10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2013
	Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For 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.)
Level 11,Vegetable Building, Industrial Park of the East City, Shouguang City, Shandong,	262700
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: +86 (536) 567 0008

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Yes x No o

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

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

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

Yes o No x

As of August 8, 2013, the registrant had outstanding 38,368,505 shares of common stock.

Table of Contents

Part I – Financial Information
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures about Market Risk	39
Item 4. Controls and Procedures	40
Part II – Other Information
Item 1. Legal Proceedings	40
Item 1A. Risk Factors	41
Item 2. Unregistered Shares of Equity Securities and Use of Proceeds	41
Item 3. Defaults Upon Senior Securities	41
Item 4. Mine Safety Disclosures	41
Item 5. Other Information	41
Item 6. Exhibits	41
Signatures	42

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GULF RESOURCES, INC.

 AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars)

(UNAUDITED)

	June 30, 2013 Unaudited			December 31, 2012 Audited
Current Assets
Cash	$	86,422,512		$	65,241,035
Accounts receivable		39,163,206			35,969,900
Inventories		5,371,214			5,993,598
Prepayments and deposits		18,750			-
Prepaid land leases		459,774			47,307
Deferred tax assets		7,094			6,973
Total Current Assets		131,442,550			107,258,813
Non-Current Assets
Property, plant and equipment, net		155,117,858			165,942,542
Property, plant and equipment under capital leases, net		1,898,683			1,996,478
Prepaid land leases, net of current portion		752,697			748,502
Deferred tax assets		2,285,533			2,246,699
Total non-current assets		160,054,771			170,934,221
Total Assets	$	291,497,321		$	278,193,034
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable and accrued expenses	$	6,330,644		$	6,533,236
Retention payable		385,360			1,432,690
Capital lease obligation, current portion		99,011			193,164
Taxes payable		4,715,553			2,856,658
Total Current Liabilities		11,530,568			11,015,748
Non-Current Liabilities
Capital lease obligation, net of current portion		2,904,931			2,952,902
Total Liabilities	$	14,435,499		$	13,968,650
Stockholders’ Equity
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding	$			$
COMMON STOCK; $0.0005 par value; 400,000,000 shares authorized as of June 30, 2013 and December 31, 2012; 38,552,070 and 38,552,070 shares issued; and 38,367,471 and 38,367,471 shares outstanding as of June 30, 2013 and December 31, 2012, respectively		19,276			19,276
Treasury stock; 184,599 shares as of June 30, 2013 and December 31, 2012 at cost		(500,000	)		(500,000	)
Additional paid-in capital		80,021,488			79,489,188
Retained earnings unappropriated		153,572,726			146,745,754
Retained earnings appropriated		16,385,779			15,973,887
Cumulative translation adjustment		27,562,553			22,496,279
Total Stockholders’ Equity		277,061,822			264,224,384
Total Liabilities and Stockholders’ Equity	$	291,497,321		$	278,193,034

See accompanying notes to the condensed consolidated financial statements.

1

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Expressed in U.S. dollars)

(UNAUDITED)

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	2013			2012			2013			2012
NET REVENUE
Net revenue	$	32,853,896		$	31,314,846		$	55,356,476		$	55,123,520
OPERATING INCOME (EXPENSES)
Cost of net revenue		(23,260,201	)		(21,389,651	)		(41,245,673	)		(38,505,533	)
Sales, marketing and other operating expenses		(25,115	)		(22,709	)		(45,418	)		(40,473	)
Research and development cost		(54,480	)		(62,526	)		(72,182	)		(105,324	)
Write-off/Impairment on property, plant and equipment		-			(911,995	)		-			(911,995	)
General and administrative expenses		(2,422,452	)		(1,370,866	)		(4,391,669	)		(3,483,071	)
Other operating income		287,127			76,104			382,689			133,178
		(25,475,121	)		(23,681,643	)		(45,372,253	)		(42,913,218	)
INCOME FROM OPERATIONS		7,378,775			7,633,203			9,984,223			12,210,302
OTHER INCOME (EXPENSE)
Interest expense		(53,583	)		(54,255	)		(106,589	)		(108,667	)
Interest income		79,429			84,915			152,272			183,805
INCOME BEFORE TAXES		7,404,621			7,663,863			10,029,906			12,285,440
INCOME TAXES		(2,048,722	)		(1,975,189	)		(2,791,042	)		(3,309,659	)
NET INCOME	$	5,355,899		$	5,688,674		$	7,238,864		$	8,975,781
COMPREHENSIVE INCOME:
NET INCOME	$	5,355,899		$	5,688,674		$	7,238,864		$	8,975,781
OTHER COMPREHENSIVE INCOME (LOSS)
- Foreign currency translation adjustments		4,298,508			(1,316,002	)		5,066,274			(1,038,104	)
COMPREHENSIVE INCOME	$	9,654,407		$	4,372,672		$	12,305,138		$	7,937,677
EARNINGS PER SHARE:
BASIC	$	0.14		$	0.16		$	0.19		$	0.26
DILUTED	$	0.14		$	0.16		$	0.19		$	0.26
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC		38,367,471			34,560,743			38,367,471			34,560,743
DILUTED		38,591,127			34,560,743			38,546,042			34,561,394

See accompanying notes to the condensed consolidated financial statements.

2

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED JUNE 30, 2013

(Expressed in U.S. dollars)

(UNAUDITED)

	Common stock
	Number		Number		Number							Additional		Statutory					Cumulative
	of shares		of shares		of treasury				Treasury			paid-in		common		Retained			translation
	issued		outstanding		stock		Amount		stock			capital		reserve		earnings			adjustment		Total
							$		$			$		$		$			$		$
BALANCE AT DECEMBER 31, 2012		38,552,070		38,367,471		184,599		19,276		(500,000	)		79,489,188		15,973,887		146,745,754			22,496,279		264,224,384
Translation adjustment	-			-		-	-					-		-		-				5,066,274		5,066,274
Issuance of stock options to employees		-		-		-		-		-			532,300		-		-			-		532,300
Net income for six-month period ended June 30, 2013	-			-		-	-			-		-		-			7,238,864		-			7,238,864
Transfer to statutory common reserve fund		-		-		-		-		-			-		411,892		(411,892	)		-		-
BALANCE AT JUNE 30, 2013		38,552,070		38,367,471		184,599		19,276		(500,000	)		80,021,488		16,385,779		153,572,726			27,562,553		277,061,822

See accompanying notes to the condensed consolidated financial statements.

3

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollars)

(UNAUDITED)

	Six-Month Period Ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,238,864		$	8,975,781
Adjustments to reconcile net income to net cash provided by operating activities:
Interest on capital lease obligation		106,206			108,044
Amortization of prepaid land leases		189,918			105,051
Depreciation and amortization		13,685,539			11,290,588
Write-off/Impairment loss on property, plant and equipment		-			911,995
Exchange (gain) loss on inter-company balances		431,147			(92,057	)
Stock-based compensation expense		532,300			26,300
Deferred tax asset		-		160,826
Changes in assets and liabilities:
Accounts receivable		(2,621,905	)		(19,514,217	)
Inventories		715,714			467,279
Prepayments and deposits		(18,750	)		(38,610	)
Accounts payable and accrued expenses		(296,268	)		206,207
Retention payable		(1,055,003	)		(457,813	)
Taxes payable		1,797,837			189,434
Net cash provided by operating activities		20,705,599			2,338,808
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions of prepaid land leases		(588,830	)		(422,877	)
Increase in construction in progress		-			(7,871,130	)
Net cash used in investing activities		(588,830	)		(8,294,007	)
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayment of capital lease obligation		(302,498	)		(297,598	)
Net cash used in financing activities		(302,498	)		(297,598	)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		1,367,206			(278,492	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		21,181,477			(6,531,289	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		65,241,035			78,576,060
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	86,422,512		$	72,044,771
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes	$	1,287,273		$	2,945,542

See accompanying notes to the condensed consolidated financial statements.

4

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(Expressed in U.S. dollars)

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)           Basis of Presentation and Consolidation

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”). The balance sheet at December 31, 2012 is derived from the audited balance sheet but does not include all disclosures required by US GAAP. In connection with the consolidated financial statements and notes included in this report, reference is made to the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Form 10-K”).

In the opinion of management, the unaudited financial information for the three and six months ended June 30, 2013 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s  2012 Form 10-K. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in the areas including classification of leases and related party transactions.


The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, 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”). HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”).  All material intercompany transactions have been eliminated on consolidation.

(b)           Nature of the Business

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), and manufactures chemical products for use in the oil industry and paper manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in The People’s Republic of China (“PRC”).

(c)           Allowance for Doubtful Accounts

As of June 30, 2013 and December 31, 2012, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the income statement for the three-month and six-month periods ended June 30, 2013 and 2012.

(d)           Concentration of Credit Risk

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited and China Merchants Bank Company Limited, which are not insured or otherwise protected. The Company placed $86,422,512 and $65,241,035 with these institutions as of June 30, 2013 and December 31, 2012, respectively.  The Company has not experienced any losses in such accounts in the PRC.

Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and due to the generally short payment terms.  About 89.5% and 100% of the balances of accounts receivable as of June 30, 2013 and December 31, 2012, respectively, are outstanding for less than three months. For the balances of accounts receivable aged more than 90 days as of June 30, 2013, all was settled in July 2013.

5

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(Expressed in U.S. dollars)

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

(e)           Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment 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. All other ordinary repair and maintenance costs are expensed as incurred.

Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.

Construction in progress primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.

The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in progress, are as follows:

	Useful life (in years)
Buildings (including salt pans)	8 - 20
Plant and machinery (including protective shells, transmission channels and ducts)	5 - 8
Motor vehicles	5
Furniture, fixtures and equipment	8

Property, plant and equipment under capital leases are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.

(f)           Retirement Benefits

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement scheme at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the consolidated income statement on an accrual basis when they are due. The Company’s contributions totaled $124,158 and $112,275 for the three-month periods ended June 30, 2013 and 2012, respectively, and totaled $243,913 and $242,393 for the six-month periods ended June 30, 2013 and 2012, respectively.

(g)           Revenue Recognition

The Company recognizes revenue, net of value-added tax, when persuasive evidence of an arrangement exists, delivery of the goods has occurred, customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

(h)           Shipping and Handling Fees and Costs

The Company does not charge its customers for shipping and handling as all customers arrange their own transportation of finished goods.  The Company classifies shipping and handling costs for purchase of raw materials as part of the cost of net revenue, which amounted to $0 and $80,607 for the six-month periods ended June 30, 2013 and 2012, respectively. There is no such shipping and handling costs for the three-month period ended June 30, 2013 and 2012 as they are borne by the suppliers since April 2012.

6

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

(i)           Recoverability of Long-lived Assets

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35 “Impairment or Disposal of Long-lived Assets” , long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.

For the three-month periods ended June 30, 2012, Certain eroded protective shells for transmission channels and ducts, with net book values of $911,995, were replaced during the second phase enhancement project, write-offs of the same amounts, were made in this quarter and included in write-off/impairment on property, plant and equipment.

For the three-month and six-month periods ended June 30, 2013, the Company determined that there are no events or circumstances indicating possible impairment of its long-lived assets.

(j)           Basic and Diluted Net Income per Share of Common Stock

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 5,282,849 and 2,906,971 shares for the three-month periods ended June 30, 2013 and 2012, respectively, and amounted to 5,189,462 and 2,175,548 shares for the six-month periods ended June 30, 2013 and 2012, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.

7

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

(j)           Basic and Diluted Net Income per Share of Common Stock – Continued

The following table sets forth the computation of basic and diluted earnings per share:

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2013		2012			2013		2012
Numerator
Net income	$	5,355,899	$	5,688,674	$	7,238,864	$	8,975,781
Denominator
Basic: Weighted-average common shares outstanding during the period		38,367,471		34,560,743		38,367,471		34,560,743
Add: Dilutive effect of stock options		223,656		-		178,571		651
Diluted		38,591,127		34,560,743		38,546,042		34,561,394
Net income per share
Basic	$	0.14	$	0.16	$	0.19	$	0.26
Diluted	$	0.14	$	0.16	$	0.19	$	0.26

(k)           Reporting Currency and Translation

The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated comprehensive income. The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.

(l)           Foreign Operations

All of the Company’s operations and assets are located in PRC.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.

(m)           New Accounting Pronouncements

No accounting standards and guidance with an effective date during the three-month and six-month periods ended June 30, 2013 or issued during 2013 had or are expected to have a significant impact on the Company’s condensed consolidated financial statements.

NOTE 2 – ASSET ACQUISITIONS

On November 26, 2012, the Company acquired substantially all of the assets owned by Chengyong Zhao in Guantai Village located Shouguang City Yangkou Township area (the “Chengyong Zhao Property” or “Factory No. 11”). The Chengyong Zhao Property includes a 20-year land lease covering approximately 1,727 acres of real property, with the related production facility, wells, pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was RMB 62 million (approximately $9.80 million), consisting of RMB 31 million (approximately $4.93million) in cash and 3,806,728 shares of the Company’s Common Stock valued at approximately $4.87 million (fair value). The production line of Factory No. 11 was resumed in March 2013 after certain repair and adjustments.

The Factory No. 11 described above was not in operation when the Company acquired the assets. Production of Factory No. 11 had previously been halted by the government since the owners of the bromine factories did not hold the proper license for the exploration and production of bromine.  The Factories No.11 had not been in operation for more than six months at the time of the acquisition. The Company recorded the above transactions as a purchase of assets.

8

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 3 – INVENTORIES

Inventories consist of:

	June 30, 2013			December 31, 2012
Raw materials	$	692,551		$	773,453
Finished goods		4,707,039			5,248,039
Allowance for obsolete and slow-moving inventory		(28,376	)		(27,894	)
	$	5,371,214		$	5,993,598

NOTE 4 – PREPAID LAND LEASES

The Company prepaid for land leases with lease terms for periods ranging from one to fifty years to use the land on which the office premises, production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.

During the three-month periods ended June 30, 2013 and 2012, amortization of prepaid land lease totaled $91,703 and $50,180, respectively, which were recorded as cost of net revenue. During the six-month periods ended June 30, 2013 and 2012, amortization of prepaid land lease totaled $189,918 and $105,051, respectively, which were recorded as cost of net revenue.

The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships. Such parcels of land are collectively owned by local townships and accordingly, the Company could not obtain land use rights certificates on these parcels of land. The parcels of land that the Company could not obtain land use rights certificates cover a total of approximately 59.39 square kilometers with an aggregate carrying value of $1,169,534 and approximately 59.39 square kilometers with an aggregate carrying value of $753,086 as at June 30, 2013 and December 31, 2012, respectively.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:

	June 30, 2013			December 31, 2012
At cost:
Mineral rights	$	6,443,763		$	6,334,277
Buildings		51,785,222			50,905,337
Plant and machinery		168,992,691			166,121,329
Motor vehicles		9,298			9,140
Furniture, fixtures and office equipment		4,859,614			4,777,044
Total		232,090,588			228,147,127
Less: Accumulated depreciation and amortization		(76,972,730	)		(62,204,585	)
Net book value	$	155,117,858		$	165,942,542

The Company has certain buildings and salt pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships. The Company has not been able to obtain property ownership certificates over these buildings and salt pans as the Company could not obtain land use rights certificates on the underlying parcels of land. The aggregate carrying values of these properties situated on parcels of the land are $39,179,525 and $39,563,438 as at June 30, 2013 and December 31, 2012, respectively.

9

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued

During the three-month period ended June 30, 2013, depreciation and amortization expense totaled $6,812,181, of which $6,504,164 and $308,017 were recorded as cost of net revenue and administrative expenses, respectively. During the three-month period ended June 30, 2012, depreciation and amortization expense totaled $5,521,178, of which $5,403,370 and $117,808 were recorded as cost of net revenue and administrative expenses, respectively. During the six-month period ended June 30, 2013, depreciation and amortization expense totaled $13,554,571, of which $12,758,306 and $796,264 were recorded as cost of sales and administrative expenses respectively. During the six-month period ended June 30, 2012, depreciation and amortization expense totaled $11,118,099, of which $10,645,703 and $472,396 were recorded as cost of sales and administrative expenses respectively.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET

Property, plant and equipment under capital leases, net consist of the following:

	June 30, 2013			December 31, 2012
At cost:
Buildings	$	133,190		$	130,925
Plant and machinery		2,503,566			2,461,028
Total		2,636,756			2,591,953
Less: Accumulated depreciation and amortization		(738,073	)		(595,475	)
Net book value	$	1,898,683		$	1,996,478

The above buildings erected on parcels of land located in Shouguang, PRC, are collectively owned by local townships.  The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.  

During the three-month periods ended June 30, 2013 and 2012, depreciation and amortization expense totaled $65,870 and $86,247, respectively, which was recorded as cost of net revenue. During the six-month periods ended June 30, 2013 and 2012, depreciation and amortization expense totaled $130,968 and $172,489, respectively, which was recorded as cost of net revenue.

10

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

	June 30,		December 31,
	2013		2012
Accounts payable	$	5,173,565	$	3,797,552
Salary payable		202,317		190,926
Social security insurance contribution payable		56,643		52,399
Price adjustment funds		395,936		1,758,828
Other payables		502,183		733,531
Total	$	6,330,644	$	6,533,236

NOTE 8 – RELATED PARTY TRANSACTIONS

During the three-month and six-month periods ended June 30, 2013, the Company borrowed $99,000 and $420,449, respectively, and fully repaid later during the same period, from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, had a 100% equity interest in Jiaxing Lighting. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand.

NOTE 9 – TAXES PAYABLE

Taxes payable consists of the following:

	June 30,		December 31,
	2013		2012
Income tax payable	$	2,129,332	$	606,190
Mineral resource compensation fee payable		366,583		239,776
Value added tax payable		1,065,876		771,673
Land use tax payable		940,364		888,349
Other tax payables		213,398		350,670
Total	$	4,715,553	$	2,856,658

NOTE 10 – CAPITAL LEASE OBLIGATIONS

The components of capital lease obligations are as follows:

	Imputed	June 30,			December 31,
	Interest rate	2013			2012
Total capital lease obligations	6.7%	$	3,003,942		$	3,146,066
Less: Current portion			(99,011	)		(193,164	)
Capital lease obligations, net of current portion		$	2,904,931		$	2,952,902

Interest expenses from capital lease obligations amounted to $53,416 and $54,024 for the three-month periods ended June 30, 2013 and 2012, respectively, which were charged to the income statements. Interest expenses from capital lease obligations amounted to $106,206 and $108,044 for the six-month periods ended June 30, 2013 and 2012, respectively, which were charged to the income statements.

11

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 11 ––EQUITY

(a) Authorized shares

During the annual general meeting held on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number of the authorized shares of the Company’s comment stocks to 80,000,000. The Company is in the process of filing the amendment and restatement of the Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized shares of the Company’s common stock.

(b) Retained Earnings - Appropriated

In accordance with the relevant PRC regulations and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after tax to the following reserve:

Statutory Common Reserve Funds

SCHC and SYCI are required each year to transfer at least 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. The Statutory Common Reserve Fund as of June 30, 2013 for SCHC and SYCI is 35% and 50% of its registered capital respectively.

NOTE 12 – STOCK-BASED COMPENSATION

Pursuant to the Company’s Amended and Restated 2007 Equity Incentive Plan, the aggregate number shares of the Company’s common stock available for grant of stock options and issuance is 4,341,989 shares.

The fair value of each option award below is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the estimated average of the life of options using the “simplified” method, as prescribed in FASB ASC 718, due to insufficient historical exercise activity during recent years as a basis from which to estimate future exercise patterns.

In early March 2013, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.12 per share and the options vested immediately. The options were valued at $4,900 fair value, with assumed 74.73% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.19% and no dividend yield. For the three-month period ended March 31, 2013, $4,900 was recognized as general and administrative expenses.

On May 30, 2013, the Company granted to 3 executive officers and 17 management staff options to purchase 600,000 shares and 203,000 shares of the Company’s common stock, respectively, at an exercise price of $0.952 per share and the options vested immediately. The options to executive officers and management staff were valued at $394,100 and $133,300 fair value, respectively, both with assumed 80.76% volatility, a four-year expiration term with expected tenor of 2 years, a risk free rate of 0.29% and no dividend yield.

The following table summarizes all Company stock option transactions between January 1, 2013 and June 30, 2013.

	Number of Option and Warrants Outstanding		Number of Option and Warrants Vested		Range of Exercise Price per Common Share
Balance, January 1, 2013		1,974,471		1,974,471	$0.95 - $12.60
Granted and vested during the six-month period ended June 30, 2013		815,500		815,500	$0.95 - $1.12
Balance, June 30, 2013		2,789,971		2,789,971	$0.95 - $12.60

12

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 12 – STOCK-BASED COMPENSATION – Continued

	Stock and Warrants Options Exercisable and Outstanding
			Weighted Average	Weighted Average
			Remaining	Exercise Price of
	Outstanding at June 30, 2013	Range of Exercise Prices	Contractual Life  (Years)	Options Currently  Outstanding
Exercisable and outstanding	2,789,971	$0.95 - $12.60	2.75	$   3.11

The weighted average grant-date fair values as at June 30, 2013 and December 31, 2012 were $3.64 and $4.62, respectively.

NOTE 13 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

(a)           United States

Gulf Resources, Inc. is subject to the United States of America Tax law at a 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 three-month and six-month periods ended June 30, 2013 and 2012, and management believes that its earnings are permanently invested in the PRC.

(b)           BVI

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and six-month periods ended June 30, 2013 and 2012.

(c)           Hong Kong

Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group 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 three-month and six-month periods ended June 30, 2013 and 2012.  The applicable statutory tax rates for the three-month and six-month periods ended June 30, 2013 and 2012 are 16.5%.

(d)           PRC

Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.

The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

13

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 13 – INCOME TAXES – Continued

As of June 30, 2013 and December 31, 2012, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $208,469,568 and $197,042,047, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of June 30, 2013 and December 31, 2012, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of June 30, 2013 and December 31, 2012, the unrecognized WHT are $9,321,132 and $8,768,486, respectively.

The components of the provision for income taxes from continuing operations are:

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
	2013		2012			2013			2012
Current taxes – PRC	$	2,048,722		$	1,892,567		$	2,791,042		$	3,148,833
Deferred taxes – PRC		-			82,622			-			160,826
	$	2,048,722		$	1,975,189		$	2,791,042		$	3,309,659

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2013			2012			2013			2012
Statutory income tax rate		25	%		25	%		25	%		25	%
Non-deductible expenses		1	%		0	%		1	%		0	%
US federal net operating loss		2	%		1	%		2	%		2	%
Effective tax rate		28	%		26	%		28	%		27	%

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2013 and December 31, 2012 are as follows:

	June 30,			December 31,
	2013			2012
Deferred tax liabilities	$	-		$	-
Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	7,094		$	6,973
Impairment on property, plant and equipment		472,812			464,778
Exploration costs		1,812,721			1,781,921
Compensation costs of unexercised stock options		1,990,360			1,809,378
US federal net operating loss		8,876,646			8,809,935
Total deferred tax assets		13,159,633			12,872,985
Valuation allowance		(10,867,006	)		(10,619,313	)
Net deferred tax asset	$	2,292,627		$	2,253,672
Current deferred tax asset	$	7,094		$	6,973
Long-term deferred tax asset	$	2,285,533		$	2,246,699

The increase in valuation allowance for each of the three-month periods ended June 30, 2013 and 2012 is $148,308 and $106,382, respectively, and six-month periods ended June 30, 2013 and 2012 is $247,693 and $330,313, respectively.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2013 and December 31, 2012.

14

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS

The Company has three reportable segments:  bromine, crude salt and chemical products. The reportable segments are consistent with how management views the markets served by the Company and the financial information that is reviewed by its chief operating decision maker.

An operating segment’s performance is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income not associated with the operations of the segment. These corporate costs (income) are separately stated below and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All the customers are located in PRC.

Three-Month Period Ended June 30, 2013	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	17,473,276	$	3,629,976	$	11,750,644	$	32,853,896	$	-		$	32,853,896
Net revenue (intersegment)		777,746		-		-		777,746		-			777,746
Income (loss) from operations before taxes		3,882,612		728,638		3,572,036		8,183,286		(804,511	)		7,378,775
Income taxes		941,322		209,755		897,645		2,048,722		-			2,048,722
Income (loss) from operations after taxes		2,941,290		518,883		2,674,391		6,134,564		(804,511	)		5,330,053
Total assets		174,524,258		56,693,091		60,193,635		291,410,984		86,337			291,497,321
Depreciation and amortization		4,309,920		1,687,487		880,645		6,878,052		-			6,878,052
Capital expenditures		-		-		-		-		-			-
Write-off / Impairment		-		-		-		-		-			-

Three-Month Period Ended June 30, 2012	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	17,539,429	$	3,779,658	$	9,995,759	$	31,314,846	$	-		$	31,314,846
Net revenue (intersegment)		808,596		-		-		808,596		-			808,596
Income (loss) from operations before taxes		3,933,561		888,555		3,007,381		7,829,497		(196,294	)		7,633,203
Income taxes		1,018,311		198,783		758,095		1,975,189		-			1,975,189
Income (loss) from operations after taxes		2,915,250		689,772		2,249,286		5,854,308		(196,294	)		5,658,014
Total assets		158,305,734		56,621,811		50,634,822		265,562,367		425,477			265,987,844
Depreciation and amortization		3,509,790		1,442,179		655,456		5,607,425		-			5,607,425
Capital expenditures		6,567,296		1,281,991		-		7,849,287		-			7,849,287
Write-off / Impairment		763,043		148,952		-		911,995		-			911,995

15

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS – Continued

Six-Month Period Ended June 30, 2013	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	29,207,643	$	6,080,762	$	20,068,071	$	55,356,476	$	-		$	55,356,476
Net revenue (intersegment)		1,392,476		-		-		1,392,476		-			1,392,476
Income (loss) from operations before taxes		4,210,425		1,266,858		5,668,715		11,145,998		(1,161,775	)		9,984,223
Income taxes		1,121,955		243,020		1,426,067		2,791,042		-			2,791,042
Income (loss) from operations after taxes		3,088,471		1,023,837		4,242,648		8,354,956		(1,161,775	)		7,193,181
Total assets		174,524,258		56,693,091		60,193,635		291,410,984		86,337			291,497,321
Depreciation and amortization		8,687,891		3,246,686		1,750,962		13,685,539		-			13,685,539
Capital expenditures		-		-		-		-		-			-
Write-off / Impairment		-		-		-		-		-			-

Six-Month Period Ended June 30, 2012	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	30,993,311	$	6,054,582	$	18,075,627	$	55,123,520	$	-		$	55,123,520
Net revenue (intersegment)		1,563,153		-		-		1,563,153		-			1,563,153
Income (loss) from operations before taxes		6,401,865		1,437,005		5,250,276		13,089,146		(878,844	)		12,210,302
Income taxes		1,681,209		302,649		1,325,801		3,309,659		-			3,309,659
Income (loss) from operations after taxes		4,720,656		1,134,356		3,924,475		9,779,487		(878,844	)		8,900,643
Total assets		158,305,734		56,621,811		50,634,822		265,562,367		425,477			265,987,844
Depreciation and amortization		7,174,033		2,805,685		1,310,870		11,290,588		-			11,290,588
Capital expenditures		6,567,296		1,281,991		-		7,849,287		-			7,849,287
Write-off / Impairment		763,043		148,952		-		911,995		-			911,995

* Certain common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of respective segment.

16

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS – Continued

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2013			2012			2013			2012
Total segment operating income	$	8,183,286		$	7,829,497		$	11,145,998		$	13,089,146
Corporate costs		(804,511	)		(196,294	)		(1,161,775	)		(878,844	)
Income from operations		7,378,775			7,633,203			9,984,223			12,210,302
Other income (expense)		25,846			30,660			45,683			75,138
Income before taxes	$	7,404,621		$	7,663,863		$	10,029,906		$	12,285,440

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2013.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue  (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	2,166	$	751	$	1,125	$	4,042		12.3	%
TOTAL			$	2,166	$	751	$	1,125	$	4,042		12.3	%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2013.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue  (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	3,347	$	1,494	$	2,055	$	6,896		12.5	%
TOTAL			$	3,347	$	1,494	$	2,055	$	6,896		12.5	%

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2012.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	1,904	$	727	$	1,109	$	3,740		11.9%
	2	Shouguang City Rongyuan Chemical Company Limited	$	2,257	$	898	$	-	$	3,155		10.1%
TOTAL			$	4,161	$	1,625	$	1,109	$	6,895		22.0%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2012.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	3,634	$	1,113	$	2,107	$	6,854		12.4%
	2	Shouguang City Rongyuan Chemical Company Limited	$	4,278	$	1,346	$	-	$	5,624		10.2%
TOTAL			$	7,912	$	2,459	$	2,107	$	12,478		22.6%

NOTE 15 – MAJOR SUPPLIERS

During the three-month and six-month periods ended June 30, 2013, the Company purchased 83.4% and 82.6% of its raw materials from its top five suppliers, respectively.  As of June 30, 2013, amounts due to those suppliers included in accounts payable were $4,289,947. During the three-month and six-month periods ended June 30, 2012, the Company purchased 85.7% and 83.5% of its raw materials from its top five suppliers, respectively.  As of June 30, 2012, amounts due to those suppliers included in accounts payable were $3,305,237. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

17

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 16 – CUSTOMER CONCENTRATION

The Company sells a substantial portion of its products to a limited number of customers.  During the three-month and six-month periods ended June 30, 2013, the Company sold 40.0% and 40.3% of its products to its top five customers, respectively. As of June 30, 2013, amounts due from these customers were $16,955,022. During the three-month and six-month periods ended June 30, 2012, the Company sold 42.8% and 43.4% of its products to its top five customers, respectively. As of June 30, 2012, amounts due from these customers were $19,888,840. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments.  There were no material unrecognized financial assets and liabilities as of June 30, 2013 and December 31, 2012.

NOTE 18 – RESEARCH AND DEVELOPMENT EXPENSES

The total research and development expenses recognized in the income statements during the three-month and six-month periods ended June 30, 2013 were $54,480 and $72,182, respectively, of which the consumption of bromine produced by the Company amounted to $12,461 and $18,582, respectively. The total research and development expenses recognized in the income statements during the three-month and six-month periods ended June 30, 2012 were $62,526 and $105,324, respectively, of which the consumption of bromine produced by the Company amounted to $13,268 and $24,008, respectively. 

NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

As of June 30, 2013, the Company has leased a real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, under capital lease. The future minimum lease payments required under capital lease, together with the present value of such payments, are included in the table show below.

The Company has leased nine pieces of land under non-cancelable operating leases, which are fixed in rentals and expired through December 2021, December 2030, December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively. The Company accounts for the leases as operating leases.

The Company has no purchase commitment as of June 30, 2013.

The following table sets forth the Company’s contractual obligations as of June 30, 2013:

	Capital Lease Obligations			Operating Lease Obligations		Construction Project Obligations
Payable within:
the next 12 months	$	303,792		$	955,478	$	-
the next 13 to 24 months		303,792			973,386		-
the next 25 to 36 months		303,792			995,256		-
the next 37 to 48 months		303,792			1,014,923		-
the next 49 to 60 months		303,792			1,038,792		-
thereafter		3,645,509			21,817,253		-
Total	$	5,164,472		$	26,795,088	$	-
Less: Amount representing interest		(2,160,530	)
Present value of net minimum lease payments	$	3,003,942

18

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS – Continued

Rental expenses related to operating leases of the Company amounted to $237,214 and $194,450, which were charged to the income statements for the three-month ended June 30, 2013 and 2012, respectively. Rental expenses related to operating leases of the Company amounted to $471,533 and $388,766, which were charged to the income statements for the six-month ended June 30, 2013 and 2012, respectively.

NOTE 20 – CONTINGENCY

Class Action

The Company and certain of its officers and directors (Ming Yang, Xiaobin Liu, and Min Li, collectively, the “Individual Defendants”) have been named as defendants in a putative securities class action lawsuit alleging violations of the federal securities laws. That action, which is now captioned Lewy, et al. v. Gulf Resources, Inc., et al., No. 11-cv-3722 ODW (MRWx), was filed on April 29, 2011 in the United States District Court for the Central District of California. The lead plaintiffs, who seek to represent a class of all purchasers and acquirers of the Company’s common stock between March 16, 2009 and April 26, 2011 inclusive, filed an amended complaint on September 12, 2011. Lead plaintiffs assert claims for violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The amended complaint alleges the defendants made false or misleading statements in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2008, 2009, and 2010, and in interim quarterly reports by, among other things, overstating revenue and net income and failing to disclose material related party transactions and certain facts about the CEO’s prior employment at another company. The amended complaint also asserts claims against the Individual Defendants for violations of Section 20(a) of the Securities Exchange Act of 1934. The amended complaint seeks damages in an unspecified amount. The Company filed a motion to dismiss the amended complaint. On May 15, 2012, the Court denied the Company’s motion to dismiss the amended complaint. On April 30, 2013, the parties executed a stipulation and agreement of settlement. The proposed settlement is subject to review and approval of the Court. The Company currently cannot estimate the amount or range of the overall costs in connection with this litigation. The Company believes that such costs will be reimbursed by the insurance company to the extent covered by the insurance policies.

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The discussion below contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act.  We have used words such as “believes,” “intends,” “anticipates,” “expects” and similar expressions to identify forward-looking statements. These statements are based on information currently available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition, cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed in, or implied by, these statements. These risks, uncertainties and other factors include, without limitation, those matters discussed in Item 1A of Part I of our 2012 Form 10-K.  Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason.  The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing in our 2012 Form 10-K and Item 1A, “Risk Factors” for the year ended December 31, 2012.

Overview

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

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

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

Our Corporate History

We were incorporated in Delaware on February 28, 1989. From November 1993 through August 2006, we were engaged in the business of owning, leasing and operating coin and debit card pay-per copy photocopy machines, fax machines, microfilm reader-printers and accessory equipment under the name “Diversifax, Inc.”. Due to the increased use of internet services, demand for our services declined sharply, and in August 2006, our Board of Directors decided to discontinue our operations.

Upper Class Group Limited, incorporated in the British Virgin Islands in July 2006, acquired all the outstanding stock of SCHC, a company incorporated in Shouguang City, Shandong Province, PRC, in May 2005. At the time of the acquisition, members of the family of Mr. Ming Yang, our president and former chief executive officer, owned approximately 63.20% of the outstanding shares of Upper Class Group Limited. Since the ownership of Upper Class Group Limited and SCHC was then substantially the same, the acquisition was accounted for as a transaction between entities under common control, whereby Upper Class Group Limited recognized the assets and liabilities transferred at their carrying amounts.

On December 12, 2006, we, then known as Diversifax, Inc., a public “shell” company, acquired Upper Class Group Limited and SCHC. Under the terms of the agreement, the stockholders of Upper Class Group Limited received 13,250,000 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of voting common stock of Gulf Resources, Inc. in exchange for all outstanding shares of Upper Class Group Limited. Members of the Yang family received approximately 62% of our common stock as a result of the acquisition.  Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Upper Class Group Limited for the net assets of Gulf Resources, Inc., accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange is identical to that resulting from a reverse acquisition, except no goodwill is recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper Class Group Limited. Share and per share amounts stated have been retroactively adjusted to reflect the share exchange. On February 20, 2007, we changed our corporate name to Gulf Resources, Inc.

20

On February 5, 2007, we acquired SYCI, a company incorporated in PRC, in October 2000. Under the terms of the acquisition agreement, the stockholders of SYCI received a total of 8,094,059 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of common stock of Gulf Resources, Inc. in exchange for all outstanding shares of SYCI's common stock. Simultaneously with the completion of the acquisition, a dividend of $2,550,000 was paid to the former stockholders of SYCI. At the time of the acquisition, approximately 49.1% of the outstanding shares of SYCI were owned by Ms. Yu, Mr. Yang’s wife, and the remaining 50.9% of the outstanding shares of SYCI were owned by SCHC, all of whose outstanding shares were owned by Mr. Yang and his wife. Since the ownership of Gulf Resources, Inc. and SYCI are substantially the same, the acquisition was accounted for as a transaction between entities under common control, whereby Gulf Resources, Inc. recognized the assets and liabilities of SYCI at their carrying amounts. Share and per share amounts have been retroactively adjusted to reflect the acquisition.

To satisfy certain ministerial requirements necessary to confirm certain government approvals required in connection with the acquisition of SCHC by Upper Class Group Limited, all of the equity interest of SCHC were transferred to a newly formed Hong Kong corporation named Hong Kong Jiaxing Industrial Limited (“Hong Kong Jiaxing”) all of the outstanding shares of which are owned by Upper Class Group Limited. The transfer of all of the equity interest of SCHC to Hong Kong Jiaxing received approval from the local State Administration of Industry and Commerce on December 10, 2007.

As a result of the transactions described above, our corporate structure is linear. That is Gulf Resources owns 100% of the outstanding shares of Upper Class Group Limited, which owns 100% of the outstanding shares of Hong Kong Jiaxing, which owns 100% of the outstanding shares of SCHC, which owns 100% of the outstanding shares of SYCI.

On October 12, 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” and on June 30, 2011 we changed our ticker symbol to “GURE” to better reflection of our corporate name.

Our current corporate structure chart is set forth in the following diagram:

 

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

21

RESULTS OF OPERATIONS

The following table presents certain information derived from the consolidated statements of operations, cash flows and stockholders equity for the three-month and six-month periods ended June 30, 2013 and 2012. 

Comparison of the Three-Month Periods Ended June 30, 2013 and 2012

	Three-Month Period Ended June 30, 2013			Three-Month Period Ended June 30, 2012				% Change
Net revenue	$	32,853,896		$	31,314,846				5	%
Cost of net revenue	$	(23,260,201	)	$	(21,389,651	)			9	%
Gross profit	$	9,593,695		$	9,925,195				(3	%)
Sales, marketing and other operating expenses	$	(25,115	)	$	(22,709	)			11	%
Research and development costs	$	(54,480	)	$	(62,526	)			(13	%)
Write-off/Impairment on property, plant and equipment	$	-		$	(911,995	)			(100	%)
General and administrative expenses	$	(2,422,452	)	$	(1,370,866	)			77	%
Other operating income	$	287,127		$	76,104				277	%
Income from operations	$	7,378,775		$	7,633,203				(3	%)
Other income (expense), net	$	25,846		$	30,660				(16	%)
Income before taxes	$	7,404,621		$	7,663,863				(3	%)
Income taxes	$	(2,048,722	)	$	(1,975,189	)			4	%
Net income	$	5,355,899		$	5,688,674				(6	%)

Net revenue.  Net revenue was $32,853,896 for three-month period ended June 30, 2013, an increase of approximately $1.5 million (or 5%) as compared to the same period in 2012. This increase was primarily attributable to the growth in our chemical products segment products, which increased from $9,995,759 for the three-month period ended June 30, 2012 to $11,750,644 for the same period in 2013, an increase of approximately 18%.

Revenue from the crude salt segment decreased from $3,779,658 for the three-month period ended June 30, 2012 to $3,629,976 for the same period in 2013, a decrease of approximately 4%. Revenue from the bromine products segment slightly decreased from $17,539,429 for the three-month period ended June 30, 2012 to $17,473,276 for the same period in 2013, a decrease of approximately 0.4%.

	Net Revenue by Segment
	Three-Month Period Ended					Three-Month Period Ended					Percent Increase/Decrease
	June 30, 2013					June 30, 2012					of Net Revenue
Segment			% of total					% of total
Bromine	$	17,473,276		53	%	$	17,539,429		56	%		(0.4	%)
Crude Salt	$	3,629,976		11	%	$	3,779,658		12	%		(4	%)
Chemical Products	$	11,750,644		36	%	$	9,995,759		32	%		18	%
Total sales	$	32,853,896		100	%	$	31,314,846		100	%		5	%

Bromine and crude salt segments	Three-Month Period Ended				Percentage Change
product sold in tonnes	June 30, 2013		June 30, 2012		Increase/(Decrease)
Bromine (excluded volume sold to SYCI)		5,666		5,031		13	%
Crude Salt		89,140		100,745		(12	%)

	Three-Month Period Ended				Percentage Change
Chemical products segment sold in tonnes	June 30, 2013		June 30, 2012		Increase/(Decrease)
Oil and gas exploration additives		3,493		3,057		14	%
Paper manufacturing additives		1,207		771		57	%
Pesticides manufacturing additives		800		830		(4	%)
Overall		5,500		4,658		18	%

22

Bromine segment

The decrease in net revenue from our bromine segment was mainly due to the decrease in the selling price of bromine, offset by the increase in average selling price. The selling price of bromine decreased from $3,486 per tonne for the three-month period ended June 30, 2012 to $3,084 tonnes for the same period in 2013, a decrease of 12%. The major reason for the decrease in the selling price of bromine was mainly attributable to the macro-economic tightening policy imposed by the PRC government beginning in the second half of 2011 to slow down the economy, which has affected our customers’ industries. As a result, we needed to offer competitive selling prices to our customers to compete with other bromine manufacturers. The average selling price for this quarter increased $128 per tonne, as compared with the three-month period ended December 31, 2012, which was $2,954 per tonne. We expect the average selling price of bromine to remain at the current level through the end of 2013 should the PRC government’s macro-economic tightening policy remain in place.

Due to the lower level of bromine price, our customers increased their bromine inventories. The sales volume of bromine increased from 5,031 tonnes for the three-month periods ended June 30, 2012 to 5,666 tonnes for the same period in 2013, an increase of 13%. The table below shows the changes in the average selling price and changes in the sales volume of bromine for three-month period ended June 30, 2013 from the same period in 2012.

	Three-Month Period Ended June 30,
Increase / (Decrease) in net revenue of bromine as a result of:	2013 vs. 2012
Decrease in average selling price	$	(2,153,185	)
Increase in sales volume	$	2,087,032
Total effect on net revenue of bromine	$	(66,153	)

Crude salt segment

The decrease in net revenue from our crude salt segment was mainly due to the decrease in the sales volume of crude salt, offset by the increase in average selling price. The sales volume of crude of crude salt decreased by 12% from 100,745 tonnes for the three-month period ended June 30, 2012 to 89,140 tonnes for the same period in 2013. The major reason for the decrease in the sales volume of crude salt was mainly attributable to the large volume of crude salt inventory held by our customers and the decreased crude salt terminal products sales due to macro-economic tightening policy imposed by the PRC government.

The average selling price of crude salt increased from $37.52 per tonne for the three-month period ended June 30, 2012 to $40.72 per tonne for the same period in 2013, an increase of 9%.

We noted an upward trend in the average selling price of crude salt since the third quarter of 2011 as due to the stable demand of the crude salt. The average selling price increased from $37.19 per tonne in the third quarter of 2011 to $40.72 per tonne in the second quarter of 2013. We expect the average selling price of crude salt to remain at current levels through the end of 2013. The table below shows the changes in the average selling price and changes in the sales volume of crude salt for three-month period ended June 30, 2013 from the same period in 2012.

	Three-Month Period Ended June 30,
Increase / (Decrease) in net revenue of crude salt as a result of:	2013 vs. 2012
Increase in average selling price	$	304,307
Decrease in sales volume	$	(453,989	)
Total effect on net revenue of crude salt	$	(149,682	)

23

Chemical products segment

	Product Mix of Chemical Products Segment										Percent
	Three-Month Period Ended					Three-Month Period Ended					Change of
	June 30, 2013					June 30, 2012					Net Revenue
Chemical Products			% of total					% of total
Oil and gas exploration additives	$	6,676,522		57	%	$	5,569,089		56	%		20	%
Paper manufacturing additives	$	1,393,172		12	%	$	985,068		10	%		41	%
Pesticides manufacturing additives	$	3,680,950		31	%	$	3,441,602		34	%		7	%
Total sales	$	11,750,644		100	%	$	9,995,759		100	%		18	%

Net revenue from our chemical products segment increased from $9,995,759 for the three-month period ended June 30, 2012 to $11,750,644 for the same period in 2013, an increase of approximately 18%. The increase was attributable to the increase in demand for our oil and gas exploration additives and paper manufacturing additives. Our oil and gas exploration chemicals are the most popular products within the chemical products segment, which contributed $6,676,522 (or 57%) and $5,569,089 (or 56%) of our chemical segment revenue for the three-month periods ended June 30, 2013 and 2012, respectively, with an increase of $1,107,433, or 20%. Net revenue from our paper manufacturing additives increased from $985,068 for the three-month period ended June 30, 2012 to $1,393,172 for the same period in 2013, an increase of approximately 41%. Net revenue from our pesticides manufacturing additives increased from $3,441,602 for the three-month period ended June 30, 2012 to $3,680,950 for the same period in 2013, an increase of approximately 7%.

The table below shows the changes in the average selling price and changes in the sales volume of major chemical products for three-month period ended June 30, 2013 from the same period in 2012.

Increase / (Decrease) in net revenue, for the three-month period ended June 30, 2013 vs. 2012, as a result of:	Oil and gas exploration additives		Paper manufacturing additives			Pesticides manufacturing additives			Total
Increase / (Decrease) in average selling price	$	293,606	$	(122,048	)	$	370,563		$	542,121
Increase / (Decrease) in sales volume	$	813,827	$	530,153		$	(131,216	)	$	1,212,764
Total effect on net revenue of chemical products	$	1,107,433	$	408,105		$	239,347		$	1,754,885

Cost of Net Revenue

	Cost of Net Revenue by Segment										% Change
	Three-Month Period Ended					Three-Month Period Ended					of Cost of
	June 30, 2013					June 30, 2012					Net Revenue
Segment			% of total					% of total
Bromine	$	12,705,212		55	%	$	11,969,325		56	%		6	%
Crude Salt	$	2,678,177		11	%	$	2,556,779		12	%		5	%
Chemical Products	$	7,876,812		34	%	$	6,863,547		32	%		15	%
Total	$	23,260,201		100	%	$	21,389,651		100	%		9	%

24

Costof net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $23,260,201 for three-month period ended June 30, 2013, an increase of $1,870,550 (or 9%) as compared to the same period in 2012. The increase in overall cost of net revenue was mainly attributable to the increase in volume of products sold and the increase in depreciation and amortization of manufacturing plant and machinery, which was partially offset by the decrease in purchase price of raw materials.

Bromine production capacity and utilization of our factories

The table below represents the annual capacity and utilization ratios for all of our bromine producing properties:

	Annual Production Capacity (in tonnes)			Utilization Ratio (i)
Three-month period ended June 30, 2012		44,547			47%
Three-month period ended June 30, 2013		47,347			51%
Variance of the three-month periods ended June 30, 2013 and 2012		2,800	(ii)		4%

(i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes.

(ii) The increase in 2,800 tonnes production capacity represents the management’s estimate of the capacity of Factory No. 11 acquired in late November 2012.

Our utilization ratio increased by 4% for the three-month period ended June 30, 2013 as compared with the same period in 2012. The increase in utilization was mainly attributable to the increasing demand of bromine from the downstream industrial customers.

Bromine segment

For the three-month period ended June 30, 2013, the cost of net revenue for the bromine segment was $12,705,212, an increase of $735,888 or 6% over the same period in 2012. The most significant components of the costs of net revenue for the bromine segment were cost of raw materials and finished goods consumed of $6,322,171 (or 50%), depreciation and amortization of manufacturing plant and machinery of $4,202,661 (or 33%) and electricity of $918,704 (or 7%) for the three-month period ended June 30, 2013. For the three-month period ended June 30, 2012, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $6,616,505 (or 55%), depreciation and amortization of manufacturing plant and machinery of $3,423,638 (or 29%) and electricity of $799,502 (or 7%), the cost structure changed as compared with the same period in 2012 where the contribution from cost of raw materials and finished goods consumed decreased by 5% and depreciation and amortization of manufacturing plant and machinery increased by 4%. The increase in net cost of net revenue was mainly attributable to the increase in volume of products sold and the increase in depreciation and amortization of manufacturing plant and machinery, which was largely offset by the decrease in purchase price of raw material.

25

The table below represents the major production cost component of bromine per tonne sold for respective periods:

Per tonne production cost	Three-Month Period Ended					Three-Month Period Ended
component of bromine segment	June 30, 2013					June 30, 2012					% Change
			% of total					% of total
Raw materials	$	1,116		50	%	$	1,315		55	%		(15	%)
Depreciation and amortization	$	742		33	%	$	681		29	%		9	%
Electricity	$	162		7	%	$	159		7	%		2	%
Others	$	222		10	%	$	224		9	%		(0.9	%)
Production cost of bromine per tonne	$	2,242		100	%	$	2,379		100	%		(6	%)

Our production cost of bromine per tonne sold was $2,242 for the three-month period ended June 30, 2013, a decrease of 6% (or $137) as compared to the same period in 2012, which was attributable mainly to the component of raw materials consumed. The significant percentage decrease in raw materials consumed per tonne by 15% was due to the decrease in the purchase price of raw materials due to the macro-economic tightening policy imposed by the PRC government. The cost of depreciation and amortization of the plant and machinery per tonne increased by 9% as compared to the same period in 2012, which was mainly attributable to the enhancement projects in second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery.

Crude salt segment

The cost of net revenue for our crude salt segment for the three-month period ended June 30, 2013 was $2,678,177, representing an increase of $121,398, or 5%, compared to $2,556,779 for the same period in 2012. The increase in cost was mainly due to the increase in the number of enhancement projects performed in second quarter of 2012, which in turn resulted in an increase in the depreciation and amortization of manufacturing plant and machinery. The significant cost components for the three-month period ended June 30, 2013 were depreciation and amortization of $1,854,237 (or 69%), resource taxes calculated based on crude salt sold of $287,316 (or 11%) and electricity of $228,176 (or 9%). The significant cost components for the three-month period ended June 30, 2012 were depreciation and amortization of $1,771,016 (or 69%), resource taxes calculated based on crude salt sold of $319,462 (or 12%) and electricity of $193,917 (or 8%). The table below represents the major production cost component of crude salt per ton for respective periods:

Per tonne production cost	Three-Month Period Ended					Three-Month Period Ended
component of crude salt segment	June 30, 2013					June 30, 2012					% Change
			% of total					% of total
Depreciation and amortization	$	20.8		69	%	$	17.6		69	%		18	%
Resource tax	$	3.2		11	%	$	3.2		13	%		0	%
Electricity	$	2.6		9	%	$	2.0		8	%		33	%
Others	$	3.4		11	%	$	2.6		10	%		31	%
Production cost of crude salt per tonne	$	30.0		100	%	$	25.4		100	%		18	%

Our production cost of crude salt per tonne was $30.0 for the three-month period ended June 30, 2013, an increase of 18% (or $4.6) as compared to the same period in 2012, which was attributable mainly to the components of depreciation and amortization of manufacturing plant and machinery. The significant percentage increase in depreciation and amortization per tonne by 18% was due to the enhancement projects in second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery. Other production costs represented mainly salaries and welfare of labor for the crude salt fields.

Chemical products segment

Cost of net revenue for our chemical products segment for the three-month period ended June 30, 2013, was $7,876,812, representing an increase of $1,013,265 or 15% over the same period in 2012. The significant costs were cost of raw material and finished goods consumed of $6,846,444 (or 87%) and $5,989,603 (or 87%) and depreciation and amortization of manufacturing plant and machinery of $703,786 (or 9%) and $640,617 (or 9%) for each of the three-month periods ended June 30, 2013 and 2012, respectively. As the components of our cost of net revenue are fixed levels of depreciation and amortization of our manufacturing plant and machinery, the rate of increase for the cost of net revenue for our chemical products segment was less than that of net revenue.

26

Gross Profit. Gross profit was $9,593,695, or 29%, of net revenue for three-month period ended June 30, 2013 compared to $9,925,195, or 32%, of net revenue for the same period in 2012. The decrease in gross profit percentage was primarily attributable to a drop in the margin percentage of bromine and crude salt segments.

	Gross Profit by Segment										% Point Change
	Three-Month Period Ended					Three-Month Period Ended					of Gross
	June 30, 2013					June 30, 2012					Profit Margin
Segment			Gross Profit Margin					Gross Profit Margin
Bromine	$	4,768,064		27	%	$	5,570,105		32	%		(5	%)
Crude Salt	$	951,799		26	%	$	1,222,878		32	%		(6	%)
Chemical Products	$	3,873,832		33	%	$	3,132,212		31	%		2	%
Total Gross Profit	$	9,593,695		29	%	$	9,925,195		32	%		(3	%)

Bromine segment

For the three-month period ended June 30, 2013, the gross profit margin for our bromine segment was 27% compared to 32% for the same period in 2012. As mentioned in the net revenue discussion above, due to the PRC government’s macro-economic tightening policy to slow down the economy, our selling price in the three-month ended June 30, 2013 was adversely affected. We cut the average selling price of bromine from $3,486 per tonne for the three-month period ended June 30, 2012 to $3,084 per tonne for the same period in 2013, a decrease of 12%, in order to compete with other bromine manufacturers. Also, as mentioned in our 2012 Form 10-K, we completed certain enhancements of our facilities in the second quarter of 2012 to pump brine water from deeper underground in order to improve the quality of brine water being extracted from our wells, which in turn increased the depreciation and amortization of the plant and equipment and hence the cost of net revenue of bromine. We expect that the average selling price and gross profit margin of bromine will remain at current level towards the end of 2013 should the PRC government’s macro-economic tightening policy remain in place.

Crude salt segment

For the three-month period ended June 30, 2013 the gross profit margin for our crude salt segment was 26% compared to 32% for the same period in 2012. This 6% decrease in our gross profit margin is mainly attributable to (i) the increase in depreciation and amortization of manufacturing facilities as a result of the enhancement projects in the second quarter of 2012 to our extraction wells and transmission channels and ducts as mentioned in our 2012 Form 10-K; and (ii) the sales volume decreased from 100,745 tonnes for the three-month period ended June 30, 2012 to 89,140 tonnes for the same period in 2013, a decrease of 12%.

Chemical products segment

The gross profit margin for our chemical products segment for the three-month period ended June 30, 2013 was 33% compared to 31% for the same period in 2012, an increase of 2%. As previously mentioned, the increase in gross profit margin was a result of the increase in demand for our oil and gas exploration additives and paper manufacturing additives which in turn increased the sales volume of these chemical products. As sales of oil and gas exploration additives contributed more than 57% of our total chemical products segment’s net revenue, the increase in demand largely increased the gross profit margin of our chemical products segment.

Research and Development Costs . The total research and development costs incurred for the three-month periods ended June 30, 2013 and 2012 were $54,480 and $62,526, respectively, a decrease of 13%. Research and development costs for the three-month period ended June 30, 2013and 2012 represented raw materials used by SYCI for testing the manufacturing routine.

27

Write-off/Impairment on property, plant and equipment. Write-off on property, plant and equipment of $911,995 for the three-month period ended June 30, 2012 represented the write-off of certain protective shells to transmission pipelines and ducts replaced during the second phase enhancement project that started in May 2012. There was no write-off on property, plant and equipment for the three-month period ended June 30, 2013.

General and Administrative Expenses. General and administrative expenses were $2,422,452 for the three-month period ended June 30, 2013, an increase of $1,051,586 (or 77%) as compared to $1,370,866 for the same period in 2012. This increase in general and administrative expenses was primarily due to (i) a non-cash expense related to stock options granted to employees increased from $11,000 for the three-month period ended June 30,2012 to $527,400 for the same period of 2013 ; and(ii) the unrealized exchange loss in relation to the translation difference of inter-company balances in USD and RMB for the three-month period ended June 30,2013 amounted to $366,028, as compared to the unrealized exchange gain for the same period in 2012 amounted to $116,379.

Other Operating Income Other operating income was $287,127 for the three-month period ended June 30, 2013, which represented (i)the sales of wastewater to some of our customers in the amount of $116,035 and (ii) a sum of $171,092 for insurance compensation received in 2013 for legal fees incurred in 2012. The other operating income for the three-month period ended June 30, 2012 represented a sum of $76,104 for sales of wastewater. Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We have signed agreements with four of our customers to sell them our wastewater at market prices.

Income from Operations. Income from operations was $7,378,775 for the three-month period ended June 30, 2013 (or 22% of net revenue), a decrease of $254,428, or approximately 3%, over income from operations for the same period in 2012. The decrease resulted primarily from (i) the increase in depreciation and amortization of the plant and machinery due to the enhancement projects from in the second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery; and (ii) the selling price of bromine decreased from $3,486 per tonne for the three-month period ended June 30, 2012 to $3,084 tonnes for the same period in 2013; and (iii) a non-cash expense related to stock options granted to employees increased from $11,000 for the three-month period ended June 30,2012 to $527,400 for the same period of 2013, partially offset by write-off of certain protective shells to transmission pipelines and ducts replaced during the second phase enhancement project in the amount of $911,995 that started in May 2012.

	Income from Operations by Segment
	Three-Month Period Ended June 30, 2013				Three-Month Period Ended June 30, 2012
Segment:				% of total				% of total
Bromine	$	3,882,612		47%	$	3,933,561		50%
Crude Salt		728,638		9%		888,555		11%
Chemical Products		3,572,036		44%		3,007,381		39%
Income from operations before corporate costs		8,183,286		100%		7,829,497		100%
Corporate costs		(804,511	)			(196,294	)
Income from operations	$	7,378,775			$	7,633,203

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Bromine segment

Income from operations from our bromine segment was $3,882,612 for the three-month period ended June 30, 2013, a decrease of $50,949 (or approximately 1%) as compared to the same period in 2012. This slightly decrease resulted primarily from the decrease in  average selling price (contributed a decrease of approximately $2.15 million) as a result of the PRC government’s macro-economic tightening policy, which was partially offset by the increase in sales volume (contributed an increase of approximately $2.09 million) due to the lower level of bromine price which resulted in our customers increasing the level of inventory holding in bromine.

Crude salt segment

Income from operations from our crude salt segment was $728,638 for the three-month period ended June 30, 2013, a decrease of $159,917 (or approximately 18%) compared to the same period in 2012. This decrease resulted primarily from the decrease in sales volume (contributed a decrease of approximately $0.45 million) due to the large volume of crude salt inventory held by our customers and the decreased crude salt terminal products sales due to macro-economic tightening policy imposed by the PRC government, which was partially offset by the increase in selling price (contributed an increase of approximately $0.30 million).

Chemical products segment

Income from operations from our chemical products segment was $3,572,036 for the three-month period ended June 30, 2013, an increase of $564,655 (or approximately 19%) compared to the same period in 2012. This increase primarily due to the increase in demand for our oil and gas exploration additives and paper manufacturing additives, which was partially offset by the increase of the depreciation from the newly acquired office units in September 2012.

Other Income, Net Other income, net of $25,846 represented bank interest income, net of capital lease interest expense for the three -month period ended June 30, 2013, a decrease of $4,814 (or approximately 16%) as compared to the same period in 2012, mainly due to lower average bank balance held during the three months period ended June 30, 2013 compared to the same period ended June 30, 2012.

Net Income Net income was $5,355,899 for the three-month period ended June 30, 2013, a decrease of $332,775 (or approximately 6%) compared to the same period in 2012. This decrease was primarily attributable to the non-cash expense related to stock options granted to employees recognized for the three-month period ended June 30, 2013.

Effective Tax Rate Our effective tax rate for the three-month periods ended June 30, 2013 and 2012 were 28% and 26% respectively. The effective tax rate for the three-month periods ended June 30, 2013 and 2012 was 3% and 1% higher than the PRC statutory income tax rate of 25%, mainly due to the US federal net operating loss incurred by the Company during both periods in which a full valuation allowance was booked.

Comparison of the Six-Month Periods Ended June 30, 2013 and 2012

	Six-Month Period Ended June 30, 2013			Six-Month Period Ended June 30, 2012				% Change
Net revenue	$	55,356,476		$	55,123,520				0.4	%
Cost of net revenue	$	(41,245,673	)	$	(38,505,533	)			7	%
Gross profit	$	14,110,803		$	16,617,987				(15	%)
Sales, marketing and other operating expenses	$	(45,418	)	$	(40,473	)			12	%
Research and development costs	$	(72,182	)	$	(105,324	)			(31	%)
Write-off/Impairment on property, plant and equipment	$	-		$	(911,995	)			(100	%)
General and administrative expenses	$	(4,391,669	)	$	(3,483,071	)			26	%
Other operating income	$	382,689		$	133,178				187	%
Income from operations	$	9,984,223		$	12,210,302				(18	%)
Other income, net	$	45,683		$	75,138				(39	%)
Income before taxes	$	10,029,906		$	12,285,440				(18	%)
Income taxes	$	(2,791,042	)	$	(3,309,659	)			(16	%)
Net income	$	7,238,864		$	8,975,781				(19	%)

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Net revenue.  Net revenue for six-month period ended June 30, 2013 was $55,356,476, representing an increase of approximately $0.2 million (or 0.4%) over the same period in 2012. Revenue from the bromine segment decrease from $30,993,311 for the six-month periods ended June 30, 2012 to $29,207,643 for the same period in 2012, a decrease of approximately 6%. Revenue from the crude salt segment increase from $6,054,582 for the six-month period ended June 30, 2012 to $6,080,762 for the same period in 2013, an increase of approximately 0.4%. Revenue from the chemical segment increased from $18,075,627 for the six-month period ended June 30, 2012 to $20,068,071 for the same period in 2013, an increase of approximately 11%.

	Net Revenue by Segment
	Six-Month Period Ended					Six-Month Period Ended					Percent Increase /Decrease
	June 30, 2013					June 30, 2012					of Net Revenue
Segment			% of total					% of total
Bromine	$	29,207,643		53	%	$	30,993,311		56	%		(6	%)
Crude Salt	$	6,080,762		11	%	$	6,054,582		11	%		0.4	%
Chemical Products	$	20,068,071		36	%	$	18,075,627		33	%		11	%
Total sales	$	55,356,476		100	%	$	55,123,520		100	%		0.4	%

Bromine and crude salt segments	Six-Month Period Ended				Percentage Change
product sold in tonnes	June 30, 2013		June 30, 2012		Increase/(Decrease)
Bromine (excluded volume sold to SYCI)		9,509		8,800		8	%
Crude Salt		151,147		160,581		(6	%)

	Six-Month Period Ended				Percentage Change
Chemical products segment sold in tonnes	June 30, 2013		June 30, 2012		Increase/(Decrease)
Oil and gas exploration additives		5,984		5,401		11	%
Paper manufacturing additives		2,046		1,253		63	%
Pesticides manufacturing additives		1,484		1,628		(9	%)
Wastewater treatment chemical additives		-		-
Overall		9,514		8,282		15	%

Bromine segment

The decrease in net revenue from our bromine segment was mainly due to the decrease in the selling price of bromine. The selling price of bromine decreased from $3,522 per tonne for the six-month period ended June 30, 2012 to $3,072 per tonnes for the same period in 2013, a decrease of 13%. The major reason for the decrease in the selling price of bromine was mainly due to the continuing macro-economic tightening policy imposed by the PRC government beginning in the second half of 2011 to slow down the economy, which has affected our customers’ industries. As a result, we needed to offer competitive selling prices to our customers to compete with other bromine manufacturers. The average selling price for the first half of 2013 remained relatively stable at around $3,050 per tonne. We expect the average selling price of bromine to remain at the current level through the end of 2013 should the PRC government’s macro-economic tightening policy remain in place.

Due to the lower level of bromine price, our customers increased their inventories. The sales volume of bromine increased from 8,800 tonnes for the six-month periods ended June 30, 2012 to 9,509 tonnes for the same period in 2013, an increase of 8%. The table below shows the changes in the average selling price and changes in the sales volume of bromine for six-month period ended June 30, 2013 from the same period in 2012.

	Six-Month Period Ended June 30,
Increase / (Decrease) in net revenue of bromine as a result of:	2013 vs. 2012
Decrease in average selling price	$	(4,121,856	)
Increase in sales volume	$	2,336,188
Total effect on net revenue of bromine	$	(1,785,668	)

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Crude salt segment

The slightly increase in net revenue from our crude salt segment was mainly due to the increase in the average selling price of crude salt , offset by the decrease in sales volume. The average selling price of crude salt increased from $37.70 per tonne for the six-month period ended June 30, 2012 to $40.23 per tonne for the same period in 2013, an increase of 7%.

The sales volume of crude salt decreased by 6% from 160,581 tonnes for the six-month period ended June 30, 2012 to 151,147 tonnes for the same period in 2013. The major reason for the decrease in the sales volume of crude salt was mainly attributable to the large volume of inventory held by our customers and the decreased crude salt terminal products sales due to Macro-economic tightening policy imposed by the PRC government.

We noted an upward trend in the average selling price of crude salt since the third quarter of 2011 as due to the stable demand of the crude salt. The average selling price increased from $37.19 per tonne in the third quarter of 2011 to $40.72 per tonne in the second quarter of 2013. We expect the average selling price of crude salt to remain at current levels through the end of 2013. The table below shows the changes in the average selling price and changes in the sales volume of crude salt for six-month period ended June 30, 2013 from the same period in 2012.

	Six-Month Period Ended June 30,
Increase / (Decrease) in net revenue of crude salt as a result of:	2013 vs. 2012
Increase in average selling price	$	393,800
Decrease in sales volume	$	(367,620	)
Total effect on net revenue of crude salt	$	26,180

Chemical products segment

	Product Mix of Chemical Products Segment										Percent
	Six-Month Period Ended					Six-Month Period Ended					Change of
	June 30, 2013					June 30, 2012					Net Revenue
Chemical Products			% of total					% of total
Oil and gas exploration additives	$	11,298,200		56	%	$	9,730,648		54	%		16	%
Paper manufacturing additives	$	2,283,844		12	%	$	1,665,601		9	%		37	%
Pesticides manufacturing additives	$	6,486,027		32	%	$	6,679,378		37	%		(3	%)
Total sales	$	20,068,071		100	%	$	18,075,627		100	%		11	%

Net revenue from our chemical products segment increased from $18,075,627 for the six-month period ended June 30, 2012 to $20,068,071 for the same period in 2013, an increase of approximately 11%. The increase was mainly attributable to the increase in demand our oil and gas exploration additives and paper manufacturing additives. Our oil and gas exploration chemicals are the most popular products within the chemical products segment, which contributed $11,298,200 (or 56%) and  $9,730,648 (or 54%) of our chemical segment revenue for the six-month periods ended June 30, 2013 and 2012, respectively, with an increase of $1,567,552, or 16%. Net revenue from our paper manufacturing additives increased from $1,665,601 for the six-month period ended June 30, 2012 to $2,283,844 for the same period in 2013, an increase of approximately 37%.

However, the effect of the increase in net revenue from our oil and gas exploration additives and paper manufacturing additives segments was partially offset by the decrease in the sales volume of our pesticides manufacturing additives products due to the decreasing demand form the downstream industrial customers. Net revenue from our pesticides manufacturing additives products decreased from $6,679,378 for the six-month period ended June 30, 2012 to $6,486,027 for the same period in 2013, a decrease of approximately 3%.

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The table below shows the changes in the average selling price and changes in the sales volume of major chemical products for six-month period ended June 30, 2013 from the same period in 2012.

Increase / (Decrease) in net revenue, for the six-month period ended June 30, 2013 vs. 2012, as a result of:	Oil and gas exploration additives		Paper manufacturing additives			Pesticides manufacturing additives			Total
Increase / (Decrease) in average selling price	$	492,003	$	(351,413	)	$	416,737		$	557,327
Increase / (Decrease) in sales volume	$	1,075,549	$	969,656		$	(610,088	)	$	1,435,117
Total effect on net revenue of chemical products	$	1,567,552	$	618,243		$	(193,351	)	$	1,992,444

Cost of Net Revenue

	Cost of Net Revenue by Segment										% Change
	Six-Month Period Ended					Six-Month Period Ended					of Cost of
	June 30, 2013					June 30, 2012					Net Revenue
Segment			% of total					% of total
Bromine	$	23,035,054		56	%	$	21,813,821		57	%		6	%
Crude Salt	$	4,374,856		11	%	$	4,095,520		10	%		7	%
Chemical Products	$	13,835,763		33	%	$	12,596,192		33	%		10	%
Total	$	41,245,673		100	%	$	38,505,533		100	%		7	%

Costof net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $41,245,673 for six-month period ended June 30, 2013, an increase of $2,740,140 (or 7%) over the same period in 2012. The increase in overall cost of net revenue was mainly attributable to the increase in volume of products sold and the increase in depreciation and amortization of manufacturing plant and machinery, which was partially offset by the decrease in purchase price of raw materials

Bromine production capacity and utilization of our factories

The table below represents the annual capacity and utilization ratios for all of our bromine producing properties:

	Annual Production Capacity (in tonnes)			Utilization Ratio (i)
Six-month period ended June 30, 2012		44,547			42%
Six-month period ended June 30, 2013		47,347			42%
Variance of the six-month periods ended June 30, 2013 and 2012		2,800	(ii)		0%

(i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes.

(ii) The increase in 2,800 tonnes production capacity represents the management’s estimate of the capacity of Factory No. 11 acquired in late November 2012.

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Bromine segment

For the six-month period ended June 30, 2013, the cost of net revenue for the bromine segment was $23,035,054, an increase of $1,221,234 or 6% over the same period in 2012. The most significant components of the costs of net revenue for the bromine segment were cost of raw materials and finished goods consumed of $10,929,289 (or 47%), depreciation and amortization of manufacturing plant and machinery of $8,315,921 (or 36%) and electricity of $1,499,228 (or 7%) for the six-month period ended June 30, 2013. For the six-month period ended June 30, 2012, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $11,466,046 (or 53%), depreciation and amortization of manufacturing plant and machinery of $6,794,153 (or 31%) and electricity of $1,439,750 (or 7%), the cost structure changed as compared with the same period in 2012 where the contribution from cost of raw materials and finished goods consumed decreased by 6% and depreciation and amortization of manufacturing plant and machinery increased by 5%. The increase in net cost of net revenue was mainly attributable to the increase in volume of products sold and the increase in depreciation and amortization of manufacturing plant and machinery, which was largely offset by the decrease in purchase price of raw material.

The table below represents the major production cost component of bromine per tonne sold for respective periods:

Per tonne production cost	Six-Month Period Ended					Six-Month Period Ended
component of bromine segment	June 30, 2013					June 30, 2012					% Change
			% of total					% of total
Raw materials	$	1,149		47	%	$	1,303		53	%		(12	%)
Depreciation and amortization	$	874		36	%	$	772		31	%		13	%
Electricity	$	158		7	%	$	164		7	%		(4	%)
Others	$	241		10	%	$	240		9	%		0.4	%
Production cost of bromine per tonne	$	2,422		100	%	$	2,479		100	%		(2	%)

Our production cost of bromine per tonne sold was $2,422 for the six-month period ended June 30, 2013, a decrease of 2% (or $57) as compared to the same period in 2012, which was attributable mainly to the component of raw materials consumed. The significant percentage decrease in raw materials consumed per tonne by 12% was due to the decrease in the purchase price of raw materials due to the macro-economic tightening policy imposed by the PRC government. The cost of depreciation and amortization of the plant and machinery per tonne increased by 13% as compared to the same period in 2012, which was mainly attributable to the enhancement projects in second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery.

Crude salt segment

For the six-month period ended June 30, 2013, the cost of net revenue for our crude salt segment was $4,374,856, representing an increase of $279,335, or 7%, compared to $4,095,520 for the same period in 2012. The increase in cost was mainly due to the increase in the number of enhancement projects performed in second quarter of 2012, which in turn resulted in an increase in the depreciation and amortization of manufacturing plant and machinery. The significant cost components for the six-month period ended June 30, 2013 were depreciation and amortization of $3,075,645 (or 70%), resource taxes calculated based on crude salt sold of $484,834 (or 11%) and electricity of $314,627 (or 7%). The significant cost components for the six-month period ended June 30, 2012 were depreciation and amortization of $2,874,870 (or 70%), resource taxes calculated based on crude salt sold of $509,191 (or 12%) and electricity of $277,967 (or 7%).The table below represents the major production cost component of crude salt per ton for respective periods:

Per tonne production cost	Six-Month Period Ended					Six-Month Period Ended
component of crude salt segment	June 30, 2013					June 30, 2012					% Change
			% of total					% of total
Depreciation and amortization	$	20.3		70	%	$	17.9		70	%		14	%
Resource tax	$	3.2		11	%	$	3.2		12	%		0	%
Electricity	$	2.1		7	%	$	1.8		7	%		17	%
Others	$	3.3		12	%	$	2.6		11	%		27	%
Production cost of crude salt per tonne	$	28.9		100	%	$	25.5		100	%		14	%

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Our production cost of crude salt per tonne was $28.9 for the six-month period ended June 30, 2013, an increase of 14% (or $3.4) as compared to the same period in 2012, which was attributable mainly to the components of depreciation and amortization of manufacturing plant and machinery. The significant percentage increase in depreciation and amortization per tonne by 14% was due to the enhancement projects in second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery. Other production costs represented mainly salaries and welfare of labor for the crude salt fields.

Chemical products segment

For the six-month period ended June 30, 2013, cost of net revenue for our chemical products segment was $13,835,763, representing an increase of $1,239,571 or 10% over the same period in 2012. The significant costs were cost of raw material and finished goods consumed of $11,822,839 (or 85%) and $10,796,469 (or 86%)and depreciation and amortization of manufacturing plant and machinery of $1,399,318 (or 10%) and $1,281,194 (or 10%) for each of the six-month periods ended June 30, 2013 and 2012, respectively. As the components of our cost of net revenue are fixed levels of depreciation and amortization of our manufacturing plant and machinery, the rate of increase for the cost of net revenue for our chemical products segment was less than that of net revenue.

Gross Profit. Gross profit was $14,110,803, or 25%, of net revenue for six-month period ended June 30, 2013 compared to $16,617,987, or 30%, of net revenue for the same period in 2012. The decrease in gross profit percentage was primarily attributable to a drop in the margin percentage of bromine and crude salt segments.

	Gross Profit by Segment										% Point Change
	Six-Month Period Ended					Six-Month Period Ended					of Gross
	June 30, 2013					June 30, 2012					Profit Margin
Segment			Gross Profit Margin					Gross Profit Margin
Bromine	$	6,172,589		21	%	$	9,179,491		30	%		(9	%)
Crude Salt	$	1,705,906		28	%	$	1,959,061		32	%		(4	%)
Chemical Products	$	6,232,308		31	%	$	5,479,435		30	%		1	%
Total Gross Profit	$	14,110,803		25	%	$	16,617,987		30	%		(5	%)

Bromine segment

The gross profit margin for our bromine segment for the six-month period ended June 30, 2013 was 21% compared to 30% for the same period in 2012. As mentioned in the net revenue discussion above, due to the PRC government’s macro-economic tightening policy to slow down the economy, our selling price in the six-month ended June 30, 2013 was adversely affected. We cut the average selling price of bromine from $3,522 per tonne for the six-month period ended June 30, 2012 to $3,072 per tonne for the same period in 2013, a decrease of 13%, in order to compete with other bromine manufacturers. Also, as mentioned in our 2012 annual report on Form 10-K, we completed certain enhancements of our facilities in the second quarter of 2012 to pump brine water from deeper underground in order to improve the quality of brine water being extracted from our wells, which in turn increased the depreciation and amortization of the plant and equipment and hence the cost of net revenue of bromine. We expect that the average selling price and gross profit margin of bromine will remain at current level towards the end of 2013 should the PRC government’s macro-economic tightening policy remain in place.

Crude salt segment

For the six-month period ended June 30, 2013, the gross profit margin for our crude salt segment was 28% compared to 32% for the same period in 2012. This 4% decrease in our gross profit margin is mainly attributable to the increase in depreciation and amortization of manufacturing facilities as a result of the enhancement projects in the second quarter of 2012 to our extraction wells and transmission channels and ducts as mentioned in our 2012 Form 10-K.

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Chemical products segment

The gross profit margin for our chemical products segment for the six-month period ended June 30, 2013 was 31% compared to 30% for the same period in 2012, an increase of 1%. As previously mentioned, the increase in gross profit margin was a result of the increase in demand for our oil and gas exploration additives and paper manufacturing additives which in turn increased the sales volume of these chemical products. As sales of oil and gas exploration additives contributed more than 56% of our total chemical products segment’s net revenue, the increase in demand largely increased the gross profit margin of our chemical products segment.

Research and Development Costs. For the six-month periods ended June 30, 2013 and 2012, the total research and development costs incurred were $72,182 and $105,324, respectively, a decrease of 31%. Research and development costs for the six-month period ended June 30, 2013and 2012 represented raw materials used by SYCI for testing the manufacturing routine.

Write-off/Impairment on property, plant and equipment. Write-off on property, plant and equipment of $911,995 for the six-month period ended June 30, 2012 represented the write-off of certain protective shells to transmission pipelines and ducts replaced during the second phase enhancement project that started in May 2012. There was no write-off on property, plant and equipment for the three-month period ended June 30, 2013.

General and Administrative Expenses. General and administrative expenses were $4,391,669 for the six-month period ended June 30, 2013, an increase of $908,598 (or 26%) as compared to $3,483,071 for the same period in 2012. This increase in general and administrative expenses was primarily due to (i) a non-cash expense related to stock options granted to employees increased from $26,300 for the six-month period ended June 30, 2012 to $532,300 for the same period of 2013; and (ii) the unrealized exchange loss in relation to the translation difference of inter-company balances in USD and RMB for the six-month period ended June 30,2013 amounted to $431,147, as compared to the unrealized exchange gain for the same period in 2012 amounted to $92,057.

Other Operating Income Other operating income was $382,689 for the six-month period ended June 30, 2013, which represented (i) the sales of wastewater to some of our customers in the amount of $211,597 and (ii) a sum of $171,092 for insurance compensation received in 2013 for legal fees incurred in 2012. The other operating income for the six-month period ended June 30, 2012 represented a sum of $133,178 for sales of wastewater. Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We have signed agreements with four of our customers to sell them our wastewater at market prices.

35

Income from Operations. Income from operations was $9,984,223 for the six-month period ended June 30, 2013 (or 18% of net revenue), a decrease of $2,226,079, or approximately 18%, over income from operations for the same period in 2012. The decrease resulted primarily from (i) the increase in depreciation and amortization of the plant and machinery due to the enhancement projects from in the second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery; and (ii) a non-cash expense related to stock options granted to employees increased from $26,300 for the six-month period ended June 30, 2012 to $532,300 for the same period of 2013; and (iii) the unrealized exchange loss in relation to the translation difference of inter-company balances in USD and RMB for the six-month period ended June 30,2013 amounted to $431,147, as compared to the unrealized exchange gain for the same period in 2012 amounted to $92,057, partially offset by write-off of certain protective shells to transmission pipelines and ducts replaced during the second phase enhancement project in the amount of $911,995 that started in May 2012.

	Income from Operations by Segment
	Six-Month Period Ended June 30, 2013				Six-Month Period Ended June 30, 2012
Segment:				% of total				% of total
Bromine	$	4,210,425		38%	$	6,401,865		49%
Crude Salt		1,266,858		11%		1,437,005		11%
Chemical Products		5,668,715		51%		5,250,276		40%
Income from operations before corporate costs		11,145,998		100%		13,089,146		100%
Corporate costs		(1,161,775	)			(878,844	)
Income from operations	$	9,984,223			$	12,210,302

Bromine segment

Income from operations from our bromine segment was $4,210,425 for the six-month period ended June 30, 2013, a decrease of $2,191,440 (or approximately 34%) compared to the same period in 2012. This decrease resulted primarily from the decrease in average selling price (contributed a decrease of approximately $4.12 million) as a result of the PRC government’s macro-economic tightening policy, which was partially offset by the increase in sales volume (contributed an increase of approximately $2.3 million) due to the lower level of bromine price which resulted in our customers increasing the level of inventory holding in bromine.

Crude salt segment

For the six-month period ended June 30, 2013, income from operations from our crude salt segment was $1,266,858, a decrease of $170,148 (or approximately 12%) compared to the same period in 2012. This decrease was mainly due to the increase in depreciation and amortization of the plant and machinery resulting from the enhancement in the second quarter of 2012 to our extraction wells and transmission channels and ducts, which accelerated the depreciation and amortization of the plant and machinery and the decrease in the sales volume of crude salt.

Chemical products segment

For the six-month period ended June 30, 2013, income from operations from our chemical products segment was $5,668,715, an increase of $418,439 (or approximately 8%) over same period in 2012. This increase was primarily due to the increase in demand for our oil and gas exploration additives and paper manufacturing additives, which was partially offset by the decrease in the sales volume of our pesticides manufacturing additives products due to the decreasing demand from the downstream industrial customers.

Other Income, Net. Other income, net of $45,683 represented bank interest income, net of capital lease interest expense for the six -month period ended June 30, 2013, a decrease of $29,455 (or approximately 39%) as compared to the same period in 2012, mainly due to lower average bank balance held for the six-month period ended June 30, 2013 compared to the period ended June 30, 2012.

Net Income. Net income was $7,238,864 for the six-month period ended June 30, 2013, a decrease of $1,736,917 (or approximately 19%) compared to the same period in 2012. This decrease was primarily attributable to the decrease in the selling price of bromine due to the macro-economic tightening policy imposed by the PRC government to slow down the economy.

Effective Tax Rate. Our effective tax rate for the six-month periods ended June 30, 2013 and 2012 was 28% and 27%, respectively. The effective tax rate for the six-month periods ended June 30,2013 and 2012 was 3% and 2% higher than the PRC statutory income tax rate of 25%, mainly due to the US federal net operating loss incurred by Gulf during both periods in which a full valuation allowance was booked.

36

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2013, cash and cash equivalents were $86,422,512 as compared to $65,241,035 as of December 31, 2012. The components of this increase of $21,181,477 are reflected below.

Statement of Cash Flows

	Six-Month Period Ended June 30,
	2013			2012
Net cash provided by operating activities	$	20,705,599		$	2,338,808
Net cash used in investing activities	$	(588,830	)	$	(8,294,007	)
Net cash used in financing activities	$	(302,498	)	$	(297,598	)
Effects of exchange rate changes on cash and cash equivalents	$	1,367,206		$	(278,492	)
Net increase (decrease)in cash and cash equivalents	$	21,181,477		$	(6,531,289	)

For the six-month period ended June 30, 2013, we met our working capital and capital investment requirements mainly by using cash flow from operations and cash on hand. The Company intends to continue to explore opportunities relating to bromine asset purchases and new bromine resource development. 

Net Cash Provided by Operating Activities

During the six-month periods ended June 30, 2013 and 2012, we had positive cash flow from operating activities of $20.7 million and $2.3 million, respectively, primarily attributable to net income.

During the six-month period ended June 30, 2013, cash flow from operating activities of $20.7 million exceeded our net income of $7.2 million, mainly due to (i) substantial non-cash charges of $14.9 million, mainly in the form of depreciation and amortization of property, plant and equipment, exchange loss on intercompany balances and stock-based compensation; partially offset by (ii) cash generated from working capital of $1.5 million, which mainly consisted of increase in accounts receivable and decrease in retention payable, partially offset by the increase in taxes payable and decrease in inventories.

During the six-month period ended June 30, 2012, net income of $9.0 million exceeded our cash flow from operating activities of $2.3 million, mainly due to (i) cash used in working capital of $19.1 million, which mainly consisted of increase in accounts receivable; which was partially offset by (ii) our net income, which included substantial non-cash charges of $12.5 million, mainly in the form of depreciation and amortization of property, plant and equipment, and write-off/impairment loss on property, plant and equipment.

Accounts receivable

Cash collections on our accounts receivable had a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of June 30, 2013 and December 31, 2012.

	June 30, 2013					December 31, 2012
			% of total					% of total
Aged 1-30 days	$	12,856,524		33	%	$	9,226,030		26	%
Aged 31-60 days	$	12,510,842		32	%	$	8,668,189		24	%
Aged 61-90 days	$	9,692,379		25	%	$	6,758,020		19	%
Aged 91-120 days	$	4,103,461		10	%	$	6,535,738		18	%
Aged 121-150 days	$	-		-		$	4,781,923		13	%
Total	$	39,163,206		100	%	$	35,969,900		100	%

The overall accounts receivable balance as of June 30, 2013 increased by $3,193,306 (or 9%), as compared to those as of December 31, 2012. Such increase is mainly attributable to the extended settlement days by customers due to the macro-economic tightening policy imposed by PRC government to slow down the economy, which in turn lengthened the average turnover days of accounts receivable from customers from 104 days for the fiscal year 2012 to 122 days for the six-month period ended June 30, 2013. Normally, 90 to 120-days credit period is granted to customers with a good repayment history. We are not aware of any allowances for doubtful debts required for the six-month period ended June 30, 2013 as we have policies in place to ensure that sales are made to customers with an appropriate credit history. All the balances of accounts receivable as June 30,2013 aged more than 90 days are subsequently settled in July 2013. We perform ongoing credit evaluation on the financial condition of our customers.

37

Inventory

Our inventory consists of the following:

	June 30, 2013						December 31, 2012
				% of total						% of total
Raw materials	$	692,551			12.9	%	$	773,453			12.9	%
Finished goods	$	4,707,039			87.6	%	$	5,248,039			87.6	%
	$	5,399,590			100.5	%	$	6,021,492			100.5	%
Allowance for obsolete and slowing-moving inventory	$	(28,376	)		(0.5	%)	$	(27,894	)		(0.5	%)
Total	$	5,371,214			100.0	%	$	5,993,598			100.0	%

The net inventory level as of June 30, 2013 decreased by $622,384 (or 10%), as compared to the net inventory level as of December 31, 2012.

Raw materials decreased by 10% as of June 30, 2013 as compared to December 31, 2012. All of the raw materials are basic chemical industry materials, few of which have a possibility of loss over time, or major fluctuations in their prices. So, we concluded that all of our raw materials as of June 30, 2013 are fully realizable for production of finished goods without any impairment.

Our finished goods consist of bromine, crude salt and chemical products. Our chemical products are similar to raw materials, as there is no loss over time and a stable market price with a positive gross profit margin of 31% for the six-month period ended June 30, 2013 (30% for fiscal year 2012). Therefore, we believe that the realization of the chemical products is 100%. Similarly, as there is no depletion of bromine, we believe that the realization of it is also 100%. Although the gross profit margin for the six-month period ended June 30, 2013 decreased to 25%, as compared with 30% in fiscal year 2012, we anticipated that the price in the rest of 2013 will not fluctuate significantly to impair the cost of bromine.

The annual loss of crude salt due to evaporation is around 3%. As the market price of crude salt per ton increased from $37.7 in the first half year of 2012 to $40.2 in the first half year of 2013, and the relative cost of production is low, we believe that there will be no realization problem for crude salt and its selling price should not be lower than its cost.

Net Cash Used in Investing Activities

In the first half of 2013, we used approximately $0.6 million cash for the prepayment of land leases.

In the second quarter of 2012, we used approximately $7.9 million cash to carry out the second phase enhancement project to our existing bromine extraction and crude salt production facilities, which are currently under construction since mid-May 2012. The total construction costs of the enhancement work to the extraction wells and protective shells to transmission channels and ducts in Factory No. 1 to 9 are approximately $12.8 million and $8.1 million, respectively, which were completed in late August 2012.

The above investing activities were financed by the opening cash balances as of December 31, 2012, and 2011, and cash generated from operation during the six-month period ended June 30, 2013 and 2012.

Net Cash Used in Financing Activities

We repaid approximately $0.3 million cash for our capital lease obligation for the six-month period ended June 30, 2013.

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 (12) months. However we will likely need to raise additional capital in order to fund the ongoing program of acquiring unlicensed bromine properties, increasing our chemical production capacity and developing new bromine and crude salt production line in Sichuan Province, PRC. We expect to raise those funds through credit facilities obtained with lending institutions. 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.

Working capital was approximately $119.9 million at June 30, 2013 as compared to approximately $96.2 million at December 31, 2012. The increase was mainly attributable to the cash provided by operating activities during the six-month period ended June 30, 2013.

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We had available cash of approximately $86.4 million at June 30, 2013, most of which is in highly liquid current deposits which earn no or little interest. We intend to retain the cash for future expansion of our bromine and crude salt businesses through acquisition, enhancement works to our existing bromine and crude salt business, and exploration cost of new brine water resources in Sichuan Province, and we do not anticipate paying cash dividends in the foreseeable future.

In the future we intend to focus our efforts on the activities of SCHC and SYCI as these segments continue to expand within the Chinese market. We also intend to explore the possibility of cooperation with overseas large-scale bromine manufacturers for expansion into overseas markets. As a result, we may issue additional shares of our capital stock and incur new debt in order to raise cash for acquisitions and other capital expenditures during the next twelve months.

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. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. We may effect 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.

Contractual Obligations and Commitments

We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. Additional information regarding our contractual obligations and commitments at June 30, 2013 is provided in the notes to our consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 19 – Capital Commitment and Operating Lease Commitments”.

Material Off-Balance Sheet Arrangements

We do not currently have any off balance sheet arrangements falling within the definition of Item 303(a) of Regulation S-K.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. We have identified the following critical accounting policies and estimates used by us in the preparation of our financial statements: accounts receivable and allowance for doubtful accounts, assets retirement obligation, property, plant and equipment, recoverability of long lived assets, mineral rights, revenue recognition, income taxes, and stock-based compensation. These policies and estimates are described in the Company’s 2012 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Pursuant to Item 301(c) of Regulation S-K (§ 229.301(c)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

39

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.

(b) Changes in internal controls

There were no 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.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any legal proceedings other than the following.

Class Action

The Company and certain of its officers and directors (Ming Yang, Xiaobin Liu, and Min Li, collectively, the “Individual Defendants”) have been named as defendants in a putative securities class action lawsuit alleging violations of the federal securities laws. That action, which is now captioned Lewy, et al. v. Gulf Resources, Inc., et al., No. 11-cv-3722 ODW (MRWx), was filed on April 29, 2011 in the United States District Court for the Central District of California. The lead plaintiffs, who seek to represent a class of all purchasers and acquirers of the Company’s common stock between March 16, 2009 and April 26, 2011 inclusive, filed an amended complaint on September 12, 2011. Lead plaintiffs assert claims for violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The amended complaint alleges the defendants made false or misleading statements in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2008, 2009, and 2010, and in interim quarterly reports by, among other things, overstating revenue and net income and failing to disclose material related party transactions and certain facts about the CEO’s prior employment at another company. The amended complaint also asserts claims against the Individual Defendants for violations of Section 20(a) of the Securities Exchange Act of 1934. The amended complaint seeks damages in an unspecified amount. The Company filed a motion to dismiss the amended complaint. On May 15, 2012, the Court denied the Company’s motion to dismiss the amended complaint. On April 30, 2013, the parties executed a stipulation and agreement of settlement. The proposed settlement is subject to review and approval of the Court. The Company currently cannot estimate the amount or range of the overall costs in connection with this litigation. The Company believes that such costs will be reimbursed by the insurance company to the extent covered by the insurance policies.

40

Item 1A. Risk Factors

There have been no changes with respect to risk factors as previously disclosed in our 2012 Form 10-K.  Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and in our 2012 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 2012 Form 10-K. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

No applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2                          Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1                          Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1                          The following financial statements from Gulf Resources, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Other Comprehensive Income (Loss); (iii) the Consolidated Statements of Changes in Equity; (iv) the Consolidated Statement of Cash Flows; and, (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GULF RESOURCES, INC.
Dated: August 9, 2013	By:	/s/ Xiaobin Liu
		Xiaobin Liu
		Chief Executive Officer
		(principal executive officer)
Dated: August 9, 2013	By:	/s/ Min Li
		Min Li
		Chief Financial Officer
		(principal financial and accounting officer)

42

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Rule 13A-14(A)/15D-14(A)

of the Securities Exchange Act of 1934

I, Xiaobin Liu, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2013 of Gulf Resources, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

c.  evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

	By:	/s/ Xiaobin Liu
		Xiaobin Liu
		Chief Executive Officer and President
Dated: August 9, 2013

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Rule 13A-14(A)/15D-14(A)

of the Securities Exchange Act of 1934

I, Min Li, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2013 of Gulf Resources, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

c.   evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

	By:	/s/ Min Li
		Min Li
		Chief Financial Officer
Dated: August 9, 2013

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350 AND EXCHANGE ACT RULES 13a-14(b) AND 15d-14(b)

(Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Gulf Resources, Inc. on Form 10-Q for the period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge and belief:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operation of the Company.

Dated: August 9, 2013
	By:	/s/ Xiaobin Liu
		Xiaobin Liu
		Chief Executive Officer and President

Dated: August 9, 2013
	By:	/s/ Min Li
		Min Li
		Chief Financial Officer

XML

11. EQUITY

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

11. EQUITY

NOTE 11 ––EQUITY

(a) Authorized shares

During the annual general meeting held on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number of the authorized shares of the Company’s comment stocks to 80,000,000. The Company is in the process of filing the amendment and restatement of the Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized shares of the Company’s common stock.

(b) Retained Earnings - Appropriated

In accordance with the relevant PRC regulations and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after tax to the following reserve:

Statutory Common Reserve Funds

SCHC and SYCI are required each year to transfer at least 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. The Statutory Common Reserve Fund as of June 30, 2013 for SCHC and SYCI is 35% and 50% of its registered capital respectively.

XML

14. BUSINESS SEGMENTS (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Segment Reporting Information [Line Items]
Net revenue (external customers)	$ 32,853,896	$ 31,314,846	$ 55,356,476	$ 55,123,520
Net revenue (intersegment)	777,746	808,596	1,392,476	1,563,153
Income (loss) from operations before taxes	7,378,775	7,633,203	9,984,223	12,210,302
Income taxes	2,048,722	1,975,189	2,791,042	3,309,659
Income (loss) from operations after taxes	5,330,053	5,658,014	7,193,181	8,900,643
Total assets	291,497,321	265,987,844	291,497,321	265,987,844	278,193,034
Depreciation and amortization	6,878,052	5,607,425	13,685,539	11,290,588
Capital expenditures	0	7,849,287	0	7,849,287
Write-off/Impairment	0	911,995	0	911,995
Bromine Segment [Member]
Segment Reporting Information [Line Items]
Net revenue (external customers)	17,473,276	17,539,429	29,207,643	30,993,311
Net revenue (intersegment)	777,746	808,596	1,392,476	1,563,153
Income (loss) from operations before taxes	3,882,612	3,933,561	4,210,425	6,401,865
Income taxes	941,322	1,018,311	1,121,955	1,681,209
Income (loss) from operations after taxes	2,941,290	2,915,250	3,088,471	4,720,656
Total assets	174,524,258	158,305,734	174,524,258	158,305,734
Depreciation and amortization	4,309,920	3,509,790	8,687,891	7,174,033
Capital expenditures	0	6,567,296	0	6,567,296
Write-off/Impairment	0	763,043	0	763,043
Crude Salt Segment [Member]
Segment Reporting Information [Line Items]
Net revenue (external customers)	3,629,976	3,779,658	6,080,762	6,054,582
Net revenue (intersegment)	0	0	0	0
Income (loss) from operations before taxes	728,638	888,555	1,266,858	1,437,005
Income taxes	209,755	198,783	243,020	302,649
Income (loss) from operations after taxes	518,883	689,772	1,023,837	1,134,356
Total assets	56,693,091	56,621,811	56,693,091	56,621,811
Depreciation and amortization	1,687,487	1,442,179	3,246,686	2,805,685
Capital expenditures	0	1,281,991	0	1,281,991
Write-off/Impairment	0	148,952	0	148,952
Chemical Products Segment [Member]
Segment Reporting Information [Line Items]
Net revenue (external customers)	11,750,644	9,995,759	20,068,071	18,075,627
Net revenue (intersegment)	0	0	0	0
Income (loss) from operations before taxes	3,572,036	3,007,381	5,668,715	5,250,276
Income taxes	897,645	758,095	1,426,067	1,325,801
Income (loss) from operations after taxes	2,674,391	2,249,286	4,242,648	3,924,475
Total assets	60,193,635	50,634,822	60,193,635	50,634,822
Depreciation and amortization	880,645	655,456	1,750,962	1,310,870
Capital expenditures	0	0	0	0
Write-off/Impairment	0	0	0	0
Segment Total [Member]
Segment Reporting Information [Line Items]
Net revenue (external customers)	32,853,896	31,314,846	55,356,476	55,123,520
Net revenue (intersegment)	777,746	808,596	1,392,476	1,563,153
Income (loss) from operations before taxes	8,183,286	7,829,497	11,145,998	13,089,146
Income taxes	2,048,722	1,975,189	2,791,042	3,309,659
Income (loss) from operations after taxes	6,134,564	5,854,308	8,354,956	9,779,487
Total assets	291,410,984	265,562,367	291,410,984	265,562,367
Depreciation and amortization	6,878,052	5,607,425	13,685,539	11,290,588
Capital expenditures	0	7,849,287	0	7,849,287
Write-off/Impairment	0	911,995	0	911,995
Corporate [Member]
Segment Reporting Information [Line Items]
Net revenue (external customers)	0	0	0	0
Net revenue (intersegment)	0	0	0	0
Income (loss) from operations before taxes	(804,511)	(196,294)	(1,161,775)	(878,844)
Income taxes	0	0	0	0
Income (loss) from operations after taxes	(804,511)	(196,294)	(1,161,775)	(878,844)
Total assets	86,337	425,477	86,337	425,477
Depreciation and amortization	0	0	0	0
Capital expenditures	0	0	0	0
Write-off/Impairment	$ 0	$ 0	$ 0	$ 0

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
NET REVENUE
Net revenue	$ 32,853,896	$ 31,314,846	$ 55,356,476	$ 55,123,520
OPERATING INCOME /EXPENSES
Cost of net revenue	(23,260,201)	(21,389,651)	(41,245,673)	(38,505,533)
Sales, marketing and other operating expenses	(25,115)	(22,709)	(45,418)	(40,473)
Research and development cost	(54,480)	(62,526)	(72,182)	(105,324)
Write-off/Impairment on property, plant and equipment	0	(911,995)	0	(911,995)
General and administrative expenses	(2,422,452)	(1,370,866)	(4,391,669)	(3,483,071)
Other operating income	287,127	76,104	382,689	133,178
Total Costs and Expenses	(25,475,121)	(23,681,643)	(45,372,253)	(42,913,218)
INCOME FROM OPERATIONS	7,378,775	7,633,203	9,984,223	12,210,302
OTHER INCOME (EXPENSE)
Interest expense	(53,583)	(54,255)	(106,589)	(108,667)
Interest income	79,429	84,915	152,272	183,805
INCOME BEFORE TAXES	7,404,621	7,663,863	10,029,906	12,285,440
INCOME TAXES	(2,048,722)	(1,975,189)	(2,791,042)	(3,309,659)
NET INCOME	5,355,899	5,688,674	7,238,864	8,975,781
COMPREHENSIVE INCOME:
Net income	5,355,899	5,688,674	7,238,864	8,975,781
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments	4,298,508	(1,316,002)	5,066,274	(1,038,104)
COMPREHENSIVE INCOME	$ 9,654,407	$ 4,372,672	$ 12,305,138	$ 7,937,677
EARNINGS PER SHARE:
BASIC	$ 0.14	$ 0.16	$ 0.19	$ 0.26
DILUTED	$ 0.14	$ 0.16	$ 0.19	$ 0.26
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC	38,367,471	34,560,743	38,367,471	34,560,743
DILUTED	38,591,127	34,560,743	38,546,042	34,561,394

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4. PREPAID LAND LEASE

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

4. PREPAID LAND LEASE

NOTE 4 – PREPAID LAND LEASES

The Company prepaid for land leases with lease terms for periods ranging from one to fifty years to use the land on which the office premises, production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.

During the three-month periods ended June 30, 2013 and 2012, amortization of prepaid land lease totaled $91,703 and $50,180, respectively, which were recorded as cost of net revenue. During the six-month periods ended June 30, 2013 and 2012, amortization of prepaid land lease totaled $189,918 and $105,051, respectively, which were recorded as cost of net revenue.

The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships. Such parcels of land are collectively owned by local townships and accordingly, the Company could not obtain land use rights certificates on these parcels of land. The parcels of land that the Company could not obtain land use rights certificates cover a total of approximately 59.39 square kilometers with an aggregate carrying value of $1,169,534 and approximately 59.39 square kilometers with an aggregate carrying value of $753,086 as at June 30, 2013 and December 31, 2012, respectively.

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18. RESEARCH AND DEVELOPMENT EXPENSES

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

18. RESEARCH AND DEVELOPMENT EXPENSES

NOTE 18 – RESEARCH AND DEVELOPMENT EXPENSES

The total research and development expenses recognized in the income statements during the three-month and six-month periods ended June 30, 2013 were $54,480 and $72,182, respectively, of which the consumption of bromine produced by the Company amounted to $12,461 and $18,582, respectively. The total research and development expenses recognized in the income statements during the three-month and six-month periods ended June 30, 2012 were $62,526 and $105,324, respectively, of which the consumption of bromine produced by the Company amounted to $13,268 and $24,008, respectively. 

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15. MAJOR SUPPLIERS (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Major Suppliers Details Narrative
Top five suppliers percentage raw materials supplied	83.40%	87.50%	82.60%	83.50%
Amount due top five suppliers	$ 4,289,947	$ 3,305,237	$ 4,289,947	$ 3,305,237

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12. STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

12. STOCK-BASED COMPENSATION

NOTE 12 – STOCK-BASED COMPENSATION

Pursuant to the Company’s Amended and Restated 2007 Equity Incentive Plan, the aggregate number shares of the Company’s common stock available for grant of stock options and issuance is 4,341,989 shares.

The fair value of each option award below is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the estimated average of the life of options using the “simplified” method, as prescribed in FASB ASC 718, due to insufficient historical exercise activity during recent years as a basis from which to estimate future exercise patterns.

In early March 2013, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.12 per share and the options vested immediately. The options were valued at $4,900 fair value, with assumed 74.73% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.19% and no dividend yield. For the three-month period ended March 31, 2013, $4,900 was recognized as general and administrative expenses.

On May 30, 2013, the Company granted to 3 executive officers and 17 management staff options to purchase 600,000 shares and 203,000 shares of the Company’s common stock, respectively, at an exercise price of $0.952 per share and the options vested immediately. The options to executive officers and management staff were valued at $394,100 and $133,300 fair value, respectively, both with assumed 80.76% volatility, a four-year expiration term with expected tenor of 2 years, a risk free rate of 0.29% and no dividend yield.

The following table summarizes all Company stock option transactions between January 1, 2013 and June 30, 2013.

	Number of Option and Warrants Outstanding		Number of Option and Warrants Vested		Range of Exercise Price per Common Share
Balance, January 1, 2013		1,974,471		1,974,471		$0.95 - $12.60
Granted and vested during the six-month period ended June 30, 2013		815,500		815,500		$0.95 - $1.12
Balance, June 30, 2013		2,789,971		2,789,971		$0.95 - $12.60

	Stock and Warrants Options Exercisable and Outstanding
			Weighted Average	Weighted Average
			Remaining	Exercise Price of
	Outstanding at June 30, 2013	Range of Exercise Prices	Contractual Life  (Years)	Options Currently  Outstanding
Exercisable and outstanding	2,789,971	$0.95 - $12.60	2.75	$   3.11

The weighted average grant-date fair values as at June 30, 2013 and December 31, 2012 were $3.64 and $4.62, respectively.

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10. CAPITAL LEASE OBLIGATIONS (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Capital Lease Obligations Details
Imputed interest rate on capital lease obligations	6.70%
Total capital lease obligations	$ 3,003,942	$ 3,146,066
Less: Current portion	(99,011)	(193,164)
Capital lease obligations, net of current portion	$ 2,904,931	$ 2,952,902

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16. CUSTOMER CONCENTRATION (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013 Top Five Customers	Jun. 30, 2012 Top Five Customers
Percent products sold to top five customers	40.00%	42.80%	40.30%	43.40%
Due from top five customers	$ 16,955,022	$ 19,888,840

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19. CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS (Tables)

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Schedule of contractual obligations

	Capital Lease Obligations			Operating Lease Obligations		Construction Project Obligations
Payable within:
the next 12 months	$	303,792		$	955,478	$	-
the next 13 to 24 months		303,792			973,386		-
the next 25 to 36 months		303,792			995,256		-
the next 37 to 48 months		303,792			1,014,923		-
the next 49 to 60 months		303,792			1,038,792		-
thereafter		3,645,509			21,817,253		-
Total	$	5,164,472		$	26,795,088	$	-
Less: Amount representing interest		(2,160,530	)
Present value of net minimum lease payments	$	3,003,942

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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

(a) Basis of Presentation

(a)           Basis of Presentation and Consolidation

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”). The balance sheet at December 31, 2012 is derived from the audited balance sheet but does not include all disclosures required by US GAAP. In connection with the consolidated financial statements and notes included in this report, reference is made to the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Form 10-K”).

In the opinion of management, the unaudited financial information for the three and six months ended June 30, 2013 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s  2012 Form 10-K. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in the areas including classification of leases and related party transactions.


The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, 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”). HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”).  All material intercompany transactions have been eliminated on consolidation.

(b) Nature of the Business

(b)           Nature of the Business

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), and manufactures chemical products for use in the oil industry and paper manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in The People’s Republic of China (“PRC”).

(c) Allowance for Doubtful Accounts

(c)           Allowance for Doubtful Accounts

As of June 30, 2013 and December 31, 2012, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the income statement for the three-month and six-month periods ended June 30, 2013 and 2012.

(d) Concentration of Credit Risk

(d)           Concentration of Credit Risk

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited and China Merchants Bank Company Limited, which are not insured or otherwise protected. The Company placed $86,422,512 and $65,241,035 with these institutions as of June 30, 2013 and December 31, 2012, respectively.  The Company has not experienced any losses in such accounts in the PRC.

Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and due to the generally short payment terms.  About 89.5% and 100% of the balances of accounts receivable as of June 30, 2013 and December 31, 2012, respectively, are outstanding for less than three months. For the balances of accounts receivable aged more than 90 days as of June 30, 2013, all was settled in July 2013.

(e) Property, Plant and Equipment

(e)           Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment 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. All other ordinary repair and maintenance costs are expensed as incurred.

Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.

Construction in progress primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.

The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in progress, are as follows:

	Useful life (in years)
Buildings (including salt pans)	8 - 20
Plant and machinery (including protective shells, transmission channels and ducts)	5 - 8
Motor vehicles	5
Furniture, fixtures and equipment	8

Property, plant and equipment under capital leases are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.

(f) Retirement Benefits

(f)           Retirement Benefits

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement scheme at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the consolidated income statement on an accrual basis when they are due. The Company’s contributions totaled $124,158 and $112,275 for the three-month periods ended June 30, 2013 and 2012, respectively, and totaled $243,913 and $242,393 for the six-month periods ended June 30, 2013 and 2012, respectively.

(g) Revenue Recognition

(g)           Revenue Recognition

The Company recognizes revenue, net of value-added tax, when persuasive evidence of an arrangement exists, delivery of the goods has occurred, customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

(h) Shipping and Handling Fees and Costs

(h)           Shipping and Handling Fees and Costs

The Company does not charge its customers for shipping and handling as all customers arrange their own transportation of finished goods.  The Company classifies shipping and handling costs for purchase of raw materials as part of the cost of net revenue, which amounted to $0 and $80,607 for the six-month periods ended June 30, 2013 and 2012, respectively. There is no such shipping and handling costs for the three-month period ended June 30, 2013 and 2012 as they are borne by the suppliers since April 2012.

(i) Recoverability of Long-lived Assets

(i)           Recoverability of Long-lived Assets

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35 “Impairment or Disposal of Long-lived Assets” , long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.

For the three-month periods ended June 30, 2012, Certain eroded protective shells for transmission channels and ducts, with net book values of $911,995, were replaced during the second phase enhancement project, write-offs of the same amounts, were made in this quarter and included in write-off/impairment on property, plant and equipment.

For the three-month and six-month periods ended June 30, 2013, the Company determined that there are no events or circumstances indicating possible impairment of its long-lived assets.

(j) Basic and Diluted Net Income per Share of Common Stock

(j)           Basic and Diluted Net Income per Share of Common Stock

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 5,282,849 and 2,906,971 shares for the three-month periods ended June 30, 2013 and 2012, respectively, and amounted to 5,189,462 and 2,175,548 shares for the six-month periods ended June 30, 2013 and 2012, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.

The following table sets forth the computation of basic and diluted earnings per share:

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2013		2012			2013		2012
Numerator
Net income	$	5,355,899	$	5,688,674	$	7,238,864	$	8,975,781
Denominator
Basic: Weighted-average common shares outstanding during the period		38,367,471		34,560,743		38,367,471		34,560,743
Add: Dilutive effect of stock options		223,656		-		178,571		651
Diluted		38,591,127		34,560,743		38,546,042		34,561,394
Net income per share
Basic	$	0.14	$	0.16	$	0.19	$	0.26
Diluted	$	0.14	$	0.16	$	0.19	$	0.26

(k) Reporting Currency and Translation

(k)           Reporting Currency and Translation

The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated comprehensive income. The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.

(l) Foreign Operations

(l)           Foreign Operations

All of the Company’s operations and assets are located in PRC.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.

(m) New Accounting Pronouncements

(m)           New Accounting Pronouncements

No accounting standards and guidance with an effective date during the three-month and six-month periods ended June 30, 2013 or issued during 2013 had or are expected to have a significant impact on the Company’s condensed consolidated financial statements.

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20. CONTINGENCY

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

20. CONTINGENCY

Class Action

The Company and certain of its officers and directors (Ming Yang, Xiaobin Liu, and Min Li, collectively, the “Individual Defendants”) have been named as defendants in a putative securities class action lawsuit alleging violations of the federal securities laws. That action, which is now captioned Lewy, et al. v. Gulf Resources, Inc., et al., No. 11-cv-3722 ODW (MRWx), was filed on April 29, 2011 in the United States District Court for the Central District of California. The lead plaintiffs, who seek to represent a class of all purchasers and acquirers of the Company’s common stock between March 16, 2009 and April 26, 2011 inclusive, filed an amended complaint on September 12, 2011. Lead plaintiffs assert claims for violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The amended complaint alleges the defendants made false or misleading statements in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2008, 2009, and 2010, and in interim quarterly reports by, among other things, overstating revenue and net income and failing to disclose material related party transactions and certain facts about the CEO’s prior employment at another company. The amended complaint also asserts claims against the Individual Defendants for violations of Section 20(a) of the Securities Exchange Act of 1934. The amended complaint seeks damages in an unspecified amount. The Company filed a motion to dismiss the amended complaint. On May 15, 2012, the Court denied the Company’s motion to dismiss the amended complaint. On April 30, 2013, the parties executed a stipulation and agreement of settlement. The proposed settlement is subject to review and approval of the Court. The Company currently cannot estimate the amount or range of the overall costs in connection with this litigation. The Company believes that such costs will be reimbursed by the insurance company to the extent covered by the insurance policies.

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8. RELATED PARTY TRANSACTIONS (Details Narrative) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013
Related Party Transactions Details Narrative
Company borrowed from Jiaxing Lighting Appliance Company Limited	$ 99,000	$ 420,449

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10. CAPITAL LEASE OBLIGATIONS (Tables)

6 Months Ended

Jun. 30, 2013

Leases [Abstract]

Capital lease obligations

	Imputed	June 30,			December 31,
	Interest rate	2013			2012
Total capital lease obligations	6.7%	$	3,003,942		$	3,146,066
Less: Current portion			(99,011	)		(193,164	)
Capital lease obligations, net of current portion		$	2,904,931		$	2,952,902

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1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Numerator
Net income	$ 5,355,899	$ 5,688,674	$ 7,238,864	$ 8,975,781
Denominator
Basic: Weighted-average common shares outstanding during the period	38,367,471	34,560,743	38,367,471	34,560,743
Add: Dilutive effect of stock options	223,656	0	178,571	651
Diluted	38,591,127	34,560,743	38,546,042	34,561,394
Net income per share
Basic	$ 0.14	$ 0.16	$ 0.19	$ 0.26
Diluted	$ 0.14	$ 0.16	$ 0.19	$ 0.26

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12. STOCK-BASED COMPENSATION (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Number of Options
Number of Options Outstanding	2,789,971
Weighted Average Exercise Price
Weighted Average Exercise Price Outstanding, Ending	$ 3.11
Weighted Average Remaining Contractual Life (in years)
Weighted Average Remaining Contractual Life (in years) Outstanding	2 years 9 months
Minimum
Weighted Average Exercise Price
Weighted Average Exercise Price Outstanding, Beginning	$ 0.95
Weighted Average Exercise Price Granted	$ 0.95
Weighted Average Exercise Price Outstanding, Ending	$ 0.95
Maximum
Weighted Average Exercise Price
Weighted Average Exercise Price Outstanding, Beginning	$ 12.6
Weighted Average Exercise Price Granted	$ 1.12
Weighted Average Exercise Price Outstanding, Ending	$ 12.6
Number of Option and Warrants Outstanding
Number of Options
Number of Options Outstanding	1,974,471
Number of Options Granted	815,500
Number of Options Outstanding	2,789,971
Number of Option and Warrants Vested
Number of Options
Number of Options Outstanding	1,974,471
Number of Options Granted	815,500
Number of Options Outstanding	2,789,971

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6. PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET (Tables)

6 Months Ended

Jun. 30, 2013

Property Plant And Equipment Under Capital Leases Net Tables

Property, plant and equipment under capital leases

	June 30, 2013			December 31, 2012
At cost:
Buildings	$	133,190		$	130,925
Plant and machinery		2,503,566			2,461,028
Total		2,636,756			2,591,953
Less: Accumulated depreciation and amortization		(738,073	)		(595,475	)
Net book value	$	1,898,683		$	1,996,478

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5. PROPERTY, PLANT AND EQUIPMENT, NET (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Property, Plant and Equipment [Abstract]
Mineral rights	$ 6,443,763	$ 6,334,277
Buildings	51,785,222	50,905,337
Plant and machinery	168,992,691	166,121,329
Motor vehicles	9,298	9,140
Furniture, fixtures and office equipment	4,859,614	4,777,044
Total	232,090,588	228,147,127
Less: Accumulated depreciation and amortization	(76,972,730)	(62,204,585)
Net book value	$ 155,117,858	$ 165,942,542

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19. CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

19. CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

As of June 30, 2013, the Company has leased a real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, under capital lease. The future minimum lease payments required under capital lease, together with the present value of such payments, are included in the table show below.

The Company has leased nine pieces of land under non-cancelable operating leases, which are fixed in rentals and expired through December 2021, December 2030, December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively. The Company accounts for the leases as operating leases.

The Company has no purchase commitment as of June 30, 2013.

The following table sets forth the Company’s contractual obligations as of June 30, 2013:

	Capital Lease Obligations			Operating Lease Obligations		Construction Project Obligations
Payable within:
the next 12 months	$	303,792		$	955,478	$	-
the next 13 to 24 months		303,792			973,386		-
the next 25 to 36 months		303,792			995,256		-
the next 37 to 48 months		303,792			1,014,923		-
the next 49 to 60 months		303,792			1,038,792		-
thereafter		3,645,509			21,817,253		-
Total	$	5,164,472		$	26,795,088	$	-
Less: Amount representing interest		(2,160,530	)
Present value of net minimum lease payments	$	3,003,942

Rental expenses related to operating leases of the Company amounted to $237,214 and $194,450, which were charged to the income statements for the three-month ended June 30, 2013 and 2012, respectively. Rental expenses related to operating leases of the Company amounted to $471,533 and $388,766, which were charged to the income statements for the six-month ended June 30, 2013 and 2012, respectively.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 7,238,864	$ 8,975,781
Adjustments to reconcile net income to net cash provided by operating activities:
Interest on capital lease obligation	106,206	108,044
Amortization of prepaid land leases	189,918	105,051
Depreciation and amortization	13,685,539	11,290,588
Write-off/Impairment on property, plant and equipment	0	911,995
Exchange (gain) loss on inter-company balances	431,147	(92,057)
Stock-based compensation expense	532,300	26,300
Deferred tax asset	0	160,826
Changes in assets and liabilities:
Accounts receivable	(2,621,905)	(19,514,217)
Inventories	715,714	467,279
Prepayments and deposits	(18,750)	(38,610)
Accounts payable and accrued expenses	(296,268)	206,207
Retention payable	(1,055,003)	(457,813)
Taxes payable	1,797,837	189,434
Net cash provided by operating activities	20,705,599	2,338,808
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions of prepaid land leases	(588,830)	(422,877)
Additions of prepaid land leases	0	(7,871,130)
Net cash used in investing activities	(588,830)	(8,294,007)
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayment of capital lease obligation	(302,498)	(297,598)
Net cash used in financing activities	(302,498)	(297,598)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	1,367,206	(278,492)
NET INCREASE IN CASH AND CASH EQUIVALENTS	21,181,477	(6,531,289)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	65,241,035	78,576,060
CASH AND CASH EQUIVALENTS - END OF PERIOD	86,422,512	72,044,771
Cash paid during the period for:
Income taxes	$ 1,287,273	$ 2,945,542

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2. ASSETS ACQUISITIONS

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

2. ASSETS ACQUISITIONS

NOTE 2 – ASSET ACQUISITIONS

On November 26, 2012, the Company acquired substantially all of the assets owned by Chengyong Zhao in Guantai Village located Shouguang City Yangkou Township area (the “Chengyong Zhao Property” or “Factory No. 11”). The Chengyong Zhao Property includes a 20-year land lease covering approximately 1,727 acres of real property, with the related production facility, wells, pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was RMB 62 million (approximately $9.80 million), consisting of RMB 31 million (approximately $4.93million) in cash and 3,806,728 shares of the Company’s Common Stock valued at approximately $4.87 million (fair value). The production line of Factory No. 11 was resumed in March 2013 after certain repair and adjustments.

The Factory No. 11 described above was not in operation when the Company acquired the assets. Production of Factory No. 11 had previously been halted by the government since the owners of the bromine factories did not hold the proper license for the exploration and production of bromine.  The Factories No.11 had not been in operation for more than six months at the time of the acquisition. The Company recorded the above transactions as a purchase of assets.

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5. PROPERTY, PLANT AND EQUIPMENT, NET

6 Months Ended

Jun. 30, 2013

Property, Plant and Equipment [Abstract]

5. PROPERTY, PLANT AND EQUIPMENT, NET

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:

	June 30, 2013			December 31, 2012
At cost:
Mineral rights	$	6,443,763		$	6,334,277
Buildings		51,785,222			50,905,337
Plant and machinery		168,992,691			166,121,329
Motor vehicles		9,298			9,140
Furniture, fixtures and office equipment		4,859,614			4,777,044
Total		232,090,588			228,147,127
Less: Accumulated depreciation and amortization		(76,972,730	)		(62,204,585	)
Net book value	$	155,117,858		$	165,942,542

The Company has certain buildings and salt pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships. The Company has not been able to obtain property ownership certificates over these buildings and salt pans as the Company could not obtain land use rights certificates on the underlying parcels of land. The aggregate carrying values of these properties situated on parcels of the land are $39,179,525 and $39,563,438 as at June 30, 2013 and December 31, 2012, respectively.

During the three-month period ended June 30, 2013, depreciation and amortization expense totaled $6,812,181, of which $6,504,164 and $308,017 were recorded as cost of net revenue and administrative expenses, respectively. During the three-month period ended June 30, 2012, depreciation and amortization expense totaled $5,521,178, of which $5,403,370 and $117,808 were recorded as cost of net revenue and administrative expenses, respectively. During the six-month period ended June 30, 2013, depreciation and amortization expense totaled $13,554,571, of which $12,758,306 and $796,264 were recorded as cost of sales and administrative expenses respectively. During the six-month period ended June 30, 2012, depreciation and amortization expense totaled $11,118,099, of which $10,645,703 and $472,396 were recorded as cost of sales and administrative expenses respectively.

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3. INVENTORIES

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

3. INVENTORIES

NOTE 3 – INVENTORIES

Inventories consist of:

	June 30, 2013			December 31, 2012
Raw materials	$	692,551		$	773,453
Finished goods		4,707,039			5,248,039
Allowance for obsolete and slow-moving inventory		(28,376	)		(27,894	)
	$	5,371,214		$	5,993,598

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3. INVENTORIES (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Inventory Disclosure [Abstract]
Raw materials	$ 692,551	$ 773,453
Finished goods	4,707,039	5,248,039
Allowance for obsolete and slow-moving inventory	(28,376)	(27,894)
Inventories	$ 5,371,214	$ 5,993,598

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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Schedule of property plant and equipment

	Useful life (in years)
Buildings (including salt pans)	8 - 20
Plant and machinery (including protective shells, transmission channels and ducts)	5 - 8
Motor vehicles	5
Furniture, fixtures and equipment	8

Schedule of computation of basic and diluted earnings per share

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2013		2012			2013		2012
Numerator
Net income	$	5,355,899	$	5,688,674	$	7,238,864	$	8,975,781
Denominator
Basic: Weighted-average common shares outstanding during the period		38,367,471		34,560,743		38,367,471		34,560,743
Add: Dilutive effect of stock options		223,656		-		178,571		651
Diluted		38,591,127		34,560,743		38,546,042		34,561,394
Net income per share
Basic	$	0.14	$	0.16	$	0.19	$	0.26
Diluted	$	0.14	$	0.16	$	0.19	$	0.26

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7. ACCOUNTS PAYABLE AND ACCRUED EXPENSE (Tables)

6 Months Ended

Jun. 30, 2013

Payables and Accruals [Abstract]

Accounts payable and accrued expenses

	June 30,		December 31,
	2013		2012
Accounts payable	$	5,173,565	$	3,797,552
Salary payable		202,317		190,926
Social security insurance contribution payable		56,643		52,399
Price adjustment funds		395,936		1,758,828
Other payables		502,183		733,531
Total	$	6,330,644	$	6,533,236

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14. BUSINESS SEGMENTS (Tables)

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Schedule of segment operating income

Three-Month Period Ended June 30, 2013	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	17,473,276	$	3,629,976	$	11,750,644	$	32,853,896	$	-		$	32,853,896
Net revenue (intersegment)		777,746		-		-		777,746		-			777,746
Income (loss) from operations before taxes		3,882,612		728,638		3,572,036		8,183,286		(804,511	)		7,378,775
Income taxes		941,322		209,755		897,645		2,048,722		-			2,048,722
Income (loss) from operations after taxes		2,941,290		518,883		2,674,391		6,134,564		(804,511	)		5,330,053
Total assets		174,524,258		56,693,091		60,193,635		291,410,984		86,337			291,497,321
Depreciation and amortization		4,309,920		1,687,487		880,645		6,878,052		-			6,878,052
Capital expenditures		-		-		-		-		-			-
Write-off / Impairment		-		-		-		-		-			-

Three-Month Period Ended June 30, 2012	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	17,539,429	$	3,779,658	$	9,995,759	$	31,314,846	$	-		$	31,314,846
Net revenue (intersegment)		808,596		-		-		808,596		-			808,596
Income (loss) from operations before taxes		3,933,561		888,555		3,007,381		7,829,497		(196,294	)		7,633,203
Income taxes		1,018,311		198,783		758,095		1,975,189		-			1,975,189
Income (loss) from operations after taxes		2,915,250		689,772		2,249,286		5,854,308		(196,294	)		5,658,014
Total assets		158,305,734		56,621,811		50,634,822		265,562,367		425,477			265,987,844
Depreciation and amortization		3,509,790		1,442,179		655,456		5,607,425		-			5,607,425
Capital expenditures		6,567,296		1,281,991		-		7,849,287		-			7,849,287
Write-off / Impairment		763,043		148,952		-		911,995		-			911,995

Six-Month Period Ended June 30, 2013	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate					Total
Net revenue (external customers)	$	29,207,643	$	6,080,762	$	20,068,071	$	55,356,476	$	-		$	55,356,476
Net revenue (intersegment)		1,392,476		-		-		1,392,476		-			1,392,476
Income (loss) from operations before taxes		4,210,425		1,266,858		5,668,715		11,145,998		(1,161,775	)		9,984,223
Income taxes		1,121,955		243,020		1,426,067		2,791,042		-			2,791,042
Income (loss) from operations after taxes		3,088,471		1,023,837		4,242,648		8,354,956		(1,161,775	)		7,193,181
Total assets		174,524,258		56,693,091		60,193,635		291,410,984		86,337			291,497,321
Depreciation and amortization		8,687,891		3,246,686		1,750,962		13,685,539		-			13,685,539
Capital expenditures		-		-		-		-		-			-
Write-off / Impairment		-		-		-		-		-			-

Six-Month Period Ended June 30, 2012	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	30,993,311	$	6,054,582	$	18,075,627	$	55,123,520	$	-		$	55,123,520
Net revenue (intersegment)		1,563,153		-		-		1,563,153		-			1,563,153
Income (loss) from operations before taxes		6,401,865		1,437,005		5,250,276		13,089,146		(878,844	)		12,210,302
Income taxes		1,681,209		302,649		1,325,801		3,309,659		-			3,309,659
Income (loss) from operations after taxes		4,720,656		1,134,356		3,924,475		9,779,487		(878,844	)		8,900,643
Total assets		158,305,734		56,621,811		50,634,822		265,562,367		425,477			265,987,844
Depreciation and amortization		7,174,033		2,805,685		1,310,870		11,290,588		-			11,290,588
Capital expenditures		6,567,296		1,281,991		-		7,849,287		-			7,849,287
Write-off / Impairment		763,043		148,952		-		911,995		-			911,995

Schedule of segment costs

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2013			2012			2013			2012
Total segment operating income	$	8,183,286		$	7,829,497		$	11,145,998		$	13,089,146
Corporate costs		(804,511	)		(196,294	)		(1,161,775	)		(878,844	)
Income from operations		7,378,775			7,633,203			9,984,223			12,210,302
Other income (expense)		25,846			30,660			45,683			75,138
Income before taxes	$	7,404,621		$	7,663,863		$	10,029,906		$	12,285,440

Schedule of major customers

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2013.

Number	Customer	Bromine (000’s)	Crude Salt (000’s)	Chemical Products (000’s)	Total Revenue  (000’s)	Percentage of Total Revenue (%)
1	Shandong Morui Chemical Company Limited	$ 2,166	$ 751	$ 1,125	$  4,042	12.3%
TOTAL		$  2,166	$  751	$  1,125	$  4,042	12.3%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2013.

Number	Customer	Bromine (000’s)	Crude Salt (000’s)	Chemical Products (000’s)	Total Revenue  (000’s)	Percentage of Total Revenue (%)
1	Shandong Morui Chemical Company Limited	$ 3,347	$ 1,494	$ 2,055	$  6,896	12.5%
TOTAL		$  3,347	$  1,494	$  2,055	$  6,896	12.5%

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2012.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	1,904	$	727	$	1,109	$	3,740		11.9%
	2	Shouguang City Rongyuan Chemical Company Limited	$	2,257	$	898	$	-	$	3,155		10.1%
TOTAL			$	4,161	$	1,625	$	1,109	$	6,895		22.0%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2012.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	3,634	$	1,113	$	2,107	$	6,854		12.4%
	2	Shouguang City Rongyuan Chemical Company Limited	$	4,278	$	1,346	$	-	$	5,624		10.2%
TOTAL			$	7,912	$	2,459	$	2,107	$	12,478		22.6%

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14. BUSINESS SEGMENTS (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Revenue, Major Customer [Line Items]
Revenues	$ 32,853,896	$ 31,314,846	$ 55,356,476	$ 55,123,520
Percentage of Total Revenue (%)	40.00%	42.80%
Shandong Maroi Chemical Company Limited [Member]
Revenue, Major Customer [Line Items]
Revenues	4,042	3,740	6,896	6,854
Percentage of Total Revenue (%)	12.30%	11.90%	12.50%	12.40%
Shandong Maroi Chemical Company Limited [Member] | Bromine
Revenue, Major Customer [Line Items]
Revenues	2,166	1,904	3,347	3,634
Shandong Maroi Chemical Company Limited [Member] | Crude Salt
Revenue, Major Customer [Line Items]
Revenues	751	727	1,494	1,113
Shandong Maroi Chemical Company Limited [Member] | Chemical Products
Revenue, Major Customer [Line Items]
Revenues	1,125	1,109	2,055	2,107
Shouguang City Rongyuan Chemical Company Limited
Revenue, Major Customer [Line Items]
Revenues		3,155		5,624
Percentage of Total Revenue (%)		10.10%		10.20%
Shouguang City Rongyuan Chemical Company Limited | Bromine
Revenue, Major Customer [Line Items]
Revenues		2,257		4,278
Shouguang City Rongyuan Chemical Company Limited | Crude Salt
Revenue, Major Customer [Line Items]
Revenues		898		1,346
Shouguang City Rongyuan Chemical Company Limited | Chemical Products
Revenue, Major Customer [Line Items]
Revenues		0		0
Total
Revenue, Major Customer [Line Items]
Revenues		$ 6,895		$ 12,478
Percentage of Total Revenue (%)		22.00%		22.60%

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13. INCOME TAXES (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Income Tax Disclosure [Abstract]
Current taxes - PRC	$ 2,048,722	$ 1,892,567	$ 2,791,042	$ 3,148,833
Deferred taxes - PRC	0	82,622	0	160,826
Income taxes	$ 2,048,722	$ 1,975,189	$ 2,791,042	$ 3,309,659

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7. ACCOUNTS PAYABLE AND ACCRUED EXPENSE (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Accounts Payable And Accrued Expense Details
Accounts payable	$ 5,173,565	$ 3,797,552
Salary payable	202,317	190,926
Social security insurance contribution payable	56,643	52,399
Price adjustment funds	395,936	1,758,828
Other payables	502,183	733,531
Total	$ 6,330,644	$ 6,533,236

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Statement of Financial Position [Abstract]
PREFERRED STOCK, par or stated value per share	$ 0.001	$ 0.001
PREFERRED STOCK, shares authorized	1,000,000	1,000,000
PREFERRED STOCK, shares outstanding	0	0
COMMON STOCK, par value per share	$ 0.0005	$ 0.0005
COMMON STOCK, shares authorized	400,000,000	400,000,000
COMMON STOCK, shares issued	38,552,070	38,552,070
COMMON STOCK, shares outstanding	38,367,471	38,367,471
Treasury stock, shares	184,599	184,599

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8. RELATED PARTY TRANSACTIONS

6 Months Ended

Jun. 30, 2013

Related Party Transactions [Abstract]

8. RELATED PARTY TRANSACTIONS

NOTE 8 – RELATED PARTY TRANSACTIONS

During the three-month and six-month periods ended June 30, 2013, the Company borrowed $99,000 and $420,449, respectively, and fully repaid later during the same period, from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, had a 100% equity interest in Jiaxing Lighting. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (USD $)	Common Stock	Treasury Stock	Additional Paid-In Capital	Statutory Common Reserve	Retained Earnings	Cumulative Translation Adjustment	Total
Balance at Dec. 31, 2012	$ 19,276	$ (500,000)	$ 79,489,188	$ 15,973,887	$ 146,745,754	$ 22,496,279	$ 264,224,384
Treasury stock, shares at Dec. 31, 2012		184,599					184,599
Balance, Shares Issued at Dec. 31, 2012	38,552,070						38,552,070
Balance, shares at Dec. 31, 2012	38,367,471						38,367,471
Translation adjustments						5,066,274	5,066,274
Issuance of stock options to employees			532,300				532,300
Net income					7,238,864		7,238,864
Transfer to statutory common reserve fund				411,892	(411,892)		0
Balance at Jun. 30, 2013	$ 19,276	$ (500,000)	$ 80,021,488	$ 16,385,779	$ 153,572,726	$ 27,562,553	$ 277,061,822
Treasury stock, shares at Jun. 30, 2013		184,599					184,599
Balance, Shares Issued at Jun. 30, 2013	38,552,070						38,552,070
Balance, shares at Jun. 30, 2013	38,367,471						38,367,471

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18. RESEARCH AND DEVELOPMENT EXPENSES (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Research And Development Expenses Details Narrative
Research and development expenses	$ 54,480	$ 62,526	$ 72,182	$ 105,324

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CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Current Assets
Cash	$ 86,422,512	$ 65,241,035
Accounts receivable	39,163,206	35,969,900
Inventories	5,371,214	5,993,598
Prepayments and deposits	18,750	0
Prepaid land leases	459,774	47,307
Deferred tax assets	7,094	6,973
Total Current Assets	131,442,550	107,258,813
Non-Current Assets
Property, plant and equipment, net	155,117,858	165,942,542
Property, plant and equipment under capital leases, net	1,898,683	1,996,478
Prepaid land leases, net of current portion	752,697	748,502
Deferred tax assets	2,285,533	2,246,699
Total non-current assets	160,054,771	170,934,221
Total Assets	291,497,321	278,193,034
Current Liabilities
Accounts payable and accrued expenses	6,330,644	6,533,236
Retention Payable	385,360	1,432,690
Capital lease obligation, current portion	99,011	193,164
Taxes payable	4,715,553	2,856,658
Total Current Liabilities	11,530,568	11,015,748
Non-Current Liabilities
Capital lease obligation, net of current portion	2,904,931	2,952,902
Total Liabilities	14,435,499	13,968,650
Stockholders Equity
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding	0	0
COMMON STOCK; $0.0005 par value; 400,000,000 shares authorized as of June 30,2013 and December 31,2012; 38,552,070 and 38,552,070 shares issued; and 38,367,471 and 38,367,471 shares outstanding as of June 30, 2013 and December 31, 2012, respectively	19,276	19,276
Treasury stock; 184,599 shares as of June 30, 2013 and December 31, 2012 at cost	(500,000)	(500,000)
Additional paid-in capital	80,021,488	79,489,188
Retained earnings unappropriated	153,572,726	146,745,754
Retained earnings appropriated	16,385,779	15,973,887
Cumulative translation adjustment	27,562,553	22,496,279
Total Stockholders Equity	277,061,822	264,224,384
Total Liabilities and Stockholders Equity	$ 291,497,321	$ 278,193,034

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13. INCOME TAXES (Details 1)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Income Tax Disclosure [Abstract]
Statutory income tax rate	25.00%	25.00%	25.00%	25.00%
Non-deductible expenses	1.00%	0.00%	1.00%	0.00%
US federal net operating loss	2.00%	1.00%	2.00%	2.00%
Effective tax rate	28.00%	26.00%	28.00%	27.00%

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3. INVENTORIES (Tables)

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

INVENTORIES

	June 30, 2013			December 31, 2012
Raw materials	$	692,551		$	773,453
Finished goods		4,707,039			5,248,039
Allowance for obsolete and slow-moving inventory		(28,376	)		(27,894	)
	$	5,371,214		$	5,993,598

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17. FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments.  There were no material unrecognized financial assets and liabilities as of June 30, 2013 and December 31, 2012.

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6. PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET(Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
At cost:	$ 2,636,756	$ 2,591,953
Less: accumulated depreciation and amortization	(738,073)	(595,475)
Net book value	1,898,683	1,996,478
Building [Member]
At cost:	133,190	130,925
Plant and machinery
At cost:	$ 2,503,566	$ 2,461,028

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14. BUSINESS SEGMENTS (Details 1) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Business Segments Details 1
Total segment operating income	$ 8,183,286	$ 7,829,497	$ 11,145,998	$ 13,089,146
Corporate costs	(804,511)	(196,294)	(1,161,775)	(878,844)
Income from operations	7,378,775	7,633,203	9,984,223	12,210,302
Other income (expense)	25,846	30,660	45,683	75,138
Net income before taxes	$ 7,404,621	$ 7,663,863	$ 10,029,906	$ 12,285,440

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1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)	6 Months Ended
	Jun. 30, 2013
Building [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, useful life	8 years
Building [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, useful life	20 years
Plant And Machinery [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, useful life	5 years
Plant And Machinery [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, useful life	8 years
Vehicles [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, useful life	5 years
Furniture, Fixtures And Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, useful life	8 years

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12. STOCK-BASED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of stock option transactions

	Number of Option and Warrants Outstanding		Number of Option and Warrants Vested		Range of Exercise Price per Common Share
Balance, January 1, 2013		1,974,471		1,974,471		$0.95 - $12.60
Granted and vested during the six-month period ended June 30, 2013		815,500		815,500		$0.95 - $1.12
Balance, June 30, 2013		2,789,971		2,789,971		$0.95 - $12.60

Schedule Stock and Warrants Options Outstanding

	Stock and Warrants Options Exercisable and Outstanding
			Weighted Average	Weighted Average
			Remaining	Exercise Price of
	Outstanding at June 30, 2013	Range of Exercise Prices	Contractual Life  (Years)	Options Currently  Outstanding
Exercisable and outstanding	2,789,971	$0.95 - $12.60	2.75	$   3.11

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13. INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Schedule of components of the provision for income taxes

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	2013			2012			2013			2012
Current taxes – PRC		$	2,048,722		$	1,892,567		$	2,791,042		$	3,148,833
Deferred taxes – PRC			-			82,622			-			160,826
		$	2,048,722		$	1,975,189		$	2,791,042		$	3,309,659

Schedule of income tax expenses reconciliation

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2013			2012			2013			2012
Statutory income tax rate		25	%		25	%		25	%		25	%
Non-deductible expenses		1	%		0	%		1	%		0	%
US federal net operating loss		2	%		1	%		2	%		2	%
Effective tax rate		28	%		26	%		28	%		27	%

Schedule of deferred tax assets and liabilities

	June 30,			December 31,
	2013			2012
Deferred tax liabilities	$	-		$	-
Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	7,094		$	6,973
Impairment on property, plant and equipment		472,812			464,778
Exploration costs		1,812,721			1,781,921
Compensation costs of unexercised stock options		1,990,360			1,809,378
US federal net operating loss		8,876,646			8,809,935
Total deferred tax assets		13,159,633			12,872,985
Valuation allowance		(10,867,006	)		(10,619,313	)
Net deferred tax asset	$	2,292,627		$	2,253,672
Current deferred tax asset	$	7,094		$	6,973
Long-term deferred tax asset	$	2,285,533		$	2,246,699

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7. ACCOUNTS PAYABLE AND ACCRUED EXPENSE

6 Months Ended

Jun. 30, 2013

Payables and Accruals [Abstract]

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSE

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

	June 30,		December 31,
	2013		2012
Accounts payable	$	5,173,565	$	3,797,552
Salary payable		202,317		190,926
Social security insurance contribution payable		56,643		52,399
Price adjustment funds		395,936		1,758,828
Other payables		502,183		733,531
Total	$	6,330,644	$	6,533,236

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5. PROPERTY, PLANT AND EQUIPMENT, NET (Tables)

6 Months Ended

Jun. 30, 2013

Property, Plant and Equipment [Abstract]

Property, plant and equipment

	June 30, 2013			December 31, 2012
At cost:
Mineral rights	$	6,443,763		$	6,334,277
Buildings		51,785,222			50,905,337
Plant and machinery		168,992,691			166,121,329
Motor vehicles		9,298			9,140
Furniture, fixtures and office equipment		4,859,614			4,777,044
Total		232,090,588			228,147,127
Less: Accumulated depreciation and amortization		(76,972,730	)		(62,204,585	)
Net book value	$	155,117,858		$	165,942,542

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4. PREPAID LAND LEASE (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Prepaid Land Lease Details Narrative
Amortization of prepaid land lease	$ 91,703	$ 50,180	$ 189,918	$ 105,051
Parcels of land of which the Company could not obtain land use rights certificates	$ 1,169,534		$ 1,169,534		$ 753,086

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10. CAPITAL LEASE OBLIGATIONS

6 Months Ended

Jun. 30, 2013

Leases [Abstract]

10. CAPITAL LEASE OBLIGATIONS

NOTE 10 – CAPITAL LEASE OBLIGATIONS

The components of capital lease obligations are as follows:

	Imputed	June 30,			December 31,
	Interest rate	2013			2012
Total capital lease obligations	6.7%	$	3,003,942		$	3,146,066
Less: Current portion			(99,011	)		(193,164	)
Capital lease obligations, net of current portion		$	2,904,931		$	2,952,902

Interest expenses from capital lease obligations amounted to $53,416 and $54,024 for the three-month periods ended June 30, 2013 and 2012, respectively, which were charged to the income statements. Interest expenses from capital lease obligations amounted to $106,206 and $108,044 for the six-month periods ended June 30, 2013 and 2012, respectively, which were charged to the income statements.

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6. PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET

6 Months Ended

Jun. 30, 2013

Leases [Abstract]

6. PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET

Property, plant and equipment under capital leases, net consist of the following:

	June 30, 2013			December 31, 2012
At cost:
Buildings	$	133,190		$	130,925
Plant and machinery		2,503,566			2,461,028
Total		2,636,756			2,591,953
Less: Accumulated depreciation and amortization		(738,073	)		(595,475	)
Net book value	$	1,898,683		$	1,996,478

The above buildings erected on parcels of land located in Shouguang, PRC, are collectively owned by local townships.  The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.  

During the three-month periods ended June 30, 2013 and 2012, depreciation and amortization expense totaled $65,870 and $86,247, respectively, which was recorded as cost of net revenue. During the six-month periods ended June 30, 2013 and 2012, depreciation and amortization expense totaled $130,968 and $172,489, respectively, which was recorded as cost of net revenue.

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1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)           Basis of Presentation and Consolidation

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”). The balance sheet at December 31, 2012 is derived from the audited balance sheet but does not include all disclosures required by US GAAP. In connection with the consolidated financial statements and notes included in this report, reference is made to the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Form 10-K”).

In the opinion of management, the unaudited financial information for the three and six months ended June 30, 2013 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s  2012 Form 10-K. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in the areas including classification of leases and related party transactions.


The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, 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”). HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”).  All material intercompany transactions have been eliminated on consolidation.

(b)           Nature of the Business

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), and manufactures chemical products for use in the oil industry and paper manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in The People’s Republic of China (“PRC”).

(c)           Allowance for Doubtful Accounts

As of June 30, 2013 and December 31, 2012, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the income statement for the three-month and six-month periods ended June 30, 2013 and 2012.

(d)           Concentration of Credit Risk

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited and China Merchants Bank Company Limited, which are not insured or otherwise protected. The Company placed $86,422,512 and $65,241,035 with these institutions as of June 30, 2013 and December 31, 2012, respectively.  The Company has not experienced any losses in such accounts in the PRC.

Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and due to the generally short payment terms.  About 89.5% and 100% of the balances of accounts receivable as of June 30, 2013 and December 31, 2012, respectively, are outstanding for less than three months. For the balances of accounts receivable aged more than 90 days as of June 30, 2013, all was settled in July 2013.

(e)           Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment 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. All other ordinary repair and maintenance costs are expensed as incurred.

Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.

Construction in progress primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.

The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in progress, are as follows:

	Useful life (in years)
Buildings (including salt pans)	8 - 20
Plant and machinery (including protective shells, transmission channels and ducts)	5 - 8
Motor vehicles	5
Furniture, fixtures and equipment	8

Property, plant and equipment under capital leases are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.

(f)           Retirement Benefits

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement scheme at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the consolidated income statement on an accrual basis when they are due. The Company’s contributions totaled $124,158 and $112,275 for the three-month periods ended June 30, 2013 and 2012, respectively, and totaled $243,913 and $242,393 for the six-month periods ended June 30, 2013 and 2012, respectively.

(g)           Revenue Recognition

The Company recognizes revenue, net of value-added tax, when persuasive evidence of an arrangement exists, delivery of the goods has occurred, customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

(h)           Shipping and Handling Fees and Costs

The Company does not charge its customers for shipping and handling as all customers arrange their own transportation of finished goods.  The Company classifies shipping and handling costs for purchase of raw materials as part of the cost of net revenue, which amounted to $0 and $80,607 for the six-month periods ended June 30, 2013 and 2012, respectively. There is no such shipping and handling costs for the three-month period ended June 30, 2013 and 2012 as they are borne by the suppliers since April 2012.

(i)           Recoverability of Long-lived Assets

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35 “Impairment or Disposal of Long-lived Assets” , long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.

For the three-month periods ended June 30, 2012, Certain eroded protective shells for transmission channels and ducts, with net book values of $911,995, were replaced during the second phase enhancement project, write-offs of the same amounts, were made in this quarter and included in write-off/impairment on property, plant and equipment.

For the three-month and six-month periods ended June 30, 2013, the Company determined that there are no events or circumstances indicating possible impairment of its long-lived assets.

(j)           Basic and Diluted Net Income per Share of Common Stock

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 5,282,849 and 2,906,971 shares for the three-month periods ended June 30, 2013 and 2012, respectively, and amounted to 5,189,462 and 2,175,548 shares for the six-month periods ended June 30, 2013 and 2012, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.

(j)           Basic and Diluted Net Income per Share of Common Stock – Continued

The following table sets forth the computation of basic and diluted earnings per share:

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2013		2012			2013		2012
Numerator
Net income	$	5,355,899	$	5,688,674	$	7,238,864	$	8,975,781
Denominator
Basic: Weighted-average common shares outstanding during the period		38,367,471		34,560,743		38,367,471		34,560,743
Add: Dilutive effect of stock options		223,656		-		178,571		651
Diluted		38,591,127		34,560,743		38,546,042		34,561,394
Net income per share
Basic	$	0.14	$	0.16	$	0.19	$	0.26
Diluted	$	0.14	$	0.16	$	0.19	$	0.26

(k)           Reporting Currency and Translation

The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated comprehensive income. The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.

(l)           Foreign Operations

All of the Company’s operations and assets are located in PRC.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.

(m)           New Accounting Pronouncements

No accounting standards and guidance with an effective date during the three-month and six-month periods ended June 30, 2013 or issued during 2013 had or are expected to have a significant impact on the Company’s condensed consolidated financial statements.

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13. INCOME TAXES (Details 2) (USD $)	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Income Tax Disclosure [Abstract]
Deferred tax liabilities	$ 0		$ 0
Deferred tax assets:
Allowance for obsolete and slow-moving inventories	7,094		6,973
Impairment on property, plant and equipment	472,812		464,778
Exploration costs	1,812,721		1,781,921
Compensation costs of unexercised stock options	1,990,360		1,809,378
US federal net operating loss	8,876,646		8,809,935
Total deferred tax assets	13,159,633		12,872,985
Valuation allowance	(10,867,006)		(10,619,313)
Net deferred tax asset	2,292,627		2,253,672
Current deferred tax asset	7,094		6,973
Long-term deferred tax asset	$ 2,285,533	$ 2,246,699	$ 2,246,699

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9. TAXES PAYABLE (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Taxes Payable Details
Income tax payable	$ 2,129,332	$ 606,190
Mineral resource compensation fee payable	366,583	239,776
Value added tax payable	1,065,876	771,673
Land use tax payable	940,364	888,349
Other tax payable	213,398	350,670
Total	$ 4,715,553	$ 2,856,658

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9. TAXES PAYABLE (Tables)

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Schedule of Taxes payable

	June 30,		December 31,
	2013		2012
Income tax payable	$	2,129,332	$	606,190
Mineral resource compensation fee payable		366,583		239,776
Value added tax payable		1,065,876		771,673
Land use tax payable		940,364		888,349
Other tax payables		213,398		350,670
Total	$	4,715,553	$	2,856,658

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19. CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS (Details) (USD $)	Jun. 30, 2013
Capital Lease Obligations Payable within:
the next 12 months	$ 303,792
the next 13 to 24 months	303,792
the next 25 to 36 months	303,792
the next 37 to 48 months	303,792
the next 49 to 60 months	303,792
thereafter	3,645,509
Total	5,164,472
Less: Amount representing interest	(2,160,530)
Present value of net minimum lease payments	3,003,942
Operating Lease Obligations
the next 12 months	955,478
the next 13 to 24 months	973,386
the next 25 to 36 months	995,256
the next 37 to 48 months	1,014,923
the next 49 to 60 months	1,038,792
thereafter	21,817,253
Total	26,795,088
Purchase Obligations
the next 12 months	0
the next 13 to 24 months	0
the next 25 to 36 months	0
the next 37 to 48 months	0
the next 49 to 60 months	0
thereafter	0
Total	$ 0

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13. INCOME TAXES

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

13. INCOME TAXES

NOTE 13 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

(a)           United States

Gulf Resources, Inc. is subject to the United States of America Tax law at a 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 three-month and six-month periods ended June 30, 2013 and 2012, and management believes that its earnings are permanently invested in the PRC.

(b)           BVI

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and six-month periods ended June 30, 2013 and 2012.

(c)           Hong Kong

Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group 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 three-month and six-month periods ended June 30, 2013 and 2012.  The applicable statutory tax rates for the three-month and six-month periods ended June 30, 2013 and 2012 are 16.5%.

(d)           PRC

Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.

The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

As of June 30, 2013 and December 31, 2012, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $208,469,568 and $197,042,047, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of June 30, 2013 and December 31, 2012, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of June 30, 2013 and December 31, 2012, the unrecognized WHT are $9,321,132 and $8,768,486, respectively.

The components of the provision for income taxes from continuing operations are:

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	2013			2012			2013			2012
Current taxes – PRC		$	2,048,722		$	1,892,567		$	2,791,042		$	3,148,833
Deferred taxes – PRC			-			82,622			-			160,826
		$	2,048,722		$	1,975,189		$	2,791,042		$	3,309,659

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2013			2012			2013			2012
Statutory income tax rate		25	%		25	%		25	%		25	%
Non-deductible expenses		1	%		0	%		1	%		0	%
US federal net operating loss		2	%		1	%		2	%		2	%
Effective tax rate		28	%		26	%		28	%		27	%

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2013 and December 31, 2012 are as follows:

	June 30,			December 31,
	2013			2012
Deferred tax liabilities	$	-		$	-
Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	7,094		$	6,973
Impairment on property, plant and equipment		472,812			464,778
Exploration costs		1,812,721			1,781,921
Compensation costs of unexercised stock options		1,990,360			1,809,378
US federal net operating loss		8,876,646			8,809,935
Total deferred tax assets		13,159,633			12,872,985
Valuation allowance		(10,867,006	)		(10,619,313	)
Net deferred tax asset	$	2,292,627		$	2,253,672
Current deferred tax asset	$	7,094		$	6,973
Long-term deferred tax asset	$	2,285,533		$	2,246,699

The increase in valuation allowance for each of the three-month periods ended June 30, 2013 and 2012 is $148,308 and $106,382, respectively, and six-month periods ended June 30, 2013 and 2012 is $247,693 and $330,313, respectively.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2013 and December 31, 2012.

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9. TAXES PAYABLE

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

9. TAXES PAYABLE

NOTE 9 – TAXES PAYABLE

Taxes payable consists of the following:

	June 30,		December 31,
	2013		2012
Income tax payable	$	2,129,332	$	606,190
Mineral resource compensation fee payable		366,583		239,776
Value added tax payable		1,065,876		771,673
Land use tax payable		940,364		888,349
Other tax payables		213,398		350,670
Total	$	4,715,553	$	2,856,658

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16. CUSTOMER CONCENTRATION

6 Months Ended

Jun. 30, 2013

Risks and Uncertainties [Abstract]

16. CUSTOMER CONCENTRATION

NOTE 16 – CUSTOMER CONCENTRATION

The Company sells a substantial portion of its products to a limited number of customers.  During the three-month and six-month periods ended June 30, 2013, the Company sold 40.0% and 40.3% of its products to its top five customers, respectively. As of June 30, 2013, amounts due from these customers were $16,955,022. During the three-month and six-month periods ended June 30, 2012, the Company sold 42.8% and 43.4% of its products to its top five customers, respectively. As of June 30, 2012, amounts due from these customers were $19,888,840. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

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14. BUSINESS SEGMENTS

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

14. BUSINESS SEGMENTS

NOTE 14 – BUSINESS SEGMENTS

The Company has three reportable segments:  bromine, crude salt and chemical products. The reportable segments are consistent with how management views the markets served by the Company and the financial information that is reviewed by its chief operating decision maker.

An operating segment’s performance is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income not associated with the operations of the segment. These corporate costs (income) are separately stated below and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All the customers are located in PRC.

Three-Month Period Ended June 30, 2013	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	17,473,276	$	3,629,976	$	11,750,644	$	32,853,896	$	-		$	32,853,896
Net revenue (intersegment)		777,746		-		-		777,746		-			777,746
Income (loss) from operations before taxes		3,882,612		728,638		3,572,036		8,183,286		(804,511	)		7,378,775
Income taxes		941,322		209,755		897,645		2,048,722		-			2,048,722
Income (loss) from operations after taxes		2,941,290		518,883		2,674,391		6,134,564		(804,511	)		5,330,053
Total assets		174,524,258		56,693,091		60,193,635		291,410,984		86,337			291,497,321
Depreciation and amortization		4,309,920		1,687,487		880,645		6,878,052		-			6,878,052
Capital expenditures		-		-		-		-		-			-
Write-off / Impairment		-		-		-		-		-			-

Three-Month Period Ended June 30, 2012	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	17,539,429	$	3,779,658	$	9,995,759	$	31,314,846	$	-		$	31,314,846
Net revenue (intersegment)		808,596		-		-		808,596		-			808,596
Income (loss) from operations before taxes		3,933,561		888,555		3,007,381		7,829,497		(196,294	)		7,633,203
Income taxes		1,018,311		198,783		758,095		1,975,189		-			1,975,189
Income (loss) from operations after taxes		2,915,250		689,772		2,249,286		5,854,308		(196,294	)		5,658,014
Total assets		158,305,734		56,621,811		50,634,822		265,562,367		425,477			265,987,844
Depreciation and amortization		3,509,790		1,442,179		655,456		5,607,425		-			5,607,425
Capital expenditures		6,567,296		1,281,991		-		7,849,287		-			7,849,287
Write-off / Impairment		763,043		148,952		-		911,995		-			911,995

Six-Month Period Ended June 30, 2013	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate					Total
Net revenue (external customers)	$	29,207,643	$	6,080,762	$	20,068,071	$	55,356,476	$	-		$	55,356,476
Net revenue (intersegment)		1,392,476		-		-		1,392,476		-			1,392,476
Income (loss) from operations before taxes		4,210,425		1,266,858		5,668,715		11,145,998		(1,161,775	)		9,984,223
Income taxes		1,121,955		243,020		1,426,067		2,791,042		-			2,791,042
Income (loss) from operations after taxes		3,088,471		1,023,837		4,242,648		8,354,956		(1,161,775	)		7,193,181
Total assets		174,524,258		56,693,091		60,193,635		291,410,984		86,337			291,497,321
Depreciation and amortization		8,687,891		3,246,686		1,750,962		13,685,539		-			13,685,539
Capital expenditures		-		-		-		-		-			-
Write-off / Impairment		-		-		-		-		-			-

Six-Month Period Ended June 30, 2012	Bromine*		Crude  Salt*		Chemical  Products		Segment  Total		Corporate			Total
Net revenue (external customers)	$	30,993,311	$	6,054,582	$	18,075,627	$	55,123,520	$	-		$	55,123,520
Net revenue (intersegment)		1,563,153		-		-		1,563,153		-			1,563,153
Income (loss) from operations before taxes		6,401,865		1,437,005		5,250,276		13,089,146		(878,844	)		12,210,302
Income taxes		1,681,209		302,649		1,325,801		3,309,659		-			3,309,659
Income (loss) from operations after taxes		4,720,656		1,134,356		3,924,475		9,779,487		(878,844	)		8,900,643
Total assets		158,305,734		56,621,811		50,634,822		265,562,367		425,477			265,987,844
Depreciation and amortization		7,174,033		2,805,685		1,310,870		11,290,588		-			11,290,588
Capital expenditures		6,567,296		1,281,991		-		7,849,287		-			7,849,287
Write-off / Impairment		763,043		148,952		-		911,995		-			911,995

* Certain common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of respective segment.

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2013			2012			2013			2012
Total segment operating income	$	8,183,286		$	7,829,497		$	11,145,998		$	13,089,146
Corporate costs		(804,511	)		(196,294	)		(1,161,775	)		(878,844	)
Income from operations		7,378,775			7,633,203			9,984,223			12,210,302
Other income (expense)		25,846			30,660			45,683			75,138
Income before taxes	$	7,404,621		$	7,663,863		$	10,029,906		$	12,285,440

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2013.

Number	Customer	Bromine (000’s)	Crude Salt (000’s)	Chemical Products (000’s)	Total Revenue  (000’s)	Percentage of Total Revenue (%)
1	Shandong Morui Chemical Company Limited	$ 2,166	$ 751	$ 1,125	$  4,042	12.3%
TOTAL		$  2,166	$  751	$  1,125	$  4,042	12.3%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2013.

Number	Customer	Bromine (000’s)	Crude Salt (000’s)	Chemical Products (000’s)	Total Revenue  (000’s)	Percentage of Total Revenue (%)
1	Shandong Morui Chemical Company Limited	$ 3,347	$ 1,494	$ 2,055	$  6,896	12.5%
TOTAL		$  3,347	$  1,494	$  2,055	$  6,896	12.5%

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2012.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	1,904	$	727	$	1,109	$	3,740		11.9%
	2	Shouguang City Rongyuan Chemical Company Limited	$	2,257	$	898	$	-	$	3,155		10.1%
TOTAL			$	4,161	$	1,625	$	1,109	$	6,895		22.0%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2012.

Number		Customer	Bromine (000’s)		Crude Salt (000’s)		Chemical Products (000’s)		Total Revenue (000’s)		Percentage of Total Revenue (%)
	1	Shandong Morui Chemical Company Limited	$	3,634	$	1,113	$	2,107	$	6,854		12.4%
	2	Shouguang City Rongyuan Chemical Company Limited	$	4,278	$	1,346	$	-	$	5,624		10.2%
TOTAL			$	7,912	$	2,459	$	2,107	$	12,478		22.6%

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 08, 2013
Document And Entity Information
Entity Registrant Name	GULF RESOURCES, INC.
Entity Central Index Key	0000885462
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		38,368,505
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013

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15. MAJOR SUPPLIERS

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

15. MAJOR SUPPLIERS

NOTE 15 – MAJOR SUPPLIERS

During the three-month and six-month periods ended June 30, 2013, the Company purchased 83.4% and 82.6% of its raw materials from its top five suppliers, respectively.  As of June 30, 2013, amounts due to those suppliers included in accounts payable were $4,289,947. During the three-month and six-month periods ended June 30, 2012, the Company purchased 85.7% and 83.5% of its raw materials from its top five suppliers, respectively.  As of June 30, 2012, amounts due to those suppliers included in accounts payable were $3,305,237. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.