to the same period in 2009. Income from operations before corporate costs was $34,557,803 for the six months ended June 30, 2010 (or 45.2% of net revenue), an increase of $12,990,499 (or approximately 60.2%) compared to the same period in 2009. For the three months ended June 30, 2010, income from operations for the bromine and crude salt segment was $18,678,688, an increase of 103.0% from $9,199,179 compared to the same period in 2009. The increase in revenue and the income from operations of our bromine and crude salt was mainly due to the increase in the selling price of bromine. For the three months ended June 30, 2010, income from operations for the chemical products segment was $3,389,772, an increase of 10.3% from $3,072,202 for the same period in 2009. The increase in revenue and the income from operations of our chemical products was driven by environmentally friendly oil and gas exploration chemicals and agricultural intermediaries.
 
 Other IncomeOther income was $59,772 for the three months ended June 30, 2010, an increase of $36,043 from $23,729 for the same period in 2009. Other income was $135,356 for the six months ended June 30, 2010, an increase of $116,607 from $18,749 for the same period in 2009. This increase in other income was primarily due to the increase in interest income which was offset by a loss from the disposal of property, plant and equipment incurred during the first six months of 2010 in order to upgrade the equipment at our bromine facilities.
 
 Net IncomeNet income was $16,426,445 for the three months ended June 30, 2010, an increase of $7,454,841 (or approximately 83.1%) compared to the same period in 2009. Net income was $24,418,581 for the six months ended June 30, 2010, an increase of $8,913,863 (or approximately 57.5%) compared to the same period in 2009. This increase was primarily attributable to the increase in revenues.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 As of June 30, 2010, cash and cash equivalents were $55,197,372 as compared to $45,536,735 as of December 31, 2009. The components of this increase of $9,660,637 are reflected below.
 
 Cash Flow
 
 Six Months Ended June 30,2010


2009Net cash provided by operating activities

$
27,942,222


$
19,255,584Net cash used in investing activities

$
(20,885,661)


$
(18,962,226)Net cash provided by financing activities

$
2,442,129


$
6,829,785Net cash inflow

$
9,660,637


$
7,079,151
 
 31
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 For the six months ended June 30, 2010 the Company met its working capital and capital investment requirements mainly by using cash flow from operations. The Company intends to continue to explore opportunities relating to bromine asset purchases. As of June 30, 2010, the capital commitment for construction of new channel and wells for bromine facilities was approximately $5.54 million.
 
 Net Cash Provided by Operating Activities
 
 During the six months ended June 30, 2010, we had positive cash flow from operating activities of $27,942,222 primarily attributable to net income of $24,418,581. During the six months ended June 30, 2009, we had positive cash flow from operating activities of $19,255,584, primarily attributable to net income of $15,504,718. Net cash provided by operating activities during the six months ended June 30, 2010 increased by $8,686,638 compared to the same period in 2009. The primary source of this was due to the increase in net income.
 
 Net Cash Provided (Used) by Investing Activities and Financing Activities
 
 The Company used $6,985,530 cash for the construction of waste water chemical additives during the six months ended June 30, 2010. The Company used $13,297,492 cash for the acquisition of bromine assets in June of 2010. The Company also used $551,699 to build new channels and wells for bromine facilities during the six months ended June 30, 2010. These projects were financed by opening cash balances as of December 31, 2009 and cash generated from operations during the first six months of 2010.
 
 We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs for the next twelve months. However we will likely need to raise additional capital in order to fund the ongoing program of acquiring unlicensed bromine properties and other properties. We expect to raise those funds through the issuance of additional shares of our equity securities in one or more public or private offerings, or through credit facilities obtained with lending institutions or a combination of both. There can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our board of directors.
 
 For the immediate future we intend to focus our efforts on the activities of SCHC and SYCI as these segments continue to expand within the Chinese market. Our long-term strategic goal is to extend our market to overseas countries.
 
 We may not be able to identify, successfully integrate or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a number of risks, including possible adverse effects on our operating results, diversion of management attention, inability to retain key personnel, risks associated with unanticipated events and the financial statement effect of potential impairment of acquired intangible assets, any of which could have a materially adverse effect on our condition and results of operations. We may affect an acquisition with a target business which may be financially unstable, under-managed, or in its early stages of development or growth. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. Our inability to implement and manage our expansion strategy successfully may have a material adverse effect on our business and future prospects.
 
 We are not currently party to any contracts or other arrangements with respect to future acquisitions.
 
 Critical Accounting Policies and Estimates
 
 Use of Estimates
 The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
 
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 Table of Contents
 
 Accounts Receivable and Allowance for Doubtful Accounts
 Accounts receivable is stated at cost, net of allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectivity of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance and the Company considers the historic level of credit losses and applies certain percentage to accounts receivable balance. The Company makes judgments about the credit worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customer begins to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
 
 As of June 30, 2010 and December 31, 2009, allowance for doubtful accounts were nil. For the three month ended June 30, 2010 and 2009, allowance for doubtful accounts amounted to nil and $61,455, respectively.
 
 Property, Plant and Equipment
 Property, plant and equipment are stated at cost. Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives.
 
 Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.
 
 The Company’s depreciation and amortization policies on fixed assets other than mineral rights and construction in progress are as follows:
 
 Useful life

(in years)Buildings
20Plant and machinery
8Motor vehicles
5Furniture, fixtures and office equipment
8
 
 Revenue Recognition
 The Company recognizes revenue, net of any taxes, when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible.  Subject to these criteria, the Company generally recognizes revenue at the time of shipment or delivery to the customer, and when the customer takes ownership and assumes risk of loss based on shipping terms.
 
 Income Taxes
 The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
 Stock-based Compensation
 Common stock, stock options and stock warrants issued to employees or directors are recorded at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period.
  33
 Table of Contents


Common stock, stock options and stock warrants issued to other than employees or directors are recorded on the basis of their fair value using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts the measurement date is the date that the service is complete. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs..
 
 Item3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not required.
 
 Item4. Controls and Procedures
 
 We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as required by Rule 13a-15(d) under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010.
 
 Although management did not accurately disclose in its Current Report on Form 8-K filed with the S.E.C on June 8, 2010 and June 24, 2010 the identities of the sellers of Factory 9 and did not include a correct translation of the agreement entered into by the Company’s subsidiary and the sellers of Factory 9, management does not believe that such omission is a material weakness in its disclosure controls.  Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2010 our disclosure controls and procedures were effective.
  There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter which is the subject of this report  that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 34
 Table of Contents
 
 PARTII—OTHER INFORMATION
 Item 1. Legal Proceedings
 
 None.
 
 Item1A. Risk Factors
 
 Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Form 10-K”), under the caption "Risk Factors," our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this Quarterly Report on Form 10-Q, our consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes, as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other information in our 2009 Form 10-K. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.
 
 Item2. Unregistered Shares of Equity Securities and Use of Proceeds
 
 None.
 
 Item3. Defaults Upon Senior Securities
 
 None.
 
 Item4. Reserved and Removed
 
 None.
 
 Item5. Other Information
 
 None.
 
 Item6. Exhibits
 
 Exhibit No.
Description31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
 31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
 32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
 
 35
 Table of Contents
 
 SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 GULF RESOURCES, INC.Dated: August 16, 2010
By:
/s/ Xiao bin LiuXiao bin LiuChief Executive Officer(principal executive officer)By:
/s/ Min LiAugust 16, 2010

Min LiChief Financial Officer(principal financial and accounting officer)
 
  36


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