china.htm

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 August 31, 2013

r 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: 333-175483

China Xuefeng Environmental Engineering Inc.

(Exact name of registrant as specified in its charter)

Nevada	99-0364975
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.

C214. Fitting Integration Building, Fazhan Road to Sugian Gate Section Jiangsu Province, China	223800
(Address of principal executive offices)	(Zip Code)

+86 (527) 8437-0508

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer	o		Accelerated filer	o

Non-accelerated filer	o	(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 o No x

As of October 16, 2013, there were 55,200,000 outstanding shares of common stock of the registrant, par value $.001 per share.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC.

QUARTERLY REPORT ON FORM 10-Q

August 31, 2013

TABLE OF CONTENTS

	PART I—FINANCIAL INFORMATION	Page

Item 1.	Financial Statements.	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	32

Item 4.	Controls and Procedures.	32

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings.	33

Item 1A.	Risk Factors.	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	33

Item 3.	Defaults Upon Senior Securities.	34

Item 4.	Mine Safety Disclosures.	34

Item 5.	Other Information.	34

Item 6.	Exhibits.	34

Signatures		35

CERTAIN USAGE OF TERMS

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of China Xuefeng Environmental Engineering Inc. (formerly known as NYC Moda Inc.).

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

Consolidated Financial Statements for the

Three Months Ended August 31, 2013 and 2012

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012

CONTENTS	PAGE

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets	3

Consolidated Statements of Income and Comprehensive Income	5

Consolidated Statement of Changes in Stockholders’ Equity	6

Consolidated Statements of Cash Flows	7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	8

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. $)


	August 31,		May 31,
ASSETS	2013		2013
	(Unaudited)

Current assets:
Cash	$	17,755,921	$	16,341,986
Prepaid expenses		57,115		97,496
Deferred income taxes		310,208		333,300

Total current assets		18,123,244		16,772,782

Fixed assets, net		35,319		21,851

Other assets:
Prepayment for acquisition of land use right		811,000		808,000

Total other assets		811,000		808,000

TOTAL ASSETS	$	18,969,563	$	17,602,633

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. $)

	August 31,		May 31,
LIABILITIES AND STOCKHOLDERS’ EQUITY	2013		2013
	(Unaudited)

Current liabilities:
Deferred revenues	$	2,019,390	$	1,333,200
Taxes payable		486,387		606,777
Loan from stockholders		182,911		182,526
Accrued liabilities and other payables		76,173		32,817
Total current liabilities		2,764,861		2,155,320

Commitments and contingencies		-		-

Stockholders’ equity:
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 55,200,000 shares issued and outstanding as of August 31, 2013 and May 31, 2013		55,200		55,200
Additional paid-in capital		11,389,049		11,389,049
Statutory reserve fund		378,808		309,655
Retained earnings		3,501,486		2,880,650
Other comprehensive income		427,747		396,533

Stockholders’ equity before noncontrolling interests		15,752,290		15,031,087
Noncontrolling interests		452,412		416,226

Total stockholders’ equity		16,204,702		15,447,313

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	18,969,563	$	17,602,633

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED, IN U.S. $)

	Three Months Ended August 31,
	2013			2012

Revenue	$	1,165,680		$	632,000
Cost of revenue		(108,755	)		(85,357	)

Gross profit		1,056,925			546,643

Operating expenses
Selling and marketing		31,258			4,598
General and administrative		73,787			101,365

Total operating expenses		105,045			105,963

Income from operations		951,880			440,680
Interest income		14,207			1,495

Income before provision for income taxes		966,087			442,175
Provision for income taxes		241,522			110,555

Net income		724,565			331,620
Noncontrolling interests		(34,576	)		(10,532	)

Net income attributable to common stockholders	$	689,989		$	321,088
Earnings per common share, basic and diluted	$	0.01		$	0.01

Weighted average shares outstanding, basic and diluted		55,200,000			41,200,000

Comprehensive income:
Net income	$	724,565		$	331,620
Foreign currency translation adjustment		32,824			(783	)
Comprehensive income		757,389			330,837
Comprehensive income attributable to noncontrolling interests		(36,186	)		(10,493	)

Net Comprehensive income attributable to common aastockholders	$	721,203		$	320,344

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 (UNAUDITED, IN U.S.$)

	Common Stock		Additional Paid-in Capital		Retained Earnings			Noncontrolling Interests		Statutory Reserve Fund		Other Comprehensive Income		Total

Balance, May 31, 2013	$	55,200	$	11,389,049	$	2,880,650		$	416,226	$	309,655	$	396,533	$	15,447,313

Net income		-		-		689,989			34,576		-		-		724,565

Appropriation to statutory reserve		-		-		(69,153	)		-		69,153		-		-

Foreign currency translation adjustment		-		-		-			1,610		-		31,214		32,824

Balance, August 31, 2013	$	55,200	$	11,389,049	$	3,501,486		$	452,412	$	378,808	$	427,747	$	16,204,702

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED, IN U.S. $)

	Three Months Ended August 31,
	2013			2012

Cash flows from operating activities:
Net income	$	724,565		$	331,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		3,167			2,401
Deferred income taxes		24,285			2,637
Changes in operating assets and liabilities:
Decrease in prepaid expenses		40,381			1,761
Increase in deferred revenues		686,190			-
(Decrease)/increase in taxes payable		(120,390	)		66,431
Increase/(decrease) in accrued liabilities		43,356			(19,325	)

Net cash provided by operating activities		1,401,554			385,525

Cash flows from investing activities:
Purchase of equipment		(16,530	)		(4,060	)

Net cash (used in) investing activities		(16,530	)		(4,060	)

Cash flows from financing activities:
Proceeds from stockholder loan		-			114,031
Net cash provided by financing activities		-			114,031

Effect of exchange rate changes on cash		28,911			(17,667	)

Net change in cash		1,413,935		477,829
Cash, beginning		16,341,986		4,139,165

Cash, end	$	17,755,921	$	4,616,994

Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	-	$	-
Income taxes	$	339,710	$	41,498

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 1. ORGANIZATION

China Xuefeng Environmental Engineering Inc. (the “Company”), formerly known as NYC Moda Inc., was incorporated under the laws of the State of Nevada on March 30, 2011. Since its inception until the closing of the Exchange Agreement, the Company was a development-stage company in the business of distributing designer clothing and footwear from established brands to customers around the world.

On November 27, 2012, the Company completed a reverse acquisition transaction through a share exchange with the stockholders of Inclusion Business Limited (“Inclusion”), whereby the Company acquired 100% of the outstanding shares of Inclusion in exchange for a total of 7,895,000 shares of its common stock, representing 76.65% of the issued and outstanding shares of common stock. As a result of the reverse acquisition, Inclusion became the Company’s wholly-owned subsidiary and the former Inclusion Stockholders became controlling stockholders. The share exchange transaction was treated as a reverse acquisition, with Inclusion as the acquirer and the Company as the acquired party for accounting purposes. Unless the context suggests otherwise, when being referred in this report to business and financial information for periods prior to the consummation of the reverse acquisition, the reference is to the business and financial information of Inclusion and its consolidated subsidiaries and variable interest entities.

On November 27, 2012, the Company filed a certificate of amendment to its articles of incorporation to change its name from “NYC Moda, Inc.” to “China Xuefeng Environmental Engineering Inc.” (the “Name Change”) and to initiate a 4-for-1 forward stock split (the “Forward Split”) of its outstanding shares of common stock. The effective dates of the Name Change and the Forward Split were December 14, 2012 and December 17, 2012, respectively. Upon the effectiveness of the Forward Split, the number of outstanding shares of the Company’s common stock increased from 10,300,000 to 41,200,000 shares. The effect of the stock split was applied retroactively to all the periods’ consolidated financial statements as if the current structure existed since the inception of the periods presented. On March 19, 2013, the Company issued 14,000,000 shares of common stock to 12 unrelated individuals in a private offering. The number of authorized shares of common stock remains at 75,000,000 shares.

As a result of the transaction with Inclusion, the Company owns all of the issued and outstanding capital stock of Lotus International Holdings Limited (“Lotus”), a wholly-owned subsidiary of Inclusion, which in turn owns all of the issued and outstanding capital stock of Baichuang Information Consulting (Shenzhen) Co. Ltd (“Baichuang Consulting”). In addition, the Company effectively and substantially controls Jiangsu Xuefeng Environmental Protection Science and Technology Co., Ltd. (“Jiangsu Xuefeng”) through a series of captive agreements with Baichuang Consulting.

Subsequent to the closing of the Exchange Agreement, the Company conducts its operations through its controlled consolidated affiliate Jiangsu Xuefeng. Jiangsu Xuefeng, incorporated under the laws of the People’s Republic of China (“PRC”) on December 14, 2007, is primarily engaged in providing improvement and upgrading services of garbage recycling processing technology and equipment.

On October 17, 2012, Baichuang Consulting (the “WFOE”), a wholly-owned subsidiary of Lotus, entered into a series of contractual arrangements (“VIE agreements”). The VIE agreements include (i) an Exclusive Technical Service and Business Consulting Agreement; (ii) a Proxy Agreement, (iii) Share Pledge Agreement and, (iv) Call Option Agreement with the stockholders of Jiangsu Xuefeng.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 1. ORGANIZATION (CONTINUED)

Exclusive Technical Service and Business Consulting Agreement: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, the WFOE provides technical support, consulting, training, marketing and operation consulting services to Jiangsu Xuefeng. In consideration for such services, Jiangsu Xuefeng has agreed to pay an annual service fee to the WFOE of 95% of Jiangsu Xuefeng’s annual net income with an additional payment of approximately US$16,190 (RMB 100,000) each month. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

Proxy Agreement: Pursuant to the Proxy Agreement, the stockholders of Jiangsu Xuefeng agreed to irrevocably entrust the WFOE to designate a qualified person acceptable under PRC law and foreign investment policies, all of the equity interests in Jiangsu Xuefeng held by the stockholders of Jiangsu Xuefeng. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

Share Pledge Agreement: Pursuant to the Share Pledge agreement, each of the stockholders pledged their shares in Jiangsu Xuefeng, to the WFOE, to secure their obligations under the Exclusive Technical Service and Business Consulting Agreement. In addition, the stockholders of Jiangsu Xuefeng agreed not to transfer, sell, pledge, dispose of or create any encumbrance on their interests in Jiangsu Xuefeng that would affect the WFOE’s interests. This Agreement remains effective until the obligations under the Exclusive Technical Service and Business Consulting Agreement, Call Option Agreement and Proxy Agreement have been fulfilled or terminated.

Call Option Agreement: Pursuant to the Call Option agreement, the WFOE has an exclusive option to purchase, or to designate a purchaser, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Jiangsu Xuefeng held by each of the stockholders. To the extent permitted by PRC laws, the purchase price for the entire equity interest is approximately US$0.16 (RMB1.00) or the minimum amount required by PRC law or government practice. This Agreement remains effective until all the call options under the Agreement have been transferred to Baichuang Consulting or its designated entities or natural persons.

As a result of the entry into the foregoing agreements, the Company has a corporate structure which is set forth as follows:

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 1. ORGANIZATION (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRESENTATION

Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entity (“VIE”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

Through the VIE agreements disclosed in Note 1, the Company is deemed the primary beneficiary of Jiangsu Xuefeng. Accordingly, the results of Jiangsu Xuefeng have been included in the accompanying consolidated financial statements. Jiangsu Xuefeng has no assets that are collateral for or restricted solely to settle their obligations. The creditors of Jiangsu Xuefeng do not have recourse to the Company’s general credit. The following financial statement amounts and balances of Jiangsu Xuefeng have been included in the accompanying consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)

ASSETS	August 31, 2013		May 31, 2013
	(Unaudited, In U.S. $)		(In U.S. $)
Current assets:
Cash	$	17,555,966	$	16,186,742
Prepaid expenses		56,130		96,511
Deferred income taxes		310,208		333,300

Total current assets		17,922,304		16,616,553

Fixed assets		56,089		39,382
Less: accumulated depreciation		20,770		17,531

Fixed assets, net		35,319		21,851

Other assets:
Prepayment for acquisition of land use right		811,000		808,000

Total other assets		811,000		808,000

TOTAL ASSETS	$	18,768,623	$	17,446,404


LIABILITIES

Current liabilities:
Due to China Xuefeng Environmental Engineering Inc. (1)		7,057,419		7,031,313
Payable to WFOE(2)		3,777,445		3,120,492
Deferred revenue		2,019,390		1,333,200
Taxes payable		438,836		570,451
Loan from stockholder		154,677		154,105
Accrued liabilities		50,067		32,817

Total current liabilities		13,497,834		12,242,378

TOTAL LIABILITIES	$	13,497,834	$	12,242,378

	(1)	Payable for issuance of common stock represents the proceeds received by Jiangsu Xuefeng for the 14,000,000 common shares issued by China Xuefeng Environmental Engineering Inc. on March 19, 2013 at $0.50 each (approximately total US$7,000,000).

	(2)	Payable to WFOE represents outstanding amounts due to Baichuang Information Consulting (Shenzhen) Co. Ltd. under the Exclusive Technical Service and Business Consulting Agreement for consulting services provided to Jiangsu Xuefeng in exchange for 95% of Jiangsu Xuefeng’s net income. Monthly payment of RMB 100,000 (approximately US$16,190) was paid in full as of August 31, 2013 and May 31, 2013.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)

	Three Months Ended August 31,
	2013		2012

Revenue	$	1,165,680	$	632,000
Net income (3)		691,529		331,663

(3)

Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to the WFOE.

	Three Months Ended August 31,
	2013			2012

Net cash provided by operating activities	$	1,357,293		$	385,568
Net cash (used in) investing activities		(16,530	)		(4,060	)
Net cash provided by financing activities		-			35,000
Effect of exchange rate changes on cash		28,461			(784	)

Net increase (decrease) in cash	$	1,369,224		$	415,724

The financial statements for the three months ended August 31, 2013, include China Xuefeng Environmental Engineering Inc., Inclusion, Lotus and its wholly owned subsidiary, Baichuang Consulting and its VIE, Jiangsu Xuefeng. The financial statements for the three months ended August 31, 2012, include Inclusion, Lotus and its wholly owned subsidiary, Baichuang Consulting and its VIE, Jiangsu Xuefeng for comparative purpose only. All significant intercompany accounts and transactions have been eliminated in consolidation when applicable.

The Company believes that Baichuang Consulting’s contractual agreements with Jiangsu Xuefeng are in compliance with PRC law and are legally enforceable. The stockholders of Jiangsu Xuefeng are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual arrangements. However, Jiangsu Xuefeng and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so. Furthermore, if Jiangsu Xuefeng or its stockholders do not act in the best interests of the Company under the contractual arrangements and any dispute relating to these contractual arrangements remains unresolved, the Company will have to enforce its rights under these contractual arrangements through PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)

As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements, which may make it difficult to exert effective control over Jiangsu Xuefeng, and its ability to conduct the Company’s business may be adversely affected.

Under ASC 810, an enterprise has a controlling financial interest in a VIE, and must consolidate that VIE, if the enterprise has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The enterprise’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights. Jiangsu Xuefeng’s actual stockholders do not hold any kick-out rights that will affect the consolidation determination.

The unaudited interim consolidated financial statements of the Company as of August 31, 2013 and for the three months ended August 31, 2013 and 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K filed with the SEC. The results of operations for the three months ended August 31, 2013 are not necessarily indicative of the results to be expected for future quarters or for the year ending May 31, 2014.

All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar” or “US$” or “$”).

CHANGE OF FISCAL YEAR END DATE

In November, 2012, in connection with the Share Exchange, the Company changed its fiscal year end date from April 30 to May 31.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION

Almost all Company assets are located in the PRC. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.”

All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of operations amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income (loss).

The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the financial statements are as follows:

August 31, 2013

May 31, 2013

August 31, 2012

Balance sheet items, except for stockholders’ equity, as of period end

0.1622

0.1616

N/A

Amounts included in the statements of income and comprehensive income, and statements of cash flows for the three months period

0.1619

N/A

0.1580

For the three months ended August 31, 2013 and 2012, foreign currency translation adjustments of $31,214 and ($744), respectively, have been reported as other comprehensive income or loss. Other comprehensive income of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17, “Exceptions to Comprehensive Recognition of Deferred Income Taxes,” the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments.

Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

The value of the RMB against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Revenues are primarily derived from providing garbage recycling processing system technology support, renovation and upgrade services and patent licensing to its customers. The Company’s revenue recognition policies comply with FASB ASC 605 “Revenue Recognition.” In general, the Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the products or services have been delivered or performed and collectability of the resulting receivable is reasonably assured.

Multiple-Element Arrangements

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple Deliverable Revenue Arrangements.” ASU No. 2009-13 amended the guidance on arrangements with multiple deliverables under ASC 605-25, “Revenue Recognition—Multiple-Element Arrangements.”

To qualify as a separate unit of accounting under ASC 605-25, the delivered item must have value to the customer on a standalone basis. The significant deliverables under the Company’s multiple-element arrangements are improvement and upgrade services and patent licensing.

Improvement and Upgrade Service

The improvement and upgrade service is a one-time service. An inspection is conducted by the customer according to industry standards within three days of the completion of the improvement and upgrade. An acceptance form is provided by the customer if the inspection is satisfactory. Performance testing is conducted on the upgraded equipment for no more than one month. Testing can be done in less than a month period. A final evaluation report is provided within five days of the completion of the performance testing. The fee for improvement and upgrade services is fixed and becomes due within 30 days, upon the signing of the contract and is not subject to refund, forfeiture or any other concession if patent licensing is not completed. No warranty is provided by the Company.

Patent Licensing

Patent licensing is limited to 5 years with payments due annually in advance. The customer is responsible for the repair services when they are necessary. The out of pocket expenses for the repair services will be charged separately to the customer by the Company. The patent technology of “harmless and comprehensive garbage processing equipment” provided by the Company to its customers has high garbage processing capacity and stable operation capacity. It is the first modern system equipment in China to use DCS (Distributed Control System) centralized control, by which mechanical automation will be realized for the comprehensive treatment of life garbage. Its core technology is to organically integrate the anaerobic digestion and aerobic fermentation garbage process, degrade and transform the organic matter of domestic waste, effectively sort out the garbage and recycle all kinds of materials, to eventually realize the true waste resource utilization and harmless utilization, with its resource utilization and harmless utilization rate approaching 100%. The resource recovery products, biogas, not only can be used for meeting the needs of the plant itself, but also can be sold as a separate product, which greatly improves the efficiency of garbage processing of the customer’s equipment, decreases production cost, and increases the recovery return of garbage processing.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Patent Licensing (Continued)

The Company’s customer who pays for an upgrade and improvement fee is not required to enter into a licensing agreement to continue to use the patented technology. If the customer does not require the garbage process equipment to reach the level of the patented technology which can process 500 tons to 1,000 tons of garbage per day, then the customer does not need to enter into the patent licensing agreement.

The Company determined that its improvement and upgrade service is individually a separate unit of accounting. In determining whether the improvement and upgrade service has a standalone value, the Company considered factors including the availability of similar services from other vendors, its fee structure based on inclusion and exclusion of the service, and its marketing and delivery of the service. The Company uses the vendor-specific objective evidence to determine the selling price for its improvement and upgrade service when sold in multiple-element arrangements. Although not yet being sold separately, the price established by the management has the relevant authority.

The Company also determined that the patent licensing has standalone value because the patent can be leased separately. The Company uses the vendor-specific objective evidence to determine the selling price for patent licensing when sold in multiple-element arrangements. Although not yet being leased separately, the price established by the management has the relevant authority.

The Company allocates the arrangement consideration based on their relative selling prices. Revenues for deliverables under improvement and upgrade services are recognized by the end of the improvement and upgrade period at the time the performance testing is passed and the final evaluation report is provided by the customer, which generally is within 30 days, assuming all other revenue recognition criteria are met. Revenues for deliverables under patent licensing are recognized monthly over the licensing period.

The Company believes the effect of changes in the selling price for improvement and upgrade services and patent licensing will not have significant effect on the allocation of the arrangement.

VULNERABILITY DUE TO OPERATIONS IN PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent, effective or continue.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC 820, “Fair Value Measurements and Disclosures,” specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:

Level 1 Inputs–	Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.

Level 2 Inputs–	Inputs other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3 Inputs–	Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis. Non-derivative financial instruments include cash, payables and accrued liabilities. As of August 31, 2013 and May 31, 2013, the carrying values of these financial instruments approximated their fair values due to their short term nature.

CASH AND CASH EQUIVALENTS

The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

Accounts receivable are recorded at the contract amount after deduction of trade discounts, allowances, if any, and do not bear interest. The allowance for doubtful accounts, when necessary, is the Company’s best estimate of the amount of probable credit losses of accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of August 31, 2013 and May 31, 2013, the Company did not have any accounts receivable. For the periods presented, the Company did not write off any accounts receivable as bad debts.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FIXED ASSETS

Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the prices paid to acquire the assets, and any expenditure that substantially increase the asset’s value or extends the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred.

The estimated useful lives for fixed assets categories are as follows:

Computers and equipment	3 years
Motor vehicles	4 years
Fixtures and furniture	5 years

DEFERRED REVENUE

Deferred revenue includes payments received for a) improvement and upgrade services and b) patent licensing fees. These payments received but not yet earned are recognized as deferred revenue on the consolidated balance sheets.

INCOME TAXES

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. At August 31, 2013 and May 31, 2013, the differences relate entirely to revenue deferred for financial statement purposes. During the quarter ended August 31, 2013, as permitted by the PRC tax law, the Company began recognizing revenue from patent licensing fees for income tax purpose, based on when it is earned rather than when it is collected, consistent with financial statement purposes. As a result, there are no differences between the basis of assets and liabilities for financial statement and income tax purposes for deferred revenue and, as a result, deferred income taxes are no longer required to be recognized. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of August 31, 2013 and May 31, 2013, the Company does not have a liability for any unrecognized tax benefits.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

Advertising costs are charged to operations when incurred. For the three months ended August 31, 2013 and 2012, advertising expense was $11,333 and $0, respectively.

STATUTORY RESERVE FUND

Pursuant to corporate law of the PRC, the Company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after such use is not less than 25% of the registered capital. For the three months ended August 31, 2013, a statutory reserve of $69,153 was required to be funded by the Company.

RECLASSIFICATION

Certain amounts in the prior year’s financial statements have been reclassified for comparative purposes to conform to the presentation in the current period’s financial statements. These reclassifications had no effect on previously reported earnings.

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

On March 5, 2013, the FASB issued ASU 2013-05 to provide guidance for whether to release cumulative translation adjustments (“CTA”) upon certain derecognition events. The update was issued to resolve the diversity in practice about whether Subtopic ASC 810-10, “Consolidation-Overall,” or ASC 830-30, “Foreign Currency Matters-Translation of Financial Statements,” applies to such transactions. ASU 2013-05 is effective prospectively for all entities with derecognition events after the effective date. For public entities, the guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. ASC 830-30 applies when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Consequently, the CTA is released into net income only if the transaction results in complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided. Otherwise, no portion of the CTA is released. The adoption of this pronouncement is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 4. FIXED ASSETS

Fixed assets are summarized as follows:

	August 31, 2013			May 31, 2013
	(U.S. $)			(U.S. $)

Computers and equipment	$	27,767		$	26,306
Motor vehicles		15,198			-
Fixtures and furniture		13,124			13,076

		56,089			39,382
Less: Accumulated depreciation		(20,770	)		(17,531	)

	$	35,319		$	21,851

For the three months ended August 31, 2013 and 2012, depreciation expense was $3,167 and $2,401, respectively.

NOTE 5. PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT

On March 23, 2012, the Company entered into an agreement with a PRC owned third party to acquire a 50-year land use right for construction of a factory facility for cash consideration of US$875,880, equivalent to RMB 5,400,000, of which US$ 811,000, equivalent to RMB 5,000,000 was paid before August 31, 2013. As of August 31, 2013, the land used right had not been obtained and no certificate for the use of land had been issued to the Company.

The agreement provides terms that under certain circumstances, such as delay in construction, the Company may be subject to a penalty of up to 20% of the payment for the land use right, or forfeiture of the land use right.

NOTE 6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

	August 31, 2013		May 31, 2013
	(U.S. $)		(U.S. $)

Payroll	$	18,435	$	14,369
Professional fees		31,398		18,306
Other		26,340		142

	$	76,173	$	32,817

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 7. INCOME TAXES

The provision for (benefit from) income taxes consisted of the following:

	Three Months Ended August 31,
	2013		2012
	(U.S. $)		(U.S. $)

Current	$	217,237	$	107,918
Deferred		24,285		2,637

	$	241,522	$	110,555

The Company is required to file income tax returns in both the PRC and the United States. PRC tax filings for the tax year ended December 31, 2012 were examined by the PRC tax authorities in May 2013. The tax filings were accepted and no adjustments were proposed by the PRC tax authorities.

The Company did not file its U.S. federal income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations” for the fiscal year ended April 30, 2013 and for the one month period ended May 31, 2013, a short year income tax return required to be filed as a result of change in fiscal year. Failure to furnish any income tax returns and information returns with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to certain civil penalties. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

In addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it has any U.S. federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through August 31, 2013. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. federal income taxes, interest and penalties. The tax years ended April 30, 2013 and 2012 and one month tax period ended May 31, 2013 remain open to examination by the IRS.

NOTE 8. RELATED PARTY TRANSACTIONS

On August 5, 2012, the Company entered into an agreement to lease the rights of patent on garbage recycling processing technology from Li Yuan, one of the Company’s officers/stockholders. Under the current terms, the Company is required to pay a fee of $12,952 (RMB 80,000) each month for five years from September 2012 to August 2017. As of August 31, 2013 and May 31, 2013, a prepaid patent leasing fee of $51,904 and $90,496, respectively, are included in prepaid expenses on the consolidated balance sheets, respectively.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 8. RELATED PARTY TRANSACTIONS (CONTINUED)

The remaining payments for the patent rights not paid as of August 31, 2013 are as follows:

Period Ending
May 31,	Amount

2014	$	64,760
2015		155,424
2016		155,424
2017		155,424
Thereafter		38,856

	$	569,888

The Company obtained a demand loan from the above officer/stockholder which is non-interest bearing. The loan of approximately $154,000 representing expenses paid by the above officer/stockholder and approximately $79,000 representing the registered capital and operating expenses of Baichuang Information Consulting (Shenzhen) Co., Ltd. (“Baichuang Consulting”) for the year ended May 31, 2013. As of August 31, 2013, Baichuang Consulting repaid approximately $51,000 to the above officer/stockholder. The net balance is reflected as loan from stockholders as of August 31, 2013 and May 31, 2013, respectively.

NOTE 9. LEASES

The Company leases office space under a one-year operating lease from an unrelated third party, which expired on March 31, 2013 and was extended to March 31, 2016. The lease requires the Company to prepay the rental for one year of $7,231 (RMB 44,664). The related prepayments of $4,226 and $6,015 are included in the prepaid expenses on the consolidated balance sheets as of August 31, 2013 and May 31, 2013, respectively. The lease provides for renewal options. Rent expense charged to operations for the three months ended August 31, 2013 and 2012 was $1,808 and $1,764, respectively. The minimum future rentals under the lease as of August 31, 2013 are as follows:

Period Ending
May 31,	Amount

2014	$	1,205
2015		7,231
2016		6,026

	$	14,462

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2013 AND 2012 (UNAUDITED)

NOTE 10. CONTINGENCIES

As disclosed in Note 7, the Company was delinquent in filing certain tax returns with the U.S. Internal Revenue Service. The Company is unable to determine the amount of penalties, if any, that may be assessed at this time. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

The Company did not file the information report for the year ended December 31, 2012 concerning its interest in foreign bank accounts on form TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBAR”). Not complying with the FBAR reporting and recordkeeping requirements will subject the Company to civil penalties up to $10,000 for each of its foreign bank accounts. The Company has not determined the amount of any penalties that may be assessed at this time and believes that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

NOTE 11. CONCENTRATION OF CREDIT RISK

Substantially all of the Company’s assets and bank accounts are in banks located in the PRC and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

The following table represents certain information about the Company’s customers which individually accounted for more than 10% of the Company’s gross revenue during the periods indicated:

	Three Months Ended					Three Months Ended
	August 31, 2013					August 31, 2012
	Amount		%			Amount		%
CUSTOMER 1		509,985		43.75	%		*		*
CUSTOMER 2		*		*			158,000		33	%
CUSTOMER 3		*		*			474,000		67	%

* Less than 10% of total revenue.

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

The following discussion of our financial condition and results of operations should also be read in conjunction with our unaudited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this Form 10-Q. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

Overview

We are in the business of providing garbage-recycling process optimizing services. We utilize the patented technology “Comprehensive and Harmless Garbage Processing Equipment” (the “Patented Technology”) to upgrade software systems and reconstruct hardware, and therefore expand the sorting scope and capacity of our customers’ garbage recycling equipment. We conduct our operations through our controlled consolidated entity in China, Jiangsu Xuefeng Environmental Protection Science and Technology Co., Ltd. (“Jiangsu Xuefeng”).

Our Services

High capability garbage treatment technology has been in demand in China since the country started to produce an increasing amount of household waste as its urban population grows. We help our customers to expand their garbage processing equipment’s sorting scope and capacity by installing various systems containing the Patented Technology, thus upgrading the software and reconstructing the hardware and eventually minimizing or eliminating the defects in their existing garbage processing equipment. This Patented Technology is owned by our Chief Executive Officer and Chairman of the Board of Directors, Li Yuan, and leased to us for the term from September 2012 to August 2017.

The Patented Technology uses Distributed Control System (DCS) centralized control to realize mechanical automation for a comprehensive treatment of household garbage. Equipment using the Patented Technology is typically comprised of a waste digestion pretreatment system, a methane gas power generation system, a sorting processing system, a bricklaying building system, a leachate treatment system, a Distribution Control System (DCS), a excrement comprehensive processing system, XFET-5 ecological and water-saving toilets and various material collection systems. The Patented Technology’s key feature is to organically integrate anaerobic digestion with aerobic fermentation, degrade and transform the garbage’s organic components, sort waste, recycle materials, and eventually realize harmless waste processing leaving no waste gas, water or residue. The Patented Technology utilizes various methods and tools to sort and process waste, such as wind force, gravity, magnet, shape screening, automatic cutting, smashing. The by-product, biogas, which can be used as an energy supply for the garbage plant itself and others, helps to lower production cost and increase reutilization return of the garbage processing.

After we complete the internal system upgrade and hardware equipment improvement of the garbage equipment, we deliver the upgraded equipment to the customers. The customers will conduct inspection and performance testing to the upgraded equipment within one month pursuant to the contract to inspect whether the internal control system and the hardware structure can operate steadily and reach the garbage process features. The inspecting items including the following: whether the quality of the equipment and accessories after improvement can match the patented technology and process various kinds of garbage, whether the various garbage systems can process automatically, and whether the daily garbage processing capacity reaches the standard of the contract. If during the performance testing period, all the performance indexes can fulfill the requirements of the contract, it would be deemed that we have fully executed the agreements.

When we complete the upgrading service for customers, we go through the acceptance check and commissioning of the company in accordance with the contract, to make sure that the service provided met the demand of the clients. After that, we are not subject to any additional service. The revenue we generated belongs to the service class income, with the main cost being the salaries of the staff and the leasing fees for the patent, whereas the hardware and software equipment, as well as the material used in the upgrading are the responsibility of the clients. After upgrade and reconstruction, we offer our customers to pay a fee to continue to use the Patented Technology in their equipment for a limited period of three to five years. Accordingly, our revenue comes from two sources: improvement and upgrading services of garbage processing equipment and patent licensing for the use of the Patented Technology.

Between September 2012 and April 2012, we provided garbage processing equipment upgrading services unrelated to the Patented Technology. Prior to April 2012, our operation was limited to business establishment and customer development.

Emerging Growth Company Status

We are an “emerging growth company”, or “EGC” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, from which we are currently exempt as a smaller reporting company, and stockholder approval of any golden parachute payments not previously approved in connection with a transaction resulting in a change of control.

Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

·	the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;

·	the last day of the fiscal year following the fifth anniversary of the completion of this offering;

·	the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and

·	the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, or the Exchange Act. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.

The Section 107 of the JOBS Act provides that we may elect to utilize the extended transition period for complying with new or revised accounting standards and such election is irrevocable if made. As such, we have made the election to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Investors may be unable to compare our business with other companies in our industry and therefore find us less attractive. Until the date that we are no longer an "emerging growth company" or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.

Results of Operations

Three Months Ended August 31, 2013 compared to Three Months ended August 31, 2012

The following table sets forth in U.S. dollars key components of our unaudited results of operations during the three months periods ended August 31, 2013 and 2012, and the percentage change between 2013 and 2012.

	2013			2012		Percentage
	(U.S. $)			(U.S. $)		Change

Revenue	$	1,165,680		$	632,000		84	%
Cost of revenue		(108,755	)		(85,357)		27	%
Gross profit		1,056,925			546,643		93	%
Selling expenses		31,258			4,598		580	%
General and administrative expenses		73,787			101,365		(27	%)
Total operating expenses		105,045			105,963		(1	%)
Operating income		951,880			440,680		116	%
Interest income		14,207			1,495		850	%
Income before provision for income taxes		966,087			442,175		118	%
Provision for income taxes		241,522			110,555		118	%
Net income		724,565			331,620		118	%
Noncontrolling interests		(34,576	)		(10,532)		228	%
Net income attributable to common stockholders	$	689,989		$	321,088		115	%

Revenue. We provide improvement and upgrading service for the garbage processing equipment of our customers. This is a one-time service. We also lease the patent to our customers. The patent licensing is limited to five years with payments due annually in advance.

Our sales increased by $533,680 or 84%. The primary reason for the substantial increase in sales was due to the increase in demand motivated by increased profit of garbage processing companies as a result of engaging our improvement and upgrading services and following the governmental requirements for garbage processing companies to improve their garbage processing capacity to address the increasing garbage processing need. In addition, the patent licensing provides us sustained revenue. The following table sets forth our revenue by segments:

	2013		2012		Percentage
	(U.S. $)		(U.S. $)		Change

Improvement and upgrading services		485,700		632,000		-23	%
Patent licensing		679,980		-		100	%
Total		1,165,680		632,000		84	%

Improvement and Upgrading Services

For the three months ended August 31, 2013, sales related to improvement and upgrading services provided to garbage recycling processing systems of one unrelated parties in accordance with contracts for a total of $485,700. The services were completed and accepted by the customer and the payment was received in full as of August 31, 2013. For the three months ended August 31, 2012, sales related to improvement and upgrading services provided to garbage recycling processing systems of two unrelated parties in accordance with contracts for a total of $632,000. The services were completed and accepted by the customers and the payment was received in full as of August 31, 2012.

Patent Licensing

For the three months ended August 31, 2013, the patent licensing revenue was generated from ten unrelated parties in accordance with the contracts for a total of $679,980. For the three months ended August 31, 2012, there was no patent licensing revenue generated.

Cost of Revenues. Our cost of revenues increased to $108,755 for the three months ended August 31, 2013 from $85,357 for the three months ended August 31, 2012. The increase in cost of revenues is in line with the increase in revenues. Our costs of revenues primarily consist of leasing fees paid to the related party for the patent, employees’ salaries, insurance, training expenses and other daily operating expenses. In addition, business taxes were classified as cost of sales as well before December 1, 2012. Under China tax law, our business tax should be changed to value added tax after December 1, 2012 but we are exempt from the VAT under the authorization from the local tax bureau.

Gross Profit. Our business stream has resulted in a high gross margin because we have no cost of products to be sold. Our cost of revenue is almost entirely comprised of direct labor, patent licensing fees, daily operating expenses and business tax. As a result, our gross profit increased to $1,056,925 for three months ended August 31, 2013 from $546,643 for three months ended August 31, 2012 which represented a gross profit ratio of 91% and 86%, respectively. The increase in our gross profit ratio was contributable to the addition of the higher profit margin segment, patent licensing, in later 2012.

Selling and Marketing Expenses. Our selling and marketing expenses increased to $31,258 for three months ended August 31, 2013 from $4,598 for three months ended August 31, 2012 which represented an increase of 580%. Our selling and marketing expenses were primarily comprised of sales employees’ salary and insurance and advertising expenses. The increase in selling and marketing expenses was mainly due to the increase in number of sales employees.

General and Administrative Expenses. Our general and administrative (“G&A”) expenses decreased to $73,787 for three months ended August 31, 2013 from $101,365 for three months ended August 31, 2012, representing a 27% decrease. Our G&A expenses were primarily comprised of G&A employees’ salaries, insurance, rent and professional fees incurred for G&A functions. As we mature, our administration strengths are being improved, more effective work results in lower G&A expenses.

Provision for Income Taxes. Our provision for income taxes increased to $241,522 for three months ended August 31, 2013 from $110,555 for three months ended August 31, 2012. Our effective tax rate was the same as the statutory rate of 25% for the three months ended August 31, 2013 and 2012. Our tax filings for the year ended December 31, 2012 were examined by the tax authorities in May 2013. The tax filings were accepted and no adjustments were proposed by the tax authorities. The increase in the provision for income taxes was primarily due to the increase in our income.

Net Income. For the three months ended August 31, 2013 and 2012, we generated net income of $724,565 and $331,620, respectively. This represented an increase in net income of $392,945 or 118%. The entrusted management agreements assign to Baichuang Consulting only 95% of the income generated from Jiangsu Xuefeng. For that reason, we reflected a “non-controlling interest” of $34,576 and $10,532 for the three months ended August 31, 2013 and 2012, respectively, before recognizing net income attributable to the common stockholders of the Company on our Consolidated Statements of Income and Comprehensive Income. After that deduction and taking into account the income and expenses incurred by our parent corporation, our net income attributable to the Company for the three months ended August 31, 2013 and 2012 was $689,989 and $321,088, representing $0.01 and $0.01 per share, respectively.

Foreign Currency Translation Adjustment. Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the three months ended August 31, 2013 and 2012, a foreign currency gain of $31,214 and loss of $744, respectively, have been reported as other comprehensive income and loss in the consolidated statements of income and other comprehensive income.

Liquidity and Capital Resources

As of August 31, 2013, we had cash and cash equivalents of $17,755,921, primarily consisting of cash on hand and demand deposits. The cash on hand principally derived from capital contributions of $4,541,532 to Jiangsu Xuefeng since January 2011, net proceeds of the private placement completed in March 2013 and cash provided from the operations. Despite our large cash reserves, the interest income generated for the three months ended August 31, 2013 was nominal for two main reasons: the bank’s current deposit interest rate is very low; and the annual interest rates float up or down at 0.35%. The interest income reported in our financial statements is the net interest after deducting bank service charges and overdraft fees. The overdraft fee was calculated as 2% of the overdraft limit. We terminated this overdraft service in April 2013, and no overdraft fees are deducted from our interest income thereafter.

To date, we have financed our operations primarily through equity contributions by our stockholders, a private placement and cash flows from operations. We believe that our cash on hand and cash flows from operations will meet our present cash needs for the next 12 months.

Operating activities

Net cash provided by operating activities was $1,401,554 for the three months ended August 31, 2013, comparing with the net income of $724,565, the difference was mainly due to the increase in advances from customers. Net cash provided by operating activities was $385,525 for the three months ended August 31, 2012. Comparing with the net income of $331,620, the difference was mainly due to the increase in income tax payable.

Investing activities

Net cash used for investing activities represented the purchase of equipment. For the three months ended August 31, 2013 and 2012, the purchase of equipment was $16,530 and $4,060, respectively.

Financing activities

For the three months ended August 31, 2013, we did not engage in any financing activities. For the three months ended August 31, 2012, the net cash provided by financing activities consists of proceeds from the stockholder loan of $114,031. The proceeds from the stockholder loan were used to pay for professional services and registered capital of Baichuang Information Consulting (Shenzhen) Co. Ltd. (“Baichuang Information”) and government registration fees for Baichuang Information due to Chinese banks’ restriction of cash transfers.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

Transfer of Cash

All of our revenues are earned by Jiangsu Xuefeng, our PRC controlled consolidated affiliate and subsidiary. PRC regulations restrict the ability to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends only out of accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amount of said fund reaches 50% of its registered capital. Allocations to this statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. The limitations on the ability of our PRC subsidiary to transfer funds could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

Lotus International Holdings Limited, a Hong Kong corporation and Baichuang Information Consulting (Shenzhen) Co., Ltd, a WFOE, is a bridge to transfer funds inside and outside the PRC. There are three ways for foreign cash to be transferred into Chinese subsidiaries:

(1) Capital funds: At the establishment of the WFOE, (Baichuang Consulting), in accordance with the provisions of PRC Foreign-Owned Enterprise Law, funds were injected as capital by Lotus International into its wholly owned foreign owned enterprise established in mainland China, Baichuang Consulting.

(2) Raised capital - acquisition: if the Company raised sufficient capital, it could transfer the capital to Jiangsu Xuefeng by causing Lotus International (HK company) to apply to the Chinese Ministry of Commerce (MOFCOM) for approval of an acquisition of Jiangsu Xuefeng by Lotus International. MOFCOM would approve such an acquisition only after a lengthy review process, and only if it determined that the price paid by Lotus International for Jiangsu Xuefeng represented a commercially fair price.

(3) Raised capital - joint venture: If the Company obtained capital that was less than the purchase price for Jiangsu Xuefeng deemed acceptable by MOFCOM, Lotus International could still inject the funds into Jiangsu Xuefeng by complying with the provisions of the PRC Sino-Foreign Equity Joint Venture Law. To accomplish this capital transfer, we would be required to apply to the Chinese government for approval to convert Jiangsu Xuefeng into an equity joint venture, in which Lotus International (HK company) would be its equity joint venture. If approved, Lotus International would then own a portion of the equity in Jiangsu Xuefeng, and the VIE agreements between Jiangsu Xuefeng and Baichuang Consulting (WFOE) would be modified accordingly to reduce the portion of net income payable by Jiangsu Xuefeng to Baichuang Consulting.

We have no current plans for the Company to fund Jiangsu Xuefeng, and expect the VIE structure to remain in place for the foreseeable future.

Pursuant to the Exclusive Technical Service and Business Consulting Agreement between Baichuang Consulting (WFOE) and Jiangsu Xuefeng, Baichuang Consulting is to provide technical support and consulting services to Jiangsu Xuefeng in exchange for (i) 95% of the total annual net income of Jiangsu Xuefeng and (ii) RMB100,000 per month (US$16,190). As a result, there are also two ways to transfer the funds from inside the PRC to outside the PRC:

(1) According to the provisions of the Service Fee in Article 3 of the Exclusive Technology Service and Business Consulting Agreement, 95% of the net income of Jiangsu Xuefeng will be paid to Baichuang Consulting as a service fee, and in turn Baichuang Consulting will in compliance with the provisions of PRC Foreign-Owned Enterprise Law, transfer this income to Lotus International (HK company) for the purpose of profit distribution.

(2) According to the provisions of the Service Fee in Article 3 of the Exclusive Technology Service and Business Consulting Agreement, a management fee of $16,190 will be paid to Baichuang Consulting each month, and in turn Baichuang Consulting will be in compliance with the provisions of the PRC Foreign-Owned Enterprise Law and transfer this income to Lotus International (HK company) for the purpose of profit distribution.

The earnings and cash transfer procedures are all designed to comply with PRC regulations. As a result, there will be no government regulations which will impact our transactions to transfer cash within our corporate structure. However, when the funds are transferred outside the PRC, all transferred amounts will be reported to the national tax bureau to examine whether the local and national taxes have been fully paid by Jiangsu Xuefeng and Baichuang Consulting.

Recent Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Smaller reporting companies are not required to provide the information required by this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, for the reasons set forth below, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of August 31, 2013 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of August 31, 2013, the Company determined that there were control deficiencies that constituted the following material weaknesses:

●	The Company does not have a sufficient number of accounting personnel, which would provide segregation of duties within our internal control procedures to support the accurate and timely reporting of our financial results.

●	The Company’s current accounting personnel lack experience and knowledge in identifying and resolving complex accounting issues under U.S. Generally Accepted Accounting Principles (GAAP).

Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us.

Item 1A. Risk Factors.

Smaller reporting companies are not required to provide the information required by this item.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Description

31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2**		Certification of Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS†		XBRL Instance Document

101.SCH†		XBRL Taxonomy Extension Schema Document

101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†		XBRL Taxonomy Extension Label Linkbase Document

101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document

*		Filed herewith.

**		In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.

†		Furnished herewith. XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

	China Xuefeng Environmental Engineering Inc.


Date: October 21, 2013	By:	/s/ Li Yuan
		Li Yuan
		Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)


Date: October 21, 2013	By:	/s/ Kuanfu Fan
		Kuanfu Fan
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

1.	I have reviewed this Quarterly Report on Form 10-Q of China Xuefeng Environmental Engineering Inc.;

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

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

4.	The registrant’s other certifying officer 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 13-a-15(f) and 15d-15(f)) for the registrant and have:

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

		(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to 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 financing reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying 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: October 21, 2013

/s/ Li Yuan
Li Yuan Chief Executive Officer (Principal Executive Officer)

1.	I have reviewed this Quarterly Report on Form 10-Q of China Xuefeng Environmental Engineering Inc.;

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

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

4.	The registrant’s other certifying officer 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 13-a-15(f) and 15d-15(f)) for the registrant and have:

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

		(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to 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 financing reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying 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: October 21, 2013

/s/ Kuanfu Fan
Kuanfu Fan Chief Financial Officer (Principal Financial Officer)

Note 2. Summary of Significant Accounting Policies: Foreign Currency Translation (Details) (USD $)	3 Months Ended
	Aug. 31, 2013	Aug. 31, 2012
Details
Foreign currency translation adjustments	$ 31,214	$ (744)

Note 11. Concentration of Credit Risk: Schedule of Customer Concentrations (Details) (USD $)	3 Months Ended
	Aug. 31, 2013	Aug. 31, 2012
Revenue	$ 1,165,680	$ 632,000
Customer1Member
Revenue	509,985
Concentration Risk, Percentage	43.75%
Customer 2
Revenue		158,000
Concentration Risk, Percentage		33.00%
Customer 3
Revenue		$ 474,000
Concentration Risk, Percentage		67.00%

Note 4. Fixed Assets (Details) (USD $)	3 Months Ended
Note 4. Fixed Assets (Details) (USD $)	Aug. 31, 2013	Aug. 31, 2012
Details
Depreciation	$ 3,167	$ 2,401

1.	The Quarterly Report on Form 10-Q for the quarter ended August 31, 2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.	The information contained in such Quarterly Report on Form 10-Q for the quarter ended August 31, 2013, fairly presents, in all material respects, the financial condition and results of operations of China Xuefeng Environmental Engineering Inc.


Date: October 21, 2013


By: /s/ Li Yuan
Li Yuan Chief Executive Officer (Principal Executive Officer)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (USD $)	3 Months Ended
	Aug. 31, 2013	Aug. 31, 2012
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Revenue	$ 1,165,680	$ 632,000
Cost of revenue	(108,755)	(85,357)
Gross Profit	1,056,925	546,643
Operating expenses
Selling and marketing	31,258	4,598
General and administrative	73,787	101,365
Total operating expenses	105,045	105,963
Income from operations	951,880	440,680
Interest income	14,207	1,495
Income before provision for income taxes	966,087	442,175
Provision for income taxes	241,522	110,555
Net income	724,565	331,620
Noncontrolling interests	(34,576)	(10,532)
Net income attributable to common stockholders	689,989	321,088
Earnings per common share, basic and diluted
Weighted average shares outstanding, basic and diluted	55,200,000	41,200,000
Comprehensive income:
Net income	724,565	331,620
Foreign currency translation adjustment	32,824	(783)
Comprehensive income	757,389	330,837
Comprehensive income attributable to noncontrolling interests	(36,186)	(10,493)
Net Comprehensive income attributable to common stockholders	$ 721,203	$ 320,344

Note 5. Prepayment For Acquisition of Land Use Right (Details) (USD $)	Aug. 31, 2013	Mar. 23, 2012
Details
Cash Consideration Required in Purchase of 50-year Land Use Right - RMB		$ 5,400,000
Prepayment for acquisition of land use right	811,000
Prepayment for acquisition of land use right - RMB	$ 5,000,000
Penalty Associated with Certain Circumstances as a Percentage of Purchase Price	20.00%

Note 1. Organization: Exclusive Technical Service and Business Consulting Agreement (Details) (USD $)	3 Months Ended
	Aug. 31, 2013
Details
Annual Service Fee Payable to the WFOE as a Percentage of Annual Net Income	95.00%
Monthly Payment to WFOE	$ 16,190
Monthly Payment to WFOE in RMB	$ 100,000

Note 9. Leases: Schedule of Future Minimum Rental Payments for Operating Leases (Details) (USD $)	Aug. 31, 2013
Details
Operating Leases, Future Minimum Payments, Due in Two Years	$ 1,205
Operating Leases, Future Minimum Payments, Due in Three Years	7,231
Operating Leases, Future Minimum Payments, Due in Four Years	6,026
Operating Leases, Future Minimum Payments Due	$ 14,462

Note 9. Leases (Details) (USD $)	3 Months Ended
Note 9. Leases (Details) (USD $)	Aug. 31, 2013	Aug. 31, 2012	May 31, 2013
Details
Total Prepayment Required for Operating Lease	$ 7,231
Total Prepayment Required for Operating Lease - RMB	44,664
Prepayment of Rental	4,226		6,015
Lease Expense	$ 1,808	$ 1,764

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	Aug. 31, 2013	Aug. 31, 2012
Cash Flows From Operating Activities:
Net income	$ 724,565	$ 331,620
Depreciation	3,167	2,401
Deferred income taxes	24,285	2,637
(Increase) or Decrease in prepaid expenses	40,381	1,761
(Increase) or Decrease in deferred revenue	686,190
Increase or (Decrease) in taxes payable	(120,390)	66,431
Increase or (Decrease) in accrued liabilities	43,356	(19,325)
Net cash provided by operating activities	1,401,554	385,525
Cash Flows From Investing Activities:
Purchase of equipment	(16,530)	(4,060)
Net cash (used in) investing activities	(16,530)	(4,060)
Cash Flows From Financing Activities:
Proceeds from stockholder loan		114,031
Net cash provided by financing activities		114,031
Effect of exchange rate changes on cash	28,911	(17,667)
Net change in cash	1,413,935	477,829
Cash, beginning	16,341,986	4,139,165
Cash, end	17,755,921	4,616,994
Supplemental disclosure of cash flow information
Interest
Income taxes	$ 339,710	$ 41,498

Note 4. Fixed Assets: Fixed Assets (Details) (USD $)	Aug. 31, 2013	May 31, 2013
Computers and equipment	$ 27,767	$ 26,306
Fixed Assets, Gross	56,089	39,382
Fixtures and furniture	13,124	13,076
Accumulated Depreciation	(20,770)	(17,531)
Fixed assets, net	35,319	21,851
Vehicles
Fixed Assets, Gross	$ 15,198

Note 1. Organization: Forward Stock Split (Details)	Aug. 31, 2013	May 31, 2013	Mar. 19, 2013	Dec. 17, 2012	Feb. 29, 2012
Details
Shares of Common Stock Authorized Prior to Forward Split				10,300,000
Common stock shares outstanding	55,200,000	55,200,000			41,200,000
Common stock shares issued	55,200,000	55,200,000	14,000,000
Common stock shares authorized	75,000,000	75,000,000

CONSOLIDATED BALANCE SHEETS PARENTHETICAL (USD $)	Aug. 31, 2013	May 31, 2013
CONSOLIDATED BALANCE SHEETS PARENTHETICAL
Common stock par value	$ 0.001	$ 0.001
Common stock shares authorized	75,000,000	75,000,000
Common stock shares issued	55,200,000	55,200,000
Common stock shares outstanding	55,200,000	55,200,000

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $)	Common Stock	Additional Paid in Capital	Retained Earnings	Noncontrolling Interests	Statutory Reserve Fund	Other Comprehensive Income	Total
Balance at May. 31, 2013		$ 11,389,049	$ 2,880,650	$ 416,226	$ 309,655	$ 396,533	$ 15,447,313
Balance - shares at May. 31, 2013	55,200,000
Net income			689,989	34,576			724,565
Appropriation to statutory reserve			(69,153)		69,153
Foreign currency translation adjustment				1,610		31,214	32,824
Balance at Aug. 31, 2013	$ 55,200	$ 11,389,049	$ 3,501,486	$ 452,412	$ 378,808	$ 427,747	$ 16,204,702
Balance - shares at Aug. 31, 2013	55,200,000

Note 6. Accrued Liabilities: Schedule of Accrued Liabilities (Details) (USD $)	Aug. 31, 2013	May 31, 2013
Details
Payroll	$ 18,435	$ 14,369
Accrued Professional Fees, Current	31,398	18,306
Other Accrued Liabilities, Current	26,340	142
Accrued liabilities and other payables	$ 76,173	$ 32,817

CONSOLIDATED BALANCE SHEETS (USD $)	Aug. 31, 2013	May 31, 2013
Current Assets:
Cash	$ 17,755,921	$ 16,341,986
Prepaid Expenses	57,115	97,496
Deferred income taxes	310,208	333,300
Total Current Assets	18,123,244	16,772,782
Fixed assets, net	35,319	21,851
Total other assets	811,000	808,000
Total Assets	18,969,563	17,602,633
Current Liabilities:
Deferred revenues	2,019,390	1,333,200
Taxes payable	486,387	606,777
Loan from stockholders	182,911	182,526
Accrued liabilities and other payables	76,173	32,817
Total current liabilities	2,764,861	2,155,320
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 55,200,000 shares issued and outstanding as of August 31, 2013 and May 31, 2013	55,200	55,200
Additional paid-in capital	11,389,049	11,389,049
Statutory reserve fund	378,808	309,655
Retained earnings	3,501,486	2,880,650
Other comprehensive income	427,747	396,533
Stockholders' equity before noncontrolling interests	15,752,290	15,031,087
Noncontrolling interests	452,412	416,226
Total stockholders' equity	16,204,702	15,447,313
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 18,969,563	$ 17,602,633

Note 1. Organization: Reverse Acquisition Transaction (Details)	Nov. 27, 2012
Details
Shares of Inclusion Acquired Upon Completion of Reverse Acquisition Transaction	100.00%
Shares of China Xuefeng Exchanged in Reverse Acquisition Transaction	7,895,000
Percentage of Shares of China Xuefeng Issued in Reverse Acquisition Transaction	76.65%

Note 2. Summary of Significant Accounting Policies: Statutory Reserve Fund (Details) (USD $)	3 Months Ended
	Aug. 31, 2013
Details
Percentage of Net Income Required to Be Transferred to Reserve Fund Pursuant to PRC Accounting Rules and Regulations	10.00%
Percentage of Company's Registered Capital Required in Reserve Fund Pursuant to PRC Accounting Rules and Regulations	50.00%
Required Reserve Balance as a Percentage of Registered Capital	25.00%
Statutory reserve	$ 69,153

Note 10. Contingencies (Details) (USD $)	3 Months Ended
Note 10. Contingencies (Details) (USD $)	Aug. 31, 2013
Details
Civil penalties on foreign bank accounts	$ 10,000

Note 8. Related Party Transactions: Schedule of Future Payments on Lease of Rights of Patent (Details) (USD $)	3 Months Ended
	Aug. 31, 2013
Details
Future payments on lease of rights of patent, year two	$ 64,760
Future payments on lease of rights of patent, year three	155,424
Future payments on lease of rights of patent, year four	155,424
Future payments on lease of rights of patent, year five	155,424
Future payments on lease of rights of patent, year thereafter	38,856
Future payments on lease of rights of patent	$ 569,888

Note 2. Summary of Significant Accounting Policies: Foreign Currency Translation: Exchange Rates Utilized to Translate Amounts for Purposes of Preparing the Financial Statements (Details)	Aug. 31, 2013	May 31, 2013	Aug. 31, 2012
Details
Exchange Rate for Balance Sheet Items Other Than Stockholders' Equity	0.1622	0.1616
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows	0.1619		0.1580

Note 1. Organization: Call Option Agreement (Details) (USD $)	3 Months Ended
	Aug. 31, 2013
Details
Purchase Price of Equity Subject to WFOE Exclusive Option to Purchase	$ 0.16
Purchase Price of Equity Subject to WFOE Exclusive Option to Purchase in RMB	$ 1.00

Note 11. Concentration of Credit Risk (Details)	3 Months Ended
Note 11. Concentration of Credit Risk (Details)	Aug. 31, 2013
Details
Percentage of Gross Revenue at Which Disclosure of Concentration is Required	10.00%

Document and Entity Information	3 Months Ended
Document and Entity Information	Aug. 31, 2013	Oct. 16, 2013
Document and Entity Information
Entity Registrant Name	China Xuefeng Environmental Engineering Inc.
Document Type	10-Q
Document Period End Date	Aug. 31, 2013
Amendment Flag	false
Entity Central Index Key	0001518487
Current Fiscal Year End Date	--05-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
EntityCommonStockSharesOutstanding		55,200,000

Note 8. Related Party Transactions (Details) (USD $)	3 Months Ended
Note 8. Related Party Transactions (Details) (USD $)	Aug. 31, 2013	May 31, 2013
Details
Prepaid patent leasing fee	$ 51,904	$ 90,496
Loan from Stockholder for Expenses Paid	154,000
Loan from Stockholder for Registered Capital and Operating Expenses	79,000
Repayment of Loan to Stockholder	$ 51,000

Note 8. Related Party Transactions: Related Party Patent Rights Lease (Details) (USD $)	3 Months Ended
	Aug. 31, 2013
Details
Monthy Amount Owed to Related Party for Lease of Patent Rights	$ 12,952
Monthy Amount Owed to Related Party for Lease of Patent Rights - RMB	$ 80,000