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EX-31.1 - GULF RESOURCES, INC.e609667_ex31-1.htm
 
 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 March 31, 2012
   
 
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.)
     
99 Wenchang Road, Chenming Industrial Park, Shouguang City,
Shandong, China
 
262714
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: +86 (536) 567 0008

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant 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 x
Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of May 1, 2012, the registrant had outstanding 34,560,743 shares of common stock.
 
 

 
       
 
Part I – Financial Information
 
Item 1. Financial Statements
1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
30
Item 4. Controls and Procedures
30
Part II – Other Information
 
Item 1. Legal Proceedings
31
Item 1A. Risk Factors
31
Item 2. Unregistered Shares of Equity Securities and Use of Proceeds
31
Item 3. Defaults Upon Senior Securities
31
Item 4. Reserved and Removed
31
Item 5. Other Information
31
Item 6. Exhibits
32
Signatures
33
 
 
PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
GULF RESOURCES, INC.
 AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
(UNAUDITED)

   
March 31, 2012
   
December 31, 2011
 
Current Assets
               
Cash
 
$
81,867,417
   
$
78,576,060
 
Accounts receivable
   
27,278,642
     
21,919,828
 
Inventories
   
4,766,966
     
4,437,972
 
Prepayments and deposits
   
363,925
     
307,600
 
Prepaid land leases
   
105,237
     
46,582
 
Deferred tax assets
   
167,511
     
228,702
 
Total Current Assets
   
114,549,698
     
105,516,744
 
Non-Current Assets
               
Property, plant and equipment, net
   
141,740,566
     
147,200,740
 
Property, plant and equipment under capital leases, net
   
2,252,855
     
2,336,920
 
Prepaid land leases, net of current portion
   
760,293
     
763,814
 
Deferred tax assets
   
2,495,065
     
2,509,481
 
Total non-current assets
   
147,248,779
     
152,810,955
 
Total Assets
 
$
261,798,477
   
$
258,327,699
 
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Accounts payable and accrued expenses
 
$
7,742,643
   
$
7,373,643
 
Retention payable
   
541,521
     
556,450
 
Capital lease obligation, current portion
   
244,066
     
189,742
 
Taxes payable
   
3,537,567
     
4,058,550
 
Total Current Liabilities
   
12,065,797
     
12,178,385
 
Non-Current Liabilities
               
Capital lease obligation, net of current portion
   
3,039,619
     
3,036,558
 
Total Liabilities
 
$
15,105,416
   
$
15,214,943
 
 
               
Stockholders’ Equity
               
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding
 
$
     
$
   
COMMON STOCK; $0.0005 par value; 100,000,000 shares authorized; 34,745,342 and 34,745,342 shares issued; and 34,560,743 and 34,560,743 shares outstanding as of March 31, 2012 and December 31, 2011, respectively
   
17,373
     
17,373
 
Treasury stock; 184,599 shares as of March 31, 2012 and December 31, 2011 at cost
   
(500,000
)
   
(500,000
)
Additional paid-in capital
   
74,123,279
     
74,107,979
 
Retained earnings unappropriated
   
135,697,275
     
133,314,581
 
Retained earnings appropriated
   
15,313,970
     
14,409,557
 
Cumulative translation adjustment
   
22,041,164
     
21,763,266
 
Total Stockholders’ Equity
   
246,693,061
     
243,112,756
 
Total Liabilities and Stockholders’ Equity
 
$
261,798,477
   
$
258,327,699
 

The accompanying notes are an integral part of these consolidated financial statements.
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Expressed in U.S. dollars)
(UNAUDITED)

   
Three-Month Period Ended
March 31,
 
   
2012
   
2011
 
             
NET REVENUE
           
Net revenue
 
$
23,808,674
   
$
45,378,532
 
                 
OPERATING EXPENSES/INCOME
               
Cost of net revenue
   
(17,115,882
)
   
(20,591,384
)
Sales, marketing and other operating expenses
   
(17,764
)
   
(24,012
)
Research and development cost
   
(42,798
)
   
(180,337
)
General and administrative expenses
   
(2,112,205
)
   
(4,341,291
)
Other operating income
   
57,074
     
22,785
 
     
(19,231,575
)
   
(25,114,239
)
                 
INCOME FROM OPERATIONS
   
4,577,099
     
20,264,293
 
                 
OTHER INCOME (EXPENSE)
               
Interest expense
   
(54,412
)
   
(42,216
)
Interest income
   
98,890
     
76,044
 
INCOME BEFORE TAXES
   
4,621,577
     
20,298,121
 
                 
INCOME TAXES
   
(1,334,470
)
   
(5,933,122
)
NET INCOME
 
$
3,287,107
   
$
14,364,999
 
                 
COMPREHENSIVE INCOME:
               
NET INCOME
 
$
3,287,107
   
$
14,364,999
 
OTHER COMPREHENSIVE INCOME
               
- Foreign currency translation adjustments
   
277,898
     
2,021,635
 
COMPREHENSIVE INCOME
 
$
3,565,005
   
$
16,386,634
 
                 
EARNINGS PER SHARE:
               
BASIC
 
$
0.10
   
$
0.41
 
DILUTED
 
$
0.10
   
$
0.40
 
                 
WEIGHTED AVERAGE NUMBER OF SHARES:
               
                 
BASIC
   
34,560,743
     
34,735,912
 
DILUTED
   
34,561,520
     
35,590,982
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
   
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE-MONTH PERIOD ENDED MARCH 31, 2012
(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, 2011
   
34,745,342
     
34,560,743
     
184,599
     
17,373
     
(500,000
)
   
74,107,979
     
14,409,557
     
133,314,581
     
21,763,266
     
243,112,756
 
Translation adjustment
 
- 
     
-
     
-
   
- 
           
- 
   
- 
   
- 
     
277,898
     
277,898
 
Issuance of stock options to employees
   
-
     
-
     
-
     
-
     
-
     
15,300
     
-
     
-
     
-
     
15,300
 
Net income for three-month period ended March 31, 2012
 
- 
     
-
     
-
   
- 
     
-
   
- 
   
- 
     
3,287,107
   
- 
     
3,287,107
 
Transfer to statutory common reserve fund
 
-
     
-
     
-
   
-
     
-
   
-
   
904,413
     
(904,413
)
 
-
     
-
 
BALANCE AT MARCH 31, 2012
   
34,745,342
     
34,560,743
     
184,599
     
17,373
     
(500,000
)
   
74,123,279
     
15,313,970
     
135,697,275
     
22,041,164
     
246,693,061
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
(UNAUDITED)

   
Three-Month Period Ended March 31,
 
   
2012
   
2011
 
   
 
   
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
   
 
 
Net income
 
$
3,287,107
   
$
14,364,999
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Interest on capital lease obligation
   
54,020
     
41,715
 
Amortization of prepaid land leases
   
54,871
     
29,842
 
Depreciation and amortization
   
5,683,163
     
3,348,519
 
Exchange loss on inter-company balances
   
24,322
     
-
 
Stock-based compensation expense
   
15,300
     
3,138,000
 
Deferred tax asset
   
78,204
   
7,888
 
Changes in assets and liabilities:
             
Accounts receivable
   
(5,325,631
)
   
(5,750,002
)
Inventories
   
(323,846
)
   
898,399
 
Prepayments and deposits
   
(56,325
)
   
787,313
 
Accounts payable and accrued expenses
   
362,206
     
2,502,453
 
Retention payable
   
(15,458
)
   
-
 
Taxes payable
   
(523,983
)
   
2,372,754
 
Net cash provided by operating activities
   
3,313,950
     
21,741,880
 
               
CASH FLOWS USED IN INVESTING ACTIVITIES
             
Additions of prepaid land leases
   
(109,076
)
   
(24,760
)
Purchase of property, plant and equipment
   
-
     
(3,038,000
)
Net cash used in investing activities
   
(109,076
)
   
(3,062,760
)
               
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
   
86,483
     
771,565
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
3,291,357
     
19,450,685
 
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
   
78,576,060
     
68,494,480
 
CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
81,867,417
   
$
87,945,165
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Income taxes
 
$
1,689,197
   
$
4,335,981
 
Interest paid
 
$
-
   
$
-
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
               
Inception of capital lease obligation for acquiring property, plant and equipment
 
$
-
   
$
3,127,913
 

The accompanying notes are an integral part of these consolidated financial statements.
 
     
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)           Basis of Presentation

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”). The balance sheet at December 31, 2011 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, 2011 (the “2011 Form 10-K”).

In the opinion of management, the unaudited financial information for the quarter ended March 31, 2012 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  2011 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.

Certain comparative amounts in the accompanying condensed financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on previously reported condensed net income or stockholders’ equity.
 
(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 March 31, 2012 and December 31, 2011, allowance for doubtful accounts were nil. No allowances for doubtful accounts were charged to the income statement for the three-month periods ended March 31, 2012 and 2011.

(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 $81,817,417 and $78,526,060 with these institutions as of March 31, 2012 and December 31, 2011, 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 93% and all the balances of accounts receivable as of March 31, 2012 and December 31, 2011, respectively, are outstanding for less than three months. The remaining 7% of the balances of accounts receivable as of March 31, 2012 are subsequently settled.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(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 $130,118 and $121,375 for the three-month periods ended March 31, 2012 and 2011, 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 $80,607 and $113,571 for the three-month periods ended March 31, 2012 and 2011, respectively.

(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.
 
  
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)

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

(i)           Recoverability of Long-lived Assets – Continued

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 period ended March 31, 2012 and 2011, the Company determined that no further impairment were required after going through the impairment testing to the operating long-lived assets (property, plant and equipment, both owned and under capital leases, net).

(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. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 1,662,044 and 63,647 shares for the three-month periods ended March 31, 2012 and 2011, respectively.

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

   
Three-Month Period Ended
March 31,
     
2012
     
2011
 
Numerator
               
Net income
 
$
3,287,107
   
$
14,364,999
 
                 
Denominator
               
Basic: Weighted-average common shares outstanding during the period 
   
34,560,743
     
34,735,912
 
Add: Dilutive effect of stock options
   
777
     
855,070
 
Diluted
   
34,561,520
     
35,590,982
 
                 
Net income per share
               
Basic
 
$
0.10
   
$
0.41
 
Diluted
 
$
0.10
   
$
0.40
 
 
(k)           New Accounting Pronouncements

No accounting standards and guidance with an effective date during the three-month period ended March 31, 2012 or issued during 2012 had or are expected to have a significant impact on the Company’s condensed consolidated financial statements.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 2 – ASSETS ACQUISITIONS
 
Pursuant to the lease contract signed by SCHC on November 5, 2010 with State-Operated Shouguang Qingshuibo Farm (the Lessor”), the Company recognized in January 2011 (1) a 20-year capital lease of 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, with an annual payment of Renminbi (“RMB”) 1,877,000 (approximately $295,365) up to December 31, 2030 to the Lessor, aggregating $3,127,913 (the present value of the minimum lease payments); and (2) a 20-year land lease and rights to new extraction wells on which the aforesaid real property, production facilities, channels and ducts, other production equipment and the buildings are situated, with an annual payment of RMB3,123,000 (approximately $495,651) up to December 31, 2030 to the Lessor. The lease was accounted for under FASB ASC 840-10-25 “Leases - Recognition” and the cost of $3,127,913 was included in property, plant equipment under capital lease in the first quarter of 2011.
 
 
The Company also enhanced the new plant and machinery leased in the first quarter of 2011 by making capital improvement in reconstruction and renovation work at a cost of approximately $3,050,400, which was recorded as buildings and plant and machinery, for the operation of the aforesaid real property, production facilities, channels and ducts, other production equipment and the buildings located on the property.

NOTE 3 – INVENTORIES

Inventories consist of:
   
March 31,
2012
   
December 31,
2011
 
             
Raw materials
 
$
836,055
   
$
848,596
 
Finished goods
   
3,945,797
     
3,604,247
 
Allowance for obsolete and slow-moving inventory
   
(14,886
)
   
(14,871
)
   
$
4,766,966
   
$
4,437,972
 
 
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 March 31, 2012 and 2011, amortization of prepaid land lease totaled $54,871 and $29,842, 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 of which the Company could not obtain land use rights certificates covers a total of approximately 101.52 square kilometers of aggregate carrying value of $822,096 and approximately 101.52 square kilometers of aggregate carrying value of $766,748 as at March 31, 2012 and December 31, 2011, respectively.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:
 
   
March 31,
2012
   
December 31,
2011
 
At cost:
           
Mineral rights
 
$
6,325,120
   
$
6,318,750
 
Buildings
   
41,015,836
     
40,974,528
 
Plant and machinery
   
137,000,357
     
136,862,383
 
Motor vehicles
   
7,031
     
7,024
 
Furniture, fixtures and office equipment
   
4,061,446
     
4,057,356
 
Total
   
188,409,790
     
188,220,041
 
Less: Accumulated depreciation and amortization
   
(46,669,224
)
   
(41,019,301
)
Net book value
 
$
141,740,566
   
$
147,200,740
 
 
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 Company could not obtain property ownership certificates covering certain properties of aggregate carrying value of $30,827,784 and $33,108,012 as at March 31, 2012 and December 31, 2011, respectively.

During the three-month period ended March 31, 2012, depreciation and amortization expense totaled $5,596,921, of which $5,242,333 and $354,588 were recorded as cost of net revenue and administrative expenses, respectively. During the three-month period ended March 31, 2011, depreciation and amortization expense totaled $3,348,519, of which $2,974,742 and $373,777 were recorded as cost of net revenue and administrative expenses, respectively. 

For the three-month periods ended March 31, 2012 and 2011, ordinary repair and maintenance expenses were $127 and $50,633, respectively.

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

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

   
March 31,
2012
   
December 31,
2011
 
At cost:
           
Buildings
 
$
130,736
   
$
130,605
 
Plant and machinery
   
2,478,957
     
2,476,460
 
Total
   
2,609,693
     
2,607,065
 
Less: Accumulated depreciation and amortization
   
(356,838
)
   
(270,145
)
Net book value
 
$
2,252,855
   
$
2,336,920
 
 
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 period ended March 31, 2012, depreciation and amortization expense totaled $86,242, which was recorded as cost of net revenue. No depreciation and amortization expense was recorded during the three-month period ended March 31, 2011 as the reconstruction and renovation work of the abovementioned property, plant and equipment was completed in late March 2011.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
March 31,
   
December 31,
 
   
2012
   
2011
 
Accounts payable
 
$
4,933,961
   
$
3,645,804
 
Salary payable
   
142,886
     
132,454
 
Social security insurance contribution payable
   
50,175
     
39,129
 
Amount due to a contractor
   
-
     
1,422,042
 
Price adjustment funds
   
1,187,733
     
1,031,685
 
Other payables
   
1,427,888
     
1,102,529
 
Total
 
$
7,742,643
   
$
7,373,643
 
 
NOTE 8 – RELATED PARTY TRANSACTIONS

During the three-month period ended March 31, 2012, the Company borrowed a sum of $175,000, 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:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
Income tax payable
 
$
1,329,397
   
$
1,761,452
 
Mineral resource compensation fee payable
   
284,760
     
410,719
 
Value added tax payable
   
875,767
     
540,463
 
Land use tax payable
   
887,065
     
1,081,117
 
Other tax payables
   
160,578
     
264,799
 
Total
 
$
3,537,567
   
$
4,058,550
 
   
NOTE 10 – CAPITAL LEASE OBLIGATIONS
 
The components of capital lease obligations are as follows:
 
 
Imputed
 
March 31,
 
December 31,
 
Interest rate
 
2012
 
2011
Total capital lease obligations
6.7%
 
$
3,283,685
   
$
3,226,300
 
Less: Current portion
     
(244,066
)
   
(189,742
)
Capital lease obligations, net of current portion
   
$
3,039,619
   
$
3,036,558
 

Interest expenses from capital lease obligations amounted to $54,020 and $41,715 for the three-month periods ended March 31, 2012 and 2011, respectively, were charged to the income statements.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 11 – 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 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 March 31, 2012 for SCHC and SYCI is 32% 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 2012, 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 $2.77 per share and the options vested immediately. The options were valued at $15,300 fair value, with assumed 95.89% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.21% and no dividend yield. For the three-month period ended March 31, 2012, $15,300 was recognized as general and administrative expenses.

The following table summarizes all Company stock option transactions between January 1, 2012 and March 31, 2012.
 
   
Number of Option
and Warrants
Outstanding
   
Number of Option
and Warrants
Non-vested
   
Number of Option
and Warrants
Vested
   
Range of
Exercise Price per Common Share
 
Balance, January 1, 2012
   
1,144,471
     
-
     
1,144,471
    $
2.41 - $12.60
 
Granted during the three-month
    period ended March 31, 2012
   
12,500
     
12,500
     
-
    $
2.77
 
Vested during the three-month period
    ended March 31, 2012
   
-
     
(12,500
)
   
12,500
    $
2.77
 
Balance, March 31, 2012
   
1,156,971
     
-
     
1,156,971
    $
2.41 - $12.60
 

   
Stock and Warrants Options Outstanding
           
Weighted Average
 
Weighted Average
           
Remaining
 
Exercise Price of
   
Outstanding at March 31, 2012
 
Range of
Exercise Prices
 
Contractual Life
 (Years)
 
Options Currently
 Outstanding
Exercisable and outstanding
 
1,156,971
 
$2.41 - $12.60
 
2.67
 
$   6.26
 
The weighted average grant-date fair values as at March 31, 2012 and December 31, 2011 were $7.24 and $7.29, respectively.

At March 31, 2012, the aggregate intrinsic value of the stock options and warrants was $1,382,612.
 
    
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
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 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 periods ended March 31, 2012 and 2011, 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 periods ended March 31, 2012 and 2011.

(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 periods ended March 31, 2012.  The applicable statutory tax rates for the three-month periods ended March 31, 2012 and 2011 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 March 31, 2012 and December 31, 2011, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $185,539,607 and $180,939,187, 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 March 31, 2012 and December 31, 2011, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of March 31, 2012 and December 31, 2011, the unrecognized WHT are $8,194,931 and $7,965,999, respectively.
 
The components of the provision for income taxes from continuing operations are:
 
   
Three-Month Period Ended March 31,
     
2012
     
2011
 
Current taxes – PRC
  $ 1,256,266     $ 5,925,234  
Deferred taxes – PRC
    78,204       7,888  
    $ 1,334,470     $ 5,933,122  
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 13 – INCOME TAXES – Continued

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 March 31,
 
Reconciliations
             
2012
   
2011
 
Statutory income tax rate
                   
25
%
   
25
%
US federal net operating loss
                   
4
%
   
4
%
Effective tax rate
                   
29
%
   
29
%

Significant components of the Company’s deferred tax assets and liabilities at March 31, 2012 and December 30, 2011 are as follows:

   
March 31,
   
December 31,
 
 
2012
   
2011
 
Deferred tax liabilities
 
$
-
   
$
-
 
                 
Deferred tax assets:
               
Allowance for obsolete and slow-moving inventories
 
$
3,721
   
$
3,718
 
Impairment on property, plant and equipment
   
639,676
     
639,031
 
Exploration costs
   
1,794,238
     
1,797,391
 
Repair and maintenance costs
   
163,790
     
224,984
 
Property, plant and equipment
   
77,208
     
81,060
 
Property, plant and equipment under capital leases
   
(16,057
)
   
(8,001
)
US federal net operating loss
   
10,335,751
     
10,111,821
 
Total deferred tax assets
   
12,998,327
     
12,850,004
 
Valuation allowance
   
(10,335,751
)
   
(10,111,821
)
Net deferred tax asset
 
$
2,662,576
   
$
2,738,183
 
                 
Current deferred tax asset
 
$
167,511
   
$
228,702
 
Long-term deferred tax asset
 
$
2,495,065
   
$
2,509,481
 

The increase in valuation allowance for each of the three-month periods ended March 31, 2012 and 2011 is $223,930 and $1,160,231, respectively.

There was no unrecognized tax benefits and accrual for uncertain tax positions as of March 31, 2012 and December 31, 2011.

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. The Company manages its sensors and controls businesses as components of an enterprise for which separate information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 14 – BUSINESS SEGMENTS – Continued

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.

 Three-Month Period Ended March 31, 2012
 
Bromine *
   
Crude
 Salt *
   
Chemical
 Products
   
Segment
 Total
   
Corporate
   
Total
 
Net revenue
(external customers)
 
$
13,453,882
   
$
2,274,924
   
$
8,079,868
   
$
23,808,674
   
$
-
   
$
23,808,674
 
Net revenue
(intersegment)
   
754,557
     
-
     
-
     
754,557
     
-
     
754,557
 
Income (loss) from operations before taxes
   
2,468,304
     
548,450
     
2,242,895
     
5,259,649
     
(682,550
)
   
4,577,099
 
Income taxes
   
662,898
     
103,866
     
567,706
     
1,334,470
     
-
     
1,334,470
 
Income (loss) from operations after taxes
   
1,805,406
     
444,584
     
1,675,189
     
3,925,179
     
(682,550
)
   
3,242,629
 
Total assets
   
160,068,266
     
52,592,746
     
48,624,781
     
261,285,793
     
512,684
     
261,798,477
 
Depreciation and amortization
   
3,664,242
     
1,363,506
     
655,415
     
5,683,163
     
-
     
5,683,163
 
Capital expenditures
   
-
     
-
     
-
     
-
     
-
     
-
 
Write-off / Impairment 
   
-
     
-
     
-
     
-
     
-
     
-
 

 Three-Month Period Ended March 31, 2011
 
Bromine *
   
Crude
 Salt *
   
Chemical
 Products
   
Segment
 Total
   
Corporate
   
Total
 
Net revenue
(external customers)
 
$
30,149,316
   
$
5,034,334
   
$
10,194,882
   
$
45,378,532
   
$
-
   
$
45,378,532
 
Net revenue
(intersegment)
   
620,716
     
-
     
-
     
620,716
     
-
     
620,716
 
Income (loss) from operations before taxes
   
16,372,899
     
3,946,918
     
3,356,537
     
23,676,354
     
(3,412,061
)
   
20,264,293
 
Income taxes
   
4,275,891
     
813,439
     
843,792
     
5,933,122
     
-
     
5,933,122
 
Income (loss) from operations after taxes
   
12,097,008
     
3,133,479
     
2,512,745
     
17,743,232
     
(3,412,061
)
   
14,331,171
 
Total assets
   
149,821,845
     
43,799,931
     
41,500,688
     
235,122,464
     
57,716
     
235,180,180
 
Depreciation and amortization
   
2,154,588
     
520,319
     
673,612
     
3,348,519
     
-
     
3,348,519
 
Capital expenditures
   
2,562,848
     
3,667,142
     
-
     
6,229,990
     
-
     
6,229,990
 
Write-off / Impairment 
   
-
     
-
     
-
     
-
     
-
     
-
 
 
* 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.
 
  
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS – Continued
 
         
Three-Month Period Ended March 31,
 
Reconciliations
             
2012
   
2011
 
Total segment operating income
                 
$
5,259,649
   
$
23,676,354
 
Corporate costs
                   
(682,550
)
   
(3,412,061
Income from operations
                   
4,577,099
     
20,264,293
 
Other income
                   
44,478
     
33,828
 
Income before taxes
                 
$
4,621,577
   
$
20,298,121
 

The following table shows the major customer(s) (10% or more) for the three-month period ended March 31, 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
 
$
1,729
   
$
386
   
$
999
   
$
3,114
     
13.1%
 
 2
 
Shouguang City Rongyuan Chemical Company Limited
 
$
2,022
   
$
448
   
$
-
   
$
2,470
     
10.4%
 
TOTAL
     
$
3,751
   
$
834
   
$
999
   
$
5,584
     
23.5%
 

The following table shows the major customer(s) (10% or more) for the three-month period ended March 31, 2011.

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
 
$
5,731
   
$
842
   
$
569
   
$
7,142
     
15.7%
 
 2
 
Shouguang City Rongyuan Chemical Company Limited
 
$
3,762
   
$
1,174
   
$
-
   
$
4,936
     
10.9%
 
TOTAL
     
$
9,493
   
$
2,016
   
$
569
   
$
12,078
     
26.6%
 

NOTE 15 – MAJOR SUPPLIERS

During the three-month period ended March 31, 2012 and 2011, the Company purchased 80.8% and 85.5% of its raw materials from its top five suppliers, respectively.  As of March 31, 2012 and 2011, amounts due to those suppliers included in accounts payable were $4,038,415 and $6,620,359, respectively. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 16 – CUSTOMER CONCENTRATION

The Company sells a substantial portion of its products to a limited number of customers.  During the three-month periods ended March 31, 2012 and 2011, the Company sold 45.3% and 48.1% of its products to its top five customers, respectively. As of March 31, 2012 and 2011, amounts due from these customers were $13,710,553 and $11,710,728, respectively. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)

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 March 31, 2012 and December 31, 2011.

NOTE 18 – RESEARCH AND DEVELOPMENT EXPENSES

The total research and development expense recognized in the income statements during the three-month period ended March 31, 2012 was $42,798, of which the consumption of bromine produced by the Company amounted to $10,740. The total research and development expense recognized in the income statements during the three-month period ended March 31, 2011 was $180,337, of which the consumption of bromine produced by the Company amounted to $30,068.

NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

As of March 31, 2012, 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 seven pieces of land under non-cancelable operating leases, which are fixed in rentals and expired through December 2021, December 2030, December 2031, 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 March 31, 2012.

The following table sets forth the Company’s contractual obligations as of March 31, 2012:

   
Capital Lease Obligations
   
Operating Lease Obligations
   
Purchase Obligations
 
Payable within: 
                 
  the next 12 months
$
298,199
   
$
684,140
   
$
-
 
  the next 13 to 24 months
   
298,199
     
777,095
     
-
 
  the next 25 to 36 months
   
298,199
     
787,760
     
-
 
the next 37 to 48 months
   
298,199
     
799,800
     
-
 
the next 49 to 60 months
   
298,199
     
811,432
     
-
 
  thereafter
   
4,174,786
     
19,001,379
     
-
 
Total
 
$
5,665,781
   
$
22,861,606
   
$
-
 
Less: Amount representing interest
   
(2,382,096
)
               
Present value of net minimum lease payments
 
$
3,283,685
                 

Rental expenses related to operating leases of the Company amounted to $194,316 and $104,007, which were charged to the income statements for the three-month ended March 31, 2012 and 2011, respectively.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Expressed in U.S. dollars)
(UNAUDITED)

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. On November 7, 2011, the Company filed a motion to dismiss the amended complaint. On December 30, 2011, lead plaintiffs filed an opposition to the Company’s motion to dismiss the amended complaint. The Company filed a reply in further support of its motion to dismiss on February 6, 2012. In response to the Company’s reply in further support of its motion to dismiss, lead plaintiffs filed an objection on February 17, 2012, to certain documents filed by the Company in support of its motion to dismiss. The Company opposed the objection on February 22, 2012, to which lead plaintiffs replied in further support of their objection on February 23, 2012. The Court has not yet ruled on the motion to dismiss nor the objections raised by lead plaintiffs. The Company intends to defend vigorously against the lawsuit.  The Company currently cannot estimate the amount or range of possible losses from this litigation. 
 
The legal costs incurred for the three-month period ended March 31, 2012 in connection with the above legal case amounted to $411,289, which was included in the income statements as general and administrative expenses. 
 
 
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 2011 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 2011 Form 10-K and Item 1A, “Risk Factors” for the year ended December 31, 2011.

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.
 
  
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.

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 periods ended March 31, 2012 and 2011. 

Comparison of the Three-Month Periods Ended March 31, 2012 and 2011

 
Three-Month Period
Ended March 31, 2012
 
Three-Month Period
Ended March 31, 2011
 
% Change
Net revenue
$
23,808,674
   
$
45,378,532
 
 
 
(48
%)
Cost of net revenue
$
(17,115,882
 
$
(20,591,384
 
 
(17
%)
Gross profit
$
6,692,792
   
$
24,787,148
 
 
 
(73
%)
Sales, marketing and other operating expenses
$
(17,764
 
$
(24,012
)
   
(26
%)
Research and development costs
$
(42,798
 
$
(180,337
 
 
(76
%)
General and administrative expenses
$
(2,112,205
 
$
(4,341,291
)
   
(51
%) 
Other operating income
$
57,074
   
$
22,785
 
 
 
150
%
Income from operations
$
4,577,099
   
$
20,264,293
 
 
 
(77
%)
Other income, net
$
44,478
   
$
33,828
 
 
 
31
%
Income before taxes
$
4,621,577
   
$
20,298,121
 
 
 
(77
%)
Income taxes
$
(1,334,470
 
$
(5,933,122
 
 
(78
%)
Net income
$
3,287,107
   
$
14,364,999
 
 
 
(77
%)

Net revenue  Net revenue was $23,808,674 for three-month period ended March 31, 2012, a decrease of approximately $21.6 million (or 48%) as compared to the same period in 2011. This decrease was primarily attributable to the reduction of overall demand for all of our segment products, specifically, (i) revenue from the bromine segment decreased from $30,149,316 for the three-month period ended March 31, 2011 to $13,453,882 for the same period in 2012, a decrease of approximately 55%; (ii) revenue from the crude salt segment decreased from $5,034,334 for the three-month period ended March 31, 2011 to $2,274,924 for the same period in 2012, a decrease of approximately 55%; and (iii) revenue from the chemical products segment decreased from $10,194,882 for the three-month period ended March 31, 2011 to $8,079,868 for the same period in 2012, a decrease of approximately 21%.

   
Net Revenue by Segment
   
   
Three-Month Period Ended
 
Three-Month Period Ended
 
Percent Decrease
   
March 31, 2012
 
March 31, 2011
 
of Net Revenue
Segment
       
% of total
       
% of total
       
Bromine
 
$
13,453,882
     
56
%
 
$
30,149,316
     
66
%
   
(55
%)
 
Crude Salt
 
$
2,274,924
     
10
%
 
$
5,034,334
     
11
%
   
(55
%)
 
Chemical Products
 
$
8,079,868
     
34
%
 
$
10,194,882
     
23
%
   
(21
%)
 
Total sales
 
$
23,808,674
     
100
%
 
$
45,378,532
     
100
%
   
(48
%)
 


   
Three-Month Period Ended
   
Percentage Change
Bromine and crude salt segments product sold in tonnes
 
March 31, 2012
   
March 31, 2011
   
Increase/(Decrease)
Bromine (excluded volume sold to SYCI)
   
3,770
     
6,560
     
(43
%)
Crude Salt
   
59,836
     
100,511
     
(40
%)
 
   
Three-Month Period Ended
   
Percentage Change
Chemical products segment sold in tonnes
 
March 31, 2012
   
March 31, 2011
   
Increase/(Decrease)
Oil and gas exploration additives
   
2,344
     
4,186
     
(44
%)
Paper manufacturing additives
   
482
     
980
     
(51
%)
Pesticides manufacturing additives
   
798
     
682
     
17
%
Overall
   
3,624
     
5,848
     
(38
%)
 
 
Bromine segment
The decrease in net revenue from our bromine segment was mainly due to the decrease in both the sales volume and selling price of bromine. The sales volume of bromine decreased from 6,560 tonnes for the three-month period ended March 31, 2011 to 3,770 tonnes for the same period in 2012, a decrease of 43%. Despite an increase in the number of our bromine production plants in recent years which maintained our production capacity, sales volume of bromine decreased. The major reason for the decrease in the sales volume of bromine was mainly attributable to the drop in overall demand for bromine as a result of the recent 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.

Due to the drop in demand of bromine as a result of the macro-economic tightening policy, since the second half of 2011, we needed to offer competitive selling prices to our customers to compete with other bromine manufacturers. The average selling price of bromine decreased from $4,596 per tonne for the three-month period ended March 31, 2011 to $3,569 per tonne for the same period in 2012, a decrease of 22%. The average selling price for this quarter remained relatively stable as compared with the three-month period ended December 31, 2011 ($3,716 per tonne). We expect the average selling price of bromine will remain at current levels through the end of 2012 should the PRC government’s macro-economic tightening policy remain in place. The table below shows the changes in the average selling price and changes in the sales volume of bromine for three-month period ended March 31, 2012 from the same period in 2011.

   
Three-Month Period
Ended March 31,
Increase / (Decrease) in net revenue of bromine as a result of:
 
2012 vs. 2011
Decrease in average selling price
 
$
(5,303,762
)
Decrease in sales volume
 
$
(11,391,672
Total effect on net revenue of bromine
 
$
(16,695,434

Crude salt segment
The decrease in net revenue from our crude salt segment was mainly due to the decrease in both the average selling price and sales volume of crude salt. The average selling price of crude salt decreased from $50.09 per tonne for the three-month period ended March 31, 2011 to $38.02 per tonne for the same period in 2012, a decrease of 24%, and the sales volume of crude salt also decreased by nearly 40% from 100,511 tonnes for the three-month period ended March 31, 2011 to 59,836 tonnes for the same period in 2012. Similar to the bromine segment, the decrease in both the average selling price and sales volume was a result of the macro-economic tightening policy imposed by the PRC government beginning in the second half of 2011 to slow down the economy. This policy resulted in, among other things, the decrease in the demand for crude salt for downstream production of chlorine alkali and use in chemical, food and beverage industries. The decrease in overall sales volume was also a result of the decrease in sales volume of bromine in this quarter, which reduced the wastewater available for the production of crude salt. 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 March 31, 2012 from the same period in 2011.

   
Three-Month Period
Ended March 31,
Increase / (Decrease) in net revenue of crude salt as a result of:
 
2012 vs. 2011
Decrease in average selling price
 
$
(967,556
)
Decrease in sales volume
 
$
(1,791,854
Total effect on net revenue of crude salt
 
$
(2,759,410

We noted a downward trend  in the average selling price of crude salt since the first quarter of 2011 as we offered competitive selling prices to our customers in order to compete with other crude salt manufacturers. The average selling price decreased from $50.09 per tonne in the first quarter of 2011 to $38.02 per tonne in the first quarter of 2012. We expect the average selling price of crude salt will remain at current levels through the end of 2012 should the PRC government’s macro-economic tightening policy remain in place.
 
 
 
Chemical products segment
   
Product Mix of Chemical Products Segment
 
Percent
   
Three-Month Period Ended
 
Three-Month Period Ended
 
Change of
   
March 31, 2012
 
March 31, 2011
 
Net Revenue
Chemical Products
       
% of total
       
% of total
       
Oil and gas exploration additives
 
$
4,161,559
     
52
%
 
$
7,199,601
     
71
%
   
(42
%)
 
Paper manufacturing additives
 
$
680,533
     
8
%
 
$
1,246,030
     
12
%
   
(45
%)
 
Pesticides manufacturing additives
 
$
3,237,776
     
40
%
 
$
1,749,251
     
17
%
   
85
%
 
Total sales
 
$
8,079,868
     
100
%
 
$
10,194,882
     
100
%
   
(21
%)
 

Net revenue from our chemical products segment decreased from $10,194,882 for the three-month period ended March 31, 2011 to $8,079,868 for the same period in 2012, a decrease of approximately 21%. The decrease was mainly attributable to the drop 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 $4,161,559 (or 52%) and $7,199,601 (or 71%) of our chemical segment revenue for the three-month periods ended March 31, 2012 and 2011, respectively, with a decrease of $3,038,042, or 42%. Net revenue from our paper manufacturing additives decreased from $1,246,030 for the three-month period ended March 31, 2011 to $680,533 for the same period in 2012, a decrease of approximately 45%. We believe that as result of the recent macro-economic tightening policy imposed by the PRC government to slow down the economy, the overall demand for chemical products was reduced, which resulted in a decrease in our volume of both oil and gas exploration additives and paper manufacturing additives sold, which decreased by 44% and 51%, respectively, for the three-month period ended March 31, 2012 as compared with the same period in 2011.

However, the effect of the decrease in net revenue from our chemical products segment was partially offset by the increase in the average selling price for all of our chemical products due to the continuing high price level of oil prices. The average selling price per tonne for our chemical products increased by 3%, 11% and 58% for oil and gas exploration additives, paper manufacturing additives and pesticides manufacturing additives, respectively, for the three-month period ended March 31, 2012 as compared with the same period in 2011. In particular, the PRC government continued to support expansion of agricultural related products, which supported the growth in sales of our pesticides manufacturing additives. Also, we successfully converted the production equipment from wastewater treatment chemical additive to pharmaceutical and agricultural chemical additives, which contributed higher profit margins than other chemical products. 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 March 31, 2012 from the same period in 2011.
 
Increase / (Decrease) in net revenue,
for the three-month period ended March 31,
2012 vs. 2011, as a result of:
 
Oil and gas exploration additives 
 
Paper manufacturing additives
 
Pesticides manufacturing additives
 
Total
Increase in average selling price
 
$
181,160
   
$
102,658
   
$
1,104,435
   
$
1,388,253
 
Increase / (Decrease) in sales volume
 
$
(3,219,202
)
 
$
(668,155
)
 
$
384,090
   
$
(3,503,267
)
Total effect on net revenue of chemical products
 
$
(3,038,042
)
 
$
(565,497
)
 
$
1,488,525
   
$
(2,115,014
)
 
Cost of Net Revenue
 
   
Cost of Net Revenue by Segment
 
% Change
   
Three-Month Period Ended
 
Three-Month Period Ended
 
of Cost of
   
March 31, 2012
 
March 31, 2011
 
Net Revenue
Segment
       
% of total
       
% of total
       
Bromine
 
$
9,844,496
     
58
%
 
$
13,249,451
     
64
%
   
(26
%)
 
Crude Salt
 
$
1,538,741
     
9
%
 
$
1,005,394
     
5
%
   
53
%
 
Chemical Products
 
$
5,732,645
     
33
%
 
$
6,336,539
     
31
%
   
(10
%)
 
Total
 
$
17,115,882
     
100
%
 
$
20,591,384
     
100
%
   
(17
%)
 

Cost of net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $17,115,882 for three-month period ended March 31, 2012, a decrease of $3,475,502 (or 17%) as compared to the same period in 2011. The decrease in overall cost of net revenue was mainly attributable to the decrease in volume of products sold as compared to the last comparable period, which was partially offset by the increase in purchase price of raw materials and depreciation and amortization of manufacturing plant and machinery and price adjustment fund, a levy imposed by the local PRC government to our bromine and crude segments since January 2011 for the purpose of enhancing the local PRC government’s ability to adjust the price and stabilize the market price of daily necessities and other important commodities. 
 
 
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 (ii)
 
Three-month period ended March 31, 2011
   
41,547
 (i)
   
60%
 
Three-month period ended March 31, 2012
   
44,547
     
37%
 
Variance of the three-month periods ended March 31, 2012 and 2011
   
3,000
 (iii)
   
(23%
)

(i) Annual production capacity for the three-month period ended March 31, 2011 was adjusted with the appraisal report carried out by an international appraisal firm, Grant Sherman Appraisal Limited, in October 2011.

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

(iii) The increase in 3,000 tonnes production capacity represents the management’s estimated capacity of Factory No. 10 acquired in late December 2011.

Our utilization ratio decreased by 23% for the three-month period ended March 31, 2012 as compared with the same period in 2011. The decrease in utilization and hence the sales volume of bromine was mainly attributable to the drop in overall demand for bromine as a result of the macro-economic tightening policy imposed by the PRC government to slow down the economy, which reduced our production volume since mid-2011.

In view of the trend of a decrease in the bromine concentration of the brine water being extracted at our production facilities as explained in 2011 Form 10-K, and in order to reduce the leakage rate and attempt to recover the annual production capacity of bromine and crude salt to a higher level in the future, we decided to carry out large scale enhancement work to replace all the eroded protective shells within a four year timeframe, which work commenced in the second quarter of 2011. During the three-month period ended March 31, 2012, no such enhancement work was carried out due to inappropriate weather conditions. We expect to resume the enhancement work in the second and third quarters of 2012 if there are appropriate weather conditions.

Bromine segment
For the three-month period ended March 31, 2012, the cost of net revenue for the bromine segment was $9,844,496, a decrease of $3,404,955 or 26% over the same period in 2011. The most significant components of the costs of net revenue for the bromine segment were cost of raw materials and finished goods consumed of $4,849,541 (or 49%), depreciation and amortization of manufacturing plant and machinery of $3,370,515 (or 34%) and electricity of $640,249 (or 7%) for the three-month period ended March 31, 2012. For the three-month period ended March 31, 2011, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $8,970,025 (or 68%), depreciation and amortization of manufacturing plant and machinery of $2,074,244 (or 16%) and electricity of $895,025 (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 19% and depreciation and amortization of manufacturing plant and machinery increased by 6%. The decrease in net cost of net revenue was attributable mainly to the decrease in raw material prices, which is largely offset by the increase in depreciation and amortization of manufacturing plant and machinery. The table below represents the major production cost component of bromine per tonne for respective periods:

 
Per tonne production cost
component of bromine segment
 
Three-Month Period Ended
 
Three-Month Period Ended
   
March 31, 2012
 
March 31, 2011
 
% Change
     
% of total
       
% of total
       
Raw materials
 
$
1,286
     
49
%
 
$
1,367
     
68
%
   
(6
%)
 
Depreciation and amortization
 
$
894
     
34
%
 
$
316
     
16
%
   
183
%
 
Electricity
 
$
170
     
7
%
 
$
136
     
7
%
   
25
%
 
Others
 
$
262
     
10
%
 
$
201
     
9
%
   
30
%
 
Production cost of bromine per tonne
 
$
2,612
     
100
%
 
$
2,020
     
100
%
   
29
%
 
 
 
Our production cost of bromine per tonne was $2,612 for the three-month period ended March 31, 2012, an increase of 29% (or $592) as compared to the same period in 2011, which was attributable mainly to the component of depreciation and amortization of manufacturing plant and machinery. The significant percentage increase in depreciation and amortization per tonne by 183% was due to the enhancement projects in late June 2011 to our crude salt fields, extraction wells and transmission channels and ducts, together with the change in the estimated useful life of certain protective shell and transmission channels and ducts from 8 years to 5 years, which accelerated the depreciation and amortization of the plant and machinery. The cost of raw materials consumed per tonne slighted decreased by 6% as compared to the last comparison period, which was mainly attributable to the decrease in the purchase price of raw materials due to the macro-economic tightening policy imposed by the PRC government. Since January 2011, included in our other production cost was a price adjustment fund, a levy charged by the PRC government, of $32 per tonne.

Crude salt segment
The cost of net revenue for our crude salt segment for the three-month period ended March 31, 2012 was $1,538,741, representing an increase of $533,347, or 53%, compared to $1,005,394 for the same period in 2011. The increase in cost was mainly due to the increase in the number of crude salt fields and enhancement projects performed in late June 2011, 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 March 31, 2012 were depreciation and amortization of $1,103,853 (or 72%), resource taxes calculated based on crude salt sold of $189,729 (or 12%) and electricity of $84,051 (or 5%). The significant cost components for the three-month period ended March 31, 2011 were depreciation and amortization of $433,513 (or 43%), resource tax of $262,111 (or 26%) and electricity of $146,155 (15%). The table below represents the major production cost component of crude salt per ton for respective periods:

 
Per tonne production cost
component of crude salt segment
 
Three-Month Period Ended
 
Three-Month Period Ended
   
March 31, 2012
 
March 31, 2011
 
% Change
     
% of total
       
% of total
       
Depreciation and amortization
 
$
18.4
     
72
%
 
$
4.3
     
43
%
   
328
%
 
Resource tax
 
$
3.2
     
12
%
 
$
2.6
     
26
%
   
23
%
 
Electricity
 
$
1.4
     
5
%
 
$
1.5
     
15
%
   
(7
%)
 
Others
 
$
2.7
     
11
%
 
$
1.6
     
16
%
   
69
%
 
Production cost of crude salt per tonne
 
$
25.7
     
100
%
 
$
10.0
     
100
%
   
157
%
 

Our production cost of crude salt per tonne was $25.7 for the three-month period ended March 31, 2012, an increase of 157% (or $15.7) as compared to the same period in 2011, which was attributable mainly to the components of depreciation and amortization of manufacturing plant and machinery and the accrual of the price adjustment fund since the second quarter of 2011. The significant percentage increase in depreciation and amortization per tonne by 328% was due to the enhancement projects performed in late June 2011 to our crude salt fields, extraction wells and transmission channels and ducts, together with the change in the estimated useful life of certain protective shell and transmission channels and ducts from 8 years to 5 years, which accelerated the depreciation and amortization of the plant and machinery. Since the second quarter of 2011, included in our other production cost was a price adjustment fund, a levy charged by PRC government since January 2011, of $0.4 per tonne. Other production costs represented mainly salaries and welfare of labor worked in the crude salt fields.

Chemical products segment
Cost of net revenue for our chemical products segment for the three-month period ended March 31, 2012, was $5,732,645, representing a decrease of $603,894 or 10% over the same period in 2011. The significant costs were cost of raw material and finished goods consumed of $4,806,866 (or 84%) and $5,673,649 (90%) and depreciation and amortization of manufacturing plant and machinery of $640,577 (or 11%) and $395,464 (or 6%) for each of the three-month periods ended March 31, 2012 and 2011, respectively. As the components of our cost of net revenue are fixed levels of depreciation and amortization of our manufacturing plant and machinery and the inflated purchase price of raw materials, the rate of decrease for the cost of net revenue for our chemical products segment was less than that of net revenue.

Gross Profit Gross profit was $6,692,792, or 28%, of net revenue for three-month period ended March 31, 2012 compared to $24,787,148, or 55%, of net revenue for the same period in 2011. The decrease in gross profit percentage was primarily attributable to a drop in the margin percentage in all of our three segments.
 
 
   
Gross Profit by Segment
 
% Point Change
   
Three-Month Period Ended
 
Three-Month Period Ended
 
of Gross
   
March 31, 2012
 
March 31, 2011
 
Profit Margin
Segment
       
Gross Profit Margin
       
Gross Profit Margin
         
Bromine
 
$
3,609,386
     
27
%
 
$
16,899,865
     
56
%
   
(29
%)
   
Crude Salt
 
$
736,183
     
32
%
 
$
4,028,940
     
80
%
   
(48
%)
   
Chemical Products
 
$
2,347,223
     
29
%
 
$
3,858,343
     
38
%
   
(9
%)
   
Total Gross Profit
 
$
6,692,792
     
28
%
 
$
24,787,148
     
55
%
   
(27
%)
   

Bromine segment
For the three-month period ended March 31, 2012, the gross profit margin for our bromine segment was 27% compared to 56% for the same period in 2011. 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 and sales volume in the three-month ended March 31, 2012 was adversely affected. We cut the average selling price of bromine from $4,596 per tonne for the three-month period ended March 31, 2011 to $3,569 per tonne for the same period in 2012, a decrease of 22%, in order to compete with other bromine manufacturers. Nevertheless, the sales volume decreased from 6,560 tonnes for the three-month period ended March 31, 2011 to 3,770 tonnes for the same period in 2012, a decrease of 43%. Also, as mentioned in our 2011 Form 10-K, we completed certain enhancements of our facilities during the second quarter of 2011 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 2012 should the PRC government’s macro-economic tightening policy remain in place.
   
Crude salt segment
For the three-month period ended March 31, 2012 the gross profit margin for our crude salt segment was 32% compared to 80% for the same period in 2011. This significant 48% decrease in our gross profit margin is attributable to (i) the increase in depreciation and amortization of manufacturing facilities as a result of the enhancement projects performed in late June 2011 to our crude fields, extraction wells and transmission channels and ducts as mentioned in our 2011 Form 10-K and (ii) the change in the estimated useful life of certain protective shells and transmission channels and ducts from 8 years to 5 years which accelerated the depreciation and amortization of the plant and machinery. For the three-month period ended March 31, 2012, the average selling price of crude salt increased to $38.02 per tonne, as compared from $50.09 per tonne for the same period in 2011, a decrease of 24%. As previously mentioned, the decrease in gross profit was a result of the macro-economic tightening policy imposed by the PRC government to slow down the economy, which decreased the demand for crude salt for downstream production of chlorine alkali and use in chemical, food and beverage industries.

Chemical products segment
The gross profit margin for our chemical products segment for the three-month period ended March 31, 2012 was 29% compared to 38% for the same period in 2011, a decrease of 9%. As previously mentioned, the decrease in gross profit margin was a result of the decrease in demand for our oil and gas exploration additives and paper manufacturing additives which in turn reduced the sales volume of these chemical products. As sales of oil and gas exploration additives contributed more than 52% of our total chemical products segment’s net revenue, the decrease in demand largely reduced the gross profit margin of our chemical products segment. However, our factory is capable of producing diversified chemical products, such as pesticides manufacturing additives with higher profit margin, the selling price fluctuation of individual chemical products is not expected to have a significant impact on our gross profit margin for overall chemical products.

Research and Development Costs The total research and development costs incurred for the three-month periods ended March 31, 2012 and 2011 were $42,798 and $180,337, respectively, a decrease of 76%.

Research and development costs for the three-month period ended March 31, 2012 represented raw materials used by SYCI for testing the manufacturing routine and samples of the new chemical products production line. Research and development costs for the three-month period ended March 31, 2011 were mostly related to the Co-Op Research and Development Center set up jointly with East China University of Science and Technology in June 2007 to develop new bromine-based chemical compounds and products to be utilized in the pharmaceutical industry, which amounted to $128,716. On June 7, 2011, SYCI and East China University of Science and Technology mutually agreed to terminate the Co-op Research Agreement due to the successful completion of the cooperative research and development tasks related to the development of bromine-related chemical products for us.
 
 
General and Administrative Expenses General and administrative expenses were $2,112,205 for the three-month period ended March 31, 2012, a decrease of $2,229,086 (or 51%) as compared to $4,341,291 for the same period in 2011. The significant decrease of $3,122,700 was primarily due to the decrease in non-cash expenses related to options granted to employees and a warrant issued to our investor relations firm, from $3,138,000 for the three-month period ended March 31, 2011 to $15,300 for the same period in 2012. Such effect was partially offset by the increase in other general and administrative expenses, which attributable to (i) the increase in land use tax expense by $626,541 due to the acquisition and lease of bromine properties and crude salt facilities; and (ii) the legal costs of $411,289 for the three-month period ended March 31, 2012 in connection with the Class Action.

Other Operating Income Other operating income, which represented the sales of wastewater to some of our customers, was $57,074 for the three-month period ended March 31, 2012, an increase of $34,289 from $22,785 for the same period in 2011. 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 three of our customers to sell them our wastewater at market prices.

Income from Operations Income from operations was $4,577,099 for the three-month period ended March 31, 2012 (or 19.2% of net revenue), a decrease of $15,687,194, or approximately 77%, over income from operations for the same period in 2011. The decrease resulted primarily from the decrease in net revenue as a result of (i) the macro-economies tightening policy imposed by the PRC government to slow down the economy, which in turn decrease the demand and selling price of our products; and (ii) the increase in depreciation and amortization of the plant and machinery due to the enhancement projects in late June 2011 to our crude salt fields, extraction wells and transmission channels and ducts, together with the change in the estimated useful life of certain protective shell and transmission channels and ducts from 8 years to 5 years, which accelerated the depreciation and amortization of the plant and machinery.

   
Income from Operations by Segment
   
Three-Month Period Ended
March 31, 2012
 
Three-Month Period Ended
March 31, 2011
Segment:
       
% of total
     
% of total
Bromine
 
$
2,468,304
   
  47%
 
$
16,372,899
   
  69%
Crude Salt
   
548,450
   
  10%
   
3,946,918
   
  17%
Chemical Products
   
2,242,895
   
  43%
   
3,356,537
   
  14%
Income from operations before corporate costs
   
5,259,649
   
100%
   
23,676,354
   
100%
Corporate costs
   
(682,550
)
       
(3,412,061
)
   
Income from operations
 
$
4,577,099
       
$
20,264,293
     

Bromine segment
Income from operations from our bromine segment was $2,468,304 for the three-month period ended March 31, 2012, a decrease of $13,904,595 (or approximately 85%) compared to the same period in 2011. This significant decrease resulted primarily from the decrease in sales volume (contributed a decrease of approximately $11 million) and in average selling price (contributed a decrease of approximately $5 million) as a result of the PRC government’s macro-economies tightening policy which decreased the demand for bromine, which was partially offset by the decrease in the cost of net revenue of bromine of approximately $3.4 million.

Crude salt segment
Income from operations from our crude salt segment was $548,450 for the three-month period ended March 31, 2012, a decrease of $3,398,468 (or approximately 86%) compared to the same period in 2011. This decrease was mainly due to (i) the decrease in both the average selling price and sales volume (contributed an aggregate decrease of approximately $3 million); and (ii) the decrease in the gross profit margin due to the enhancement projects which increased the depreciation of manufacturing facilities.

Chemical products segment
Income from operations from our chemical products segment was $2,242,895 for the three-month period ended March 31, 2012, a decrease of $1,113,642 (or approximately 33%) compared to the same period in 2011. This decrease resulted primarily from the decrease in net revenue of our oil and gas exploration additives and paper manufacturing additives of approximately $3.6 million due to decreased demand, which was partially offset by (i) the increase in net revenue of our pesticides manufacturing additives of approximately $1.5 million; and (ii) the decrease in cost of net revenue of approximately $0.6 million as explained hereinbefore.
 
 
Other Income, Net Other income, net represented bank interest income, net of capital lease interest expense. 
  
Net Income Net income was $3,287,107 for the three-month period ended March 31, 2012, a decrease of $11,077,892 (or approximately 77%) compared to the same period in 2011. This decrease was primarily attributable to the overall decrease in demand for our products 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 both the three-month periods ended March 31, 2012 and 2011 was 29%. The effective tax rate was 4% differ from the PRC statutory income tax rate of 25%, which was due to the US federal net operating loss incurred by Gulf during both periods.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of March 31, 2012, cash and cash equivalents were $81,867,417 as compared to $78,576,060 as of December 31, 2011. The components of this increase of $3,291,357 are reflected below.
 
Statement of Cash Flows
  
   
Three-Month Period Ended March 31,
 
   
2012
   
2011
 
Net cash provided by operating activities
 
$
3,313,950
   
$
21,741,880
 
Net cash used in investing activities
 
$
(109,076
)
 
$
(3,062,760
)
Net cash (used in)/provided by financing activities
 
$
-
   
$
-
 
Effects of exchange rate changes on cash and cash equivalents
 
$
86,483
   
$
771,565
 
Net increase in cash and cash equivalents
 
$
3,291,357
   
$
19,450,685
 
     
For the three-month period ended March 31, 2012, although our operations were affected by the PRC government’s macro-economic tightening policy, 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 three-month periods ended March 31, 2012 and 2011, we had positive cash flow from operating activities of $3.3 million and $21.7 million, respectively, primarily attributable to net income.
   
During the three-month period ended March 31, 2012, cash flow from operating activities of $3.3 million approximated our net income of $3.3 million, which was caused by (i) cash used in working capital of $5.9 million, mainly consisted of increase in accounts receivable and tax paid; and (ii) our net income included substantial non-cash charges of $5.9 million, mainly in form of depreciation and amortization of property, plant and equipment.
 
During the three-month period ended March 31, 2011, cash flow from operating activities of $21.7 million exceeded our net income of $14.4 million, which was caused by (i) cash provided by working capital of $0.8 million, mainly consisted of increase accounts payable and accrued expenses and less amount of tax paid, as partially offset by the increase in accounts receivable for cash used in working capital; and (ii) our net income included substantial non-cash charges of $6.5 million, mainly in form of stock-based compensation and depreciation and amortization of 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 March 31, 2012 and December 31, 2011.
 
   
March 31, 2012
 
December 31, 2011
   
 
   
% of total
         
% of total
 
Aged 1-30 days
  $ 11,250,124       41 %   $ 7,411,018       34 %
Aged 31-60 days
  $ 9,759,925       36 %   $ 9,380,766       43 %
Aged 61-90 days
  $ 4,403,395       16 %   $ 5,128,044       23 %
Aged over 90 days
  $ 1,865,198       7 %   $ -       -  
Total
  $ 27,278,642       100 %   $ 21,919,828       100 %
 
The overall accounts receivable balance as of March 31, 2012 increased by $5,358,814 (or 24%), as compared to those as of December 31, 2011. 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 48 days for the fiscal year 2011 to 90 days for the three-month period ended March 31, 2012. 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 three-month period ended March 31, 2012 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 of March 31, 2012 aged more than 90 days are subsequently settled in April 2012. We perform ongoing credit evaluation on the financial condition of our customers.
 
Inventory
 
Our inventory consists of the following:
   
March 31, 2012
 
December 31, 2011
         
% of total
       
% of total
Raw materials
 
$
836,055
     
17.5
%
 
$
848,596
     
19.1
%
Finished goods
 
$
3,945,797
     
82.8
%
 
$
3,604,247
     
81.2
%
   
$
4,781,852
     
100.3
%
 
$
4,452,843
     
100.3
%
Allowance for obsolete and slowing-moving inventory
 
$
(14,886
)
   
(0.3
%)
 
$
(14,871
)
   
(0.3
%)
Total
 
$
4,766,966
     
100.0
%
 
$
4,437,972
     
100.0
%
 
The gross inventory level as of March 31, 2012 increased by $329,009 (or 7%), as compared to the gross inventory level as of December 31, 2011, which composed mainly increase in crude salt.
 
Raw materials slightly decreased by 1% as of March 31, 2012 as compared to December 31, 2011. 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 March 31, 2012 are fully realizable for production of finished goods without any impairment.
 
Our finished goods are mainly composed 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 29% for the three-month period ended March 31, 2012 (31% for fiscal year 2011). 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 three-month period ended March 31, 2012 decreased to 27%, as compared with 48% in fiscal year 2011, we anticipated that the price in the rest of 2012 will not fluctuate significantly to impair the cost of bromine.
 
The annual loss of crude salt due to evaporation is around 3%. Although the market price of crude salt decreased from $50.09 per tonne in first quarter of 2011 to $38.02 in the first quarter of 2012, the gross margin is still attractive as the relative cost of production is low, we believe that there will be no realizability problem for crude salt and its selling price should not be lower than its cost.

Net Cash Used in Investing Activities
 
For the three-month period ended March 31, 2012, we used approximately $0.1 million cash for the prepayment of land leases, which was financed by opening cash balances as of December 31, 2011.

Net Cash Used in Financing Activities
 
We have no major financing activities for the three-month period ended March 31, 2012.

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 $102.5 million at March 31, 2012 as compared to approximately $93.3 million at December 31, 2011. The increase was mainly attributable to the cash provided by operating activities and the increase in accounts receivable during the three-month period ended March 31, 2012.
 
We had available cash of approximately $81.9 million at March 31, 2012, 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 condensed consolidated balance sheets or fully disclosed in the notes to our condensed consolidated financial statements. Additional information regarding our contractual obligations and commitments at March 31, 2012 is provided in the notes to our condensed 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 2011 Form 10-K.
 
 
Impact of Inflation

Inflationary factors, such as increases in the cost of our product and overhead costs, may adversely affect our operating results. Based on the Consumer Price Index in the PRC, the average annual rate of inflation over the three-year period from 2008 to 2010 was 2.8%. Inflationary pressures increased in 2011, reflecting the rise in our cost of raw materials and electricity expenses. For the three-month period ended March 31, 2012, the rate of inflation was 3.6%. We believe that in the long run the selling prices of its products could be increased at a similar level to compensate the adverse effect. In the foreseeable future, a high rate of inflation may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
There have been no material changes in market risk from the information provided in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of the Company’s 2011 Annual Report on Form 10-K.

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
 
The following changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) have been made during the three-month period ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have implemented the following steps to improve our disclosure controls and procedures to address the material weaknesses as mentioned in the 2011 Form 10-K:

 
In March 2012, we developed and put into use an additional checklist for our management to increase their oversight to timely report any related party transactions and the translation gain or loss on intercompany balances, if any.

 
Since January 2012, we provided ongoing training courses to our management personnel, including our CFO, for the updates of US GAAP and SEC reporting requirements.
 
      
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. On November 7, 2011, the Company filed a motion to dismiss the amended complaint. On December 30, 2011, lead plaintiffs filed an opposition to the Company’s motion to dismiss the amended complaint. The Company filed a reply in further support of its motion to dismiss on February 6, 2012. In response to the Company’s reply in further support of its motion to dismiss, lead plaintiffs filed an objection on February 17, 2012, to certain documents filed by the Company in support of its motion to dismiss. The Company opposed the objection on February 22, 2012, to which lead plaintiffs replied in further support of their objection on February 23, 2012. The Court has not yet ruled on the motion to dismiss nor the objections raised by lead plaintiffs. The Company intends to defend vigorously against the lawsuit.  The Company currently cannot estimate the amount or range of possible losses from this litigation. 

Item 1A. Risk Factors

There have been no changes with respect to risk factors as previously disclosed in our 2011 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 2011 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 2011 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 March 31, 2012 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.
 
 
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: May 7, 2012
By:
/s/ Xiaobin Liu
   
Xiaobin Liu
   
Chief Executive Officer
   
(principal executive officer)
     
Dated: May 7, 2012
By:
/s/ Min Li
   
Min Li
   
Chief Financial Officer
   
(principal financial and accounting officer)
 
 
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