10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarter ended: November 30, 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: 333-175483

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 o No ☒

As of January 12, 2017, there were 63,020,871 outstanding shares of common stock of the registrant, par value $0.001 per share.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
	Page
Item 1. Financial Statements.	2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	43
Item 4. Controls and Procedures.	43
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	45
Item 1A. Risk Factors.	45
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.	45
Item 3 Defaults Upon Senior Securities.	45
Item 4. Mine Safety Disclosures.	45
Item 5. Other Information.	45
Item 6. Exhibits.	46
Signatures	47

2

Item 1. Financial Statements.

The following unaudited interim financial statements of China Xuefeng Environmental Engineering Inc. (referred to herein as the "Company," "we," "us" or "our") are included in this quarterly report on Form 10-Q:

China Xuefeng Environmental Engineering Inc.

November 30, 2016 and 2015

Index to the Consolidated Financial Statements

	Page
Consolidated Balance Sheets at November 30, 2016 (unaudited) and May 31, 2016
Unaudited Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended November 30, 2016 and 2015		4
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2016 and 2015		5
Notes to Unaudited Consolidated Financial Statements		6

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (IN U.S. $) (UNAUDITED)

	November 30,		May 31,
ASSETS	2016		2016
Current assets:
Cash	$	5,240,737	$	5,912,106
Accounts receivable		4,092,812		4,173,156
Prepaid VAT		4,106,140		3,735,575
Prepaid expenses		323,165		88,477
Total current assets		13,762,854		13,909,314
Noncurrent assets:
Fixed assets, net		43,492,005		41,603,297
Prepaid lease		5,590,544		5,913,880
Accounts receivable-non-current		3,572,846		5,907,361
Deferred income tax assets		314,779		280,184
Total noncurrent assets		52,970,174		53,704,722
TOTAL ASSETS	$	66,733,028	$	67,614,036

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (IN U.S. $) (UNAUDITED)

	November 30,			May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY	2016			2016
Current liabilities:
Accounts payable	$	474,377		$	1,247,399
Deferred revenues		2,900,101			2,967,016
Taxes payable		693,048			810,428
Loan from stockholder		8,491,346			8,781,471
Accrued liabilities		124,405			165,097
Total current liabilities		12,683,277			13,971,411
Security deposits payable		2,670,318			2,794,868
TOTAL LIABILITIES		15,353,595			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		34,584,997			34,584,997
Statutory reserve fund		2,095,931			1,843,520
Retained earnings		18,832,299			16,234,031
Other comprehensive income		(4,196,815	)		(1,877,812	)
Total stockholders' equity		51,379,433			50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	66,733,028		$	67,614,036

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

	Three Months Ended, November 30,				Six Months Ended, November 30,
	2016		2015		2016		2015
Revenue:
Sales	$	1,952,580	$	6,219,910	$	3,488,689	$	17,084,983
Lease income		582,737		45,327		1,174,836		45,327
Total revenue		2,535,317		6,265,237		4,663,525		17,130,310
Cost of goods sold:
Cost of sales		116,543		3,948,609		256,329		12,052,108
Depreciation expense - leased equipment		286,878		22,025		573,201		22,025
Total cost of goods sold		403,421		3,970,634		829,530		12,074,133
Gross profit	2,131,896		2,294,603			3,833,995		5,056,177
Operating expenses:
Selling and marketing		177,205		309,062		328,643		561,319
General and administrative	281,459		308,095			543,313		595,302
Total operating expenses	458,664		617,157			871,956		1,156,621

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

	Three Months Ended, November 30,							Six Months Ended, November 30,
	2016				2015			2016			2015
Income from operations	1,673,232					1,677,446			2,962,039			3,899,556
Interest income			122,129			80,756			257,294			102,620
Government subsidy			222,327			233,849			448,226			475,820
Income before provision for income taxes			2,017,688			1,992,051			3,667,559			4,477,996
Provision for income taxes	454,637					445,800			816,880			1,012,544
Net income			1,563,051			1,546,251			2,850,679			3,465,452
Noncontrolling interest	-					70,452			-			158,439
Net income attributable to common stockholders		$	1,563,051		$	1,475,799		$	2,850,679		$	3,307,013
Earnings per common share, basic and diluted		$	0.02		$	0.02		$	0.05		$	0.05
Weighted average shares outstanding, basic and diluted			63,020,871			63,020,871			63,020,871			63,020,871
Comprehensive income:
Net Income		$	1,563,051		$	1,546,251		$	2,850,679		$	3,465,452
Foreign currency translation adjustment			(1,568,218	)		1,051,507			(2,319,003	)		(102,828	)
Comprehensive income			(5,167	)		2,597,758			531,676			3,362,624
Comprehensive income attributable to noncontrolling interests			-			(1,870	)		-			(52,532	)
Net Comprehensive income attributable to Common  stockholders		$	(5,167	)	$	2,595,888		$	531,676		$	3,310,092

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2016

 (IN U.S. $) (UNAUDITED)

	Common Stock		Additional Paid-in Capital		Retained Earnings			Statutory Reserve Fund		Other Comprehensive Income			Total
Balance, May 31, 2016	$	63,021	$	34,584,997	$	16,234,031		$	1,843,520	$	(1,877,812	)	$	50,847,757
Net income		-		-		2,850,679			-		-			2,850,679
Appropriation to statutory reserve		-		-		(252,411	)		252,411		-			-
Foreign currency translation adjustment		-		-		-			-		(2,319,003	)		(2,319,003	)
Balance, November 30, 2016	$	63,021	$	34,584,997	$	18,832,299		$	2,095,931	$	(4,196,815	)	$	51,379,433

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

	For The Six Month Ended
	November 30,
	2016			2015
Cash flows from operating activities:
Net income	$	2,850,679		$	3,465,452
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		618,489			60,216
Amortization for the land lease		61,556			65,346
(Increase) in deferred income tax assets		(48,471	)		(65,678	)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		2,024,011			(12,425,625	)
(Increase) in inventories		-			(194,070	)
(Increase) in prepaid VAT		(552,883	)		(1,356,754	)
(Increase) decrease in prepaid expenses		(245,628	)		82,712
(Increase) in advances to supplier		-			(6,368,880	)
(Decrease) increase in accounts payable and accrued liabilities		(654,862	)		735,566
Increase in deferred revenue		67,234			102,842
(Decrease) in taxes payable		(85,124	)		(120,547	)
Net cash provided by (used in) operating activities		4,035,001			(16,019,420	)
Cash flows from investing activities:
Purchase of fixed assets		(4,501,517	)		(15,902,382	)
Cash flows from financing activities:
Loan receive from external		-			459,958
Proceeds from shareholder loan		-			12,688,507
Loan repaid to external		-			(317,213	)
Increase in security deposit payable		-			624,400
Net cash provided by financing activities		-			13,455,652
Effect of exchange rate changes on cash		(204,853	)		(993,789	)
Net (decrease) in cash		(671,369	)		(19,459,939	)
Cash, beginning		5,912,106			26,493,540
Cash, end	$	5,240,737		$	7,033,601

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

	For The Six Month Ended
	November 30,
	2016			2015
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes paid		$	950,476		$	1,005,057
Land appreciation tax paid			2,988			3,172
Supplemental disclosure of non-cash activities
Property, equipment, construction in process transferred from prepayment		$	-		$	1,592,370
Property, equipment, construction in process accrued		$	-		$	879,899
Payment of accrued liabilities by shareholder		$	89,000		$	36,000

See accompanying notes to the consolidated financial statements.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 1.   ORGANIZATION

China Xuefeng Environmental Engineering Inc. (the "Company"), formerly known as NYC Moda Inc., was incorporated under the laws of the State of Nevada on March 30, 2011.  Since its inception until the closing of the Exchange Agreement, the Company was a development-stage company.

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.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 1.   ORGANIZATION (CONTINUED)

Exclusive Technical Service and Business Consulting Agreement: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, the WFOE provides technical support, consulting, training, marketing and 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 January 19, 2016, the VIE structure was terminated upon Baichuang Consulting exercising its option to purchase all of the registered equity of Jiangsu Xuefeng.  Baichuang Consulting became the sole owner of Jiangsu Xuefeng

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 was determined by the audited net assets of the Company as of May 31, 2016, initially with a payment of 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 on August 4, 2016. 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 eliminated the cash payment making the entire purchase with stock of the Company. The price utilized was $3 per share and 7,820,871 shares were issued to Mr. Li Yuan.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 1.   ORGANIZATION (CONTINUED)

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 (see note 6). As of November 30, 2016 and May 31, 2016, the total purchase amount $7,714,280 from Jiangsu Liding was fully delivered in December 2015, and included in the fixed assets of the accompanying consolidated balance sheet as of November 30, 2016 and May 31, 2016.

 "Linyi Xuefeng was officially approved and incorporated under the laws of the People's Republic of China ("PRC") in June 2013. Mr. Yuan Li was the sole owner since inception. Linyi Xuefeng is constructing a garbage processing plant which is planned to commerce operations in 2017. The only non-operating revenue was a subsidy received from the government for the city pollution garbage processing plant construction."

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

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRESENTATION

The unaudited interim consolidated financial statements of the Company as of November 30, 2016 and for the three and six months ended November 30, 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 and six months ended November 30, 2016 are not necessarily indicative of the results to be expected for future quarters or for the year ending May 31, 2017.

The acquisition of Linyi Xuefeng was treated as a combination of entities under common control as Mr. Li Yuan was the chief executive officer, a major shareholder and had voting control 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 has been restated and 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

The accompanying consolidated financial statements of the Company have been prepared on the accrual basis.

Until January 19, 2016, the consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its VIE for which it is deemed the primary beneficiary.  On January 19, 2016, the VIE structure was terminated upon Baichuang Consulting exercising its option to purchase all of the registered equity of Jiangsu Xuefeng.  Baichuang Consulting became the sole owner of Jiangsu Xuefeng.  All significant inter-company accounts and transactions have been eliminated in consolidation.

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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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ACQUISITION OF LINYI XUEFENG

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

	November 30,		May 31,
	2016		2016
	(Unaudited)
TOTAL ASSETS	$	31,383,280	$	32,316,617
TOTAL LIABILITIES	$	8,670,489	$	8,854,005

	For the  three months ended November 30,				For the  six months ended November 30,
	2016		2015		2016		2015
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
TOTAL OPERATING EXPENSES	$	96,012	$	138,471	$	193,047	$	262,711
TOTAL OTHER INCOME	$	223,004	$	233,504	$	449,062	$	475,819
NET INCOME	$	151,244	$	129,737	$	304,486	$	278,786

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."

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION (CONTINUED)

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:

	November 30,		May 31,
	2016		2016
	(Unaudited)
Balance sheet items, except for stockholders' equity, as of periods end		0.1451		0.1519

	Three Months Ended November 30,				Six Months Ended November 30,
	2016		2015		2016		2015
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows		0.1481		0.1572		0.1494		0.1591

For the three months ended November 30, 2016 and 2015, foreign currency translation adjustments of $(1,568,218) and $1,051,507, respectively, for the six months ended November 30, 2016 and 2015, foreign currency translation adjustments of $(2,319,003) and $(102,828), 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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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 subsidies are recognized as earned when grant expenses are incurred up to the maximum amount allowed for each grant award.

17

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Sales-Type Leases

The Company entered into three sales-type lease arrangements during the six months ended November 30, 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	$	2,017,581
2018		4,196,498
2019		1,446,598
	$	7,660,677

Operating Leases

The Company entered into four operating lease arrangements with three 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 $179,280 (RMB 1,200,000), $358,560 (RMB2, 400,000), and $149,400 (RMB1, 000,000) respectively. Revenue from the leasing of the equipment is recognized monthly. In addition, the lease required a security deposit on $696,604 (RMB4, 800,000), $1,393, 210 (RMB9, 600,000) and $580,504 (RMB 4,000,000), 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	$	1,374,480
2018		2,748,960
2019		2,748,960
2020		2,748,960
2021		1,743,000
	$	11,364,360

18

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

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.

19

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Multiple-Element Arrangements (Continued)

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:

20

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Multiple-Element Arrangements (Continued)

Multiple Elements (Continued)

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.

21

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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 November 30, 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
Motor vehicles	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.

22

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 November 30, 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 November 30, 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 and its subsidiaries 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 and six months ended November 30, 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.

23

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES (CONTINUED)

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 November 30, 2016 and 2015, advertising expense was $133,741 and $201,946 respectively. For the six months ended November 30, 2016 and 2015, advertising expense was $224,100 and $385,022, 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 six months ended November 30, 2016 and 2015, a statutory reserve of $252,411 and $341,298, 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.

RECLASSIFICATION

Certain amounts in the previous periods presented have been reclassified to conform to the current year financial statement presentation.

24

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 3.   RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the effect this ASU will have on its consolidated statement of cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.

In May, 2016, the FASB issued ASU No. 2016-10, Revenue with Contracts with Customers: Narrow-scope Improvements and Practical Expedients, which is an amendment to ASU No. 2014-09 that clarifies the objective of the collectability criterion, to allow entities to exclude amounts collected from customers from all sales taxes from the transaction price, to specify the measurement date for noncash consideration is contract inception, variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, and clarification on contract modifications at transition. The implementation guidelines follow ASU No. 2014-09.

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 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.

25

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 3.   RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

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.

NOTE 4.   FIXED ASSETS

Fixed assets are summarized as follows:

	November 30, 2016			May 31, 2016
	(Unaudited)
Computers and equipment	$	78,718		$	64,817
Vehicles		84,064			87,984
Investment in leased property		20,975,391			17,425,249
Production facilities		8,135,950			8,515,428
Furniture and fixtures		17,622			18,445
Building and improvement		15,310,793			16,024,922
		44,602,538			42,136,845
Less: accumulated depreciation		(1,110,533	)		(533,548	)
	$	43,492,005		$	41,603,297

For the three months ended November 30, 2016 and 2015, depreciation expense was $307,072 and $52,843 respectively. For the six months ended November 30, 2016 and 2015, depreciation expense was $618,489 and $60,216 respectively.

Building and improvements include approximately $7.7 million relating to construction of the garbage recycling processing plant and production facilities purchase (see note 1). Of this amount approximately $10,752 and $21,676 of depreciation has been taken during the three and six months ended November 30, 2016, relating to office furniture and equipment placed in service. The facility has taken longer than originally planned to complete due to government delays and is expected to complete by May 31, 2017. Total investment is expected to be approximately $29 million.

26

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 5.   INCOME TAXES

	For the Three Months Ended November 30,						For the Six Months Ended November 30,
	2016			2015			2016			2015
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Current	$	478,886		$	480,708		$	865,348		$	1,078,426
Deferred		(24,249	)		(34,908	)		(48,468	)		(65,882	)
Total	$	454,637		$	445,800		$	816,880		$	1,012,544

As of November 30, 2016, the Company had unused operating loss carry-forwards of approximately $1,259,000 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 six months ended November 30:

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

27

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 5.   INCOME TAXES (CONTINUED)

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.

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 $11,952 (RMB 80,000) each month for five years from September 2012 to August 2017.  The related prepaid patent leasing fees of $11,608 and $85,064 are included in prepaid expenses on the consolidated balance sheets as of November 30, 2016 and May 31, 2016, respectively.

The remaining payments for the patent rights are as follows:

Year Ending
May 31,	Amount
2017	$	71,712
2018		35,856
	$	107,568

The Company obtained a demand loan from Li Yuan, a stockholder which is non-interest bearing.  The total loan of approximately $560,000 represents $481,000 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 November 30, 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 $32,389,400,000 (RMB 200,000,). 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 $21,813,260 (RMB 140,000,000) and treated as a capital contribution to the Linyi Xuefeng. The loans outstanding were $7,930,991 and $8,300,910 as of November 30, 2016 and May 31, 2016, respectively.

28

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 6.   RELATED PARTY TRANSACTIONS (CONTINUED)

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 November 30, 2016 and May 31, 2016, the total purchase amount $7,714,280 from Jiangsu Liding was fully delivered in December 2015, and included in the fixed assets of the accompanying consolidated balance sheet as of November 30, 2016 and May 31, 2016.

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 $6,477,880 (RMB 40,000,000). In addition, the Company was required to subject a deed tax of $194,336 (RMB 1,200,000). 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 $4,048,675 (RMB25,000,000) on September 25, 2013 and $2,429,205 (RMB 15,000,000) 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 November 30, 2016 and 2015 was $30, 532 and $32, 116, respectively. The amortization for the land use right for the six months ended November 30, 2016 and 2015 was $61,556 and $65,346, respectively.

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 $3,586 (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 November 30, 2016 and 2015 was $1,779 and $1,882, respectively. Rent expense for the six months ended November 30, 2016 and 2015 was $3,586 and $3,818 respectively.

29

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 8.   LEASES (CONTINUED)

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

Year Ending
May 31,	Amount
2017	$	7,171
2018		14,701
2019		13,864
	$	35,736

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.

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.

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.

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CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 11.   CONCENTRATION OF CREDIT AND BUSINESS RISK (CONTINUED)

Major customers

For the three months ended November 30, 2016 and 2015, top five customers of the Company accounted for 53% of revenue for operating lease and one customers that accounted for 75% of revenue for sale type lease, respectively. For the six months ended November 30, 2016 and 2015, top five customers of the Company accounted for 43% of revenue for operating lease and two customers that accounted for 85% of revenue for sales type lease, respectively. Two customers accounted for 100% accounts receivable at November 30, 2016 and May 31, 2016.

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	$	51,383,435
TOTAL ASSETS	$	51,383,435

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		34,584,997
Statutory reserve fund		1,843,520
Retained earnings		16,234,031
Other comprehensive income		(1,877,812	)
Total stockholders' equity		50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	51,383,435

31

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 12.   CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)

Condensed Statements of Income

	For The Year Ended May 31,
	2016
Revenues:
Share of earnings from investment in subsidiaries and	$	6,430,586
Operating expenses:
General and administrative		123,000
Net income	$	6,553,586

Condensed Statements of Cash Flows

	For The Year Ended May 31,
	2016
Cash flows from operating activities:
Net income	$	6,553,586
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Share of earnings from investment in subsidiaries		(6,430,586	)
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

32

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015

(IN U.S. $) (UNAUDITED)

NOTE 12.   CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)

Basis of Presentation

The Company records its investment in its subsidiaries under the equity method of accounting.  Such investments are presented as "Investment in subsidiaries" on the condensed balance sheet and the subsidiaries' profits are presented as "Share of earnings from investment in subsidiaries" in the condensed statement of operations.

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.

There were no cash transactions in the US parent company during the three and six months ended May 31, 2016.

Restricted Net Assets

Under PRC laws and regulations, the Company's PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the Company's PRC subsidiaries amounted to approximately $50,848,000 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.

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

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

Overview 

We are in the business of providing equipment and upgrade services to optimize garbage-recycling processes. We sell and lease comprehensive and environmental-friendly garbage recycling equipment. We also utilize our licensed patented technology of "comprehensive and harmless garbage-processing equipment" to upgrade software systems and reconstruct hardware for our clients and therefore expand the sorting scope and capacity of our clients' garbage recycling equipment. We also have manufactured, sold and leased garbage-processing equipment commencing since fiscal year ended May 31, 2016. We conduct our operations through our wholly-owned subsidiaries Jiangsu Xuefeng Environmental Protection Science and Technology Co., Ltd. ("Jiangsu Xuefeng") and Linyi County Renewable Resources Utilization Co., Ltd. ("Linyi Xuefeng")

Our Services

With the development of the urbanization in China, the amount of household garbage is growing, whereas the processing capability of garbage processing equipment cannot satisfy the increasing amount of garbage. In order to improve the processing equipment of garbage processing plants, we provide upgrades and improvements to the software systems and hardware equipment by installing various systems of our licensed patented technology "comprehensive and harmless garbage-processing equipment" into customers' equipment, and reconstruct the hardware to expand the garbage sorting scope and capacity of their equipment.

The comprehensive and harmless garbage processing equipment that we sell or lease is comprised of a waste digestion pretreatment system, methane gas power generation system, sorting processing system, bricklaying building system, leachate treatment system, DCS (distribution control system), XFET-5 ecological and water-saving toilets and excrement comprehensive processing system and various material collection systems. The equipment technology is designed and manufactured based on the complicated situation of the household garbage in China. According to the features of various garbage, the equipment utilizes the wind-force, gravity, magnetic, shape, etc. to process the garbage by the combined way of machine selecting, winnowing, magnetic separation, automatic cutting, smashing and other technological processes. The equipment has large processing capacity and can run all day. The stand-alone equipment can process 500 to 1000 tons of garbage per day. It can sort and process complicated municipal solid waste, leaving almost no pollution and no residue, reaching the "3 without" standard of no waste gas, no waste water and no waste residue.

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The licensed patented technology of "harmless and comprehensive garbage processing equipment" provided by Jiangsu Xuefeng to its customers has a 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 rate, approaching 100%. The resource recovery products, biogas, can not only be used for meeting the needs of the plant itself, but also for sale outside the company, which greatly improves the efficiency of the garbage processing equipment, decreases production costs, and increases the recovery return of garbage processing.

After we sell or lease the equipment or complete the internal system upgrade and hardware equipment improvements of the clients' garbage equipment, we deliver the upgraded equipment to the customers. The customers will conduct an inspection and performance testing of the upgraded equipment within one month pursuant to the contract to inspect whether the internal control system and the hardware structure can operate steadily and achieve the expected results. The inspection includes the following: whether the quality of the equipment and accessories or after improvement can match the licensed patented technology and process various kinds of garbage, whether the various garbage systems can process automatically, and whether the daily garbage processing capacity reaches the expected results per the contract. If during the performance testing period, the performance meets the requirements of the contract, it would be deemed that we have fully fulfilled our obligations under the contract.

When we complete the upgrading service for a client, we go through the acceptance check and commissioning of the company in accordance with the contract, to make sure that the services provided met the expectations of the clients. After that, we are not subject to any additional services. The revenue we generated belongs to the service class income, with the main cost being the salaries of the staff and the leasing fees for the patent, whereas the hardware and software equipment, as well as the material used in the upgrading process are the responsibility of the client.

Acquisition of Linyi Xuefeng

On August 4, 2016, we 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 determined by the audited net assets of Linyi Xuefeng as of May 31, 2016, with payment of RMB10, 000,000 in cash and the rest to be paid in common shares of China Xuefeng depending on the 75% closing price of the last trading day. On October 7, 2016, a supplementary agreement was entered between both parties to finalize the purchase and cost based upon the audited net asset value $23,462,612 on May 31, 2016. The transfer price is $3 per share and 7,820,871 shares in total to Mr. Li Yuan without cash consideration. Linyi Xuefeng is primarily engaged in garbage recycling processing and currently still in development stage without any production.

Upon acquisition, Linyi Xuefeng became a wholly-owned subsidiary. The acquisition was accounted for as a business combination.

35

Implications of Being an Emerging Growth Company
We qualify as an emerging growth company as that term is used in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

● A requirement to have only two years of audited financial statements and only two years of related MD&A;

● Exemption from the auditor attestation requirement in the assessment of the emerging growth company's internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002;

● Reduced disclosure about the emerging growth company's executive compensation arrangements; and

● No non-binding advisory votes on executive compensation or golden parachute arrangements.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the "Securities Act") for complying with new or revised accounting standards. We have elected to use the extended transition period provided above and therefore our financial statements may not be comparable to companies that comply with public company effective dates.

We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Results of Operations

Three months Ended November 30, 2016 and 2015

The following table sets forth in U.S. dollars, key components of our unaudited results of operations for the three months ended November 30, 2016 and 2015, and the percentage change between 2016 and 2015.

	Three Months Ended November 30,
	2016			2015			Percentage
	(U.S. $)			(U.S. $)			Change
Revenue	$	2,535,317		$	6,265,237			(60	%)
Cost of revenue		(403,421	)		(3,970,634	)		(90	%)
Gross profit		2,131,896			2,294,603			(7	%)
Selling expenses		177,205			309,062			(43	%)
General and administrative expenses		281,459			308,095			(9	%)
Total operating expenses		458,664			617,157			(26	%)
Operating income		1,673,232			1,677,446			(0	%)
Other operating income		344,456			314,605			9	%
Income before provision for income taxes		2,017,688			1,992,051			1	%
Provision for income taxes		454,637			445,800			(0	%)
Net income		1,563,051			1,546,251			2	%
Noncontrolling interests		-			(70,452	)		(100	%)
Net income attributable to common  stockholders	$	1,563,051		$	1,475,799			6	%

36

Revenue

We provide improvement and upgrading services for garbage processing equipment to our customers. This is a one-time service. We also license a patent to our customers. The patent licensing is limited to five years with payments due annually in advance. During the fiscal year ended May 31, 2016, we began to sell or lease the garbage processing equipment to our customers.

We generated $2,535,317 in revenue for the three months ended November 30, 2016, as compared to $6,265,237 for the three months ended November 30, 2015. Our revenue for the three months ended November 30, 2016 decreased by $3,729,920 or 60% compared to the revenue for the three months ended November 30, 2015. The primary reason for the significant decrease in revenue was mainly due to the sale of one unit of garbage processing equipment for the three months ended November 30, 2015 but no such sales during the three months ended November 30, 2016.

The following table sets forth our revenue for the three months ended November 30, 2016 and 2015: 

	Three Months Ended November 30,
	2016			2015			Percentage
	(U.S. $)			(U.S. $)			Change
Improvements and Upgrading Services		$	773,354		$	477,300	62		%
Patent Leasing	1,179,226			1,036,200			14		%
Sales type lease	-			4,706,410			(100		%)
Operating lease			582,737			45,327		1,186	%
Total		$	2,535,317		$	6,265,237		(60	%)

Improvement and Upgrading Services

During the three months ended November 30, 2016, we provided improvement and upgrading services to one customer and generated revenue of $773,354, comparing to $477,300 for the three months ended November 30, 2015. For the three months ended November 30, 2015, we provided such services to one customer. The services were completed and accepted by the customer and the payment was received in full as of November 30, 2016. While our core business still focuses on providing improvement and upgrading services for customers' garbage processing equipment, we have also begun selling or leasing our garbage processing equipment.

Patent Licensing

During the three months ended November 30, 2016 and 2015, we generated revenue of $1,179,226 and $1,036,200 from licensing our patent to 18 and 15 unrelated customers, respectively. Among of these 18 and 15 unrelated customers, we generated the patent licensing revenue for entire three months from 17 and 14 unrelated customers for the three months ended November 30, 2016 and 2015, respectively.

Sales Type Lease

For the three months ended November 30, 2016, we didn't have any sales type lease revenue. During the three months ended November 30, 2015, we leased one unit of garbage processing equipment to one customer. These sales were recognized as sales type leases because title to the equipment will be transferred to the customers at the end of the lease. The equipment was sold for $4,706,410 after the VAT. We received 20% of the selling price from the customer during the three months ended November 30, 2015. We will receive quarterly payments of approximate $378,480 during the following three years including interest at 5.25%.

37

Operating lease

During the three months ended November 30, 2016, we had four operating leases for a 300-ton and three 500-ton garbage processing system. The lease period is 5 years with annual lease payments of $597,600 and $2,151,360 (for the three 500-ton garbage processing system), respectively, before VAT. The 300-ton garbage processing system was delivered and tested in the beginning of November 2015. The two 500-ton garbage processing systems were delivered and tested in the beginning of January 2016. Another 500-ton garbage processing system was delivered and tested in the end of April 2016. These leases are being accounted for as operating leases because they have no renewal or purchase option. At the end of the five years, either a new lease will be negotiated or the equipment will be returned. For the three months ended November 30, 2016, we generated operating lease revenue of 582,737 for the four pieces of equipment. For the three months ended November 30, 2015, as the 300-ton garbage processing system was delivered and tested in the beginning of November 2015 and one month's lease payment of $45,327 was recognized as operating lease revenue.

Cost of Goods Sold 

Our cost of goods sold decreased to $403,421 for the three months ended November 30, 2016 from $3,970,634 for the three months ended November 30, 2015, which represented a decrease of 90%. This is mainly attributable to the $3, 805,287 cost of the garbage processing unit sold under the sales type lease for the three months ended November 30, 2015. For improvement and upgrading service and patent licensing revenue, the cost primarily consists of fees paid to the related party for licensing the patent, employees' salaries and training expenses. In addition, the cost of the garbage processing equipment also includes various equipment and supplies necessary for assembling and installing equipment and the related labor. For the operating lease revenue, the depreciation of the garbage processing equipment is also included in the cost of revenue.

Gross Profit

Our gross profit decreased to $2,131,896 for the three months ended November 30, 2016 from $2,294,603 for the three months ended November 30, 2015. Our gross profit ratio was significantly increased because our business stream has resulted in a high gross margin for the three months ended November 30, 2016 without cost of garbage processing equipment under the sales type leases. Our cost of goods sold is almost entirely direct labor and patent licensing fees, and other operating expenses for the three months ended November 30, 2016. The gross profit ratio for the quarters ended November 30, 2016 and 2015 was 84% and 37%, respectively.

Selling and Marketing Expenses 

Our selling and marketing expenses decreased to $177,205 for the three months ended November 30, 2016 from $309,062 for the three months ended November 30, 2015 which represented a decrease of 43%. Our selling and marketing expenses were primarily comprised of sales employees' salaries, advertising expenses, training expenses and travelling expenses. The decrease was primarily due to the significant decrease in advertising, travelling and entertainment expenses.

General and Administrative Expenses

Our general and administrative expenses decreased to $281,459 for the three months ended November 30, 2016 from $308,095 for the three months ended November 30, 2015, representing a 9% decrease. Our general and administrative expenses were primarily comprised of employees' salaries, travelling expenses, entertainment expenses and professional fees such as legal and audit fees. The decrease was primarily caused by the decrease in entertainment expenses.

Non-operating income

Our non-operating income included interest income and government subsidy. Despite our large cash balances, the interest income generated for the three months ended November 30, 2016 and 2015 was nominal for principally two reasons: 1) extremely low bank's current deposit interest rate and 2) minimal fluctuation of the annual interest rates within a 0.30% range. The interest income reported is net after deducting bank service charges. For the three months ended November 30, 2016 and 2015, our interest income also includes interest of $111,833 and $65,244, respectively, earned on the sales type leases. Our non-operating income also included government subsidy. Our wholly owned subsidiary, Linyi Xuefeng, received government subsidy of approximate $896,000 (RMB 6,000,000) annually. For the three months ended November 30, 2016 and 2015, the income of government subsidy was $222,327 and $233,849 under accrue basis, respectively.

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Provision for Income Taxes

Our provision for income taxes decreased to $454,637 for the three months ended November 30, 2016 from $455,800 for the three months ended November 30, 2015.  Our effective tax rate for the three months ended November 30, 2016 and 2015 was approximately the statutory rate of 25%. The PRC tax authorities examined our tax filings for the calendar year ended December 31, 2015 in May 2016. Our prior filings were accepted and no adjustments were proposed. The increase in the provision for income taxes was primarily due to the increase in our pre-tax income.

Net Income

For the three months ended November 30, 2016 and 2015, we generated net income of $1,563,051 and $1,546,251, respectively.  This represented an increase in net income of $16,800 or 2%. We terminated the variable interest entity agreement on January 11, 2016.  For that reason, we reflected a "non-controlling interest" of $0 and $70,452 for the three months ended November 30, 2016 and 2015, respectively, before recognizing net income attributable to the common stockholders of the Company.  After the "non-controlling interest", our net income attributable to the common stockholders' of the Company for the three months ended November 30, 2016 and 2015 was $1,563,051 and $1,475,799, respectively, representing $0.02 per share and $0.02 per share, respectively.

Six months Ended November 30, 2016 and 2015
 

The following table sets forth in U.S. dollars, key components of our unaudited results of operations for the six months ended November 30, 2016 and 2015, and the percentage change between 2016 and 2015.

	Six Months Ended November 30,
	2016			2015			Percentage
	(U.S. $)			(U.S. $)			Change
Revenue	$	4,663,525		$	17,130,310			(73	%)
Cost of revenue		(829,530	)		(12,074,133	)		(93	%)
Gross profit		3,833,995			5,056,177			(24	%)
Selling expenses		328,643			561,319			(41	%)
General and administrative expenses		543,313			595,302			(9	%)
Total operating expenses		871,956			1,156,621			(25	%)
Operating income		2,962,039			3,899,556			(24	%)
Other operating income		705,520			578,440			22	%
Income before provision for income taxes		3,667,559			4,477,996			(18	%)
Provision for income taxes		816,880			1,012,544			(19	%)
Net income		2,850,679			3,465,452			(18	%)
Noncontrolling interests		-			(158,439	)		(100	%)
Net income attributable to common  stockholders	$	2,850,679		$	3,307,013			(14	%)

Revenue

We generated $4,663,525 in revenue for the six months ended November 30, 2016, as compared to $17,130,310 for the six months ended November 30, 2015. Our revenue for the six months ended November 30, 2016 decreased by $12,466,785 or 73% compared to the revenue for the six months ended November 30, 2015. The primary reason for the significant decrease in revenue was mainly due to the sale of three garbage processing equipment for the six months ended November 30, 2015 but no such sales during the six months ended November 30, 2016.

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The following table sets forth our revenue for the three months ended November 30, 2016 and 2015: 

	Six Months Ended November 30,
	2016			2015			Percentage
	(U.S. $)			(U.S. $)			Change
Improvements and Upgrading Services		$	1,225,150		$	477,300	157		%
Patent Leasing	2,263,539			2,052,390			10		%
Sales type lease	-			14,555,293			(100		%)
Operating lease			1,174,836			45,327		2,492	%
Total		$	4,663,525		$	17,130,310		(73	%)

Improvement and Upgrading Services

During the six months ended November 30, 2016, we provided improvement and upgrading services to three customers and generated revenue of $1,225,150. As comparison, for the six months ended November 30, 2015, we only provided such services to one customer and generated $477,300 in revenue. The services were completed and accepted by the customer and the payment was received in full as of November 30, 2016. While our core business still focuses on providing improvement and upgrading services for customers' garbage processing equipment, we have also begun selling or leasing our garbage processing equipment.

Patent Licensing

For the six months ended November 30, 2016, revenue from patent licensing was from 18 unrelated customers totaling $2,263,539. As 16 customers were licensed in the prior year and two customers commenced on September 1, 2016 and October 1, 2016, the patent licensing revenue was recognized for the whole six months for these 14 customers, for three months for the customer commenced on September 1, 2016 and for two months for the customer commenced on October 1, 2016. For the six months ended November 30, 2015, revenue from patent licensing was from 15 unrelated customers totaling $2,052,390. As 14 customers were licensed in the prior year and one commenced in October 1, 2015, the patent licensing revenue was recognized for the whole six months for these 14 customers.

Sales Type Lease

For the six months ended November 30, 2016, we didn't have any sales type lease revenue. During the six months ended November 30, 2015, we leased three units of garbage processing equipment to two customer. These sales were recognized as sales type leases because title to the equipment will be transferred to the customers at the end of the lease. The three units of equipment were sold for $14,555,293 after the VAT. We received 26.6% and 20% of the selling price from the two customers during the six months ended November 30, 2015, respectively. We will receive quarterly payment of $1,135,440 during the following three years plus 5.25% interest.

Operating lease

During the six months ended November 30, 2016, we had four operating leases for a 300-ton and three 500-ton garbage processing system. The lease period is 5 years with annual lease payments of $597,600 and $2,151,360 (for the three 500-ton garbage processing system), respectively, before VAT. The 300-ton garbage processing system was delivered and tested in the beginning of November 2015. The two 500-ton garbage processing systems were delivered and tested in the beginning of January 2016. Another 500-ton garbage processing system was delivered and tested in the end of April 2016. These leases are being accounted for as operating leases because they have no renewal or purchase option. At the end of the five years, either a new lease will be negotiated or the equipment will be returned. For the six months ended November 30, 2016, we generated operating lease revenue of 1,174,836 for the four units of equipment. For the six months ended November 30, 2015, as the 300-ton garbage processing system was delivered and tested in the beginning of November 2015 and one month's lease payment of $45,327 was recognized as operating lease revenue.

Cost of Goods Sold 

Our cost of goods sold decreased to $829,530 for the six months ended November 30, 2016 from $12,074,133 for the six months ended November 30, 2015, which represented a decrease of 93%. This is mainly attributable to the $11,744,343 cost of the garbage processing equipment sold under the sales type lease for the six months ended November 30, 2015. For improvement and upgrading service and patent licensing revenue, the cost primarily consists of fees paid to the related party for licensing the patent, employees' salaries and training expenses. In addition, the cost of the garbage processing equipment also includes various equipment and supplies necessary for assembling and installing equipment and the related labor. For the operating lease revenue, the depreciation of the garbage processing equipment is also included in the cost of revenue.

40

Gross Profit

Our gross profit decreased to $3,833,995 for the six months ended November 30, 2016 from $5,056,177 for the six months ended November 30, 2015. Our gross profit ratio was significantly increased because our business stream has resulted in a high gross margin for the six months ended November 30, 2016 without cost of garbage processing equipment under the sales type leases. Our cost of goods sold is almost entirely direct labor and patent licensing fees, and other operating expenses for the three months ended November 30, 2016. The gross profit ratio for the six months ended November 30, 2016 and 2015 was 82% and 30%, respectively.

Selling and Marketing Expenses 

Our selling and marketing expenses decreased to $328,643 for the six months ended November 30, 2016 from $561,319 for the six months ended November 30, 2015 which represented a decrease of 41%. Our selling and marketing expenses were primarily comprised of sales employees' salaries, advertising expenses, training expenses and travelling expenses. The decrease was primarily due to the significant decrease in advertising, travelling and entertainment expenses.

General and Administrative Expenses

Our general and administrative expenses decreased to $543,313 for the six months ended November 30, 2016 from $595,302 for the six months ended November 30, 2015, representing a 9% decrease. Our general and administrative expenses were primarily comprised of employees' salaries, travelling expenses, entertainment expenses and professional fees such as legal and audit fees. The decrease was primarily caused by the decrease in travelling and entertainment expenses.

Non-operating income

Our non-operating income included interest income and government subsidy. Despite our large cash balances, the interest income generated for the six months ended November 30, 2016 and 2015 was nominal for principally two reasons: 1) extremely low bank's current deposit interest rate and 2) minimal fluctuation of the annual interest rates within a 0.30% range. The interest income reported is net after deducting bank service charges. For the six months ended November 30, 2016 and 2015, our interest income also includes interest of $246,984 and $65,244, respectively, earned on the sales type leases. Our non-operating income also included government subsidy. Our wholly owned subsidiary, Linyi Xuefeng, received government subsidy of approximate $896,000 (RMB 6,000,000) annually. For the six months ended November 30, 2016 and 2015, the income of government subsidy was $448,226 and $475,820 under accrue basis, respectively.

Provision for Income Taxes

Our provision for income taxes decreased to $816,880 for the six months ended November 30, 2016 from $1,012,544 for the six months ended November 30, 2015.  Our effective tax rate for the six months ended November 30, 2016 and 2015 was approximately the statutory rate of 25%. Our tax filings for the calendar year ended December 31, 2015 were examined by the PRC tax authorities in May 2016. Our prior filings were accepted and no adjustments were proposed. The increase in the provision for income taxes was primarily due to the increase in our pre-tax income.

Net Income

For the six months ended November 30, 2016 and 2015, we generated net income of $2,850,679 and $3,465,452, respectively.  This represented a decrease in net income of $614,773 or 18%. We terminated the variable interest entity agreement on January 11, 2016.  For that reason, we reflected a "non-controlling interest" of $0 and $158,439 for the six months ended November 30, 2016 and 2015, respectively, before recognizing net income attributable to the common stockholders of the Company.  After the "non-controlling interest", our net income attributable to the common stockholders' of the Company for the six months ended November 30, 2016 and 2015 was $2,850,679 and $3,307,013, respectively, representing $0.05 per share and $0.05 per share, respectively.

41

Foreign Currency Translation Adjustment

Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of the period. Equity transactions are recorded at their historical amounts. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the three and six months ended November 30, 2016 and 2015, a foreign currency gain (loss) of $(1,568,218) and $1,051,507, respectively, $(2,319,003) and $(102,828), respectively, have been reported as other comprehensive income (loss) in the consolidated statements of income and other comprehensive income (loss). The foreign currency loss was mainly due to the devaluation of the Chinese currency by approximately 6.5%.

Liquidity and Capital Resources

As of November 30, 2016, we had cash and cash equivalents of $5,240,737, primarily consisting of cash on hand and demand deposits. The cash balance was principally derived from cash from operations and loan from shareholders.

To date, we have financed our operations primarily through cash flows from operations and loan from our shareholder. We believe that our cash on hand and cash flows from operations will meet our present cash needs for the next 12 months.

Operating activities

Net cash provided in operating activities was $4,035,001 for the six months ended November 30, 2016, as compared with the net cash used by operating activities of $16,019,420 for the six months ended November 30, 2015. For the six months ended November 30, 2016, the decrease in the accounts receivable of $2,024,011, depreciation expenses of $618,489, increase in prepaid VAT of 552,883, the increase in prepaid expenses of $245,628 and the decrease in accounts payable and other accrued liabilities of $654,862 mainly caused the difference between the net cash provided by operating activities and the net income.  For the six months ended November 30, 2015, the increase in accounts receivable of $12,425,625, the increase in advance to supplier of $6,368,880, the increase in prepaid VAT of $1,356,754, the increase in accounts payable of $735,566 primarily caused the difference between the net cash used by operating activities and the net income.

Investing activities

Net cash used in investing activities represented the purchase of fixed assets that was $4,501,517 for the six months ended November 30, 2016 and $15,902,382 for the six months ended November 30, 2015.

Financing activities

For the six months ended November 30, 2016, we did not have any cash provided or used by any financing activities. For the six months ended November 30, 2015, we received a loan from unrelated party of $459,958 and a loan from shareholder of $12,688,507 from our shareholder which was primarily used for the construction of Linyi Xuefeng and the payment for U.S professional expenses. For the six months ended November 30, 2015, we also repaid shareholder loan of $317,213. We also received a security deposit of $624,400 for the six months ended November 30, 2015.

Effect of exchange rate on cash

The negative effect of the exchange rate on cash of $204,853 and $993,789, respectively, for the six months ended November 30, 2016 and 2015 was principally due to the devaluation by the PRC government of their currency. There could be further negative adjustments should the PRC government or the exchange markets further devalue the Chinese currency.

Off-Balance Sheet Arrangements

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

42

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

Changes in interest rates may affect the interest earned and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant.

Currency Exchange Fluctuations

All of the Company's revenues are denominated in Chinese Renminbi, while its expenses are denominated primarily in Chinese Renminbi ("RMB"). The value of the RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China ("PBOC"), which are set daily based on the previous day's inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. dollars had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the Renminbi from the United States dollar. At the recent quarterly regular meeting of PBOC, its Currency Policy Committee affirmed the effects of the reform on Chinese Renminbi exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of Renminbi has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. In August 2015, the PRC government devalued its currency by approximately 6.5%. The Company has never engaged in currency hedging operations and has no present intention to do so.

Country Risk

A substantial portion of our assets and operations are located and conducted in PRC. While the PRC economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations applicable to us.  If there are any changes in any policies by the Chinese government and our business is negatively affected as a result, then our financial results, including our ability to generate revenue and profits, will also be negatively affected. Economic growth in the PRC has recently begun to slow.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2016.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of November 30, 2016.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of November 30, 2016, the Company determined that there were control deficiencies that constituted the following material weaknesses:

43

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

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

Changes in Internal Control over Financial Reporting

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

44

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

ITEM 1A. RISK FACTORS.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K and subsequent amendments filed with the SEC on August 30, 2016, November 15, 2016 and December 28, 2016.

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

There were no unregistered sales of the Company's equity securities during the nine months ended November 30, 2016, that were not otherwise disclosed in a Current Report on Form 8-K.  

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.  OTHER INFORMATION.

There is no other information required to be disclosed under this item which was not previously disclosed.               

45

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".

46

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: January 17, 2017	By:	/s/ Li Yuan
		Li Yuan
		Chief Executive Officer Principal Executive Officer
Date: January 17, 2017	By:	/s/ Kuanfu Fan
		Kuanfu Fan
		Chief Financial Officer Principal Financial Officer

47

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 quarterly report on Form 10-Q 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: January 17, 2017	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 quarterly report on Form 10-Q 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: January 17, 2017	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 Quarterly Report of China Xuefeng Environmental Engineering Inc. (the "Company"), on Form 10-Q for the period ended November 30, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Li Yuan, Principal 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 November 30, 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 November 30, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 17, 2017	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 Quarterly Report of China Xuefeng Environmental Engineering Inc. (the "Company"), on Form 10-Q for the period ended November 30, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Kuanfu Fan, Principal 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 November 30, 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 November 30, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 17, 2016	By:	/s/ Kuanfu Fan
		Kuanfu Fan
		Principal Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Nov. 30, 2016	Jan. 12, 2017
Document and Entity Information:
Entity Registrant Name	China Xuefeng Environmental Engineering Inc.
Document Type	10-Q
Document Period End Date	Nov. 30, 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	No
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Entity Incorporation, State Country Name	Nevada
Entity Incorporation, Date of Incorporation	Mar. 30, 2011

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Nov. 30, 2016	May 31, 2016
Current Assets:
Cash	$ 5,240,737	$ 5,912,106
Accounts receivable	4,092,812	4,173,156
Prepaid VAT	4,106,140	3,735,575
Prepaid Expenses	323,165	88,477
Total Current Assets	13,762,854	13,909,314
Noncurrent assets:
Fixed assets, net	43,492,005	41,603,297
Prepaid Lease	5,590,544	5,913,880
Accounts receivable-non-current	3,572,846	5,907,361
Deferred income tax assets	314,779	280,184
Total noncurrent assets	52,970,174	53,704,722
Total Assets	66,733,028	67,614,036
Current Liabilities:
Accounts payable	474,377	1,247,399
Deferred revenues	2,900,101	2,967,016
Taxes payable	693,048	810,428
Loan from stockholder	8,491,346	8,781,471
Accrued liabilities	124,405	165,097
Total current liabilities	12,683,277	13,971,411
Security deposits payable	2,670,318	2,794,868
TOTAL LIABILITIES	15,353,595	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	34,584,997	34,584,997
Statutory reserve fund	2,095,931	1,843,520
Retained earnings	18,832,299	16,234,031
Other comprehensive income	(4,196,815)	(1,877,812)
Total stockholders' equity	51,379,433	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 66,733,028	$ 67,614,036

XML

CONSOLIDATED BALANCE SHEETS PARENTHETICAL - $ / shares	Nov. 30, 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		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Revenue:
Sales	$ 1,952,580	$ 6,219,910	$ 3,488,689	$ 17,085,123
Lease income	582,737	45,327	1,174,836	45,187
Total revenue	2,535,317	6,265,237	4,663,525	17,130,310
Cost of goods sold:
Cost of sales	116,543	3,948,609	256,329	12,052,108
Depreciation expense - leased equipment	286,878	22,025	573,201	22,025
Total cost of goods sold	403,421	3,970,634	829,530	12,074,133
Gross profit	2,131,896	2,294,603	3,833,995	5,056,177
Operating expenses:
Selling and marketing	177,205	309,062	328,643	561,319
General and administrative	281,459	308,095	543,313	595,302
Total operating expenses	458,664	617,157	871,956	1,156,621
Income from operations	1,673,232	1,677,446	2,962,039	3,899,556
Interest income	122,129	80,756	257,294	102,620
Government subsidy	222,327	233,849	448,226	475,820
Income before provision for income taxes	2,017,688	1,992,051	3,667,559	4,477,996
Provision for income taxes	454,637	445,800	816,880	1,012,544
Net income	1,563,051	1,546,251	2,850,679	3,465,452
Noncontrolling interest		70,452		158,439
Net income attributable to common stockholders	$ 1,563,051	$ 1,475,799	$ 2,850,679	$ 3,307,013
Earnings per common share, basic and diluted	$ 0.02	$ 0.02	$ 0.05	$ 0.05
Weighted average shares outstanding, basic and diluted	63,020,871	63,020,871	63,020,871	63,020,871
Comprehensive income:
Net Income	$ 1,563,051	$ 1,546,251	$ 2,850,679	$ 3,465,452
Foreign currency translation adjustment	(1,568,218)	1,051,507	(2,319,003)	(102,828)
Comprehensive income	(5,167)	2,597,758	531,676	3,362,624
Comprehensive income attributable to noncontrolling interests		(1,870)		(52,532)
Net Comprehensive income attributable to common stockholders	$ (5,167)	$ 2,595,888	$ 531,676	$ 3,310,092

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - 6 months ended Nov. 30, 2016 - USD ($)	Common Stock	Additional Paid in Capital	Retained Earnings	Statutory Reserve Fund	Other Comprehensive Income	Total
Balance at May. 31, 2016	$ 63,021	$ 34,584,997	$ 16,234,031	$ 1,843,520	$ (1,877,812)	$ 50,847,757
Balance - shares at May. 31, 2016	63,020,871
Net income			2,850,679			2,850,679
Appropriation to statutory reserve			(252,411)	252,411
Foreign currency translation adjustment					(2,319,003)	(2,319,003)
Balance at Nov. 30, 2016	$ 63,021	$ 34,584,997	$ 18,832,299	$ 2,095,931	$ (4,196,815)	$ 51,379,433
Balance - shares at Nov. 30, 2016	63,020,871

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Cash Flows From Operating Activities:
Net income	$ 1,563,051	$ 1,546,251	$ 2,850,679	$ 3,465,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			618,489	60,216
Amortization for the land lease	30,532	32,116	61,556	65,346
(Increase) in deferred income tax assets	(24,249)	(34,908)	(48,471)	(65,678)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable			2,024,011	(12,425,625)
(Increase) or Decrease in Inventories				(194,070)
(Increase) in prepaid VAT			(552,883)	(1,356,754)
(Increase) decrease in prepaid expenses			(245,628)	82,712
(Increase) in advances to supplier				(6,368,880)
(Decrease) increase in accounts payable and accrued liabilities			(654,862)	735,566
Increase in deferred revenue			67,234	102,842
(Decrease) in taxes payable			(85,124)	(120,547)
Net cash provided by (used in) operating activities			4,035,001	(16,019,420)
Cash Flows From Investing Activities:
Purchase of fixed assets			(4,501,517)	(15,902,382)
Cash Flows From Financing Activities:
Loan receive from external				459,958
Proceeds from shareholder loan				12,688,507
Loan repaid to external				(317,213)
Increase in security deposit payable				624,400
Net cash provided by financing activities				13,455,652
Effect of exchange rate changes on cash			(204,853)	(993,789)
Net (decrease) in cash			(671,369)	(19,459,939)
Cash, beginning			5,912,106	26,493,540
Cash, end	$ 5,240,737	$ 7,033,601	5,240,737	7,033,601
Cash paid during the period for:
Income taxes paid			950,476	1,005,057
Land appreciation tax paid			2,988	3,172
Supplemental disclosure of non-cash activities
Property, equipment, construction in process transferred from prepayment				1,592,370
Property, equipment, construction in process accrued				879,899
Payment of accrued liabilities by shareholder			$ 89,000	$ 36,000

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Note 1. Organization

6 Months Ended

Nov. 30, 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 January 19, 2016, the VIE structure was terminated upon Baichuang Consulting exercising its option to purchase all of the registered equity of Jiangsu Xuefeng.  Baichuang Consulting became the sole owner of Jiangsu Xuefeng

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 was determined by the audited net assets of the Company as of May 31, 2016, initially with a payment of 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 on August 4, 2016. 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 eliminated the cash payment making the entire purchase with stock of the Company. The price utilized was $3 per share and 7,820,871 shares were issued to Mr. Li Yuan.

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 (see note 6). As of November 30, 2016 and May 31, 2016, the total purchase amount $7,714,280 from Jiangsu Liding was fully delivered in December 2015, and included in the fixed assets of the accompanying consolidated balance sheet as of November 30, 2016 and May 31, 2016.

 “Linyi Xuefeng was officially approved and incorporated under the laws of the People’s Republic of China (“PRC”) in June 2013. Mr. Yuan Li was the sole owner since inception. Linyi Xuefeng is constructing a garbage processing plant which is planned to commerce operations in 2017. The only non-operating revenue was a subsidy received from the government for the city pollution garbage processing plant construction.”

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 % holding
	Inclusion Business Limited
		100 % holding
	Lotus International Holdings Limited
		100 % holding		On Shore
	Baichuang Information Consulting (Shenzhen) Co., Ltd			Off Shore
	WOFE
	100 % holding		100 % holding
Jiangsu Xuefeng Environment Protection Science and Technology Co., Ltd		Linyi County Renewable Resources Utilization Co., Ltd.
domestic operating entity		domestic operating entity

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Note 2. Summary of Significant Accounting Policies

6 Months Ended

Nov. 30, 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 November 30, 2016 and for the three and six months ended November 30, 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 and six months ended November 30, 2016 are not necessarily indicative of the results to be expected for future quarters or for the year ending May 31, 2017.

The acquisition of Linyi Xuefeng was treated as a combination of entities under common control as Mr. Li Yuan was the chief executive officer, a major shareholder and had voting control 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 has been restated and 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

The accompanying consolidated financial statements of the Company have been prepared on the accrual basis.

Until January 19, 2016, the consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its VIE for which it is deemed the primary beneficiary.  On January 19, 2016, the VIE structure was terminated upon Baichuang Consulting exercising its option to purchase all of the registered equity of Jiangsu Xuefeng.  Baichuang Consulting became the sole owner of Jiangsu Xuefeng.  All significant inter-company accounts and transactions have been eliminated in consolidation.

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

ACQUISITION OF LINYI XUEFENG

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

	November 30,	May 31,
	2016	2016
	(Unaudited)
Total Assets	$ 31,383,280	$	32,316,617
TOTAL LIABILITIES	$   8,670,489	$	8,854,005

	For the three months ended November 30,			For the six months ended November 30,
	2016	2015		2016	2015
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
TOTAL OPERATING EXPENSES	$        96,012		$      138,471	$      193,047		$      262,711
TOTAL OTHER INCOME	$      223,004		$      233,504	$      449,062		$      475,819
NET INCOME	$      151,244		$        129,737	$      304,486		$      278,786

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:

	November 30, 2016		May 31, 2016
	(unaudited)
Balance sheet items, except for stockholders’ equity, as of periods end	0.1451		0.1519
	Three Months Ended November 30,		Six Months Ended November 30,
	2016	2015	2016	2015
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	0.1481	0.1572	0.1494	0.1591

For the three months ended November 30, 2016 and 2015, foreign currency translation adjustments of $(1,568,218) and $1,051,507, respectively, for the six months ended November 30, 2016 and 2015, foreign currency translation adjustments of $(2,319,003) and $(102,828), 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 subsidies 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 six months ended November 30, 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	$	2,017,581
2018	4,196,498
2019	1,446,598
	$	7,660,677

Operating Leases

The Company entered into four operating lease arrangements with three 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 $179,280 (RMB 1,200,000), $358,560 (RMB2,400,000), and $149,400 (RMB1,000,000) respectively. Revenue from the leasing of the equipment is recognized monthly. In addition, the lease required a security deposit on $696,604 (RMB4,800,000), $1,393,210 (RMB9,600,000) and $580,504 (RMB 4,000,000), 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	$	1,374,480
2018	2,748,960
2019	2,748,960
2020	2,748,960
2021	1,743,000
	$	11,364,360

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 November 30, 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
Motor Vehicles	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 November 30, 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 November 30, 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 and its subsidiaries 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 and six months ended November 30, 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 November 30, 2016 and 2015, advertising expense was $133,741 and $201,946 respectively. For the six months ended November 30, 2016 and 2015, advertising expense was $224,100 and $385,022, 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 six months ended November 30, 2016 and 2015, a statutory reserve of $252,411 and $341,298, 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.

Reclassification

Certain amounts in the previous periods presented have been reclassified to conform to the current year financial statement presentation.

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Note 3. Recently Issued Accounting Standards

6 Months Ended

Nov. 30, 2016

Notes

Note 3. Recently Issued Accounting Standards

NOTE 3.   RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the effect this ASU will have on its consolidated statement of cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.

In May, 2016, the FASB issued ASU No. 2016-10, Revenue with Contracts with Customers: Narrow-scope Improvements and Practical Expedients, which is an amendment to ASU No. 2014-09 that clarifies the objective of the collectability criterion, to allow entities to exclude amounts collected from customers from all sales taxes from the transaction price, to specify the measurement date for noncash consideration is contract inception, variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, and clarification on contract modifications at transition. The implementation guidelines follow ASU No. 2014-09.

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 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.

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Note 4. Fixed Assets

6 Months Ended

Nov. 30, 2016

Notes

Note 4. Fixed Assets

NOTE 4.   FIXED ASSETS

Fixed assets are summarized as follows:

		November 30, 2016			May 31,      2016
		(Unaudited)
Computers and equipment	$		78,718	$		64,817
Vehicles		84,064			87,984
Investment in leased property		20,975,391			17,425,249
Production facilities		8,135,950			8,515,428
Furniture and fixtures		17,622			18,445
Building and improvement		15,310,793			16,024,922
		44,602,538			42,136,845
Less: accumulated depreciation		(1,110,533)			(533,548)
		$	43,492,005		$	41,603,297

For the three months ended November 30, 2016 and 2015, depreciation expense was $307,072 and $52,843 respectively. For the six months ended November 30, 2016 and 2015, depreciation expense was $618,489 and $60,216 respectively.

Building and improvements include approximately $7.7 million relating to construction of the garbage recycling processing plant and production facilities purchase (see note 1). Of this amount approximately $10,752 and $21,676 of depreciation has been taken during the three and six months ended November 30, 2016, relating to office furniture and equipment placed in service. The facility has taken longer than originally planned to complete due to government delays and is expected to complete by May 31, 2017. Total investment is expected to be approximately $29 million.

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Note 5. Income Taxes

6 Months Ended

Nov. 30, 2016

Notes

Note 5. Income Taxes

NOTE 5.   INCOME TAXES

		For the Three  Months Ended November 30,				For the Six  Months Ended November 30,
		2016		2015		2016		2015
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Current	$	478,886	$	480,708	$	865,348	$	1,078,426
Deferred		(24,249)		(34,908)		(48,471)		(65,678)
Total	$	454,637	$	445,800	$	816,880	$	1,012,544

As of November 30, 2016, the Company had unused operating loss carry-forwards of approximately $1,259,000 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 six months ended November 30:

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

6 Months Ended

Nov. 30, 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 $11,952 (RMB 80,000) each month for five years from September 2012 to August 2017. The related prepaid patent leasing fees of $11,608 and $85,064 are included in prepaid expenses on the consolidated balance sheets as of November 30, 2016 and May 31, 2016, respectively.

The remaining payments for the patent rights are as follows:

Year Ending
May 31,	Amount
2017	$ 71,712
2018	35,856
	$ 107,568

The Company obtained a demand loan from Li Yuan, a stockholder which is non-interest bearing.  The total loan of approximately $560,000 represents $481,000 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 November 30, 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 $7,930,991 and $8,300,910 as of November 30, 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 November 30, 2016 and May 31, 2016, the total purchase amount $7,714,280 from Jiangsu Liding was fully delivered in December 2015, and included in the fixed assets of the accompanying consolidated balance sheet as of November 30, 2016 and May 31, 2016.

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Note 7. Land Use Right

6 Months Ended

Nov. 30, 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 $6,477,880 (RMB 40,000,000). In addition, the Company was required to subject a deed tax of $194,336 (RMB 1,200,000). 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 $4,048,675 (RMB 25,000,000) on September 25, 2013 and $2,429,205 (RMB 15,000,000) 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 November 30, 2016 and 2015 was $30,532 and $32,116, respectively. The amortization for the land use right for the six months ended November 30, 2016 and 2015 was $61,556 and $65,346, respectively.

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Note 8. Leases

6 Months Ended

Nov. 30, 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 $3,586 (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 November 30, 2016 and 2015 was $1,779 and $1,882, respectively. Rent expense for the six months ended November 30, 2016 and 2015 was $3,586 and $3,818 respectively.

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

Year Ending
May 31,	Amount
2017	$	7,171
2018	14,701
2019	13,864
	$	35,736

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Note 9. Contingencies

6 Months Ended

Nov. 30, 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

6 Months Ended

Nov. 30, 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

6 Months Ended

Nov. 30, 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 November 30, 2016 and 2015, top five customers of the Company accounted for 53% of revenue for operating lease and one customers that accounted for 75% of revenue for sale type lease, respectively. For the six months ended November 30, 2016 and 2015, top five customers of the Company accounted for 43% of revenue for operating lease and two customers that accounted for 85% of revenue for sales type lease, respectively. Two customers accounted for 100% accounts receivable at November 30, 2016 and May 31, 2016.

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Note 12. Condensed Financial Information of Registrant

6 Months Ended

Nov. 30, 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	$	51,383,435
TOTAL ASSETS	$	51,383,435

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	34,584,997
Statutory reserve fund	1,843,520
Retained earnings	16,234,031
Other comprehensive income	(1,877,812)
Total stockholders’ equity	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS’     EQUITY	$	51,383,435

Condensed Statements of Income

	For The Year Ended May 31,
		2016
Revenues:
Share of earnings from investment in   subsidiaries and		$	6,430,586
Operating expenses:
General and administrative			123,000
Net income		$	6,553,586

	For The Year Ended May 31,
		2016
Cash flows from operating activities:
Net income	$		6,553,586
Adjustments to reconcile net income to net cash   provided by (used in) operating activities
Share of earnings from investment in   subsidiaries		(6,430,586)
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 under the equity method of accounting.  Such investments are presented as "Investment in subsidiaries" on the condensed balance sheet and the subsidiaries' profits are presented as "Share of earnings from investment in subsidiaries" in the condensed statement of operations.

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.

There were no cash transactions in the US parent company during the three and six months ended May 31, 2016.

Restricted Net Assets

Under PRC laws and regulations, the Company's PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the Company's PRC subsidiaries amounted to approximately $50,848,000 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.

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

6 Months Ended

Nov. 30, 2016

Policies

Basis of Accounting and Presentation

BASIS OF ACCOUNTING AND PRESENTATION 

The unaudited interim consolidated financial statements of the Company as of November 30, 2016 and for the three and six months ended November 30, 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 and six months ended November 30, 2016 are not necessarily indicative of the results to be expected for future quarters or for the year ending May 31, 2017.

The acquisition of Linyi Xuefeng was treated as a combination of entities under common control as Mr. Li Yuan was the chief executive officer, a major shareholder and had voting control 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 has been restated and 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)

6 Months Ended

Nov. 30, 2016

Policies

Variable Interest Entity

VARIABLE INTEREST ENTITY

The accompanying consolidated financial statements of the Company have been prepared on the accrual basis.

Until January 19, 2016, the consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its VIE for which it is deemed the primary beneficiary.  On January 19, 2016, the VIE structure was terminated upon Baichuang Consulting exercising its option to purchase all of the registered equity of Jiangsu Xuefeng.  Baichuang Consulting became the sole owner of Jiangsu Xuefeng.  All significant inter-company accounts and transactions have been eliminated in consolidation.

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: Acquisition of Linyi Xuefeng (Policies)

6 Months Ended

Nov. 30, 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.

	November 30,	May 31,
	2016	2016
	(Unaudited)
Total Assets	$ 31,383,280	$	32,316,617
TOTAL LIABILITIES	$   8,670,489	$	8,854,005

	For the three months ended November 30,			For the six months ended November 30,
	2016	2015		2016	2015
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
TOTAL OPERATING EXPENSES	$        96,012		$      138,471	$      193,047		$      262,711
TOTAL OTHER INCOME	$      223,004		$      233,504	$      449,062		$      475,819
NET INCOME	$      151,244		$        129,737	$      304,486		$      278,786

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

6 Months Ended

Nov. 30, 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)

6 Months Ended

Nov. 30, 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:

	November 30, 2016		May 31, 2016
	(unaudited)
Balance sheet items, except for stockholders’ equity, as of periods end	0.1451		0.1519
	Three Months Ended November 30,		Six Months Ended November 30,
	2016	2015	2016	2015
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	0.1481	0.1572	0.1494	0.1591

For the three months ended November 30, 2016 and 2015, foreign currency translation adjustments of $(1,568,218) and $1,051,507, respectively, for the six months ended November 30, 2016 and 2015, foreign currency translation adjustments of $(2,319,003) and $(102,828), 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)

6 Months Ended

Nov. 30, 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 subsidies 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)

6 Months Ended

Nov. 30, 2016

Policies

Sales-type Leases

Sales-Type Leases

The Company entered into three sales-type lease arrangements during the six months ended November 30, 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	$	2,017,581
2018	4,196,498
2019	1,446,598
	$	7,660,677

Operating Leases

The Company entered into four operating lease arrangements with three 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 $179,280 (RMB 1,200,000), $358,560 (RMB2,400,000), and $149,400 (RMB1,000,000) respectively. Revenue from the leasing of the equipment is recognized monthly. In addition, the lease required a security deposit on $696,604 (RMB4,800,000), $1,393,210 (RMB9,600,000) and $580,504 (RMB 4,000,000), 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	$	1,374,480
2018	2,748,960
2019	2,748,960
2020	2,748,960
2021	1,743,000
	$	11,364,360

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

6 Months Ended

Nov. 30, 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)

6 Months Ended

Nov. 30, 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 November 30, 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)

6 Months Ended

Nov. 30, 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)

6 Months Ended

Nov. 30, 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
Motor Vehicles	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)

6 Months Ended

Nov. 30, 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)

6 Months Ended

Nov. 30, 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)

6 Months Ended

Nov. 30, 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 November 30, 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 November 30, 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 and its subsidiaries 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 and six months ended November 30, 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)

6 Months Ended

Nov. 30, 2016

Policies

Advertising Costs

Advertising Costs

Advertising costs are charged to operations when incurred.  For the three months ended November 30, 2016 and 2015, advertising expense was $133,741 and $201,946 respectively. For the six months ended November 30, 2016 and 2015, advertising expense was $224,100 and $385,022, respectively.

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

6 Months Ended

Nov. 30, 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 six months ended November 30, 2016 and 2015, a statutory reserve of $252,411 and $341,298, 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)

6 Months Ended

Nov. 30, 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: Reclassification (Policies)

6 Months Ended

Nov. 30, 2016

Policies

Reclassification

Reclassification

Certain amounts in the previous periods presented have been reclassified to conform to the current year financial statement presentation.

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Schedule of Business Acquisitions, by Acquisition

	November 30,	May 31,
	2016	2016
	(Unaudited)
Total Assets	$ 31,383,280	$	32,316,617
TOTAL LIABILITIES	$   8,670,489	$	8,854,005

	For the three months ended November 30,			For the six months ended November 30,
	2016	2015		2016	2015
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
TOTAL OPERATING EXPENSES	$        96,012		$      138,471	$      193,047		$      262,711
TOTAL OTHER INCOME	$      223,004		$      233,504	$      449,062		$      475,819
NET INCOME	$      151,244		$        129,737	$      304,486		$      278,786

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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)

6 Months Ended

Nov. 30, 2016

Tables/Schedules

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

	November 30, 2016		May 31, 2016
	(unaudited)
Balance sheet items, except for stockholders’ equity, as of periods end	0.1451		0.1519
	Three Months Ended November 30,		Six Months Ended November 30,
	2016	2015	2016	2015
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	0.1481	0.1572	0.1494	0.1591

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases: Schedule of Future Minimum Collections Related to Sales-Type Lease Arrangement (Tables)

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Schedule of Future Minimum Collections Related to Sales-Type Lease Arrangement

Year Ending
May 31,	Amount
2017	$	2,017,581
2018	4,196,498
2019	1,446,598
	$	7,660,677

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Schedule of Future Minimum Rental Payments for Operating Leases

Year Ending
May 31,	Amount
2017	$	1,374,480
2018	2,748,960
2019	2,748,960
2020	2,748,960
2021	1,743,000
	$	11,364,360

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Property, Plant, and Equipment Useful Life

Computers and equipment	3 years
Motor Vehicles	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)

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Fixed Assets

		November 30, 2016			May 31,      2016
		(Unaudited)
Computers and equipment	$		78,718	$		64,817
Vehicles		84,064			87,984
Investment in leased property		20,975,391			17,425,249
Production facilities		8,135,950			8,515,428
Furniture and fixtures		17,622			18,445
Building and improvement		15,310,793			16,024,922
		44,602,538			42,136,845
Less: accumulated depreciation		(1,110,533)			(533,548)
		$	43,492,005		$	41,603,297

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Provision for (Benefit from) Income Taxes

		For the Three  Months Ended November 30,				For the Six  Months Ended November 30,
		2016		2015		2016		2015
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Current	$	478,886	$	480,708	$	865,348	$	1,078,426
Deferred		(24,249)		(34,908)		(48,471)		(65,678)
Total	$	454,637	$	445,800	$	816,880	$	1,012,544

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Schedule of Effective Income Tax Rate Reconciliation

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

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Schedule of Future Payments on Lease of Rights of Patent

Year Ending
May 31,	Amount
2017	$ 71,712
2018	35,856
	$ 107,568

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Schedule of Future Minimum Lease Payments for Capital Leases

Year Ending
May 31,	Amount
2017	$	7,171
2018	14,701
2019	13,864
	$	35,736

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Condensed Balance Sheets - US Parent

Condensed Balance Sheets

ASSETS	May 31, 2016
Investment in subsidiaries	$	51,383,435
TOTAL ASSETS	$	51,383,435

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	34,584,997
Statutory reserve fund	1,843,520
Retained earnings	16,234,031
Other comprehensive income	(1,877,812)
Total stockholders’ equity	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS’     EQUITY	$	51,383,435

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

6 Months Ended

Nov. 30, 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		$	6,430,586
Operating expenses:
General and administrative			123,000
Net income		$	6,553,586

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

6 Months Ended

Nov. 30, 2016

Tables/Schedules

Condensed Cash Flow Statement

	For The Year Ended May 31,
		2016
Cash flows from operating activities:
Net income	$		6,553,586
Adjustments to reconcile net income to net cash   provided by (used in) operating activities
Share of earnings from investment in   subsidiaries		(6,430,586)
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)	6 Months Ended
	Nov. 30, 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	Nov. 30, 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)	6 Months Ended
	Nov. 30, 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: Acquisition of Linyi Xuefeng: Schedule of Business Acquisitions, by Acquisition (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015	May 31, 2016
Total Assets	$ 66,733,028		$ 66,733,028		$ 67,614,036
TOTAL LIABILITIES	15,353,595		15,353,595		16,766,279
Total operating expenses	458,664	$ 617,157	871,956	$ 1,156,621
Linyi Xuefeng
Total Assets	31,383,280		31,383,280		32,316,617
TOTAL LIABILITIES	8,670,489		8,670,489		$ 8,854,005
Total operating expenses	96,012	138,471	193,047	262,711
Other Income	223,004	233,504	449,062	475,819
Net Income (Loss) Attributable to Parent	$ 151,244	$ 129,737	$ 304,486	$ 278,786

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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)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015	May 31, 2016
Details
Exchange Rate for Balance Sheet Items Other Than Stockholders' Equity	0.1451		0.1451		0.1519
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows	0.1481	0.1572	0.1494	0.1591

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Note 2. Summary of Significant Accounting Policies: Foreign Currency Translation (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Details
Foreign Currency Translation Adjustment	$ (1,568,218)	$ 1,051,507	$ 2,319,003	$ 102,828

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Total revenue	$ 2,535,317	$ 6,265,237	$ 4,663,525	$ 17,130,310
SalesTypeLeasesArrangementMember
Total revenue	$ 14,300,324

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases: Schedule of Future Minimum Collections Related to Sales-Type Lease Arrangement (Details)	6 Months Ended
	Nov. 30, 2016 USD ($)
Details
Future Minimum Collections Year Two	$ 2,017,581
Future Minimum Collections Year Three	4,196,498
Future Minimum Collections Year Four	1,446,598
Future Minimum Collections Total	$ 7,660,677

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Note 2. Summary of Significant Accounting Policies: Sales-type Leases: Schedule of Future Minimum Rental Payments for Operating Leases (Details)	Nov. 30, 2016 USD ($)
Details
Operating Leases, Future Minimum Payments, Due in Two Years	$ 1,374,480
Operating Leases, Future Minimum Payments, Due in Three Years	2,748,960
Operating Leases, Future Minimum Payments, Due in Four Years	2,748,960
Operating Leases, Future Minimum Payments, Due in Five Years	1,743,000
Operating Leases, Future Minimum Payments Due	$ 11,364,360

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Note 2. Summary of Significant Accounting Policies: Fixed Assets: Property, Plant, and Equipment Useful Life (Details)	6 Months Ended
	Nov. 30, 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		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016
Effective Income Tax Rate Reconciliation, Percent	23.00%	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		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Details
Advertising Expense	$ 133,741	$ 201,946	$ 224,100	$ 385,022

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Note 2. Summary of Significant Accounting Policies: Statutory Reserve Fund (Details) - USD ($)	6 Months Ended
	Nov. 30, 2016	Nov. 30, 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	$ 252,411	$ 341,298

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Note 4. Fixed Assets: Fixed Assets (Details) - USD ($)	Nov. 30, 2016	May 31, 2016
Fixed Assets, Gross	$ 44,602,538	$ 42,136,845
Accumulated Depreciation	(1,110,533)	(533,548)
Fixed assets, net	43,492,005	41,603,297
ComputersAndEquipmentMember
Fixed Assets, Gross	78,718	64,817
Vehicles
Fixed Assets, Gross	84,064	87,984
Investment in leased property
Fixed Assets, Gross	20,975,391	17,425,249
Manufacturing Facility
Fixed Assets, Gross	8,135,950	8,515,428
FixturesAndFurnitureMember
Fixed Assets, Gross	17,622	18,445
Building and Building Improvements
Fixed Assets, Gross	$ 15,310,793	$ 16,024,922

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Note 4. Fixed Assets (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Details
Depreciation	$ 307,072	$ 52,843	$ 618,489	$ 60,216

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Note 5. Income Taxes: Provision for (Benefit from) Income Taxes (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Details
Provision for Income Taxes, Current	$ 478,886	$ 480,708	$ 865,348	$ 1,078,426
Deferred income taxes	(24,249)	(34,908)	(48,471)	(65,678)
Income Tax Expense (Benefit), Extraordinary Items	$ 454,637	$ 445,800	$ 816,880	$ 1,012,544

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Note 5. Income Taxes (Details)	Nov. 30, 2016 USD ($)
Details
Operating Loss Carryforwards	$ 1,259,000

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Note 5. Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Details)	3 Months Ended
	Nov. 30, 2016	Nov. 30, 2015
Details
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	25.00%	25.00%
Government Subsidy	2.00%	2.00%
Effective Income Tax Rate Reconciliation, Percent	23.00%	23.00%

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Note 6. Related Party Transactions: Related Party Patent Rights Lease (Details) - USD ($)	3 Months Ended
	Nov. 30, 2016	May 31, 2016
Details
Monthly Amount Owed to Related Party for Lease of Patent Rights	$ 11,952
Monthly Amount Owed to Related Party for Lease of Patent Rights - RMB	80,000
Prepaid patent leasing fee	$ 11,608	$ 85,064

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Note 6. Related Party Transactions: Schedule of Future Payments on Lease of Rights of Patent (Details)	6 Months Ended
	Nov. 30, 2016 USD ($)
Details
Future payments on lease of rights of patent, year two	$ 71,712
Future payments on lease of rights of patent, year three	35,856
Future payments on lease of rights of patent	$ 107,568

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Note 6. Related Party Transactions: Loan From Stockholder (Details)	6 Months Ended
	Nov. 30, 2016 USD ($)
Details
Loan from Stockholder for Expenses Paid	$ 560,000
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		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Details
Amortization for the land lease	$ 30,532	$ 32,116	$ 61,556	$ 65,346

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Note 8. Leases (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
Details
Total Prepayment Required for Operating Lease			$ 6,784
Total Prepayment Required for Operating Lease - RMB			44,664
Lease Expense	$ 1,779	$ 1,882	$ 3,586	$ 3,818

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Note 8. Leases: Schedule of Future Minimum Lease Payments for Capital Leases (Details)	Nov. 30, 2016 USD ($)
Details
Capital Leases, Future Minimum Payments Due in Two Years	$ 7,171
Capital Leases, Future Minimum Payments Due in Three Years	14,701
Capital Leases, Future Minimum Payments Due in Four Years	13,864
Capital Leases, Future Minimum Payments Due	$ 35,736

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Note 9. Contingencies (Details)	3 Months Ended
	Nov. 30, 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	6 Months Ended
	Nov. 30, 2016	Nov. 30, 2016
Details
Concentration Risk, Customer	top five customers of the Company accounted for 53% of revenue for operating lease and one customers that accounted for 75% of revenue for sale type lease, respectively	top five customers of the Company accounted for 43% of revenue for operating lease and two customers that accounted for 85% of revenue for sales type lease, respectively

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Note 12. Condensed Financial Information of Registrant: Condensed Balance Sheets - US Parent (Details) - USD ($)	Nov. 30, 2016	May 31, 2016
Total Assets	$ 66,733,028	$ 67,614,036
Loan from stockholder	8,491,346	8,781,471
Accrued liabilities	124,405	165,097
TOTAL LIABILITIES	15,353,595	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	34,584,997	34,584,997
Statutory reserve fund	2,095,931	1,843,520
Retained earnings	18,832,299	16,234,031
Other comprehensive income	(4,196,815)	(1,877,812)
Total stockholders' equity	51,379,433	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	66,733,028	$ 67,614,036
Parent Company
Investment In Subsidiaries And Vies	51,383,435
Total Assets	51,383,435
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	34,584,997
Statutory reserve fund	1,843,520
Retained earnings	16,234,031
Other comprehensive income	(1,877,812)
Total stockholders' equity	50,847,757
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 51,383,435

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Note 12. Condensed Financial Information of Registrant: Condensed Statement of Comprehensive Income - US Parent (Details) - USD ($)	3 Months Ended		6 Months Ended
	Nov. 30, 2016	Nov. 30, 2015	Nov. 30, 2016	Nov. 30, 2015
General and administrative	$ 281,459	$ 308,095	$ 543,313	$ 595,302
Parent Company
Share of earnings from investment in subsidiaries and VIEs	6,430,586
General and administrative	123,000
Net Income (Loss) Attributable to Parent	$ 6,553,586

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Note 12. Condensed Financial Information of Registrant: Condensed Cash Flow Statement (Details) - USD ($)	3 Months Ended	6 Months Ended
	Nov. 30, 2016	Nov. 30, 2016	Nov. 30, 2015
Net cash (used in) provided by operating activities		$ 4,035,001	$ (16,019,420)
Payment of accrued liabilities by shareholder		$ 89,000	$ 36,000
Parent Company
Net Income (Loss) Attributable to Parent	$ 6,553,586
Share of earnings from investment in subsidiaries and VIEs	(6,430,586)
Increase (Decrease) in Accrued Liabilities	123,000
Payment of accrued liabilities by shareholder	$ 100,438