10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

(Amendment No.1)

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

For the quarter ended: August 31, 2016

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________ to____________

Commission File Number: 000-53741

CHINA XUEFENG ENVIORNMENTAL ENGINEERING INC.

(Exact name of Registrant as specified in its charter)

Nevada	99-0364975
(State or other jurisdiction of incorporation)	(IRS Employer I.D. No.)

The Beijing-Hangzhou Grand Canal Service Center

229 Tongda Avenue

Economic and Technological Development Zone,

Suqian, Jiangsu Province, P.R. China 223800

(Address of principal executive offices and zip Code)

+86 (527) 8437-0508

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes ☑  No ☐

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

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

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

As of October 17, 2016, there were 63,020,871 outstanding shares of common stock of the registrant, par value $0.001 per share.

 EXPLANATORY NOTE

This Form 10-Q/A amends the Quarterly Report on Form 10-Q of China Xuefeng Environmental Engineering Inc. for the quarterly period ended August 31, 2016 (the "Form 10-Q"), as filed with the Securities and Exchange Commission (the "SEC") on October 17, 2016, for the sole purpose of furnishing the Interactive Data Files as Exhibit 101 in accordance with Rule 405 of Regulation S-T. Exhibit 101 provides the financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).

No other changes have been made to the Form 10-Q. This Form 10-Q/A speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Form 10-Q.

ITEM 6. EXHIBITS

Exhibit No.	Description
31.1	Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
31.2	Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
32.1	Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
32.2	Certification of Principal Financial Officer, pursuant to 18 U.S.C. 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 Regulation S-T, the XBRL related information on Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" herewith not "filed".
+	In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed".

SIGNATURES

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

	China Xuefeng Environmental Engineering Inc.
Date: October 20, 2016	By:	/s/ Li Yuan
		Li Yuan
		Chief Executive Officer Principal Executive Officer
Date: October 20, 2016	By:	/s/ Kuanfu Fan
		Kuanfu Fan
		Chief Financial Officer Principal Financial Officer

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Li Yuan, certify that:

1.    I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-Q/A of China Xuefeng Environmental Engineering Inc.;

2.    Based on my knowledge, this quarterly 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 quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

 5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

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

Date: October 20, 2016	By:	/s/ Li Yuan
		Li Yuan Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Kuanfu Fan, certify that:

1.    I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-Q/A of China Xuefeng Environmental Engineering Inc.;

2.    Based on my knowledge, this quarterly 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 quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

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

Date: October 20, 2016	By:	/s/ Kuanfu Fan
		Kuanfu Fan Principal Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with this Amendment No. 1 to Quarterly Report of China Xuefeng Environmental Engineering Inc. (the "Company"), on Form 10-Q/A for the period ended August 31, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Li Yuan, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) Such Quarterly Report on Form 10-Q for the period ended August 31, 2016 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 period ended August 31, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 20, 2016	By:	/s/ Li Yuan
		Li Yuan
		Principal Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with this Amendment No. 1 to Quarterly Report of China Xuefeng Environmental Engineering Inc. (the "Company"), on Form 10-Q/A for the period ended August 31, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Kuanfu Fan, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) Such Quarterly Report on Form 10-Q for the period ended August 31, 2016, 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 period ended August 31, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 20, 2016	By:	/s/ Kuanfu Fan
		Kuanfu Fan
		Principal Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Aug. 31, 2016	Oct. 17, 2016
Document and Entity Information:
Entity Registrant Name	China Xuefeng Environmental Engineering Inc.
Document Type	10-Q
Document Period End Date	Aug. 31, 2016
Trading Symbol	nycm
Amendment Flag	false
Entity Central Index Key	0001518487
Current Fiscal Year End Date	--05-31
EntityCommonStockSharesOutstanding		63,020,871
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	2017
Document Fiscal Period Focus	Q1
Entity Incorporation, State Country Name	Nevada
Entity Incorporation, Date of Incorporation	Mar. 30, 2011

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Aug. 31, 2016	May 31, 2016
Current Assets:
Cash	$ 7,670,907	$ 5,912,106
Accounts receivable	4,166,689	4,173,156
Prepaid VAT	3,581,274	3,735,575
Prepaid Expenses	500,347	88,477
Total Current Assets	15,919,217	13,909,314
Noncurrent assets:
Fixed assets, net	40,706,868	41,603,297
Prepaid Lease	5,797,156	5,913,880
Accounts receivable-non-current	4,760,339	5,907,361
Deferred income tax assets	300,187	280,184
Total noncurrent assets	51,564,550	53,704,722
Total Assets	67,483,767	67,614,036
Current Liabilities:
Accounts payable	690,399	1,247,399
Deferred revenues	3,058,646	2,967,016
Taxes payable	750,814	810,428
Loan from stockholder	8,696,914	8,781,471
Accrued liabilities	148,116	165,097
Total current liabilities	13,344,889	13,971,411
Security deposits payable	2,754,278	2,794,868
TOTAL LIABILITIES	16,099,167	16,766,279
Stockholders' equity:
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 63,020,871 shares issued and outstanding	63,021	63,021
Additional paid-in capital	33,518,248	33,518,248
Statutory reserve fund	1,956,240	1,843,520
Retained earnings	17,352,579	16,234,031
Other comprehensive income	(2,574,371)	(1,838,853)
Stockholders' equity before noncontrolling interests	50,315,717	49,819,967
Noncontrolling interest	1,068,883	1,027,790
Total stockholders' equity	51,384,600	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 67,483,767	$ 67,614,036

XML

CONSOLIDATED BALANCE SHEETS PARENTHETICAL - $ / shares	Aug. 31, 2016	May 31, 2016
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	63,020,871	63,020,871
Common stock shares outstanding	63,020,871	63,020,871

XML

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Revenue:
Sales	$ 1,536,109	$ 10,865,073
Lease income	592,099
Total revenue	2,128,208	10,865,073
Cost of goods sold:
Cost of sales	139,786	8,103,499
Depreciation expense - leased equipment	286,323
Total cost of goods sold	426,109	8,103,499
Gross profit	1,702,099	2,761,574
Operating expenses:
Selling and marketing	151,438	252,257
General and administrative	261,854	287,207
Total operating expenses	413,292	539,464
Income from operations	1,288,807	2,222,110
Interest income	135,165	21,865
Government subsidy	225,899	241,970
Income before provision for income taxes	1,649,871	2,485,945
Provision for income taxes	362,243	566,744
Net income	1,287,628	1,919,201
Noncontrolling interest	(56,360)	(87,987)
Net income attributable to common stockholders	$ 1,231,268	$ 1,831,214
Earnings per common share, basic and diluted	$ 0.02	$ 0.03
Weighted average shares outstanding, basic and diluted	63,020,871	63,020,871
Comprehensive income:
Net Income	$ 1,287,628	$ 1,919,201
Foreign currency translation adjustment	(750,785)	(1,154,335)
Comprehensive income	536,843	764,866
Comprehensive income attributable to noncontrolling interests	(41,093)	(50,662)
Net Comprehensive income attributable to common stockholders	$ 495,750	$ 714,204

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - 3 months ended Aug. 31, 2016 - USD ($)	Common Stock	Additional Paid in Capital	Retained Earnings	Noncontrolling Interests	Statutory Reserve Fund	Other Comprehensive Income	Total
Balance at May. 31, 2016	$ 63,021	$ 33,518,248	$ 16,234,031	$ 1,027,790	$ 1,843,520	$ (1,838,853)	$ 50,847,757
Balance - shares at May. 31, 2016	63,020,871
Net income			1,231,268	56,360			1,287,628
Appropriation to statutory reserve			(112,720)		112,720
Foreign currency translation adjustment				(15,267)		(735,518)	(750,785)
Balance at Aug. 31, 2016	$ 63,021	$ 33,518,248	$ 17,352,579	$ 1,068,883	$ 1,956,240	$ (2,574,371)	$ 51,384,600
Balance - shares at Aug. 31, 2016	63,020,871

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Cash Flows From Operating Activities:
Net income	$ 1,287,628	$ 1,919,201
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	311,417	7,373
Amortization for the land lease	31,024	33,230
Increase in deferred income tax assets	(24,219)	(30,974)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	968,029	(10,050,668)
Decrease in prepaid VAT	100,657
(Increase) decrease in prepaid expenses	(415,653)	43,437
(Increase) in advance to supplier		(2,625,840)
(Decrease) increase in accounts payable and accrued liabilities	(473,197)	543,921
Increase in deferred revenue	135,544	209,399
(Decrease) increase in taxes payable	(48,136)	231,334
Net cash provided by (used in) operating activities	1,873,094	(9,719,587)
Cash Flows From Investing Activities:
Purchase of fixed assets	(17,423)	(9,741,051)
Cash Flows From Financing Activities:
Proceeds from shareholder		12,259,848
Effect of exchange rate changes on cash	(96,870)	(1,142,809)
Net increase (decrease) in cash	1,758,801	(8,343,599)
Cash, beginning	5,912,106	26,493,540
Cash, end	7,670,907	18,149,941
Cash paid during the period for:
Interest		627
Income taxes	436,072	689,855
Supplemental disclosure of non-cash activities
Property, equipment, construction in process transferred from prepayment		834,302
Property, equipment, construction in process accrued		$ (11,615)
Payment of accrued liabilities by shareholder	$ 39,000

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Note 1. Organization

3 Months Ended

Aug. 31, 2016

Notes

Note 1. Organization

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.

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 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 our 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.  

In November, 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 Name Change and the Forward Split were effective in December, 2012. 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. In March, 2013, the Company sold 14,000,000 shares of common stock to 12 unrelated individuals in a private offering, generating $7,000,000 in net proceeds.

As a result of the transaction with Inclusion, the Company owns all of the issued and outstanding common 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.

The Company conducts its operations through its controlled consolidated variable interest entity (“VIE”), Jiangsu Xuefeng.  Jiangsu Xuefeng, incorporated under the laws of the People’s Republic of China (“PRC”) in December, 2007, is primarily engaged in the sale, lease and installation of garbage recycling equipment and provides improvement and upgrading services of garbage recycling processing technology and equipment. 

In October 2012, Baichuang Consulting (the “WFOE”), a wholly-owned subsidiary of Lotus, entered into a series of contractual arrangements (the “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.

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 operational 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 and an additional payment of approximately US$15,910 (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.

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 exercised by Baichuang Consulting or its designated entities or natural persons.

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.

On August 4, 2016, Baichuang Information Consulting Co., Ltd (“Baichuang Information”) entered into an agreement with Mr. Li Yuan, the sole shareholder of Linyi County Xuefeng Renewable Resources Utilization Technology Co., Ltd (“Linyi Xuefeng”), to purchase his 100% ownership of Linyi Xuefeng. Mr. Li Yuan is the Chief Executive Officer and main shareholder of the Company. The purchase price is to be determined by the audited net assets of the Company as of May 31, 2016, (“payment anticipated to be RMB10,000,000 ($1,500,000 US) in cash and the balance to be paid in common shares of China Xuefeng at 75% of the closing price of the last trading day of stock delivery”).  In any event, the payment method of specific amount and securities shall be separately accounted for and discussed after the audit report is issued.

On October 7, 2016, a supplementary agreement was entered between both parties to finalize the purchase based upon the audited net asset value of $23,462,612 on May 31, 2016. The supplementary agreement indicated that the transfer price is $3 per share consisting entirely of stock of the Company. Accordingly, 7,820,871 shares were issued to Mr. Li Yuan.

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.
							100%
					Inclusion Business Limited (BVI)
							100%
				Lotus International Holdings Limited (Hong Kong)
Offshore
Onshore							100%
			Baichuang Information Consulting (Shenzhen) Co., Ltd (WFOE)
	Yi Yuan	Li Yuan				VIE Entrustment Agreements	100%
	10%	90%
Jiangsu Xuefeng Environmental Protection Science and Technology Co., Ltd								Linyi County Xuefeng Renewable Resources Utilization Technology Co., Ltd

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Note 2. Summary of Significant Accounting Policies

3 Months Ended

Aug. 31, 2016

Notes

Note 2. Summary of Significant Accounting Policies

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

BASIS OF ACCOUNTING AND PRESENTATION 

The unaudited interim consolidated financial statements of the Company as of August 31, 2016 and for the three months ended August 31, 2016 and 2015, 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, 2016 are not necessarily indicative of the results to be expected for future three months or for the year ending May 31, 2017.

The acquisition of Linyi Xuefeng was treated as a combination of entities under common as Mr. Li Yuan was the chief executive officer and major shareholder of both companies. An acquisition of an entity under common control is treated similar to a “pooling of interest.” Accordingly, the financial statements of the Company include the historical balances of Linyi Xuefeng as if the acquisition occurred on the first day of the earliest period presented.

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

VARIABLE INTEREST ENTITY

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 entities (“VIEs”).  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.

Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity 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 reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, have the unilateral ability to exercise those rights.  Jiangsu Xuefeng’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.

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.

ASSETS		August 31, 2016		May 31,   2016
		(Unaudited)
Current assets:
Cash	$	6,538,804	$	5,587,133
Account receivable		4,165,891		4,172,406
Prepaid VAT		2,153,313		2,286,570
Prepaid expenses		497,566		87,492
Total current assets		13,355,574		12,133,601
Fixed assets, net		16,542,498		17,070,774
Account receivable-noncurrent		4,760,339		5,907,361
TOTAL ASSETS	$	34,658,411	$	35,111,736
LIABILITIES
Current liabilities:
Due to China Xuefeng Environmental    Engineering, Inc. (1)	$	6,513,058	$	6,609,043
Payable to WFOE (2)		15,700,755		13,958,489
Accounts payable		254,471		774,665
Deferred revenue		2,385,045		2,967,016
Taxes payable		565,832		635,027
Loan from stockholder		272,866		276,888
Accrued liabilities		41,235		42,746
Total current liabilities		25,733,262		25,263,874
Deposit payable-noncurrent		2,754,278		2,794,868
TOTAL LIABILITIES	$	28,487,540	$	28,058,742

(1)     Due to China Xuefeng Environmental Engineering, Inc. is for the proceeds from the sale of common stock which proceeds were received by Jiangsu Xuefeng for 14,000,000 common shares issued by China Xuefeng Environmental Engineering, Inc. on March 19, 2013 at $0.50 each (approximately 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 and additional monthly payments of RMB 100,000 (approximately US$15,630).  During the three months ended August 31, 2016 and 2015, Jiangsu Xuefeng did not make any payment to the WOFE.

		For The Three Months Ended August 31,
		2016			2015
		(Unaudited)			(Unaudited)
Revenue	$		2,128,208	$		10,865,073
Net income (3)	$		1,127,203	$		1,759,742

(3)     Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to the WFOE, which is not reflected above.

			For The Three Months Ended August 31,
			2016			2015
			(Unaudited)			(Unaudited)
Net cash provided by (used in) operating activities	$			1,056,516	$		(9,650,785)
Net cash (used in) investing activities		(17,423)				(178,100)
Effect of exchange rate changes on cash		(87,422)				(740,497)
Net increase (decrease) in cash	$			951,671	$		(10,569,382)

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.  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. 

ACQUISITION OF LINYI XUEFENG

The following financial statement amounts and balances of Linyi Xuefeng have been included in the accompanying consolidated financial statements.

	August 31,	May 31,
	2016	2016
	(Unaudited)
Total Assets	$  32,642,934	$	32,316,617
TOTAL LIABILITIES	$    9,368,758	$	8,854,005

	For The Three Months Ended August 31,
	2016	2015
	(Unaudited)			(Unaudited)
TOTAL OPERATING EXPENSES	$        97,035		$      124,240
TOTAL OTHER INCOME	$      226,058		$      242,315
NET INCOME	$      153,242		$      149,049

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.

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 income 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, 2016	May 31,  2016	August 31,  2015
Balance sheet items, except for stockholders’ equity, as of year end	0.1497	0.1519	N/A
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	0.1506	N/A	0.1613

For the three months ended August 31, 2016 and 2015, foreign currency translation adjustments of $(750,785) and $(1,154,335), respectively, have been reported as other comprehensive income.  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.

REVENUE RECOGNITION

Revenues are primarily derived from selling and leasing garbage processing equipment, providing garbage recycling processing system technology support, renovation and upgrade services and patent licensing to 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.

Improvement and upgrading service is a one-time service provided to upgrade customer’s existing equipment before they opt to license and use our patented technology. The fee for the service would be paid within thirty (30) days upon execution of the contract.

Inspection would be conducted by the customers according to industry standards within three days upon completion of the improvement and upgrading service. Performance testing would then be conducted on the upgraded equipment, which typically can be done within a month. A final inspection assessment report would be provided to the customers within five days upon completion of the testing and Customers would provide the Company with a signed acceptance form if they are satisfied. The Company will recognize the revenue for the improvement and upgrading service once the performance testing is passed and the final evaluation report is provided by the customer.

Patent licensing is limited to five (5) years with payments due annually in advance and recognized as revenue monthly. We are responsible to provide repairing service when necessary, but customers would bear any out of pocket expense relating to the repairing service.

We believe that lease receivables have four potential risks: operation risk, credit risk, accident risk and natural disasters risk.

First, there is no guarantee that the licensee of our patent will have sufficient capital resources to perform the licensing agreement and pay the licensing fee on time or at all. The length of the agreement is up to five (5) years and therefore the Company may not able to collect fees for the entire agreement. Second, there is a potential credit risk for which the licensee may unilaterally terminate the agreement and thus affect the payout of the licensing agreement. Third, accident involving the equipment caused by employees of the licensee may have material adverse effect on the operation of the licensee. This unforeseeable risk could impact the licensee’s ability to perform throughout the length of the agreement. Lastly, unforeseeable natural disasters could have a material adverse effect on the production and operation of the Company’s licensees. If their operation is impacted by events such as fire, flood or earthquakes, they may need to cease their operation and therefore may be unable to perform their obligations under the agreement.

Linyi Xuefeng’s income relates solely to government for city pollution garbage processing system constructions.  Government subsidy are recognized as earned when grant expenses are incurred up to the maximum amount allowed for each grant award.

Sales-Type Leases

The Company entered into three sales-type lease arrangements during the three months ended August 31, 2015, with two customers for financing of their purchase of garbage processing equipment.  The arrangements with the customers have a fixed term of three years. Revenue from the sale of the equipment is recognized at the inception of the lease. The payments have been present valued with an annual interest rate of 5.25%. In connection with these arrangements, the Company recognized revenue of $14,300,324 for the year ended May 31, 2016. Future minimum collections for the year ending May 31 are as follows:

Year Ending
May 31,	Amount
2017	$	3,102,134
2018	4,329,537
2019	1,492,458
	$	8,924,129

Operating Leases

The Company entered into three operating lease arrangements with two customers for garbage processing equipment on April 25, 2016, December 28, 2015 and November 6, 2015, respectively. The arrangement with the customer has a fixed term of five years with three monthly payments of $180,719, $361,438 and $150,599, respectively. Revenue from the leasing of the equipment is recognized monthly. In addition, the lease required a security deposit on $718,507, $1,437,014 and $598,756, respectively. At the end of the five years lease term, it will be determined whether the lease will be extended, leased to a new customer or returned to the Company. Future minimum payments for the years ending May 31 are as follows:

Year Ending
May 31,	Amount
2017	$	2,078,266
2018	2,771,022
2019	2,771,022
2020	2,771,022
2021	1,756,988
	$	12,148,320

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. By the end of improvement and upgrading services, there is persuasive evidence of an arrangement exists since company has a signed contract with a customer; delivery has occurred and a customer has completed inspection and accepted the improvement and upgrading services then delivered; the fee is fixed and become due within 30 days upon the signing of the contract; and collectability is probable. 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 within one month. 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.  The fees for the improvement and upgrading services are not subject to refund, forfeiture or any other concession if patent licensing is not completed.

The Company has met the agreed upon specifications and has not been required to make any refunds for its services.  No warranty is provided by the Company.

The customer is responsible for repair services when necessary.  The out of pocket expenses for the repair services will be charged separately to the customer by the Company. 

Patent Licensing

Patent licensing is limited to 5 years with payments due annually in advance.  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 a 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.

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 processing 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.

Multiple Elements

The Company determined that its improvement and upgrade services are individually a separate unit of accounting.  In determining whether the improvement and upgrade services has 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 services.  The Company uses the vendor-specific objective evidence to determine the selling price for its improvement and upgrade services 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 licensed separately. The Company uses the vendor-specific objective evidence to determine the price for patent licensing when sold in multiple-element arrangements.  Although not yet being licensed separately, the price established by the management has the relevant authority.  The Company establishes the price of  upgrading and improvement service and the price of patent licensing is determined based on the following method:

Since equipment improvement and upgrade service and patent leasing service are derived from the Company’s patented technology, which the Company has the exclusive right to while others must obtain licensing rights to use the technology, the Company have a strong bargaining power in the market to undertake the promotion of its brand and corporate image. Furthermore, the Company uses a profit cost pricing method to determine the price of its product. The Company calculates the price by adding its target profit, or a 90% gross profit margin, to the base product cost to derive the final sale price of its services.

The Company allocates the arrangement consideration based on their relative selling prices.  Revenues for the improvement and upgrade services are recognized when completed, 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 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC 820, “Fair Value Measurement,” defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.  The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

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 measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  As of August 31, 2016 and May 31, 2016, none of the Company’s assets and liabilities were required to be reported at fair value on a recurring basis.  Carrying values of non-derivative financial instruments, including cash, accounts receivable, prepaid VAT, accounts payable and accrued expenses, and deferred revenue approximate their fair values due to the short term nature of these financial instruments.  There were no changes in methods or assumptions during the periods presented.

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. 

FIXED ASSETS

Fixed assets are recorded at cost, less accumulated depreciation.  Cost includes the price paid to acquire the asset, and any expenditures 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 the original useful life 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 asset categories are as follows:

Computers and equipment	3 years
Vehicle	4 years
Furniture and fixtures	5 years
Investment in leased property	15 years
Machinery	10 years
Building and improvement	20 years

IMPAIRMENT OF LONG-LIVED ASSETS

The Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets.  In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets.  No impairment of long-lived assets was recognized for the periods presented.

DEFERRED REVENUE

Deferred revenue is advance payments received for patent licensing fees and received from government for city pollution garbage processing system constructions. These payments received, but not yet earned, are recognized as deferred revenue in 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 of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  At August 31, 2016 and May 31, 2016, the differences relate entirely to revenue deferred for financial statement purposes.  During the year ended May 31, 2015, as permitted by the PRC tax law, the Company began recognizing revenue from patent licensing fees for income tax purposes, based on when it is earned rather than when it is collected, consistent with the financial statement recognition.  As a result, there are no differences between the basis of assets and liabilities for financial statements 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, 2016 and May 31, 2016, the Company does not have a liability for any unrecognized tax benefits.

The income tax laws of various jurisdictions in which the Company, its subsidiaries and the VIE operate are summarized as follows:

United States

The Company is subject to United States tax at graduated rates from 15% to 34%.  No provision for income taxes in the United States has been made as the Company had no U.S. taxable income for the three months ended August 31, 2016 and 2015.

PRC

Jiangsu Xuefeng and Baichuang Consulting are subject to an Enterprise Income Tax at 25% and file their own tax returns.  Consolidated tax returns are not permitted in China.

BVI

Inclusion is incorporated in the BVI and is governed by their income tax laws.  According to current BVI income tax law, the applicable income tax rate for the Company is 0%.

Hong Kong

Lotus is incorporated in Hong Kong.  Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

Advertising Costs

Advertising costs are charged to operations when incurred.  For the three months ended August 31, 2016 and 2015, advertising expense was $90,359 and $183,076, respectively.

Statutory Reserve Fund

Pursuant to corporate law in 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, 2016 and 2015, a statutory reserve of $112,720 and $194,220, respectively, was required to be allocated to the Company.

VALUE ADDED TAX (“VAT”)

All China-based enterprises are subject to a VAT imposed by the PRC government on their domestic product sales.  The output VAT is charged to customers who purchase goods from the Company and the input VAT is paid when the Company purchases goods from its vendors. Input VAT rates are 17% for the purchasing activities conducted by the Company. Output VAT rate is 17% for all products.  The input VAT can be offset against the output VAT.  The VAT payable will be presented on the balance sheets when input VAT is less than the output VAT.  Recoverable balance will be presented on the balance sheets when input VAT is larger than the output VAT.

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Note 3. Recently Issued Accounting Standards

3 Months Ended

Aug. 31, 2016

Notes

Note 3. Recently Issued Accounting Standards

NOTE 3.   RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).’’ This guidance supersedes current guidance on revenue recognition in Topic 605, “Revenue Recognition.’’ In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU No.2015-14 to defer the effective date of ASU No. 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company beginning June 1, 2018. The Company is currently evaluating the effect the guidance will have on the consolidated financial statements.

In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment is effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of this standard on its consolidated financial statements.

In March 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-03 – Interest – Imputation of Interest (Subtopic 835-30). This ASU addressed the simplification of debt issuance costs presentation by presenting debt issuance costs in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-01 – Income Statement – Extraordinary and Unusual Items (Subtopic 225-20).  This ASU addressed the simplification of income statement presentation by eliminating the concept of extraordinary items.  The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.  The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively.  A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements.  Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  This accounting standard update did not have a material impact on the Company’s consolidated financial statements.

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Note 4. Fixed Assets

3 Months Ended

Aug. 31, 2016

Notes

Note 4. Fixed Assets

NOTE 4.   FIXED ASSETS

Fixed assets are summarized as follows:

		August 31, 2016			May 31,      2016
		(Unaudited)
Computers and equipment	$		81,193	$		64,818
Vehicles		86,707			87,984
Investment in leased property		17,172,179			17,425,249
Production facilities		8,391,757			8,515,428
Furniture and fixtures		18,177			18,445
Building and improvement		15,792,189			16,024,922
		41,542,202			42,136,846
Less: accumulated depreciation		(835,334)			(533,549)
		$	40,706,868		$	41,603,297

For the three months ended August 31, 2016 and 2015, depreciation expense was $311,417 and $7,373 respectively.

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Note 5. Income Taxes

3 Months Ended

Aug. 31, 2016

Notes

Note 5. Income Taxes

NOTE 5.   INCOME TAXES

	For the Three  Months Ended August 31,
	2016	2015
	(Unaudited)	(Unaudited)
Current	$ 386,462	$ 597,718
Deferred	(24,219)	(30,974)
Total	$ 362,243	$ 566,744

As of August 31, 2016, the Company had unused operating loss carry-forwards of approximately $1,200,000 expiring in various years through 2022. 

The expected tax rate for income in the PRC is 25%.  The following table reconciles the effective income tax rates with the statutory rates for the three months ended August 31:

	2016	2015
Statutory rate	25%	25%
Government subsidy	3%	2%
Effective income tax rate	22%	23%

The recognized government subsidy by Linyi Xuefeng was tax exempt per notice form the PRC tax authorities and accordingly there is no tax provision to be recognized. 

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, 2015 and 2014 were examined by the PRC tax authorities in May 2016 and 2015, respectively. 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 years ended May 31, 2016, May 31, 2015, and May 31, 2014, which is a short year income tax return required to be filed as a result of the 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 May 31, 2016. 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 May 31, 2016, 2015 and 2014 remain open to examination by the IRS.

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Note 6. Related Party Transactions

3 Months Ended

Aug. 31, 2016

Notes

Note 6. Related Party Transactions

NOTE 6.   RELATED PARTY TRANSACTIONS

On August 5, 2012, the Company entered into an agreement to lease the patent rights on garbage recycling processing technology from Li Yuan, one of the Company’s stockholders.  Under the current terms, the Company is required to pay a fee of $12,048 (RMB 80,000) each month for five years from September 2012 to August 2017. The related prepaid patent leasing fees of $47,900 and $85,061 are included in prepaid expenses on the consolidated balance sheets as of August 31, 2016 and May 31, 2016, respectively.

The remaining payments for the patent rights are as follows:

Year Ending
May 31,	Amount
2017	$ 108,432
2018	36,144
	$ 144,576

The Company obtained a demand loan from Li Yuan, a stockholder which is non-interest bearing.  The total loan of approximately $519,000 represents $440,000 of expenses paid by the stockholder and  payments of approximately $79,000 representing the registered capital and operating expenses of Baichuang Information Consulting (Shenzhen) Co., Ltd. The balance is reflected as loan from stockholder as of August 31, 2016 and May 31, 2016.

On June 25, 2013, Linyi Xuefeng and the shareholder, Mr. Li Yuan, entered into a loan agreement pursuant to which Mr. Li Yuan provides a loan facility to the Linyi Xuefeng, which are non-interest bearing and expiring on June 30, 2017. The maximum amount of the loan is RMB 200,000,000 (US $32,389,400). Any borrowings in excess of this amount may be negotiated between the parties. On December 17, 2015, a resolution of the board was signed by Mr. Li Yuan, who is the sole shareholder of Linyi Xuefeng, surrendered a loan to the Linyi Xuefeng of RMB 140,000,000 (USD $21,813,260) and treated as a capital contribution to the Linyi Xuefeng. The loans outstanding were $8,180,354 and $8,300,910 as of August 31, 2016 and May 31, 2016, respectively.

Linyi Xuefeng also signed a series of agreements with Jiangsu Liding Machinery Manufacturing Co., Ltd (“Jiangsu Liding”) for the construction of the garbage recycling processing plant and production facilities purchase. The shareholder of the Company, Mr. Li Yuan, is also the shareholder of Jiangsu Liding. As of August 31, 2016 and May 31, 2016, the purchase amount of $7,714,280 from Jiangsu Liding was delivered in December 2015, and included in the fixed assets of the accompanying consolidated balance sheet as of August 31, 2016 and May 31, 2016.

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Note 7. Land Use Right

3 Months Ended

Aug. 31, 2016

Notes

Note 7. Land Use Right

NOTE 7.  LAND USE RIGHT

On September 6, 2013, the Company signed with Linyi Yanjiazhuang Beizhi Village government to obtain a land use right 66,667 square meters of land at total RMB 40,000,000 (USD$ 6,477,880). In addition, the Company was required to subject a deed tax of RMB 1,200,000 (USD$ 194,336). The purchase of the land was approved by local government on September 9, 2013. The Company fully paid the deed tax of $194,336 when the purchase agreement was signed. The Company paid RMB 25,000,000 (USD$ 4,048,675) on September 25, 2013 and RMB 15,000,000 (USD$ 2,429,205) on November 12, 2013 to local government for the land purchase. The land use right started on September 9, 2013 and ends on September 8, 2063.

The amortization for the land use right for the three months ended August 31, 2016 and 2015 was $31,024 and $33,230, respectively.

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Note 8. Leases

3 Months Ended

Aug. 31, 2016

Notes

Note 8. Leases

NOTE 8.   LEASES

The Company leases one office space under a one-year operating lease from an unrelated third party, which expired on March 31, 2016.  The lease required the Company to prepay the rental for one year of $6,784 (RMB 44,664). The lease provides for renewal options but the Company ceased the lease. The Company entered into a new lease agreement with an unrelated third party for new office space, which commenced on April 1, 2016 and expires on March 31, 2019.  The lease requires the Company to prepay the semi-annual rental of $3,593 (RMB 24,000). The lease provides for renewal options. 

The Company leases another office space under a three-year operating lease from an unrelated third party, which expired on May 31, 2016. The lease required the Company to prepay the semi-annual rental. On May 26, 2016, the Company renewed the lease for another three years which ends on May 31, 2019. Rent expense for the three months ended August 31, 2016 and 2015 was $1,807 and $1,936, respectively.

Future minimum payments for the years ending May 31 are as follows:

Year Ending
May 31,	Amount
2017	$	11,054
2018	15,030
2019	5,120
	$	31,204

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Note 9. Contingencies

3 Months Ended

Aug. 31, 2016

Notes

Note 9. Contingencies

NOTE 9.   CONTINGENCIES

As disclosed in Note 6, the Company is 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 reports for the years ended December 31, 2015, 2014 and 2013 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 year it has 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.

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Note 10. Vulnerability Due To Operations in The Prc

3 Months Ended

Aug. 31, 2016

Notes

Note 10. Vulnerability Due To Operations in The Prc

NOTE 10.   VULNERABILITY DUE TO OPERATIONS IN THE PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. The different cultures, business preferences, corruption, diverse uncertain government regulations, tax systems and currency regulations are risks impacting the Company’s current operations. 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.

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Note 11. Concentration of Credit and Business Risk

3 Months Ended

Aug. 31, 2016

Notes

Note 11. Concentration of Credit and Business Risk

NOTE 11.   CONCENTRATION OF CREDIT AND BUSINESS RISK

Cash and cash equivalents

Substantially all of the Company’s 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. 

Major customers

For the three months ended August 31, 2016 and 2015, the Company had three and one different customers that accounted for 49% and 67% of revenue, respectively. Two customers accounted for 100% accounts receivable at August 31, 2016 and May 31, 2016.

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Note 12. Condensed Financial Information of Registrant

3 Months Ended

Aug. 31, 2016

Notes

Note 12. Condensed Financial Information of Registrant

NOTE 12.   CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

The condensed financial information of the Company’s US parent only balance sheets as of May 31, 2016, and the US parent company only statements of income, and cash flows for the year ended May 31, 2016 are as follows:

Condensed Balance Sheets

ASSETS	May 31, 2016
Investment in subsidiaries and VIE	$	50,355,645
TOTAL ASSETS	$	50,355,645

LIABILITIES AND stockholders’ EQUITY
Current liabilities:
Loan from stockholder	$	492,678
Accrued liabilities	43,000
Total current liabilities	535,678
Stockholders’ equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 63,020,871 shares issued and outstanding	63,021
Additional paid-in capital	33,518,248
Statutory reserve fund	1,843,520
Retained earnings	16,234,031
Other comprehensive income	(1,838,853)
Total stockholders’ equity	49,819,967
TOTAL LIABILITIES AND STOCKHOLDERS’     EQUITY	$	50,355,645

Condensed Statements of Income

	For The Year Ended May 31,
		2016
Revenues:
Share of earnings from investment in   subsidiaries and VIE		$	3,948,073
Operating expenses:
General and administrative			123,000
Net income		$	3,825,073

	For The Year Ended May 31,
		2016
Cash flows from operating activities:
Net income	$		3,825,073
Adjustments to reconcile net income to net cash   provided by (used in) operating activities
Share of earnings from investment in   subsidiaries and VIE		(3,948,073)
Increase in accrued liabilities		123,000
Net cash (used by) operating activities		-
Net increase in cash		-
Cash, beginning of year		-
Cash, end of year		$	-
Noncash financing activities:
Payment of accrued liabilities by shareholder		$	100,438

Basis of Presentation

The Company records its investment in its subsidiaries and VIE under the equity method of accounting.  Such investment is presented as “Investment in subsidiaries and VIE” in the condensed balance sheet and the U.S. parent’s share of the subsidiaries and VIE’s profits are presented as “Share of earnings from investment in subsidiaries and VIE” in the condensed statements of income and cash flows.

Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted.  The parent only financial information has been derived from the Company’s consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements.

Restricted Net Assets

Under PRC laws and regulations, the Company’s PRC subsidiary and VIE are restricted in their ability to transfer certain of their net assets to the parent company in the form of dividend payments, loans or advances.  The restricted net assets of the Company’s PRC subsidiary and VIE amounted to $49,819,967  as of May 31, 2016.

In addition, the Company’s operations and revenues are conducted and generated in the PRC; all of the Company’s revenues being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulations in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC’s foreign exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted net assets of consolidated subsidiaries and VIE’s exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.  For purposes of this test, restricted net assets of consolidated subsidiaries and VIEs shall mean that amount of the registrant’s proportionate share of net assets of its consolidated subsidiaries and VIEs (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without the consent of a third party.  The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiary and VIE exceed 25% of the consolidated net assets of the Company.

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Note 2. Summary of Significant Accounting Policies: Basis of Accounting and Presentation (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Basis of Accounting and Presentation

BASIS OF ACCOUNTING AND PRESENTATION 

The unaudited interim consolidated financial statements of the Company as of August 31, 2016 and for the three months ended August 31, 2016 and 2015, 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, 2016 are not necessarily indicative of the results to be expected for future three months or for the year ending May 31, 2017.

The acquisition of Linyi Xuefeng was treated as a combination of entities under common as Mr. Li Yuan was the chief executive officer and major shareholder of both companies. An acquisition of an entity under common control is treated similar to a “pooling of interest.” Accordingly, the financial statements of the Company include the historical balances of Linyi Xuefeng as if the acquisition occurred on the first day of the earliest period presented.

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

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Variable Interest Entity

VARIABLE INTEREST ENTITY

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 entities (“VIEs”).  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.

Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity 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 reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, have the unilateral ability to exercise those rights.  Jiangsu Xuefeng’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.

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.

ASSETS		August 31, 2016		May 31,   2016
		(Unaudited)
Current assets:
Cash	$	6,538,804	$	5,587,133
Account receivable		4,165,891		4,172,406
Prepaid VAT		2,153,313		2,286,570
Prepaid expenses		497,566		87,492
Total current assets		13,355,574		12,133,601
Fixed assets, net		16,542,498		17,070,774
Account receivable-noncurrent		4,760,339		5,907,361
TOTAL ASSETS	$	34,658,411	$	35,111,736
LIABILITIES
Current liabilities:
Due to China Xuefeng Environmental    Engineering, Inc. (1)	$	6,513,058	$	6,609,043
Payable to WFOE (2)		15,700,755		13,958,489
Accounts payable		254,471		774,665
Deferred revenue		2,385,045		2,967,016
Taxes payable		565,832		635,027
Loan from stockholder		272,866		276,888
Accrued liabilities		41,235		42,746
Total current liabilities		25,733,262		25,263,874
Deposit payable-noncurrent		2,754,278		2,794,868
TOTAL LIABILITIES	$	28,487,540	$	28,058,742

(1)     Due to China Xuefeng Environmental Engineering, Inc. is for the proceeds from the sale of common stock which proceeds were received by Jiangsu Xuefeng for 14,000,000 common shares issued by China Xuefeng Environmental Engineering, Inc. on March 19, 2013 at $0.50 each (approximately 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 and additional monthly payments of RMB 100,000 (approximately US$15,630).  During the three months ended August 31, 2016 and 2015, Jiangsu Xuefeng did not make any payment to the WOFE.

		For The Three Months Ended August 31,
		2016			2015
		(Unaudited)			(Unaudited)
Revenue	$		2,128,208	$		10,865,073
Net income (3)	$		1,127,203	$		1,759,742

(3)     Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to the WFOE, which is not reflected above.

			For The Three Months Ended August 31,
			2016			2015
			(Unaudited)			(Unaudited)
Net cash provided by (used in) operating activities	$			1,056,516	$		(9,650,785)
Net cash (used in) investing activities		(17,423)				(178,100)
Effect of exchange rate changes on cash		(87,422)				(740,497)
Net increase (decrease) in cash	$			951,671	$		(10,569,382)

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.  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. 

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Note 2. Summary of Significant Accounting Policies: Acquisition of Linyi Xuefeng (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Acquisition of Linyi Xuefeng

ACQUISITION OF LINYI XUEFENG

The following financial statement amounts and balances of Linyi Xuefeng have been included in the accompanying consolidated financial statements.

	August 31,	May 31,
	2016	2016
	(Unaudited)
Total Assets	$  32,642,934	$	32,316,617
TOTAL LIABILITIES	$    9,368,758	$	8,854,005

	For The Three Months Ended August 31,
	2016	2015
	(Unaudited)			(Unaudited)
TOTAL OPERATING EXPENSES	$        97,035		$      124,240
TOTAL OTHER INCOME	$      226,058		$      242,315
NET INCOME	$      153,242		$      149,049

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Note 2. Summary of Significant Accounting Policies: Use of Estimates (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Use of Estimates

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.

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Note 2. Summary of Significant Accounting Policies: Foreign Currency Translation (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Foreign Currency Translation

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 income 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, 2016	May 31,  2016	August 31,  2015
Balance sheet items, except for stockholders’ equity, as of year end	0.1497	0.1519	N/A
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	0.1506	N/A	0.1613

For the three months ended August 31, 2016 and 2015, foreign currency translation adjustments of $(750,785) and $(1,154,335), respectively, have been reported as other comprehensive income.  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.

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Note 2. Summary of Significant Accounting Policies: Revenue Recognition (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Revenue Recognition

REVENUE RECOGNITION

Revenues are primarily derived from selling and leasing garbage processing equipment, providing garbage recycling processing system technology support, renovation and upgrade services and patent licensing to 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.

Improvement and upgrading service is a one-time service provided to upgrade customer’s existing equipment before they opt to license and use our patented technology. The fee for the service would be paid within thirty (30) days upon execution of the contract.

Inspection would be conducted by the customers according to industry standards within three days upon completion of the improvement and upgrading service. Performance testing would then be conducted on the upgraded equipment, which typically can be done within a month. A final inspection assessment report would be provided to the customers within five days upon completion of the testing and Customers would provide the Company with a signed acceptance form if they are satisfied. The Company will recognize the revenue for the improvement and upgrading service once the performance testing is passed and the final evaluation report is provided by the customer.

Patent licensing is limited to five (5) years with payments due annually in advance and recognized as revenue monthly. We are responsible to provide repairing service when necessary, but customers would bear any out of pocket expense relating to the repairing service.

We believe that lease receivables have four potential risks: operation risk, credit risk, accident risk and natural disasters risk.

First, there is no guarantee that the licensee of our patent will have sufficient capital resources to perform the licensing agreement and pay the licensing fee on time or at all. The length of the agreement is up to five (5) years and therefore the Company may not able to collect fees for the entire agreement. Second, there is a potential credit risk for which the licensee may unilaterally terminate the agreement and thus affect the payout of the licensing agreement. Third, accident involving the equipment caused by employees of the licensee may have material adverse effect on the operation of the licensee. This unforeseeable risk could impact the licensee’s ability to perform throughout the length of the agreement. Lastly, unforeseeable natural disasters could have a material adverse effect on the production and operation of the Company’s licensees. If their operation is impacted by events such as fire, flood or earthquakes, they may need to cease their operation and therefore may be unable to perform their obligations under the agreement.

Linyi Xuefeng’s income relates solely to government for city pollution garbage processing system constructions.  Government subsidy are recognized as earned when grant expenses are incurred up to the maximum amount allowed for each grant award.

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Sales-type Leases

Sales-Type Leases

The Company entered into three sales-type lease arrangements during the three months ended August 31, 2015, with two customers for financing of their purchase of garbage processing equipment.  The arrangements with the customers have a fixed term of three years. Revenue from the sale of the equipment is recognized at the inception of the lease. The payments have been present valued with an annual interest rate of 5.25%. In connection with these arrangements, the Company recognized revenue of $14,300,324 for the year ended May 31, 2016. Future minimum collections for the year ending May 31 are as follows:

Year Ending
May 31,	Amount
2017	$	3,102,134
2018	4,329,537
2019	1,492,458
	$	8,924,129

Operating Leases

The Company entered into three operating lease arrangements with two customers for garbage processing equipment on April 25, 2016, December 28, 2015 and November 6, 2015, respectively. The arrangement with the customer has a fixed term of five years with three monthly payments of $180,719, $361,438 and $150,599, respectively. Revenue from the leasing of the equipment is recognized monthly. In addition, the lease required a security deposit on $718,507, $1,437,014 and $598,756, respectively. At the end of the five years lease term, it will be determined whether the lease will be extended, leased to a new customer or returned to the Company. Future minimum payments for the years ending May 31 are as follows:

Year Ending
May 31,	Amount
2017	$	2,078,266
2018	2,771,022
2019	2,771,022
2020	2,771,022
2021	1,756,988
	$	12,148,320

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Note 2. Summary of Significant Accounting Policies: Multiple-element Arrangements (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Multiple-element Arrangements

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. By the end of improvement and upgrading services, there is persuasive evidence of an arrangement exists since company has a signed contract with a customer; delivery has occurred and a customer has completed inspection and accepted the improvement and upgrading services then delivered; the fee is fixed and become due within 30 days upon the signing of the contract; and collectability is probable. 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 within one month. 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.  The fees for the improvement and upgrading services are not subject to refund, forfeiture or any other concession if patent licensing is not completed.

The Company has met the agreed upon specifications and has not been required to make any refunds for its services.  No warranty is provided by the Company.

The customer is responsible for repair services when necessary.  The out of pocket expenses for the repair services will be charged separately to the customer by the Company. 

Patent Licensing

Patent licensing is limited to 5 years with payments due annually in advance.  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 a 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.

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 processing 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.

Multiple Elements

The Company determined that its improvement and upgrade services are individually a separate unit of accounting.  In determining whether the improvement and upgrade services has 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 services.  The Company uses the vendor-specific objective evidence to determine the selling price for its improvement and upgrade services 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 licensed separately. The Company uses the vendor-specific objective evidence to determine the price for patent licensing when sold in multiple-element arrangements.  Although not yet being licensed separately, the price established by the management has the relevant authority.  The Company establishes the price of  upgrading and improvement service and the price of patent licensing is determined based on the following method:

Since equipment improvement and upgrade service and patent leasing service are derived from the Company’s patented technology, which the Company has the exclusive right to while others must obtain licensing rights to use the technology, the Company have a strong bargaining power in the market to undertake the promotion of its brand and corporate image. Furthermore, the Company uses a profit cost pricing method to determine the price of its product. The Company calculates the price by adding its target profit, or a 90% gross profit margin, to the base product cost to derive the final sale price of its services.

The Company allocates the arrangement consideration based on their relative selling prices.  Revenues for the improvement and upgrade services are recognized when completed, 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 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.

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Note 2. Summary of Significant Accounting Policies: Fair Value of Financial Instruments (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Fair Value of Financial Instruments

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC 820, “Fair Value Measurement,” defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.  The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

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 measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  As of August 31, 2016 and May 31, 2016, none of the Company’s assets and liabilities were required to be reported at fair value on a recurring basis.  Carrying values of non-derivative financial instruments, including cash, accounts receivable, prepaid VAT, accounts payable and accrued expenses, and deferred revenue approximate their fair values due to the short term nature of these financial instruments.  There were no changes in methods or assumptions during the periods presented.

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Note 2. Summary of Significant Accounting Policies: Cash and Cash Equivalents (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Cash and Cash Equivalents

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. 

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Note 2. Summary of Significant Accounting Policies: Fixed Assets (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Fixed Assets

FIXED ASSETS

Fixed assets are recorded at cost, less accumulated depreciation.  Cost includes the price paid to acquire the asset, and any expenditures 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 the original useful life 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 asset categories are as follows:

Computers and equipment	3 years
Vehicle	4 years
Furniture and fixtures	5 years
Investment in leased property	15 years
Machinery	10 years
Building and improvement	20 years

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Note 2. Summary of Significant Accounting Policies: Impairment of Long-lived Assests (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Impairment of Long-lived Assests

IMPAIRMENT OF LONG-LIVED ASSETS

The Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets.  In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets.  No impairment of long-lived assets was recognized for the periods presented.

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Note 2. Summary of Significant Accounting Policies: Deferred Revenue (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Deferred Revenue

DEFERRED REVENUE

Deferred revenue is advance payments received for patent licensing fees and received from government for city pollution garbage processing system constructions. These payments received, but not yet earned, are recognized as deferred revenue in the consolidated balance sheets.

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Note 2. Summary of Significant Accounting Policies: Income Taxes (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Income Taxes

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 of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  At August 31, 2016 and May 31, 2016, the differences relate entirely to revenue deferred for financial statement purposes.  During the year ended May 31, 2015, as permitted by the PRC tax law, the Company began recognizing revenue from patent licensing fees for income tax purposes, based on when it is earned rather than when it is collected, consistent with the financial statement recognition.  As a result, there are no differences between the basis of assets and liabilities for financial statements 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, 2016 and May 31, 2016, the Company does not have a liability for any unrecognized tax benefits.

The income tax laws of various jurisdictions in which the Company, its subsidiaries and the VIE operate are summarized as follows:

United States

The Company is subject to United States tax at graduated rates from 15% to 34%.  No provision for income taxes in the United States has been made as the Company had no U.S. taxable income for the three months ended August 31, 2016 and 2015.

PRC

Jiangsu Xuefeng and Baichuang Consulting are subject to an Enterprise Income Tax at 25% and file their own tax returns.  Consolidated tax returns are not permitted in China.

BVI

Inclusion is incorporated in the BVI and is governed by their income tax laws.  According to current BVI income tax law, the applicable income tax rate for the Company is 0%.

Hong Kong

Lotus is incorporated in Hong Kong.  Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

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Note 2. Summary of Significant Accounting Policies: Advertising Costs (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Advertising Costs

Advertising Costs

Advertising costs are charged to operations when incurred.  For the three months ended August 31, 2016 and 2015, advertising expense was $90,359 and $183,076, respectively.

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Note 2. Summary of Significant Accounting Policies: Statutory Reserve Fund (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Statutory Reserve Fund

Statutory Reserve Fund

Pursuant to corporate law in 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, 2016 and 2015, a statutory reserve of $112,720 and $194,220, respectively, was required to be allocated to the Company.

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Note 2. Summary of Significant Accounting Policies: Value Added Tax ("vat") (Policies)

3 Months Ended

Aug. 31, 2016

Policies

Value Added Tax ("vat")

VALUE ADDED TAX (“VAT”)

All China-based enterprises are subject to a VAT imposed by the PRC government on their domestic product sales.  The output VAT is charged to customers who purchase goods from the Company and the input VAT is paid when the Company purchases goods from its vendors. Input VAT rates are 17% for the purchasing activities conducted by the Company. Output VAT rate is 17% for all products.  The input VAT can be offset against the output VAT.  The VAT payable will be presented on the balance sheets when input VAT is less than the output VAT.  Recoverable balance will be presented on the balance sheets when input VAT is larger than the output VAT.

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Assets and Liabilities of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Assets and Liabilities of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements

ASSETS		August 31, 2016		May 31,   2016
		(Unaudited)
Current assets:
Cash	$	6,538,804	$	5,587,133
Account receivable		4,165,891		4,172,406
Prepaid VAT		2,153,313		2,286,570
Prepaid expenses		497,566		87,492
Total current assets		13,355,574		12,133,601
Fixed assets, net		16,542,498		17,070,774
Account receivable-noncurrent		4,760,339		5,907,361
TOTAL ASSETS	$	34,658,411	$	35,111,736
LIABILITIES
Current liabilities:
Due to China Xuefeng Environmental    Engineering, Inc. (1)	$	6,513,058	$	6,609,043
Payable to WFOE (2)		15,700,755		13,958,489
Accounts payable		254,471		774,665
Deferred revenue		2,385,045		2,967,016
Taxes payable		565,832		635,027
Loan from stockholder		272,866		276,888
Accrued liabilities		41,235		42,746
Total current liabilities		25,733,262		25,263,874
Deposit payable-noncurrent		2,754,278		2,794,868
TOTAL LIABILITIES	$	28,487,540	$	28,058,742

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Revenues of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Revenues of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements

		For The Three Months Ended August 31,
		2016			2015
		(Unaudited)			(Unaudited)
Revenue	$		2,128,208	$		10,865,073
Net income (3)	$		1,127,203	$		1,759,742

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Cash Flows of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Cash Flows of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements

			For The Three Months Ended August 31,
			2016			2015
			(Unaudited)			(Unaudited)
Net cash provided by (used in) operating activities	$			1,056,516	$		(9,650,785)
Net cash (used in) investing activities		(17,423)				(178,100)
Effect of exchange rate changes on cash		(87,422)				(740,497)
Net increase (decrease) in cash	$			951,671	$		(10,569,382)

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Note 2. Summary of Significant Accounting Policies: Acquisition of Linyi Xuefeng: Schedule of Business Acquisitions, by Acquisition (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Schedule of Business Acquisitions, by Acquisition

	August 31,	May 31,
	2016	2016
	(Unaudited)
Total Assets	$  32,642,934	$	32,316,617
TOTAL LIABILITIES	$    9,368,758	$	8,854,005

	For The Three Months Ended August 31,
	2016	2015
	(Unaudited)			(Unaudited)
TOTAL OPERATING EXPENSES	$        97,035		$      124,240
TOTAL OTHER INCOME	$      226,058		$      242,315
NET INCOME	$      153,242		$      149,049

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Note 2. Summary of Significant Accounting Policies: Foreign Currency Translation: Exchange Rates Utilized to Translate Amounts for Purposes of Preparing the Financial Statements (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Exchange Rates Utilized to Translate Amounts for Purposes of Preparing the Financial Statements

	August 31, 2016	May 31,  2016	August 31,  2015
Balance sheet items, except for stockholders’ equity, as of year end	0.1497	0.1519	N/A
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	0.1506	N/A	0.1613

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases: Schedule of Future Minimum Rental Payments for Operating Leases (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Schedule of Future Minimum Rental Payments for Operating Leases

Year Ending
May 31,	Amount
2017	$	2,078,266
2018	2,771,022
2019	2,771,022
2020	2,771,022
2021	1,756,988
	$	12,148,320

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Note 2. Summary of Significant Accounting Policies: Fixed Assets: Property, Plant, and Equipment Useful Life (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Property, Plant, and Equipment Useful Life

Computers and equipment	3 years
Vehicle	4 years
Furniture and fixtures	5 years
Investment in leased property	15 years
Machinery	10 years
Building and improvement	20 years

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Note 4. Fixed Assets: Fixed Assets (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Fixed Assets

		August 31, 2016			May 31,      2016
		(Unaudited)
Computers and equipment	$		81,193	$		64,818
Vehicles		86,707			87,984
Investment in leased property		17,172,179			17,425,249
Production facilities		8,391,757			8,515,428
Furniture and fixtures		18,177			18,445
Building and improvement		15,792,189			16,024,922
		41,542,202			42,136,846
Less: accumulated depreciation		(835,334)			(533,549)
		$	40,706,868		$	41,603,297

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Note 5. Income Taxes: Provision for (Benefit from) Income Taxes (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Provision for (Benefit from) Income Taxes

	For the Three  Months Ended August 31,
	2016	2015
	(Unaudited)	(Unaudited)
Current	$ 386,462	$ 597,718
Deferred	(24,219)	(30,974)
Total	$ 362,243	$ 566,744

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Note 5. Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Schedule of Effective Income Tax Rate Reconciliation

	2016	2015
Statutory rate	25%	25%
Government subsidy	3%	2%
Effective income tax rate	22%	23%

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Note 6. Related Party Transactions: Schedule of Future Payments on Lease of Rights of Patent (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Schedule of Future Payments on Lease of Rights of Patent

Year Ending
May 31,	Amount
2017	$ 108,432
2018	36,144
	$ 144,576

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Note 8. Leases: Schedule of Future Minimum Lease Payments for Capital Leases (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Schedule of Future Minimum Lease Payments for Capital Leases

Year Ending
May 31,	Amount
2017	$	11,054
2018	15,030
2019	5,120
	$	31,204

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Note 12. Condensed Financial Information of Registrant: Condensed Balance Sheets - US Parent (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Condensed Balance Sheets - US Parent

Condensed Balance Sheets

ASSETS	May 31, 2016
Investment in subsidiaries and VIE	$	50,355,645
TOTAL ASSETS	$	50,355,645

LIABILITIES AND stockholders’ EQUITY
Current liabilities:
Loan from stockholder	$	492,678
Accrued liabilities	43,000
Total current liabilities	535,678
Stockholders’ equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 63,020,871 shares issued and outstanding	63,021
Additional paid-in capital	33,518,248
Statutory reserve fund	1,843,520
Retained earnings	16,234,031
Other comprehensive income	(1,838,853)
Total stockholders’ equity	49,819,967
TOTAL LIABILITIES AND STOCKHOLDERS’     EQUITY	$	50,355,645

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Note 12. Condensed Financial Information of Registrant: Condensed Statement of Comprehensive Income - US Parent (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Condensed Statement of Comprehensive Income - US Parent

Condensed Statements of Income

	For The Year Ended May 31,
		2016
Revenues:
Share of earnings from investment in   subsidiaries and VIE		$	3,948,073
Operating expenses:
General and administrative			123,000
Net income		$	3,825,073

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Note 12. Condensed Financial Information of Registrant: Condensed Cash Flow Statement (Tables)

3 Months Ended

Aug. 31, 2016

Tables/Schedules

Condensed Cash Flow Statement

	For The Year Ended May 31,
		2016
Cash flows from operating activities:
Net income	$		3,825,073
Adjustments to reconcile net income to net cash   provided by (used in) operating activities
Share of earnings from investment in   subsidiaries and VIE		(3,948,073)
Increase in accrued liabilities		123,000
Net cash (used by) operating activities		-
Net increase in cash		-
Cash, beginning of year		-
Cash, end of year		$	-
Noncash financing activities:
Payment of accrued liabilities by shareholder		$	100,438

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Note 1. Organization (Details)	3 Months Ended
	Aug. 31, 2016
Details
Entity Incorporation, State Country Name	Nevada
Entity Incorporation, Date of Incorporation	Mar. 30, 2011

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Note 1. Organization: Reverse Acquisition Transaction (Details)	Nov. 27, 2012 shares
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%

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Note 1. Organization: Forward Stock Split (Details) - USD ($)	1 Months Ended
	Mar. 19, 2013	Aug. 31, 2016	May 31, 2016	Dec. 17, 2012	Feb. 29, 2012
Details
Shares of Common Stock Authorized Prior to Forward Split				10,300,000
Common stock shares outstanding		63,020,871	63,020,871		41,200,000
Common stock shares issued	14,000,000	63,020,871	63,020,871
Stock Issued During Period, Value, Share-based Compensation, Net of Forfeitures	$ 7,000,000

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Note 1. Organization: Call Option Agreement (Details)	3 Months Ended
	Aug. 31, 2016 $ / shares
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

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Assets and Liabilities of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements (Details) - USD ($)		Aug. 31, 2016	May 31, 2016
Cash		$ 7,670,907	$ 5,912,106
Accounts receivable		4,166,689	4,173,156
Prepaid VAT		3,581,274	3,735,575
Total current assets		15,919,217	13,909,314
Fixed assets, net		40,706,868	41,603,297
Accounts receivable-non-current		4,760,339	5,907,361
TOTAL ASSETS		67,483,767	67,614,036
Deferred revenues		3,058,646	2,967,016
Loan from stockholder		8,696,914	8,781,471
Accrued liabilities		148,116	165,097
Total current liabilities		13,344,889	13,971,411
Security deposits payable		2,754,278	2,794,868
TOTAL LIABILITIES		16,099,167	16,766,279
Variable Interest Entity, Not Primary Beneficiary
Cash		6,538,804	5,587,133
Accounts receivable		4,165,891	4,172,406
Prepaid VAT		2,153,313	2,286,570
Prepaid expenses and other current assets		497,566	87,492
Total current assets		13,355,574	12,133,601
Fixed assets, net		16,542,498	17,070,774
Accounts receivable-non-current		4,760,339	5,907,361
TOTAL ASSETS		34,658,411	35,111,736
Due to China Xuefeng	[1]	6,513,058	6,609,043
Payable to WFOE	[2]	15,700,755	13,958,489
Accounts Payable, Current		254,471	774,665
Deferred revenues		2,385,045	2,967,016
Income taxes payable		565,832	635,027
Loan from stockholder		272,866	276,888
Accrued liabilities		41,235	42,746
Total current liabilities		25,733,262	25,263,874
Security deposits payable		2,754,278	2,794,868
TOTAL LIABILITIES		$ 28,487,540	$ 28,058,742

[1] Due to China Xuefeng Environmental Engineering, Inc. is for the proceeds from sale of common stock which proceeds were 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 and additional monthly payments of RMB 100,000 (approximately US$15,800).

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Payable to WFOE (Details)	3 Months Ended
	Aug. 31, 2016 USD ($)
Details
Annual Service Fee Payable to the WFOE as a Percentage of Annual Net Income	95.00%
Monthly Payment to WFOE in RMB	$ 100,000
Monthly Payment to WFOE	$ 15,630

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Revenues of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements (Details) - USD ($)		3 Months Ended
		Aug. 31, 2016	Aug. 31, 2015
Revenue		$ 2,128,208	$ 10,865,073
Variable Interest Entity, Not Primary Beneficiary
Revenue		2,128,208	10,865,073
Net income	[1]	$ 1,127,203	$ 1,759,742

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

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Note 2. Summary of Significant Accounting Policies: Variable Interest Entity: Cash Flows of Variable Interest Entity Jiangsu Xuefeng Included in Consolidated Financial Statements (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Net cash (used in) provided by operating activities	$ 1,873,094	$ (9,719,587)
Effect of exchange rate changes on cash	(96,870)	(1,142,809)
Net increase in cash	1,758,801	(8,343,599)
Variable Interest Entity, Not Primary Beneficiary
Net cash (used in) provided by operating activities	1,056,516	(9,650,785)
Net cash (used in) provided by investing activities	(17,423)	(178,100)
Effect of exchange rate changes on cash	(87,422)	(740,497)
Net increase in cash	$ 951,671	$ (10,569,382)

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Note 2. Summary of Significant Accounting Policies: Acquisition of Linyi Xuefeng: Schedule of Business Acquisitions, by Acquisition (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015	May 31, 2016
TOTAL ASSETS	$ 67,483,767		$ 67,614,036
TOTAL LIABILITIES	16,099,167		16,766,279
Total operating expenses	413,292	$ 539,464
Net income	1,287,628	1,919,201
Linyi Xuefeng
TOTAL ASSETS	32,642,934		32,316,617
TOTAL LIABILITIES	9,368,758		$ 8,854,005
Total operating expenses	97,035	124,240
Other Income	226,058	242,315
Net income	$ 153,242	$ 149,049

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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, 2016	May 31, 2016	Aug. 31, 2015
Details
Exchange Rate for Balance Sheet Items Other Than Stockholders' Equity	0.1497	0.1519
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows	0.1506		0.1613

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Note 2. Summary of Significant Accounting Policies: Foreign Currency Translation (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Foreign Currency Translation Adjustment	$ (750,785)	$ (1,154,335)

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Revenue	$ 2,128,208	$ 10,865,073
Future Minimum Collections Year Two	3,102,134
Future Minimum Collections Year Three	4,329,537
Future Minimum Collections Year Four	1,492,458
Future Minimum Collections Total	8,924,129
SalesTypeLeasesArrangementMember
Revenue	$ 14,300,324

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases: Schedule of Future Minimum Rental Payments for Operating Leases (Details)	Aug. 31, 2016 USD ($)
Details
Operating Leases, Future Minimum Payments, Due in Two Years	$ 2,078,266
Operating Leases, Future Minimum Payments, Due in Three Years	2,771,022
Operating Leases, Future Minimum Payments, Due in Four Years	2,771,022
Operating Leases, Future Minimum Payments, Due in Five Years	1,756,988
Operating Leases, Future Minimum Payments Due	$ 12,148,320

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Note 2. Summary of Significant Accounting Policies: Fixed Assets: Property, Plant, and Equipment Useful Life (Details)	3 Months Ended
	Aug. 31, 2016
ComputersAndEquipmentMember
Property, Plant and Equipment, Useful Life	3 years
Vehicles
Property, Plant and Equipment, Useful Life	4 years
FixturesAndFurnitureMember
Property, Plant and Equipment, Useful Life	5 years
Investment in leased property
Property, Plant and Equipment, Useful Life	15 years
Machinery and Equipment
Property, Plant and Equipment, Useful Life	10 years
Building and Building Improvements
Property, Plant and Equipment, Useful Life	20 years

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Note 2. Summary of Significant Accounting Policies: Income Taxes (Details)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Effective Income Tax Rate Reconciliation, Percent	22.00%	23.00%
Minimum
Effective Income Tax Rate Reconciliation, Percent	15.00%
Maximum
Effective Income Tax Rate Reconciliation, Percent	34.00%

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Note 2. Summary of Significant Accounting Policies: Advertising Costs (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Advertising Expense	$ 90,359	$ 183,076

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Note 2. Summary of Significant Accounting Policies: Statutory Reserve Fund (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
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 Fund
Appropriation to statutory reserve	$ 112,720	$ 194,220

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Note 4. Fixed Assets: Fixed Assets (Details) - USD ($)	Aug. 31, 2016	May 31, 2016
Fixed Assets, Gross	$ 41,542,202	$ 42,136,846
Accumulated Depreciation	(835,334)	(533,549)
Fixed assets, net	40,706,868	41,603,297
ComputersAndEquipmentMember
Fixed Assets, Gross	81,193	64,818
Vehicles
Fixed Assets, Gross	86,707	87,984
Investment in leased property
Fixed Assets, Gross	17,172,179	17,425,249
Manufacturing Facility
Fixed Assets, Gross	8,391,757	8,515,428
FixturesAndFurnitureMember
Fixed Assets, Gross	18,177	18,445
Building and Building Improvements
Fixed Assets, Gross	$ 15,792,189	$ 16,024,922

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Note 4. Fixed Assets (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Depreciation	$ 311,417	$ 7,373

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Note 5. Income Taxes: Provision for (Benefit from) Income Taxes (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Provision for Income Taxes, Current	$ 386,462	$ 597,718
Deferred income taxes	(24,219)	(30,974)
Income Tax Expense (Benefit), Extraordinary Items	$ 362,243	$ 566,744

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Note 5. Income Taxes (Details)	Aug. 31, 2016 USD ($)
Details
Operating Loss Carryforwards	$ 1,200,000

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Note 5. Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Details)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	25.00%	25.00%
Government Subsidy	3.00%	2.00%
Effective Income Tax Rate Reconciliation, Percent	22.00%	23.00%

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Note 6. Related Party Transactions: Related Party Patent Rights Lease (Details)	3 Months Ended
	Aug. 31, 2016 USD ($)
Details
Monthly Amount Owed to Related Party for Lease of Patent Rights	$ 12,048
Monthly Amount Owed to Related Party for Lease of Patent Rights - RMB	$ 80,000

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Note 6. Related Party Transactions (Details) - USD ($)	Aug. 31, 2016	May 31, 2016
Details
Prepaid patent leasing fee	$ 47,900	$ 85,061

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Note 6. Related Party Transactions: Schedule of Future Payments on Lease of Rights of Patent (Details)	3 Months Ended
	Aug. 31, 2016 USD ($)
Details
Future payments on lease of rights of patent, year two	$ 108,432
Future payments on lease of rights of patent, year three	36,144
Future payments on lease of rights of patent	$ 144,576

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Note 6. Related Party Transactions: Loan From Stockholder (Details)	3 Months Ended
	Aug. 31, 2016 USD ($)
Details
Loan from Stockholder for Expenses Paid	$ 519,000
Loan from Stockholder for Registered Capital and Operating Expenses	$ 79,000

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Note 7. Land Use Right (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Amortization for the land lease	$ 31,024	$ 33,230

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Note 8. Leases (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Details
Total Prepayment Required for Operating Lease	$ 6,784
Total Prepayment Required for Operating Lease - RMB	44,664
Lease Expense	$ 1,807	$ 1,936

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Note 8. Leases: Schedule of Future Minimum Lease Payments for Capital Leases (Details)	Aug. 31, 2016 USD ($)
Details
Capital Leases, Future Minimum Payments Due in Two Years	$ 11,054
Capital Leases, Future Minimum Payments Due in Three Years	15,030
Capital Leases, Future Minimum Payments Due in Four Years	5,120
Capital Leases, Future Minimum Payments Due	$ 31,204

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Note 9. Contingencies (Details)	3 Months Ended
	Aug. 31, 2016 USD ($)
Details
Civil penalties on foreign bank accounts	$ 10,000

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Note 11. Concentration of Credit and Business Risk (Details)	3 Months Ended
	Aug. 31, 2016
Details
Concentration Risk, Customer	the Company had three and one different customers that accounted for 49% and 67% of revenue, respectively. Two customers accounted for 100% accounts receivable

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Note 12. Condensed Financial Information of Registrant: Condensed Balance Sheets - US Parent (Details) - USD ($)	Aug. 31, 2016	May 31, 2016
TOTAL ASSETS	$ 67,483,767	$ 67,614,036
Loan from stockholder	8,696,914	8,781,471
Accrued liabilities	148,116	165,097
TOTAL LIABILITIES	16,099,167	16,766,279
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 63,020,871 shares issued and outstanding	63,021	63,021
Additional paid-in capital	33,518,248	33,518,248
Statutory reserve fund	1,956,240	1,843,520
Retained earnings	17,352,579	16,234,031
Other comprehensive income	(2,574,371)	(1,838,853)
Balance	51,384,600	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	67,483,767	$ 67,614,036
Parent Company
Investment In Subsidiaries And Vies	50,355,645
TOTAL ASSETS	50,355,645
Loan from stockholder	492,678
Accrued liabilities	43,000
TOTAL LIABILITIES	535,678
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 63,020,871 shares issued and outstanding	63,021
Additional paid-in capital	33,518,248
Statutory reserve fund	1,843,520
Retained earnings	16,234,031
Other comprehensive income	(1,838,853)
Balance	49,819,967
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 50,355,645

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Note 12. Condensed Financial Information of Registrant: Condensed Statement of Comprehensive Income - US Parent (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
General and administrative	$ 261,854	$ 287,207
Net income	1,287,628	$ 1,919,201
Parent Company
Share of earnings from investment in subsidiaries and VIEs	3,948,073
General and administrative	123,000
Net income	$ 3,825,073

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Note 12. Condensed Financial Information of Registrant: Condensed Cash Flow Statement (Details) - USD ($)	3 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Net income	$ 1,287,628	$ 1,919,201
Net cash (used in) provided by operating activities	1,873,094	$ (9,719,587)
Payment of accrued liabilities by shareholder	39,000
Parent Company
Net income	3,825,073
Share of earnings from investment in subsidiaries and VIEs	(3,948,073)
Increase (Decrease) in Accrued Liabilities	123,000
Payment of accrued liabilities by shareholder	$ 100,438