10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended March 31, 2016

¨ 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: 001-34864

CHINA HGS REAL ESTATE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Florida	33-0961490
(State or Other Jurisdiction of Incorporation)	(I.R.S. Employer Identification Number)

6 Xinghan Road, 19th Floor, Hanzhong City

Shaanxi Province, PRC 723000

 (Address of Principal Executive Offices, Zip Code)

+(86) 091 - 62622612

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x      No ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨      No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 9, 2016 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	45,050,000

TABLE OF CONTENTS

[PAGE NUMBERS NEED TO BE UPDATED UPON COMPLETION]

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Interim Financial Statements	1
	Condensed Consolidated Balance Sheets at March 31, 2016 and September 30, 2015	1
	Condensed Consolidated Statements of Income and Comprehensive Income for The Three and Six Months Ended March 31, 2016 and 2015	2
	Condensed Consolidated Statements of Cash Flows for The Three and Six Months Ended March 31, 2016 and 2015	3
	Notes to Condensed Consolidated Financial Statements	4-22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	40
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6	Exhibits	41
	Signatures	42

PART I: FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,		September 30,
	2016		2015
ASSETS
Current assets:
Cash	$	1,645,683	$	1,333,919
Restricted cash		1,754,899		1,715,268
Cost and earnings in excess of billings		10,776,949		11,825,036
Real estate property development completed		70,037,049		75,391,512
Real estate property under development		54,500,779		55,154,153
Other current assets		2,589,958		228,223
Total current assets		141,305,317		145,648,111
Property, plant and equipment, net		728,832		780,038
Real estate property development completed, net of current portion		1,953,991		2,140,271
Security deposits for land use right		3,101,064		3,146,237
Real estate property under development, net of current portion		162,980,474		143,660,781
Due from local government for real estate property development completed		3,020,993		3,065,000
Total Assets	$	313,090,671	$	298,440,438
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan	$	1,550,532	$	6,292,474
Other loans		-		5,674,239
Accounts payable		27,463,408		41,501,682
Other payables		13,211,084		12,676,362
Construction deposits		1,510,987		1,959,706
Billings in excess of cost and earnings		2,293,100		3,315,302
Customer deposits		22,113,775		17,387,969
Shareholder loan		2,296,867		1,810,000
Accrued expenses		4,351,823		4,855,891
Taxes  payable		16,047,250		15,830,886
Total current liabilities		90,838,826		111,304,511
Deferred tax liabilities		4,798,516		4,711,161
Customer deposits, net of current portion		9,259,448		8,246,004
Other loans, less current portion		49,334,131		15,731,186
Construction deposits, net of current portion		912,119		972,432
Total liabilities		155,143,040		140,965,294
Commitments and Contingencies
Stockholders' equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and outstanding March 31, 2016 and September 30, 2015		45,050		45,050
Additional paid-in capital		17,794,116		17,764,316
Statutory surplus		16,439,333		16,439,333
Retained earnings		122,395,463		119,668,198
Accumulated other comprehensive income		1,273,669		3,558,247
Total stockholders' equity		157,947,631		157,475,144
Total Liabilities and Stockholders' Equity	$	313,090,671	$	298,440,438

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME  AND COMPREHENSIVE INCOME

(Unaudited)

	Three months ended March 31,						Six months ended March 31,
	2016			2015			2016			2015
Real estate sales	$	6,851,859		$	23,558,742		$	12,708,466		$	34,124,429
Less: Sales tax		(481,325	)		(1,566,839	)		(893,313	)		(2,237,389	)
Cost of real estate sales		(4,128,020	)		(11,330,140	)		(7,336,909	)		(18,355,946	)
Gross profit		2,242,514			10,661,763			4,478,244			13,531,094
Operating expenses
Selling and distribution expenses		126,026			217,976			216,179			593,142
General and administrative expenses		580,851			593,348			1,059,362			1,209,526
Total operating expenses		706,877			811,324			1,275,541			1,802,668
Operating income		1,535,637			9,850,439			3,202,703			11,728,426
Interest income		-			3,276			-			4,440
Interest expense		(69,094	)		(18,100	)		(173,140	)		(36,200	)
Income before income taxes		1,466,543			9,835,615			3,029,563			11,696,666
Provision for income taxes		166,502			565,514			302,298			800,575
Net income		1,300,041			9,270,101			2,727,265			10,896,091
Other comprehensive income (loss)
Foreign currency translation adjustment		1,054,539			593,266			(2,284,578	)		780,027
Comprehensive income	$	2,354,580		$	9,863,367		$	442,687		$	11,676,118
Basic and diluted income per common share
Basic and diluted	$	0.03			$ 0. 21		$	0.06		$	0.24
Weighted average common shares outstanding
Basic		45,050,000			45,050,000			45,050,000			45,050,000
Diluted		45,050,000			45,120,699			45,050,000			45,120,699

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended March 31,
	2016			2015
Cash flows from operating activities
Net income	$	2,727,265		$	10,896,091
Adjustments to reconcile net income to net cash providing by (used in) operating activities:
Deferred tax provision		154,618			734,407
Stock based compensation		29,800			-
Depreciation		39,909			42,012
Changes in assets and liabilities:
Due from local government for real estate property development completed		-			814,120
Advances to vendors		(22,979	)		(65,130	)
Cost and earnings in excess of billings		876,158			1,299,070
Real estate property development completed		4,416,727			1,675,022
Real estate property under development		(21,468,295	)		801,585
Other current assets		(2,336,254	)		1,176,152
Accounts payables		(13,409,544	)		(17,215,394	)
Other payables		714,978			547,901
Billings in excess of cost and earnings		(972,219	)		2,985,006
Customer deposits		6,092,375			(890,271	)
Construction deposits		(465,792	)		(9,832	)
Accrued expenses		(437,604	)		767,099
Taxes payable		442,578			1,004,726
Net cash (used in) providing by operating activities		(23,618,279	)		4,562,564
Cash flow from financing activities
Restricted cash		(64,102	)		(30,168	)
Proceeds from shareholder loan		842,975			5,856,780
Repayment of shareholder loan		(357,298	)		-
Repayment of bank loans		(4,640,228	)		(6,512,961	)
Proceeds from other loans		33,746,140			4,884,721
Repayment of other loans		(5,579,101	)		(8,873,910	)
Net cash provided by (used in) financing activities		23,948,386			(4,675,538	)
Effect of changes of foreign exchange rate on cash		(18,343	)		5,884
Net increase (decrease) in cash		311,764			(107,090	)
Cash, beginning of period		1,333,919			1,125,545
Cash, end of period	$	1,645,683		$	1,018,455
Supplemental disclosures of cash flow information:
Interest paid	$	961,149		$	1,056,229
Income taxes paid	$	162,762		$	72,089

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

China HGS Real Estate, Inc. (“China HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential apartments, parking space and commercial properties in Tier 3 and Tier 4 cities and counties in China.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 2016 and 2015 are not necessarily indicative of the results that may be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 filed with the SEC on December 18, 2015.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs, share-based compensation and other similar charges. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

4

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value of financial instruments

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the accompanying condensed consolidated balance sheets for cash, restricted cash, advances to vendors, security deposits for land use rights, other current assets, accounts payable, short-term loans, other payables, customer deposits, accrued expenses and taxes payable approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term loan payable.

Revenue recognition

Percentage of Completion method

Real estate sales for the long term real estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

a.	Construction is beyond a preliminary stage.
b.	The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
c.	Sufficient units have already been sold to assure that the entire property will not revert to rental property.
d.	Sales prices are collectible.
e.	Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.

5

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition - continued

Percentage of Completion method

Under the percentage of completion method, revenues from condominium units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Full accrual method

Revenue from the sales of short term development properties, where the construction period is expected to be 18 months or less is recognized by the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property.

The Company provides “mortgage loan guarantees” only with respect to buyers who make down-payments of 30%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receives the loan proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”).  If, after investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation.  If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party.  Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates.  If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan.  The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.

6

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition - continued

Full accrual method

For municipal road construction projects, fees are generally recognized by the full accrual method at the time the projects are completed.

Foreign currency translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

	For six months ended March 31,				September 30,
	2016		2015		2015
Period end RMB : USD exchange rate		6.4494		6.1206		6.3568
Six months average RMB : USD exchange rate		6.4652		6.1416		6.1653

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

Cash

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted Cash

The restricted cash is required by the banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any risks.

7

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Advances to vendors

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.

Security deposits for land use rights

Security deposits for land use rights consist of the deposits held by the PRC government for the purchase of land use rights and other deposit held by an unrelated party to transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfer of legal title.

Real estate property development completed and under development

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real estate property under development is classified as a current asset, if the property is reasonably expected to be completed within the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

8

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Real estate property development completed and under development (continued)

In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and six months ended March 31, 2016 and 2015, the Company did not recognize any impairment for real estate property under development and completed.

Capitalization of Interest

Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is expensed as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three and six months ended March 31, 2016, the total interest capitalized in the real estate property development was $442,788 and $874,936, respectively. For the three and six months ended March 31, 2015, the total interest capitalized in the real estate property under development was $1,005,007 and $1,968,313.

Impairment of long-lived assets

In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company is required to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the three and six months ended March 31, 2016 and 2015.

9

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.

Property warranty

The Company provides its customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the three and six months periods ended March 31, 2016 and 2015, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is considered necessary at the balance sheet dates.

Construction Deposits

Construction deposits are the warranty deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse customers in the event of customer claims due to construction defects.  The remaining balance of the deposits are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date of the deposit.

Share-based compensation

Share-based payment transactions are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.

Forfeitures are estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest. 

10

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

Deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of March 31, 2016 and September 30, 2015.

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC.  No income is earned in the United States and the management does not repatriate any earnings outside the PRC.  As a result, the Company did not generate any U.S. taxable income for the three and six months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, Chinese entities’ income tax returns filed in China for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 are subject to examination by the Chinese taxing authorities.

As of March 31, 2016, the tax years ended September 30, 2007 through December 31, 2015 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s tax years ended September 30, 2011 through December 31, 2015 remains open for statutory examination by U.S. tax authorities.

Land appreciation tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date.  The methods to implement this tax law vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nandajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.

11

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Comprehensive income (loss)

In accordance with ASC 220-10-55, comprehensive income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of comprehensive income (loss) during the three and six months ended March 31, 2016 and 2015 were net income and foreign currency translation adjustments.

Basic and diluted earnings per share

The Company computes earnings per share (“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Advertising expenses

Advertising costs are expensed as incurred. For the three and six months ended March 31, 2016, the Company recorded advertising expenses of $22,949 and $43,416, respectively (2015 - $65,313 and $154,043).

Concentration risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

The Company is dependent on third-party sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials. For the three months ended March 31, 2016, two suppliers accounted for over 43% and 16% of the Company’s total project expenditures, respectively. For the three months ended March 31, 2015, three suppliers accounted for 25%, 17% and 12% of project expenditures. For the six months ended March 31, 2016, two suppliers accounted for 55% and 12% of the Company’s the project expenditures. For the six months ended March 31, 2015, two suppliers accounted for 18% and 16% of the Company’s project expenditures, respectively.

Reclassification

Restricted cash in 2015 cash flows have been reclassified as cash flow from financing activities to conform to the current period presentation. This reclassification has no effect on the accompanying condensed consolidated cash flows.  

12

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

In January 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect, if any, this update will have on the Company's unaudited condensed consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In April 2016, the FASB released ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

13

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

The following summarizes the components of real estate property development completed and under development as of March 31, 2016 and September 30, 2015:

	March 31, 2016		September 30, 2015
Development completed
Hanzhong City Mingzhu Garden Phase I	$	1,073,655	$	1,146,277
Hanzhong City Mingzhu Garden Phase II		61,659,416		66,070,589
Hanzhong City Nan Dajie (Mingzhu Xinju)		1,418,592		1,439,257
Yang County Yangzhou Pearl Garden Phase I		3,050534		3,419,273
Yang County Yangzhou Pearl Garden Phase II		4,788,843		5,456,387
Real estate property development completed		71,991,040		77,531,783
Less:  Real estate property completed –short-term		70,037,049		75,391,512
Real estate property completed –long-term	$	1,953,991	$	2,140,271
Under development:
Hanzhong City Oriental Pearl Garden (a)	$	54,500,799	$	55,154,153
Yang County Yangzhou Palace		61,429,290		47,843,166
Hanzhong City Shijin Project		7,510,424		7,619,829
Hanzhong City Liangzhou Road  and related projects (b)		90,906,456		85,069,755
Hanzhong City Hanfeng Beiyuan East (c)		579,550		587,993
Hanzhong City Beidajie (e)		77,604		78,735
Yang County East 2nd Ring Road (d)		2,477,130		2,461,303
Real estate property under development		217,481,253		198,814,934
Less:  Short-term portion		54,500,779		55,154,153
Real estate property under development –long-term	$	162,980,474	$	143,660,781

(a) The Company recognized $1,970,130 and $2,920,181 of development cost in cost of real estate sales under the percentage of completion method for the three and six months ended March 31, 2016 (2015 - $4,391,364 and $6,619,422). The Company was in the process of finalizing landscaping and underground structure and expected to complete the construction before September 30, 2016.

(b) In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. Due to the extension, the Company expected the road construction to be completed in late 2016. The Company’s development cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government.

14

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT (continued)

As of March 31, 2016, the actual costs incurred by the Company were $90,906,456 (September 30, 2015- $85,069,755) and the incremental cost related to residence resettlement approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. For the three and six months ended March 31, 2016 and 2015, the Company did not receive government’s subsidies for its Shanty Area Reform Project surrounding Liang Zhou Road located in Hantai District, Hanzhong City, respectively.

(c) In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the year ended September 30, 2014. As of March 31, 2016, the Company was in discussion with the local government to finalize the budget for the project.

(d) The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 kilometers and a budgeted price of approximately $26.1 million (or RMB168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (March 31, 2016 -5% and September 30, 2015 – 5%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction is expected to be completed by late 2016 or early 2017.

(e) For the three and six months ended March 31, 2016, the Company received government’s subsidies in the amount of $Nil and $3,256,029 for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District, Hanzhong City, respectively. For the three and six months ended March 31, 2015, the Company did not receive related government subsidies. Since the Company has not met the performance requirement, the Company included the subsidies received in the liability.

As of March 31, 2016 and September 30, 2015, land use rights included in real estate property under development totaled $38,734,372 and $39,929,072, respectively.

NOTE 4. BANK LOAN

On August 23, 2013, the Company entered into a project finance loan agreement (the "Loan Agreement") with China Construction Bank, Hanzhong Branch (the “Bank") for a working capital loan (the “Loan”). The Loan has a three-year term in the principal amount of $23,257,977 (RMB150,000,000) at an interest rate 5.5% at March 31, 2016 which is 0.5% over the benchmark interest rate of 5.0% and is adjustable every twelve months from the date of the loan. The loan is for the development of the Company’s Mingzhu Beiyuan project.

The Company pledged its real estate properties in the Mingzhu Beiyuan project (Phase II) with carrying value of $61,659,416 as of March 31, 2016 (September 30, 2015 - $66,070,589). The Loan is also subject to certain covenants including current ratio of not less than 2 and quick ratio of not less than 0.8. The bank treated all the Company’s real estate property including real estate property completed and real estate property under development as current assets. Based on the fact that the Company made timely repayments as required in the loan agreement during fiscal 2015 and 2016 and Mingzhu Beiyuan achieved good presale status, the bank waived both current ratio and quick ratio requirement under the loan agreement. The balance of loan is due on August 20, 2016.

	March 31, 2016		September 30, 2015
China Construction Bank Loan	$	1,550,532	$	6,292,474

15

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 4. BANK LOAN (continued)

The average interest rate of the loan was 5.5% as of March 31, 2016 and September 30, 2015. For the three and six months ended March 31, 2016, total loan interest was $49,345 and $132,408, which was included in the interest expense for the period, because the project has been completed by September 30, 2015. For the three and six months ended March 31, 2015, the total loan interest was $49,345 and $132,408, which was capitalized in to the development cost of Mingzhu Garden – Mingzhu Beiyuan project Phase II.

NOTE 5. OTHER LOANS

	March 31, 2016		September 30, 2015
Loan A (i)	$	-	$	954,883
Loan B (ii)		-		4,719,356
Loan C (iii)		36,929,876		15,731,186
Loan D (iv)		12,404,255		-
		49,334,131		21,405,425
Less: current maturities of other loans		-		5,674,239
Other loans-long term portion	$	49,334,131	$	15,731,186

(i) A working capital finance agreement with a local investment company in Hanzhong was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, total interest was $5,729 and $23,607 (2015 - $333,464 and $716,274) respectively, which was capitalized in to the development cost of Liangzhou road project.

(ii) A credit agreement with a financial institution was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, the interest was $Nil and $108,272 (2015 - $268,790 and $450,480), respectively, which was capitalized in to the development cost of Oriental Pearl Garden real estate project.

16

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 5. OTHER LOANS (continued)

(iii) On June 26, 2015, the Company signed an agreement with Hanzhong Urban Construction Investment Development Co., Ltd., a state owned Company, to borrow up to $38,763,296 (RMB 250,000,000) long term loan at 4.245% interest to develop Liang Zhou Road Project. As of March 31, 2016, the Company borrowed $36,929,876 from this credit line. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Palace project with carrying value of $61,429,290 as of March 31, 2016. For the three and six months ended March 31, 2016, total interest was $359,405 and $652,885 (2015- $Nil) respectively, which was capitalized in to the development cost of Liangzhou road project. The loan has following repayment schedule:

	Repayment in USD		Repayment in RMB
Part I
May 29, 2017		3,314,346		21,375,542
November 20, 2017		5,147,766		33,200,000
May 20, 2018		5,256,303		33,900,000
November 20, 2018		5,256,303		33,900,000
May 20, 2019		5,411,356		34,900,000
November 29, 2019		5,411,356		34,900,000
Part II
May 29, 2017		1,187,707		7,660,000
November 20, 2017		1,187,707		7,660,000
May 20, 2018		1,187,258		7,670,000
November 20, 2018		1,187,258		7,670,000
May 20, 2019		1,187,258		7,670,000
November 29, 2019		1,187,258		7,670,000
Total		36.929,876		238,175,542

(iv) On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center (“Housing Fund”) to borrow up to approximately $12,404,255 million (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at is 3.575% and is due in January 2019. Our major shareholder pledged his assets for the loan. As of March 31, 2016, the Company received full proceeds from Housing Fund. The progress repayment is required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and six months ended March 31, 2016, total interest was $67,584 (2015- $Nil) respectively, which was capitalized in to the development cost of Oriental Garden project. The full amount of loan has following repayment schedule:

	Repayment in USD		Repayment in RMB
Earlier of July 2018 or 60% sales completed		3,101,065		20,000,000
Earlier of October 2018 or 70% sales completed		4,651,595		30,000,000
Earlier of January 2019 or 75% sales completed		4,651,595		30,000,000
Total		12,404,255		80,000,000

17

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 6. CUSTOMER DEPOSITS

Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:

	March 31, 2016		September 30, 2015
Customer deposits by real estate projects
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II	$	10,016,585	$	7,832,619
Hanzhong City Oriental Pearl Garden		8,549,160		7,220,575
Liangzhou road and related projects		2,572,332		2,035,615
Yang County Palace		6,687,116		6,210,389
Yangzhou Pearl Garden Phase I and II		3,548,030		2,334,775
Total		31,373,223		25,633,973
Less Customer deposits -short-term		22,113,775		17,387,969
Customer deposits - long-term	$	9,259,448	$	8,246,004

Customer deposits are typically 10%-20% of the unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of March 31, 2016 and September 30, 2015, approximately $1.8 million and $1.7 million was guaranteed by the Company, respectively.

NOTE 7. RELATED PARTY LOANS

	March 31, 2016		September 30, 2015
Shareholder loan – USD loan (a)	$	1,810,000	$	1,810,000
Shareholder loan – RMB loan (b)		486,867		-
Total	$	2,296,867	$	1,810,000

a. The Company has a one year loan agreement (“USD Loan Agreement”) with Mr. Xiaojun Zhu, the Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The loan is due on July 31, 2016. The Company recorded interest of $18,100 and $36,200 for the three and six months ended March 31, 2016 (2015 -$18,100 and $36,200). The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

b. On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow from Mr. Zhu in order to support the Company’s Liang Shan Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed with a new expiration date of March 31, 2017, with at an interest rate of 5.5% as of March 31, 2016 and September 30, 2015. The Company recorded interest of $10,070 and $22,588 for the three and six months ended March 31, 2016 (2015 - $115,132 and $195,231), respectively, which is capitalized in the development cost of Liangzhou road project. The Company has not paid this interest and it is recorded in accrued expenses in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.  

18

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

NOTE 8. STOCK OPTIONS

On August 22, 2015, the Company’s Board of Directors granted stock options to two new independent directors to repurchase up to an aggregate of 120,000 shares of the Company’s common stock (“2015 Stock Options”).  The shares underlying the options become excisable during the following 36 months period at the end of each quarter. The exercise price of the options is $1.89 per share. As of March 31, 2016 and September 30, 2015, 19.4% and 2.8% of the option awards have vested, respectively. The assumptions used in calculating the fair value of options granted using the Black-Scholes option pricing model are as follows:

The assumptions used in calculating the fair value of options granted using the Black-Scholes option pricing model are as follows:	Options granted in August 2015
Risk-free interest rate		0.95	%
Expected life of the options		3 year
Expected volatility		143	%
Expected dividend yield		0	%
Fair value	$	178,800

The Company uses the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates to determine fair value. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is primarily based on the simplified method due to the Company’s limited option exercise behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following table summarizes the stock option activities of the Company:  

	Number of options			Weighted Average Exercise Price		Weighted Average Remaining Life in Years		Aggregate intrinsic value
Outstanding, September 30, 2015		130,000		$	1.93		2.71	$	-
Granted		-			-		-		-
Forfeited		(10,000	)		1.31		-		-
Exercised		-			-		-		-
Outstanding, March 31, 2016		120,000		$	1.89		2.39	$	-
Exercisable, March 31,  2016		23,333		$	1.89		2.39	$	-

The Company recorded $14,900 and $29,800 stock-based compensation expense for the three and six months ended March 31, 2016 (2015 - $Nil), respectively. Since the average share price for the three and six months ended March 31, 2016 was below the exercise price of the above options, these options were anti-dilutive at March 31, 2016 and therefore would not be included in the diluted shares calculation.

19

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

NOTE 9. TAXES

(A) Business sales tax

The Company is subject to a 5% business sales tax on revenue.  It is the Company’s continuing practice to recognize the 5% business sales tax based on revenue as a cost of sales as the revenue is recognized. As of March 31, 2016, the Company had business sales tax payable of $13,561,559 (September 30, 2015- $13,306,414), which is expected to be paid when the projects are completed and assessed by the local tax authority

(B) Corporate income taxes (“CIT”)

The Company’s PRC subsidiaries and VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed annually at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue. For the three and six months ended March 31, 2016 the Company’s income taxes were $166,502 and $302,298 (2015 - $565,514 and $800,575), respectively.

Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules.  The difference between the two tax rules will not be a liability of the Company.  There will be no further tax payments for the difference.

Income tax expense for the three and six months ended March 31, 2016 and 2015 is summarized as follows:

	Three months ended March 31,				Six months ended March 31,
	2016		2015		2016		2015
Current tax provision	$	78,188	$	54,910	$	147,680	$	66,168
Deferred tax provision		88,314		510,604		154,618		734,407
Income tax provision	$	166,502	$	565,514	$	302,298	$	800,575

20

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. TAXES (continued)

The parent Company China HGS Real Estate Inc. is incorporated in the United States. Net operating loss carry forwards for United States income tax purposes approximated to $467,000 and $401,000 as of March 31, 2016 and September 30, 2015, respectively, which are available to reduce future years’ taxable income. These carry forwards will expire in 2035. However, the change in control resulting from the reverse merger in 2009 limits the amount of loss to be utilized each year. Management doesn’t expect to remit any of its net income back to the United States in the foreseeable future. Accordingly, the Company recorded a full valuation allowance as of March 31, 2016 and September 30, 2015. The components of deferred taxes as of March 31, 2016 and September 30, 2015 consist of the following:

	March 31, 2016			September 30, 2015
Deferred tax assets
Deferred tax assets from net operating loss carry-forwards for U.S. parent company	$	158,834		$	136,394
Valuation allowance		(158,834	)		(136,394	)
Deferred tax asset-net	$	-		$	-
Deferred tax liability
Revenue recognized based on percentage of completion	$	4,798,516		$	4,711,161
Deferred tax liability- long term	$	4,798,516		$	4,711,161

The valuation allowance increased $11,220 and $22,440 for the three and six months ended March 31, 2016 (2015 -$6,154 and $12,308), respectively.

	Three months ended March 31,				Six months ended March 31,
	2016		2015		2016		2015
Beginning Balance	$	147,614	$	116,243	$	136,394	$	110,089
Current period additions		11,220		6,154		22,440		12,308
Ending Balance	$	158,834	$	122,397	$	158,834	$	122,397

(C) Land Appreciation Tax (“LAT”)

Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, the Company’s local tax authority in Hanzhong City has not imposed the regulation on real estate companies in its area of administration. Instead, the local tax authority has levied the LAT at the rate of 0.5% in Yang County and 1.0% in Hanzhong against total cash receipts from sales of real estate properties, rather than according to the progressive rates. As at March 31, 2016, the outstanding LAT payable was $882,874 with respect to completed real estate properties sold up to March 31, 2016. As at September 30, 2015,  the outstanding LAT payable balance was $752,664 with respect to completed real estate properties sold up to September 30, 2015. 

21

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. TAXES (continued)

(D) Taxes payable consisted of the following:

	March 31, 2016		September 30, 2015
CIT	$	768,250	$	794,780
Business tax		13,561,559		13,306,414
Other tax and fees		1,717,441		1,729,692
Total taxes payable	$	16,047,250	$	15,830,886

NOTE 10. COMMITMENTS AND CONTINGENCY

As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient. As of March 31, 2016 and September 30, 2015, the amount of security deposit provided for these guarantees was approximately $1.8 million and $1.7 million respectively.

Total operating lease commitments for rental of office of the Company’s PRC subsidiaries as of March 31, 2016 is as follows:

Twelve months ending March 31,	Minimum lease payment
2017	$	21,836
Years after		-
Total minimum payments required	$	21,836

For the three and six months ended March 31, 2016, the rental expense was $6,306 and $12,760 (2015 -$6,740 and $13,479), respectively

22

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of China HGS Real Estate, Inc. for the three and six months ended March 31, 2016 and 2015 and should be read in conjunction with such financial statements and related notes included in this report.

As used in this report, the terms “Company,” “we,” “our,” “us” and “HGS” refer to China HGS Real Estate, Inc. and its subsidiaries.

Preliminary Note Regarding Forward-Looking Statements.

We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:

• our ability to sustain our project development

• our ability to obtain additional land use rights at favorable prices;

• the market for real estate in Tier 3 and 4 cities and counties;

• our ability to obtain additional capital in future years to fund our planned expansion; or

• economic, political, regulatory, legal and foreign exchange risks associated with our operations.

Business Overview

We conduct substantially all of our business through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the initiation of our business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.

For the first six months ended March 31, 2016, our sales, gross profit and net income were $12,708,466, $4,478,244 and $2,715,265, respectively, representing an approximate 62.8%, 66.9% and 75.0% decrease in sales, gross profit and net income from six months ended March 31, 2015, respectively. The decreases mainly resulted from a slowdown of contracted sales achieved in the first half of fiscal 2016. Since the construction of our real estate property under developments for our Oriental Pearl Garden has not been completed and other under development projects are not available for sales due to sales permits have not been obtained, we realized decreased contract sales for revenue recognized under the percentage of completion method for the three and six months ended March 31, 2016. On the other hand, we strengthened the sales promotion and efforts to sell completed units in order to consume the large inventory balance carried from prior year.

The Company adopted the percentage of completion method to account for real estate sales from large high rise residential projects with construction periods over 18 to 24 months. Total revenue recognized under the percentage of completion method for the first six months ended March 31, 2016 was $6,184,724 (2015- $30,692,416), representing 48.7% (2015 – 89.9%) of total revenue for the period, with related costs of these real estate sales was $2,920,181 (2015 - $16,680,924), representing 39.8% (2015 – 90.9%) of the real estate costs in the period. The gross profit from the percentage of completion method was $2,754,749 (2015 - $12,011,904), representing 61.5% (2014 – 88.8%) of the total gross profit for the quarter.

23

For the first six months ended March 31, 2016, our average selling price (“ASP”) for real estate projects (excluding sales of parking spaces) located in Yang County was approximately $347.1 per square meter, a decrease of 30.3% from the ASP of $497.8 per square meter for the six months ended March 31, 2015. The higher ASP in the same period of last year was due to more commercial units with higher selling price sold. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $587.7 per square meter, a 2.4% decrease from the ASP of $601.9 per square meter for the six months ended March 31, 2015.

Market Outlook

In early 2016, China’s central bank cut the minimum mortgage down payment for first-time buyers from 25% to 20%, allowed people to buy multiple homes, provided a further incentive for rural-urban migration and granted real estate developer access to China’s onshore bond markets.  These policies aim to resolve the housing inventory problem and may lead to strong real estate sales in 2016.

Our customers have a constant growth in their disposable income. With a lower housing price to family disposable income ratio and an increasing urbanization level, there is a growing demand for high quality residential housing. From this perspective, the Company is positive about the outlook for the local real estate market in a long term. In the meantime, the Company is in the process of diversifying its revenue and developing more commercial and municipal projects. The Company plan to build a commercial plaza, consisting shopping mall, apartment and office buildings well as hotels in the Liangzhou road area. The Company is in the process of finalizing the planning of this project as of March 31, 2016. The construction of this project will anticipate to start in the end of 2016 or beginning of 2017, but could be delayed due to the relocation of existing residences in the Liangzhou Road area, which is currently handling by local government. These new project initiatives will support the Company’s growth in the long run.

We intend to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales network, enhancing our cost and operational synergies and improving cash flows and strengthening our balance sheet. In this respect, we began the construction of the following large high rise residential projects in Hanzhong City and Yang County:

Oriental Pearl Garden

The project is located in downtown of Hanzhong City. It consists of 1 multi-layer residential building and 12 high-rise residential buildings with commercial shops on the first and second floors with an estimated GFA of 273,787 square meters. The Company started construction in the third quarter of fiscal 2012. The pre-sale license was obtained in November 2013. The Company was in the process of finalizing landscaping and underground structure and expected to complete the construction before September 30, 2016. Meantime, the Company is planning to build an extension Phase (or Phase II) of Oriental Garden project. The construction of Phase II of Oriental Garden project is estimated to start in the end of 2016.

Mingzhu Beiyuan

The project is located in the south west part of Hanzhong City. It includes 17 high-rise residential buildings with an estimated GFA of 358,058 square meters. The Company started construction in the third quarter of fiscal 2012 and completed the construction in the last quarter of fiscal 2015. The pre-sale license was obtained in April 2013.

Yangzhou Pearl Garden

The project included 5 high-rise residential buildings and 1 multi-layer residential building with total GFA of 67,653 square meters located in Yang County and the construction was completed in the last quarter of fiscal 2015. The related pre-sales licenses were obtained in February 2013.

Yangzhou Palace

The Company is currently constructing 9 high-rise residential buildings and 16 sub-high-rise residential and multi-layer residential buildings with total GFA of 285,244 square meters in Yangzhou Palace located in Yang County. The construction started in the fourth quarter of fiscal 2013 and is expected to be completed by the early of 2017. The Company has not obtained pre-sale license as of March 31, 2016.

24

Road Construction

Liangzhou Road and related project

In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. Due to the extension, the Company expected the road construction to be completed in 2016. The Company’s development cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government.

As of March 31, 2016, the actual costs incurred by the Company were $90,906,456 (September 30, 2015 - $85,069,755) and the incremental cost related to residence resettlement was approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. For the three and six months ended March 31, 2016 and 2015, the Company did not receive government’s subsidies for its Shanty Area Reform Project surrounding Liang Zhou Road located in Hantai District, Hanzhong City, respectively.

Other road constructions

Other road construction projects mainly included a Yang County East 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15km and a budgeted price of approximately $26.1 million (or RMB168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (March 31, 2016 -5% and September 30, 2015 – 5%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction is expected to be completed by late 2016 or beginning of 2017.

In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the year ended September 30, 2014. As of March 31, 2016, the Company was in discussion with the local government to finalize the budget for the project.

For the three and six months ended March 31, 2016, the Company received government’s subsidies in the amount of $Nil and $3,256,029 for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District, Hanzhong City, respectively. For the three and six months ended March 31, 2015, the Company did not receive related government subsidies. Since the Company has not met the performance requirement, the Company recorded the subsidies received as deferred income until certain requirement are met before recognizing these subsidies as income.

We expect these initiatives will help us during this difficult period and better position us to capitalize on opportunities from a future market upturn.

25

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and use them on historical experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates because of different assumptions or conditions.

We believe the following critical accounting policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements. These policies should be read in conjunction with Note 2 of the notes to unaudited condensed consolidated financial statements.

Revenue recognition

Percentage of Completion method

Real estate sales for the long term real estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

a.	Construction is beyond a preliminary stage.
b.	The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
c.	Sufficient units have already been sold to assure that the entire property will not revert to rental property.
d.	Sales prices are collectible.
e.	Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.

Under the percentage of completion method, revenues from condominium units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Revenue recognized to date in excess of amounts received from customers is classified as current assets under cost and earnings in excess of billings. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under billings in excess of cost and earnings.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined. 

Full accrual method

Revenue from the sales of short term development properties, where the construction period is expected to 18 months or less is recognized by the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property.

26

 The Company provides “mortgage loan guarantees” only with respect to buyers who make down-payments of 30%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receives the loan proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”).  If, after investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation.  If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party.  Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates.  If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan.  The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.

For municipal road construction projects, fees are generally recognized by the full accrual method at the time of the projects are completed.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, income taxes, budgeted costs, share-based compensation and other similar charges. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Real estate property development completed and under development

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real estate property under development is classified as a current asset, if the property is reasonably expected to be completed within the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and six months ended March 31, 2016 and 2015, the Company did not recognize any impairment for real estate property under development and completed. If we had to recognize an impairment loss, it would have affected our net income and earnings per share.

27

RESULTS OF OPERATIONS

Three Months Ended March 31, 2016 compared to Three Months Ended March 31, 2015

Revenues

The following is a breakdown of revenue:

	For Three Months Ended March 31,
	2016		2015
Revenue recognized under full accrual method	$	3,319,313	$	2,684,833
Revenue recognized under percentage of completion method		3,532,546		20,873,909
Total	$	6,851,859	$	23,558,742

Revenues recognized under full accrual method

The following table summarizes our revenue generated by different projects:

	For Three Months Ended March 31,
	2016						2015						Variance
	Revenue			%			Revenue			%			Amount			%
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)	$	2,935,740			88.4	%	$	559,744			20.9	%	$	2,375,996			424.5	%
Yangzhou Pearl Garden		383,573			11.6	%		976,854			36.4	%		(593,281	)		(60.7	)%
NanDajie (Mingzhu Xinju)		-			-			171,291			6.3	%		(171,291	)		(100	)%
Mingping		-			-			976,944			36.4	%		(976,944	)		(100	)%
Total Real Estate Sales before Sales Tax		3,319,313			100	%		2,684,833			100	%		634,480			23.6	%
Sales Tax		(204,920	)					(196,553	)					(8,367	)		4.3	%
Revenue net of sales tax	$	3,114,393					$	2,488,280					$	626,113			25.2	%

Our revenues are derived from the sale of residential buildings, commercial front-stores and parking space in projects that we have developed. Our sales of completed real estate projects were consistent from the same period of last year. Revenues before sales tax increased by 23.6% to approximately $3.3 million for the three months ended March 31, 2016 from approximately $2.7 million for the same period last year. The total GFA sold during the three months ended March 31, 2016 was 6,295 square meters. The total GFA sold during the three months ended March 31, 2015 was 1,801 square meters, the GFA sold increased by 4,494 square meters. For the completed real estate properties, we only have limited models are available for customer selection. In order to promote the sales of the remaining units, we lowered our selling price during the quarter ended March 31, 2016, which led to more GFA sold during the quarter than in the same period of 2015.

Sales tax for the three months ended March 31, 2016 and 2015 consisted of a business tax, 5% of the revenue, an urban construction tax, 7% of business tax, an education surcharge tax, 3% of business tax, and land appreciation tax. Land appreciation tax for the three months ended March 31, 2016 and 2015 was assessed at the rate of 0.5% of the customer deposits in Yang County and 1% of the customer deposits in Hanzhong. The sales tax for the three months ended March 31, 2016 increased by 4.3% from the same period last year, primarily as a result of the increase in our revenue. 

28

Revenue recognized under percentage completion method

			For the three months ended March 31, 2016
	Total GFA		Average Percentage of Completion(1)			Qualified Contract Sales(2)		Revenue Recognized under Percentage of Completion		Accumulated   Revenue Recognized under Percentage of Completion
Real estate properties under development located in Hanzhong
Oriental Garden		273,787		90	%	$	92,153,399	$	3,532,546	$	87,521,374

(1) Percentage of Completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements as of and for the year indicated.

(2) Qualified contract sales only include all contract sales with customer deposits balance as of March 31, 2016 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.

			For the three months ended March 31, 2015
	Total GFA		Average Percentage of Completion			Qualified Contract Sales(1)		Revenue Recognized under Percentage of Completion		Accumulated   Revenue recognized under Percentage of completion
Real estate properties under development located in Hanzhong
Mingzhu Garden – Mingzhu Beiyuan		355,321		90	%	$	73,876,029	$	8,348,171	$	71,145,798
Oriental Garden		273,693		82	%		78,226,682		11,626,305		69,298,432
Real estate properties under development located in Yang County
Yangzhou Pearl Garden		64,854		96	%		18,582,514		899,433		17,771,492
Total	$	693,868				$	170,685,225	$	20,873,909	$	158,215,722

(1) Qualified contract sales only include all contract sales with customer deposits balance as of March 31, 2015 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.

Both Mingzhu Garden Phase II and Yangzhou Pear Garden Phase II projects were completed by September 30, 2015, therefore the related revenue was not included in the above table. For Oriental Garden real estate property under development, total contract sales as of March 31, 2016 were $95,740,912 (September 30, 2015 - $95,518,605). Total GFA sold under contract sales as of March 31, 2016 was 124,741 square meters (September 30, 2015 – 119,353). The average unit price under contract sales was $767.5 per square meters (September 30, 2015 - $800). For the purpose of percentage of completion calculation, the qualified contract sales amount was approximately $92,153,399 for the three months ended March 31, 2016 (September 30, 2015 - $92,093,999).

29

Cost of Sales

The following table sets forth a breakdown of our cost of sales:

	For Three Months Ended March  31,
	2016					2015					Variance
	Cost		%			Cost		%			Amount			%
Land use rights	$	302,459		7.3	%	$	557,004		4.9	%	$	(254,545	)		(45.7	%)
Construction cost		3,825,561		92.7	%		10,773,136		95.1	%		(6,947,575	)		(64.5	%)
Total cost	$	4,128,020		100	%	$	11,330,140		100	%	$	(7,202,120	)		(63.6	%)

Our cost of sales consists of costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) times the total cost of the project (or phase of the project).

Cost of sales was approximately $4.1 million for the three months ended March 31, 2016 compared to $11.3 million for the three months ended March 31, 2015. The $7.2 million decrease in cost of sales was mainly attributable to the decrease in total GFA sold during the quarter ended March 31, 2016 under percentage of completion method which led to decreased revenue and cost of sales during this quarter.  

Land use rights cost: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the three months ended March 31, 2016 were approximately $0.3 million, as compared to $0.6 million for the three months ended March 31, 2015, representing a decrease of approximately $0.3 from the same quarter last year. The decrease was consistent with the fact that total GFA sold under percentage completion method in this quarter was lower than the same period of 2015. As a result, total revenue for the three months ended March 31, 2016 was less than the same quarter of last year.

Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the three months ending March 31, 2016 were approximately $3.8 million as compared to approximately $10.8 million for the three months ended March 31, 2015, representing a decrease of $6.9 million. The decrease in construction cost was due to decrease in units sold under percentage of completion method during the quarter ended March 31, 2016.

The total cost of sales as a percentage of real estate sales before sales tax for the three months ended March 31, 2016 increased to 60.2% from 48.1% for the three months ended March 31, 2015, which was mainly attributable to the fact the Company sold lots parking space and certain commercial units during the three months ended March 31, 2015 with higher margins.

Gross Profit

Gross profit was approximately $2.2 million for the three months ended March 31, 2016 as compared to approximately $10.7 million for the three months ended March 31, 2015, representing a decrease of $8.5 million, which was mainly attributable to decreased revenue recognized under the percentage of completion method in the current quarter. The overall gross profit as a percentage of real estate sales before sales tax decreased to 32.7% during the three months ended March 31, 2016 from 45.3% for the same quarter last year, mainly due to higher margin parking space and commercial units sold during the three months ended March 31, 2015. During the quarter ended March 31, 2016, only 16.7% of revenue were from sales of commercial properties and parking lots, while 51.2% of revenue were from sales of commercial properties and parking lots in the same period of last year. Generally, the gross margins for sales of commercial properties ranged from 60% to 85% and the gross margins for sales of residential properties ranged from 30% to 35%. In addition, the Company adopted more flexible selling price on the residential units in the Mingzhu Garden project and Yangzhou Pearl Garden project, the lower selling price also resulted in a decrease in the gross margin. The overall decrease in gross profit margin for the three months ended March 31, 2016 reflected the above factors.

30

The following table sets forth the gross margin of each of our projects:

	For Three Months Ended  March 31,
	2016						2015
	Gross Profit			Percentage of Revenue			Gross Profit			Percentage of Revenue
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)	$	1,062,939			36.2	%	$	3,836,779			43.1	%
Oriental Garden		1,562,416			44.2	%		7,234,941			62.2	%
Yangzhou Pearl Garden		98,484			25.7	%		777,925			41.4	%
NanDajie (Mingzhu Xinju)		-			-			51,668			30.2	%
Mingping		-			-			327,289			33.5	%
Sales Tax		(481,325	)					(1,566,839	)
Total Gross Profit		2,242,514			32.7	%		10,661,763			45.3	%
Total Real Estate Sales before Sales Tax	$	6,851,859					$	23,558,742

Operating Expenses

Total operating expenses decreased by 12.9% or $104,447 to $706,877 for the three months ended March 31, 2016 from $811,324 for the three months ended March 31, 2015 as a result of a decrease in selling expense of $91,950 and a 2.1% decrease in general and administration expenses.

The decrease in selling expenses for three months ended March 31, 2016 was primarily attributed to decrease of commission paid to salesforce and marketing activities.

	For Three Months Ended March 31,
	2016			2015
Selling expenses	$	126,026		$	217,976
General and administrative expenses		580,851			593,348
Total operating expenses	$	706,877		$	811,324
Percentage of Real Estate Sales before Sales Tax		10.3	%		3.4	%

Income Taxes

U.S. Taxes

China HGS is a Florida corporation. However, all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the three months ended March 31, 2016 and 2015.

31

PRC Taxes

Our Company is governed by the Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

However, the local tax authority of Hanzhong City has the power to assess corporate taxes annually on local enterprises at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The tax authority assessed us for income taxes at the rate of 1.25% on revenue in Yang County and 2.5% on our revenue in Hanzhong, instead of statutory rate of 25% on the income before income tax. Income tax provision for the three months ended March 31, 2016 were $166,502 compared to $565,514 for the three months ended March 31, 2015 as a result of the decrease in our revenue.

Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. Management believes that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written tax clearance from the local tax authority. Thus, no additional taxes payable have been recorded for the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional taxes due can be reasonably estimated, additional taxes shall be recorded in the period in which the amount can be reasonably estimated and shall not be charged retroactively to an earlier period.

Net Income

We reported net income of $1,300,041 for the three months ended March 31, 2016, as compared to net income of $9,270,101 for the three months ended March 31, 2015. The decrease of $8.0 million in our net income was primarily due to the lower revenue and gross profit as discussed above under Revenues and Gross Profit.

Other Comprehensive Income

We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”).   RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Translation adjustments resulting from this process amounted to $1,054,539 and $593,266 for the three months ended March 31, 2016 and 2015, respectively.  The balance sheet amounts with the exception of equity at March 31, 2016 were translated at 6.4494 RMB to 1.00 USD as compared to 6.3568 RMB to 1.00 USD at September 30, 2015. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the periods ended March 31, 2016 and 2015 were 6.4652 RMB and 6.1416 RMB, respectively.

Six Months Ended March 31, 2016 compared to Six Months Ended March 31, 2015

Revenues

The following is a breakdown of revenue:

	For Six Months Ended March 31,
	2016		2015
Revenue recognized under full accrual method	$	6,523,742	$	3,432,013
Revenue recognized under percentage of completion method		6,184,724		30,692,416
Total	$	12,708,466	$	34,124,429

32

Revenues recognized under full accrual method

The following table summarizes our revenue generated by different projects:

	For Six Months Ended March 31,
	2016						2015						Variance
	Revenue			%			Revenue			%			Amount			%
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)	$	5,290,690			81.1	%	$	713,188			20.8	%	$	(4,577,502	)		641.8	%
Yangzhou Pearl Garden		1,233,052			18.9	%		1,570,590			45.8	%		(337,538	)		(21.5	)%
NanDajie (Mingzhu Xinju)		-			-			171,291			5.0	%		(171,291	)		(100	)%
MinPing		-			-			976,944			28.4	%		(976,944	)		(100	)%
Total Real Estate Sales before Sales Tax		6,523,742			100	%		3,432,013			100	%		3,091,729			90.1	%
Sales Tax		(383,519	)					(237,801	)					145,718			61.3	%
Revenue net of sales tax	$	6,140,223					$	3,194,212					$	2,946,011			92.2	%

Our revenues are derived from the sale of residential buildings, commercial front-stores and parking space in projects that we have developed. Our sales of completed real estate projects almost doubled from the sales in the same period of last year. Revenues before sales tax increased by 90.1% to approximately $6.5 million for the six months ended March 31, 2016 from approximately $3.4 million for the same period last year. The total GFA sold during the six months ended March 31, 2016 was 12,555 square meters. The total GFA sold during the six months ended March 31, 2015 was 3,588 square meters. For the completed real estate properties, we only limited models are available for customer selection. In order to promote the sales of the remaining units, we lowered our selling price during the six months ended March 31, 2016, which led to more GFA sold during the six months ended March 31, 2016 than in the same period of 2015.

Sales tax for the six months ended March 31, 2016 and 2016 consisted of a business tax, 5% of the revenue, an urban construction tax, 7% of business tax, an education surcharge tax, 3% of business tax, and land appreciation tax. Land appreciation tax for the six months ended March 31, 2016 and 2015 was assessed at the rate of 0.5% of the customer deposits in Yang County and 1% of the customer deposits in Hanzhong. The sales tax for the six months ended March 31, 2016 increased by 61.3% from the same period last year, primarily as a result of the increase in our revenue. 

Revenue recognized under percentage completion method

			For the six months ended March 31, 2016
	Total GFA		Average Percentage of Completion(1)			Qualified Contract Sales(2)		Revenue Recognized under Percentage of Completion		Accumulated   Revenue Recognized under Percentage of Completion
Real estate properties under development located in Hanzhong
Oriental Garden		273,787		90	%	$	92,153,399	$	6,184,724	$	87,521,374

(1) Percentage of Completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements as of and for the year indicated.

(2) Qualified contract sales only include all contract sales with customer deposits balance as of March 31, 2016 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.

33

			For the six months ended March 31, 2015
	Total GFA		Average Percentage of Completion			Qualified Contract Sales(3)		Revenue Recognized under Percentage of Completion		Accumulated   Revenue Recognized under Percentage of Completion
Real estate properties under development located in Hanzhong
Mingzhu Garden – Mingzhu Beiyuan		355,321		90	%	$	73,876,029	$	13,033,419	$	71,145,798
Oriental Garden		273,693		82	%		78,226,682		15,026,765		69,298,432
Real estate properties under development located in Yang County
Yangzhou Pearl Garden		64,854		96	%		18,582,514		2,632,232		17,771,492
Total		693,868				$	170,685,225	$	30,692,416	$	158,215,722

(3) Qualified contract sales only include all contract sales with customer deposits balance as of March 31, 2015 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.

Both Mingzhu Garden Phase II and Yangzhou Pear Garden Phase II projects were completed by September 30, 2015, therefore the related revenue was not included in the above table. For Oriental Garden real estate property under development, total contract sales as of March 31, 2016 were $95,740,912 (September 30, 2015 - $95,518,605). Total GFA sold under contract sales as of March 31, 2016 was 124,741 square meters (September 30, 2015 – 119,353). The average unit price under contract sales was $767.5 per square meters (September 30, 2015 - $800). For the purpose of percentage of completion calculation, the qualified contract sales amount was approximately $92,153,399 for the three months ended March 31, 2016 (September 30, 2015 - $92,093,999).

Cost of Sales

The following table sets forth a breakdown of our cost of sales:

	For Six Months Ended March  31,
	2016					2015					Variance
	Cost		%			Cost		%			Amount			%
Land use rights	$	525,466		7.2	%	$	953,651		5.2	%	$	(428,185	)		(44.9	%)
Construction cost		6,811,443		92.8	%		17,402,295		94.8	%		(10,590,852	)		(60.9	%)
Total cost	$	7,336,909		100	%	$	18,355,946		100	%	$	(11,019,037	)		(60.0	%)

Our cost of sales consists of costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) times the total cost of the project (or phase of the project).

34

Cost of sales was approximately $7.3 million for the six months ended March 31, 2016 compared to $18.4 million for the six months ended March 31, 2015. The $11.0 million decrease in cost of sales was mainly attributable to the decrease in total GFA sold during the six months ended March 31, 2016 under percentage of completion method which led to decreased revenue and cost of sales during this period. 

Land use rights cost: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the six months ended March 31, 2016 were approximately $0.5 million, as compared to $1.0 million for the six months ended March 31, 2015, representing a decrease of $0.5 million from the same period last year. The decrease was consistent with the fact that total GFA sold under percentage completion method for the six months ended March 31, 2016 was lower than the same period of 2015. .

Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the six months ending March 31, 2016 were approximately $6.8 million as compared to approximately $17.4 million for the six months ended March 31, 2015, representing a decrease of $10.6 million. The decrease in construction cost was due to decrease in units sold under percentage of completion method during the six months ended March 31, 2016 

The total cost of sales as a percentage of real estate sales before sales tax for the three months ended March 31, 2015 slightly increased to 57.7% from 53.8% for the six months ended March 31, 2015, which was mainly attributable to the fact the Company sold more parking space and certain commercial units with higher margin in the same period of last year.

Gross Profit

Gross profit was approximately $4.5 million for the six months ended March 31, 2016 as compared to approximately $13.5 million for the six months ended March 31, 2015, representing a decrease of $9.0 million, which was mainly attributable to less revenue recognized in the current period. The overall gross profit as a percentage of real estate sales before sales tax decreased to 35.2% during the six months ended March 31, 2016 from 39.7% for the same period last year, mainly due to the Company sold more parking space and certain commercial units with higher margin in the same period of last year. During the six months ended March 31, 2016, only 22.2% of revenue were from sales of commercial properties and parking lots, while 34.5% of revenue were from sales of commercial properties and parking lots in the same period of last year. Generally, the gross margins for sales of commercial properties ranged from 60% to 85% and the gross margins for sales of residential properties ranged from 30% to 35%. In addition, the Company adopted more flexible selling price on the residential units in the Mingzhu Garden project and Yangzhou Pearl Garden project, the lower selling price also resulted in a decrease in the gross margin. The overall decrease in gross profit margin for the six months ended March 31, 2016 reflected the above factors. 

The following table sets forth the gross margin of each of our projects:

	For Six Months Ended March 31,
	2016						2015
	Gross Profit			Percentage of Revenue			Gross Profit			Percentage of Revenue
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)	$	1,780,593			33.7	%	$	5,601,975			40.8	%
Oriental Garden		3,264,542			52.8	%		8,407,343			55.9	%
Yangzhou Pearl Garden		326,422			26.5	%		1,380,207			32.8	%
NanDajie		-			-			51,669			30.2	%
MingPing		-			-			327,289			33.5	%
Sales Tax		(893,313	)					(2,237,389	)
Total Gross Profit		4,478,244			35.2	%		13,531,094			39.7	%
Total Real Estate Sales before Sales Tax	$	12,708,466					$	34,124,429

35

Operating Expenses

Total operating expenses decreased by 29.2% or $527,127 to $1,275,541 for the six months ended March 31, 2016 from $1,802,668 for the six months ended March 31, 2015 as a result of a significant decrease in selling expense of $376,963 and a 12.4% decrease in general and administration expenses of $150,164

The decrease in selling expenses for six months ended March 31, 2016 was primarily attributed to decrease of commission paid to salesforce and marketing activities. The decrease in general administration expense for the six months ended March 31, 2016 was attributed to the Company paid a higher consulting fee paid on real estate property assessments in the same period of last year.

	For Six Months Ended March 31,
	2016			2015
Selling expenses	$	216,179		$	593,142
General and administrative expenses		1,059,362			1,209,526
Total operating expenses	$	1,275,541		$	1,802,668
Percentage of Real Estate Sales before Sales Tax		10.0	%		5.3	%

Income Taxes

U.S. Taxes

China HGS is a Florida corporation. However, all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the six months ended March 31, 2016 and 2015.

PRC Taxes

Our Company is governed by the Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

However, the local tax authority of Hanzhong City has the power to assess corporate taxes annually on local enterprises at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The tax authority assessed us for income taxes at the rate of 1.25% on revenue in Yang County and 2.5% on our revenue in Hanzhong, instead of statutory rate of 25% on the income before income tax. Income tax provision for the six months ended March 31, 2016 were $302,298 compared to $800,575 for the six months ended March 31, 2015 as a result of the decrease in our revenue.

Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. Management believes that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written tax clearance from the local tax authority. Thus, no additional taxes payable have been recorded for the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional taxes due can be reasonably estimated, additional taxes shall be recorded in the period in which the amount can be reasonably estimated and shall not be charged retroactively to an earlier period.

36

Net Income

We reported net income of approximately $2.7 million for the six months ended March 31, 2016, as compared to net income of approximately $10.9 for the six months ended March 31, 2015. The decrease of $8.2 million in our net income was primarily due to the lower revenue and gross profit as discussed above under Revenues and Gross Profit.

Other Comprehensive Income

We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”).   RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Translation adjustments resulting from this process amounted to negative $2,284,578 and $780,027 for the six months ended March 31, 2016 and 2015, respectively.  The balance sheet amounts with the exception of equity at March 31, 2016 were translated at 6.4494 RMB to 1.00 USD as compared to 6.3568 RMB to 1.00 USD at September 30, 2015. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the periods ended March 31, 2016 and 2015 were 6.4652 RMB and 6.1416 RMB, respectively.

Liquidity and Capital Resources

Current Assets and Liabilities

Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. In the past, we mainly financed our operations primarily through cash flows from operations and borrowings from our principal shareholder.

As of March 31, 2016, the Company had approximately $50.5 million in working capital, an increase of $16.2 million as compared to $34.3 million as of September 30, 2015. Our total cash and restricted cash balance were consistently maintained at approximately $3.4 million and $3.0 million as of March 31, 2016 and September 30, 2015, respectively. Since most of our current real estate development is completed, we are expecting to collect the full purchase price from our existing customers in the coming period. In addition, on June 26, 2015, the Company signed an agreement with Hanzhong Urban Construction Investment Development Co., Ltd., a state owned Company, to borrow up to $38,763,296 (RMB 250,000,000). It is a long term loan at 4.245% interest to develop Liang Zhou Road Project. As of March 31, 2016, the Company borrowed $36,929,876. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Palace project with carrying value of $61,429,290 as of March 31, 2016. Furthermore, On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center to borrow up to $12,404,255 (RMB 80,000,000) for development of Oriental Garden project. The loan carries interest at is 3.575% and is due in January 2019. The repayment is required based on certain sales milestones or a fixed repayment schedule starting in July 2018. Our major shareholder pledged his assets for the loan. The Housing Fund has rights to monitor the project’s future cash flow. In addition, we expect our cash collection from sales of completed units and pre-sale will continue to improve during fiscal 2016 and beyond.

With respect to capital funding requirements, the Company budgeted capital spending based on an ongoing assessment of needs to maintain adequate cash. Due to the long term relationship with our construction suppliers, we were able to effectively manage cash spending on construction. Also, our major shareholder, Mr. Xiaojun Zhu has agreed to provide his personal funds, if necessary, to support on an as needed basis. In addition, the Company’s cash flows from pre-sales and current sales should provide financial support for our current developments and operations.

37

In order to fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the present time, however, we do not have commitments of funds from any third party.

Cash Flow

Comparison of cash flows results is summarized as follows:

	Six months ended March 31,
	2016			2015
Net cash  (used in) provided by operating activities	$	(23,618,279	)	$	4,532,396
Net cash provided by (used in) financing activities		23,948,386			(4,645,370	)
Effect of change of foreign exchange rate on cash		(18,343	)		5,884
Net cash increase (decrease)  in cash		311,764			(107,090	)
Cash, beginning of period		1,333,919			1,125,545
Cash, end of period	$	1,645,683		$	1,018,455

Operating Activities

Net cash used in operating activities during the six months ended March 31, 2016 was $23.6 million, consisting of net income of $2.7 million, noncash adjustments of $0.2 million and net changes in our operating assets and liabilities, which mainly included the increase in spending on real estate property under development of $21.5 million, paying off the accounts payable of $13.4 million, an increase of other current asset of $2.3 million and decrease of billing in excess of cost and earnings of $1.0 million, offset by a decrease in real estate property development completed by $4.4 million due to current sales, an increase of customer deposits of $6.1 million, a decrease of cost and earnings in excess of billings of $0.9 million and increase of other payable of $0.7 million.

Net cash provided by operating activities during the six months ended March 31, 2015 was $4.5 million, consisting of net income of $10.9 million, noncash adjustments of $0.8 million and net changes in our operating assets and liabilities, which mainly included an increase in billings in excess of cost and earnings of $3.0 million and decrease in cost and earning in excess of billings of $1.3 million resulted from using the percentage of completion method of revenue recognition, decreases in both real estate property development completed of $1.7 million and real estate property under development of 0.8 million, a decrease in other current asset of $1.2 million, a decrease in due from local government for real estate property development completed of 0.8 million, an increase in taxes payable of $1.0 million, an increase of accrued expense of $0.8 million and an increase in other payables of $0.5 million, offset by payments of accounts payable of $17.3 million to our sub-contractors and suppliers and a decrease in customer deposits of $0.9 million due to slow season for the presales.

Financing Activities

Net cash flows provided by financing activities amounted to approximately $23.9 million for the six months ended March 31, 2016, which mainly included an increase of $33.7 million new loans from financial institutions and offset by total loan repayments of $10.2 million.

Net cash flows used in financing activities amounted to approximately $4.6 million for the six months ended March 31, 2015, which mainly included loan repayments of approximately $10.5 million to bank and other financial institutions, offset by an increase of approximately $5.9 million shareholder loans from our principle shareholder.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Inflation

Inflation has not had a material impact on our business and we do not expect inflation to have a material impact on our business in the near future.

38

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Exchange Risk

All of our net sales, and a majority of our costs and expenses are denominated in RMB. Although the conversion of RMB is highly regulated in China, the value of RMB against the value of the U.S. dollar or any other currency nonetheless may fluctuate and be affected by, among other things, changes in China’s political and economic conditions. Under current policy, the value of RMB is permitted to fluctuate within a narrow band against a basket of certain foreign currencies. China is currently under significant international pressures to liberalize this government currency policy, and if such liberalization were to occur, the value of RMB could appreciate or depreciate against the U.S. dollar.

Because substantially all of our earnings and majority of our cash assets are denominated in RMB, other than certain cash deposits we keep in a bank in Hong Kong and the U.S., appreciation or depreciation in the value of RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividends we may issue in future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by the PRC exchange control regulations that restrict our ability to convert RMB into foreign currency.

Interest Rate Risk

We have not been, nor do we anticipate being exposed to material risks due to changes in interest rates. Our risk exposure to changes in interest rates relates primarily to the interest income generated by cash deposited in interest-bearing savings accounts and interest expense on variable rate bank loan. We have not used, and do not expect to use in the future any derivative financial instruments to hedge our interest risk exposure. However, fluctuations in interest rates can lead to significant changes in our interest income and interest expense.

Credit Risk

We are exposed to credit risk from our cash in banks, accounts receivable and due from local government for real estate property development completed. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. Accounts receivable are subjected to credit evaluations. An allowance would be made, if necessary, for estimated unrecoverable amounts by reference to past default experience, if any, and by reference to the current economic environment.

39

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2016.

Management is committed to improving the internal controls over financial reporting and will undertake the consistent improvements or enhancements on an ongoing basis.

To remediate the material weakness and significant deficiencies and to prevent similar deficiencies in the future, we are currently evaluating additional controls and procedures, which may include:

• Engaging a third party IT consulting firm to help formalize the Company’s policies and procedures on information technology, analyzing the capability and reliability of existing systems, and establishing an integrated information technology development plan.

• Providing additional U.S. GAAP knowledge and SEC reporting requirement training for the internal audit department and establishing formal policies and procedures in internal audit function.

• Reinforcing the procedures to ensure appropriate management level’s approval on offering sales discount and ensuring sufficient review on the monthly tax return reconciliations.

• Implementing ongoing initiative and training in the Company to ensure the importance of internal controls and compliance, with established policies and procedures, are fully understood throughout the organization and providing continuous U.S. GAAP knowledge training to relevant employees involved to ensure the performance of and compliance with these procedures and policies.

The Company continued to engage an existing independent professional consulting firm to assist the Company’s Internal Control Evaluation Committee in evaluating internal control effectiveness in fiscal 2016.

The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements, and (iii) the Company’s business and operating results may be harmed.

Changes in Internal Control over Financial Reporting

Except for the matters described above to improve our internal controls over financial reporting, there were no changes in our internal control over financial reporting for the three and six months ended March 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, however, the Company is in the process of designing and planning to change as described above.

40

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

ITEM 1A. RISK FACTORS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit Number	Description of Exhibit
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1*	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

* Furnished electronically herewith

41

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	China HGS Real Estate, Inc.
May 10, 2016	By:	/s/ Xiaojun Zhu
		Xiaojun Zhu
		Chief Executive Officer

	China HGS Real Estate, Inc.
May 10, 2016	By:	/s/ Wei Shen
		Wei Shen
		Chief Financial Officer

42

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Xiaojun Zhu, the Chief Executive Officer, certify that:

(1)           I have reviewed this Quarterly Report on Form 10-Q of China HGS Real Estate, Inc., for the fiscal period ended March 31, 2016.

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

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

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

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

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

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

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

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

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

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

Date: May 10, 2016

/s/ Xiaojun Zhu

Name: Xiaojun Zhu 
Title: Chief Executive Officer 

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Wei Shen, the Chief Financial Officer of the registrant, certify that:

(1)           I have reviewed this Quarterly Report on Form 10-Q of China HGS Real Estate Inc., for the fiscal period ended March 31, 2016.

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

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

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

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

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

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

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

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

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

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

May 10, 2016

/s/Wei Shen

Name: Wei Shen 

Title: Chief  Financial Officer 

EX-32.1

Exhibit 32.1

Certification
of Principal Executive Officer and Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a),
As Adopted
Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002

The undersigned of the Company, certifies that:

(1)          They has reviewed this Quarterly Report on Form 10-Q of China HGS Real Estate, Inc. for the quarter ended March 31, 2016; and

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

/s/ Xiaojun Zhu	/s/ Wei Shen
Name: Xiaojun Zhu	Name: Wei Shen
Title: Chief Executive Officer	Chief Financial Officer
May 10, 2016	May 10, 2016

A signed original of this written statement required by Section 906 of the Sarbanes Oxley Act of 2002 has been provided to the Company and will be retained by the Company and will be furnished to the SEC or its staff upon request. This exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the SEC.

XML

Document And Entity Information - shares	6 Months Ended
	Mar. 31, 2016	May. 09, 2016
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
Entity Registrant Name	CHINA HGS REAL ESTATE INC.
Entity Central Index Key	0001158420
Current Fiscal Year End Date	--09-30
Entity Filer Category	Smaller Reporting Company
Trading Symbol	HGSH
Entity Common Stock, Shares Outstanding		45,050,000

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Mar. 31, 2016	Sep. 30, 2015
Current assets:
Cash	$ 1,645,683	$ 1,333,919
Restricted cash	1,754,899	1,715,268
Cost and earnings in excess of billings	10,776,949	11,825,036
Real estate property development completed	70,037,049	75,391,512
Real estate property under development	54,500,779	55,154,153
Other current assets	2,589,958	228,223
Total current assets	141,305,317	145,648,111
Property, plant and equipment, net	728,832	780,038
Real estate property development completed, net of current portion	1,953,991	2,140,271
Security deposits for land use right	3,101,064	3,146,237
Real estate property under development, net of current portion	162,980,474	143,660,781
Due from local government for real estate property development completed	3,020,993	3,065,000
Total Assets	313,090,671	298,440,438
Current liabilities:
Bank loan	1,550,532	6,292,474
Other loans	0	5,674,239
Accounts payable	27,463,408	41,501,682
Other payables	13,211,084	12,676,362
Construction deposits	1,510,987	1,959,706
Billings in excess of cost and earnings	2,293,100	3,315,302
Customer deposits	22,113,775	17,387,969
Shareholder loan	2,296,867	1,810,000
Accrued expenses	4,351,823	4,855,891
Taxes payable	16,047,250	15,830,886
Total current liabilities	90,838,826	111,304,511
Deferred tax liabilities	4,798,516	4,711,161
Customer deposits, net of current portion	9,259,448	8,246,004
Other loans, less current portion	49,334,131	15,731,186
Construction deposits, net of current portion	912,119	972,432
Total liabilities	$ 155,143,040	$ 140,965,294
Commitments and Contingencies
Stockholders' equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and outstanding March 31, 2016 and September 30, 2015	$ 45,050	$ 45,050
Additional paid-in capital	17,794,116	17,764,316
Statutory surplus	16,439,333	16,439,333
Retained earnings	122,395,463	119,668,198
Accumulated other comprehensive income	1,273,669	3,558,247
Total stockholders' equity	157,947,631	157,475,144
Total Liabilities and Stockholders' Equity	$ 313,090,671	$ 298,440,438

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2016	Sep. 30, 2015
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	45,050,000	45,050,000
Common stock, shares outstanding	45,050,000	45,050,000

XML

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - USD ($)	3 Months Ended		6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Real estate sales	$ 6,851,859	$ 23,558,742	$ 12,708,466	$ 34,124,429
Less: Sales tax	(481,325)	(1,566,839)	(893,313)	(2,237,389)
Cost of real estate sales	(4,128,020)	(11,330,140)	(7,336,909)	(18,355,946)
Gross profit	2,242,514	10,661,763	4,478,244	13,531,094
Operating expenses
Selling and distribution expenses	126,026	217,976	216,179	593,142
General and administrative expenses	580,851	593,348	1,059,362	1,209,526
Total operating expenses	706,877	811,324	1,275,541	1,802,668
Operating income	1,535,637	9,850,439	3,202,703	11,728,426
Interest income	0	3,276	0	4,440
Interest expense	(69,094)	(18,100)	(173,140)	(36,200)
Income before income taxes	1,466,543	9,835,615	3,029,563	11,696,666
Provision for income taxes	166,502	565,514	302,298	800,575
Net income	1,300,041	9,270,101	2,727,265	10,896,091
Other comprehensive income (loss)
Foreign currency translation adjustment	1,054,539	593,266	(2,284,578)	780,027
Comprehensive income	$ 2,354,580	$ 9,863,367	$ 442,687	$ 11,676,118
Basic and diluted income per common share
Basic and diluted	$ 0.03	$ 0.21	$ 0.06	$ 0.24
Weighted average common shares outstanding
Basic	45,050,000	45,050,000	45,050,000	45,050,000
Diluted	45,050,000	45,120,699	45,050,000	45,120,699

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash flows from operating activities
Net income	$ 2,727,265	$ 10,896,091
Adjustments to reconcile net income to net cash providing by (used in) operating activities:
Deferred tax provision	154,618	734,407
Stock based compensation	29,800	0
Depreciation	39,909	42,012
Changes in assets and liabilities:
Due from local government for real estate property development completed	0	814,120
Advances to vendors	(22,979)	(65,130)
Cost and earnings in excess of billings	876,158	1,299,070
Real estate property development completed	4,416,727	1,675,022
Real estate property under development	(21,468,295)	801,585
Other current assets	(2,336,254)	1,176,152
Accounts payables	(13,409,544)	(17,215,394)
Other payables	714,978	547,901
Billings in excess of cost and earnings	(972,219)	2,985,006
Customer deposits	6,092,375	(890,271)
Construction deposits	(465,792)	(9,832)
Accrued expenses	(437,604)	767,099
Taxes payable	442,578	1,004,726
Net cash (used in) providing by operating activities	(23,618,279)	4,562,564
Cash flow from financing activities
Restricted cash	(64,102)	(30,168)
Proceeds from shareholder loan	842,975	5,856,780
Repayment of shareholder loan	(357,298)	0
Repayment of bank loans	(4,640,228)	(6,512,961)
Proceeds from other loans	33,746,140	4,884,721
Repayment of other loans	(5,579,101)	(8,873,910)
Net cash provided by (used in) financing activities	23,948,386	(4,675,538)
Effect of changes of foreign exchange rate on cash	(18,343)	5,884
Net increase (decrease) in cash	311,764	(107,090)
Cash, beginning of period	1,333,919	1,125,545
Cash, end of period	1,645,683	1,018,455
Supplemental disclosures of cash flow information:
Interest paid	961,149	1,056,229
Income taxes paid	$ 162,762	$ 72,089

XML

ORGANIZATION AND BASIS OF PRESENTATION

6 Months Ended

Mar. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

ORGANIZATION AND BASIS OF PRESENTATION

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

China HGS Real Estate, Inc. (“China HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential apartments, parking space and commercial properties in Tier 3 and Tier 4 cities and counties in China.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 2016 and 2015 are not necessarily indicative of the results that may be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 filed with the SEC on December 18, 2015.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs, share-based compensation and other similar charges. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Fair value of financial instruments

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the accompanying condensed consolidated balance sheets for cash, restricted cash, advances to vendors, security deposits for land use rights, other current assets, accounts payable, short-term loans, other payables, customer deposits, accrued expenses and taxes payable approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term loan payable.

Revenue recognition

Percentage of Completion method

Real estate sales for the long term real estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

a.	Construction is beyond a preliminary stage.
b.	The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
c.	Sufficient units have already been sold to assure that the entire property will not revert to rental property.
d.	Sales prices are collectible.
e.	Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met. 

Percentage of Completion method

Under the percentage of completion method, revenues from condominium units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Full accrual method

Revenue from the sales of short term development properties, where the construction period is expected to be 18 months or less is recognized by the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property.

The Company provides “mortgage loan guarantees” only with respect to buyers who make down-payments of 30%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receives the loan proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.

 

Full accrual method

For municipal road construction projects, fees are generally recognized by the full accrual method at the time the projects are completed.

Foreign currency translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

	For six months ended March 31,				September 30,
	2016		2015		2015
Period end RMB : USD exchange rate		6.4494		6.1206		6.3568
Six months average RMB : USD exchange rate		6.4652		6.1416		6.1653

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

Cash

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted Cash

The restricted cash is required by the banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any risks.

 

Advances to vendors

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.

Security deposits for land use rights

Security deposits for land use rights consist of the deposits held by the PRC government for the purchase of land use rights and other deposit held by an unrelated party to transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfer of legal title.

Real estate property development completed and under development

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real estate property under development is classified as a current asset, if the property is reasonably expected to be completed within the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and six months ended March 31, 2016 and 2015, the Company did not recognize any impairment for real estate property under development and completed.

Capitalization of Interest

Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is expensed as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three and six months ended March 31, 2016, the total interest capitalized in the real estate property development was $442,788 and $874,936, respectively. For the three and six months ended March 31, 2015, the total interest capitalized in the real estate property under development was $1,005,007 and $1,968,313.

 

Impairment of long-lived assets

In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company is required to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the three and six months ended March 31, 2016 and 2015.

Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.

Property warranty

The Company provides its customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the three and six months periods ended March 31, 2016 and 2015, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is considered necessary at the balance sheet dates.

 

Construction Deposits

Construction deposits are the warranty deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse customers in the event of customer claims due to construction defects. The remaining balance of the deposits are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date of the deposit.

Share-based compensation

Share-based payment transactions are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.

Forfeitures are estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest.

Income taxes

Deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of March 31, 2016 and September 30, 2015.

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result, the Company did not generate any U.S. taxable income for the three and six months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, Chinese entities’ income tax returns filed in China for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 are subject to examination by the Chinese taxing authorities.

As of March 31, 2016, the tax years ended September 30, 2007 through December 31, 2015 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s tax years ended September 30, 2011 through December 31, 2015 remains open for statutory examination by U.S. tax authorities.

Land appreciation tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

 

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nandajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.

 

Comprehensive income (loss)

In accordance with ASC 220-10-55, comprehensive income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of comprehensive income (loss) during the three and six months ended March 31, 2016 and 2015 were net income and foreign currency translation adjustments.

Basic and diluted earnings per share

The Company computes earnings per share (“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Advertising expenses

Advertising costs are expensed as incurred. For the three and six months ended March 31, 2016, the Company recorded advertising expenses of $22,949 and $43,416, respectively (2015 - $65,313 and $154,043).

 

Concentration risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

The Company is dependent on third-party sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials. For the three months ended March 31, 2016, two suppliers accounted for over 43% and 16% of the Company’s total project expenditures, respectively. For the three months ended March 31, 2015, three suppliers accounted for 25%, 17% and 12% of project expenditures. For the six months ended March 31, 2016, two suppliers accounted for 55% and 12% of the Company’s the project expenditures. For the six months ended March 31, 2015, two suppliers accounted for 18% and 16% of the Company’s project expenditures, respectively.

Reclassification

Restricted cash in 2015 cash flows have been reclassified as cash flow from financing activities to conform to the current period presentation. This reclassification has no effect on the accompanying condensed consolidated cash flows.

Recent Accounting Pronouncements

In January 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect, if any, this update will have on the Company's unaudited condensed consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In April 2016, the FASB released ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

XML

REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

6 Months Ended

Mar. 31, 2016

Real Estate [Abstract]

REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

The following summarizes the components of real estate property development completed and under development as of March 31, 2016 and September 30, 2015:

	March 31, 2016		September 30, 2015
Development completed
Hanzhong City Mingzhu Garden Phase I	$	1,073,655	$	1,146,277
Hanzhong City Mingzhu Garden Phase II		61,659,416		66,070,589
Hanzhong City Nan Dajie (Mingzhu Xinju)		1,418,592		1,439,257
Yang County Yangzhou Pearl Garden Phase I		3,050,534		3,419,273
Yang County Yangzhou Pearl Garden Phase II		4,788,843		5,456,387
Real estate property development completed		71,991,040		77,531,783
Less: Real estate property completed –short-term		70,037,049		75,391,512
Real estate property completed –long-term	$	1,953,991	$	2,140,271
Under development:
Hanzhong City Oriental Pearl Garden (a)	$	54,500,799	$	55,154,153
Yang County Yangzhou Palace		61,429,290		47,843,166
Hanzhong City Shijin Project		7,510,424		7,619,829
Hanzhong City Liangzhou Road and related projects (b)		90,906,456		85,069,755
Hanzhong City Hanfeng Beiyuan East (c)		579,550		587,993
Hanzhong City Beidajie (e)		77,604		78,735
Yang County East 2nd Ring Road (d)		2,477,130		2,461,303
Real estate property under development		217,481,253		198,814,934
Less: Short-term portion		54,500,779		55,154,153
Real estate property under development –long-term	$	162,980,474	$	143,660,781

(a) The Company recognized $1,970,130 and $2,920,181 of development cost in cost of real estate sales under the percentage of completion method for the three and six months ended March 31, 2016 (2015 - $4,391,364 and $6,619,422). The Company was in the process of finalizing landscaping and underground structure and expected to complete the construction before September 30, 2016.

(b) In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. Due to the extension, the Company expected the road construction to be completed in late 2016. The Company’s development cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government.

As of March 31, 2016, the actual costs incurred by the Company were $90,906,456 (September 30, 2015- $85,069,755) and the incremental cost related to residence resettlement approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. For the three and six months ended March 31, 2016 and 2015, the Company did not receive government’s subsidies for its Shanty Area Reform Project surrounding Liang Zhou Road located in Hantai District, Hanzhong City, respectively.

(c) In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the year ended September 30, 2014. As of March 31, 2016, the Company was in discussion with the local government to finalize the budget for the project.

(d) The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 kilometers and a budgeted price of approximately $26.1 million (or RMB168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (March 31, 2016 -5% and September 30, 2015 – 5%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction is expected to be completed by late 2016 or early 2017.

(e) For the three and six months ended March 31, 2016, the Company received government’s subsidies in the amount of $Nil and $3,256,029 for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District, Hanzhong City, respectively. For the three and six months ended March 31, 2015, the Company did not receive related government subsidies. Since the Company has not met the performance requirement, the Company included the subsidies received in the liability.

As of March 31, 2016 and September 30, 2015, land use rights included in real estate property under development totaled $38,734,372 and $39,929,072, respectively.

XML

BANK LOAN

6 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

BANK LOAN

NOTE 4. BANK LOAN

On August 23, 2013, the Company entered into a project finance loan agreement (the "Loan Agreement") with China Construction Bank, Hanzhong Branch (the “Bank") for a working capital loan (the “Loan”). The Loan has a three-year term in the principal amount of $23,257,977 (RMB150,000,000) at an interest rate 5.5% at March 31, 2016 which is 0.5% over the benchmark interest rate of 5.0% and is adjustable every twelve months from the date of the loan. The loan is for the development of the Company’s Mingzhu Beiyuan project.

 

The Company pledged its real estate properties in the Mingzhu Beiyuan project (Phase II) with carrying value of $61,659,416 as of March 31, 2016 (September 30, 2015 - $66,070,589). The Loan is also subject to certain covenants including current ratio of not less than 2 and quick ratio of not less than 0.8. The bank treated all the Company’s real estate property including real estate property completed and real estate property under development as current assets. Based on the fact that the Company made timely repayments as required in the loan agreement during fiscal 2015 and 2016 and Mingzhu Beiyuan achieved good presale status, the bank waived both current ratio and quick ratio requirement under the loan agreement. The balance of loan is due on August 20, 2016.

 

	March 31, 2016		September 30, 2015
China Construction Bank Loan	$	1,550,532	$	6,292,474

The average interest rate of the loan was 5.5% as of March 31, 2016 and September 30, 2015. For the three and six months ended March 31, 2016, total loan interest was $49,345 and $132,408, which was included in the interest expense for the period, because the project has been completed by September 30, 2015. For the three and six months ended March 31, 2015, the total loan interest was $49,345 and $132,408, which was capitalized in to the development cost of Mingzhu Garden – Mingzhu Beiyuan project Phase II.

XML

OTHER LOANS

6 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

OTHER LOANS

NOTE 5. OTHER LOANS

	March 31, 2016		September 30, 2015
Loan A (i)	$	-	$	954,883
Loan B (ii)		-		4,719,356
Loan C (iii)		36,929,876		15,731,186
Loan D (iv)		12,404,255		-
		49,334,131		21,405,425
Less: current maturities of other loans		-		5,674,239
Other loans-long term portion	$	49,334,131	$	15,731,186

(i) A working capital finance agreement with a local investment company in Hanzhong was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, total interest was $5,729 and $23,607 (2015 - $333,464 and $716,274) respectively, which was capitalized in to the development cost of Liangzhou road project.

(ii) A credit agreement with a financial institution was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, the interest was $Nil and $108,272 (2015 - $268,790 and $450,480), respectively, which was capitalized in to the development cost of Oriental Pearl Garden real estate project.

 

(iii) On June 26, 2015, the Company signed an agreement with Hanzhong Urban Construction Investment Development Co., Ltd., a state owned Company, to borrow up to $38,763,296 (RMB 250,000,000) long term loan at 4.245% interest to develop Liang Zhou Road Project. As of March 31, 2016, the Company borrowed $36,929,876 from this credit line. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Palace project with carrying value of $61,429,290 as of March 31, 2016. For the three and six months ended March 31, 2016, total interest was $359,405 and $652,885 (2015- $Nil) respectively, which was capitalized in to the development cost of Liangzhou road project. The loan has following repayment schedule:

	Repayment in USD		Repayment in RMB
Part I
May 29, 2017		3,314,346		21,375,542
November 20, 2017		5,147,766		33,200,000
May 20, 2018		5,256,303		33,900,000
November 20, 2018		5,256,303		33,900,000
May 20, 2019		5,411,356		34,900,000
November 29, 2019		5,411,356		34,900,000
Part II
May 29, 2017		1,187,707		7,660,000
November 20, 2017		1,187,707		7,660,000
May 20, 2018		1,187,258		7,670,000
November 20, 2018		1,187,258		7,670,000
May 20, 2019		1,187,258		7,670,000
November 29, 2019		1,187,258		7,670,000
Total		36,929,876		238,175,542

(iv) On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center (“Housing Fund”) to borrow up to approximately $12,404,255 million (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at is 3.575% and is due in January 2019. Our major shareholder pledged his assets for the loan. As of March 31, 2016, the Company received full proceeds from Housing Fund. The progress repayment is required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and six months ended March 31, 2016, total interest was $67,584 (2015- $Nil) respectively, which was capitalized in to the development cost of Oriental Garden project. The full amount of loan has following repayment schedule:

	Repayment in USD		Repayment in RMB
Earlier of July 2018 or 60% sales completed		3,101,065		20,000,000
Earlier of October 2018 or 70% sales completed		4,651,595		30,000,000
Earlier of January 2019 or 75% sales completed		4,651,595		30,000,000
Total		12,404,255		80,000,000

XML

CUSTOMER DEPOSITS

6 Months Ended

Mar. 31, 2016

Banking and Thrift [Abstract]

CUSTOMER DEPOSITS

NOTE 6. CUSTOMER DEPOSITS

Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:

	March 31, 2016		September 30, 2015
Customer deposits by real estate projects
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II	$	10,016,585	$	7,832,619
Hanzhong City Oriental Pearl Garden		8,549,160		7,220,575
Liangzhou road and related projects		2,572,332		2,035,615
Yang County Palace		6,687,116		6,210,389
Yangzhou Pearl Garden Phase I and II		3,548,030		2,334,775
Total		31,373,223		25,633,973
Less Customer deposits -short-term		22,113,775		17,387,969
Customer deposits - long-term	$	9,259,448	$	8,246,004

Customer deposits are typically 10%-20% of the unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of March 31, 2016 and September 30, 2015, approximately $1.8 million and $1.7 million was guaranteed by the Company, respectively.

XML

RELATED PARTY LOANS

6 Months Ended

Mar. 31, 2016

Related Party Transactions [Abstract]

RELATED PARTY LOANS

NOTE 7. RELATED PARTY LOANS

	March 31, 2016		September 30, 2015
Shareholder loan – USD loan (a)	$	1,810,000	$	1,810,000
Shareholder loan – RMB loan (b)		486,867		-
Total	$	2,296,867	$	1,810,000

a. The Company has a one year loan agreement (“USD Loan Agreement”) with Mr. Xiaojun Zhu, the Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The loan is due on July 31, 2016. The Company recorded interest of $18,100 and $36,200 for the three and six months ended March 31, 2016 (2015 -$18,100 and $36,200). The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

b. On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow from Mr. Zhu in order to support the Company’s Liang Shan Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed with a new expiration date of March 31, 2017, with at an interest rate of 5.5% as of March 31, 2016 and September 30, 2015. The Company recorded interest of $10,070 and $22,588 for the three and six months ended March 31, 2016 (2015 - $115,132 and $195,231), respectively, which is capitalized in the development cost of Liangzhou road project. The Company has not paid this interest and it is recorded in accrued expenses in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

XML

STOCK OPTIONS

6 Months Ended

Mar. 31, 2016

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

STOCK OPTIONS

NOTE 8. STOCK OPTIONS

On August 22, 2015, the Company’s Board of Directors granted stock options to two new independent directors to repurchase up to an aggregate of 120,000 shares of the Company’s common stock (“2015 Stock Options”). The shares underlying the options become excisable during the following 36 months period at the end of each quarter. The exercise price of the options is $1.89 per share. As of March 31, 2016 and September 30, 2015, 19.4% and 2.8% of the option awards have vested, respectively. The assumptions used in calculating the fair value of options granted using the Black-Scholes option pricing model are as follows:

 

The assumptions used in calculating the fair value of options granted using the Black-Scholes option pricing model are as follows:	Options granted in August 2015
Risk-free interest rate		0.95	%
Expected life of the options		3 year
Expected volatility		143	%
Expected dividend yield		0	%
Fair value	$	178,800

The Company uses the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates to determine fair value. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is primarily based on the simplified method due to the Company’s limited option exercise behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following table summarizes the stock option activities of the Company:

	Number of options		Weighted Average Exercise Price		Weighted Average Remaining Life in Years		Aggregate intrinsic value
Outstanding, September 30, 2015		130,000	$	1.93		2.71	$	-
Granted		-		-		-		-
Forfeited		(10,000)		1.31		-		-
Exercised		-		-		-		-
Outstanding, March 31, 2016		120,000	$	1.89		2.39	$	-
Exercisable, March 31, 2016		23,333	$	1.89		2.39	$	-

The Company recorded $14,900 and $29,800 stock-based compensation expense for the three and six months ended March 31, 2016 (2015 - $Nil), respectively. Since the average share price for the three and six months ended March 31, 2016 was below the exercise price of the above options, these options were anti-dilutive at March 31, 2016 and therefore would not be included in the diluted shares calculation.

XML

TAXES

6 Months Ended

Mar. 31, 2016

Income Tax Disclosure [Abstract]

TAXES

NOTE 9. TAXES

(A) Business sales tax

The Company is subject to a 5% business sales tax on revenue.  It is the Company’s continuing practice to recognize the 5% business sales tax based on revenue as a cost of sales as the revenue is recognized. As of March 31, 2016, the Company had business sales tax payable of $13,561,559 (September 30, 2015- $13,306,414), which is expected to be paid when the projects are completed and assessed by the local tax authority

(B) Corporate income taxes (“CIT”)

The Company’s PRC subsidiaries and VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed annually at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue. For the three and six months ended March 31, 2016 the Company’s income taxes were $166,502 and $302,298 (2015 - $565,514 and $800,575), respectively.

Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules.  The difference between the two tax rules will not be a liability of the Company.  There will be no further tax payments for the difference.

Income tax expense for the three and six months ended March 31, 2016 and 2015 is summarized as follows:

	Three months ended				Six months ended
	March 31,				March 31,
	2016		2015		2016		2015
Current tax provision	$	78,188	$	54,910	$	147,680	$	66,168
Deferred tax provision		88,314		510,604		154,618		734,407
Income tax provision	$	166,502	$	565,514	$	302,298	$	800,575

The parent Company China HGS Real Estate Inc. is incorporated in the United States. Net operating loss carry forwards for United States income tax purposes approximated to $467,000 and $401,000 as of March 31, 2016 and September 30, 2015, respectively, which are available to reduce future years’ taxable income. These carry forwards will expire in 2035. However, the change in control resulting from the reverse merger in 2009 limits the amount of loss to be utilized each year. Management doesn’t expect to remit any of its net income back to the United States in the foreseeable future. Accordingly, the Company recorded a full valuation allowance as of March 31, 2016 and September 30, 2015. The components of deferred taxes as of March 31, 2016 and September 30, 2015 consist of the following:

	March 31, 2016		September 30, 2015
Deferred tax assets
Deferred tax assets from net operating loss carry-forwards for U.S. parent company	$	158,834	$	136,394
Valuation allowance		(158,834)		(136,394)
Deferred tax asset-net	$	-	$	-
Deferred tax liability
Revenue recognized based on percentage of completion	$	4,798,516	$	4,711,161
Deferred tax liability- long term	$	4,798,516	$	4,711,161

The valuation allowance increased $11,220 and $22,440 for the three and six months ended March 31, 2016 (2015 -$6,154 and $12,308), respectively.

	Three months ended				Six months ended
	March 31,				March 31,
	2016		2015		2016		2015
Beginning Balance	$	147,614	$	116,243	$	136,394	$	110,089
Current period additions		11,220		6,154		22,440		12,308
Ending Balance	$	158,834	$	122,397	$	158,834	$	122,397

(C) Land Appreciation Tax (“LAT”)

Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from  30% to  60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, the Company’s local tax authority in Hanzhong City has not imposed the regulation on real estate companies in its area of administration. Instead, the local tax authority has levied the LAT at the rate of  0.5% in Yang County and  1.0% in Hanzhong against total cash receipts from sales of real estate properties, rather than according to the progressive rates. As at March 31, 2016, the outstanding LAT payable was $882,874 with respect to completed real estate properties sold up to March 31, 2016. As at September 30, 2015,  the outstanding LAT payable balance was $752,664 with respect to completed real estate properties sold up to September 30, 2015. 

 (D) Taxes payable consisted of the following:

	March 31,		September 30,
	2016		2015
CIT	$	768,250	$	794,780
Business tax		13,561,559		13,306,414
Other tax and fees		1,717,441		1,729,692
Total taxes payable	$	16,047,250	$	15,830,886

XML

COMMITMENTS AND CONTINGENCY

6 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 10. COMMITMENTS AND CONTINGENCY

As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient. As of March 31, 2016 and September 30, 2015, the amount of security deposit provided for these guarantees was approximately $1.8 million and $1.7 million respectively.

Total operating lease commitments for rental of office of the Company’s PRC subsidiaries as of March 31, 2016 is as follows:

	Minimum
Twelve months ending March 31,	lease payment
2017	$	21,836
Years after		-
Total minimum payments required	$	21,836

For the three and six months ended March 31, 2016, the rental expense was $6,306 and $12,760 (2015 -$6,740 and $13,479), respectively

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

Principles of consolidation

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Use of estimates

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs, share-based compensation and other similar charges. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Fair value of financial instruments

Fair value of financial instruments

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the accompanying condensed consolidated balance sheets for cash, restricted cash, advances to vendors, security deposits for land use rights, other current assets, accounts payable, short-term loans, other payables, customer deposits, accrued expenses and taxes payable approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term loan payable.

Revenue recognition

Revenue recognition

Percentage of Completion method

Real estate sales for the long term real estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

a.	Construction is beyond a preliminary stage.
b.	The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
c.	Sufficient units have already been sold to assure that the entire property will not revert to rental property.
d.	Sales prices are collectible.
e.	Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met. 

Percentage of Completion method

Under the percentage of completion method, revenues from condominium units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Full accrual method

Revenue from the sales of short term development properties, where the construction period is expected to be 18 months or less is recognized by the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property.

The Company provides “mortgage loan guarantees” only with respect to buyers who make down-payments of 30%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receives the loan proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.

 

Full accrual method

For municipal road construction projects, fees are generally recognized by the full accrual method at the time the projects are completed.

Foreign currency translation

Foreign currency translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

	For six months ended March 31,				September 30,
	2016		2015		2015
Period end RMB : USD exchange rate		6.4494		6.1206		6.3568
Six months average RMB : USD exchange rate		6.4652		6.1416		6.1653

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

Cash

Cash

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted cash

Restricted Cash

The restricted cash is required by the banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any risks.

Advances to vendors

Advances to vendors

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.

Security deposits for land use rights

Security deposits for land use rights

Security deposits for land use rights consist of the deposits held by the PRC government for the purchase of land use rights and other deposit held by an unrelated party to transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfer of legal title.

Real estate property development completed and under development

Real estate property development completed and under development

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real estate property under development is classified as a current asset, if the property is reasonably expected to be completed within the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and six months ended March 31, 2016 and 2015, the Company did not recognize any impairment for real estate property under development and completed.

Capitalization of Interest

Capitalization of Interest

Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is expensed as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three and six months ended March 31, 2016, the total interest capitalized in the real estate property development was $442,788 and $874,936, respectively. For the three and six months ended March 31, 2015, the total interest capitalized in the real estate property under development was $1,005,007 and $1,968,313.

Impairment of long-lived assets

Impairment of long-lived assets

In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company is required to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the three and six months ended March 31, 2016 and 2015.

Customer deposits

Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.

Property warranty

Property warranty

The Company provides its customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the three and six months periods ended March 31, 2016 and 2015, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is considered necessary at the balance sheet dates.

Construction Deposits

Construction Deposits

Construction deposits are the warranty deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse customers in the event of customer claims due to construction defects. The remaining balance of the deposits are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date of the deposit.

Stock-based compensation

Share-based compensation

Share-based payment transactions are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.

Forfeitures are estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest.

Income taxes

Income taxes

Deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of March 31, 2016 and September 30, 2015.

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result, the Company did not generate any U.S. taxable income for the three and six months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, Chinese entities’ income tax returns filed in China for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 are subject to examination by the Chinese taxing authorities.

As of March 31, 2016, the tax years ended September 30, 2007 through December 31, 2015 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s tax years ended September 30, 2011 through December 31, 2015 remains open for statutory examination by U.S. tax authorities.

Land appreciation tax ("LAT")

Land appreciation tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

 

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nandajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.

Comprehensive income

Comprehensive income (loss)

In accordance with ASC 220-10-55, comprehensive income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of comprehensive income (loss) during the three and six months ended March 31, 2016 and 2015 were net income and foreign currency translation adjustments.

Basic and diluted earnings per share

Basic and diluted earnings per share

The Company computes earnings per share (“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Advertising expenses

Advertising expenses

Advertising costs are expensed as incurred. For the three and six months ended March 31, 2016, the Company recorded advertising expenses of $22,949 and $43,416, respectively (2015 - $65,313 and $154,043).

Concentration risk

Concentration risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

The Company is dependent on third-party sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials. For the three months ended March 31, 2016, two suppliers accounted for over 43% and 16% of the Company’s total project expenditures, respectively. For the three months ended March 31, 2015, three suppliers accounted for 25%, 17% and 12% of project expenditures. For the six months ended March 31, 2016, two suppliers accounted for 55% and 12% of the Company’s the project expenditures. For the six months ended March 31, 2015, two suppliers accounted for 18% and 16% of the Company’s project expenditures, respectively.

Reclassification

Reclassification

Restricted cash in 2015 cash flows have been reclassified as cash flow from financing activities to conform to the current period presentation. This reclassification has no effect on the accompanying condensed consolidated cash flows.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In January 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect, if any, this update will have on the Company's unaudited condensed consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In April 2016, the FASB released ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

Currency Exchange Rate

	For six months ended March 31,				September 30,
	2016		2015		2015
Period end RMB : USD exchange rate		6.4494		6.1206		6.3568
Six months average RMB : USD exchange rate		6.4652		6.1416		6.1653

XML

REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT (Tables)

6 Months Ended

Mar. 31, 2016

Real Estate [Abstract]

Components of Real Estate Property Completed and under Development

The following summarizes the components of real estate property development completed and under development as of March 31, 2016 and September 30, 2015:

	March 31, 2016		September 30, 2015
Development completed
Hanzhong City Mingzhu Garden Phase I	$	1,073,655	$	1,146,277
Hanzhong City Mingzhu Garden Phase II		61,659,416		66,070,589
Hanzhong City Nan Dajie (Mingzhu Xinju)		1,418,592		1,439,257
Yang County Yangzhou Pearl Garden Phase I		3,050,534		3,419,273
Yang County Yangzhou Pearl Garden Phase II		4,788,843		5,456,387
Real estate property development completed		71,991,040		77,531,783
Less: Real estate property completed –short-term		70,037,049		75,391,512
Real estate property completed –long-term	$	1,953,991	$	2,140,271
Under development:
Hanzhong City Oriental Pearl Garden (a)	$	54,500,799	$	55,154,153
Yang County Yangzhou Palace		61,429,290		47,843,166
Hanzhong City Shijin Project		7,510,424		7,619,829
Hanzhong City Liangzhou Road and related projects (b)		90,906,456		85,069,755
Hanzhong City Hanfeng Beiyuan East (c)		579,550		587,993
Hanzhong City Beidajie (e)		77,604		78,735
Yang County East 2nd Ring Road (d)		2,477,130		2,461,303
Real estate property under development		217,481,253		198,814,934
Less: Short-term portion		54,500,779		55,154,153
Real estate property under development –long-term	$	162,980,474	$	143,660,781

(a) The Company recognized $1,970,130 and $2,920,181 of development cost in cost of real estate sales under the percentage of completion method for the three and six months ended March 31, 2016 (2015 - $4,391,364 and $6,619,422). The Company was in the process of finalizing landscaping and underground structure and expected to complete the construction before September 30, 2016.

(b) In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. Due to the extension, the Company expected the road construction to be completed in late 2016. The Company’s development cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government.

As of March 31, 2016, the actual costs incurred by the Company were $90,906,456 (September 30, 2015- $85,069,755) and the incremental cost related to residence resettlement approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. For the three and six months ended March 31, 2016 and 2015, the Company did not receive government’s subsidies for its Shanty Area Reform Project surrounding Liang Zhou Road located in Hantai District, Hanzhong City, respectively.

(c) In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the year ended September 30, 2014. As of March 31, 2016, the Company was in discussion with the local government to finalize the budget for the project.

(d) The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 kilometers and a budgeted price of approximately $26.1 million (or RMB168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (March 31, 2016 -5% and September 30, 2015 – 5%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction is expected to be completed by late 2016 or early 2017.

(e) For the three and six months ended March 31, 2016, the Company received government’s subsidies in the amount of $Nil and $3,256,029 for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District, Hanzhong City, respectively. For the three and six months ended March 31, 2015, the Company did not receive related government subsidies. Since the Company has not met the performance requirement, the Company included the subsidies received in the liability.

XML

BANK LOAN (Tables)

6 Months Ended

Mar. 31, 2016

Bank Loan [Member]

Debt Instrument [Line Items]

Component of Short Term Debt

Based on the fact that the Company made timely repayments as required in the loan agreement during fiscal 2015 and 2016 and Mingzhu Beiyuan achieved good presale status, the bank waived both current ratio and quick ratio requirement under the loan agreement. The balance of loan is due on August 20, 2016. 

	March 31, 2016		September 30, 2015
China Construction Bank Loan	$	1,550,532	$	6,292,474

XML

OTHER LOANS (Tables) - OTHER LOANS [Member]

6 Months Ended

Mar. 31, 2016

Schedule of Long-term Debt Instruments

	March 31, 2016		September 30, 2015
Loan A (i)	$	-	$	954,883
Loan B (ii)		-		4,719,356
Loan C (iii)		36,929,876		15,731,186
Loan D (iv)		12,404,255		-
		49,334,131		21,405,425
Less: current maturities of other loans		-		5,674,239
Other loans-long term portion	$	49,334,131	$	15,731,186

(i) A working capital finance agreement with a local investment company in Hanzhong was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, total interest was $5,729 and $23,607 (2015 - $333,464 and $716,274) respectively, which was capitalized in to the development cost of Liangzhou road project.

(ii) A credit agreement with a financial institution was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, the interest was $Nil and $108,272 (2015 - $268,790 and $450,480), respectively, which was capitalized in to the development cost of Oriental Pearl Garden real estate project.

(iii) On June 26, 2015, the Company signed an agreement with Hanzhong Urban Construction Investment Development Co., Ltd., a state owned Company, to borrow up to $38,763,296 (RMB 250,000,000) long term loan at 4.245% interest to develop Liang Zhou Road Project. As of March 31, 2016, the Company borrowed $36,929,876 from this credit line. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Palace project with carrying value of $61,429,290 as of March 31, 2016. For the three and six months ended March 31, 2016, total interest was $359,405 and $652,885 (2015- $Nil) respectively, which was capitalized in to the development cost of Liangzhou road project. The loan has following repayment schedule:

(iv) On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center (“Housing Fund”) to borrow up to approximately $12,404,255 million (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at is 3.575% and is due in January 2019. Our major shareholder pledged his assets for the loan. As of March 31, 2016, the Company received full proceeds from Housing Fund. The progress repayment is required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and six months ended March 31, 2016, total interest was $67,584 (2015- $Nil) respectively, which was capitalized in to the development cost of Oriental Garden project. The full amount of loan has following repayment schedule:

Hanzhong Urban Construction Investment Development Co., Ltd [Member]

Schedule of Maturities of Long-term Debt

	Repayment in USD		Repayment in RMB
Part I
May 29, 2017		3,314,346		21,375,542
November 20, 2017		5,147,766		33,200,000
May 20, 2018		5,256,303		33,900,000
November 20, 2018		5,256,303		33,900,000
May 20, 2019		5,411,356		34,900,000
November 29, 2019		5,411,356		34,900,000
Part II
May 29, 2017		1,187,707		7,660,000
November 20, 2017		1,187,707		7,660,000
May 20, 2018		1,187,258		7,670,000
November 20, 2018		1,187,258		7,670,000
May 20, 2019		1,187,258		7,670,000
November 29, 2019		1,187,258		7,670,000
Total		36,929,876		238,175,542

Hanzhong Municipal Housing Provident Fund Management Center [Member]

Schedule of Maturities of Long-term Debt

	Repayment in USD		Repayment in RMB
Earlier of July 2018 or 60% sales completed		3,101,065		20,000,000
Earlier of October 2018 or 70% sales completed		4,651,595		30,000,000
Earlier of January 2019 or 75% sales completed		4,651,595		30,000,000
Total		12,404,255		80,000,000

XML

CUSTOMER DEPOSITS (Tables)

6 Months Ended

Mar. 31, 2016

Banking and Thrift [Abstract]

Customer Deposits from Pre-Sale of Residential Units

Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:

	March 31, 2016		September 30, 2015
Customer deposits by real estate projects
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II	$	10,016,585	$	7,832,619
Hanzhong City Oriental Pearl Garden		8,549,160		7,220,575
Liangzhou road and related projects		2,572,332		2,035,615
Yang County Palace		6,687,116		6,210,389
Yangzhou Pearl Garden Phase I and II		3,548,030		2,334,775
Total		31,373,223		25,633,973
Less Customer deposits -short-term		22,113,775		17,387,969
Customer deposits - long-term	$	9,259,448	$	8,246,004

XML

RELATED PARTY LOANS (Tables)

6 Months Ended

Mar. 31, 2016

Related Party Transactions [Abstract]

Schedule of Shareholder Loan

	March 31, 2016		September 30, 2015
Shareholder loan – USD loan (a)	$	1,810,000	$	1,810,000
Shareholder loan – RMB loan (b)		486,867		-
Total	$	2,296,867	$	1,810,000

a. The Company has a one year loan agreement (“USD Loan Agreement”) with Mr. Xiaojun Zhu, the Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The loan is due on July 31, 2016. The Company recorded interest of $18,100 and $36,200 for the three and six months ended March 31, 2016 (2015 -$18,100 and $36,200). The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

b. On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow from Mr. Zhu in order to support the Company’s Liang Shan Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed with a new expiration date of March 31, 2017, with at an interest rate of 5.5% as of March 31, 2016 and September 30, 2015. The Company recorded interest of $10,070 and $22,588 for the three and six months ended March 31, 2016 (2015 - $115,132 and $195,231), respectively, which is capitalized in the development cost of Liangzhou road project. The Company has not paid this interest and it is recorded in accrued expenses in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

XML

STOCK OPTIONS (Tables)

6 Months Ended

Mar. 31, 2016

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

Assumptions used in Calculating Fair Value of Options Granted

The assumptions used in calculating the fair value of options granted using the Black-Scholes option pricing model are as follows:	Options granted in August 2015
Risk-free interest rate		0.95	%
Expected life of the options		3 year
Expected volatility		143	%
Expected dividend yield		0	%
Fair value	$	178,800

Stock Option Activities

	Number of options		Weighted Average Exercise Price		Weighted Average Remaining Life in Years		Aggregate intrinsic value
Outstanding, September 30, 2015		130,000	$	1.93		2.71	$	-
Granted		-		-		-		-
Forfeited		(10,000)		1.31		-		-
Exercised		-		-		-		-
Outstanding, March 31, 2016		120,000	$	1.89		2.39	$	-
Exercisable, March 31, 2016		23,333	$	1.89		2.39	$	-

XML

TAXES (Tables)

6 Months Ended

Mar. 31, 2016

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit)

Income tax expense for the three and six months ended March 31, 2016 and 2015 is summarized as follows:

	Three months ended				Six months ended
	March 31,				March 31,
	2016		2015		2016		2015
Current tax provision	$	78,188	$	54,910	$	147,680	$	66,168
Deferred tax provision		88,314		510,604		154,618		734,407
Income tax provision	$	166,502	$	565,514	$	302,298	$	800,575

Components of Deferred Taxes

The components of deferred taxes as of March 31, 2016 and September 30, 2015 consist of the following:

	March 31, 2016		September 30, 2015
Deferred tax assets
Deferred tax assets from net operating loss carry-forwards for U.S. parent company	$	158,834	$	136,394
Valuation allowance		(158,834)		(136,394)
Deferred tax asset-net	$	-	$	-
Deferred tax liability
Revenue recognized based on percentage of completion	$	4,798,516	$	4,711,161
Deferred tax liability- long term	$	4,798,516	$	4,711,161

Summary of Valuation Allowance

The valuation allowance increased $11,220 and $22,440 for the three and six months ended March 31, 2016 (2015 -$6,154 and $12,308), respectively.

	Three months ended				Six months ended
	March 31,				March 31,
	2016		2015		2016		2015
Beginning Balance	$	147,614	$	116,243	$	136,394	$	110,089
Current period additions		11,220		6,154		22,440		12,308
Ending Balance	$	158,834	$	122,397	$	158,834	$	122,397

Taxes payable

	March 31,		September 30,
	2016		2015
CIT	$	768,250	$	794,780
Business tax		13,561,559		13,306,414
Other tax and fees		1,717,441		1,729,692
Total taxes payable	$	16,047,250	$	15,830,886

XML

COMMITMENTS AND CONTINGENCY (Tables)

6 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Schedule Of Future Minimum Rental Payments

Total operating lease commitments for rental of office of the Company’s PRC subsidiaries as of March 31, 2016 is as follows:

	Minimum
Twelve months ending March 31,	lease payment
2017	$	21,836
Years after		-
Total minimum payments required	$	21,836

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Currency Exchange Rate) (Details)	6 Months Ended		12 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Sep. 30, 2015
Period end RMB : USD exchange rate	6.4494	6.1206	6.3568
Six months average RMB : USD exchange rate	6.4652	6.1416	6.1653

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Significant Accounting Policies [Line Items]
Advertising Expense	$ 22,949	$ 65,313	$ 43,416	$ 154,043
Percentage Of Contract Cost Withholds			2.00%
Real Estate Property Plant And Equipment Interest Capitalization	$ 442,788	$ 1,005,007	$ 874,936	$ 1,968,313
Supplier One [Member] | Project Expenditure [Member]
Significant Accounting Policies [Line Items]
Concentration Risk, Percentage	43.00%	25.00%	55.00%	18.00%
Supplier Two [Member] | Project Expenditure [Member]
Significant Accounting Policies [Line Items]
Concentration Risk, Percentage	16.00%	17.00%	12.00%	16.00%
Supplier Three [Member] | Project Expenditure [Member]
Significant Accounting Policies [Line Items]
Concentration Risk, Percentage		12.00%
Hanzhong
Significant Accounting Policies [Line Items]
Land appreciation tax rate			1.00%
Yang Country
Significant Accounting Policies [Line Items]
Land appreciation tax rate			0.50%
Minimum
Significant Accounting Policies [Line Items]
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees			30.00%
Percentage Of Mortgage Proceeds As Security			5.00%
Land appreciation tax rate			30.00%
Maximum
Significant Accounting Policies [Line Items]
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees			50.00%
Percentage Of Mortgage Proceeds As Security			10.00%
Land appreciation tax rate			60.00%

XML

REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT (Components Of Real Estate) (Details) - USD ($)		Mar. 31, 2016	Sep. 30, 2015
Real Estate Properties [Line Items]
Real estate property development completed		$ 71,991,040	$ 77,531,783
Less: Real estate property completed - short-term		70,037,049	75,391,512
Real estate property completed - long-term		1,953,991	2,140,271
Real estate property under development		217,481,253	198,814,934
Less: Short-term portion		54,500,779	55,154,153
Real estate property under development -long-term		162,980,474	143,660,781
Hanzhong City Mingzhu Garden Phase I
Real Estate Properties [Line Items]
Real estate property development completed		1,073,655	1,146,277
Hanzhogn City Mingzhu Garden Phase II
Real Estate Properties [Line Items]
Real estate property development completed		61,659,416	66,070,589
Hanzhong City Nan Dajie (Mingzhu Xinju)
Real Estate Properties [Line Items]
Real estate property development completed		1,418,592	1,439,257
Yang County Yangzhou Pearl Garden Phase I
Real Estate Properties [Line Items]
Real estate property development completed		3,050,534	3,419,273
Yang County Yangzhou Pearl Garden Phase II
Real Estate Properties [Line Items]
Real estate property development completed		4,788,843	5,456,387
Hanzhong City Oriental Pearl Garden
Real Estate Properties [Line Items]
Real estate property under development	[1]	54,500,799	55,154,153
Yang County Yangzhou Palace
Real Estate Properties [Line Items]
Real estate property under development		61,429,290	47,843,166
Hanzhong City Shijin Project
Real Estate Properties [Line Items]
Real estate property under development		7,510,424	7,619,829
Hanzhong City Liangzhou Road and related projects
Real Estate Properties [Line Items]
Real estate property under development	[2]	90,906,456	85,069,755
Hanzhong City Hanfeng Beiyuan East
Real Estate Properties [Line Items]
Real estate property under development	[3]	579,550	587,993
Hanzhong City Beidajie
Real Estate Properties [Line Items]
Real estate property under development	[4]	77,604	78,735
Yang County East 2nd Ring Road
Real Estate Properties [Line Items]
Real estate property under development	[5]	$ 2,477,130	$ 2,461,303

[1] The Company recognized $1,970,130 and $2,920,181 of development cost in cost of real estate sales under the percentage of completion method for the three and six months ended March 31, 2016 (2015 - $4,391,364 and $6,619,422). The Company was in the process of finalizing landscaping and underground structure and expected to complete the construction before September 30, 2016.

[2] In September 2013, the Company entered into an agreement ("Liangzhou Agreement") with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project"). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government's original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project's road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. Due to the extension, the Company expected the road construction to be completed in late 2016. The Company's development cost incurred on Liangzhou Road Project is treated as the Company's deposit on purchasing the related land use rights, as agreed by the local government. As of March 31, 2016, the actual costs incurred by the Company were $90,906,456 (September 30, 2015- $85,069,755) and the incremental cost related to residence resettlement approved by the local government. The Company determined that the Company's Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. For the three and six months ended March 31, 2016 and 2015, the Company did not receive government's subsidies for its Shanty Area Reform Project surrounding Liang Zhou Road located in Hantai District, Hanzhong City, respectively.

[3] In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the year ended September 30, 2014. As of March 31, 2016, the Company was in discussion with the local government to finalize the budget for the project.

[4] For the three and six months ended March 31, 2016, the Company received government’s subsidies in the amount of $Nil and $3,256,029 for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District, Hanzhong City, respectively. For the three and six months ended March 31, 2015, the Company did not receive related government subsidies. Since the Company has not met the performance requirement, the Company included the subsidies received in the liability.

[5] The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 kilometers and a budgeted price of approximately $26.1 million (or RMB168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (March 31, 2016 -5% and September 30, 2015 – 5%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction is expected to be completed by late 2016 or early 2017.

XML

REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT (Narrative) (Details) ¥ in Millions	3 Months Ended		6 Months Ended
	Mar. 31, 2016 USD ($)	Mar. 31, 2015 USD ($)	Mar. 31, 2016 USD ($)	Mar. 31, 2016 CNY (¥)	Mar. 31, 2015 USD ($)	Sep. 30, 2015 USD ($)
Real Estate Properties [Line Items]
Land use right included in real estate property under development	$ 38,734,372		$ 38,734,372			$ 39,929,072
Hanzhong City Oriental Pearl Garden
Real Estate Properties [Line Items]
Construction and Development Costs, Total	1,970,130	$ 4,391,364	2,920,181		$ 6,619,422
Hanzhong City Liangzhou Road and related projects
Real Estate Properties [Line Items]
Budgeted Price For Municipal Roads			33,000,000
Actual Construction And Development Costs Incurred	$ 90,906,456		90,906,456			$ 85,069,755
Yang County East 2nd Ring Road
Real Estate Properties [Line Items]
Budgeted Price For Municipal Roads			$ 26,100,000	¥ 168
Debt Instrument, Interest Rate, Stated Percentage	5.00%		5.00%			5.00%
Hanzhong City Beidajie
Real Estate Properties [Line Items]
Revenue from Grants	$ 0		$ 3,256,029

XML

BANK LOAN (Components of Bank Loan) (Details) - USD ($)	Mar. 31, 2016	Sep. 30, 2015
China Construction Bank Loan	$ 1,550,532	$ 6,292,474

XML

BANK LOAN (Narrative) (Details) - Loan Agreement [Member]	3 Months Ended		6 Months Ended
	Mar. 31, 2016 USD ($)	Mar. 31, 2015 USD ($)	Mar. 31, 2016 USD ($)	Mar. 31, 2015 USD ($)	May. 03, 2016 CNY (¥)	Mar. 31, 2016 CNY (¥)	Sep. 30, 2015 USD ($)
Debt instrument, principal amount	$ 23,257,977		$ 23,257,977		¥ 150,000,000	¥ 150,000,000
Debt instrument, stated interest rate	5.50%		5.50%			5.50%
Long-term Debt, Weighted Average Interest Rate	0.50%		0.50%			0.50%
Share Based Compensation Arrangement By Share Based Payment Award Options Weighted Average Remaining Contractual Term [Abstract]
Debt instrument, pledged asset value	$ 61,659,416		$ 61,659,416				$ 66,070,589
Debt instrument, weighted average interest rate	5.50%		5.50%			5.50%	5.50%
Debt instrument, capitalized interest expense	$ 49,345	$ 49,345	$ 132,408	$ 132,408
Debt Instrument Interest Rate Percentage Over Benchmark	5.00%		5.00%			5.00%

XML

OTHER LOANS (Other Loans-Long Term Portion) (Details) - USD ($)		Mar. 31, 2016	Sep. 30, 2015
Other loan		$ 49,334,131	$ 21,405,425
Less: current maturities of other loans		0	5,674,239
Other loans-long term portion		49,334,131	15,731,186
Loan A
Other loan	[1]	0	954,883
Loan B
Other loan	[2]	0	4,719,356
Loan C
Other loan	[3]	36,929,876	15,731,186
Loan D
Other loan	[4]	$ 12,404,255	$ 0

[1] A working capital finance agreement with a local investment company in Hanzhong was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, total interest was $5,729 and $23,607 (2015 - $333,464 and $716,274) respectively, which was capitalized in to the development cost of Liangzhou road project.

[2] A credit agreement with a financial institution was fully repaid in fiscal 2016. For the three and six months ended March 31, 2016, the interest was $Nil and $108,272 (2015 - $268,790 and $450,480), respectively, which was capitalized in to the development cost of Oriental Pearl Garden real estate project.

[3] On June 26, 2015, the Company signed an agreement with Hanzhong Urban Construction Investment Development Co., Ltd., a state owned Company, to borrow up to $38,763,296 (RMB 250,000,000) long term loan at 4.245% interest to develop Liang Zhou Road Project. As of March 31, 2016, the Company borrowed $36,929,876 from this credit line. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Palace project with carrying value of $61,429,290 as of March 31, 2016. For the three and six months ended March 31, 2016, total interest was $359,405 and $652,885 (2015- $Nil) respectively, which was capitalized in to the development cost of Liangzhou road project.

[4] On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center ("Housing Fund") to borrow up to approximately $12,404,255 million (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at is 3.575% and is due in January 2019. Our major shareholder pledged his assets for the loan. As of March 31, 2016, the Company received full proceeds from Housing Fund. The progress repayment is required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and six months ended March 31, 2016, total interest was $67,584 (2015- $Nil) respectively, which was capitalized in to the development cost of Oriental Garden project.

XML

OTHER LOANS (Schedule Of Repayment Loan) (Details) - 6 months ended Mar. 31, 2016	USD ($)	CNY (¥)
Debt Instrument Scheduled Repayment Amount	$ 36,929,876	¥ 238,175,542
May 29, 2017 | Loan repayment part one [Member]
Debt Instrument Scheduled Repayment Amount	3,314,346	21,375,542
May 29, 2017 | Loan Repayment Par Two [Member]
Debt Instrument Scheduled Repayment Amount	1,187,707	7,660,000
November 20, 2017 | Loan repayment part one [Member]
Debt Instrument Scheduled Repayment Amount	5,147,766	33,200,000
November 20, 2017 | Loan Repayment Par Two [Member]
Debt Instrument Scheduled Repayment Amount	1,187,707	7,660,000
May 20, 2018 | Loan repayment part one [Member]
Debt Instrument Scheduled Repayment Amount	5,256,303	33,900,000
May 20, 2018 | Loan Repayment Par Two [Member]
Debt Instrument Scheduled Repayment Amount	1,187,258	7,670,000
November 20, 2018 | Loan repayment part one [Member]
Debt Instrument Scheduled Repayment Amount	5,256,303	33,900,000
November 20, 2018 | Loan Repayment Par Two [Member]
Debt Instrument Scheduled Repayment Amount	1,187,258	7,670,000
May 20, 2019 | Loan repayment part one [Member]
Debt Instrument Scheduled Repayment Amount	5,411,356	34,900,000
May 20, 2019 | Loan Repayment Par Two [Member]
Debt Instrument Scheduled Repayment Amount	1,187,258	7,670,000
November 29, 2019 | Loan repayment part one [Member]
Debt Instrument Scheduled Repayment Amount	5,411,356	34,900,000
November 29, 2019 | Loan Repayment Par Two [Member]
Debt Instrument Scheduled Repayment Amount	$ 1,187,258	¥ 7,670,000

XML

OTHER LOANS (Schedule Of Full Repayment Loan) (Details) - 6 months ended Mar. 31, 2016 - Other Short Term Loan 4 [Member]	USD ($)	CNY (¥)
Debt Instrument, Periodic Payment, Total	$ 12,404,255	¥ 80,000,000
Earlier Of July 2018 Or 60 Sales Completed [Member]
Debt Instrument, Periodic Payment, Total	3,101,065	20,000,000
Earlier Of October 2018 Or 70 Sales Completed [Member]
Debt Instrument, Periodic Payment, Total	4,651,595	30,000,000
Earlier Of January 2019 Or 75 Sales Completed [Member]
Debt Instrument, Periodic Payment, Total	$ 4,651,595	¥ 30,000,000

XML

OTHER LOANS (Narrative) (Details)	3 Months Ended		6 Months Ended
	Mar. 31, 2016 USD ($)	Mar. 31, 2015 USD ($)	Mar. 31, 2016 USD ($)	Mar. 31, 2015 USD ($)	Mar. 31, 2016 CNY (¥)	Jan. 08, 2016 USD ($)	Jan. 08, 2016 CNY (¥)
Oriental Garden Project [Member]
Debt Instrument [Line Items]
Interest Costs Capitalized	$ 67,584	$ 0	$ 67,584	$ 0
Finance Agreement [Member]
Debt Instrument [Line Items]
Interest Costs Capitalized	5,729	333,464	23,607	716,274
Credit Agreement [Member]
Debt Instrument [Line Items]
Interest Costs Capitalized		268,790	108,272	450,480
Agreement Wth Hanzhong Urban Construction Investment Development Co Ltd [Member]
Debt Instrument [Line Items]
Debt Instrument, Face Amount	$ 38,763,296		$ 38,763,296		¥ 250,000,000
Debt Instrument, Interest Rate, Stated Percentage	4.245%		4.245%		4.245%
Interest Costs Capitalized	$ 359,405	$ 0	$ 652,885	$ 0
Hanzhong Municipal Housing Provident Fund Management Center [Member]
Debt Instrument [Line Items]
Debt Instrument, Face Amount						$ 12,404,255	¥ 80,000,000
Debt Instrument, Interest Rate, Stated Percentage						3.575%	3.575%

XML

CUSTOMER DEPOSITS (Customer Deposits From Pre-Sale Of Residential Units) (Details) - USD ($)	Mar. 31, 2016	Sep. 30, 2015
Customer deposits by real estate projects
Total	$ 31,373,223	$ 25,633,973
Including: Customer deposits -short-term	22,113,775	17,387,969
Customer deposits - long-term	9,259,448	8,246,004
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
Customer deposits by real estate projects
Total	10,016,585	7,832,619
Hanzhong City Oriental Pearl Garden
Customer deposits by real estate projects
Total	8,549,160	7,220,575
Liangzhou road and related projects
Customer deposits by real estate projects
Total	2,572,332	2,035,615
Yang County Palace
Customer deposits by real estate projects
Total	6,687,116	6,210,389
Yangzhou Pearl Garden Phase I and II
Customer deposits by real estate projects
Total	$ 3,548,030	$ 2,334,775

XML

CUSTOMER DEPOSITS (Narrative) (Details) - USD ($) $ in Millions	6 Months Ended
	Mar. 31, 2016	Sep. 30, 2015
Deposit Liabilities [Line Items]
Mortgage loan guarantee amount	$ 1.8	$ 1.7
Minimum
Deposit Liabilities [Line Items]
Percentage of customer deposit of unit price for cash purchase	10.00%
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees	30.00%
Maximum
Deposit Liabilities [Line Items]
Percentage of customer deposit of unit price for cash purchase	20.00%
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees	50.00%

XML

RELATED PARTY LOANS (Schedule of Other Short-term Loans) (Details)		Mar. 31, 2016 USD ($)	Mar. 31, 2016 CNY (¥)	Sep. 30, 2015 USD ($)	Sep. 30, 2015 CNY (¥)
Shareholder Loans [Line Items]
Shareholder loan		$ 2,296,867		$ 1,810,000
Shareholder USD Loan Agreement
Shareholder Loans [Line Items]
Shareholder loan	[1]	$ 1,810,000		$ 1,810,000
Shareholder RMB Loan Agreement
Shareholder Loans [Line Items]
Shareholder loan | ¥	[2]		¥ 486,867		¥ 0

[1] The Company has a one year loan agreement ("USD Loan Agreement") with Mr. Xiaojun Zhu, the Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company's subsidiary. The loan is due on July 31, 2016. The Company recorded interest of $18,100 and $36,200 for the three and six months ended March 31, 2016 (2015 -$18,100 and $36,200). The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

[2] On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the "Guangsha"), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the "Shareholder RMB Loan Agreement"), pursuant to which Guangsha is able to borrow from Mr. Zhu in order to support the Company's Liang Shan Road construction project development and the Company's working capital needs. The Loan Agreement has a one-year term, and has been renewed with a new expiration date of March 31, 2017, with at an interest rate of 5.5% as of March 31, 2016 and September 30, 2015. The Company recorded interest of $10,070 and $22,588 for the three and six months ended March 31, 2016 (2015 - $115,132 and $195,231), respectively, which is capitalized in the development cost of Liangzhou road project. The Company has not paid this interest and it is recorded in accrued expenses in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

XML

RELATED PARTY LOANS (Narrative) (Details) - USD ($)		3 Months Ended		6 Months Ended
		Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015	Sep. 30, 2015
Shareholder Loans [Line Items]
Interest (expense)		$ 69,094	$ 18,100	$ 173,140	$ 36,200
Shareholder loan		2,296,867		2,296,867		$ 1,810,000
Shareholder USD Loan Agreement
Shareholder Loans [Line Items]
Interest (expense)		18,100	18,100	36,200	36,200
Shareholder loan	[1]	1,810,000		1,810,000		$ 1,810,000
Shareholder's RMB Loan Agreement
Shareholder Loans [Line Items]
Interest (expense)		$ 10,070	$ 115,132	$ 22,588	$ 195,231
Debt instrument, stated interest rate		5.50%		5.50%		5.50%

[1] The Company has a one year loan agreement ("USD Loan Agreement") with Mr. Xiaojun Zhu, the Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company's subsidiary. The loan is due on July 31, 2016. The Company recorded interest of $18,100 and $36,200 for the three and six months ended March 31, 2016 (2015 -$18,100 and $36,200). The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2016 and September 30, 2015.

XML

STOCK OPTIONS (Assumptions Used In Calculating Fair Value Of Options Granted) (Details)	1 Months Ended
	Aug. 31, 2015 USD ($)
Risk-free interest rate	0.95%
Expected life of the options	3 years
Expected volatility	143.00%
Expected dividend yield	0.00%
Fair value	$ 178,800

XML

STOCK OPTIONS (Stock Option Activities) (Details) - USD ($)	6 Months Ended	12 Months Ended
	Mar. 31, 2016	Sep. 30, 2015
Number of Options
Outstanding at beginning of period	130,000
Granted	0
Forfeited	(10,000)
Exercised	0
Outstanding at end of period	120,000	130,000
Exercisable at end of period	23,333
Weighted Average Exercise Price
Outstanding at beginning of period	$ 1.93
Granted	0
Forfeited	1.31
Exercised	0
Outstanding at end of period	1.89	$ 1.93
Exercisable at end of period	$ 1.89
Weighted Average Remaining Life in Years
Outstanding, September 30, 2015	2 years 4 months 20 days	2 years 8 months 16 days
Exercisable at end of period	2 years 4 months 20 days
Aggregate intrinsic value
Outstanding, March 31, 2016	$ 0
Exercisable, March 31, 2016	$ 0

XML

STOCK OPTIONS (Narrative) (Details) - USD ($)	1 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended
	Aug. 31, 2015	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015	Sep. 30, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options exercise price				$ 0
Stock Based Compensation		$ 14,900	$ 0	$ 29,800	$ 0
Stock Option Plan 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted	120,000
Options exercise price	$ 1.89
Stock option vesting, percentage				19.40%		2.80%

XML

TAXES (Components of Income Tax Expenses) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Income Taxes [Line Items]
Current tax provision	$ 78,188	$ 54,910	$ 147,680	$ 66,168
Deferred tax provision	88,314	510,604	154,618	734,407
Income tax provision	$ 166,502	$ 565,514	$ 302,298	$ 800,575

XML

TAXES (Components Of Deferred Taxes) (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Sep. 30, 2014
Deferred tax assets
Deferred tax assets from net operating loss carry-forwards for parent company	$ 158,834		$ 136,394
Valuation allowance	(158,834)	$ (147,614)	(136,394)	$ (122,397)	$ (116,243)	$ (110,089)
Deferred tax asset-net	0		0
Deferred tax liability
Revenue recognized based on percentage of completion	4,798,516		4,711,161
Deferred tax liability- long term	$ 4,798,516		$ 4,711,161

XML

TAXES (Movement of valuation allowance) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Income Taxes [Line Items]
Beginning Balance	$ 147,614	$ 116,243	$ 136,394	$ 110,089
Current period additions	11,220	6,154	22,440	12,308
Ending Balance	$ 158,834	$ 122,397	$ 158,834	$ 122,397

XML

TAXES (Taxes Payable) (Details) - USD ($)	Mar. 31, 2016	Sep. 30, 2015
Income Taxes [Line Items]
CIT	$ 768,250	$ 794,780
Business tax	13,561,559	13,306,414
Other tax and fees	1,717,441	1,729,692
Total taxes payable	$ 16,047,250	$ 15,830,886

XML

TAXES (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015	Sep. 30, 2015
Income Taxes [Line Items]
Business sales tax, rate			5.00%
Business sales tax	$ 13,561,559		$ 13,561,559		$ 13,306,414
Income tax at statutory tax rate			25.00%
Net operating loss carry forwards	467,000		$ 467,000		401,000
Net operating loss carry forwards, expiration year			2035
Provision for income taxes	166,502	$ 565,514	$ 302,298	$ 800,575
Land appreciation tax payable	882,874		882,874		$ 752,664
Valuation allowance, period additions	$ 11,220	$ 6,154	$ 22,440	$ 12,308
Minimum
Income Taxes [Line Items]
Land appreciation tax rate			30.00%
Maximum
Income Taxes [Line Items]
Land appreciation tax rate			60.00%
Hanzhong
Income Taxes [Line Items]
Local income tax rate			2.50%
Land appreciation tax rate			1.00%
Yang Country
Income Taxes [Line Items]
Local income tax rate			1.25%
Land appreciation tax rate			0.50%

XML

COMMITMENTS AND CONTINGENCY (Schedule Of Future Minimum Rental Payments) (Details)	Mar. 31, 2016 USD ($)
Operating Lease Commitments [Line Items]
2016	$ 21,836
Years after	0
Total minimum payments required	$ 21,836

XML

COMMITMENTS AND CONTINGENCY (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015	Sep. 30, 2015
Commitments And Contingencies [Line Items]
Operating Leases, Rent Expense	$ 6,306	$ 6,740	$ 12,760	$ 13,479
Security deposit provided for guarantee	$ 1,800,000		$ 1,800,000		$ 1,700,000
Minimum
Commitments And Contingencies [Line Items]
Percentage Of Mortgage Proceeds As Security			5.00%
Maximum
Commitments And Contingencies [Line Items]
Percentage Of Mortgage Proceeds As Security			10.00%