Filing Compare · China Xuefeng Environmental Engineering Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended ~~February~~August 2831, 2018

☐ 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.)

229 Tongda Avenue Economic and Technological Development Zone, Suqian, Jiangsu Province, P.R. 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 ☒ No ☐

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

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

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

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

As of ~~April~~October 910, 2018, there were 66,520,871 outstanding shares of common stock of the registrant, par value $0.001 per share.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION Page Item 1. Financial Statements. 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 3227 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 4431 Item 4. Controls and Procedures. 4431 PART II – OTHER INFORMATION Item 1. Legal Proceedings. 4533 Item 1A. Risk Factors. 4533 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds. 4533 Item 3 Defaults Upon Senior Securities. 4533 Item 4. Mine Safety Disclosures. 4533 Item 5. Other Information. 4533 Item 6. Exhibits. 4533 Signatures 4634

PART I – FINANCIAL INFORMATION

~~ITEM~~Item 1. ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. $)

	February 28,		May 31,
	August 31,		May 31,
ASSETS	2018		~~2017~~2018
	(Unaudited)
Current assets:
Cash	$	1319,~~789~~977,~~487~~874	$	1017,~~343~~559,~~963~~007
Accounts receivable		31,~~191~~420,~~936~~125		42,~~365~~607,~~854~~798
Inventory		4420,~~195~~422		-37,669
Prepaid Expenses		~~319~~489,~~576~~484		7137,~~009,322~~632
Prepaid VAT		53,~~087~~958,~~818~~335		4,~~649~~615,~~599~~812
Deferred registration cost		141,975		-
Total current assets		25,866,240		24,957,918
Total current assets		22,574,987		26,368,738
Noncurrent assets:
Fixed assets, net		3431,~~814~~047,~~143~~189		2333,~~860~~729,~~312~~725
Lease equipment, net		2825,~~037~~009,~~439~~946		2327,~~774~~167,~~359~~719
Prepaid lease		5,~~923~~427,~~136~~770		5,~~592~~816,~~757~~243
Accounts receivable-non-current		-		1,463,078
Deferred income tax assets		815,907		823,949
Deferred income tax assets		779,620		211,653
Total noncurrent assets		62,300,812		67,537,636
Total noncurrent assets		69,554,338		54,902,159
TOTAL ASSETS	$	88,167,052	$	92,495,554
TOTAL ASSETS	$	92,129,325	$	81,270,897

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(~~UNAUDITED, IN U.S. $~~CONTINUED)

	February 28,		May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY	2018		2017
	(Unaudited)
Current liabilities:
Accounts payable	$	1,105,230	$	498,959
Deferred revenues		3,786,350		3,695,730
Taxes payable		492,446		596,765
Loan from stockholder		10,930,221		17,468,486
Accrued liabilities		200,610		99,299
Total current liabilities		16,514,857		22,359,239
Security deposits payable		5,055,488		3,404,670
TOTAL LIABILITIES		21,570,345		25,763,909
Stockholders' equity:
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 64,572,153 and 63,020,871 shares issued and outstanding as of February 28, 2018 and May 31, 2017		66,521		63,021
Additional paid-in capital		41,581,497		34,584,997
Statutory reserve fund		2,593,995		2,437,684
Retained earnings		25,163,252		22,022,689
Other comprehensive income (loss)		1,153,715		(3,601,403	)
Total stockholders' equity		70,558,980		55,506,988
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	92,129,325	$	81,270,897

(IN U.S. $)

	August 31,			May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY	2018			2018
	(Unaudited)
Current liabilities:
Accounts payable	$	84,188		$	1,049,776
Deferred revenues		4,606,091			3,995,944
Taxes payable		462,210			489,349
Loan from stockholder		10,286,018			10,892,539
Accrued liabilities		108,054			118,375

Total current liabilities		15,546,561			16,545,983

Security deposits payable		4,684,160			4,991,680

TOTAL LIABILITIES		20,230,721			21,537,663

Stockholders' equity:
Common stock, $0.001 par value per share, 75,000,000 shares authorized; 66,520,871 shares issued and outstanding as of August 31 and May 31, 2018		66,521			66,521
Additional paid-in capital		41,581,497			41,581,497
Statutory reserve fund		2,595,662			2,595,662
Retained earnings		27,880,157			26,462,203
Other comprehensive (loss) income		(4,187,506	)		252,008

Total stockholders' equity		67,936,331			70,957,891

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	88,167,052		$	92,495,554

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~CONTINUED~~IN U.S. $)

(UNAUDITED, IN U.S. $)

	Three Months Ended August 31,
	2018		2017
	(Unaudited)		(Unaudited)
Revenue:
Sales	$	2,772,585	$	1,332,936
Lease income		1,034,464		886,092

Total revenue		3,807,049		2,219,028

Cost of goods sold:
Cost of sales		1,170,680		140,448
Depreciation expense - leased equipment		496,027		428,791

Total cost of goods sold		1,666,707		569,239

Gross profit		2,140,342		1,649,789

Operating expenses:
Selling and marketing		295,607		176,906
General and administrative		289,775		240,661

Total operating expenses		585,382		417,567

	Three Months Ended, February 28,				Nine Months Ended, February 28,
	2018		2017		2018		2017
Revenue:
Sales	$	1,832,415	$	1,955,155	$	4,977,147	$	5,443,844
Lease income		1,058,016		671,135		2,892,551		1,845,971
Total revenue		2,890,431		2,626,290		7,869,698		7,289,815
Cost of goods sold:
Cost of sales		436,180		154,534		703,615		410,863
Depreciation expense - leased equipment		511,698		349,084		1,399,358		922,285
Total cost of goods sold		947,878		503,618		2,102,973		1,333,148
Gross profit	1,942,553		2,122,672			5,766,725		5,956,667
Operating expenses:
Selling and marketing		313,282		181,591		742,850		510,234
General and administrative	304,507		153,086			826,793		696,399
R&D Expense	374,841		-			999,276		-
Total operating expenses	992,630		334,677			2,568,919		1,206,633

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~CONTINUED~~IN U.S. $)

(UNAUDITED, IN U.S. $)

	Three Months Ended August 31,
	2018			2017
	(Unaudited)			(Unaudited)

Income from operations	$	1,554,960		$	1,232,222
Interest income		25,943			82,687
Government subsidy		224,996			222,156

Income before provision for income taxes		1,805,899			1,537,065
Provision for income taxes	387,945				318,567

Net income		1,417,954			1,218,498

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

Weighted average shares outstanding, basic and diluted		66,520,871			63,020,871

Comprehensive Income:
Net Income	$	1,417,954		$	1,218,498
Foreign currency translation adjustment		(4,439,514	)		1,910,583

Comprehensive (loss) income	$	(3,021,560	)	$	3,129,081

	Three Months Ended, February 28,				Nine Months Ended, February 28,
	2018		2017		2018		2017
Income from operations	949,923			1,787,995		3,197,806		4,750,034
Interest income		59,292		103,903		211,538		361,197
Government subsidy		232,660		217,462		681,908		665,688
Income before provision for income taxes		1,241,875		2,109,360		4,091,252		5,776,919
Provision for income taxes	179,532			480,143		794,379		1,297,023
Net income		1,062,343		1,629,217		3,296,873		4,479,896
Earnings per common share, basic and diluted	$	0.02	$	0.03	$	0.05	$	0.07
Weighted average shares outstanding, basic and diluted		64,572,153		63,020,871		64,572,153		63,020,871
Comprehensive Income:
Net Income	$	1,062,343	$	1,629,217	$	3,296,873	$	4,479,896
Foreign currency translation adjustment		3,006,557		87,049		4,755,118		(2,231,954	)
Comprehensive income	$	4,068,900	$	1,716,266	$	8,051,991	$	2,247,942

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE ~~NINE~~THREE MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

	Common Stock		Additional Paid-in Capital		Retained Earnings			Statutory Reserve Fund		Other Comprehensive Income			Total
Balance, May 31, 2017	$	63,021	$	34,584,997	$	22,022,689		$	2,437,684	$	(3,601,403	)	$	55,506,988
Balance, May 31, 2018	$	66,521	$	41,581,497	$	26,462,203		$	2,595,662	$	252,008		$	70,957,891
Ordinary shares issue		3,500		6,996,500		-			-		-			7,000,000
Net income		-		-		1,417,954			-		-			1,417,954
Net income		-		-		3,296,873			-		-			3,296,873
Foreign currency translation adjustment		-		-		-			-		(4,439,514	)		(4,439,514	)
Appropriation to statutory reserve		-		-		(156,311	)		156,311		-			-
Balance, August 31, 2018	$	66,521	$	41,581,497	$	27,880,157		$	2,595,662	$	(4,187,506	)	$	67,936,331
Foreign currency translation adjustment		-		-		-			-		4,755,118			4,755,118
Balance, February 28, 2018 (Unaudited)	$	66,521	$	41,581,497	$	$25,163,251		$	2,593,995	$	1,153,715		$	70,558,979

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~THREE MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

	For Nine Months Ended February 28,
	For Three Months Ended August 31,
	2018			2017
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net income	$	31,~~296~~417,~~873~~954		$	41,~~479~~218,~~896~~498
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,~~880~~115,~~514~~533			~~992~~455,~~137~~497
Amortization for the land		9330,~~649~~899			9130,~~421~~509
(Increase) in deferred income tax assets		(~~529~~43,~~246~~775	)		(71312,~~382~~731	)
Changes in operating assets and liabilities:
Decrease in accounts receivable		21,~~840~~157,~~839~~182			31,~~025~~049,~~754~~991
(Increase) in inventory		(42,391	)		(90,848	)
Decrease in inventory		15,295			-
(Increase) in prepaid VAT		(79,023	)		(1,218,759	)
Decrease in prepaid VAT		382,332			150,636
(Increase) in prepaid expenses		(4369,~~413,591~~173	)		(~~213~~4,~~020~~164,190	)
Increase (decrease) in accounts payable and accrued liabilities		4,086,527			(8,196	)
(Decrease) increase in accounts payable and accrued liabilities		(926,286	)		345,580
Decrease (increase) in deferred revenue		(184,368	)		547,343
Increase in deferred revenue		877,484			814,572
(Decrease) in taxes payable		(143,976	)		(44,115	)
Increase (decrease) in taxes payable		3,076			(174,966	)
Net cash provided by operating activities		6,805,807			7,490,231
Net cash provided by (used in) operating activities		3,660,521			(586,604	)
Cash flows from investing activities:
Purchase of fixed assets		(6,001	)		(661,940	)
Cash paid for stock issuance costs		(141,975	)		-
Purchase of items of leasing equipment		(3,743,237	)		(6,797,044	)
Net cash (used in) investing activities		(3,891,213	)		(7,458,984	)
Cash flows from financing activities:
Cash received from stock issuance		7,000,000			-
Loan received from shareholder		30,400			20,000
Increase in security deposit payable		~~727,369~~-			710,~~067~~899
Payment on shareholder loans		(7,544,217	)		-
Net cash provided by financing activities		30,400			730,899
Net cash provided by financing activities		183,152			710,067
Effect of exchange rate changes on cash		(1,272,054	)		13,420
Effect of exchange rate changes on cash		347,778			(400,150	)
Net increase in cash		2,418,867			157,715
Cash, beginning of year		17,559,007			10,343,963
Cash, end of year	$	19,977,874		$	10,501,678

See accompanying notes to the consolidated financial statements.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~THREE MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

	For Nine Months Ended February 28,
			For Three Months Ended
		2018		2017
			August 31,
		(Unaudited)		(Unaudited)
			2018		2017
Net increase in cash			3,445,524		341,164
Supplemental disclosure of cash flow information
Cash, beginning			10,343,963		5,912,106
Income taxes paid		$	428,644	$	535,904
Cash, end		$	13,789,487	$	6,253,270
Land appreciation tax paid		$	1,500	$	1,481
Supplemental disclosure of non-cash activities
Property, equipment, equipment and construction in progress accrued		$	-	$	9,020,787
Payment of accrued liabilities by shareholder		$	30,400	$	20,000

Supplemental disclosure of cash flow information
Income taxes paid	$	1,467,848	$	1,412,520
Land appreciation tax paid	$	4,546	$	4,438
Supplemental disclosure of non-cash activities
Property, equipment, equipment construction in process transferred from prepayment	$	9,229,770	$	-
Property, equipment, equipment construction in process accrued	$	-	$	1,934,476
Payment of accrued liabilities by shareholder	$	62,365	$	89,000

See accompanying notes to the consolidated financial statements.

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 NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 1. ORGANIZATION

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

On November 27, 2012, the Company completed a reverse acquisition transaction through a share exchange with the stockholders of Inclusion Business Limited ("Inclusion"), whereby the Company acquired 100% of the outstanding shares of Inclusion in exchange for 7,895,000 shares of its common stock, representing 76.65% of the issued and outstanding shares of common stock. As a result of the reverse acquisition, Inclusion became the Company's wholly-owned subsidiary and the former Inclusion Stockholders became our controlling stockholders. The share exchange transaction was treated as a reverse acquisition, with Inclusion as the acquirer and the Company as the acquired party for accounting purposes.

In November, 2012, the Company filed a certificate of amendment to its articles of incorporation to change its name from "NYC Moda, Inc." to "China Xuefeng Environmental Engineering Inc." (the "Name Change") and to initiate a 4-for-1 forward stock split (the "Forward Split") of its outstanding shares of common stock. The Name Change and the Forward Split were effective in December, 2012. Upon the effectiveness of the Forward Split, the number of outstanding shares of the Company's common stock increased from 10,300,000 to 41,200,000 shares. In March, 2013, the Company sold 14,000,000 shares of common stock to 12 unrelated individuals in a private offering, generating $7,000,000 in net proceeds.

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

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

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

Exclusive Technical Service and Business Consulting Agreement: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, the WFOE provides technical support, consulting, training, marketing and operational consulting services to Jiangsu Xuefeng. In consideration for such services, Jiangsu Xuefeng has agreed to pay an annual service fee to the WFOE of 95% of Jiangsu Xuefeng's annual net income and an additional payment of approximately US$15,910 (RMB100,000) each month. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 1. ORGANIZATION (CONTINUED)

~~Exclusive~~Proxy ~~Technical Service and Business Consulting~~ Agreement: Pursuant to the ~~Exclusive~~Proxy ~~Technical Service and Business Consulting~~ Agreement, the ~~WFOE~~stockholders ~~provides~~of ~~technical~~Jiangsu ~~support,~~Xuefeng ~~consulting,~~agreed ~~training,~~to ~~marketing~~irrevocably ~~and~~entrust ~~operational~~the ~~consulting~~WFOE ~~services~~ to ~~Jiangsu~~designate ~~Xuefeng.~~a Inqualified ~~consideration~~person ~~for~~acceptable ~~such~~under ~~services,~~PRC ~~Jiangsu~~law ~~Xuefeng~~and ~~has~~foreign ~~agreed~~investment policies, to ~~pay~~oversee anall ~~annual~~of ~~service fee to~~ the ~~WFOE~~equity ofinterests ~~95%~~in of Jiangsu Xuefeng's ~~annual~~held ~~net~~by ~~income~~the ~~and~~stockholders ~~an additional payment~~ of ~~approximately~~Jiangsu ~~US$15,910 (RMB100,000) each month~~Xuefeng. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

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

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

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

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

On August 4, 2016, Baichuang Information Consulting Co., Ltd ("Baichuang Information") entered into an agreement with Mr. Li Yuan, the sole shareholder of Linyi County Xuefeng Renewable Resources Utilization Technology Co., Ltd ("Linyi Xuefeng"), to purchase his 100% ownership of Linyi Xuefeng. Mr. Li Yuan is the Chief Executive Officer and main shareholder of the Company. The purchase price was determined by the audited net assets of ~~the~~Linyi ~~Company~~Xuefeng as of May 31, 2016, initially with a payment of RMB10,000,000 ($1,500,000 US) in cash and the balance to be paid in common shares of China Xuefeng at 75% of the closing price on August 4, 2016. On October 7, 2016, a supplementary agreement was entered between both parties to finalize the purchase based upon the audited net asset value of $ 23,462,612 on May 31, 2016. The supplementary agreement eliminated the cash payment making the entire purchase with stock of the Company. The price utilized was $3 per share and 7,820,871 shares were issued to Mr. Li Yuan.

Linyi Xuefeng also signed a series of agreements with Jiangsu Liding Machinery Manufacturing Co., Ltd ("Jiangsu Liding") for the construction of the garbage recycling processing plant and production facilities purchase. The majority shareholder of the Company, Mr. Li Yuan, is also the shareholder of Jiangsu Liding (see note 6). In 2016, the total purchase amount $7,714,280 from Jiangsu Liding, which was fully delivered in December 2015, was included in the fixed assets of the accompanying consolidated balance sheet as of May 31, 2018, 2017 and 2016. In 2017, the total purchase amount $8,599,726 from Jiangsu Liding, and paid in advanced with $6,879,781 was included in prepaid expenses of the accompanying consolidated balance sheet as of May 31, 2017. The total purchase in 2017 was fully delivered in July, 2017 and included in the fixed assets of the accompanying consolidated balance sheet as of May 31, 2018.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 1. ORGANIZATION (CONTINUED)

Linyi Xuefeng ~~also~~was ~~signed~~officially aapproved ~~series~~and ofincorporated ~~agreements~~under ~~with~~the ~~Jiangsu~~laws ~~Liding~~of ~~Machinery~~the ~~Manufacturing~~People's ~~Co.,~~Republic ~~Ltd~~of China ("~~Jiangsu Liding~~PRC") ~~for~~in ~~the~~June ~~construction of the garbage recycling processing plant and production facilities purchase~~2013. ~~The shareholder of the Company,~~ Mr. Li Yuan, isLi ~~also~~was the ~~shareholder~~sole ofowner ~~Jiangsu~~since ~~Liding (see note 6)~~inception. InLinyi ~~2016,~~Xuefeng ~~the~~constructed ~~total~~a ~~purchase~~garbage ~~amount~~processing ~~$7,714,280~~plant ~~from~~which ~~Jiangsu~~commenced ~~Liding~~operations ~~was fully delivered~~ in ~~December 2015 and included in the fixed assets of the accompanying consolidated balance sheet as of~~ February ~~28,~~ 2018 ~~and May 31, 2017~~. InPreviously ~~2017,~~Linyi ~~and~~Xufeng ~~the~~received ~~total~~non-operating ~~purchase amount $8~~revenue,~~599,726~~ ~~from~~which ~~Jiangsu Liding, and paid in advanced with $6,879,781~~ was ~~included~~a insubsidy ~~prepaid~~received ~~expenses~~from ~~with of~~ the ~~accompanying~~government ~~consolidated~~for ~~balance sheet as of May 31, 2017. The total purchase in 2017 was fully delivered in July, 2017 and included in~~ the ~~fixed~~city ~~assets~~pollution ofgarbage ~~the~~processing ~~accompanying~~plant ~~consolidated balance sheet as of February 28, 2018~~construction.

~~Linyi~~On ~~Xuefeng~~October ~~was~~30, ~~officially~~2017, ~~approved~~the ~~and~~Company ~~incorporated~~completed ~~under~~a closing of private placement offering (the ~~laws~~"Offering") of shares of the ~~People~~Company's ~~Republic~~common ofstock, ~~China~~par value $0.001 per share (the "~~PRC~~Shares"), inat ~~June~~a ~~2013~~purchase price of RMB 13.275, Mror US$2.00 ~~Yuan~~per Lishare, ~~was~~based on the ~~sole~~currency ~~owner~~exchange ~~since~~rate ~~inception~~of 6.6375 ~~Linyi~~on ~~Xuefeng~~October is27, ~~constructing~~2017, afor ~~garbage~~an ~~processing~~aggregate ~~plant~~purchase ~~which~~price ~~has~~of ~~commenced~~RMB ~~operations~~46,462,500, ~~and~~or ~~drive~~approximately ~~revenue~~$7,000,000. inUpon ~~February~~the ~~2018.~~closing, ~~The~~the ~~non-operating~~Company ~~revenue~~issued ~~was~~ a ~~subsidy~~total ~~received~~of ~~from~~3,500,000 ~~the~~shares ~~government~~of ~~for~~its ~~the~~common ~~city~~stock ~~pollution~~to ~~garbage~~the ~~processing~~subscribers ~~plant~~in ~~construction~~the Offering.

On October 30, 2017, China Xuefeng Environmental Engineering, Inc. (the "Company") completed a closing of private placement offering (the "Offering") of shares of the Company's common stock, par value $0.001 per share (the "Shares"), at a purchase price of RMB 13.275, or US$2.00 per share, based on the currency exchange rate of 6.6375 on October 27, 2017, for an aggregate purchase price of RMB 46,462,500, or approximately $7,000,000. Upon the closing, the Company issued a total of 3,500,000 shares of its common stock to the subscribers in the Offering.

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 NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017

(UNAUDITED, IN U.S. $)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRESENTATION

The unaudited interim consolidated financial statements of the Company as of ~~February~~August 2831, 2018 and for the three ~~and nine~~ months ended ~~February~~August 2831, 2018 and 2017, 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 nine~~ months ended ~~February~~August 2831, 2018 are not necessarily indicative of the results to be expected for future three months or for the year ending May 31, ~~2018~~2019.

The acquisition of Linyi Xuefeng was treated as a combination of entities under common control as Mr. Li Yuan was the chief executive officer, a major shareholder and had voting control of both companies. An acquisition of an entity under common control is treated similar to a "pooling of interest." Accordingly, the financial statements of the Company have been restated and include the historical balances of Linyi Xuefeng as if the acquisition occurred on the first day of the earliest period presented.10

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

VARIABLE INTEREST ENTITY

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

~~ACQUISITION~~BASIS OF ~~LINYI~~ACCOUNTING ~~XUEFENG~~AND PRESENTATION (CONTINUED)

The ~~following~~acquisition of Linyi Xuefeng was treated as a combination of entities under common control as Mr. Li Yuan was the chief executive officer, a major shareholder and had voting control of both companies. An acquisition of an entity under common control is treated similar to a "pooling of interest." Accordingly, the financial ~~statement~~statements ~~amounts~~of the Company have been restated and include the historical balances of Linyi Xuefeng ~~have~~as ~~been~~if ~~included~~the inacquisition occurred on the ~~accompanying~~first ~~consolidated~~day ~~financial~~of ~~statements~~the earliest period presented.

	February 28,		May 31,
	2018		2017
	(Unaudited)
TOTAL ASSETS	$	44,196,781	$	40,133,685
TOTAL LIABILITIES	$	19,613,463	$	16,877,408

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

	For Three Months Ended February 28,					For Nine Months Ended February 28,
	2018			2017		2018			2017
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
TOTAL OPERATING EXPENSES	$	904,210		$	93,833	$	1,591,218		$	286,880
TOTAL OTHER INCOME	$	233,891		$	217,978	$	686,550		$	667,040
NET (LOSS) INCOME	$	(370,827	)	$	147,056	$	(434,277	)	$	451,542

USE OF ESTIMATES

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017

(UNAUDITED, IN U.S. $)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION

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

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

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

	February 28, 2018	May 31, 2017	February 28, 2017
		August 31, 2018		May 31, 2018		August 31, 2017
	(Unaudited)	(Unaudited)	(Unaudited)
Balance sheet items, except for stockholders' equity, as of periods end			0.1464		0.1560		0.1517
Balance sheet items, except for stockholders' equity, as of periods end	0.1580	0.1468	N/A
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows			0.1500		0.1532		0.1481
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows for three months	0.1551	N/A	0.1450
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows for nine months	0.1515	N/A	0.1479

For the three months ended February 28, 2018 and 2017, foreign currency translation adjustments of $3,006,558 and $87,049, respectively, for the nine months ended February 28, 2018 and 2017, foreign currency translation adjustments of $4,755,118 and $(2,231,954), respectively, have been reported as other comprehensive income (loss). Other comprehensive income (loss) 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.11

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.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

~~REVENUE~~FOREIGN ~~RECOGNITION~~CURRENCY TRANSLATION (CONTINUED)

For the three months ended August 31, 2018 and 2017, foreign currency translation adjustments of $(4,439,514) and $1,910,583, respectively, have been reported as other comprehensive (loss) income. Other comprehensive (loss) 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.

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.

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

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

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

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

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

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

First, there is no guarantee that the licensee of our patent will have sufficient capital resources to perform the licensing agreement and pay the licensing fee on time or at all. The length of the agreement is up to five (5) years and therefore the Company may not able to collect fees for the entire agreement. Second, there is a potential credit risk for which the licensee may unilaterally terminate the agreement and thus affect the payout of the licensing agreement. Third, an accident involving the equipment caused by employees of the licensee may have material adverse effect on the operation of the licensee. This unforeseeable risk could impact the licensee's ability to perform throughout the length of the agreement. Lastly, unforeseeable natural disasters could have a material adverse effect on the production and operation of the Company's licensees. If their operation is impacted by events such as fire, flood or earthquakes, they may need to cease their operation and therefore may be unable to perform their obligations under the agreement.12

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Linyi Xuefeng's revenues are primarily derived from selling organic manure, hollow brick, wood plastic tray and ferrous metal. It's income also relates to government for city pollution garbage processing system constructions. Government subsidies are recognized as earned when grant expenses are incurred up to the maximum amount allowed for each grant award.

Sales-Type Leases

The Company entered into three sales-type lease arrangements during the three months ended August 31, 2015, with two customers for financing of their purchase of garbage processing equipment. The arrangements with the customers have a fixed term of three years. Revenue from the sale of the equipment is recognized at the inception of the lease. The payments have been present valued with an annual interest rate of 5.25%. In connection with these arrangements, the Company recognized no revenue for the three ~~and nine~~ months ended ~~February~~August 2831, 2018 and 2017. Future minimum collections for the year ending May 31 are as follows:

Year Ending
May 31,	Amount	~~Amount~~
2018		$	1,164,719
2019		$	366,025
2019			1,575,047
		$	366,025
		$	2,739,766

Operating Leases

The Company entered into ~~seven~~multiplelease ~~operating lease~~ arrangements with ~~six~~ customers for garbage processing equipment ~~on October 20, 2017, March 31, 2017, December 28, 2016, April 25, 2016, December 28, 2015 and November 6, 2015, respectively~~. The ~~arrangement~~arrangements with ~~the customer has~~ a fixed term of five years with ~~quarterly~~ payments ofdue ~~$151,535~~quarterly ~~(RMB1,000,000),~~with ~~$181,842~~deposit ~~(RMB1,200,000),~~payments ~~$181,842 (RMB1,200,000),~~equivalent ~~$181,842~~to ~~(RMB1,200,000),~~one ~~$363,684~~year ~~(RMB2,400,000),~~leasing ~~and $151,535 (RMB1,000,000) respectively~~fee. Revenue from the leasing of the equipment is recognized monthly. In addition, the lease required a security deposit on $631,936 (RMB4,000,000), $758,323 (RMB4,800,000), $758,323 (RMB4,800,000), $758,323 (RMB4,800,000), $1,516,646 (RMB9,600,000) and $631,936 (RMB4,000,000), respectively. At the end of each of the five ~~years~~year lease ~~term~~terms, it will be determined whether the lease will be extended, leased to a new customer or returned to the Company. Future minimum payments for the years ending May 31 are as follows:

Year Ending
May 31,	Amount
2018	$	1,212,281
2019		4,849,124
2020		4,849,124
2021		3,828,787
2022		1,636,579
Thereafter		252,559
	$	16,628,454

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Operating Leases (Continued)

Year Ending
May 31,	Amount

2019	$	3,599,936
2020		4,799,915
2021		3,789,933
2022		1,619,971
2023		249,996

	$	14,059,751

Multiple-Element Arrangements

In October 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-13, "Multiple Deliverable Revenue Arrangements." ASU No. 2009-13 amended the guidance on arrangements with multiple deliverables under ASC 605-25, "Revenue Recognition—Multiple-Element Arrangements." To qualify as a separate unit of accounting under ASC 605-25, the delivered item must have value to the customer on a standalone basis. The significant deliverables under the Company's multiple-element arrangements are improvement and upgrade services and patent licensing.

Improvement and Upgrade Service

The improvement and upgrade service is a one-time service. By the end of improvement and upgrading services, there is persuasive evidence ofthat an arrangement exists since ~~company~~the Company has a signed contract with a customer; delivery has occurred and a customer has completed inspection and accepted the improvement and upgrading services then delivered; the fee is fixed and become due within 30 days upon the signing of the contract; and collectability is probable. An inspection is conducted by the customer according to industry standards within three days of the completion of the improvement and upgrade. An acceptance form is provided by the customer if the inspection is satisfactory. Performance testing is conducted on the upgraded equipment within one month. A final evaluation report is provided within five days of the completion of the performance testing. The fee for improvement and upgrade services is fixed and becomes due within 30 days, upon the signing of the contract. The fees for the improvement and upgrading services are not subject to refund, forfeiture or any other concession if patent licensing is not completed.

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

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

1614

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Multiple-Element Arrangements (Continued)

Patent Licensing

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

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

Multiple Elements

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

The Company also determined that the patent licensing has standalone value because the patent can be licensed separately. The Company uses the vendor-specific objective evidence to determine the price for patent licensing when sold in multiple-element arrangements. Although not yet being licensed separately, the price established by the management has the relevant authority. The Company establishes the price of upgrading and improvement service and the price of patent licensing is determined based on the following method:

1715

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Multiple-Element Arrangements (Continued)

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

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

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Level 1 Inputs –	Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 Inputs –	Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3 Inputs –	Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. As of August 31, 2018 and May 31, 2018, none of the Company's assets and liabilities were required to be reported at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash, accounts receivable, prepaid VAT, accounts payable and accrued expenses, and deferred revenue approximate their fair values due to the short term nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.

18 16

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. As of February 28, 2018 and May 31, 2017, none of the Company's assets and liabilities were required to be reported at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash, accounts receivable, prepaid VAT, accounts payable and accrued expenses, and deferred revenue approximate their fair values due to the short term nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.

CASH AND CASH EQUIVALENTS

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

FIXED ASSETS AND LEASE EQUIPMENT

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

Computers and equipment	3 years
Motor vehicles	4 years
Furniture and fixtures	5 years
Lease equipment	15 years
Machinery	10 years
Building and improvement	20 years
Building and improvements	20 years

IMPAIRMENT OF LONG-LIVED ASSETS

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

19DEFERRED REVENUE

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED REVENUE

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

INCOME TAXES

The Company accounts for income taxes in accordance with FASB ASC 740, "Income Taxes" ("ASC 740"), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. During the year ended May 31, 2015, as permitted by the PRC tax law, the Company began recognizing revenue from patent licensing fees for income tax purposes, based on when it is earned rather than when it is collected, consistent with the financial statement recognition. As a result, there are no differences between the basis of assets and liabilities for financial statements and income tax purposes for deferred revenue and, as a result, deferred income taxes are no longer required to be recognized. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of ~~February~~August 2831, 2018 and May 31, ~~2017~~2018, the Company does not have a liability for any unrecognized tax benefits.

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

United States

~~The~~On ~~Company~~December is22, ~~subject~~2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law making significant changes to ~~United~~the ~~States~~Internal ~~tax~~Revenue atCode. ~~graduated~~Changes ~~rates~~include, but are not limited to, a U.S. corporate tax rate decrease from 1535% to 3421% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. ~~provision~~118 ~~for~~("SAB ~~income~~118") ~~taxes~~was issued to address the application of US GAAP in situations when a registrant does not have the ~~United~~necessary ~~States~~information ~~has~~available, ~~been~~prepared, ~~made~~or asanalyzed (including computations) in reasonable detail to complete the ~~Company~~accounting ~~had~~for nocertain Uincome tax effects of the Act.S. ~~taxable~~The ~~income~~Company ~~for~~hasn't determined the ~~three~~reasonable ~~and~~estimate ~~nine~~in ~~months~~connection ~~ended~~with ~~February~~the ~~28,~~transition ~~2018~~tax ~~and~~on the mandatory deemed repatriation of foreign earnings at December 31, 2017. Additional work is necessary to do a more detailed analysis of the Act as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in fiscal 2019 when the analysis is complete.

~~PRC~~18

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES (CONTINUED)

PRC

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

BVI

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

Hong Kong

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

ADVERTISING COSTS

Advertising costs are charged to operations when incurred. For the three months ended ~~February~~August 2831, 2018 and 2017, advertising expense was $~~139~~134,~~596~~998 and $~~130~~133,~~933~~294 respectively. ~~For the nine months ended February 28, 2018 and 2017, advertising expense was $409,145 and $355,033, respectively .~~

STATUTORY RESERVE FUND

Pursuant to corporate law in the PRC, the Company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the Company's registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years' losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after such use is not less than 25% of the registered capital. For the ~~nine~~three months ended ~~February~~August 2831, 2018 and 2017, a statutory reserve of $~~156,311~~0 and $~~401~~109,~~191~~670, respectively, was required to be allocated toby the Company.

VALUE ADDED TAX ("VAT")

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

2119

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS

In ~~November~~July ~~2016~~2017, the ~~Financial~~FASB ~~Accounting~~issued ~~Standards~~ASU ~~Board~~2017-11, Earnings Per Share (~~"FASB"~~Topic 260), ~~issued~~Distinguishing ~~Accounting~~Liabilities ~~Standards~~from ~~Update~~Equity (~~"ASU"~~Topic 480), NoDerivatives and Hedging (Topic 815). ~~2016~~The amendments in Part I of this Update change the classification analysis of certain equity-18linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, ~~"Statement~~a ofdown ~~Cash~~round ~~Flows:~~feature ~~Restricted~~no ~~Cash"~~longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. The amendments ~~address~~also ~~diversity~~clarify inexisting ~~practice~~disclosure ~~that~~requirements ~~exists~~for equity-classified instruments. The amendments in Part II of this Update recharacterize the ~~classification~~indefinite ~~and~~deferral ~~presentation~~of certain provisions of ~~changes~~Topic in480 ~~restricted~~that ~~cash~~now onare presented as pending content in the ~~statement~~Codification, ofto ~~cash~~a ~~flows~~scope exception. ~~The~~Those ~~amendment~~amendments isdo ~~effective~~not ~~for~~have an accounting effect. For public ~~companies~~business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2017~~2018. Early adoption is permitted for all entities, including adoption in an interim ~~periods~~period. ~~within~~If ~~those~~an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal ~~years~~year that includes that interim period. The Company ~~does~~believes ~~not~~that ~~anticipate~~the ~~that~~adoption of this ~~adoption~~ASU will not have a ~~significant~~material impact on its financial ~~position, results of operations, or cash flows~~statements.

In ~~August~~September ~~2016~~2017, the FASB issued ASU ~~2016~~2017-1513, ~~Statement~~Revenue offrom ~~Cash~~Contracts ~~Flows~~with Customers (Topic ~~230~~606): ~~Classification~~and Leases (Topic 842). The main objective of ~~Certain~~this ~~Cash~~pronouncement ~~Receipts~~is ~~and~~to ~~Cash~~clarify ~~Payments.~~the ~~This~~effective ~~ASU~~date ~~addresses~~of the ~~classification~~adoption of ASC Topic 606 and ASC Topic 842 and the definition of public business entity as stipulated in ASU 2014-09 and ASU 2016-02. ASU 2014-09 provides that a public business entity and certain ~~specific~~other ~~cash~~specified ~~flow~~entities ~~issues~~adopt ~~including~~ASC ~~debt~~Topic ~~prepayment~~606 orfor ~~extinguishment~~annual ~~costs~~reporting periods beginning after December 15, ~~settlement~~2017, ofincluding ~~certain~~interim ~~debt~~reporting ~~instruments~~periods within that reporting period. All other entities are required to adopt ASC Topic 606 for annual reporting periods beginning after December 15, ~~contingent~~2018, ~~consideration~~and ~~payments~~interim ~~made~~reporting periods within annual reporting periods beginning after December 15, 2019. ASU 2016-12 requires that "a public business ~~combination,~~entity ~~proceeds~~and ~~from~~certain ~~the~~other ~~settlement~~specified ofentities ~~certain~~adopt ~~insurance~~ASC ~~claims~~Topic 842 for fiscal years beginning after December 15, 2018, and ~~distributions~~interim ~~received~~periods ~~from~~within ~~equity~~those ~~method~~fiscal ~~investees~~years. ~~This~~All ~~ASU~~other isentities ~~effective~~are required to adopt ASC Topic 842 for fiscal years beginning after December 15, ~~2017~~2019, and interim periods within ~~those~~ fiscal years beginning after December 15, ~~with~~2020". ~~early~~ASU ~~adoption~~2017-13 ~~permitted~~clarifies that the SEC would not object to certain public business entities electing to use the non-public business entities effective dates for applying ASC 606 and ASC 842. AnASU ~~entity~~2017-13, however, limits such election to certain public business entities that ~~elects~~"otherwise ~~early~~would ~~adoption~~not ~~must~~meet ~~adopt~~the ~~all~~definition of ~~the~~a ~~amendments~~public business entity except for a requirement to include or inclusion of its financial statements or financial information in ~~the~~another ~~same~~entity's ~~period~~filings with the SEC". The Company isexpects ~~currently~~that ~~evaluating~~ the ~~effect~~adoption of this ASU will not have ona ~~its~~material ~~consolidated~~impact ~~statement~~on ofits ~~cash~~financial ~~flows~~statements.

In ~~June~~February ~~2016~~2018, the FASB issued ASU ~~No. 2016~~2018-1302, ~~Financial~~Income ~~Instruments~~Statement—~~Credit~~Reporting ~~Losses~~Comprehensive Income (Topic ~~326~~220):. ~~Measurement~~The ofamendments ~~Credit~~in ~~Losses~~this onupdate ~~Financial~~allow ~~Instruments~~a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ~~The~~Consequently, ~~new~~the ~~standard~~amendments ~~requires~~eliminate ~~financial~~the ~~assets~~stranded ~~measured~~tax ateffects ~~amortized~~resulting ~~cost~~from bethe ~~presented~~Tax atCuts and Jobs Act and will improve the ~~net~~usefulness ~~amount~~of ~~expected~~information reported to befinancial ~~collected~~statement users. However, ~~through~~because anthe ~~allowance~~amendments ~~for~~only ~~credit~~relate ~~losses~~to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that isrequires ~~deducted~~that the effect of a change in tax laws or rates be included in income from ~~the~~continuing ~~amortized~~operations ~~cost~~is ~~basis~~not affected. The ~~standard~~amendments ~~will~~in bethis update also require certain disclosures about stranded tax effects. The guidance is effective for ~~the~~fiscal ~~Company~~years beginning ~~January~~after 1,December ~~2020~~15, 2018 with early ~~application~~adoption permitted, including interim periods within those years. The Company isexpects ~~evaluating~~that the ~~impact~~adoption of ~~adopting~~ this ~~new~~ASU ~~accounting~~will ~~guidance~~not have a material impact on its ~~consolidated~~ financial statements.

In May, 2016, the FASB issued ASU No. 2016-10, Revenue with Contracts with Customers: Narrow-scope Improvements and Practical Expedients, which is an amendment to ASU No. 2014-09 that clarifies the objective of the collectability criterion, to allow entities to exclude amounts collected from customers from all sales taxes from the transaction price, to specify the measurement date for noncash consideration is contract inception, variable consideration guidance applies only tovariability resulting from reasons other than the form of the consideration, and clarification on contract modifications at transition. The implementation guidelines follow ASU No. 2014-09.20

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

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification ("ASC") 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects that the adoption of this ASU will not have a material impact on its financial statements.

The Company believes that other recent accounting pronouncement updates will not have a material effect on the Company's consolidated financial statements.

NOTE 4. FIXED ASSETS

Fixed assets are summarized as follows:

	February 28, 2018			May 31, 2017
	August 31, 2018			May 31, 2018
	(Unaudited)
Computers and equipment	$	9185,~~949~~195		$	7990,~~601~~789
Vehicles		9184,~~511~~790			8590,~~007~~356
Production facilities		1817,~~567~~203,~~117~~354			818,~~308~~332,~~691~~771
Furniture and fixtures		~~121~~112,~~779~~834			~~112~~120,~~548~~242
Building and improvement		1615,~~667~~443,~~312~~090			1516,~~482~~456,~~441~~945
		35,539,668			24,068,288
		32,929,263			35,091,103
Less: accumulated depreciation		(~~725~~1,~~525~~882,074	)		(~~207~~1,~~976~~361,378	)
	$	3431,~~814~~047,~~143~~189		$	2333,~~860~~729,~~312~~725

For the three months ended ~~February~~August 2831, 2018 and 2017, depreciation expense was $~~427~~619,~~445~~506 and $2426,~~514 respectively.~~706 ~~For the nine months ended February 28, 2018 and 2017, depreciation expense was $481,157 and $74,884~~ respectively.

Building and improvements and production facilities include approximately $3433 million relating to construction of the garbage recycling processing plant and production facilities purchase (see note 1).

~~NOTE 5. LEASE EQUIPMENT~~21

	February 28, 2018			May 31, 2017
	(Unaudited)
Leasing equipment	$	31,346,275			$	25,492,775
Less: accumulated depreciation		(3,308,836	)			(1,718,416	)
	$	28,037,439			$	23,774,359

For the three months ended February 28, 2018 and 2017, depreciation expense was $511,698 and $349,134 respectively. For the nine months ended February 28, 2018 and 2017, depreciation expense was $1,399,357 and $917,253 respectively.

Before leasing the equipment to their client, the Company will upgrade the equipment to meet the client's requirement. The Company recorded the equipment as equipment construction in process before it finishes the upgrading process. As of February 28, 2018, no equipment construction in process was included in lease equipment.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 5. LEASE EQUIPMENT

Lease equipment is summarized as follows:

	August 31, 2018			May 31, 2018
	(Unaudited)

Leasing equipment	$	29,043,876		$	30,950,637
Less: accumulated depreciation		(4,033,930	)		(3,782,918	)

	$	25,009,946		$	27,167,719

For the three months ended August 31, 2018 and 2017, depreciation expense was $496,027 and $428,791 respectively.

Before leasing the equipment to their client, the Company will upgrade the equipment to meet the client's requirement. The Company records the equipment as equipment construction in process before it finishes the upgrading process. As of August 31, 2018, no equipment construction in process was included in lease equipment.

NOTE 6. INCOME TAXES

The Company is required to file income tax returns in both the United States and the PRC. Its operations in the United States have been insignificant and income taxes have not been accrued. In the PRC, the Company files tax returns for Jiangsu Xuefeng.

The provision for ~~(benefit from)~~ income taxes consists of the following for the three ~~and nine~~ months ended ~~February~~August 2831, 2018 and 2017:

For the Three Months Ended February 28,

For the nine months ended February 28,

For the Three Months Ended August 31,

2018

2017

~~2018~~

~~2017~~

(Unaudited)

~~(Unaudited)~~

Current

~~380~~374,~~695~~836

~~503~~411,~~057~~679

~~1,166,441~~

~~1,368,405~~

Deferred

~~(201~~13,~~163~~109

)

(2293,~~914~~112

)

~~(372,062~~

)

~~(71,382~~

)

Total

~~179~~387,~~532~~945

~~480~~318,~~143~~567

~~794,379~~

~~1,297,023~~

As of ~~February~~August 2831, 2018, the Company had unused operating loss carry-forwards of approximately $3,~~118~~263,~~480~~628 expiring in various years through ~~2022~~2023.

~~The expected tax rate for income in the PRC is 25%. The following table reconciles the effective income tax rates with the statutory rates for the nine months ended February 28:~~22

	2018			2017
Statutory rate		25	%		25	%
Permanent difference		(1	%)		-
Government subsidy		(5	%)		(3	%)
Effective income tax rate		19	%		22	%

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

The Company is required to file income tax returns in both the PRC and the United States. PRC tax filings for the tax year ended December 31, 2017 was examined by the PRC tax authorities in May 2018. PRC tax filings for the tax year ended December 31, 2016 were examined by PRC tax authorities in May 2017. The tax filings were accepted and no adjustments were proposed by the PRC tax authorities.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 6. INCOME TAXES (CONTINUED)

~~During~~The ~~the~~expected ~~year ended May 31, 2017, the Company filed its U.S. federal income~~ tax ~~returns,~~rate ~~including, without limitation, information returns on Internal Revenue Service ("IRS") Form 5471, "Information Return of U.S. Persons with Respect to Certain Foreign Corporations"~~ for ~~the fiscal years ended May 31, 2017, May 31, 2016, and May 31, 2015, which is a short year~~ income ~~tax return required to be filed as a result of the change~~ in ~~fiscal year. and~~ the ~~information~~PRC ~~reports~~is ~~for the years ended December 31, 2016, 2015 and 2014 concerning its interest in foreign bank accounts on form TDF 90-22~~25%.1, The ~~"Report~~following oftable ~~Foreign~~reconciles ~~Bank and Financial Accounts" ("FBAR"). Currently,~~ the ~~2015,~~effective ~~2016~~income ~~and 2017~~ tax ~~years~~rates ~~are~~with ~~open and subject to examination by~~ the ~~taxing~~statutory ~~authorities. Management~~rates isfor of the ~~opinion~~three ~~that~~months ~~penalties,~~ended ifAugust ~~any, that may be assessed would not be material to the consolidated financial statements.~~31:

In addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it has any U.S. Federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through May 31, 2017. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. Federal income taxes, interest and penalties. The tax years ended May 31, 2017, 2016 and 2015 remain open to examination by the IRS.

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

The Company is required to file income tax returns in both the PRC and the United States. PRC tax filings for the tax year ended December 31, 2017 was examined by the PRC tax authorities in May 2018. The tax filings were accepted and no adjustments were proposed by the PRC tax authorities.

In addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it has any U.S. Federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through May 31, 2018. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. Federal income taxes, interest and penalties. The tax years ended May 31, 2017, 2016 and 2015 remain open to examination by the IRS.

NOTE 7. RELATED PARTY TRANSACTIONS

OnThe ~~August 5, 2012, the~~ Company ~~entered~~is ~~into~~currently anleasing ~~agreement to lease~~ the patent rights on garbage recycling processing technology from Li Yuan, one of the Company's stockholders~~. Under~~ ~~the~~under ~~current~~an ~~terms,~~agreement ~~the~~expiring Aug 2022. The Company is required to pay a fee of $12,~~123~~000 (RMB80,000) each month ~~for~~during ~~five years from September 2012 to August 2017. The Company has renewed~~ the agreement ~~to pay the same fee each month for five years from September 2017 to August 2022~~term. The related prepaid patent leasing fees of $~~126~~46,~~387~~842 and $8287,~~182~~354 are included in prepaid expenses on the consolidated balance sheets as of ~~February~~August 2831, 2018 and May 31, ~~2017~~2018, respectively.

The remaining payments for the patent rights are as follows:

Year Ending
May 31,	Amount
2018		37,916
2019	$	105,394
2019		151,665
2020		140,525
2020		151,665
2021		140,525
2021		151,665
2022		140,525
2022		151,665
2023		35,131
Thereafter		37,916
Total	$	562,100
Total	$	682,492

2523

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)

The Company obtained a demand loan from Li Yuan, a stockholder which is non-interest bearing. The total loan of approximately $~~645~~757,~~964~~145 represents $~~566~~678,~~964~~145 of expenses paid by the stockholder and payments of approximately $79,000 representing the registered capital and operating expenses of Baichuang Information Consulting (Shenzhen) Co., Ltd. The balance is reflected as loan from stockholder Asas of ~~February~~August ~~28, 2018 and May~~ 31, ~~2017~~2018.

On June 25, 2013, Linyi Xuefeng and the shareholder, Mr. Li Yuan, entered into a loan agreement pursuant to which Mr. Li Yuan provides a loan facility to the Linyi Xuefeng, which are non-interest bearing ~~and~~with ~~expiring~~the ~~on June 30, 2017. The~~ maximum amount of the loan is RMB200,000,000 ($29,350,600). Any borrowings in excess of this amount may be negotiated between the parties. ~~As of February 28, 2018, the loans outstanding was RMB115,096,000 (approximately $17,403,000).~~ On December 17, 2015, a resolution of the board was signed by Mr. Li Yuan, who is the sole shareholder of Linyi Xuefeng, surrendered another loan to the Linyi Xuefeng of RMB140,000,000 (approximately $20,545,00) and treated as a capital contribution to the Linyi Xuefeng. The loans outstanding were $9,528,873 and $10,154,453 as of August 31, 2018 and May 31, 2018, respectively.

Linyi Xuefeng also signed a series of agreements with Jiangsu Liding Machinery Manufacturing Co., Ltd ("Jiangsu Liding") for the construction of the garbage recycling processing plant and production facilities purchase. The shareholder of the Company, Mr. Li Yuan, is also the shareholder of Jiangsu Liding. Total purchase amount $7,714,280 from Jiangsu Liding was fully delivered in December 2015, and included in the fixed assets of the accompanying consolidated balance sheet as of May 31, 2017 and 2016. In 2017, and the total purchase amount $8,599,726 from Jiangsu Liding, and advanced payment of $6,879,781 was included in prepaid expenses with of the accompanying consolidated balance sheet as of May 31, 2017. In 2018, and the total purchase in 2017 was fully delivered in July, 2017 and included in the fixed assets of the accompanying consolidated balance sheet as of February 28, 2018.

NOTE 8. LAND USE RIGHT

On September 6, 2013, the Company signed with Linyi Yanjiazhuang Beizhi Village government to obtain a land use right 66,667 square meters of land at total $5,870,120 (RMB40,000,000). In addition, the Company was required to subject a deed tax of $176,104 (RMB1,200,000 ). The purchase of the land was approved by local government on September 9, 2013. The Company fully paid the deed tax of $176,104 when the purchase agreement was signed. The Company paid $3,668,825 (RMB25,000,000) on September 25, 2013 and $2,201,295 (RMB15,000,000) on November 12, 2013 to local government for the land purchase. The land use right started on September 9, 2013 and ends on September 8, 2063.

The amortization for the land use right for the three months ended ~~February~~August ~~28, 2018 and 2017 was $~~31,~~952~~ ~~and $29,865 respectively. The amortization for the land use right for the nine months ended February 28,~~ 2018 and 2017 was $9330,~~649~~ 899 and $9130,~~421~~509 respectively.

NOTE 9. SECURITY DEPOSIT PAYABLE

The company leased out highly efficient waste disposal equipment to customers and received a one year leasing fee as a deposit. The security deposit payable was $54,~~055~~684,~~488~~160 and $34,~~404~~991,~~670,~~ 680 as of ~~February~~August 2831, 2018 and May 31, ~~2017~~2018, respectively.

26NOTE 10. LEASES

The Company leases office space from an unrelated third party, which commenced on April 1, 2016 and expires on March 31, 2019. The lease requires the Company to prepay the semi-annual rental of $3,600 (RMB24,000). The lease provides for renewal options.

The Company also leases office space for Linyi Xuefeng under a three-year operating lease from an unrelated third party, which expired on May 31, 2016 and the lease was renewed until May 31, 2019. The lease required the Company to prepay the semi-annual rental.

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 10. LEASES (CONTINUED)

~~The~~Rent ~~Company~~expense ~~entered into a new lease agreement with an unrelated third party~~ for ~~new~~the ~~office~~three ~~space,~~months ~~which~~ended ~~commenced~~August ~~on April 1~~31, ~~2016~~2018 and ~~expires~~2017 onwas ~~March 31~~$3,690, ~~2019. The~~and ~~lease requires the Company to prepay the semi-annual rental of~~ $3,~~637 (RMB24~~643,~~000).~~ ~~The lease provides for renewal options~~respectively.

The Company leases another office space for Linyi Xuefeng under a three-year operating lease from an unrelated third party, which expired on May 31, 2016. The lease required the Company to prepay the semi-annual rental. On May 26, 2016, the Company renewed the lease for another three years which ends on May 31, 2019.

Rent expense For the three months ended February 28, 2018 and 2017 was $3,816 and $1,740 respectively. Rent expense For the nine months ended February 28, 2018 and 2017 was $11,183 and $5,326 respectively.

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

Year Ending
May 31,	Amount
2018		$	7,456
2019		$	10,140
2019			14,062
		$	10,140
		$	21,518

AsNOTE ~~disclosed in Note 6, the 2014, 2015 and 2016 tax years are open and subject to examination by the taxing authorities~~11. CONTINGENCIES On July 17, 2017, the Company received a notice from the IRS with the amount due totaled of $30,208 in relates to the late filing of the Company's tax returns. The Company is currently in the progress of communicating with the IRS to appeal to the amount. As of the date of the report, the result is pending and the management is unable to assess the outcome of the communication.

On July 17, 2017, the Company received a notice from the Internal Revenue Service (the "IRS") with the amount due of $30,208 relatives to the late filing of the Company's tax returns. The Company is currently communicating with the IRS to appeal to the amount. As of the date of the report, the result is pending and the management is unable to assess the outcome of the communication. As disclosed in Note 6, the 2015, 2016 and 2017 tax years are open and subject to examination by the taxing authorities.

The Company hasn't determined the reasonable estimate in connection with the transition tax on the mandatory deemed repatriation of foreign earnings at December 31, 2017. Additional work is necessary to do a more detailed analysis of the Act as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in fiscal 2018 when the analysis is complete.

Yuan Li, the Chief Executive Officer of the Company, has been named in a lawsuit by an unrelated third party (the "Plaintiff") regarding a disputed loan plus interest due to the Plaintiff. The filing also alleges that the Company's two operating entities, Jiangsu Xuefeng and Linyi Xuefeng, are guarantors of the loan. The district court in China originally decided in favor of the plaintiff but the decision was subsequently overturned by the High Court of Jiangsu Province. The court's decision is currently under appeal. The Company has denied that it is a guarantor of the loan and believes that it does not have any liability to the Plaintiff.

NOTE 12. VULNERABILITY DUE TO OPERATIONS IN THE PRC

The Company's operations may be adversely affected by significant political, economic and social uncertainties in the PRC. The different cultures, business preferences, corruption, diverse uncertain government regulations, tax systems and currency regulations are risks impacting the Company's current operations. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC's political, economic and social conditions. There is also no guarantee that the PRC government's pursuit of economic reforms will be consistent, effective or continue.

2725

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~FEBRUARY~~AUGUST 2831, 2018 AND 2017

(~~UNAUDITED,~~ IN U.S. $) (UNAUDITED)

NOTE 13. CONCENTRATION OF CREDIT AND BUSINESS RISK

Cash and cash equivalents

Substantially all of the Company's bank accounts are in banks located in the PRC and are ~~not~~ covered by protection similar to that provided by the Federal Deposit Insurance Corporation ("FDIC") on funds held in United States banks. The Insurance covers amount upto RMB500,000 (approximately U.S. $73,200 for all depository accounts at each bank. The amount in excess of insured limits at August 31, 2018 was approximately $19,539,000.

Major customers

For the three months ended ~~February~~August 2831, 2018 and 2017, ~~two~~three customers of the Company accounted for 2345% of revenue, and ~~three~~one ~~customers~~customer of the Company accounted for 4017% of revenue, respectively. Four ~~For the nine months ended February 28, 2018 and 2017, one~~ customers ~~of the Company~~ accounted for 1499% of ~~revenue,~~accounts ~~and~~receivable ~~two~~as ~~customers~~of ~~accounted~~August ~~for~~31, ~~75%~~2018 ofand ~~revenue~~May 31, ~~respectively~~2018.

~~Two customers accounted for 86% and 100% accounts receivable as February 28, 2018 and May 31, 2017.~~26

28Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

~~CHINA~~The ~~XUEFENG~~following ~~ENVIRONMENTAL~~discussion ~~ENGINEERING~~of ~~INC~~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. ~~AND~~The ~~SUBSIDIARIES~~following discussion contains forward-looking statements 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017

(UNAUDITED, IN U.S. $)

NOTE 14. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

The condensed financial information of the Company's US parent only balance sheets as of May 31, 2017, and the US parent company only statements of income, and cash flows for the year ended May 31, 2017 are as follows:

Condensed Balance Sheets

ASSETS	May 31, 2017
Investment in subsidiaries and VIE		$	56,110,357
TOTAL ASSETS		$	56,110,357

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan from stockholder	$	564,401
Accrued liabilities		38,968
Total current liabilities		603,369
Stockholders' equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 63,020,871 shares issued and outstanding		63,021
Additional paid-in capital		34,584,997
Statutory reserve fund		2,437,684
Retained earnings		22,022,689
Other comprehensive income		(3,601,403	)
Total stockholders' equity		55,506,988
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	56,110,357

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017

(UNAUDITED, IN U.S. $)

NOTE 14. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)

Condensed Statements of Income

	For The Year Ended May 31,
	2017
Revenues:
Share of earnings from investment in subsidiaries and	$	4,659,228
Operating expenses:
General and administrative		148,316
Net income	$	4,510,912

Condensed Statements of Cash Flows

	For The Year Ended May 31,
	2017
Cash flows from operating activities:
Net income	$	4,510,912
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Share of earnings from investment in subsidiaries		(4,659,228	)
Increase in accrued liabilities		148,316
Net cash from operating activities		-
Net increase in cash		-
Cash, beginning of year		-
Cash, end of year	$	-
Noncash financing activities:
Payment of accrued liabilities by shareholder	$	152,348

CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017

(UNAUDITED, IN U.S. $)

NOTE 14. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)

Basis of Presentation

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

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

There were no cash transactions in the US parent company during the three months ended May 31, 2017.

Restricted Net Assets

Under PRC laws and regulations, the Company's PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the Company's PRC subsidiaries amounted to approximately $56,110,357, as of May 31, 2017.

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Overview

We are in the business of providing equipment and upgrade services to optimize garbage-recycling processes. We sell and lease comprehensive and environmental-friendly garbage recycling equipment. We also utilize our licensed patented technology of "comprehensive and harmless garbage-processing equipment" to upgrade software systems and reconstruct hardware for our clients and therefore expand the sorting scope and capacity of our clients' garbage recycling equipment. We also have manufactured, sold and leased garbage-processing equipment commencing since fiscal year ended May 31, 2016. We operate one cycling facilities that processes garbage and generates manufactured products for sale since the fiscal year ended May 31, 2018. We conduct our operations through our wholly-owned subsidiaries Jiangsu Xuefeng Environmental Protection Science and Technology Co., Ltd. ("Jiangsu Xuefeng") and Linyi County Renewable Resources Utilization Co., Ltd. ("Linyi Xuefeng").

Our Services

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

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

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

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

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

Acquisition of Linyi Xuefeng

On August 4, 2016, we entered into an agreement with Mr. Li Yuan, the sole shareholder of Linyi County Xuefeng Renewable Resources Utilization Technology Co., Ltd ("Linyi Xuefeng"), to purchase his 100% ownership of Linyi Xuefeng. Mr. Li Yuan is the Chief Executive Officer and main shareholder of the Company. The purchase price wasdetermined ~~is determined~~ by the audited net assets of Linyi Xuefeng as of May 31, 2016, with payment of RMB10, 000,000 in cash and the rest to be paid in common shares of China Xuefeng depending on the 75% closing price of the last trading day. On October 7, 2016, a supplementary agreement was entered between both parties to finalize the purchase and cost based upon the audited net asset value $23,462,612 on May 31, 2016. The transfer price is $3 per share and 7,820,871 shares in total to Mr. Li Yuan without cash consideration. Linyi Xuefeng is primarily engaged in garbage recycling processing. ~~and~~Upon ~~currently~~acquisition, ~~still~~Linyi inXuefeng ~~development~~became ~~stage~~a ~~without~~wholly-owned ~~any~~subsidiary. ~~production~~The acquisition was accounted for as a business combination.

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

Results of Operations

Results of Operations for the Three Months Ended ~~February~~August 2831, 2018 and 2017

The following table sets forth in U.S. dollars, key components of our ~~audited~~unaudited results of operations for the three months ended ~~February~~August 2831, 2018 and 2017 and the percentage change between these comparable periods.

	Quarter Ended February 28,
	For the Three Months Ended August 31,
	2018			2017			Percentage
	(U.S. $)			(U.S. $)			Change
Revenue	$	23,~~890~~807,~~431~~049		$	2,~~626~~219,~~290~~028			1072	%
Cost of revenue		(~~947~~1,~~878~~666,707	)		(~~503~~569,~~618~~239	)		88193	%
Gross profit		12,~~942~~140,~~553~~342			21,~~122~~649,~~672~~789			(830	%)
Selling expenses		~~313~~295,~~282~~607			~~181~~176,~~591~~906			7367	%
General and administrative expenses		~~304~~289,~~507~~775			~~153~~240,~~086~~661			9920	%
R&D expenses		374,841						100	%
Total operating expenses		585,382			417,567			40	%
Total operating expenses		992,630			334,677			197	%
Operating income		1,554,960			1,232,222			26	%
Operating income		949,923			1,787,995			(47	%)
Non-operating income		250,939			304,843			(18	%)
Non-operating income		291,952			321,365			(9	%)
Income before provision for income taxes		1,805,899			1,537,065			17	%
Income before provision for income taxes		1,241,875			2,109,360			(41	%)
Provision for income taxes		387,945			318,567			22	%
Provision for income taxes		179,532			480,143			(63	%)
Net income		1,417,954			1,218,498			16	%
Net income		1,062,343			1,629,217			(35	%)
Noncontrolling interests		-			-			0	%
Noncontrolling interests		-	)		-			0	%
Net income attributable to common stockholders	$	1,417,954		$	1,218,498			16	%
Net income attributable to common stockholders	$	1,062,343		$	1,629,217			(35	%)

Revenue

We ~~provide~~generated ~~improvement~~$3,807,049 in ~~and~~revenue ~~upgrading~~for ~~services~~the ~~for~~three ~~garbage~~months ~~processing~~ended ~~equipment~~August 31, 2018, as compared to ~~our~~$2,219,028 ~~customers.~~for ~~This~~the isthree amonths ~~one-time~~ended ~~service.~~August We31, ~~also~~2017. ~~license~~Our ~~a patent~~revenue tofor ~~our~~the ~~customers.~~three ~~The~~months ~~patent~~ended ~~licensing~~August is31, ~~limited~~2018 toincreased ~~five~~by ~~years~~$1,588,021 ~~with~~or ~~payments~~72% ~~due~~compared ~~annually~~to inthe ~~advance.~~revenue ~~During~~for the ~~fiscal~~three ~~year~~months ended ~~May~~August 31, ~~2016~~2017, weprimarily ~~began~~resulting tofrom ~~sell or lease~~ the ~~garbage~~operations ~~processing~~of ~~equipment~~Linyi toXuefeng ~~our~~recycling ~~customers~~plant. ~~During~~The following table shows the ~~quarter~~details ~~ended~~of ~~February~~our ~~28,~~revenue ~~2018,~~in wethe ~~began~~three tomonths ~~produce~~ended ~~and~~August ~~sell~~31, ~~garbage~~2018 ~~related~~and ~~products~~2017.

We generated $2,890,431 in revenue for the three months ended February 28, 2018, as compared to $2,626,290 for the three months ended February 28, 2017. Our revenue for the three months ended February 28, 2018 increased by $264,141 or 10% compared to the revenue for the three months ended February 28, 2017. Revenue remained stable by comparing with the three months ended February 28, 2018 and 2017.

	Three Months Ended August 31,
	2018			2017			Percentage
	(U.S. $)			(U.S. $)			Change

Patent Leasing		1,417,475			1,332,936		6		%
Operating lease		1,034,464			886,092		17		%
Sales of garbage related products			1,355,110			-		100	%
Total		$	3,807,049		$	2,219,028		72	%

	Quarters Ended February 28,
	2018			2017			Percentage
	(U.S. $)			(U.S. $)			Change
Improvements and Upgrading Services		$	-		$	757,119	(100		%)
Patent Leasing		1,469,510			1,198,036		23		%
Operating lease		1,058,018			671,135		58		%
			362,903			-		100	%
Total		$	2,890,431		$	2,626,290		10	%

Improvement and Upgrading Services

During the three months ended February 28, 2018, we didn't provided any improvement and upgrading services customers. During the three months ended February 28, 2017, we provided improvement and upgrading services to one customer and generated such revenue of $757,119. The service was completed and accepted by the customer and the payment was received in full as of February 28, 2017. While our core business still focuses on providing improvement and upgrading services for customers' garbage processing equipment, we had also begun selling or leasing our garbage processing equipment and processing and sell garbage related products.

Patent Licensing

During the three months ended ~~February~~August 2831, 2018, we generated revenue of $1,~~469~~417,~~510~~475 from licensing our patent to 21 unrelated customers. During the three months ended ~~February~~August 2831, 2017, we generated revenue of $1,~~198~~332,~~036~~936 from licensing our patent to 1920 unrelated customers. As all these customers became licensees before June 1, 2017 and 2016, respectively, patent licensing revenue was recognized for the entire three months for these customers during the ~~prior~~ related periods.

3428

Operating ~~lease~~leases

During the ~~three~~year ~~months~~ ended ~~February~~May 2831, 2017, we had ~~five~~six operating leases for a 300-ton and ~~four~~five 500-ton garbage processing system. The lease period is 5 years with annual lease payments of $~~591~~612,~~722~~604 and $23,~~840~~675,~~267~~625 (for the total ~~four~~five 500-ton garbage processing system), respectively, before VAT. The 300-ton garbage processing system was delivered and tested in the beginning of November 2015. The two 500-ton garbage processing systems were delivered and tested in the beginning of January 2016. Another two 500-ton garbage processing system was delivered and tested in the end of April 2016 and December 2016, respectively. We also delivered and tested one 500-ton garbage processing system in the end of March 2017. These leases are being accounted for as operating leases because they have no renewal or purchase option. At the end of the five years, either a new lease will be negotiated or the equipment will be returned. For the ~~three~~year ~~months~~ ended ~~February~~May 2831, 2017, we generated operating lease revenue of $~~671~~2,~~135~~667,783 from the ~~four~~six ~~equipment~~leases. During the ~~three~~year ~~months~~ ended ~~February~~May 2831, 2018, we have ~~two~~one new operating ~~leases~~lease for ~~three~~a 500-ton garbage processing system. The lease period is still 5 years with annual lease payments of $1612,~~333~~604,~~509,~~ before VAT. ~~These~~The ~~two~~ 500-ton garbage processing ~~systems~~system ~~were~~was delivered and tested on ~~March~~October 3117, 2017. ~~and~~During ~~October~~the 17year ended May 31, ~~2017~~2018, ~~respectively~~we generated operating lease revenue of $3,973,691 from the seven leases. During the three months ended ~~February~~August 2831, 2018 and 2017, we generated operating lease revenue of $1,~~058~~034,~~018~~464 ~~from~~and ~~the~~$886,092, ~~seven equipment~~respectively.

Sales of garbage related products

During the ~~three~~year ~~months~~ ended ~~February~~May 2831, 2018, we started to process and sell garbage related products, such as organic manure, hollow brick, wood plastic tray and ferrous metal. During the three months ended ~~February~~August 2831, 2018, we generated revenue of $~~362~~1,~~903~~355,110 from selling garbage related products. During the three months ended ~~February~~August 2831, 2017, we ~~didn't~~did not have such type of revenue.

Cost of Goods Sold

Our cost of goods sold increased to $~~947~~1,~~878~~666,707 for the three months ended ~~February~~August 2831, 2018 from $~~503~~569,~~618~~239 for the three months ended ~~February~~August 2831, 2017, which represented an increase of 88193%. It is primarily because the cost of leasing equipment increased and the new revenue stream was introduced which has a lower gross margin. ~~Our~~For the improvement and upgrading service and patent licensing revenue, the cost primarily consists of fees paid to the related party for licensing the patent, employees' salaries and training expenses. For the operating lease revenue, the depreciation of the garbage processing equipment is the main cost which also included in the cost of revenue. For the sales of garbage related products, we purchased raw material for the manufacturing and so the costs were increased. For the three months ended August 31, 2018, the cost of garbage related products was $1,035,097. It is the primary cost included in cost of goods sold for the three months ended August 31, 2018.

Gross Profit

Our gross profit ~~reduced~~increased to $12,~~942~~140,~~553~~342 for the three months ended ~~February~~August 2831, 2018 from $21,~~122~~649,~~672~~789 for the three months ended ~~February~~August 2831, 2017. Our gross profit ratio for the three months ended ~~February~~August 2831, 2018 and 2017 was 6756% and 8174%, respectively. ~~Our~~For the three months ended August 31, 2017, our business stream has resulted in a high gross margin because we have no cost of products sold ~~before~~. Our cost of goods sold is almost entirely direct labor and patent licensing fees, depreciation of leased equipment and other operating expenses. Since we started to sell garbage related products during the year ended May 31, ~~our~~2018, we incurred an increased amount of cost of goods sold. As a result, we expect that gross profit margin ~~will~~to gocontinue ~~down~~to decrease in the following periods.

Selling and Marketing Expenses

Our selling and marketing expenses increased to $~~313~~295,~~282~~607 for the three months ended ~~February~~August 2831, 2018 from $~~181~~176,~~591~~906 for the three months ended ~~February~~August 2831, 2017 which represented an increase of 7367%. Our selling and marketing expenses were primarily comprised of sales employees' salaries, advertising expenses, training expenses and travelling expenses. The primary reason why selling and marketing expenses increased significantly is because of the acquisition of Linyi Xuefeng ~~plant~~and Linyi Xuefeng incurred a significant amount of selling and marketing expenses due to its start of operations.

General and Administrative Expenses

Our general and administrative expenses increased to $~~304~~289,~~507~~775 for the three months ended ~~February~~August 2831, 2018 from $~~153~~240,~~086~~661 for the three months ended ~~February~~August 2831, 2017 which represented an increase of 9920%. Our general and administrative expenses were primarily comprised of employees' salaries, travelling expenses, entertainment expenses and professional fees such as legal and audit fees. The primary reason for such an increase in General and Administrative expenses is the acquisition of Linyi Xuefeng.

R&D Expenses

We incurred R&D expense of $374,841 for the three months ended February 28, 2018. No such expense incurred in the three months ended February 28, 2017. Our R&D expenses primarily included the cost of the feasibility testing of the garbage processing machine in Liyi factory.

Non-Operating Income

Despite our large cash balances, the interest income generated for the three months ended ~~February~~August 2831, 2018 and 2017 was nominal for principally two reasons: 1) extremely low bank's current deposit interest rate and 2) minimal fluctuation of the annual interest rates within a 0.30% range; The interest income reported is net after deducting bank service charges. For the three months ended ~~February~~August 2831, 2018 and 2017, our interest income also includes interest of $4819,~~965~~627 and $9075,~~605~~504, respectively, earned on the sales type leases. Our non-operating income also included a government subsidy. Our wholly owned subsidiary, Linyi Xuefeng, received a government subsidy of approximate $~~909~~900,~~211~~000 (RMB 6,000,000) annually. For the three months ended ~~February~~August 2831, 2018 and 2017, the income ofrelated to the government subsidy was $~~232~~224,~~660~~996 and $~~217~~222,~~462 under accrue basis~~156, respectively.

3629

Provision for Income Taxes

~~Our~~The ~~provision~~Company's ~~for~~two ~~income~~operating ~~taxes decreased to $179~~entities,~~532~~ ~~for~~Jiangsu ~~the~~Xuefeng ~~three~~and ~~months~~Linyi ~~ended February 28~~Xuefeng, ~~2018~~and ~~from~~its ~~$480,143~~Chief ~~for~~Executive ~~the~~Officer ~~three~~and ~~months~~main ~~ended~~shareholder, ~~February~~Yuan 28Li, ~~2017. Our~~(collectively ~~effective tax rate for~~ the ~~three~~"Defendants"), ~~months~~have ~~ended~~been ~~February~~named ~~28,~~in ~~2018~~a ~~and~~court ~~2017~~filing ~~was~~by ~~approximately~~an ~~14%~~unrelated ~~and~~third ~~23%,~~party ~~respectively.~~(the "Plaintiff"). The ~~enterprise~~filing ~~income~~alleges ~~tax~~that ~~rate~~the isDefendants ~~25%~~borrowed inapproximately ~~China.~~RMB45,000,000 ~~Our~~(estimated ~~tax~~USD$6,588,000) ~~filing~~from ~~for~~ the ~~calendar~~Plaintiff ~~year~~and ~~ended~~is ~~December~~demanding ~~31,~~that ~~2016 was examined by~~ the ~~PRC~~balance ~~tax~~including ~~authorities~~interest inbe ~~May~~repaid ~~2017~~immediately. The ~~Our~~Defendants ~~prior~~have ~~filings~~denied ~~were~~owing ~~accepted~~any ~~and~~amount noto ~~adjustments~~the ~~were~~Plaintiff ~~proposed.~~in ~~Due~~its appeal to the ~~government~~court. The ~~subsidy~~Company isbelieves ~~exempt~~that ~~from income tax,~~ the ~~decrease~~litigation inis ~~the~~at ~~provision~~an ~~for~~early ~~income~~stage ~~taxes~~and ~~was~~the ~~primarily~~ultimate ~~due~~liability, toif ~~the~~any, ~~decrease~~cannot inbe ~~our~~presently ~~pre-tax income~~determined.

Net Income

~~For the three months ended February 28, 2018, we generated~~ Our net income of $1,062,343 and $1,629,217, respectively. We terminated the variable interest entity agreement on January 11, 2016. For that reason, we didn't have "non-controlling interest" for the three months ended February 28, 2018 and 2017, respectively. As a result, our net income attributable to the common stockholders of the Company for the three months ended ~~February~~August 2831, 2018 and 2017 was $1,~~062~~417,~~343~~954 and $1,~~629~~218,~~217~~498, respectively, representing $0.02 per share and $0.0302 per share, respectively.

Results of Operations for the Nine Months Ended February 28, 2018 and 2017

The following table sets forth in U.S. dollars, key components of our audited results of operations for the nine months ended February 28, 2018 and 2017 and the percentage change between these comparable periods.

	Nine Months Ended February 28,
	2018			2017		Percentage
	(U.S. $)			(U.S. $)		Change
Revenue	$	7,869,698		$	7,289,815		8	%
Cost of revenue		(2,102,973	)		(1,333,148		58	%
Gross profit		5,766,725			5,956,667		(3	%)
Selling expenses		742,850			510,234		46	%
General and administrative expenses		826,793			696,399		19	%
R&D expenses		999,276					100	%
Total operating expenses		2,568,919			1,206,633		113	%
Operating income		3,197,806			4,750,034		(33	%)
Non-operating income		893,446			1,026,885		(13	%)
Income before provision for income taxes		4,091,252			5,776,919		(29	%)
Provision for income taxes		794,379			1,297,023		(39	%)
Net income		3,296,873			4,479,896		(26	%)
Noncontrolling interests		-			-		0	%
Net income attributable to common stockholders	$	3,296,873		$	4,479,896		(26	%)

Revenue

We generated $7,869,698 in revenue for the nine months ended February 28, 2018, as compared to $7,289,815 for the nine months ended February 28, 2017. Our revenue for the nine months ended February 28, 2018 increased by $579,883 or 8% compared to the revenue for the nine months ended February 28, 2017. Revenue remained stable by comparing with the nine months ended February 28, 2018 and 2017.

	Nine Months Ended February 28,
	2018			2017			Percentage
	(U.S. $)			(U.S. $)			Change
Improvements and Upgrading Services		$	454,605		$	1,982,269	(77		%
Patent Leasing	4,159,639			3,461,575			20		%
Operating lease	2,892,551			1,845,971			57		%
			362,903			-		100	%
Total		$	7,869,698		$	7,289,815		8	%

Improvement and Upgrading Services

During the nine months ended February 28, 2018, we provided improvement and upgrading services to one customer and generated such revenue of $454,605. During the nine months ended February 28, 2017, we provided improvement and upgrading services to five customer and generated such revenue of $1,982,269. The service was completed and accepted by the customer and the payment was received in full as of February 28, 2018 and 2017. While our core business still focuses on providing improvement and upgrading services for customers' garbage processing equipment, we had also begun selling or leasing our garbage processing equipment and processing and sell garbage related products.

Patent Licensing

During the nine months ended February 28, 2018, we generated revenue of $4,159,639 from licensing our patent to 21 unrelated customers. During the nine months ended February 28, 2017, we generated revenue of $3,461,575 from licensing our patent to 19 unrelated customers. As all these customers became licensees before June 1, 2017 and 2016, respectively, patent licensing revenue was recognized for the entire three months for these customers during prior periods.

Operating lease

During the nine months ended February 28, 2017, we had five operating leases for a 300-ton and four 500-ton garbage processing system. The lease period is 5 years with annual lease payments of $591,722 and $2,840,267 (for the total four 500-ton garbage processing system), respectively, before VAT. The 300-ton garbage processing system was delivered and tested in the beginning of November 2015. The two 500-ton garbage processing systems were delivered and tested in the beginning of January 2016. Another two 500-ton garbage processing system was delivered and tested in the end of April 2016 and December 2016, respectively. These leases are being accounted for as operating leases because they have no renewal or purchase option. At the end of the five years, either a new lease will be negotiated or the equipment will be returned. For the nine months ended February 28, 2017, we generated operating lease revenue of $1,845,971 from the four equipment. During the nine months ended February 28, 2018, we have two new operating leases for three 500-ton garbage processing system. The lease period is still 5 years with annual lease payments of $1,333,509, before VAT. These two 500-ton garbage processing systems were delivered and tested on March 31, 2017 and October 17, 2017, respectively. During the nine months ended February 28, 2018, we generated operating lease revenue of $2,892,551 from the seven equipment.

Sales of garbage related products

During the nine months ended February 28, 2018, we started to process and sell garbage related products. During the nine months ended February 28, 2018, we generated revenue of $362,903 from selling garbage related products. During the nine months ended February 28, 2017, we didn't have such type of revenue.

Cost of Goods Sold

Our cost of goods sold increased to $2,102,973 for the nine months ended February 28, 2018 from $1,333,148 for the nine months ended February 28, 2017, which represented an increase of 58%. It is primarily because the cost of leasing equipment increased and the new revenue stream was introduced which has a lower gross margin. Our improvement and upgrading service and patent licensing revenue, the cost primarily consists of fees paid to the related party for licensing the patent, employees' salaries and training expenses. For the operating lease revenue, the depreciation of the garbage processing equipment is the main cost which also included in the cost of revenue.

Gross Profit

Our gross profit reduced to $5,766,725 for the nine months ended February 28, 2018 from $5,956,667 for the nine months ended February 28, 2017. Our gross profit ratio for the nine months ended February 28, 2018 and 2017 was 73% and 82%, respectively. Our business stream has resulted in a high gross margin because we have no cost of products sold before. Our cost of goods sold is almost entirely direct labor and patent licensing fees, depreciation of leased equipment and other operating expenses. Since we started to sell garbage related products, our gross profit margin will go down in the following periods.

Selling and Marketing Expenses

Our selling and marketing expenses increased to $742,850 for the nine months ended February 28, 2018 from $510,234 for the nine months ended February 28, 2017 which represented an increase of 46%. Our selling and marketing expenses were primarily comprised of sales employees' salaries, advertising expenses, training expenses and travelling expenses. The primary reason why selling and marketing expenses increased significantly because of the acquisition of Linyi plant.

General and Administrative Expenses

Our general and administrative expenses increased to $826,793 for the nine months ended February 28, 2018 from $696,399 for the nine months ended February 28, 2017 which represented an increase of 19%. Our general and administrative expenses were primarily comprised of employees' salaries, travelling expenses, entertainment expenses and professional fees such as legal and audit fees.

R&D Expenses

We incurred R&D expense of $999,276 for the nine months ended February 28, 2018. No such expense incurred in the nine months ended February 28, 2017. Our R&D expenses primarily included the cost of the feasibility testing of the garbage processing machine in Liyi factory.

Non-Operating Income

Despite our large cash balances, the interest income generated for the nine months ended February 28, 2018 and 2017 was nominal for principally two reasons: 1) extremely low bank's current deposit interest rate and 2) minimal fluctuation of the annual interest rates within a 0.30% range; The interest income reported is net after deducting bank service charges. For the nine months ended February 28, 2018 and 2017, our interest income also includes interest of $189,565 and $347,063, respectively, earned on the sales type leases. Our non-operating income also included government subsidy. Our wholly owned subsidiary, Linyi Xuefeng, received government subsidy of approximate $909,211 (RMB 6,000,000) annually. For the nine months ended February 28, 2018 and 2017, the income of government subsidy was $681,908 and $665,688 under accrue basis, respectively.

Provision for Income Taxes

Our provision for income taxes decreased to $794,379 for the nine months ended February 28, 2018 from $1,297,023 for the nine months ended February 28, 2017. Our effective tax rate for the nine months ended February 28, 2018 and 2017 was approximately 19% and 22%, respectively. The enterprise income tax rate is 25% in China. Our tax filing for the calendar year ended December 31, 2016 was examined by the PRC tax authorities in May 2017. Our prior filings were accepted and no adjustments were proposed. Due to the government subsidy is exempt from income tax, the decrease in the provision for income taxes was primarily due to the decrease in our pre-tax income.

Net Income

For the nine months ended February 28, 2018, we generated net income of $3,296,873 and $4,479,896, respectively. We terminated the variable interest entity agreement on January 11, 2016. For that reason, we didn't have "non-controlling interest" for the three months ended February 28, 2018 and 2017, respectively. As a result, our net income attributable to the common stockholders of the Company for the nine months ended February 28, 2018 and 2017 was $3,296,873 and $4,479,896, respectively, representing $0.05 per share and $0.07 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. Equity transactions are recorded at their historical amounts. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency is included in the results of operations as incurred. For the three ~~and nine~~ months ended ~~February~~August 2831, 2018 and 2017, a foreign currency gain (loss) of $3(4,~~006~~439,~~557~~514) and $871,~~049~~910, ~~respectively~~583, ~~$4,755,118~~ ~~and $(2,231,954),~~ respectively, have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income. The foreign currency ~~loss~~ gain was mainly due to the revaluation ~~devaluation~~ of the Chinese currency since byMay ~~approximately 6~~2018.~~5%.~~

Liquidity and Capital Resources

As of ~~February~~August 2831, 2018, we had cash and cash equivalents of $1319,~~789~~977,~~487~~874, primarily consisting of cash on hand and demand deposits. The cash balance was principally derived from ~~cash~~accumulated ~~from~~ operations and issuance of stock of $7,009,000.

To date, we have financed our operations primarily through 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 in operating activities was $63,~~805~~660,~~807~~521 for the ~~nine~~three months ended ~~February~~August 2831, 2018, as compared with the net cash ~~provided~~used by operating activities of $7586,~~490,231~~604 for the ~~nine~~three months ended ~~February~~August 2831, 2017. For the ~~nine~~three months ended ~~February~~August 2831, 2018, the decrease in the accounts receivable of $21,~~840~~157,~~839~~182, depreciation expenses of $1,~~880~~115,~~514~~533, decrease in ~~deferred~~prepaid ~~revenue~~VAT of $~~184~~382,~~368~~332, ~~increased~~ decrease in accounts payable and accrued liability of $4926,~~086~~286,~~527,~~ increase in prepaid expenses of $4369,~~413,591~~173 ~~mainly~~primarily caused the difference between the net cash provided by operating activities and the net income. For the ~~nine~~three months ended ~~February~~August 2831, 2017, the decrease in the accounts receivable of $31,~~025~~049,~~754~~991, prepaid VAT of $150,636, depreciation expenses of $~~992~~455,~~137~~497, increase in ~~prepaid~~deferred ~~VAT~~revenue of 1$814,~~218~~572,~~759,~~ ~~the~~increased in accrued liability of $345,580, increase in ~~prepaid~~deferred ~~expenses~~income tax assets of $~~213~~312,~~020~~731 and ~~the~~ increase in ~~deferred~~prepaid ~~revenue~~expenses of $~~547~~4,~~343~~164,190 mainly caused the difference between the net cash provided by operating activities and the net income.

Investing activities

~~Net~~There ~~cash~~were ~~used~~no in investing activities ~~was~~in ~~$3,891,213 for~~ the ~~nine~~three months ended ~~February~~August 2831, 2018 ~~which included purchase of fixed assets of $6,001, stock issuance payment of $141,975~~ and ~~purchase leasing equipment of $3,743,237. Net cash used in investing activities was $7,458,984 for the nine months ended February 28,~~ 2017 ~~which included the purchase of fixed assets of $661~~,~~940~~ ~~and purchase leasing equipment of $6,797,044~~respectively.

Financing activities

For the ~~nine~~three months ended ~~February~~August 2831, 2018, we received ~~$7,000,000~~a ~~from~~loan ~~issue~~ of ~~our common stock,~~ $~~727~~30,~~369~~400 from ~~the~~a ~~security~~shareholder ~~deposit~~for ~~received~~the ~~and~~U.S ~~paid~~listing ~~$7,544,217~~expenses ~~loan to a shareholder~~payment. For the ~~nine~~three months ended ~~February~~August 2831, 2017, we received security deposit payable of $710,~~067~~899 for the leased equipment and loan of $20,000 from our shareholder.

Effect of Exchange Rate on Cash

The positive (negative) effect of the exchange rate on cash of $~~347~~(1,~~778~~272,054) and $~~(400~~13,~~150)~~420 was principally due to the revaluation (devaluation ) by the PRC government of their currency for the ~~nine~~years ~~months~~ ended ~~February~~May 2831, 2018 and 2017, respectively. There could be further negative adjustments should the PRC government or the exchange markets further devalue the Chinese currency.

Off-Balance Sheet Arrangements

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

43Item 3. Quantitative and Qualitative Disclosures About Market Risk.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

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

Currency Exchange Fluctuations

All of the Company's revenues are denominated in Chinese Renminbi, while its expenses are denominated primarily in Chinese Renminbi ("RMB"). The value of the RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China ("PBOC"), which are set daily based on the previous day's inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. dollars had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the Renminbi from the United States dollar. At the recent quarterly regular meeting of PBOC, its Currency Policy Committee affirmed the effects of the reform on Chinese Renminbi exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of Renminbi has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. In August 2015, the PRC government devalued its currency by approximately 3.0%. The Company has never engaged in currency hedging operations and has no present intention to do so.

Country Risk

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

~~ITEM~~Item 4. ~~CONTROLS~~Controls ~~AND~~and ~~PROCEDURES~~Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of ~~February~~August 2831, 2018.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a – 15(f). Management conducted an assessment as of ~~February~~August 2831, 2018 of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of ~~February~~August 2831, 2018.

44A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of August 31, 2018, the Company determined that there were control deficiencies that constituted the following material weaknesses:

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 February 28, 2018, the Company determined that there were control deficiencies that constituted the following material weaknesses: 31

●	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~~Item 1. ~~LEGAL~~Legal ~~PROCEEDINGS~~Proceedings.

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

~~ITEM~~Yuan 1ALi, the Chief Executive Officer of the Company, has been named in a lawsuit by an unrelated third party (the "Plaintiff") regarding a disputed loan plus interest due to the Plaintiff. The ~~RISK~~filing ~~FACTORS~~also alleges that the Company's two operating entities, Jiangsu Xuefeng and Linyi Xuefeng, are guarantors of the loan. The district court in China originally decided in favor of the plaintiff but the decision was subsequently overturned by the High Court of Jiangsu Province on September 5, 2018. The court's decision is currently under appeal. The Company has denied that it is a guarantor of the loan and believes that it does not have any liability to the Plaintiff.

WeItem ~~believe~~1A. ~~there~~Risk ~~are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on August 29, 2017~~Factors.

~~ITEM~~Smaller ~~2. UNREGISTERED~~reporting ~~SALES~~companies OFare ~~EQUITY~~not ~~SECURITIES~~required ~~AND~~to ~~USE~~provide OFthe ~~PROCEEDS~~information required by this item.

~~There~~Item ~~were~~2. Unregistered noSales ~~unregistered sales~~ of ~~the~~Equity ~~Company's~~Securities ~~equity~~and ~~securities~~Use ~~during~~of ~~the three months ended February 28, 2018, that were not otherwise disclosed in a Current Report on Form 8-K~~Proceeds.

~~ITEM~~There ~~3. DEFAULTS~~were ~~UPON~~no ~~SENIOR~~unregistered ~~SECURITIES~~sales of the Company's equity securities during the three months ended August 31, 2018, that were not otherwise disclosed in a Current Report on Form 8-K.

Item 3. Defaults Upon Senior Securities.

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

~~ITEM~~Item 4. ~~MINE~~Mine ~~SAFETY~~Safety ~~DISCLOSURES~~Disclosures.

Not Applicable.

~~ITEM~~Item 5. ~~OTHER~~Other ~~INFORMATION~~Information.

None.

~~ITEM~~Item 6. ~~EXHIBITS~~Exhibits.

Exhibit No.		Description

31.1*		Certification of Principal Executive Officer and Principal Accounting Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002

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

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

*		Filed herewith
**		In accordance with Regulation S-T, the XBRL related information on Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" herewith not "filed".
+		In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed".

4533

SIGNATURES

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

	China Xuefeng Environmental Engineering Inc.
Date: April 9, 2018	By:	/s/ Li Yuan
Date: October 19, 2018	By:	/s/ Li Yuan
		Li Yuan
		Chief Executive Officer and Chief Financial Officer Principal Executive Officer and Principal Accounting Officer

4634

Statutory rate

Government subsidy

Effective income tax rate