UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
 
 T
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2009or£
              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.)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           TNo £
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer £
              Accelerated
      filer TNon-accelerated
      filer (Do not check if a smaller reporting company) £
              Smaller
      reporting company £
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes           £No T
  As of
November 2, 2009, the registrant had outstanding 31,542,542 shares of
common stock.
  
  Table of
Contents
 
 Page
  Part
      I — FINANCIAL STATEMENTS
                1Item
      1.
                Financial
      Statements.
                1Item
      2.
                Management’s Discussion and Analysis of Financial Condition and
      Results
      of Operations.
                24Item
      3.
                Quantitative and
      Qualitative Disclosures About Market Risk.
                31Item
      4.
                Controls and
      Procedures.
                32Part
      II — OTHER INFORMATION.
                33Item
      1.
                Legal
      Proceedings.
                33Item
      1A.
                Risk
      Factors.
                33Item
      2.
                Unregistered Sales
      of Equity Securities and Use of Proceeds.
                33Item
      3.
                Defaults Upon
      Senior Securities.
                33Item
      4.
                Submission of
      Matters to a Vote of Security Holders.
                33Item
      5.
                Other
      Information.
                33Item
      6.
                Exhibits.
                33


i


PARTI — FINANCIAL STATEMENTS
  Item
1. Financial Statements.
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
  September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(unaudited)
                  
                  
                  (audited)ASSETSCURRENT
      ASSETSCash
                  
                  $
                  19,256,504
                  
                  
                  $
                  30,878,044Accounts
      receivable, net of allowance
                  
                  
                  15,431,176
                  
                  
                  
                  11,674,645Inventories
                  
                  
                  471,469
                  
                  
                  
                  418,259Prepayment
      and deposit
                  
                  
                  362,915
                  
                  
                  
                  229,408Prepaid
      land lease
                  
                  
                  15,849
                  
                  
                  
                  15,849Deferred
      tax asset
                  
                  
                  3,453
                  
                  
                  
                  3,453Other
      receivable
                  
                  
                  2,289
                  
                  
                  
                  2,64135,543,655
                  
                  
                  
                  43,222,299PROPERTY,
      PLANT AND EQUIPMENT, Net
                  
                  
                  81,136,111
                  
                  
                  
                  45,399,456PREPAID
      LAND LEASE, Net of current portion
                  
                  
                  725,824
                  
                  
                  
                  737,711TOTAL
      ASSETS
                  
                  $
                  117,405,590
                  
                  
                  $
                  89,359,466LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                  
                  $
                  6,653,162
                  
                  
                  $
                  4,746,993Loan
      Payable
                  
                  
                  -
                  
                  
                  
                  4,034,250Retention
      Payable
                  
                  
                  660,150
                  
                  
                  
                  -Note
      and loan payable – related parties
                  
                  
                  -
                  
                  
                  
                  4,650,000Due
      to related party
                  
                  
                  769,090
                  
                  
                  
                  852,068Taxes
      payable
                  
                  
                  5,253,780
                  
                  
                  
                  4,269,442TOTAL
      CURRENT LIABILITIES
                  
                  
                  13,336,182
                  
                  
                  
                  18,552,753NON
      CURRENT LIABILITIESNote
      payable, net of current portion
                  
                  
                  -
                  
                  
                  
                  18,337,493TOTAL
      LIABILITIES
                  
                  
                  13,336,182
                  
                  
                  
                  36,890,246STOCKHOLDERS’
      EQUITYPREFERED
      STOCK ; $0.001 par value; 1,000,000 sharesauthorized
      none outstanding
                  
                  
                  -
                  
                  
                  
                  -COMMON
      STOCK; $0.0005 par value; 100,000,000 sharesauthorized;
      31,599,552 and 24,917,210issues
      and outstanding in 2009 and 2008
                  
                  
                  15,800
                  
                  
                  
                  12,459ADDITIONAL
      PAID-IN CAPITAL
                  
                  
                  40,743,524
                  
                  
                  
                  13,072,668RETAINED
      EARNINGS – UNAPPROPRIATED
                  
                  
                  55,649,994
                  
                  
                  
                  31,817,465RETAINED
      EARNINGS – APPROPRIATED
                  
                  
                  3,223,418
                  
                  
                  
                  3,223,418CUMULATIVE
      TRANSLATION ADJUSTMENT
                  
                  
                  4,436,672
                  
                  
                  
                  4,343,210TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  104,069,408
                  
                  
                  
                  52,469,220TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  117,405,590
                  
                  
                  $
                  89,359,466
  See
accompanying notes to condensed consolidated financial statements.
  1
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three
      Months Ended
                    September
      30,
                  
                  
                  Nine
      Months Ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008NET
      REVENUENet
      sales
                  
                  $
                  27,667,158
                  
                  
                  $
                  17,554,873
                  
                  
                  $
                  80,891,594
                  
                  
                  $
                  63,354,609OPERATING
      EXPENSESCost
      of net revenue
                  
                  
                  15,533,613
                  
                  
                  
                  11,388,348
                  
                  
                  
                  45,520,357
                  
                  
                  
                  38,050,971Research
      and development cost
                  
                  
                  125,122
                  
                  
                  
                  122,744
                  
                  
                  
                  375,187
                  
                  
                  
                  389,853General
      and administrative expenses
                  
                  
                  870,554
                  
                  
                  
                  960,747
                  
                  
                  
                  2,966,375
                  
                  
                  
                  2,824,37716,529,289
                  
                  
                  
                  12,471,839
                  
                  
                  
                  48,861,919
                  
                  
                  
                  41,265,201INCOME
      FROM OPERATIONS
                  
                  
                  11,137,869
                  
                  
                  
                  5,083,034
                  
                  
                  
                  32,029,675
                  
                  
                  
                  22,089,
      408OTHER
      INCOME (EXPENSES)Interest
      expense
                  
                  
                  (102)
                  
                  
                  
                  -
                  
                  
                  
                  (27,144)
                  
                  
                  
                  (60,111)Interest
      income
                  
                  
                  19,815
                  
                  
                  
                  26,143
                  
                  
                  
                  65,607
                  
                  
                  
                  70,400Sundry
      income (expense)
                  
                  
                  -
                  
                  
                  
                  779
                  
                  
                  
                  -
                  
                  
                  
                  (3,764)INCOME
      BEFORE INCOME TAXES
                  
                  
                  11,157,582
                  
                  
                  
                  5,109,956
                  
                  
                  
                  32,068,138
                  
                  
                  
                  22,095,933INCOME
      TAXES current
                  
                  
                  2,829,772
                  
                  
                  
                  1,373,055
                  
                  
                  
                  8,235,609
                  
                  
                  
                  5,925,532NET
      INCOME
                  
                  $
                  8,327,810
                  
                  
                  $
                  3,736,901
                  
                  
                  $
                  23,832,529
                  
                  
                  $
                  16,170,401EARNINGS
      PER SHARE:BASIC
                  
                  $
                  0.27
                  
                  
                  $
                  0.15
                  
                  
                  $
                  0.79
                  
                  
                  $
                  0.65DILUTED
                  
                  $
                  0.27
                  
                  
                  $
                  0.15
                  
                  
                  $
                  0.79
                  
                  
                  $
                  0.65WEIGHTED
      AVERAGE NUMBER OF SHARES:BASIC
                  
                  
                  30,806,546
                  
                  
                  
                  24,917,211
                  
                  
                  
                  30,179,367
                  
                  
                  
                  24,917,211DILUTED
                  
                  
                  30,806,546
                  
                  
                  
                  24,917,211
                  
                  
                  
                  30,179,367
                  
                  
                  
                  24,919,164
  See
accompanying notes to condensed consolidated financial statements.
  2
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (UNAUDITED)
 
 Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008NET
      INCOME
                  
                  $
                  8,327,810
                  
                  
                  $
                  3,736,901
                  
                  
                  $
                  23,832,529
                  
                  
                  $
                  16,170,401OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
                  
                  
                  148,833
                  
                  
                  
                  228,921
                  
                  
                  
                  93,462
                  
                  
                  
                  2,341,313COMPREHENSIVE
      INCOME
                  
                  $
                  8,476,643
                  
                  
                  $
                  3,965,822
                  
                  
                  $
                  23,925,991
                  
                  
                  $
                  18,511,714
  See
accompanying notes to condensed consolidated financial statements.
  3
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 NINE
MONTHS ENDED SEPTEMBER 30, 2009
 
 StatutoryAdditional
                  
                  
                  Common
                  
                  
                  
                  
                  
                  CumulativeNumber
                  
                  
                  Common
                  
                  
                  Paid-in
                  
                  
                  Reserve
                  
                  
                  Retained
                  
                  
                  Translationof
      Shares
                  
                  
                  Stock
                  
                  
                  Capital
                  
                  
                  Fund
                  
                  
                  Earnings
                  
                  
                  Adjustment
                  
                  
                  TotalBALANCE
      AT
                    DECEMBER
      31, 2008
                  
                  
                  99,668,842
                  
                  
                  $
                  49,834
                  
                  
                  $
                  13,035,293
                  
                  
                  $
                  3,223,418
                  
                  
                  $
                  31,817,465
                  
                  
                  $
                  4,343,210
                  
                  
                  $
                  52,469,220Retroactive
      Restatement due to 1:4 stock split
                  
                  
                  (74,751,631
                  )
                  
                  
                  (37,375
                  )
                  
                  
                  37,375
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance
      at December 31, 2008 (restated)
                  
                  
                  24,917,211
                  
                  
                  
                  12,459
                  
                  
                  
                  13,072,668
                  
                  
                  
                  3,223,418
                  
                  
                  
                  31,817,465
                  
                  
                  
                  4,343,210
                  
                  
                  
                  52,469,220Cumulative
      translation
                    Adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  93,462
                  
                  
                  
                  93,462Common
      stock issuance for settlement of shareholder’s note
payable
                  
                  
                  5,250,000
                  
                  
                  
                  2,625
                  
                  
                  
                  21,284,868
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,287,493Common
      stock issuance for acquiring assets
                  
                  
                  1,432,341
                  
                  
                  
                  716
                  
                  
                  
                  6,027,872
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,028,588Issuance
      of warrants for consulting expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  48,616
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  48,616Issuance
      of stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  309,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  309,500Net
      income for nine months ended September 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,832,529
                  
                  
                  
                  -
                  
                  
                  
                  23,832,529BALANCE
      AT
                    September
      30, 2009 (unaudited)
                  
                  
                  31,599,552
                  
                  
                  
                  15,800
                  
                  
                  
                  40,743,524
                  
                  
                  
                  3,223,418
                  
                  
                  
                  55,649,994
                  
                  
                  
                  4,436,672
                  
                  
                  
                  104,069,408
  See
accompanying notes to condensed consolidated financial statements.
  4
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 Nine
      Months Ended
                    September
      30,2009
                  
                  
                  2008CASH
      FLOWS PROVIDED BY OPERATING ACTIVITIESNet
      income
                  
                  $
                  23,832,529
                  
                  
                  $
                  16,170,401Adjustments
      to reconcile net income to
      net cash provided by operating activitiesAmortization
      of warrants issued for expenses
                  
                  
                  309,500
                  
                  
                  
                  602,142Amortization
      of prepaid expenses by shares issued for consulting fee
                  
                  
                  48,616
                  
                  
                  
                  145,484Amortization
      and prepaid expense
                  
                  
                  11,943
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  4,816,540
                  
                  
                  
                  3,426,455Bad
      debt provision
                  
                  
                  78,150(Increase)
      decrease in assetsAccounts
      receivable
                  
                  
                  (3,831,618
                  )
                  
                  
                  (4,426,119
                  )Inventories
                  
                  
                  (53,099
                  )
                  
                  
                  (1,659,098
                  )Prepayment
      and deposit
                  
                  
                  (133,215
                  )
                  
                  
                  (713,470
                  )Income
      tax receivable
                  
                  
                  -
                  
                  
                  
                  -Increase
      (decrease) in liabilities
                  
                  
                  -Accounts
      payable and accrued expenses
                  
                  
                  1,874,951
                  
                  
                  
                  3,102,777Taxes
      payable
                  
                  
                  1,004,489
                  
                  
                  
                  969,282Net
      cash provided by operating activities
                  
                  
                  27,958,786
                  
                  
                  
                  17,617,854CASH
      FLOWS USED IN INVESTING ACTIVITIESProperty,
      plant and equipment
                  
                  
                  (33,828,480
                  )
                  
                  
                  (17,365,195
                  )Net
      cash used in investing activities
                  
                  
                  (33,828,480
                  )
                  
                  
                  (17,365,195
                  )CASH
      FLOWS PROVIDED BY FINANCING ACTIVITIESRepayment
      to bank loan
                  
                  
                  -
                  
                  
                  
                  (3,843,675
                  )Proceeds
      from loan payable
                  
                  
                  -
                  
                  
                  
                  4,023,250Repayment
      to loan payable
                  
                  
                  (4,031,775
                  )
                  
                  
                  -Proceeds
      from Note and loan payable (related parties)
                  
                  
                  -
                  
                  
                  
                  13,635,405Repayment
      to Note and loan payable (related parties)
                  
                  
                  -
                  
                  
                  
                  (2,670,192
                  )Proceeds
      from related party
                  
                  
                  8,452,194
                  
                  
                  
                  -Repayment
      to related party
                  
                  
                  (10,168,016
                  )
                  
                  
                  -Net
      cash used in provided by financing activities
                  
                  
                  (5,747,597
                  )
                  
                  
                  11,144,788EFFECTS
      OF EXCHANGE RATE CHANGE ON CASH
                  
                  
                  (4,249
                  )
                  
                  
                  703,038NET
      INCREASE (DECREASE) IN CASH
                  
                  
                  (11,621,540
                  )
                  
                  
                  12,100,485CASH
      – BEGINNING OF PERIOD
                  
                  
                  30,878,044
                  
                  
                  
                  10,773,875CASH
      – END OF PERIOD
                  
                  $
                  19,256,504
                  
                  
                  $
                  22,874,360
  See
accompanying notes to condensed consolidated financial statements.
  5
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
  Nine
      Months Ended
                      September
      30,2009
                    
                    
                    2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for:Income
      taxes
                    
                    $
                    7,681,162
                    
                    
                    $
                    5,444,244Interest
      paid
                    
                    $
                    27,009
                    
                    
                    $
                    126,715SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ACTIVITIESWaiver
      of accrued interest to Additional Paid In Capital
                    
                    $
                    -
                    
                    
                    $
                    131,533Issuance
      of common stock as payment for shareholders note payable
                    
                    $
                    21,287,493
                    
                    
                    $
                    -Issuance
      of common stock for prepaid expenses
                    
                    $
                    -
                    
                    
                    $
                    -Issuance
      of common stock for purchase of assets
                    
                    $
                    6,028,588
                    
                    
                    $
                    -Purchase
      of property, plant and equipment for retention payable
                    
                    $
                    659,745
                    
                    
                    $
 
  See
accompanying notes to condensed consolidated financial statements.
  6
  GULF
RESOURCES, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  The
accompanying unaudited condensed consolidated financial statements have been
prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries
(collectively, the “Company”).  These statements include all
adjustments (consisting only of their normal recurring adjustments) which
management believes are necessary for a fair presentation of the statements and
have been prepared on a consistent basis using the accounting policies described
in the Form 10-K for the year ended December 31, 2008 (“2008 Form
10-K”).  Certain financial information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading.  The Notes
to Financial Statements included in the 2008 Form 10-K should be read in
conjunction with the accompanying interim financial statements.  The
interim operating results for the nine months ended September 30, 2009 may not
be indicative of operating results expected for the full year.
  Nature of the
Business
  The
Company manufactures and trades bromine and crude salt through its wholly-owned
subsidiary, Shouguang City Haoyuan Chemical Company Limited, a company
incorporated in the People’s Republic of China (“PRC”)  (“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, a company incorporated in the PRC
(“SYCI”).
  Basis of
Consolidation
  The
consolidated financial statements include the accounts of Gulf Resources, Inc.
and its wholly-owned subsidiaries, Upper Class Group Limited, a company
incorporated in the British Virgin Islands, which owns 100% of Hong Kong Jiaxing
Industrial Limited, a company incorporated in Hong Kong (“HKJI”), which owns
100% of SCHC and SYCI which is 100% owned by SCHC.  All material
intercompany transactions have been eliminated in consolidation.
  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 and the related disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
  7
  GULF
RESOURCES, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Allowance of doubtful
accounts
  Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
company establishes an allowance for doubtful accounts based on management’s
assessment of the collectivity of trade and other receivables. A considerate
amount of judgment is required in assessing the amount of allowance and the
company considers the historic level of credit losses and applies certain
percentage to accounts receivable balance. The company makes judgments about the
credit worthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future. If the financial condition of the customer begins deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.
  Based on
the above assessment, during the reporting period ended September 30, 2009, the
management established the general provision allowance according to the aging of
trade and other receivable as follows:
 
 Provision
      Base
                  Aging
                  Provision
      rateThe
      balance of
                  <120
      days
                  0.5%Accounts
      receivable
                  121
      days – 1 year
                  5%1 –
      2 year
                  30%2 –
      3 year
                  50%>3
      year
                  100%
 
  Bad debts
are written off when identified. The company extends unsecured credit to
customers ranging from 45 days to 90 days in the normal course of business. The
company does not accrue interest on trade and other receivable.
  As of
September 30, 2009, allowance for doubtful accounts amounted to $ 78,242. As of
December 31, 2008, allowance for doubtful accounts was $0.
  8
  GULF
RESOURCES, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Concentration of Credit
Risk
  Concentrations
of credit risk with respect to accounts receivable are limited since the Company
performs ongoing credit evaluations of its customers’ financial condition and
due to the generally short payment terms.
  Inventories
  Inventories
are stated at the lower of cost, determined on a first-in first-out cost basis,
or net realizable value. Costs of work-in-progress and finished goods are
composed of direct materials, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is based on estimated selling price
less selling expenses.
  Property, Plant and
Equipment
  Property,
Plant and Equipment is 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. Mineral rights are amortized ratably over the 50
year term of the lease, or the equivalent term under the units of production
method, whichever is shorter.
  The
Company’s depreciation and amortization policies on fixed assets are as
follows:
 
 Useful
      life
                    (in years)Mineral
      rights
                  Period
      of lease or 50 years or the equivalent term under the units of production
      method, whichever is shorterBuildings
                  20Machinery
                  8Motor
      vehicles
                  5Equipment
                  8
  9
  GULF
RESOURCES, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Asset Retirement
Obligation
  The
Company follows FASB ASC 410-20, which established a uniform methodology for
accounting for estimated reclamation and abandonment costs. FASB ASC 410-20
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which the legal obligation associated with the
retirement of the long-lived asset is incurred. When the liability is initially
recorded, the offset is capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. To settle the liability, the obligation is paid, and
to the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded.
  Currently,
there are no reclamation or abandonment obligations associated with the land
being utilized for exploitation
  Recoverability of Long Lived
Assets
  The
Company follows FASB ASC 360-10, “Accounting for the Impairment of Disposal of
Long-Lived Assets.” The Statement requires that long-lived and certain
identifiable intangibles be 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.
  Mineral
Rights
  The
Company follows FASB ASC 805-10 which provides 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.
  Fair Value of Financial
Instruments
  FASB ASC
825-10 requires disclosing fair value to the extent practicable for financial
instruments that are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or
settlement.
  For
certain financial instruments, including cash, accounts and other receivables,
accounts payable, short-term loans, accruals and other payables, it was assumed
that the carrying amounts approximate fair value because of the near term
maturities of such obligations. The carrying amounts of loans payable
approximate fair value since the interest rate associated with the debt
approximates the current market interest rate.
  10
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Reporting Currency and
Translation
  The
financial statements of the Company’s foreign subsidiaries are measured using
the local currency as the functional currency; however, the reporting currency
is the United States dollar (“USD”).  Assets and liabilities of the
Company have been translated into dollars using the exchange rate at the balance
sheet date. The average exchange rate for the period has been used to translate
revenues and expenses.  Translation adjustments are reported
separately and accumulated in a separate component of equity (cumulative
translation adjustment).
  Foreign
Operations
  All of
the Company’s operations and assets are located in China.  The Company
may be adversely affected by possible political or economic events in this
country.  The effect of these factors cannot be accurately
predicted.
  Revenue
Recognition
  In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 104, Revenue Recognition , the
Company recognizes revenue, net of any taxes, when persuasive evidence of a
customer or distributor arrangement exists or acceptance occurs, receipt of
goods by customer occurs, the price is fixed or determinable, and the sales
revenues are considered collectible.  Subject to these criteria, the
Company generally recognizes revenue at the time of shipment or delivery to the
customer, and when the customer takes ownership and assumes risk of loss based
on shipping terms.
  Income
Taxes
  The
Company uses the asset and liability method of accounting for income taxes
pursuant to FASB ASC 740-10.  Under the asset and liability method of
SFAS No. 109, 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.
  11
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Shipping and Handling Fees
and Costs
  The
Company follows FASB ASC 605-45, “accounting for 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 sales.   For the three months ended September
30, 2009 and 2008, shipping and handling costs were $123,794 and $91,365
respectively, and for the nine months ended September 30, 2009 and 2008,
shipping and handling costs were $365,525 and $312,611
respectively.
  Basic and Diluted Net Income
per Share of Common Stock
  In
accordance with, FASB ASC 260-10, 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.
  Recently Adopted Accounting
Pronouncements
  FASB ASC
820-10 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this standard relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. This standard is effective for fiscal years beginning after
November 15, 2007; however, it provides a one-year deferral of the effective
date for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value at least
annually. The Company adopted this standard for financial assets and financial
liabilities and nonfinancial assets and nonfinancial liabilities disclosed or
recognized at fair value on a recurring basis (at least annually) as of January
1, 2008. The Company adopted the standard for nonfinancial assets and
nonfinancial liabilities on January 1, 2009. The adoption of this standard in
each period did not have a material impact on its financial
statements.
  FASB ASC
805 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. This standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This standard was adopted by the Company beginning January 1,
2009 and will change the accounting for business combinations on a prospective
basis.
  12
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Recently Adopted Accounting
Pronouncements (continued)
  FASB ASC
810-10 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. The standard
establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that does not result in
deconsolidation and expands disclosures in the consolidated financial
statements. This standard is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years.  This standard
is not currently applicable to the Company.
  FASB ASC
815-10 is effective January 1, 2009. This standard requires enhanced disclosures
about derivative instruments and hedging activities to allow for a better
understanding of their effects on an entity’s financial position, financial
performance, and cash flows. Among other things, this standard requires
disclosures of the fair values of derivative instruments and associated gains
and losses in a tabular formant. This standard is not currently applicable to
the Company since the Company does not have derivative instruments or hedging
activity.
  FASB ASC
350-30 and 275-10 amend the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This standard is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. This standard is not
currently applicable to the Company.
  FASB ASC
260-10 provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. This standard is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company does not
currently have any share-based awards that would qualify as participating
securities. Therefore, application of this standard is not expected to have an
effect on the Company’s financial reporting.
  13
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Recently Adopted Accounting
Pronouncements (continued)
  FASB ASC
470-20 will be effective for financial statements issued for fiscal years
beginning after December
15, 2008. The standard includes guidance that convertible debt instruments that
may be settled in cash upon conversion should be separated between the liability
and equity components, with each component being accounted for in a manner that
will reflect the entity’s nonconvertible debt borrowing rate when interest costs
are recognized in subsequent periods. This standard is currently not applicable
to the Company since the Company does not have any convertible
debt.
  FASB ASC
815-10 and 815-40 are effective for financial statements for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The standard addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which is the first part
of the scope exception for the purpose of determining whether the instrument is
classified as an equity instrument or accounted for as a derivative instrument
which would be recognized either as an asset or liability and measured at fair
value. The standard shall be applied to outstanding instruments as of the
beginning of the fiscal year in which this standard is initially applied. Any
debt discount that was recognized when the conversion option was initially
bifurcated from the convertible debt instrument shall continue to be amortized.
The cumulative effect of the change in accounting principles shall be recognized
as an adjustment to the opening balance of retained earnings. The Company
adopted this standard as of January 1, 2009, and was not required to reclassify
any of its warrants as liabilities
  FASB ASC
825-10 requires disclosures about the fair value of financial instruments for
interim reporting periods. This standard is effective for interim reporting
periods ending after June 15, 2009. The adoption of this standard did not have a
material impact on the Company’s financial statements.
  FASB ASC
820-10 provides additional guidance for Fair Value Measurements when
the volume and level of activity for the asset or liability has significantly
decreased. This standard is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on its financial statements.
  FASB ASC
320-10 amends the other-than-temporary impairment guidance for debt and equity
securities. This standard is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on its financial statements.
  FASB ASC
855-10 is effective for interim or annual financial periods ending after June
15, 2009 and establishes general standards of accounting and disclosure of
events that occur after the balance sheet but before financial statements are
issued or are available to be issued. However, since the Company is a public
entity, management is required to evaluate subsequent events through the date
that financial statements are issued and disclose the date through which
subsequent events have been evaluated, as well as the date the financial
statements were issued. This standard was adopted for its interim period ending
June 30, 2009. Subsequent events have been evaluated through November 9, 2009,
the date the financial statements were issued.
  14
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Recently Adopted Accounting
Pronouncements (continued)
  As of
September 30, 2009, the FASB has issued Accounting Standards Updates (ASU)
through No. 2009-12. None of the ASUs have had an impact on the Company’s
financial statements.
  Recently Issued Accounting
Pronouncements Not Yet Adopted
  As of
September 30, 2009, there are no recently issued accounting standards not yet
adopted which would have a material effect on the Company’s financial
statements.
  NOTE 2 –
ASSETS ACQUISITIONS
  On
January 8, 2008, the Company  acquired substantially all of the
assets owned by Xiaodong Yang in the Shouguang City Hanting  Area (the
“Yangxiaodong property” or Factory No. 6”).  The Yangxiaodong property
includes a 50-year mineral rights and land lease covering 1,069 hectares of real
property, with non-reserve mineralized materials of  approximately 205,000
tons of bromine and 294 wells, as well as 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
$9,722,222
  On
January 7, 2009, the Company  acquired substantially all of the assets
owned by Fenqiu Yuan, Han Wang and Yufen Zhang in theShouguang City
Renjiazhuangzi Village North Area (the “Fenqiu Yuan, Han Wang & Yufen Zhang
property” or Factory No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang property
includes a 50-year mineral rights and land lease covering 1,611 hectares of real
property, with non-reserve mineralized materials of approximately 150,000 tons
of bromine, as well as 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), (note 11).
  On
September 30, 2009, the company acquired substantially all of the assets owned
by FengxiaYuan, Han Wang and Qing Yang in the Shouguang City Yingli Township
Beishan Village (the “ Fengxia Yuan, Han Wang& Qing Yang property” or
Factory No. 8”). The FengxiaYuan, Han Wang and Qing Yang property includes a
50-year mineral rights and land lease covering 11.02 KM2 of real property, with
non-reserve mineralized materials of approximately 150,000 tons of bromine, as
well as 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), (note 11).
  The asset
acquisitions described above were 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 been previously halted by the government.
  15
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 3 –
INVENTORY
  Inventory
consists of:
 
 September
      30,
                    2009
                  
                  
                  December
      31, 2008(unaudited)
                  
                  
                  (audited)Raw
      Material
                  
                  $
                  322,374
                  
                  
                  $
                  202,435Finished
      Goods
                  
                  
                  162,909
                  
                  
                  
                  229,638Allowance
      for obsolete and slow moving inventory
                  
                  
                  (13,814)
                  
                  
                  
                  (13,814)$
                  471,469
                  
                  
                  $
                  418,259
  NOTE 4 –
PREPAID LAND LEASE
  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 are amortized on a straight line basis.
During the three months ended September 30, 2009, amortization of prepaid land
lease totaled $ 3,960, of which $3,813 and $147 were recorded as cost of sales
and administrative expenses respectively. During the nine months ended September
30, 2009, amortization of prepaid land lease totaled $11,878, of which $11,438
and $440 were recorded as cost of sales and administrative expenses
respectively.
  NOTE 5 –
PROPERTY, PLANT AND EQUIPMENT, NET
  Property,
plant and equipment, net consist of the following :
 September
      30,
                    2009
                    (unaudited)
                  
                  
                  December
      31,
                    2008
                    (audited)At
      cost:Mineral
      rights
                  
                  $
                  5,840,594
                  
                  
                  
                  5,840,594Buildings
                  
                  
                  21,218,761
                  
                  
                  
                  6,410,813Plant
      and machinery
                  
                  
                  61,443,813
                  
                  
                  
                  37,619,002Motor
      vehicles
                  
                  
                  57,947
                  
                  
                  
                  57,947Furniture,
      fixtures and office equipment
                  
                  
                  4,277,972
                  
                  
                  
                  2,353,789Total
                  
                  
                  92,838,820
                  
                  
                  
                  52,282,144Less:
      accumulated depreciation and amortization
                  
                  
                  11,702,975
                  
                  
                  
                  6,882,688Net
      book value
                  
                  $
                  81,136,111
                  
                  
                  
                  45,399,456
  16
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  During
the three months ended September 30, 2009, the Company completed a sewage
treatment project which had a total cost of RMB45,000,000 (USD
$6,601,500).  The company is retaining RMB4,500,000 (USD$660,150),
reflected on the balance sheet as retention payable, which represents 10% of the
value of the sewage project until the quality guarantee period expires which is
one year after the completion of the project. According to the agreement, this
amount will be paid within one year.
  By
September 2009, the Company completed the construction of well and channel,
which are used for the production of bromine and crude salt and resulted in the
addition of $5,638,785 in property, plant and equipment.
  During
the three months 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 three months ended
September 30, 2008, depreciation and amortization expense totaled $1,299,305, of
which $1,261,017 and $38,288 were recorded as cost of sales and administrative
expenses respectively. During the nine months ended September 30, 2009,
depreciation and amortization expense totaled $4,816,540, of which $4,675,676
and $140,773 were recorded as cost of sales and administrative expenses
respectively. During the nine months ended September 30, 2008, depreciation and
amortization expense totaled $3,198,613, of which $3,107,235 and $91,378 were
recorded as cost of sales and administrative expenses respectively.
  NOTE 6 –
LOAN PAYABLE
  This
amount is interest free with no fixed terms of repayment, and not secured
against the company’s assets. This amount is owed to a non-related
party.
  NOTE 7 –
NOTES AND LOAN PAYABLE – RELATED PARTIES
 
 September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(unaudited)
                  
                  
                  (audited)Note
      payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
      Limited is unsecured, non-interest bearing, pursuant to an agreement
      which, as is Chinese custom, states that the loan need not be paid in the
      immediate future. This loan is denominated in RMB (a)
                  
                  $
                  -
                  
                  
                  $
                  18,337,493Note
      payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
      Limited is unsecured, non-interest bearing and is due May 2009. The loan
      is denominated in US dollars. (a)
                  
                  
                  -
                  
                  
                  
                  3,000,000Loan
      from a stockholder First Capital Limited is unsecured, non-interest
      bearing with no fixed term of repayment.
                  
                  
                  -
                  
                  
                  1,650,000Total
      loans
                  
                  
                  -
                  
                  
                  
                  22,987,493Less:
      current portion
                  
                  
                  -
                  
                  
                  
                  (4,650,000)Long-term
      loans, less current portion
                  
                  $
                  -
                  
                  
                  $
                  18,337,493Future
      maturities of notes payable-related parties are as
follows:2009
                  
                  
                  $
                  -
                  
                  
                  $
                  -2010
                  
                  
                  
                  -
                  
                  
                  
                  -2011
                  
                  
                  
                  -
                  
                  
                  18,337,493Total
                  
                  
                  $
                  -
                  
                  
                  $
                  18,337,493
  17
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
 
 (a)
                  Based
      on an amendment agreement dated January 24, 2009, the Company issued
      5,250,000  shares of its common stock in lieu of repayment of
      the Loans to Shenzhen Huayin Guaranty and Investment Company Limited to
      the following companies, which assumed the Loans from Shenzhen Hua Yin,
      and in the following amounts: Top King, 1,500,000 million shares of common
      stock; Billion Gold, 2,000,000 shares of common stock; Topgood, 1,750,000
      shares of common stock. Upon the issuance of the shares, the Loans were
      deemed paid in full and were
cancelled.
 
  Since the
conversion of debt into shares of common stock took place with an existing
shareholder, the conversion was accounted for as a capital
transaction.
  NOTE 8 –
DUE TO A RELATED PARTY
 
 Due
      to related parties consists of the following:September
      30,
                    2009
                  
                  
                  December
      31, 2008(unaudited)
                  
                  
                  (audited)Due
      to related company - Jiaxing Lighting
                  
                  
                  867,900
                  
                  
                  
                  852,068Due
      from related company – Haoyuan Group
                  
                  
                  (98,810)
                  
                  
                  
                  -$
                  769,090
                  
                  
                  $
                  852,068
   The
$867,900 due to related company represents funds received from Jiaxing Lighting
for investment purpose in SCHC.  Mr. Ming Yang, Chairman of the
Company, is the director and shareholder of Jiaxing Lighting.
  The
$98,810 due from related company represents funds advanced to Haoyuan Group, Mr.
Ming Yang, Chairman of the Company, is the director and shareholder of Haoyuan
Group. As of June 30, 2009, Haoyuan Group had loaned the company $7,667,138.
During the three months ended September 30, 2009, the company repaid Haoyuan
Group $7,667,138 and lent them $98,810.
  Balances
due to related company are unsecured, non-interest bearing and have no fixed
repayment terms.
  NOTE 9 –
TAXES PAYABLE
 
 Taxes
      payable consists of the following:September
      30,
                    2009
                  
                  
                  December
      31, 2008(unaudited)
                  
                  
                  (audited)Income
      tax payable
                  
                  $
                  2,881,664
                  
                  
                  $
                  2,329,227Mineral
      resource compensation fee payable
                  
                  
                  327,157
                  
                  
                  
                  291,861Value
      added tax payable and others
                  
                  
                  2,044,959
                  
                  
                  
                  1,648,354Total
                  
                  $
                  5,253,780
                  
                  
                  $
                  4,269,442
  18
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 10 –
RETAINED EARNINGS – APPROPRIATED
  In
accordance with the relevant PRC regulations and the Company’s Articles of
Association, the Company is required to allocate its profit after tax to the
following reserves:
  Statutory Common Reserve
Funds
  SCHC and
SYCI are required each year to transfer 10% of the profit after tax as reported
under the PRC statutory financial statements to the Statutory Common Reserve
Funds until the balance reaches 50% of the registered share
capital.  This reserve can be used to make up any loss incurred or to
increase share capital.  Except for the reduction of losses incurred,
any other application should not result in this reserve balance falling below
25% of the registered capital. Due to the increase in capital contribution in
SCHC in 2009, the statutory common Reserve Fund as of September 30, 2009 is 25%
of its registered capital.
  Statutory Public Welfare
Funds
  Prior to
January 1, 2007, SCHC and SYCI were required each year to transfer 5% of the
profit after tax as reported under the PRC statutory financial statements to the
Statutory public welfare funds.  This reserve was restricted to
capital expenditure for employees’ collective welfare facilities that are owned
by the Company.  The Statutory public welfare funds are not available
for distribution to the stockholders (except on liquidation).  Once
capital expenditure for staff welfare facilities has been made, an equivalent
amount must be transferred from the Statutory public welfare funds to the
discretionary common reserve funds.  Due to a change in the PRC
Company Law, appropriation of profit to the Statutory Public Welfare Fund is no
longer required.  Therefore, the balance in the Statutory Public
Welfare Fund was transferred to the Statutory Common Reserve Fund on January 1,
2007.
  NOTE 11 –
COMMON STOCK
  On July
29, 2009, holders of 67,638,898 shares of our issued and outstanding common
stock, or 55.4% of the 122,168,842 issued and outstanding shares of common stock
on that date, authorized, by written consent, an amendment to our certificate of
incorporation to effect a four-for-one reverse stock split of our common
stock.   On October 6, 2009, the Company filed the amendment to
the certificate of incorporation with the Secretary of State of the State of
Delaware, effecting the reverse stock split on October 9, 2009.
  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 (Note 7).
  In March
2009, the Company issued 375,000 shares of its common stock, valued at $615,000
(fair value), to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen
Zhang (Note 2)
  In
September 2009, the Company agreed to issue 1,057,342 shares of its common
stock, valued at $5,297,850 (fair value), to acquire assets owned by Mr. Fenqiu
Yuan, Han Wang and Yufen Zhang.  These shares have not yet been issued
by the company (Note 2).
  19
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 12 –
STOCK-BASED COMPENSATION
  The Company
issued 25,000 warrants on August 1, 2008 at a price of $4.80 per share as part
of a consulting agreement with its investor relations firm. These options fully
vest on August 1, 2009. The warrants were valued at $65,000, fair value, using
the Black-Scholes option-pricing  model with assumed 1,430%
volatility, a four year expiration term, a risk free rate of 3% and a dividend
yield of 0%. The value of the warrants will be expensed over one year, which
is the term of the consulting agreement. For the three and nine months
ended September 30, 2009, $16,384 and $48,616 was recognized as consulting
expense.
  In March
2009, the Company granted to 9 management staffs (including 4 board of
directors) options to purchase a total of 150,000 shares (25,000 for each of 3
board of directors, and 12,500 for each of 1 non executive independent director
and 5 other management staff) of the Company’s common stock at an exercise
price of $4.80 per share and the options vested immediately. The options were
valued at $222,000,fair value, using the Black-Scholes option pricing model with
assumed 1,098% volatility, a ten year expiration term, a risk free rate of 3%
and a dividend yield of 0%. For the three and nine months ended September 30,
2009, $0 and $222,000 was recognized as general and administrative
expenses.
  In May
2009 the Company granted to one director options to purchase 12,500
shares of the Company’s common stock at an exercise price of $4.80 per
share and the options vested immediately. The options were valued at
$29,500,fair value, using the Black-Scholes option pricing model with assumed
1,096% volatility, a ten year expiration term, a risk free rate of 3% and a
dividend yield of 0%. For the three months and nine months
ended  September 30, 2009, $0 and $29,500 was recognized as general
and administrative expenses.
  In June
2009 the Company granted to 1 director options to purchase 25,000 shares of
the Company’s common stock at an exercise price of $4.80 per share and the
options vested immediately. The options were valued at $58,000, fair value,
using the Black-Scholes option pricing model with assumed 1,096% volatility, a
three year expiration term, a risk free rate of 3% and a dividend yield of 0%.
For the three and nine months ended September 30, 2009, $- and $58,000 was
recognized as general and administrative expenses.
  The
following table summarizes all Company stock option and warrant transactions
between December 31,2008 and September 30, 2009.
 
 Option
                    &Warrants
                    Outstanding
                  
                  
                  Option
                    &Warrants
                    Vested
                  
                  
                  Range
      of
                    Exercise
      Price per Common ShareBalance,
      December 31, 2008
                  
                  
                  325,000
                  
                  
                  
                  112,500
                  
                  
                  
                  $0.84
      - $9.80Granted
      or vested during nine months ended September 30, 2009
                  
                  
                  187,500
                  
                  
                  
                  233,333
                  
                  
                  
                  $4.80Expired
      during nine months ended September 30, 2009Forfeited
      during nine months ended September 30, 2009
                  
                  
                  (250,000)
                  
                  
                  
                  (83,333)
                  
                  
                  
                  $9.80Balance,
      September 30, 2009
                  
                  
                  262,500
                  
                  
                  
                  262,500
                  
                  
                  
                  $0.84
      - $8.20
  20
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
 
 Stock
      and Warrants Options OutstandingNumber
      Outstanding
                  
                  Weighted
      Average
                  
                  Weighted
      AverageRange
      of
                  
                  Currently
      Exercisable
                  
                  Remaining
                  
                  Exercise
      Price of OptionsExercise
      Prices
                  
                  at
      September 30, 2009
                  
                  Contractual
      Life (Years)
                  
                  Currently
      Exercisable$0.84-$8.20
                  
                  262,500
                  
                  6.57
                  
                  $   7.07
  NOTE 13 –
INCOME TAXES
  The
Company utilizes the asset and liability method of accounting for income taxes
in accordance with FASB ASC 740-10. The Company’s effective tax rates for the
three months and nine months ended September 30, 2009 were 25.3% and
25.6%.  Effective tax rates for both the three months and nine months
ended September 30, 2008 were 26.8%.  These rates in those periods
differed from the statutory PRC rates of 25%, due to the non-deductibility of
certain expenses incurred outside of the PRC.
  No
provision for deferred taxes has been made as there were no material temporary
differences for the period ended September 30, 2009 and 2008. Deferred taxes
asset amounted to $3,453 and $3,453 as of September 30, 2009 and December 31,
2008.
  There was
no change in unrecognized tax benefits and accrual for uncertain tax positions
the period ended September 30, 2009.
  Tax years
from 2005 through 2008 remain subject to examination by major tax
jurisdiction.
  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 nine months ended September 30, 2009 and 2008
and management believes that its earnings are permanently invested in the
PRC.
  BVI
  Upper
Class Group Limited was incorporated in the BVI and, under the current laws of
the BVI, it is not subject to income taxes.
  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 year.  The applicable statutory tax
rate for the nine months ended September 30, 2009 and 2008 is
16.5%.
  PRC
  Enterprise
income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the
assessable profits,  of which 15% is for national tax and 10% is for
local tax.
  21
  GULF
RESOURCES, INC.AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 14 –
BUSINESS SEGMENTS
  The
Company follows SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information,which requires the Company to provide
certain information about their operating segments.  The Company has
two reportable segments:  bromine and crude salt and chemical
products.
 
 Three
      Months EndedSeptember
      30, 2009
                    (unaudited)
                  
                  Bromine
      and
                    Crude
      Salt
                  
                  
                  Chemical
                    Products
                  
                  
                  Segment
                    Total
                  
                  
                  Corporate
                  
                  
                  Consolidated
                    TotalNet
      sales
                  
                  $
                  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
      expenditures
                  
                  
                  12,227,274
                  
                  
                  
                  2,638,980
                  
                  
                  
                  14,866,254
                  
                  
                  
                  -
                  
                  
                  
                  14,866,254
 
 
 Three
      Months EndedSeptember
      30, 2008
                    (unaudited)
                  
                  Bromine
      and
                    Crude
      Salt
                  
                  
                  Chemical
                    Products
                  
                  
                  Segment
                    Total
                  
                  
                  Corporate
                  
                  
                  Consolidated
                    TotalNet
      sales
                  
                  $
                  13,106,804
                  
                  
                  
                  4,448,069
                  
                  
                  
                  17,554,873
                  
                  
                  -
                  
                  
                  
                  17,554,873Income
      (loss) from operations
                  
                  
                  4,086,664
                  
                  
                  
                  1,378,530
                  
                  
                  
                  5,465,194
                  
                  
                  
                  (382,160
                  )
                  
                  
                  5,083,034Total
      assets
                  
                  
                  63,513,465
                  
                  
                  
                  17,961,014
                  
                  
                  
                  81,474,479
                  
                  
                  
                  75,507
                  
                  
                  
                  81,549,986Depreciation
      and amortization
                  
                  
                  1,068,738
                  
                  
                  
                  221,664
                  
                  
                  
                  1,290,402
                  
                  
                  
                  -
                  
                  
                  
                  1,290,402Capital
      expenditures
                  
                  
                  519,977
                  
                  
                  
                  -
                  
                  
                  
                  519,977
                  
                  
                  
                  -
                  
                  
                  
                  519,977
 
 
 Nine
      Months EndedSeptember
      30, 2009
                    (unaudited)
                  
                  Bromine
      and
                    Crude
      Salt
                  
                  
                  Chemical
                    Products
                  
                  
                  Segment
                    Total
                  
                  
                  Corporate
                  
                  
                  Consolidated
                    TotalNet
      sales
                  
                  $
                  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
      expenditures
                  
                  
                  27,890,325
                  
                  
                  
                  5,938,155
                  
                  
                  
                  33,828,480
                  
                  
                  
                  -
                  
                  
                  
                  33,828,480
  22
  GULF
RESOURCES, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
 
 Nine
      Months EndedSeptember
      30, 2008
                    (unaudited)
                  
                  Bromine
      and
                    Crude
      Salt
                  
                  
                  Chemical
                    Products
                  
                  
                  Segment
                    Total
                  
                  
                  Corporate
                  
                  
                  Consolidated
                    TotalNet
      sales
                  
                  $
                  47,627,468
                  
                  
                  
                  15,727,141
                  
                  
                  
                  63,354,609
                  
                  
                  
                  -
                  
                  
                  
                  63,354,609Income
      (loss) from operations
                  
                  
                  18,427,749
                  
                  
                  
                  5,252,071
                  
                  
                  
                  23,679,820
                  
                  
                  
                  (1,590,412
                  )
                  
                  
                  22,089,408Total
      assets
                  
                  
                  63,513,465
                  
                  
                  
                  17,961,014
                  
                  
                  
                  81,474,479
                  
                  
                  
                  75,507
                  
                  
                  
                  81,549,986Depreciation
      and amortization
                  
                  
                  3,043,928
                  
                  
                  
                  382,527
                  
                  
                  
                  3,426,455
                  
                  
                  
                  -
                  
                  
                  
                  3,426,455Capital
      expenditures
                  
                  
                  10,529,286
                  
                  
                  
                  6,835,909
                  
                  
                  
                  17,365,195
                  
                  
                  
                  -
                  
                  
                  
                  17,365,195
 
 
 Three
      Months Ended
                  
                  
                  Nine
      Months EndedSeptember
      30,
                  
                  
                  September
      30,Reconciliations
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Total
      segment operating income
                  
                  $
                  11,298,523
                  
                  
                  $
                  5,465,194
                  
                  
                  $
                  32,865,828
                  
                  
                  $
                  23,679,820Corporate
      overhead expenses
                  
                  
                  (160,654
                  )
                  
                  
                  (382,160
                  )
                  
                  
                  (836,152
                  )
                  
                  
                  (1,590,412
                  )Other
      income (expense)
                  
                  
                  19,713
                  
                  
                  
                  26,922
                  
                  
                  
                  38,462
                  
                  
                  
                  6,525Income
      tax expense
                  
                  
                  (2,829,772
                  )
                  
                  
                  (1,373,055
                  )
                  
                  
                  (8,235,609
                  )
                  
                  
                  (5,925,532
                  )Total
      consolidated net income
                  
                  $
                  8,327,810
                  
                  
                  $
                  3,736,901
                  
                  
                  $
                  23,832,529
                  
                  
                  $
                  16,170,401
  NOTE 15 –
MAJOR SUPPLIER
  During
the three and nine months ended September 30, 2009, the Company purchased 20%
and 12% of its raw material from two different suppliers.  At
September 30, 2009, amounts due to those suppliers included in accounts payable
were $1,734,846. During the three months and nine months ended September 30,
2008, the Company purchased 62% and 59% of its raw material from three
suppliers.  At September 30, 2008, amounts due to those suppliers
included in accounts payable were $2,504,000. This concentration makes the
Company vulnerable to a near-term severe impact, should the relationships be
terminated.
  NOTE 16 –
CUSTOMER CONCENTRATION
  The
Company sells a substantial portion of its product to a limited number of
customers. During the three months ended September 30, 2009, there were no
customers that represented more than 10% of net revenue. During the nine months
ended September 30, 2009, the Company’s two largest customers aggregated
$16,760,658, or approximately 21% of total net revenue. At September 30, 2009,
amounts due from these customers were $ 1,949,385.
  During
the three months ended September 30, 2008, sales to the Company’s two largest
customers, based on net revenue from such customers, aggregated $5,257,000, or
approximately 30% of total net revenue.  During the nine months ended
September 30, 2008, the Company’s largest customers aggregated $6,578,000, or
approximately 10% of total net revenue.  At September 30, 2008,
amounts due from these customers were $2,309,518.
  This
concentration makes the Company vulnerable to a near-term severe impact, should
the relationships be terminated.
  23
  GULF
RESOURCES, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (UNAUDITED)
  NOTE 17 –
ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER
  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 during the next five
years to East China University of Science and Technology for research. The
research and development expense recognized during the three months and nine
months ended September 30, 2009 was $125,197 and $375,262. The research and
development expense recognized during the three months and nine months ended
September 30, 2008 was $122,744 and $389,853.
  NOTE 18 –
RELATED PARTY TRANSACTIONS
 
 September
      30, 2009
                  
                  
                  December
      31, 2008(unaudited)
                  
                  
                  (audited)Shenzhen
      Huayin Guaranty and Investment Company Limited Waiver of accrued interest
      during first quarter 2008
                  
                  $
                  -
                  
                  
                  $
                  131,533Note
      and loan payable – First Capital Limited (Note 7)
                  
                  $
                  -
                  
                  
                  
                  1,650,000Shenzhen
      Huayin Guaranty and Investment Company Limited (Note 7)
                  
                  $
                  -
                  
                  
                  $
                  21,337,493Due
      to related party:Jiaxing
      Lighting (Note 8)
                  
                  $
                  867,900
                  
                  
                  $
                  852,068Haoyuan
      Group (Note 8)
                  
                  $
                  (98,810)
                  
                  
                  $
                  -
   Item2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
  Forward
Looking Statements
  This
quarterly report on Form 10-Q and other reports filed by Gulf Resources, Inc.
(the “Company” or “we”) 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, 2008 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.
  24
  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.
  Company
Overview
  The
Company conducts operations through its two wholly-owned PRC subsidiaries,
Shouguang City Haoyuan Chemical Company Limited (“SCHC”) and Shouguang Yuxin
Chemical Industry Co., Limited (“SYCI”). Our business is also reported in these
two segments; Bromine and Crude salts (SCHC), and Chemical Products
(SYCI).
  Through
SCHC, we believe that 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, papermaking, chemical agents and
inorganic chemicals.
  On
December 12, 2006, the Company, which was then an inactive “shell” company,
acquired, through a share exchange, Upper Class Group Limited which then owned
all of the outstanding shares of SCHC. Under GAAP 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
comparative historical financial statements issued after the acquisition of the
legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper
Class Group Limited, which is considered to be the accounting
acquirer.  Share and per share amounts stated have been retroactively
adjusted to reflect the acquisition.
  On
February 5, 2007, Gulf Resources, through its subsidiary SCHC, acquired SYCI.
Prior to the acquisition the majority of the ownership of Gulf Resources and of
SYCI was controlled by the same party, therefore, 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. Share and per
share amounts stated in this report have also been retroactively adjusted to
reflect this transaction.
  On August
31, 2008, Gulf Resources completed the construction of a new chemical production
line. It passed the examination by Shouguang City Administration of Work Safety
and local fire department. This new production line focuses on producing
environmental friendly additive products, solid lubricant and polyether
lubricant, for use in oil and gas exploration. The line has an annual production
capacity of 5,000 tons. Formal production of this chemical production line
started on September 15, 2008.
  25
  On
October 9, 2009 we completed a 1-for-4 reverse stock split of our common stock,
such that for each four shares outstanding prior to the stock split there was
one share outstanding after the reverse stock split.  All shares of
common stock referenced in this report have been adjusted to reflect the stock
split figures.  On October 27, 2009 our shares began trading on the
NASDAQ Global Select Market under the ticker symbol “GFRE”.
  RESULTS
OF OPERATIONS
  The
following table presents certain information derived from the consolidated
statements of operations, cash flows and shareholders’ equity for the three
months and nine months ended September 30, 2009 and September 30, 2008,
respectively.
 
 
 Three
      months ended
                      September
      30, 2009
                  
                  
                  
                  Three
      months
                      ended
                      September
      30,
                      2008
                  
                  
                  
                  Percentage
      ChangeNet
      Revenue
                  
                  $
                  27,667,158
                  
                  
                  $
                  17,554,873
                  
                  
                  
                  57.6
                  %Cost
      of Net Revenue
                  
                  
                  15,533,613
                  
                  
                  
                  11,388,348
                  
                  
                  
                  36.4
                  %Gross
      Profit
                  
                  
                  12,133,545
                  
                  
                  
                  6,166,525
                  
                  
                  
                  96.8
                  %Research
      and Development costs
                  
                  
                  125,122
                  
                  
                  
                  122,744
                  
                  
                  
                  1.9
                  %General
      and Administrative expenses
                  
                  
                  870,555
                  
                  
                  
                  960,747
                  
                  
                  
                  -9.4
                  %Income
      from operations
                  
                  
                  11,137,869
                  
                  
                  
                  5,083,034
                  
                  
                  
                  119.1
                  %Other
      Income (expenses), net
                  
                  
                  19,713
                  
                  
                  
                  26,922
                  
                  
                  
                  -26.8
                  %Income
      before taxes
                  
                  
                  11,157,582
                  
                  
                  
                  5,109,956
                  
                  
                  
                  118.4
                  %Income
      Taxes
                  
                  
                  2,829,772
                  
                  
                  
                  1,373,055
                  
                  
                  
                  106.1
                  %Net
      Income
                  
                  $
                  8,327,810
                  
                  
                  $
                  3,736,901
                  
                  
                  
                  122.9
                  %
  
 Nine
      months
                      ended
                      September
      30, 2009
                  
                  
                  
                  Nine
      months
                      ended
                      September
      30,
                      2008
                  
                  
                  
                  Percentage
      ChangeNet
      Revenue
                  
                  $
                  80,891,594
                  
                  
                  $
                  63,354,609
                  
                  
                  
                  27.7
                  %Cost
      of Net Revenue
                  
                  
                  45,520,357
                  
                  
                  
                  38,050,971
                  
                  
                  
                  19.6
                  %Gross
      Profit
                  
                  
                  35,371,237
                  
                  
                  
                  25,303,638
                  
                  
                  
                  39.8
                  %Research
      and Development costs
                  
                  
                  375,187
                  
                  
                  
                  389,853
                  
                  
                  
                  03.8
                  %General
      and Administrative expenses
                  
                  
                  2,966,375
                  
                  
                  
                  2,824,377
                  
                  
                  
                  5.0
                  %Income
      from operations
                  
                  
                  32,029,675
                  
                  
                  
                  22,089,408
                  
                  
                  
                  45.0
                  %Other
      Income (expenses), net
                  
                  
                  38,462
                  
                  
                  
                  6,525
                  
                  
                  
                  489.5
                  %Income
      before taxes
                  
                  
                  32,068,138
                  
                  
                  
                  22,095,933
                  
                  
                  
                  45.1
                  %Income
      Taxes
                  
                  
                  8,235,609
                  
                  
                  
                  5,925,532
                  
                  
                  
                  39.0
                  %Net
      Income
                  
                  $
                  23,832,529
                  
                  
                  $
                  16,170,401
                  
                  
                  
                  47.4
                  %
  26
  Net revenueNet revenue was $27.7 million for three months ended September 30,
2009, an increase of $10.1 million (or approximately 57.6%) compared to the same
period in 2008. This increase was primarily attributable to the growth in
our bromine and crude salt segment, with net revenue increasing from $13.1
million for three months ended September 30, 2008 compared to $18.8 million in
the same period in 2009, an increase of approximately $5.7 million or 43.5%.
This increase was primarily the result of increased production due to the
acquisition of a bromine producing property in the first quarter of 2009. The
increased production of crude salt generated approximately $2.1 of additional
net revenue for this quarter. Another important reason for overall the increase
in net revenue was the growth in the sales of chemical products, with net
revenue increasing from $4.4 million for three months ended September 30, 2008
to $8.8 million in the same period in 2009, an increase of 99.0%. The increase
in our chemical products segment was primarily a result of increased sales of
our new environmentally friendly additive products, solid lubricant and
polyether lubricant, which are used in oil and gas exploration and were first
introduced in the fourth quarter of 2008
 
 Net
      Revenue by SegmentThree
      months ended
                  
                  
                  Three
      months endedSeptember 30,
      2009
                  
                  
                  September 30,
      2008Segment
                  
                  
                  
                  
                  Percent
      of total
                  
                  
                  
                  
                  
                  Percent
      of totalBromine
      and Crude salt
                  
                  $
                  18,814,932
                  
                  
                  
                  68%
                  
                  
                  $
                  13,106,804
                  
                  
                  
                  74.7%Chemical
      Products
                  
                  
                  8,852,226
                  
                  
                  
                  32%
                  
                  
                  
                  4,448,069
                  
                  
                  
                  25.3%Total
      Revenues
                  
                  $
                  27,667,158
                  
                  
                  
                  100.0%
                  
                  
                  $
                  17,554,873
                  
                  
                  
                  100.0%
  
 Three
      months ended September 302009
      vs. 2008Segment
                  Percent
      increase of Net revenueBromine
      and Crude salt
                  43.5%Chemical
      Products
                  99.0%
  Net
revenue for the nine months ended September 30, 2009, was $80.9 million,
representing an increase of $17.5 million or 27.7% compared to the same period
in 2008. Approximately 65% of the increase came from the chemical products
segment, and net revenue in this segment increased by $10.3 million from $15.7
million to $26.0 million. The increase in the chemical products segment was
primarily a result of increased sales of our new environmentally friendly
additive products. Approximately 41% of the increase came from the bromine and
crude salt segment, and net revenue in this segment increased by $7.2 million
from $47.6 million to $54.9 million.  This increase was mainly due to
the acquisition of a bromine producing property during the first quarter of
2009.
  27
  Net
      Revenue by SegmentNine
      months ended
                  
                  
                  Nine
      months endedSeptember 30,
      2009
                  
                  
                  September 30,
      2008Segments
                  
                  
                  
                  
                  Percent
      of total
                  
                  
                  
                  
                  
                  Percent
      of totalBromine
      and Crude salt
                  
                  $
                  54,874,656
                  
                  
                  
                  67.8%
                  
                  
                  $
                  47,627,468
                  
                  
                  
                  75.2%Chemical
      Products
                  
                  
                  26,016,938
                  
                  
                  
                  32.2%
                  
                  
                  
                  15,727,141
                  
                  
                  
                  24.8%Total
      Revenues
                  
                  $
                  80,891,594
                  
                  
                  
                  100.0%
                  
                  
                  $
                  63,354,609
                  
                  
                  
                  100.0%
   Nine
      Months Ended September 302009
      vs. 2008Segment
                  Percent
      increase of Net revenueBromine
      and Crude salt
                  15.2%Chemical
      Products
                  65.4%
  Cost of Net
revenue and Gross profit.The cost of net revenue reflects raw
materials consumed, electricity, depreciation, direct salaries and benefits of
staff engaged in the production process, and other manufacturing costs. The cost
of net revenue and the resulting gross profit for the three and nine months
ended September 30, 2009 and 2008 were:
 
 Three
      months ended September 302009
                  
                  
                  %
      of Net revenue
                  
                  2008
                  
                  
                  %
      of Net revenueCost
      of net revenue
                  
                  $
                  15,533,613
                  
                  
                  
                  56.1
                  %
                  
                  $
                  11,388,348
                  
                  
                  
                  64.9
                  %Gross
      Profit
                  
                  
                  12,133,545
                  
                  
                  
                  43.9
                  %
                  
                  
                  6,166,525
                  
                  
                  
                  35.1
                  %Nine
      months ended September 302009
                  
                  
                  %
      of Net revenue
                  
                  2008
                  
                  
                  %
      of Net revenueCost
      of net revenue
                  
                  $
                  45,520,357
                  
                  
                  
                  56.3
                  %
                  
                  $
                  38,050,971
                  
                  
                  
                  60.0
                  %Gross
      Profit
                  
                  
                  35,371,237
                  
                  
                  
                  43.7
                  %
                  
                  
                  25,303,638
                  
                  
                  
                  40.0
                  %
  The
increases in the cost of net revenue were largely the result of the
substantially higher sales volumes recorded in both the three and nine month
periods ended September 30, 2009 as compared to the corresponding prior year
periods.  The reduction in the cost of net revenue as a percentage of
net revenue for the nine month periods ended September 30, 2009 compared to 2008
was due to a higher percentage of revenue from high margin products: crude salt
and an environmentally friendly chemical product, which has a lower product cost
as a percentage of its net revenue, as well as production efficiencies in
consumables and electricity, in part as a result of economies of scale achieved
due to the acquisitions, and greater utilization of our chemical production
capacity. The increases in gross profit for both periods were largely the result
of higher sales volumes as well as the other factors noted above
  Research and
Development CostsThe research and development costs result from the
agreement that SYCI and East China University of Science and Technology entered
into 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. The research and development costs incurred for the
three months ended September 30, 2009 and 2008 was $125,197 and $122,744
respectively. The research and development costs incurred for the nine months
ended September 30, 2009 and 2008 was $375,262 and $389,853
respectively.  All research findings and patents developed by this
Center will belong to Gulf Resources.
  28
  General and
Administrative ExpensesGeneral and administrative expenses were $870,555
and $2,966,375 for the three and nine months ended September 30 ,2009, a
decrease of $90,193 and an increase of $141,998, compared to the three and nine
months ended September 30, 2008 respectively.  The decrease in general
and administrative expenses in the third quarter of 2009 was primarily due to
decrease in consulting expenses. The increase in general and administrative
expenses for the nine months ended September 30, 2009 was primarily due to
stock-based compensation incurred and the increase in depreciation and mineral
resource compensation fee during the third quarter and for the nine months ended
September 30, 2009
  Income
from Operations
 
 Income
      from Operations by SegmentThree
      months ended
                  
                  Three
      months endedSeptember
      30, 2009
                  
                  September
      30, 2008Segment
                  
                  
                  
                  Percent
      of total
                  
                  
                  
                  
                  Percent
      of totalBromine
      and Crude salt
                  
                  $
                  8,245,278
                  
                  
                  
                  73.0%
                  
                  
                  $
                  4,086,664
                  
                  
                  
                  74.8%Chemical
      Products
                  
                  
                  3,053,245
                  
                  
                  
                  27.0%
                  
                  
                  
                  1,369,393
                  
                  
                  
                  25.2%Income
      from operations before corporate costs
                  
                  
                  11,298,523
                  
                  
                  
                  100%
                  
                  
                  
                  5,465,194
                  
                  
                  
                  100.0%Corporate
      costs
                  
                  
                  (160,654)
                  
                  
                  
                  
                  
                  
                  
                  (382,160)Income
      from operations
                  
                  $
                  11,137,869
                  
                  
                  
                  
                  
                  
                  $
                  5,083,034
 
 Income
      from Operations by SegmentNine
      months ended
                  
                  Nine
      months endedSeptember
      30, 2009
                  
                  September
      30, 2008Segment
                  
                  
                  
                  Percent
      of total
                  
                  
                  
                  
                  Percent
      of totalBromine
      and Crude salt
                  
                  $
                  23,986,058
                  
                  
                  
                  73.0%
                  
                  
                  $
                  18,427,749
                  
                  
                  
                  77.8%Chemical
      Products
                  
                  
                  8,879,769
                  
                  
                  
                  27.0%
                  
                  
                  
                  5,252,071
                  
                  
                  
                  22.2%Income
      from operations before corporate costs
                  
                  
                  32,865,827
                  
                  
                  
                  100.0%
                  
                  
                  
                  23,679,820
                  
                  
                  
                  100.0%Corporate
      costs
                  
                  
                  (836,152)
                  
                  
                  
                  
                  
                  
                  
                  (1,590,412)Income
      from operations
                  
                  $
                  32,029,675
                  
                  
                  
                  
                  
                  
                  $
                  22,089,408
  Income
from operations before corporate costs was $11.3 million for the three months
ended September 30, 2009 (40.8% of net revenue), an increase of $5.9 million (or
approximately 106.7%) compared to the same period in 2008.  Income
from operations before corporate costs was $32.9 million for the nine months
ended September 30, 2009 (40.6% of net revenue), an increase of $9.2 million (or
approximately 38.8%) compared to the same period in 2008. These increases
resulted primarily from the increases in net revenue and the resulting higher
income from operations from the bromine and crude salts segment of the Company.
For the three months ended September 30, 2009, income from operations for the
bromine and crude salt segment was $8.2 million, an increase of 102% from $4.1
million for the same period in 2008. For nine months ended September 30, 2009,
income from operations for the bromine and crude salt segment was $23.9 million,
an increase of 30% from $18.4 million for the same period in 2008. These
increases in net revenue and income from operations of bromine and crude salt
segment were primarily as a result of the purchase of a bromine producing asset
in the first quarter of 2009 and a higher gross margin due to production cost
efficiencies. The larger increases in net revenue and income from operations of
our chemical products were largely due to increased sales of an environmentally
friendly chemical product and an oil and gas exploration additive chemical
product.
  Net IncomeNet income was $8.3 million for three months ended September 30, 2009, an
increase of $4.6 million (122.9%) compared to the same period in
2008.  Net income was $23.8 million for the nine months ended
September 30, 2009, an increase of $7.7 million (47.4%), compared to the same
period in 2008. These increases were primarily attributable to the higher
operating profit resulting from the increases in revenue, and a decrease in the
effective tax rate to 25.6% in 2009 from approximately 26.8% in
2008
  29
  LIQUIDITY
AND CAPITAL RESOURCES
  As of
September 30, 2009, cash, and cash equivalents were $19,256,504 as compared to
$30,878,044 as of December 31, 2008. The components of this decrease of
$11,621,540 are reflected below.
  Cash
Flow
 Nine
      Months Ended
                    September
      302009
                  
                  
                  2008Net
      cash provided by operating activities
                  
                  $
                  27,958,786
                  
                  
                  $
                  17,617,854Net
      cash used in investing activities
                  
                  
                  (33,828,480)
                  
                  
                  
                  (17,365,195)Net
      cash provided by financing activities
                  
                  
                  (5,747,597)
                  
                  
                  
                  11,144,787Net
      cash inflow (outflow)
                  
                  $
                  (11,621,540)
                  
                  
                  $
                  12,100,485
  For the
nine months ended September 30, 2009 the Company met its working capital and
capital investment requirements mainly by using cash flow from
operations.
  Net
Cash Provided by Operating Activities
  During
nine months 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,
as well as depreciation of fixed assets of $4,816,540. Net cash provided by
operating activities during nine months ended September 30, 2009 increased by
$10,340,932 from the same period in 2008, primarily due to a $7,662,128 increase
in net income, and the increase in depreciation.
  Net
Cash Provided (Used) by Investing Activities and Financing
Activities
  We used
$10,000,000 cash and issued 375,000 shares to acquire additional mineral rights,
property, plant and equipment during three months ended March 31,
2009.
  We used
$5,638,785 cash to complete the construction of well and channel, which are used
for the production of bromine and crude salt during three months ended June 30,
2009.
  We used
$5,941,350 cash to complete the construction of waste water disposal system
during three months ended September 30, 2009.
  We used
$11,516,960 cash and agreed to issue, but has not yet issued 1,057,342 shares to
acquire additional mineral rights, property, plant and equipment during three
months ended September 30, 2009.
  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. 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 sales 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.
  30
  We are
not currently party to any contracts or other arrangements with respect to
future acquisitions.
  Significant
Accounting Policies and Estimates
  Refer to
Note 1 of the Financial Statement
  Impact
of inflation
  We are
subject to commodity price risks arising from price fluctuations in the market
prices of the raw materials. We have generally been able to pass on cost
increases through price adjustments. However, the ability to pass on these
increases depends on market conditions influenced by the overall economic
conditions in China. We manage our price risks through productivity improvements
and cost-containment measures. We do not believe that inflation risk is material
to our business or our financial position, results of operations or cash flows
at this time.
  Off
Balance Sheet Arrangements
  We do not
have any off-balance sheet arrangements as defined by standards issued by the
Financial Accounting Standards Board, and accordingly, no such arrangements are
likely to have a current or future effect on our financial position, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
  Item3. Quantitative and Qualitative Disclosures About Market
Risk.
  Interest
Rate Risk
  We are
exposed to interest rate risk due primarily to our short-term bank loans.
Although the interest rates are fixed for the terms of the loans, the terms are
typically twelve months and interest rates are subject to change upon renewal.
Since July 20, 2007, the People’s Bank of China has increased the interest rate
of Renminbi bank loans with a term of six months or less by 0.2% and loans with
a term of six to 12 months by 0.3%. The new interest rates are approximately
6.0% and 6.8% for Renminbi bank loans with a term six months or less and loans
with a term of six to 12 months, respectively. The change in interest rates has
no impact on our bank loans secured before July 28, 2007. We monitor interest
rates in conjunction with our cash requirements to determine the appropriate
level of debt balances relative to other sources of funds. We have not entered
into any hedging transactions in an effort to reduce our exposure to interest
rate risk.
  Credit
Risk
  The
Company is exposed to credit risk from its cash in bank and fixed deposits and
bills and accounts receivable. The credit risk on cash in bank and fixed
deposits is limited because the counterparties are recognized financial
institutions. Bills and accounts receivable are subjected to credit evaluations.
An allowance has been made for estimated irrecoverable amounts which have been
determined by reference to past default experience and the current economic
environment.
  Foreign
Exchange Risk
  The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has no longer been pegged to the U.S. Dollar at a
constant exchange rate. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in
the exchange rate, the Renminbi may appreciate or depreciate within a flexible
peg range against the U.S. dollar in the medium to long term. Moreover, it is
possible that in the future, PRC authorities may lift restrictions on
fluctuations in the Renminbi exchange rate and lessen intervention in the
foreign exchange market.
  31
  Because
substantially all of our earnings and cash assets are denominated in Renminbi,
but our reporting currency is the U.S. dollar, fluctuations in the exchange rate
between the U.S. dollar and the Renminbi will affect our balance sheet and our
earnings per share in U.S. dollars. In addition, appreciation or depreciation in
the value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue in the future
that will be exchanged into U.S. dollars and earnings from, and the value of,
any U.S. dollar-denominated investments we make in the future.
  Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.
  Most of
the transactions of the Company are settled in Renminbi and U.S. dollars. In the
opinion of the directors, the Company is not exposed to significant foreign
currency risk.
  Inflation
  Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the selling prices
of our products do not increase with these increased costs.
  Company’s
Operations are Substantially in Foreign Countries
  Substantially
all of our operations are conducted in China and are subject to various
political, economic, and other risks and uncertainties inherent in conducting
business in China. Among other risks, the Company and its subsidiaries’
operations are subject to the risks of restrictions on transfer of funds; export
duties, quotas, and embargoes; domestic and international customs and tariffs;
changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations. Additional information regarding such
risks can be found under the heading “Risk Factors” in our Amended Report Form
10-K for the fiscal year ended December 31, 2008.
  Item4. Controls and Procedures.
  Based on
an evaluation of our disclosure controls and procedures as of the end of the
quarterly period covered by this report (the “Evaluation Date”) our president
and chief financial officer have determined that our current disclosure controls
and procedures are effective.
  There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) under the Exchange Act) during our most
recently completed fiscal quarter which is the subject of this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
  32
  PARTII — OTHER INFORMATION.
  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 31,2008 (the “2008 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 2008 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 Sales of Equity Securities and Use of Proceeds.
  None.
  Item
3. Defaults Upon Senior Securities.
  None.
  Item
4. Submission of Matters to a Vote of Security Holders.
  On July
29, 2009, holders of 67,638,898 shares of our issued and outstanding common
stock, or 55.4% of the 122,168,842 issued and outstanding shares of common stock
on that date, authorized, by written consent, an amendment to our certificate of
incorporation to effect a four-for-one reverse stock split of our common
stock.   On October 6, 2009, the Company filed the amendment to
the certificate of incorporation with the Secretary of State of the State of
Delaware, effecting the reverse stock split on October 9, 2009.
  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.
  33
  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.Date:
      November 9, 2009
                  By:
                  /s/
      Xiaobin LiuXiaobin
      LiuChief
      Executive Officer(principal
      executive officer)By:
                  /s/
      Min LiMin
      LiChief
      Financial Officer(principal
      financial and accounting officer)