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 September 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 x No 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 o  No x
 
 As of November 9, 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 ofOperations
24Item 3. Quantitative and Qualitative Disclosures about Market Risk
32Item 4. Controls and Procedures
32Part II – Other InformationItem 1. Legal Proceedings
33Item 1A. Risk Factors
33Item 2. Unregistered Shares of Equity Securities and Use of Proceeds
33Item 3. Defaults Upon Senior Securities
33Item 4. Reserved and Removed
33Item 5. Other Information
33Item 6. Exhibits
33
 
 Table of Contents
 
 CAUTIONARY STATEMENT ON 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
 PART I—FINANCIAL INFORMATION
 Item 1. Financial Statements
 
 GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Expressed in U.S. dollars)(UNAUDITED)
 
 September 30, 2010


December 31, 2009Current AssetsCash

$
73,398,371


$
45,536,735Accounts receivable


13,515,584



14,960,002Inventories


1,255,279



650,332Prepayment and deposit


534,226



233,330Prepaid land lease


83,933



46,133Deferred tax asset


106,080



85,672Other receivables


-



2,195,208Total Current Assets


88,893,473



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


104,652,358



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


724,495



721,862Total Assets

$
194,270,326


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

$
7,137,904


$
5,823,745Retention payable


449,100



660,150Due to a related party


-



1,190Taxes payable


7,720,048



5,555,113Total Current Liabilities


15,307,052



12,040,198Total Liabilities


15,307,052



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

$
-


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


17,320



17,271Additional paid in capital


66,533,170



64,718,026Retained earnings unappropriated


99,091,972



59,808,289Retained earnings appropriated


5,679,769


5,679,769Cumulative translation adjustment


7,641,043



4,159,615Total Stockholders’ Equity


178,963,274



134,382,970Total Liabilities and Stockholders’ Equity

$
194,270,326


$
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 INCOME AND COMPREHENSIVE INCOME
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 Three-Month Period Ended

September 30,


Nine-Month Period Ended

September 30,2010


2009


2010


2009NET REVENUENet revenue
$
44,758,294


$
27,667,158


$
121,203,521


$
80,891,594OPERATING EXPENSESCost of net revenue

(23,347,605
)


(15,533,613
)


(63,273,007
)


(45,520,357
)Sales, marketing and other operating expenses

(18,789
)


(5,898
)


(94,476
)


(16,681
)Research and development cost

(546,607
)


(125,122
)


(1,049,029
)


(375,187
)General and administrative expenses

(1,003,129
)


(864,656
)


(4,012,213
)


(2,949,694
)(24,916,130
)


(16,529,289
)


(68,428,725
)


(48,861,919
)INCOME FROM OPERATIONS

19,842,164



11,137,869



52,774,796



32,029,675OTHER INCOME (EXPENSES)Interest expense

(394
)


(102
)


(620
)


(27,144
)Interest income

67,083



19,815



180,667



65,607Sundry income

66,555



-



88,553



-INCOME BEFORE TAXES

19,975,408



11,157,582



53,043,396



32,068,138INCOME TAXES

(5,110,306
)


(2,829,772
)


(13,759,713
)


(8,235,609
)NET INCOME
$
14,865,102


$
8,327,810


$
39,283,683


$
23,832,529COMPREHENSIVE INCOME:NET INCOME
$
14,865,102


$
8,327,810


$
39,283,683


$
23,832,529OTHER COMPREHENSIVE INCOME- Foreign currency translation adjustments

2,818,766



148,833



3,481,428



93,462COMPREHENSIVE INCOME
$
17,683,868


$
8,476,643


$
42,765,111


$
23,925,991EARNINGS PER SHARE:BASIC
$
0.43


$
0.27


$
1.14


$
0.79DILUTED
$
0.43


$
0.27


$
1.13


$
0.79WEIGHTED AVERAGE NUMBER OF SHARES:BASIC

34,640,007



30,806,546



34,596,825



30,179,367DILUTED

34,742,327



30,806,546



34,744,914



30,179,367
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 3
 Table of Contents
 
 GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYNINE-MONTH PERIOD ENDED SEPTEMBER 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

-


-


-


-


-



3,481,428



3,481,428Common stock issued for  exercising stock options


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 nine-month period ended September 30, 2010

-


-


-


-



39,283,683


-



39,283,683BALANCE AT SEPTEMBER 30, 2010


34,640,007



17,320



66,533,170



5,679,769



99,091,972



7,641,043



178,963,274
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 4
 Table of Contents
 
 GULF RESOURCES, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in U.S. dollars)(UNAUDITED)
 
 Nine-Month Period Ended September 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
39,283,683


$
23,832,529Adjustments to reconcile net income to net cash provided by operating activities:Amortization of warrants


-



309,500Amortization of prepaid expenses


75,436



11,943Amortization of prepaid expenses by shares issued for consulting fee


-



48,616Depreciation and amortization


7,867,568



4,816,540Stock-based compensation expense


1,188,966



-Deferred tax asset


(18,331
)

-Bad debt provision


-



78,150Changes in assets and liabilitiesAccounts receivable


1,719,870



(3,831,618
)Inventories


(581,346
)


(53,099
)Prepayment and deposit


(290,968
)


(133,215
)Other receivables


2,296



-Accounts payable and accrued expenses


1,182,100



1,874,951Retention payable


(220,640
)


-Taxes payable


2,015,614



1,004,489Net cash provided by operating activities


52,224,248



27,958,786CASH FLOWS USED IN INVESTING ACTIVITIESAdditions of prepaid land lease


(99,733
)


-Purchase of property, plant and equipment


(27,875,693
)


(33,828,480
)Net cash used in investing activities


(27,975,426
)


(33,828,480
)CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIESProceeds from exercising stock options


18,000



-Proceeds from private placement


2,192,919


-Repayment of loan payable


-



(4,031,775
)Advance from a related party


-


8,452,194Repayment to a related party


(1,190
)


(10,168,016
)Net cash provided by (used in) financing activities


2,209,729



(5,747,597
)EFFECTS OF EXCHANGE RATE CHANGESON CASH AND CASH EQUIVALENTS


1,403,085



(4,249
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


27,861,636



(11,621,540
)CASH & CASH EQUIVALENTS - BEGINNING OF PERIOD


45,536,735



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

$
73,398,371


$
19,256,504
 
 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 (CONTINUED)(Expressed in U.S. dollars)(UNAUDITED)
 
 Nine-Month Period Ended September 30,2010


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

$
11,698,528


$
7,681,162Interest paid

$
620


$
27,009SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ANDFINANCING 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


$
6,028,588Issuance of common stock for exercising warrants

$
8


$
-
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 6
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a)           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 and nine-month period ended September 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 interim periods 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.
 
 (b)           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").
 
 (c)           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.  Both SCHC and SYCI are companies incorporated in The People’s Republic of China (“PRC”).  All material intercompany transactions have been eliminated on consolidation.
 
 (d)           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
 
 7
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
  (e)           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 collectability of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance and the Company considers the historical 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 September 30, 2010 and December 31, 2009, allowance for doubtful accounts were nil. Nil and $78,150 allowances for doubtful accounts were charged to the income statement for the nine-month period ended September 30, 2010 and 2009, respectively.
 
 (f)           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.
 
 (g)           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.
 
 (h)           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
 
 8
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 (i) Asset Retirement Obligation
 
 The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.
 
 (j)           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.
 
 (k)           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 $122,584 and $67,070 for the three-month period ended September 30, 2010 and 2009, respectively, and the Company’s contributions totaled $365,623 and $218,658 for the nine-month period ended September 30, 2010 and 2009, respectively
 
 (l)           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.
 
 (m)          Reporting Currency and Translation
 
 The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the reporting currency is the United States dollar (“USD” or “$”).
 
 As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated comprehensive income. The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods. The statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.
 
 9
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 (n)           Foreign Operations
 
 All of the Company’s operations and assets are located in PRC.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.
 
 (o)           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.
 
 (p)           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.
 
 (q)           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-month period ended September 30, 2010 and 2009, shipping and handling costs were $162,261 and $123,794, respectively, and for the nine-month period ended September 30, 2010 and 2009, shipping and handling costs were $447,572 and $365,524 respectively.
 
 (r)           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.
 
 (s)           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.
 
 10
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 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-Month Period Ended

September 30,2010


2009NumeratorNet income

$
14,865,102


$
8,327,810DenominatorBasic: Weighted-average common shares outstanding during the period


34,640,007



30,806,546Add: Dilutive effect of stock options


102,320



-Diluted


34,742,327



30,806,546Net income per shareBasic

$
0.43


$
0.27Diluted

$
0.43


$
0.27
 
 
 Nine-Month Period Ended

September 30,2010


2009NumeratorNet income

$
39,283,683


$
23,832,529DenominatorBasic: Weighted-average common shares outstanding during the period


34,596,825



30,179,367Add: Dilutive effect of stock options


148,089



-Diluted


34,744,914



30,179,367Net income per shareBasic

$
1.14


$
0.79Diluted

$
1.13


$
0.79
 
 (t)           Recently Adopted Accounting Pronouncements
 
 In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities and Exchange Commission filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. This amendment was effective upon issuance. The adoption of ASU 2010-09 is for disclosure purposes only and did not have any effect on the Company’s financial position or results of operations.
 
 11
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
  NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES– Continued
  In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which amends ASC Topic 820, Fair Value Measurement and Disclosure (“ASC 820”) to require a number of additional disclosures regarding fair value measurements. In addition to the new disclosure requirements, ASU 2010-06 amends ASC 820 to clarify that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities. Prior to the issuance of ASU 2010-06, the guidance in ASC 820 required separate fair value disclosures for each major category of assets and liabilities. ASU 2010-06 also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. Except for the requirement to disclose information about purchases, sales, issuance and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all of the provisions of ASU 2010-06 were effective for interim and annual reporting periods beginning after December 15, 2009. The Company adopted these provisions as of January 1, 2010. The adoption of these provisions did not have any effect on the Company’s financial position or results of operations. The requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 measurements is effective for annual reporting periods beginning after December 15, 2010, or January 1, 2011 for the Company. The adoption of this portion of ASU 2010-06 will not have any effect on the Company’s financial position or results of operations.
 
 In June 2009, the FASB issued guidance now codified within ASC Topic 810, Consolidation (“ASC 810”), which requires entities to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and obligation to absorb losses of the entity that could potentially be significant to the variable interest. The guidance was effective as of the beginning of the annual reporting period commencing after November 15, 2009. The Company adopted these provisions as of January 1, 2010. The adoption of the guidance codified within ASC 810 did not have any effect on the Company’s financial position or results of operations.
 
 (u)           Recent Accounting Pronouncements Not Yet Adopted
 
 In July 2010, the FASB issued ASU No. 2010-20, Receivables (“ASC Topic 310”): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the disclosure requirements under this ASU and the impact on the Company’s consolidated financial statements and the disclosures presented in the consolidated financial statements.
 
 In October 2009, the FASB issued ASU No. 2009-13, Multiple-Delivery Revenue Arrangements (“ASU 2009-13”), which establishes the accounting and reporting guidance for arrangements including multiple deliverable revenue-generating activities, and provides amendments to the criteria for separating deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments of ASU 2009-13 also establish a hierarchy for determining the selling price of a deliverable, and require significantly enhanced disclosures to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about their nature and terms, significant deliverables, and the general timing of delivery. The amendments also require disclosure of information about the significant judgments made and changes to those judgments, and about how the application of the relative selling price method affects the timing or amount of revenue recognition. The amendments of ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in annual reporting periods beginning on or after June 15, 2010, or January 1, 2011 for the Company. Early application is permitted. Management does not anticipate any effect on the Company’s financial position or results of operations.
 
 12
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES– Continued
 
 In April 2010, the FASB issued ASU No. 2010-13, Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market 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. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Management does not anticipate significant effect of the amendment to the Group as the Group has accounted for share-based payment award as equity.
 
 The Company does not believe that any other of the recently issued and adopted, but not yet effective, accounting standards would have a material effect on the Company’s consolidated financial statements and the disclosures presented in the consolidated financial statements.
 
 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 the Shouguang 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).
 
 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.
 
 13
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 3 – INVENTORIES
 
 Inventory consists of:
 
 September 30,

2010


December 31,

2009Raw material

$
386,202


$
298,359Finished goods


873,805



356,605Allowance for obsolete and slow moving inventory


(4,728
)


(4,632
)$
1,255,279


$
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-month period ended September 30, 2010, amortization of prepaid land lease totaled $29,056, of which $28,908 and $148 were recorded as cost of net revenue and administrative expenses respectively.  During the three-month period ended September 30, 2009, amortization of prepaid land lease totaled $3,960, of which $3,813 and $147 were recorded as cost of net revenue and administrative expenses respectively. During the nine-month period ended September 30, 2010, amortization of prepaid land lease totaled $75,436, of which $74,994 and $442 were recorded as cost of net revenue and administrative expenses respectively.  During the nine-month period ended September 30, 2009, amortization of prepaid land leases totaled $11,943, of which $11,503 and $440 were recorded as cost of net revenue and administrative expenses respectively.
 
 NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
 
 Property, plant and equipment, net consist of the following:
 
 September 30,

2010


December 31,

2009At cost:Mineral rights

$
5,960,034


$
5,840,594Buildings


29,745,843



21,651,379Plant and machinery


87,206,873



63,270,428Furniture, fixtures and office equipment


3,857,708



3,602,676Motor vehicles


6,625



-Construction in progress


-



1,467,000Total


126,777,083



95,832,077Less: accumulated depreciation and amortization


(22,124,725
)


(13,838,183
)Net book value

$
104,652,358


$
81,993,894
 
 14
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued
 
 During the three-month period ended September 30, 2010, depreciation and amortization expense totaled $3,048,776, of which $2,947,862 and $100,914 were recorded as cost of net revenue and administrative expenses respectively. During the three-month period ended September 30, 2009, depreciation and amortization expense totaled $1,789,660, of which $1,749,949 and $39,711 were recorded as cost of sales and administrative expenses respectively.
 
 During the nine-month period ended September 30, 2010, depreciation and amortization expense totaled $7,867,568, of which $7,643,938 and $223,630 were recorded as cost of net revenue and administrative expenses respectively. During the nine-month period ended September 30, 2009, depreciation and amortization expense totaled $4,816,540, of which $4,698,295 and $118,245 were recorded as cost of sales and administrative expenses respectively.
 
 There were no impairment provisions made at September 30, 2010 and December 31, 2009.
 
 In August 2009, the Company completed a sewage treatment project at a total cost of RMB45,000,000 (equivalent to $6,601,500).  A retention amount of $660,150, 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 RMB60,000,000 (equivalent to $8,838,000).  A retention amount of $449,100, representing 5% of the total cost will be paid to Shouguang City Shengkun Construction Co., Ltd. upon one year after the completion date.
 
 NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts payable and accrued expenses consist of the following:
 
 September 30,


December 31,2010


2009Accounts payable

$
6,471,133


$
5,348,638Salary payable


190,486



177,194Social security insurance contribution payable


50,032



19,132Other payable


426,253



278,781Total

$
7,137,904


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


December 31,2010


2009Due to a key management

$
-


$
1,190
 
 The amount of $1,190 represented an advance from a member of a key management of the Company which is unsecured, and interest free and repayable on demand.
 
 15
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 8 – TAXES PAYABLE
 
 Taxes payable consists of the following:
 
 September 30,

December 31,2010

2009Income tax payable
$
5,235,092

$
3,079,233Mineral resource compensation fee payable

594,320


333,928Value added tax payable and others

1,890,636


2,141,952Total
$
7,720,048

$
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.
 
 16
 Table of Contents
  GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 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 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-month and nine-month periods ended September 30, 2010, nil and $995,539 was recognized as general and administrative expenses, respectively.
 
 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-month and nine-month periods ended September 30, 2010, nil and $193,428 was recognized as general and administrative expenses, respectively.
 
 The following table summarizes all Company stock option transactions between January 1, 2010 and September 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 nine-monthperiod ended September 30, 2010


157,500



157,500


$
8.25-12.0Exercised during the nine-monthperiod ended September 30, 2010


(37,500
)


(37,500
)

$
1.44-$4.8Balance, September 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 September 30, 2010

Contractual Life (Years)

Currently Exercisable$0.84-$12.0

621,471

2.09

$   7.72
 
 The weighted average grant-date fair values as at September 30, 2010 and December 31, 2009 were $6.99 and $6.84, respectively.
 
 At September 30, 2010, the aggregate intrinsic value of the stock options and warrants was $193,147.
 
 17
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 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.
 
 (a)           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 periods ended September 30, 2010 and 2009, and management believes that its earnings are permanently invested in the PRC. As of September 30, 2010 and December 31, 2009, the accumulated undistributed PRC earnings are $116,470,425 and $75,096,727, respectively.
 
 (b)           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 September 30, 2010 and 2009.
 
 (c)           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 September 30, 2010 and 2009 are 16.5%.
 
 (d)           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 exempted 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.
 
 18
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 11– INCOME TAXES– Continued
 
 September 30,


December 31,2010


2009Deferred tax liabilities

$
-


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

$
1,182


$
1,158Property, plant and equipment


101,759



81,437Net operating loss


7,638,095



6,692,426Other assets


3,139



3,077Total deferred tax assets


7,744,175



6,778,098Valuation allowance


(7,638,095
)


(6,692,426
)Net deferred tax asset

$
106,080


$
85,672Current deferred tax asset

$
106,080


$
85,672Long-term deferred tax asset

$
-


$
-
 
 There was no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2010 and December 31, 2009.
 
 Tax returns filed regarding tax years from 2005 through 2009 are subject to review by the respective tax authorities.
 
 19
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 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-Month

Period Ended

Bromine and


Chemical


Segment





ConsolidatedSeptember 30, 2010

Crude Salt


Products


Total


Corporate


TotalNet revenue

$
32,760,760


$
11,997,534


$
44,758,294


$
-


$
44,758,294Income (loss) from operations


17,100,117



3,206,300



20,306,417



(464,253
)


19,842,164Total assets


156,754,567



37,408,781



194,163,348



106,978



194,270,326Depreciation and amortization


2,355,730



693,046



3,048,776



-



3,048,776Capital expenditure


6,575,634



-



6,575,634



-



6,575,634
 
 
 Three-Month

Period Ended

Bromine and


Chemical


Segment





ConsolidatedSeptember 30, 2009

Crude Salt


Products


Total


Corporate


TotalNet revenue

$
18,814,932


$
8,852,226


$
27,667,158


$
-


$
27,667,158Income (loss) from operations


8,245,278



3,053,245



11,298,523



(160,654
)


11,137,869Total assets


91,479,066



25,776,330



117,255,396



150,194



117,405,590Depreciation and amortization


1,502,376



287,284



1,789,660



-



1,789,660Capital expenditure


12,227,274



2,638,980



14,866,254



-



14,866,254
 
 Nine-Month

Period Ended

Bromine and


Chemical


Segment





ConsolidatedSeptember 30, 2010

Crude Salt


Products


Total


Corporate


TotalNet revenue

$
87,641,288


$
33,562,233


$
121,203,521


$
-


$
121,203,521Income (loss) from operations


44,904,633



9,959,587



54,864,220



(2,089,424
)


52,774,796Total assets


156,754,567



37,408,781



194,163,348



106,978



194,270,326Depreciation and amortization


6,331,062



1,536,506



7,867,568



-



7,867,568Capital expenditure


21,000,690



7,483,230



28,483,920



-



28,483,920
 
 20
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 12– BUSINESS SEGMENTS– Continued
 
 Nine-Month

Period Ended

Bromine and


Chemical


Segment





ConsolidatedSeptember 30, 2009

Crude Salt


Products


Total


Corporate


TotalNet revenue

$
54,874,656


$
26,016,938


$
80,891,594


$
-


$
80,891,594Income (loss) from operations


23,986,058



8,879,769



32,865,827



(836,152
)


32,029,675Total assets


91,479,066



25,776,330



117,255,396



150,194



117,405,590Depreciation and amortization


4,085,235



731,305



4,816,540



-



4,816,540Capital expenditure


27,890,325



5,938,155



33,828,480



-



33,828,480
  Three-Month Period


Nine-Month PeriodEnded September 30,


Ended September 30,Reconciliations

2010


2009


2010


2009Total segment operating income

$
20,306,417


$
11,298,523


$
54,864,220


$
32,865,827Corporate overhead expenses


(464,253
)


(160,654
)


(2,089,424
)


(836,152
)Other income


133,244



19,713



268,600



38,463Income tax expense


(5,110,306
)


(2,829,772
)


(13,759,713
)


(8,235,609
)Total consolidated net income

$
14,865,102


$
8,327,810


$
39,283,683


$
23,832,529
 
 The following table shows the major customer(s) (10% or more) for the nine-month period ended September 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

$12,745

$-

$12,745

10.5%TOTAL



$12,745

$-

$12,745

10.5%
 
 The following table shows the major customer(s) (10% or more) for the nine-month period ended September 30, 2009.
 
 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

$8,440

$-

$8,440

10.4%2

Shandong Morui Chemical Company Limited

$8,321

$-

$8,321

10.3%TOTAL



$16,761

$-

$16,761

20.7%
 
 21
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 13 – MAJOR SUPPLIERS
 
 During the nine-month period ended September 30, 2010, the Company purchased 89.8% of its raw materials from its top five suppliers.  At September 30, 2010, amounts due to those suppliers included in accounts payable were $5,977,531. During the nine-month period ended September 30, 2009, the Company purchased 43.9% of its raw material from top five suppliers.  At September 30, 2009, amounts due to those suppliers included in accounts payable were $3,260,353. 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 nine-month period ended September 30, 2010, the Company sold 40.7% of its products to its top five customers. At September 30, 2010, amounts due from these customers were $5,984,753. During the nine-month period ended September 30, 2009, the Company sold 39.1% of its products to its top five customers.  At September 30, 2009, amounts due from these customers was $4,616,172. 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 and third quarters of 2010, the Company’s wholly-owned subsidiary, SYCI conducted research for the new production line of waste water treatment additives, the purpose of which is for the testing of the manufacturing routine and samples. The research and development expense incurred for the new production line from outside parties and internal company were $672,786 and $563,953, respectively.
 
 The total research and development expense recognized in the income statements during the three-month and nine-month periods ended September 30, 2010 were $546,607 and $1,049,029, respectively. The research and development expense recognized in the income statements during the three-month and nine-month periods ended September 30, 2009 were $125,122 and $375,187, respectively.
 
 22
 Table of Contents
 
 GULF RESOURCES, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010
 (Expressed in U.S. dollars)
 (UNAUDITED)
 
 NOTE 16 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS
 
 The Company has no outstanding capital commitment as of September 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 September 30, 2010:
 
 Less than 1 year

$
81,7041 -3 years

$
206,1163 -5 years

$
223,660More than 5 years

$
9,003,584Total

$
9,515,064
 
 Rental expenses amounted to $29,056 and $75,436 were charged to the income statements for the three-month and nine-month period ended September 30, 2010 respectively. Rental expense amounted to $9,934 and $11,943 were charged to the income statements for the three-month and nine-month period ended September 30, 2009 respectively.
  23
 Table of Contents
  Item 2. Management’s Discussionand 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 Salt, 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.
 
 24
 Table of Contents
 
 On February 5, 2007, Gulf Resources, through its subsidiary SCHC, acquired SYCI. Since the ownership of Gulf Resources and SYCI was substantially the same prior to the acquisition, 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 stockholders equity for the three-month and nine-month period ended September 30, 2010 and 2009.
 
 Three-Month Period

Ended September 30, 2010

Three-Month Period

Ended September 30, 2009

Percentage

ChangeNet revenue
$
44,758,294


$
27,667,158


62
%Cost of net revenue
$
(23,347,605
)

$
(15,533,613
)

50
%Gross profit
$
21,410,689


$
12,133,545


76
%Sales, marketing and other operating expenses
$
(18,789
)

$
(5,898
)

219
%Research and development costs
$
(546,607
)

$
(125,122
)

337
%General and administrative expenses
$
(1,003,129
)

$
(864,656
)

16
%Income from operations
$
19,842,164


$
11,137,869


78
%Other income net
$
133,244


$
19,713


576
%Income before taxes
$
19,975,408


$
11,157,582


79
%Income taxes
$
(5,110,306
)

$
(2,829,772
)

81
%Net income
$
14,865,102


$
8,327,810


78
%
 
 25
 Table of Contents
  Nine-Month Period

Ended September 30, 2010

Nine-Month Period

Ended September 30, 2009

Percentage

ChangeNet revenue
$
121,203,521


$
80,891,594



50
%Cost of net revenue
$
(63,273,007
)

$
(45,520,357
)


39
%Gross profit
$
57,930,514


$
35,371,237



64
%Sales, marketing and other operating expenses
$
(94,476
)

$
(16,681
)


466
%Research and development costs
$
(1,049,029
)

$
(375,187
)


180
%General and administrative expenses
$
(4,012,213
)

$
(2,949,694
)


36
%Income from operations
$
52,774,796


$
32,029,675



65
%Other income net
$
268,600


$
38,463



598
%Income before taxes
$
53,043,396


$
32,068,138



65
%Income taxes
$
(13,759,713
)

$
(8,235,609
)


67
%Net income
$
39,283,683


$
23,832,529



65
%
 
 Net revenue Net revenue was $44,758,294 for three-month period ended September 30, 2010, an increase of $17,091,136 (or approximately 61.8%) 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 $18,814,932 for the three-month period ended September 30, 2009 to $32,760,760 for the same period in 2010, an increase of approximately 74.1%.
 
 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 $1,808 per tonne for the three-month period ended September 30, 2009 to $2,708 per tonne for the same period in 2010, an increase of 49.8%. The sales volume of bromine slightly increased from 8,912 tonnes for the three-month period ended September 30, 2009 to 10,408 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 slightly increased from 106,820 tonnes for the three-month period ended September 30, 2009 to 109,930 tonnes for the same period in 2010. The average selling price of crude salt increased from $25 per tonne for the three-month period ended September 30, 2009 to $42 per tonne for the same period in 2010. Revenues from our chemical products segment increased from $8,852,226 for three-month period ended September 30, 2009 to $11,997,534 for the same period in 2010, an increase of approximately 35.5%. The increase was mainly due to the strong demand for environmentally friendly oil and gas exploration chemicals and agricultural intermediaries.
 
 Net revenue for the nine-month period ended September 30, 2010, was $121,203,521, representing an increase of $40,311,927 or 49.8% over the same period in 2009. For the nine-month period ended September 30, 2010, net revenue from our bromine and crude salt segment grew by $32,766,632 to $87,641,288, an increase of 59.7% compared to the same period in 2009. The increase was mainly due to the increase in the average selling price of bromine from $1,736 per tonne for the nine-month period ended September 30, 2009 to $2,666 per tonne for the same period in 2010, an increase of 53.6%. Sales volume of bromine slightly increased from 27,255 tonnes for the nine-month period ended September 30, 2009 to 28,577 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 272,360 tonnes for the nine-month period ended September 30, 2009 to 288,031 tonnes for the same period in 2010, and the average selling price of crude salt increased from $28 per tonne to $40 per tonne. Net revenue from our chemical products segment was $33,562,233 for the nine-month period ended September 30, 2010, an increase of $7,545,295 or 29.0% 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.
 
 26
 Table of Contents
  Net Revenue by SegmentThree-Month Period Ended


Three-Month Period EndedSeptember 30, 2010


September 30, 2009Segments




Percent of total





Percent of totalBromine and crude salt

$
32,760,760



73.2
%

$
18,814,932



68.0
%Chemical products

$
11,997,534



26.8
%

$
8,852,226



32.0
%Total revenues

$
44,758,294



100.0
%

$
27,667,158



100.0
%
 
 
 Three-Month Period Ended September 30,2010 vs. 2009Segments
Percent Increase of Net RevenueBromine and crude salt
74.1%Chemical products
35.5%
 
 
 Net Revenue by SegmentNine-Month Period Ended


Nine-Month Period EndedSeptember 30, 2010


September 30, 2009Segments




Percent of total





Percent of totalBromine and crude salt

$
87,641,288



72.3%


$
54,874,656



67.8%Chemical products

$
33,562,233



27.7%


$
26,016,938



32.2%Total revenues

$
121,203,521



100.0%


$
80,891,594



100.0%
 
 
 Nine-Month Period Ended September 30,2010 vs. 2009Segments
Percent Increase of Net RevenueBromine and Crude salt
59.7%Chemical Products
29.0%
 
  Bromine and crude salt segment product sold in tonnes

Three-Month Period Ended

September 30, 2010


Three-Month Period Ended

September 30, 2009


Percentage ChangeBromine


10,408



8,912



16.8
%Crude salt


109,930



106,820



2.9
%
 
  Bromine and crude salt segment product sold in tonnes

Nine-Month

Period Ended

September 30, 2010


Nine-Month

Period Ended

September 30, 2009


Percentage ChangeBromine


28,577



27,255



4.8
%Crude salt


288,031



272,360



5.8
%
  Due to the diverse product mix and varying values, management does not believe that the tonne sold by the chemical product division is a meaningful metric.
 
 27
 Table of Contents
 
 Cost of Net Revenue Cost of net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $23,347,605 for three-month period ended September 30, 2010, an increase of $7,813,992 (or approximately 50.3%) compared to the same period in 2009. Our cost of net revenue was $63,273,007 for the nine-month period ended September 30, 2010, an increase of $17,752,650 (or approximately 39.0%) compared to the same period in 2009. This increase resulted primarily from the production volume increase in both bromine and crude salt and chemical products segments. Production volume increase was due to the increase in demand of both segment products. 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 the economies of scale.
 
 Gross Profit Gross profit was $21,410,689, or 47.8% of net revenue for three-month period ended September 30, 2010 compared to $12,133,545, or 43.9% of net revenue for the same period in 2009. Gross profit was $57,930,514, or 47.8% of net revenue for the nine-month period ended September 30, 2010 compared to $35,371,237, 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 nine-month period ended September 30, 2010 as compared to the same period in 2009, the average selling price of bromine increased from $1,736 per tonne to $2,666 per tonne with an increase of 53.6%, while the inflation rate for cost of net revenue in our bromine and crude salt segment was much 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 and third quarters of 2010, our wholly-owned subsidiary, SYCI conducted research for the new production line of waste water treatment additives, the purpose of which is for the testing the manufacturing routine and samples. The research and development expense incurred for the aforesaid new production line from outside parties and internal company were $672,786 and $563,953, respectively. The total research and development costs incurred for the three-month period ended September 30, 2010 and 2009 was $546,607 and $125,122 respectively. The research and development costs incurred for the nine-month period ended September 30, 2010 and 2009 was $1,049,029 and $375,187 respectively.
 
 General and Administrative Expenses General and administrative expenses were $1,003,129 for the three-month period ended September 30, 2010, an increase of $138,473 (or approximately 16.0%) compared to $864,656 for the same period in 2009. The increase was mainly due to the increase in salary and welfare payments, depreciation, legal and professional fees, land duty and franchise tax by approximately $497,000. Such increment was partly offset by the reclassification of PRC mineral resources compensation fees of approximately $327,000 for the three-month period ended September 30, 2009 which were previously treated as general and administrative expenses but were reclassified as cost of net revenue (approximately $587,000) for the same period in 2010. General and administrative expenses were $4,012,213 for the nine-month period ended September 30, 2010, an increase of $1,062,519 (or approximately 36.0%) from $2,949,694 for the same period in 2009. This significant increase in general and administrative expenses was primarily due to non-cash expenses related to (i) options granted to our employees in the amount of $995,538, and (ii) a warrant issued to our investor relations firm in the amount 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-Month Period Ended

September 30, 2010


Three-Month Period Ended

September 30, 2009Percent of total





Percent of totalSegmentBromine and crude salt

$
17,100,117



84.2
%

$
8,245,278



73.0
%Chemical products


3,206,300



15.8
%


3,053,245



27.0
%Income from operations before corporate costs


20,306,417



100.0
%


11,298,523



100.0
%Corporate costs


(464,253
)






(160,654
)Income from operations


19,842,164







11,137,869
 
 28
 Table of Contents
 
 Income from Operation by SegmentNine-Month Period Ended

September 30, 2010


Nine-Month Period Ended

September 30, 2009Percent of total





Percent of totalSegmentBromine and crude salt

$
44,904,633



81.8
%

$
23,986,058



73.0
%Chemical products


9,959,587



18.2
%


8,879,769



27.0
%Income from operations before corporate costs


54,864,220



100.0
%


32,865,827



100.0
%Corporate costs


(2,089,424
)






(836,152
)Income from operations


52,774,796







32,029,675
 
 Income from operations before corporate costs was $20,306,417 for the three-month period ended September 30, 2010 (or 45.3% of net revenue), an increase of $9,007,894 (or approximately 79.7%) compared to the same period in 2009. Income from operations before corporate costs was $54,864,220 for the nine-month period ended September 30, 2010 (or 45.3% of net revenue), an increase of $21,998,393 (or approximately 66.9%) compared to the same period in 2009. For the three-month period ended September 30, 2010, income from operations for the bromine and crude salt segment was $17,100,117, an increase of 107.4% from $8,245,278 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-month period ended September 30, 2010, income from operations for the chemical products segment was $3,206,300, an increase of 5.0% from $3,053,245 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 Income Other income was $133,244 for the three-month period ended September 30, 2010, an increase of $113,531 from $19,713 for the same period in 2009. Other income was $268,600 for the nine-month period ended September 30, 2010, an increase of $230,137 from $38,463 for the same period in 2009. This increase in other income was primarily due to the increase in interest income and the sale of wastewater to some of our customers since March 2010. Wastewater is a byproduct generated from the production of bromine which eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We have signed agreements with three of our customers to sell them our wastewater at market prices.
 
 Net Income Net income was $14,865,102 for the three-month period ended September 30, 2010, an increase of $6,537,292 (or approximately 78.5%) compared to the same period in 2009. Net income was $39,283,683 for the nine-month period ended September 30, 2010, an increase of $15,451,154 (or approximately 64.8%) compared to the same period in 2009. This increase was primarily attributable to the increase in sales volume and selling price of bromine.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 As of September 30, 2010, cash and cash equivalents were $73,398,371 as compared to $45,536,735 as of December 31, 2009. The components of this increase of $27,861,636 are reflected below.
 
 Cash Flow
 
 Nine-Month Period Ended September 30,2010


2009Net cash provided by operating activities

$
52,224,248


$
27,958,786Net cash used in investing activities

$
(27,975,426
)

$
(33,828,480
)Net cash provided by (used in) financing activities

$
2,209,729


$
(5,747,597
)Effects of exchange rate change on cash

$
1,403,085


$
(4,249
)Net cash inflow (outflow)

$
27,861,636


$
(11,621,540
)
 
 
 For the nine-month period ended September 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.
 
 29
 Table of Contents
 
 Net Cash Provided by Operating Activities
 
 During the nine-month period ended September 30, 2010, we had positive cash flow from operating activities of $52,224,248 primarily attributable to net income of $39,283,683. During the nine-month period ended September 30, 2009, we had positive cash flow from operating activities of $27,958,786, primarily attributable to net income of $23,832,529. Net cash provided by operating activities during the nine-month period ended September 30, 2010 increased by $24,265,462 compared to the same period in 2009. The primary source of this increment was due to the increase in net income.  As a result of increasing demand for bromine and crude salt in the China market, the selling price per tonne of bromine and crude salt for the nine-month period ended September 30, 2010 increased by 53.6% and 43.1% respectively, over the same period in 2009.
 
 Net Cash Provided by (Used in) Investing Activities and Financing Activities
 
 The Company used approximate $7 million cash for the construction of waste water chemical additives during the nine-month period ended September 30, 2010. The Company used approximate $14 million cash for the acquisition of bromine assets in June of 2010. The Company also used approximate $7 million to build new channels and wells for bromine facilities during the nine-month period ended September 30, 2010. These projects were financed by opening cash balances as of December 31, 2009 and cash generated from operations during the first nine 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
 
 (a)           Use of Estimates
 
 Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires us 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. We base 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.
 
 30
 Table of Contents
  (b)           Accounts Receivable and Allowance for Doubtful Accounts
 
 Accounts receivable is stated at cost, net of allowance for doubtful accounts. We establish an allowance for doubtful accounts based on our assessment of the collectivity of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance and we consider the historic level of credit losses and apply certain percentage to accounts receivable balance. We make 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.
 
 (c)           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.
 
 Our 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
 
 (d)           Revenue Recognition
 
 We recognize 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, we generally recognize 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.
 
 (e)           Income Taxes
 
 We use 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.
 
 (f)           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.
 
 31
 Table of Contents
  Item 3. Quantitativeand Qualitative Disclosures About Market Risk
 
 Not required.
 
 Item 4. Controls and Procedures
 
 Evaluation of Disclosure 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 September 30, 2010. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2010 our disclosure controls and procedures were effective.
 
 The Company’s internal control consultant, Deloitte Touche Tohmatsu (“Deloitte”), has issued an interim report regarding the Company’s internal control. The objective of Deloitte’s engagement is to assist the Company with an independent assessment of the managerial, operations and internal controls of the Company, covering the areas of the Company’s Corporate Controls, Anti-Fraud Program, Financial Reporting and Disclosure Controls, and to provide recommendations to improve identified internal control weaknesses. In their interim report, Deloitte provided recommendations in respect of certain internal control improvement areas.  These improvement areas were considered by the Company’s management as enhancement to the Company’s existing controls and not related to any significant deficiencies. It is expected Deloitte will issue a final report around the end of 2010 after improvements have been implemented by the Company and re-assessed by Deloitte.
 
 Changes in Internal Control Over Financial Reporting.  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.
 
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  PART II—OTHERINFORMATION
 
 Item 1. Legal Proceedings
 
 None.
 
 Item 1A. 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.
 
 Item 2. Unregistered Shares of Equity Securities and Use of Proceeds
 
 None.
 
 Item 3. Defaults Upon Senior Securities
 
 None.
 
 Item 4. (Reserved and Removed)
 
 Item 5. Other Information
 
 None.
 
 Item 6. 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
 
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 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: November 15, 2010
By:
/s/ Xiaobin LiuXiaobin LiuChief Executive Officer(principal executive officer)November 15, 2010
By:
/s/ Min LiMin LiChief Financial Officer(principal financial and accounting officer)
 
 
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