China Xuefeng Environmental Engineering Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - China Xuefeng Environmental Engineering Inc.	Financial_Report.xls
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - China Xuefeng Environmental Engineering Inc.	chinaexh311.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - China Xuefeng Environmental Engineering Inc.	chinaexh312.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF THE COMPANY, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - China Xuefeng Environmental Engineering Inc.	chinaexh321.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER OF THE COMPANY, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - China Xuefeng Environmental Engineering Inc.	chinaexh322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended November 30, 2013

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

For the Transition Period from ___________ to _____________

Commission File Number: 333-175483

China Xuefeng Environmental Engineering Inc.

(Exact name of registrant as specified in its charter)

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

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

+86 (527) 8437-0508

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

Large accelerated filer	o		Accelerated filer	o

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

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

As of January 13, 2014, there were 55,200,000 outstanding shares of common stock of the registrant, par value $.001 per share.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC.

QUARTERLY REPORT ON FORM 10-Q

November 30, 2013

TABLE OF CONTENTS

	PART I—FINANCIAL INFORMATION	Page

Item 1.	Financial Statements.	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	34

Item 4.	Controls and Procedures.	34

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings.	34

Item 1A.	Risk Factors.	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	34

Item 3.	Defaults Upon Senior Securities.	35

Item 4.	Mine Safety Disclosures.	35

Item 5.	Other Information.	35

Item 6.	Exhibits.	35

Signatures		36

CERTAIN USAGE OF TERMS

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

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

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

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

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

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

Consolidated Financial Statements for the

Three and Six Months Ended November 30, 2013 and 2012

CHINA XUEFENG ENVIRONMENTAL ENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012

CONTENTS	PAGE

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets	3

Consolidated Statements of Income and Comprehensive Income	5

Consolidated Statement of Changes in Stockholders’ Equity	7

Consolidated Statements of Cash Flows	8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	9

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S.$)

	November 30,		May 31,
ASSETS	2013		2013
	(Unaudited)

Current assets:
Cash	$	19,036,448	$	16,341,986
Prepaid expenses		16,461		97,496
Deferred income taxes		67,279		333,300

Total current assets		19,120,188		16,772,782

Fixed assets, net		31,573		21,851

Other assets:
Prepayment for acquisition of land use right		815,500		808,000

TOTAL ASSETS	$	19,967,261	$	17,602,633

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S.$)

	November 30,		May, 31
LIABILITIES AND STOCKHOLDERS’ EQUITY	2013		2013
	(Unaudited)

Current liabilities:
Deferred revenue	$	1,908,270	$	1,333,200
Taxes payable		279,459		606,777
Loan from stockholders		215,059		182,526
Accrued liabilities and other payables		34,993		32,817
Total current liabilities		2,437,781		2,155,320

Stockholders’ equity:
Common stock, $0.001 par value per share,75,000,000 shares authorized; 55,200,000 shares issued and outstanding as of November 30, 2013 and May 31, 2013		55,200		55,200
Additional paid in capital		11,389,049		11,389,049
Statutory reserve fund		496,012		309,655
Retained earnings		4,530,991		2,880,650
Other comprehensive income		544,559		396,533

Stockholders’ equity before noncontrolling interests		17,015,811		15,031,087
Noncontrolling interests		513,669		416,226

Total stockholders’ equity		17,529,480		15,447,313

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	19,967,261	$	17,602,633

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED, IN U.S.$)

	Three Months Ended November 30,						Six Months Ended November 30,
	2013			2012			2013			2012

Revenue	$	1,781,880		$	1,519,520		$	2,947,560		$	2,151,520
Cost of revenue		(94,710	)		(199,876	)		(203,465	)		(285,233	)

Gross profit		1,687,170			1,319,644			2,744,095			1,866,287

Operating expenses
Selling and marketing		21,637			4,609			52,895			9,207
General and administrative		73,605			80,169			147,392			181,534

Total operating expenses		95,242			84,778			200,287			190,741

Income from operations		1,591,928			1,234,866			2,543,808			1,675,546
Interest income		15,154			1,518			29,361			3,013

Income before provision for income taxes		1,607,082			1,236,384			2,573,169			1,678,559
Provision for income taxes		401,771			301,200			643,293			411,755

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED, IN U.S.$)

	Three Months Ended November 30,						Six Months Ended November 30,
	2013			2012			2013			2012

Net income		1,205,311			935,184			1,929,876			1,266,804
Noncontrolling interests		(58,602	)		(45,180	)		(93,178	)		(55,712	)

Net income attributable to common stockholders	$	1,146,709		$	890,004		$	1,836,698		$	1,211,092

Earnings per common share, basic and diluted	$	0.02		$	0.02		$	0.03		$	0.03

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

Comprehensive Income:
Net Income	$	1,205,311		$	935,184		$	1,929,876		$	1,266,804
Foreign currency translation adjustment		119,467			58,745			152,291			57,962

Comprehensive income		1,324,778			993,929			2,082,167			1,324,766
Comprehensive income attributable to noncontrolling interests		(61,257	)		(48,107	)		(97,443	)		(58,600	)

Net Comprehensive income attributable to common stockholders	$	1,263,521		$	945,822		$	1,984,724		$	1,266,166

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2013 (UNAUDITED, IN U.S.$)

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

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

Net income		-		-		-		1,836,698			-		93,178		1,929,876

Appropriation to statutory reserve		-		-		186,357		(186,357	)		-		-		-

Foreign currency translation adjustment		-		-		-		-			148,026		4,265		152,291

Balance, November 30, 2013	$	55,200	$	11,389,049	$	496,012	$	4,530,991		$	544,559	$	513,669	$	17,529,480

See accompanying notes to the consolidated financial statements

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED, IN U.S. $)

	Six Months Ended November 30,
	2013			2012

Cash flows from operating activities:
Net income	$	1,929,876		$	1,266,804
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		7,102			5,142
Decrease in deferred income taxes		267,960			2,641
Changes in operating assets and liabilities:
Decrease in prepaid expenses		81,035			3,498
Increase in accounts payable		-			38,232
Increase in deferred revenue		575,070			477,900
(Decrease) increase in income taxes payable		(327,318	)		282,421
Increase (decrease) in accrued liabilities		2,176			(40,975	)

Net cash provided by operating activities		2,535,901			2,035,663

Cash flows from investing activities:
Purchase of equipment		(16,581	)		(4,459	)

Cash flows from financing activities:
Repayment of stockholder loan		-			(47,903	)
Proceeds from stockholder loan		31,000			149,031

Net cash provided by financing activities		31,000			101,128

Effect of exchange rate changes on cash		144,142			30,178

Net change in cash		2,694,462			2,162,510
Cash, beginning		16,341,986			4,139,165

Cash, end	$	19,036,448		$	6,301,675

Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	-		$	-
Income taxes	$	366,153		$	128,783

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 1. ORGANIZATION

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

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

On November 27, 2012, the Company filed a certificate of amendment to its articles of incorporation to change its name from “NYC Moda, Inc.” to “China Xuefeng Environmental Engineering Inc.” (the “Name Change”) and to initiate a 4-for-1 forward stock split (the “Forward Split”) of its outstanding shares of common stock. The effective dates of the Name Change and the Forward Split were December 14, 2012 and December 17, 2012, respectively. Upon the effectiveness of the Forward Split, the number of outstanding shares of the Company’s common stock increased from 10,300,000 to 41,200,000 shares. The effect of the stock split was applied retroactively to all the periods’ consolidated financial statements as if the current structure existed since the inception of the periods presented. On March 19, 2013, the Company issued 14,000,000 shares of common stock to 12 unrelated individuals in a private offering, generating $7,096,579 in net proceeds. The number of authorized shares of common stock remains at 75,000,000 shares.

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

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

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 1. ORGANIZATION (CONTINUED)

Exclusive Technical Service and Business Consulting Agreement: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, the WFOE provides technical support, consulting, training, marketing and operation consulting services to Jiangsu Xuefeng. In consideration for such services, Jiangsu Xuefeng has agreed to pay an annual service fee to the WFOE of 95% of Jiangsu Xuefeng’s annual net income with an additional payment of approximately US$16,240 (RMB 100,000) each month. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

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

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

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

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 1. ORGANIZATION (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRESENTATION

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

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)

ASSETS	November 30, 2013		May 31, 2013
	(Unaudited, in U.S. $)		(In U.S. $)
Current assets:
Cash	$	18,791,045	$	16,186,742
Prepaid expenses		15,476		96,511
Deferred income taxes		67,279		333,300

Total current assets		18,873,800		16,616,553

Fixed assets		56,400		39,382
Less: accumulated depreciation		24,827		17,531

Fixed assets, net		31,573		21,851

Other assets:
Prepayment for acquisition of land use right		815,500		808,000

TOTAL ASSETS	$	19,720,873	$	17,446,404

LIABILITIES

Current liabilities:
Due to China Xuefeng Environmental Engineering Inc. (1)	$	7,096,579	$	7,031,313
Payable to WFOE(2)		4,890,881		3,120,492
Deferred revenue		1,908,270		1,333,200
Taxes payable		220,539		570,451
Loan from stockholder		187,107		154,105
Accrued liabilities		34,993		32,817

Total current liabilities		14,338,369		12,242,378

TOTAL LIABILITIES	$	14,338,369	$	12,242,378

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

(2)

Payable to WFOE represents outstanding amounts due to Baichuang Information Consulting (Shenzhen) Co. Ltd. under the Exclusive Technical Service and Business Consulting Agreement for consulting services provided to Jiangsu Xuefeng in exchange for 95% of Jiangsu Xuefeng’s net income. The monthly payments of RMB 100,000 (approximately US$16,240) was paid as of November 30, 2013 and May 31, 2013.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)

	For the three months ended November 30				For the six months ended November 30
	2013		2012		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Revenue	$	1,781,880	$	1,519,520	$	2,947,560	$	2,151,520
Net income (3)	$	1,172,038	$	935,184	$	1,863,567	$	1,266,804

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

	For the six months ended November 30
	2013			2012
	(Unaudited)			(Unaudited)

Net cash provided by operating activities	$	2,446,998		$	2,035,982
Net cash (used in) investing activities		(16,581	)		(4,459	)
Net cash provided by financing activities		31,000			70,000

The financial statements for the three and six months ended November 30, 2013 and 2012, include China Xuefeng Environmental Engineering Inc., Inclusion, Lotus and its wholly owned subsidiary, Baichuang Consulting and its VIE, Jiangsu Xuefeng. All significant intercompany accounts and transactions have been eliminated in consolidation when applicable.

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

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)

The unaudited interim consolidated financial statements of the Company as of November 30, 2013 and for the three and six months periods ended November 30, 2013 and 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K filed with the SEC. The results of operations for the three and six months ended November 30, 2013 are not necessarily indicative of the results to be expected for future quarters or for the year ending May 31, 2014.

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

CHANGE OF FISCAL YEAR END DATE

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

USE OF ESTIMATES

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

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).

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION (CONTINUED)

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, 2013		May 31, 2013		November 30, 2012

Balance sheet items, except for stockholders’ equity, as of year or period end		0.1631		0.1616		0.1593

Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows for the period		0.1624		N/A		0.1582

For the three months ended November 30, 2013 and 2012, foreign currency translation adjustments of $119,467 and $58,745, respectively, have been reported as other comprehensive income or loss. For the six months ended November 30, 2013 and 2012, foreign currency translation adjustments of $152,291 and $57,962 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 providing garbage recycling processing system technology support, renovation and upgrade services and patent licensing to its customers. The Company’s revenue recognition policies comply with FASB ASC 605 “Revenue Recognition.” In general, the Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the products or services have been delivered or performed and collectability of the resulting receivable is reasonably assured.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (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. An inspection is conducted by the customer according to industry standards within three days of the completion of the improvement and upgrade. An acceptance form is provided by the customer if the inspection is satisfactory. Performance testing is conducted on the upgraded equipment for no more than one month. Testing can be done in less than a month period. A final evaluation report is provided within five days of the completion of the performance testing. The fee for improvement and upgrade services is fixed and becomes due within 30 days, upon the signing of the contract and is not subject to refund, forfeiture or any other concession if patent licensing is not completed. No warranty is provided by the Company.

Patent Licensing

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

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

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

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

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

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

VULNERABILITY DUE TO OPERATIONS IN PRC

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (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 measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis. Non-derivative financial instruments include cash, payables and accrued liabilities. As of November 30, 2013 and May 31, 2013, the carrying values of these financial instruments approximated their fair values due to their short term nature.

CASH AND CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

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

Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of November 30, 2013 and May 31, 2013, the Company did not have any accounts receivable. For the periods presented, the Company did not write off any accounts receivable as bad debts.

FIXED ASSETS

Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the prices paid to acquire the assets, 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 original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred. The estimated useful lives for fixed assets categories are as follows:

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED REVENUE

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

INCOME TAXES

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

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of November 30, 2013 and May 31, 2013, the Company does not have a liability for any unrecognized tax benefits.

ADVERTISING COSTS

Advertising costs are charged to operations when incurred. For the three months ended November 30, 2013 and 2012, advertising expense was $4,095 and $0, respectively. For the six months ended November 30, 2013 and 2012, advertising expenses was $15,428 and $0, respectively.

STATUTORY RESERVE FUND

Pursuant to corporate law of the PRC, the Company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after use is not less than 25% of registered capital. For six months ended November 30, 2013 and 2012, a statutory reserve of $186,357 and $121,018, respectively, were required to be allocated by the Company.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

NOTE 4. FIXED ASSETS

Fixed assets are summarized as follows:

	November 30, 2013			May 31, 2013
	(Unaudited)

Computers and equipment	$	27,920		$	26,306
Motor vehicles		15,282			-
Fixtures and furniture		13,197			13,076

		56,400			39,382
Less: Accumulated depreciation		(24,827	)		(17,531	)

	$	31,573		$	21,851

For the three months ended November 30, 2013 and 2012, depreciation expense was $3,935 and $2,741, respectively. For the six months ended November 30, 2013 and 2012, depreciation expense was $7,102 and $5,142, respectively.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 5. PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT

On March 23, 2012, the Company entered into an agreement with a PRC owned third party to acquire a 50-year land use right for construction of a factory facility for cash consideration of US$ 880,740, equivalent to RMB 5,400,000, of which US$ 815,500, equivalent to RMB 5,000,000 was paid before November 30, 2013. As of November 30, 2013, the land used right had not been obtained and no certificate for the use of land had been issued to the Company.

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

NOTE 6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

	November 30, 2013		May 31, 2013
	(Unaudited)

Payroll	$	21,639	$	14,369
Professional fees		13,024		18,306
Other		330		142

	$	34,993	$	32,817

NOTE 7. INCOME TAXES

The provision for income taxes consisted of the following:

	For the three months ended November 30				For the six months ended November 30
	2013		2012		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Current	$	158,096	$	301,200	$	375,333	$	409,114
Deferred		243,675		-		267,960		2,641

	$	401,771	$	301,200	$	643,293	$	411,755

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

The Company did not file its U.S. federal income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations” for the fiscal year ended April 30, 2013 and for the one month

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 7. INCOME TAXES (CONTINUED)

period ended May 31, 2013, a short year income tax return required to be filed as a result of change in fiscal year. Failure to furnish any income tax returns and information returns with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to certain civil penalties. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

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

NOTE 8. RELATED PARTY TRANSACTIONS

On August 5, 2012, the Company entered into an agreement to lease the rights of a patent on garbage recycling processing technology from Li Yuan, one of the Company’s officers/stockholders. Under the current terms, the Company is required to pay a fee of $12,992 (RMB 80,000) each month for five years from September 2012 to August 2017. As of November 30, 2013 and May 31, 2013, a prepaid patent leasing fee of $13,048 and $90,496, respectively, are included in prepaid expenses on the consolidated balance sheets, respectively.

The remaining payments for the patent rights as of November 30, 2013 are as follows:

Period Ending	Annual
May 31,	Amount

2014		64,960
2015		155,904
2016		155,904
2017		155,904
Thereafter		38,976

	$	571,648

The Company obtained a demand loan from the above officer/stockholder which is non-interest bearing. The loan of approximately $187,000 representing expenses paid by the above officer/stockholder and approximately $79,000 representing the registered capital and operating expenses of Baichuang Information Consulting (Shenzhen) Co., Ltd. (“Baichuang Consulting”) for the year ended May 31, 2013. For the six months ended November 30, 2013, Baichuang Consulting made no payments to the above officer/stockholder. The balance is reflected as loan from stockholders as of November 30, 2013 and May 31, 2013.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 9. LEASES

The Company leases office space under a one-year operating lease from an unrelated third party, which expired on March 31, 2013 and was extended to March 31, 2016. The lease requires the Company to prepay the rental for one year of $7,253 (RMB 44,664). The related prepayments of $2,428 and $6,015 are included in the prepaid expenses on the consolidated balance sheets as of November 30, 2013 and May 31, 2013, respectively. The lease provides for renewal options. Rent expense charged to operations for the three and six months ended November 30, 2013 and 2012 was $1,818 and $1,769, respectively, and $3,627 and $3,533, respectively. The minimum future rentals under the lease as of November 30, 2013 are as follows:

Period Ending
May 31,	Amount

2014	$	1,209
2015		7,253
2016		6,045

	$	14,507

NOTE 10. CONTINGENCIES

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

The Company did not file the information report for the year ended December 31, 2012 concerning its interest in foreign bank accounts on form TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBAR”). Not complying with the FBAR reporting and recordkeeping requirements will subject the Company to civil penalties up to $10,000 for each 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 11. CONCENTRATION OF CREDIT RISK

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

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

	For the three months ended					For the six months ended
	November 30, 2013					November 30, 2013
	Amount		%			Amount		%
CUSTOMER 1		*		*			584,640		19.83	%
CUSTOMER 2		560,280		31.44	%		560,280		19.01	%
CUSTOMER 3		487,200		27.34	%		487,200		16.53	%

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2013 AND 2012 (UNAUDITED)

NOTE 11. CONCENTRATION OF CREDIT RISK (CONTINUED)

	For the three months ended					For the six months ended
	November 30, 2012					November 30, 2012
	Amount		%			Amount		%
CUSTOMER 1		498,593		32.81	%		498,330		23.16	%
CUSTOMER 2		474,850		31.25	%		474,600		22.06	%
CUSTOMER 3		474,850		31.25	%		474,600		22.06	%
CUSTOMER 4		*		*			545,790		25.37	%

*Less than 10% of total revenues.

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 services to optimize garbage-recycling processes. We utilize our licensed patented “comprehensive and harmless garbage-processing equipment” to upgrade software systems and reconstruct hardware for our clients, and thus expand the sorting scope and capacity of our clients’ garbage recycling equipment. We conduct our operations through our controlled consolidated affiliate Jiangsu 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 demand. In order to resolve the defects of the processing equipment of other garbage processing plants, we provide upgrades and improvement to the software systems and hardware equipment by installing the various systems of our licensed patented technology “comprehensive and harmless garbage-processing equipment” into customers’ equipment, and reconstructing the hardware to expand the garbage sorting scope and capacity of our clients’ equipment.

The patented “harmless and comprehensive garbage processing equipment” has high garbage processing capacity and stable operation capability. It is the first modern system equipment in China to use DCS (Distributed Control System) centralized control, by which mechanical automation will be realized for the comprehensive treatment of life garbage. Its core technology is to organically integrate the anaerobic digestion and aerobic fermentation garbage process, degrade and transform the organic matter of domestic waste, effectively sort out the garbage and recycle all kinds of materials, to eventually realize the true waste resource utilization and harmless utilization, with its resource utilization and harmless utilization rate approximate 100%. The resource recovery products, biogas, can not only be used for meeting the needs of the plant itself, but also for outer supply, which greatly improves the efficiency of garbage processing of customer’s equipment, decreases production cost, and increases the recovery return of garbage processing.

The comprehensive and harmless garbage processing equipment 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 could run whole day. The stand-alone equipment can process 500 tons to 1000 tons of garbage per day. It can sort and process complicated municipal solid waste, leaving no pollution and no residue, reaching the "3 without" standard of no waste gas, no waste water and no waste residue.

After we complete the internal system upgrade and hardware equipment improvement of the garbage equipment, we deliver the upgraded equipment to the customers. The customers will conduct inspection and performance testing to the upgraded equipment which is no more than one month pursuant to the contract to inspect whether the internal control system and the hardware structure can operate steadily and obtain the garbage process features. The inspection includes the following: whether the quality of the equipment and accessories after improvement can match the patented technology and process various kinds of garbage, whether the various garbage systems can process automatically, and whether the daily garbage processing capacity reaches the standard of the contract. If during the performance testing period, all the performance indexes can fulfill the requirements of the contract, it would be deemed that we have fully executed the agreements.

Prior to the first service agreement in April 2012, we did not conduct any business activities except for the preparation of the business and the development of the clients, etc. When we complete the upgrading service for the client, we go through the acceptance check and commissioning of the company in accordance with the contract, to make sure that the service provided met the demand of the clients. After that, we are not subject to any additional service. The revenue we generated belongs to the service class income, with the main cost being the salaries of the staff and the leasing fees for the patent, whereas the hardware and software equipment, as well as the material used in the upgrading are the responsibility of the clients.

Recent Developments

Acquisition of Inclusion

The Company was organized in the state of Nevada on March 30, 2011. The Company was initially created to engage in the business of clothing distribution. Since its inception, the Company was a development stage company and has not earned any revenue.

On November 27, 2012, we completed a reverse acquisition transaction through a share exchange with Inclusion and its stockholders, or the “Inclusion Stockholders”, whereby we acquired 100% of the issued and outstanding capital stock of Inclusion in exchange for our issuance of 7,895,000 shares of our common stock (pre-Forward Split), which constituted 76.65% of our issued and outstanding capital stock as of and immediately after the consummation of the reverse acquisition. As a result of the reverse acquisition, Inclusion became our wholly-owned subsidiary and the former Inclusion Stockholders became our controlling stockholders. The share exchange transaction has been treated as a reverse acquisition, with Inclusion as the acquirer and the Company as the acquired party for accounting purposes.

Prior to the closing of the reverse acquisition, the Company’s prior shareholder, Mr. Zhenxing Liu, surrendered 7,895,000 shares of the common stock of the Company. Mr. Zhenxing Liu did not receive any consideration from the Company for accounting purposes. However, Mr. Zhenxing Liu may be deemed to have received consideration from the increase in the value of 250,000 shares held by Mr. Zhenxing Liu as a result of the reverse acquisition. Mr. Zhenxing Liu purchased 8,145,000 shares at approximately $0.007 per share at the time when the Company was considered a shell and kept 250,000 shares after the surrender. On November 30, 2012, at the closing of the reverse acquisition, the stockholder’s equity increased to $5,194,728. Accordingly, the value of the 250,000 shares held by Mr. Zhenxing Liu appreciated to approximately $124,673. Other than such appreciation in the value of his shares, Mr. Zhenxing Liu did not receive any other consideration in connection with the reverse acquisition.

As a result of our acquisition of Inclusion, we now own all of the issued and outstanding capital stock of Lotus International Holdings Limited (“Lotus”), which in turn owns all of the issued and outstanding capital stock of Baichuang Information Consulting (Shenzhen) Co. Ltd (“Baichuang Consulting”). In addition, we effectively and substantially control Jiangsu Xuefeng through a series of captive agreements with Baichuang Consulting.

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

Name Change and Forward Stock Split

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

Private Offering

On March 19, 2013, we completed a closing of a private offering (the “Offering”) of shares of the Company’s common stock, par value $0.001 per share (the “Shares”), at a price of $0.50 per share, for an aggregate purchase price of $7,000,000 (the “Purchase Price”). Upon the closing, the Company issued 14,000,000 shares of its common stock pursuant to the Offering.

Emerging Growth Company Status

We are an “emerging growth company”, or “EGC” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, from which we are currently exempt as a smaller reporting company, and stockholder approval of any golden parachute payments not previously approved in connection with a transaction resulting in a change of control. We expect to take advantage of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and the stock price may be more volatile.

While we have not yet done so, 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, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

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 Securities Exchange Act of 1934, as amended, 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, 2013 compared to Three Months ended November 30, 2012

The following table sets forth in U.S. dollars key components of our unaudited results of operations during the three months periods ended November 30, 2013 and 2012, and the percentage change between 2013 and 2012:

	2013			2012		Percentage
	(U.S. $)			(U.S. $)		Change
Revenue	$	1,781,880		$	1,519,520		17	%
Cost of revenue		(94,710	)		(199,876)		(53	%)
Gross profit		1,687,170			1,319,644		28	%
Selling expenses		21,637			4,609		369	%
General and administrative expenses		73,605			80,169		(8	%)
Total operating expenses		95,242			84,778		12	%
Operating income		1,591,928			1,234,866		29	%
Interest income		15,154			1,518		898	%
Income before provision for income taxes		1,607,082			1,236,384		30	%
Provision for income taxes		401,771			301,200		33	%
Net income		1,205,311			935,184		29	%
Noncontrolling interests		(58,602	)		(45,180)		30	%
Net income attributable to common stockholders	$	1,146,709		$	890,004		29	%

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

Our sales for the three months ended November 30, 2013 increased by $268,360 or 17% compared the sales for the three months ended November 30, 2012. The primary reason for the substantial increase in sales was a direct result of the increase in revenue from patent licensing offset by the decrease in revenue from improvement and upgrading service. Meanwhile, the decrease in growth rate was related to decreased portion of revenue from improvement and upgrading service and increased portion of revenue from patent leasing. The following table sets forth our revenue for the three months periods ended November 30, 2013 and 2012 by segments:

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

Improvement and upgrading services		975,900		1,424,600		-31	%
Patent licensing		805,980		94,920		749	%
Total		1,781,880		1,519,520		17	%

Improvement and Upgrading Services

For the three months ended November 30, 2013, revenue from improvement and upgrading services provided to two unrelated customers was $975,900. The services were completed and accepted by the customer and the payment was received in full as of November 30, 2013. For the three months ended November 30, 2012, revenue from improvement and upgrading services provided to three unrelated customers was $1,424,600. The services were completed and accepted by the customers and the payment was received in full as of November 30, 2012.

Patent Licensing

For the three months ended November 30, 2013, revenue from patent licensing was generated from 11 unrelated customers of $805,980. For the three months ended November 30, 2013, revenue from patent licensing was generated from two unrelated customers of $94,920.

Cost of Revenues. Our cost of revenues decreased to $94,710 for the three months ended November 30, 2013 from $199,876 for the three months ended November 30, 2012. The decrease in cost of revenues was mainly due to a 81% decrease in training expense of technical staff training in that technical staff requires less training as they obtain more experience. In addition, we were no longer subject to sales tax effective December 1, 2012, which further resulted in the decrease in cost of revenues.

Our costs of revenues primarily consist of fees paid to the related party for licensing the patent, employees’ salaries, insurance, training expenses and other daily operating expenses. In addition, business taxes were classified as cost of revenues before December 1, 2012. Under China tax law, our business tax should be changed to value added tax after December 1, 2012 but we are exempt from the value added tax by the authority of the local tax bureau.

Gross Profit. Our business stream has resulted in a high gross margin because we have no cost of products to be sold. Our cost of revenue is almost entirely direct labor and patent licensing fees, and other operating expenses. As a result, our gross profit increased to $1,687,170 for three months ended November 30, 2013 from $1,319,644 for three months ended November 30, 2012 which represented a gross profit ratio of 95% and 87%, respectively.

Selling and Marketing Expenses. Our selling and marketing expenses increased to $21,637 for three months ended November 30, 2013 from $4,609 for three months ended November 30, 2012 which represented an increase by 369%. Our selling and marketing expenses were primarily comprised of sales employees’ salary and insurance and advertising expenses. The increase in selling and marketing expenses was mainly due to the increased marketing expenses including remuneration of sales employees.

General and Administrative Expenses. Our general and administrative expenses decreased to $73,605 for three months ended November 30, 2013 from $80,169 for three months ended November 30, 2012, representing an 8% decrease. Our general and administrative expenses were primarily comprised of employees’ salaries, insurance, rent and professional fees.

Provision for Income Taxes. Our provision for income taxes increased to $401,771 for three months ended November 30, 2013 from $301,200 for three months ended November 30, 2012. Our effective tax rate for the three months ended November 30, 2013 and 2012 were the statutory rate 25%. Our tax filings for the year ended December 31, 2012 were examined by the tax authorities in April 2013. The tax filings were accepted and no adjustments were proposed by the tax authorities. The increase in the provision for income taxes was primarily due to the increase in our income.

Net Income. For the three months ended November 30, 2013 and 2012, we generated net income of $1,205,311 and $935,184, respectively. This represented an increase in net income of $270,127 or 29%. The entrusted management agreements assign to Baichuang Consulting only 95% of the income generated from Jiangsu Xuefeng. For that reason, we reflected a “non-controlling interest” of $58,602 and $45,180 for the three months ended November 30, 2013 and 2012, respectively, before recognizing net income attributable to the common stockholders of the Company on our Consolidated Statements of Income and Comprehensive Income. After the discussed “non-controlling interest” deduction and taking into account the income and expenses incurred by the parent corporation, our net income attributable to the Company for the three months ended November 30, 2013 and 2012 was $1,146,709 and $890,004, representing $0.02 and $0.02 per share, respectively.

Foreign Currency Translation Adjustment. Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the three months ended November 30, 2013 and 2012, a foreign currency gain of $119,467 and $58,745, respectively, have been reported as other comprehensive income and loss in the consolidated statements of income and other comprehensive income.

Six months Ended November 30, 2013 compared to Six Months ended November 30, 2012

The following table sets forth in U.S. dollars key components of our unaudited results of operations during the six months periods ended November 30, 2013 and 2012, and the percentage change between 2013 and 2012:

	2013			2012		Percentage
	(U.S. $)			(U.S. $)		Change
Revenue	$	2,947,560		$	2,151,520		37	%
Cost of revenue		(203,465	)		(285,233)		(29	%)
Gross profit		2,744,095			1,866,287		47	%
Selling expenses		52,895			9,207		475	%
General and administrative expenses		147,392			181,534		(19	%)
Total operating expenses		200,287			190,741		5	%
Operating income		2,543,808			1,675,546		52	%
Interest income		29,361			3,013		874	%
Income before provision for income taxes		2,573,169			1,678,559		53	%
Provision for income taxes		643,293			411,755		56	%
Net income		1,929,876			1,266,804		52	%
Noncontrolling interests		(93,178	)		(55,712)		67	%
Net income attributable to common stockholders	$	1,836,698		$	1,211,092		52	%

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

Our sales for the six months ended November 30, 2013 increased by $796,040 or 37% compared the sales for the six months ended November 30, 2012. The primary reason for the substantial increase in sales was a direct result of the increase in revenue from patent licensing offset by the decrease in revenue from improvement and upgrading service. The following table sets forth our revenue for the six months periods ended November 30, 2013 and 2012 by segments:

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

Improvement and upgrading services		1,461,600		2,056,600		-29	%
Patent licensing		1,485,960		94,920		147	%
Total		2,947,560		2,151,520		37	%

Improvement and Upgrading Services

For the six months ended November 30, 2013, revenue from improvement and upgrading services provided to three unrelated customers was $1,461,600. The services were completed and accepted by the customer and the payment was received in full as of November 30, 2013. For the six months ended November 30, 2012, revenue from improvement and upgrading services provided to five unrelated customers was $2,056,600. The services were completed and accepted by the customers and the payment was received in full as of November 30, 2012.

Patent Licensing

For the six months ended November 30, 2013, revenue from patent licensing was generated from 11 unrelated customers of $1,485,960. For the six months ended November 30, 2013, revenue from patent licensing was generated from two unrelated customers of $94,920.

Cost of Revenues. Our cost of revenues decreased to $203,465 for the six months ended November 30, 2013 from $285,233 for the six months ended November 30, 2012. The decrease in cost of revenues was mainly due to a 61% decrease in training expense of technical staff training in that technical staff requires less training as they obtain more experience. In addition, we were no longer subject to sales tax effective December 1, 2012, which further resulted in the decrease in cost of revenues.

Our costs of revenues primarily consist of fees paid to the related party for the patent licensing, employees’ salaries, insurance, training expenses and other daily operating expenses. In addition, business taxes were classified as cost of revenues before December 1, 2012. Under China tax law, our business tax should be changed to value added tax after December 1, 2012 but we are exempt from the value added tax by the authority of the local tax bureau.

Gross Profit. Our business stream has resulted in a high gross margin because we have no cost of products to be sold. Our cost of revenue is almost entirely direct labor, patent licensing fees, daily operating expenses. As a result, our gross profit increased to $2,744,095 for six months ended November 30, 2013 from $1,866,287 for six months ended November 30, 2012 which represented a gross profit ratio of 93% and 87%, respectively.

Selling and Marketing Expenses. Our selling and marketing expenses increased to $52,895 for six months ended November 30, 2013 from $9,207 for six months ended November 30, 2012 which represented an increase by 475%. Our selling and marketing expenses were primarily comprised of sales employees’ salary and insurance and advertising expenses. The increase in selling and marketing expenses was mainly due to the increased marketing expenses including remuneration of sales employees.

General and Administrative Expenses. Our general and administrative expenses decreased to $147,392 for six months ended November 30, 2013 from $181,534 for six months ended November 30, 2012, representing a 19% decrease. Our general and administrative expenses were primarily comprised of employees’ salaries, insurance, rent and professional fees.

Provision for Income Taxes. Our provision for income taxes increased to $643,293 for six months ended November 30, 2013 from $411,755 for six months ended November 30, 2012. Our effective tax rate was the same as the statutory rate of 25% for the six months ended November 30, 2013 and 2012. Our tax filings for the year ended December 31, 2012 were examined by the tax authorities in April 2013. The tax filings were accepted and no adjustments were proposed by the tax authorities. The increase in the provision for income taxes was primarily due to the increase in our income.

Net Income. For the six months ended November 30, 2013 and 2012, we generated net income of $1,929,876 and $1,266,804, respectively. This represented an increase in net income of $663,072 or 52%. The entrusted management agreements assign to Baichuang Consulting only 95% of the income generated from Jiangsu Xuefeng. For that reason, we reflected a “non-controlling interest” of $93,178 and $55,712 for the six months ended November 30, 2013 and 2012, respectively, before recognizing net income attributable to the common stockholders of the Company on our Consolidated Statements of Income and Comprehensive Income. After that the discussed “non-controlling interest” deduction and taking into account the income and expenses incurred by the parent corporation, our net income attributable to the Company for the six months ended November 30 and 2012 was $1,836,698 and $1,211,092, representing $0.03 and $0.03 per share, respectively.

Foreign Currency Translation Adjustment. Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the six months ended November 30, 2013 and 2012, a foreign currency gain of $152,291 and $57,962, respectively, have been reported as other comprehensive income and loss in the consolidated statements of income and other comprehensive income.

Liquidity and Capital Resources

As of November 30, 2013, we had cash and cash equivalents of $19,036,448, primarily consisting of cash on hand and demand deposits. The cash balance was principally derived from capital contributions of $4,541,532 to Jiangsu Xuefeng’s capital contributions since January 2011, net proceeds of the private placement completed in March 2013 and cash provided from the operations. Despite our large cash balances, the interest income generated for the period ended November 30, 2013 was nominal for principally two reasons: the bank’s current deposit interest rate is very low, and the annual interest rates float up or down within 0.35% range; The interest income reported in our financial statements is the net interest after deducting bank service charges and overdraft fees. The overdraft fee was calculated as 2% of the overdraft limit. We terminated this overdraft service in April 2013, and no overdraft fees are deducted from our interest income thereafter.

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

Operating activities

Net cash provided by operating activities was $2,535,901 for the six months ended November 30, 2013. Comparing with the net income of $1,929,876 for the six months ended November 30, 2012, the difference was mainly due to the increase in deferred revenue. Net cash provided by operating activities was $2,035,663 for the six months ended November 30, 2012. Comparing with the net income of $1,266,804, the difference was mainly due to the increase in deferred revenue and income tax payable.

Investing activities

Net cash used for investing activities represented the expenditures on purchasing equipment. For the six months ended November 30, 2013 and 2012, $16,581 and $4,459 were used for purchase of equipment, respectively.

Financing activities

For the six months ended November 30, 2013 and 2012, the net cash provided by financing activities consists of net proceeds of the stockholder loan of $31,000 and $101,128, respectively. The proceeds from the stockholder loan were used to pay professional fees.

We believe that our cash on hand and cash flows from operations will meet our present cash needs for the next 12 months.

Off-Balance Sheet Arrangements

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

Transfer of Cash

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

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

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

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

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

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

Pursuant to the Exclusive Technical Service and Business Consulting Agreement between Baichuang Consulting (WFOE) and Jiangsu Xuefeng, Baichuang Consulting is to provide technical support and consulting services to Jiangsu Xuefeng in exchange for (i) 95% of the total annual net income of Jiangsu Xuefeng and (ii) RMB100,000 per month (US$16,280). As a result, there are also two ways to transfer the funds from inside the PRC to outside the PRC:

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

(2) According to the provisions of the Service Fee in Article 3 of the Exclusive Technology Service and Business Consulting Agreement, a management fee of $16,280 will be paid to Baichuang Consulting each month, and in turn Baichuang Consulting will be in compliance with the provisions of the PRC Foreign-Owned Enterprise Law and transfer this income to Lotus International (HK company) for the purpose of profit distribution.

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

Recent Accounting Pronouncements

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, for the reasons set forth below, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of November 30, 2013 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of November 30, 2013, the Company determined that there were control deficiencies that constituted the following material weaknesses:

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

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

Changes in Internal Control over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Description

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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*		Filed herewith.

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

SIGNATURES

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

	China Xuefeng Environmental Engineering Inc.


Date: January 21, 2014	By:	/s/ Li Yuan
		Li Yuan
		Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)


Date: January 21, 2014	By:	/s/ Kuanfu Fan
		Kuanfu Fan
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Attached files

China Xuefeng Environmental Engineering Inc. Reports

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