UNITED
STATES





SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


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


For
the quarterly period ended September 30, 2009





 ̈
            TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934


For
the transition period from _______ to _______





Commission
file number: 000-51972





SHENGKAI
INNOVATIONS, INC.


(Exact
      name of small business issuer as specified in its
  charter)





Florida
              11-3737500(State
      or other jurisdiction of incorporation or
                organization)
              (IRS
      Employer identification No.)





NO.
27, WANG GANG ROAD


JIN
NAN (SHUANG GANG) ECONOMIC AND TECHNOLOGY DEVELOPMENT AREA


TIANJIN, PEOPLE’S REPUBLIC
OF CHINA


(Address
of principal executive offices)





(8622)
2858-8899


(Registrant’s
telephone number, including area code)





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





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





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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





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





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




APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes  ̈  No
 ̈





APPLICABLE
ONLY TO CORPORATE ISSUERS:





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 22,362,500 shares of common stock, $.001 par
value, were outstanding as of November 2, 2009.





TABLE
OF CONTENTS





PagePART
      IItem
      1.
                  Financial
      Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  33Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  38Item
      4T.
                  Controls
      and Procedures
                  38PART
      IIItem
      1.
                  Legal
      Proceedings
                  39Item
      1A.
                  Risk
      Factors
                  39Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  39Item
      3.
                  Defaults
      Upon Senior Securities
                  39Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  39Item
      5.
                  Other
      Information
                  39Item
      6.
                  Exhibits
                  39SIGNATURES
                  40


2





PART
I – FINANCIAL INFORMATION





Item
1.                       Financial
Statements





SHENGKAI INNOVATIONS, INC.




(F/K/A SOUTHERN SAUCE COMPANY, INC.)




FINANCIAL
STATEMENTS




FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US dollars) (Unaudited)




3




SHENGKAI INNOVATIONS,
INC.
 (F/K/A SOUTHERN SAUCE
COMPANY, INC.)




CONTENTS
                    
                    PAGESREPORT
      OF INDEPENDENT REGISTERED PUBLICACCOUNTING
      FIRM
                    
                    5CONSOLIDATED
      BALANCE SHEETS
                    
                    6 –
      7CONSOLIDATED
      STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME
                    
                    8CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                    
                    9CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                    
                    10 –
      11CONSOLIDATED
      NOTES TO FINANCIAL STATEMENTS
                    
                    12 –
      32


4





ALBERT
WONG & CO.


CERTIFIED
PUBLIC ACCOUNTANTS


7th
Floor, Nan Dao Commercial Building


359-361
Queen’s Road Central


Hong
Kong


Tel :
2851 7954


Fax: 2545
4086





ALBERT
WONG


B.Soc.,
Sc., LL.B., P.C.LL., Barrister-at-law, C.P.A.(Practising).







The Board
of Directors and Stockholders of


Shengkai
Innovations, Inc.


(F/K/A
Southern Sauce Company, Inc.)





Report of Independent
Registered Public Accounting Firm





We have
reviewed the accompanying interim consolidated balance sheets, and the related
consolidated statements of income, stockholders’ equity and cash flows of
Shengkai Innovations, Inc. and consolidated subsidiaries as of September 30,
2009 and 2008, and for the three-month period then ended. These interim
financial information statements are the responsibility of the company's
management.




We
conducted our review in accordance with standards established by the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.




Based on
our review, we are not aware of any material modifications that should be made
to the accompanying interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.





/s/
      Albert Wong & Co.Hong
      Kong, China
                Albert
      Wong & Co.November
      12, 2009
                Certified
      Public Accountants


5





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
BALANCE SHEETS


AS
AT SEPTEMBER 30, 2009 AND JUNE 30, 2009


(Stated
in US Dollars) (Unaudited)





Note
                                    
                                    
                                    September 30, 2009
                                    
                                    
                                    June 30, 2009(Unaudited)
                                    
                                    
                                    (Audited)ASSETSCurrent
      assetsCash
      and cash equivalents
                                    
                                    
                                    
                                    
                                    $
                                    41,075,839
                                    
                                    
                                    $
                                    38,988,958Pledged
      deposits
                                    
                                    4
                                    
                                    
                                    
                                    1,688,592
                                    
                                    
                                    
                                    940,488Trade
      receivables
                                    
                                    
                                    
                                    
                                    
                                    5,750,679
                                    
                                    
                                    
                                    4,061,706Notes
      receivable
                                    
                                    
                                    
                                    
                                    
                                    292,500
                                    
                                    
                                    
                                    292,193Other
      receivables
                                    
                                    5
                                    
                                    
                                    
                                    83,752
                                    
                                    
                                    
                                    22,979Prepaid
      VAT
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    194,535Advances
      to suppliers
                                    
                                    
                                    
                                    
                                    
                                    849,738
                                    
                                    
                                    
                                    328,785Inventories
                                    
                                    6
                                    
                                    
                                    
                                    885,818
                                    
                                    
                                    
                                    907,799Total
      current assets
                                    
                                    
                                    
                                    
                                    $
                                    50,626,918
                                    
                                    
                                    $
                                    45,737,443Plant
      and equipment, net
                                    
                                    7
                                    
                                    
                                    
                                    5,243,448
                                    
                                    
                                    
                                    5,173,269Intangible
      assets, net
                                    
                                    8
                                    
                                    
                                    
                                    9,122,955
                                    
                                    
                                    
                                    9,342,322TOTAL
      ASSETS
                                    
                                    
                                    
                                    
                                    $
                                    64,993,321
                                    
                                    
                                    $
                                    60,253,034LIABILITIES
      ANDSTOCKHOLDERS’
      EQUITYCurrent
      liabilitiesNotes
      payable
                                    
                                    
                                    
                                    
                                    $
                                    373,193
                                    
                                    
                                    $
                                    984,561Accounts
      payable
                                    
                                    
                                    
                                    
                                    
                                    1,601,150
                                    
                                    
                                    
                                    1,121,185Advances
      from customers
                                    
                                    
                                    
                                    
                                    
                                    1,191,885
                                    
                                    
                                    
                                    242,986Other
      payables
                                    
                                    9
                                    
                                    
                                    
                                    912,437
                                    
                                    
                                    
                                    794,754Accruals
                                    
                                    
                                    
                                    
                                    
                                    18,860
                                    
                                    
                                    
                                    131,581Income
      tax payable
                                    
                                    
                                    
                                    
                                    
                                    1,280,659
                                    
                                    
                                    
                                    1,471,380Total
      current liabilities
                                    
                                    
                                    
                                    
                                    $
                                    5,378,184
                                    
                                    
                                    $
                                    4,746,447TOTAL
      LIABILITIES
                                    
                                    
                                    
                                    
                                    $
                                    5,378,184
                                    
                                    
                                    $
                                    4,746,447Commitments
      and contingencies
                                    
                                    15
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -





See
accompanying notes to consolidated financial statements




6




SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
BALANCE SHEETS (Continued)


AS
AT SEPTEMBER 30, 2009 AND JUNE 30, 2009


(Stated
in US Dollars) (Unaudited)





Note
                    
                    
                    September 30, 2009
                    
                    
                    June 30, 2009(Unaudited)
                    
                    
                    (Audited)STOCKHOLDERS’
      EQUITYPreferred
      Stock – $0.001 par value 15,000,000 share authorized
      ;  7,637,368 and 7,887,368 issued and outstanding as of
      September 30, 2009 and June 30, 2009 respectively.
                    
                    10
                    
                    
                    $
                    7,637
                    
                    
                    $
                    7,887Common
      stock - $0.001 par value 50,000,000 shares authorized; 22,362,500 and
      22,112,500 shares  issued and outstanding as
      of  September 30, 2009 and June 30, 2009
      respectively.
                    
                    11
                    
                    
                    
                    22,363
                    
                    
                    
                    22,113Additional
      paid-in capital
                    
                    11
                    
                    
                    
                    30,666,631
                    
                    
                    
                    30,666,631Statutory
      reserves
                    
                    
                    
                    
                    
                    4,693,020
                    
                    
                    
                    4,693,020Retained
      earnings
                    
                    
                    
                    
                    
                    21,505,304
                    
                    
                    
                    17,456,857Accumulated
      other comprehensive income
                    
                    
                    
                    
                    
                    2,720,182
                    
                    
                    
                    2,660,079$
                    59,615,137
                    
                    
                    $
                    55,506,587TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    
                    
                    
                    $
                    64,993,321
                    
                    
                    $
                    60,253,034





See
accompanying notes to consolidated financial statements


7





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





Three months ended September 30,Note
                      
                      
                      2009
                      
                      
                      2008Net
      revenues
                      
                      
                      
                      
                      $
                      11,110,169
                      
                      
                      $
                      9,197,247Cost
      of sales
                      
                      
                      
                      
                      
                      (4,320,091
                      )
                      
                      
                      (3,607,574
                      )Gross
      profit
                      
                      
                      
                      
                      $
                      6,790,078
                      
                      
                      $
                      5,589,673Operating
      expenses:Selling
                      
                      
                      
                      
                      
                      (1,001,612
                      )
                      
                      
                      (870,837
                      )General
      and administrative
                      
                      
                      
                      
                      
                      (747,728
                      )
                      
                      
                      (596,486
                      )Operating
      income
                      
                      
                      
                      
                      $
                      5,040,738
                      
                      
                      $
                      4,122,350Other
      income
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      7,316Interest
      income
                      
                      
                      
                      
                      
                      287,712
                      
                      
                      
                      22,846Income
      before income taxes
                      
                      
                      
                      
                      $
                      5,328,450
                      
                      
                      $
                      4,152,512Income
      taxes
                      
                      12
                      
                      
                      
                      (1,280,003
                      )
                      
                      
                      (1,026,195
                      )Net
      income
                      
                      
                      
                      
                      $
                      4,048,447
                      
                      
                      $
                      3,126,317Foreign
      currency translation adjustment
                      
                      
                      
                      
                      
                      60,103
                      
                      
                      
                      68,906Comprehensive
      income
                      
                      
                      
                      
                      $
                      4,108,550
                      
                      
                      $
                      3,195,223Basic
      earnings per share
                      
                      13
                      
                      
                      $
                      0.181
                      
                      
                      $
                      0.026Diluted
      earnings per share
                      
                      13
                      
                      
                      $
                      0.135
                      
                      
                      $
                      0.019Basic
      weighted average share outstanding
                      
                      13
                      
                      
                      
                      22,362,500
                      
                      
                      
                      22,122,500Diluted
      weighted average share outstanding
                      
                      13
                      
                      
                      
                      29,999,868
                      
                      
                      
                      29,999,868





See
accompanying notes to consolidated financial statements


8





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’EQUITY


FOR
THE YEAR ENDED JUNE 30, 2009 AND THREE MONTHS ENDED SEPTEMBER 30,
2009


(Stated in US Dollars) (Unaudited)





AccumulatedCommon stock
                                          
                                          
                                          
                                          
                                          
                                          Additional
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          otherNumber
                                          
                                          
                                          
                                          
                                          
                                          Preferred
                                          
                                          
                                          paid-in
                                          
                                          
                                          Statutory
                                          
                                          
                                          Retained
                                          
                                          
                                          comprehensiveof share
                                          
                                          
                                          Amount
                                          
                                          
                                          stock
                                          
                                          
                                          capital
                                          
                                          
                                          reserves
                                          
                                          
                                          earnings
                                          
                                          
                                          Income
                                          
                                          
                                          TotalBalance,
      June 30, 2008
                                          
                                          
                                          22,112,500
                                          
                                          
                                          $
                                          22,113
                                          
                                          
                                          $
                                          5,916
                                          
                                          
                                          $
                                          23,494,626
                                          
                                          
                                          $
                                          2,875,066
                                          
                                          
                                          $
                                          8,257,303
                                          
                                          
                                          $
                                          2,526,518
                                          
                                          
                                          $
                                          37,181,542Net
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          13,577,694
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          13,577,694Proceeds
      from shares issued
      in private placement,
      net of transaction
      costs of$386,210
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,971
                                          
                                          
                                          
                                          4,611,819
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,613,790Appropriations
      tostatutory
      reserves
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,817,954
                                          
                                          
                                          
                                          (1,817,954
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Dividends
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,560,186
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,560,186
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Foreign
      currencytranslation
      adjustment
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          133,561
                                          
                                          
                                          
                                          133,561Balance,
      June 30, 2009
                                          
                                          
                                          22,112,500
                                          
                                          
                                          $
                                          22,113
                                          
                                          
                                          $
                                          7,887
                                          
                                          
                                          $
                                          30,666,631
                                          
                                          
                                          $
                                          4,693,020
                                          
                                          
                                          $
                                          17,456,857
                                          
                                          
                                          $
                                          2,660,079
                                          
                                          
                                          $
                                          55,506,587Balance,
      June 30, 2009
                                          
                                          
                                          22,112,500
                                          
                                          
                                          $
                                          22,113
                                          
                                          
                                          $
                                          7,887
                                          
                                          
                                          $
                                          30,666,631
                                          
                                          
                                          $
                                          4,693,020
                                          
                                          
                                          $
                                          17,456,857
                                          
                                          
                                          $
                                          2,660,079
                                          
                                          
                                          $
                                          55,506,587Net
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,048,447
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,048,447Appropriations
      tostatutory
      reserves
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Conversion
      of preferred
      stock
                                          
                                          
                                          250,000
                                          
                                          
                                          
                                          250
                                          
                                          
                                          
                                          (250
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Dividends
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Foreign
      currencytranslation
      adjustment
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          60,103
                                          
                                          
                                          
                                          60,103Balance,
      September 30, 2009
                                          
                                          
                                          22,362,500
                                          
                                          
                                          $
                                          22,363
                                          
                                          
                                          $
                                          7,637
                                          
                                          
                                          $
                                          30,666,631
                                          
                                          
                                          $
                                          4,693,020
                                          
                                          
                                          $
                                          21,505,304
                                          
                                          
                                          $
                                          2,720,182
                                          
                                          
                                          $
                                          59,615,137





See
accompanying notes to consolidated financial statements


9





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





Three months ended September 30,2009
                
                
                2008Cash
      flows from operating activitiesNet
      income
                
                $
                4,048,447
                
                
                $
                3,126,317Depreciation
                
                
                104,109
                
                
                
                41,441Amortization
                
                
                229,088
                
                
                
                191,276Adjustments
      to reconcile net income to net cash provided by operating
      activities:Trade
      receivables
                
                
                (1,683,834
                )
                
                
                (215,801
                )Notes
      receivable
                
                
                -
                
                
                
                (5,836
                )Other
      receivables
                
                
                (60,718
                )
                
                
                (2,046
                )Prepaid
      VAT
                
                
                194,640
                
                
                
                -Deposits
      and prepaid expenses
                
                
                -
                
                
                
                922Advances
      to suppliers
                
                
                (520,340
                )
                
                
                (252,809
                )Inventories
                
                
                22,925
                
                
                
                (482,758
                )Notes
      payable
                
                
                (612,092
                )
                
                
                63,440Accounts
      payable
                
                
                478,539
                
                
                
                405,842Advances
      from customers
                
                
                948,159
                
                
                
                106,293Other
      payables
                
                
                116,787
                
                
                
                105,232Accruals
                
                
                (112,802
                )
                
                
                29,073Income
      tax payable
                
                
                (192,172
                )
                
                
                72,544Net
      cash provided by operating activities
                
                $
                2,960,736
                
                
                $
                3,183,130Cash
      flows from investing activitiesPurchase
      of property, plant and equipment
                
                $
                (168,807
                )
                
                $
                (60,076
                )Deposit
      for land use right auction
                
                
                -
                
                
                
                (379,400
                )Increase
      in pledged deposits
                
                
                (747,158
                )
                
                
                (48,847
                )Net
      cash used in investing activities
                
                $
                (915,965
                )
                
                $
                (488,323
                )Cash
      flows from financing activitiesProceeds
      from stock issued, net of transaction costs of $386,210
                
                $
                -
                
                
                $
                4,613,790Net
      cash provided by financing activities
                
                $
                -
                
                
                $
                4,613,790





See
accompanying notes to consolidated financial statements


10





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





2009
                
                
                2008Net
      cash and cash equivalents sourced
                
                $
                2,044,771
                
                
                $
                7,308,597Effect
      of foreign currency translation on cash  and cash
      equivalents
                
                
                42,110
                
                
                
                31,602Cash
      and cash equivalents–beginning of year
                
                
                38,988,958
                
                
                
                21,313,484Cash
      and cash equivalents–end of year
                
                $
                41,075,839
                
                
                $
                28,653,683


Supplementary
      cash flow information:Interest
      received
                    
                    $
                    287,712
                    
                    
                    $
                    22,846Tax
      paid
                    
                    
                    1,472,175
                    
                    
                    
                    953,651





See
accompanying notes to consolidated financial statements


11


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)




1.      ORGANIZATION
AND PRINCIPAL ACTIVITIES





Shengkai
Innovations, Inc. (the Company) was incorporated in the State of Florida on
December 8, 2004. Prior to June 9, 2008 the company has only nominal operations
and assets. On October 23, 2008, the Company changed its name from Southern
Sauce Company, Inc. to Shengkai Innovations, Inc.





On June
9, 2008, the Company executed a reverse-merger with Shen Kun International
Limited (“Shen Kun”) by an exchange of shares whereby the Company issued
20,550,000   common shares at $0.001 par value in exchange for
all Shen Kun shares.





The
exchange transaction was accounted for as a reverse acquisition in accordance
with Accounting Standards Codification (“ASC”) 805, “Business Combinations”
(formerly included under Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations). For financial reporting purposes, this
transaction is classified as a recapitalization of the Company and Shen Kun. The
accompanying audited consolidated financial statements were retroactively
adjusted to reflect the effects of the recapitalization of the financial
statements of the Company and the historical financial statements of Shen Kun.
The 1,562,500 shares of Shengkai Innovations, Inc. outstanding prior to this
stock exchange transaction were accounted for at the net book value at the time
of the transaction, which was a deficit of $62,206. The consolidated statements
of income include the results of operations of Tianjin Shengkai Industrial
Technology Development Co., Ltd for the period ended September 30, 2009 and
2008.





Shen Kun
formed Sheng Kai (Tianjin) Ceramic Valves Co., Ltd. (“SK Ceramic Valves” or
“WFOE”), which entered into a series of agreements with Tianjin Shengkai
Industrial Technology Development Co., Ltd (“Shengkai”) including but not
limited to consigned management, technology service, loan, exclusive purchase
option, equity pledge, etc. The agreements were entered on May 30, 2008. As a
result of entering the abovementioned agreements, WFOE deem to control Shengkai
as a Variable Interest Entity as required by FASB Interpretation No. 46 (revised
MARCH 2003) Consolidated of Variable Interest Entities, and Interpretation of
ARB No. 51. In connection with the reverse merger transaction, on June 11, 2008
the Company sold 5,915,526 Units for aggregate gross proceeds of $15,000,000, at
a price of $2.5357 per Unit. Each Unit consists of one share of Southern Sauce
Series A Convertible Preferred Stock, par value $0.001 per share (the “Preferred
Shares”), convertible into one share of common stock, par value $0.001 per share
(the “common stock”), and one Series A Warrant to purchase common stock equal to
120% of the number of shares of common stock issuable upon conversion of the
Preferred Shares (“Warrant”). Additionally, on July 18, 2008, the Company sold
1,971,842 Units for aggregate gross proceeds of $5,000,000, at a price of
$2.5357 per Unit. Each Unit consists of one Preferred Share, convertible into
one share of common stock, par value $0.001 per share (the “common stock”), and
one Warrant to purchase common stock equal to 120% of the number of shares of
common stock issuable upon conversion of the Preferred Shares.





The
Company, through its subsidiaries and Shengkai, (hereinafter, collectively
referred to as “the Group”), is now in the business of manufacturing and selling
of ceramic valve.


12


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)
            Method
      of Accounting





The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes.  The financial statements
and notes are representations of management.  Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements.





(b)
            Principles
      of Consolidation





The
consolidated financial statements, which include the Company and its
subsidiaries, are complied in accordance with generally accepted accounting
principles in the United States of America. All significant inter-company
accounts and transactions have been eliminated. The consolidated financial
statements include 100% of assets, liabilities, and net income or loss of those
wholly-owned subsidiaries.





The
company owned the three subsidiaries since its reverse-merger on June 9, 2008.
The detailed identities of the consolidating subsidiaries would have been as
follows:





Name of Company
                            
                            Place of
                              incorporation
                            
                            Attributable
                              interestShen
      Kun International Limited
                            
                            British
      Virgin Islands
                            
                            
                            100
                            %Sheng
      Kai (Tianjin) Ceramic Valves Co., Ltd
                            
                            PRC
                            
                            
                            100
                            %*Tianjin
      Shengkai Industrial TechnologyDevelopment
      Co., Ltd
                            
                            PRC
                            
                            
                            100
                            %*Deemed
      variable interest entity member





(c)
            Use
      of estimates





The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the 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.  Management makes these estimates using
the best information available at the time the estimates are made; however
actual results could differ materially from those estimates.


13


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(d)
            Economic
      and political risks





The
Group’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.





The
Group’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Group’s results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.





(e)
            Pledged
      deposits





Pledged
deposits represents deposits on account to secure notes payable and deposit for
investor relation or public relation affairs as at the period ended September
30, 2009 and June 30, 2009 respectively.





(f)
            Plant
      and equipment





Plant and
equipment are carried at cost less accumulated
depreciation.  Depreciation is provided over their estimated useful
lives, using the straight-line method. Estimated useful lives of the plant and
equipment are as follows:





Buildings
                  20
      – 40 yearsMachinery
      and equipment
                  3 –
      20 yearsOffice
      equipment
                  3 –
      10 yearsMotor
      vehicles
                  10
      years





The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.





(g)
            Intangible
      assets





Intangible
assets represent land use rights, patent rights and others in the
PRC.  Land use rights are carried at cost and amortized on a
straight-line basis over the period of rights of 50 years commencing from the
date of acquisition of equitable interest. Patent rights are carried at cost and
amortized on a straight-line basis over the period of rights of 10 years
commencing from the date of acquisition of equitable interest.  Others
are software costs which are carried at cost and amortized on a straight-line
basis over the period of 6 years.


14




SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(h)
            Accounting
      for the impairment of long-lived
assets





The Group
periodically evaluates the carrying value of long-lived assets to be held and
used, including intangible assets subject to amortization, when events and
circumstances warrant such a review, pursuant to the guidelines established in
ASC350. The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair market values are reduced for the cost to
dispose.





During
the reporting periods, there was no impairment loss.





(i)
            Inventories





Inventories
      consist of finished goods, work in progress and raw materials, and stated
      at the lower of cost or market value. Substantially all inventory costs
      are determined using the weighted average basis. Finished goods are
      comprised of direct materials, direct labor and an appropriate proportion
      of overhead. The management regularly evaluates the composition of its
      inventory to identify slow-moving and obsolete inventories to determine if
      additional write-downs are
required.





(j)
            Cash
      and cash equivalents





The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts in the PRC and Hong Kong. The Company does not maintain any bank
accounts in the United States of America.





September 30,
                    2009
                  
                  
                  June 30,
                    2009Cash
      on hand
                  
                  $
                  1,832
                  
                  
                  $
                  6,236Bank
      of China
                  
                  
                  16,958
                  
                  
                  
                  21,081Industrial
      and Commercial Bank of China
                  
                  
                  3,381,524
                  
                  
                  
                  750,757Industrial
      Bank Co. Ltd.
                  
                  
                  2,078,008
                  
                  
                  
                  2,962,345Shanghai
      Pudong Development Bank
                  
                  
                  35,581,883
                  
                  
                  
                  35,232,842The
      Hong Kong and Shanghai BankingCorporation
      Limited
                  
                  
                  15,634
                  
                  
                  
                  15,697$
                  41,075,839
                  
                  
                  $
                  38,988,958


15


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(k)
            Revenue
      recognition





Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met:





-
Persuasive evidence of an arrangement exists;


-
Delivery has occurred or services have been rendered;


- The
seller’s price to the buyer is fixed or determinable, and


-
Collection is reasonably assured.





Net
revenue is recognized when customer takes delivery and acceptance of products,
the price is fixed or determinable as stated on sales contract, and the
collectability is reasonably assured.





(l)
            Costs
      of sales





Cost of
sales consists primarily of direct material costs, direct labor cost, direct
depreciation and related direct expenses attributable to the production of
products.  Written-down of inventory to lower of cost or market is
also reflected in cost of revenues.





(m)
            Research
      and development costs





The
Company expensed all research and development costs as
incurred.  Research and development expenses included in the general
and administrative expenses for the three months ended September 30, 2009 and
2008 were $158,148 and $109,891 respectively.





(n)
            Retirement
      benefit plans





The
employees of the Company are members of a state-managed retirement benefit plan
operated by the government of the PRC.  The Company is required to
contribute a specified percentage of payroll costs to the retirement benefit
scheme to fund the benefits.  The only obligation of the Company with
respect to the retirement benefit plan is to make the specified
contributions.





Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The retirement benefit expenses included in and the general and
administrative expenses for the three months ended September 30, 2009 and 2008
were $35,880 and $21,120 respectively.


16


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(o)
            Income
      tax





The Group
accounts for income tax using an asset and liability approach and allows for
recognition of deferred tax benefits in future years.  Under the asset
and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.  A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before the Group is
able to realize their benefits, or that future realization is
uncertain.





(p)
            Foreign
      currency translation





The
accompanying financial statements are presented in United States dollars. SK
Ceramic Valves and Shengkai use its local currency, Renminbi (RMB), as its
functional currency. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the end of period exchange rates. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in stockholders’ equity. Transaction gains and losses that arise from
exchange rate fluctuations from transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.





The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.





The
exchange rates used to translate amounts in RMB into USD for the purposes of
preparing the consolidated financial statements were as follows:





September
      30, 2009Balance
      sheet
                    RMB 6.83760 to US$1.00Statement
      of income and comprehensive income
                    RMB 6.84110 to US$1.00June
      30, 2009Balance
      sheet
                    RMB 6.84480 to US$1.00Statement
      of income and comprehensive income
                    RMB 6.84819 to US$1.00September
      30, 2008Balance
      sheet
                    RMB 6.85510 to US$1.00Statement
      of income
                    RMB 6.85292 to US$1.00




The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions.  No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.


17




SHENGKAI
INNOVATIONS, INC.




(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(q)
            Cash
      and concentration of risk





Cash
includes cash on hand and demand deposits in bank accounts maintained within
PRC.  Total cash in the banks at September 30, 2009 and June 30, 2009
amounted to $41,074,007 and $38,982,722 respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to
significant financial institution risks on its cash in bank accounts. Also see
Note 3 for credit risk details.





(r)
            Statutory
      reserves





As
stipulated by the PRC’s Company Law and as provided in the SK Ceramic Valves,
and Shengkai’s Articles of Association, SK Ceramic Valves, and Shengkai’s net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:





(i)
              Making
      up cumulative prior years’ losses, if
any;


(ii)
              Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered capital, which is restricted
      for set off against losses, expansion of production and operation or
      increase in registered
capital;


(iii)
              Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company's “Statutory common welfare fund”, which is
      restricted for capital expenditure for the collective benefits of the
      Company's employees; and


(iv)
              Allocations
      to the discretionary surplus reserve, if approved in the shareholders’
      general meeting.





On
December 31, 2003, Shengkai established a statutory surplus reserve as well as a
statutory common welfare fund and commenced to appropriate 10% and 5%,
respectively of the PRC net income after taxation to these reserves. The amounts
included in the statutory reserves were surplus reserve of $4,693,020 as of
September 30, 2009 and June 30, 2009.





(s)
            Comprehensive
      income





Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.  Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements.  The Company’s current component of other
comprehensive income is the foreign currency translation
adjustment.


18


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(t)
            Recently
      Implemented Standards




ASC 105,
Generally Accepted Accounting
Principles (“ASC 105”) (formerly Statement of Financial Accounting
Standards No. 168, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162)
reorganized by topic existing accounting and reporting guidance issued by the
Financial Accounting Standards Board (“FASB”) into a single source of
authoritative generally accepted accounting principles (“GAAP”) to be applied by
nongovernmental entities. All guidance contained in the Accounting Standards
Codification (“ASC”) carries an equal level of authority. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. Accordingly, all other accounting literature will be deemed
“non-authoritative”. ASC 105 is effective on a prospective basis for financial
statements issued for interim and annual periods ending after September 15,
2009. The Company has implemented the guidance included in ASC 105 as of
July 1, 2009. The implementation of this guidance changed the Company’s
references to GAAP authoritative guidance but did not impact the Company’s
financial position or results of operations.




ASC 855,
Subsequent Events (“ASC
855”) (formerly Statement of Financial Accounting Standards No. 165, Subsequent Events) includes
guidance that was issued by the FASB in May 2009, and is consistent with current
auditing standards in defining a subsequent event. Additionally, the guidance
provides for disclosure regarding the existence and timing of a company’s
evaluation of its subsequent events. ASC 855 defines two types of subsequent
events, “recognized” and “non-recognized”. Recognized subsequent events provide
additional evidence about conditions that existed at the date of the balance
sheet and are required to be reflected in the financial statements.
Non-recognized subsequent events provide evidence about conditions that did not
exist at the date of the balance sheet but arose after that date and, therefore;
are not required to be reflected in the financial statements. However, certain
non-recognized subsequent events may require disclosure to prevent the financial
statements from being misleading. This guidance was effective prospectively for
interim or annual financial periods ending after June 15, 2009. The Company
implemented the guidance included in ASC 855 as of April 1, 2009. The
effect of implementing this guidance was not material to the Company’s financial
position or results of operations.


19


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(t)
              Recently
      Implemented Standards
(Continued)





ASC 944,
Financial Services –
Insurance (“ASC 944”) contains guidance that was previously issued by the
FASB in May 2008 as Statement of Financial Accounting Standards No. 163,
Accounting for Financial
Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60that provides for changes to both the recognition and measurement of
premium revenues and claim liabilities for financial guarantee insurance
contracts that do not qualify as a derivative instrument in accordance with ASC
815, Derivatives and
Hedging (formerly included under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities). This financial guarantee insurance
contract guidance also expands the disclosure requirements related to these
contracts to include such items as a company’s method of tracking insured
financial obligations with credit deterioration, financial information about the
insured financial obligations, and management’s policies for placing and
monitoring the insured financial obligations. ASC 944, as it relates to
financial guarantee insurance contracts, was effective for fiscal years
beginning after December 15, 2008, except for certain disclosures related
to the insured financial obligations, which were effective for the third quarter
of 2008. The Company does not have financial guarantee insurance products, and,
accordingly, the implementation of this portion of ASC 944 did not have an
effect on the Company’s results of operations or financial
position.




ASC 805,
Business Combinations(“ASC 805”) (formerly included under Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations)
contains guidance that was issued by the FASB in December 2007. It requires the
acquiring entity in a business combination to recognize all assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
certain exceptions. Additionally, the guidance requires changes to the
accounting treatment of acquisition related items, including, among other items,
transaction costs, contingent consideration, restructuring costs,
indemnification assets and tax benefits. ASC 805 also provides for a substantial
number of new disclosure requirements. ASC 805 also contains guidance that was
formerly issued as FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies which was intended to provide additional guidance
clarifying application issues regarding initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. ASC 805 was effective for
business combinations initiated on or after the first annual reporting period
beginning after December 15, 2008. The Company implemented this guidance
effective January 1, 2009. Implementing this guidance did not have an
effect on the Company’s financial position or results of operations; however it
will likely have an impact on the Company’s accounting for future business
combinations, but the effect is dependent upon acquisitions, if any, that are
made in the future.


20


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(u)
            Recently
      Issued Standards




In August
2009, the FASB issued ASC Update No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820): Measuring Liabilities at Fair Value (“ASC Update
No. 2009-05”). This update amends ASC 820, Fair Value Measurements and
Disclosures and provides further guidance on measuring the fair value of
a liability. The guidance establishes the types of valuation techniques to be
used to value a liability when a quoted market price in an active market for the
identical liability is not available, such as the use of an identical or similar
liability when traded as an asset. The guidance also further clarifies that a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are both Level 1 fair value measurements. If adjustments are required
to be applied to the quoted price, it results in a level 2 or 3 fair value
measurement. The guidance provided in the update is effective for the first
reporting period (including interim periods) beginning after issuance. The
Company does not expect that the implementation of ASC Update No. 2009-05
will have a material effect on its financial position or results of
operations.





In
September 2009, the FASB issued ASC Update No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820): Investments in Certain Entities that Calculate Net
Asset Value per Share (or Its Equivalent) (“ASC Update
No. 2009-12”). This update sets forth guidance on using the net asset value
per share provided by an investee to estimate the fair value of an alternative
investment. Specifically, the update permits a reporting entity to measure the
fair value of this type of investment on the basis of the net asset value per
share of the investment (or its equivalent) if all or substantially all of the
underlying investments used in the calculation of the net asset value is
consistent with ASC 820. The update also requires additional disclosures by each
major category of investment, including, but not limited to, fair value of
underlying investments in the major category, significant investment strategies,
redemption restrictions, and unfunded commitments related to investments in the
major category. The amendments in this update are effective for interim and
annual periods ending after December 15, 2009 with early application
permitted. The Company does not expect that the implementation of ASC Update
No. 2009-12 will have a material effect on its financial position or
results of operations.


21


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(u)
            Recently
      Issued Standards (Continued)





In June
2009, FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB
Interpretation No. 46(R)(“Statement No. 167”). Statement
No. 167 amends FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities an interpretation of ARB No. 51 (“FIN 46R”) to require an
analysis to determine whether a company has a controlling financial interest in
a variable interest entity. This analysis identifies the primary beneficiary of
a variable interest entity as the enterprise that has a) the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance and b) the obligation to absorb losses of the
entity that could potentially be significant to the variable interest entity or
the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. The statement requires an ongoing
assessment of whether a company is the primary beneficiary of a variable
interest entity when the holders of the entity, as a group, lose power, through
voting or similar rights, to direct the actions that most significantly affect
the entity’s economic performance. This statement also enhances disclosures
about a company’s involvement in variable interest entities. Statement
No. 167 is effective as of the beginning of the first annual reporting
period that begins after November 15, 2009. Although Statement No. 167
has not been incorporated into the Codification, in accordance with ASC 105, the
standard shall remain authoritative until it is integrated. The Company does not
expect the adoption of Statement No. 167 to have a material impact on its
financial position or results of operations.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140 (“Statement
No. 166”). Statement No. 166 revises FASB Statement of Financial
Accounting Standards No. 140, Accounting for Transfers and
Extinguishment of Liabilities a replacement of FASB Statement 125
(“Statement No. 140”) and requires additional disclosures about transfers
of financial assets, including securitization transactions, and any continuing
exposure to the risks related to transferred financial assets. It also
eliminates the concept of a “qualifying special-purpose entity”, changes the
requirements for derecognizing financial assets, and enhances disclosure
requirements. Statement No. 166 is effective prospectively, for annual
periods beginning after November 15, 2009, and interim and annual periods
thereafter. Although Statement No. 166 has not been incorporated into the
Codification, in accordance with ASC 105, the standard shall remain
authoritative until it is integrated. The Company does not expect the adoption
of Statement No. 166 will have a material impact on its financial position
or results of operations.


22


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





3.
            CONCENTRATIONS
      OF CREDIT RISK AND MAJOR CUSTOMERS





Financial
instruments which potentially expose the Group to concentrations of credit risk,
consists of cash and accounts receivable as of September 30, 2009 and June 30,
2009. The Group performs ongoing evaluations of its cash position and credit
evaluations to ensure sound collections and minimize credit losses
exposure.





As of
September 30, 2009 and June 30, 2009, almost all the Group’s bank deposits were
conducted with banks in the PRC where there is currently no rule or regulation
mandated on obligatory insurance of bank accounts. A minimal bank deposit was
maintained with the bank in Hong Kong.





For the
three months ended September 30, 2009 and 2008, more than 99% of the Group’s
sales were generated from the PRC. In addition, nearly all accounts receivable
as of September 30, 2009 and June 30, 2008, also arose in the PRC.





The
maximum amount of loss exposure due to credit risk that the Group would bear if
the counter parties of the financial instruments failed to perform represents
the carrying amount of each financial asset in the balance sheet.





Normally
the Group does not require collateral from customers or debtors.





For the
three months ended September 30, 2009 and 2008, there was no customer who
accounts for 10% or more of the Group’s revenue.





Details
of customer account for 10% or more of the Group’s accounts receivable were as
follows:




September 30, 2009
                  
                  
                  June 30, 2009Customer
      A
                  
                  $
                  -
                  
                  
                  $
                  655,755Customer
      B
                  
                  
                  -
                  
                  
                  
                  438,067





As at
September 30, 2009, there was no customer who accounts for 10% or more of the
Group’s accounts receivable.





4.
            PLEDGED
      DEPOSITS





Pledged
deposits as of September 30, 2009 and June 30, 2008 were restricted cash kept in
purpose of investor relation or public relation affairs and to secure notes
payable respectively.


23


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





5.
            OTHER
      RECEIVABLES





September 30, 2009
                  
                  
                  June 30, 2009Disbursement
      and advances to employee
                  
                  $
                  14,129
                  
                  
                  $
                  12,268Tender
      deposits
                  
                  
                  64,350
                  
                  
                  $
                  10,227Sundry
                  
                  
                  5,273
                  
                  
                  $
                  484$
                  83,752
                  
                  
                  $
                  22,979




6.
            INVENTORIES





Inventories
comprise the followings:





September 30, 2009
                  
                  
                  June 30, 2009Finished
      goods
                  
                  $
                  240,591
                  
                  
                  $
                  236,574Work
      in process
                  
                  
                  29,729
                  
                  
                  
                  49,607Raw
      materials
                  
                  
                  615,498
                  
                  
                  
                  621,618$
                  885,818
                  
                  
                  $
                  907,799




24


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





7.
            PLANT
      AND EQUIPMENT, NET




September
      30, 2009
                        
                        
                        June
      30, 2009At
      costBuildings
                        
                        $
                        2,053,140
                        
                        
                        $
                        2,050,980Machinery
      and equipment
                        
                        
                        3,060,665
                        
                        
                        
                        3,056,646Office
      equipment
                        
                        
                        168,291
                        
                        
                        
                        166,748Motor
      vehicles
                        
                        
                        484,832
                        
                        
                        
                        416,163$
                        5,766,928
                        
                        
                        $
                        5,690,537Less:
      accumulated depreciation
                        
                        
                        (937,123
                        )
                        
                        
                        (832,085
                        )$
                        4,829,805
                        
                        
                        $
                        4,858,452Construction
      in progress
                        
                        
                        413,643
                        
                        
                        
                        314,8175,243,448
                        
                        
                        
                        5,173,269





Depreciation
expenses included in the cost of sales for the three months ended September 30,
2009 and 2008 were $87,588 and $27,379 respectively; and in the general and
administrative expenses for the three months ended September 30, 2009 and 2008
were $16,521 and $14,062 respectively.





Construction
in progress represents direct costs of construction incurred. Capitalization of
these costs ceases and the construction in progress is transferred to plant and
equipment when substantially all the activities necessary to prepare the assets
for their intended use are completed. No depreciation is provided until it is
completed and ready for intended use.  Capital commitments in respect
of these projects are $20,236,578 at September 30, 2009.


25


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





8.
            INTANGIBLE
      ASSETS, NET





September 30, 2009
                  
                  
                  June 30, 2009Land
      use rights, at cost
                  
                  $
                  2,791,305
                  
                  
                  $
                  2,788,369Less:
      accumulated amortization
                  
                  
                  (307,499
                  )
                  
                  
                  (302,714
                  )2,483,806
                  
                  
                  
                  2,485,655Patent
      rights, at costs
                  
                  
                  7,458,758
                  
                  
                  
                  7,450,912Less:
      accumulated amortization
                  
                  
                  (2,274,190
                  )
                  
                  
                  (2,085,525
                  )5,184,568
                  
                  
                  
                  5,365,387Others,
      at costs
                  
                  
                  1,519,935
                  
                  
                  
                  1,518,336Less:
      accumulated amortization
                  
                  
                  (65,354
                  )
                  
                  
                  (27,056
                  )1,454,581
                  
                  
                  
                  1,491,280$
                  9,122,955
                  
                  
                  $
                  9,342,322





Amortization
expenses included in the general and administrative expenses for the three
months ended September 30, 2009 and 2008 were $229,088and $191,276
respectively.








9.
              OTHER
      PAYABLES





September 30, 2009
                  
                  
                  June 30, 2009Commission
      payables
                  
                  $
                  299,080
                  
                  
                  $
                  312,365Expense
      payables
                  
                  
                  29,621
                  
                  
                  
                  12,389Deposit
      for project
                  
                  
                  121,005
                  
                  
                  
                  467,508Sundry
      PRC taxes payables
                  
                  
                  461,854
                  
                  
                  
                  -Sundry
                  
                  
                  877
                  
                  
                  
                  2,492$
                  912,437
                  
                  
                  $
                  794,754




26


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





10.
            PREFERRED
      STOCK AND WARRANTS





On June
11, 2008, the Company sold 5,915,526 shares of Series A Preferred Stock and
various stock purchase warrants for cash consideration totaling $15 million
dollars (the “June 2008 Financing”). The exercise price, expiration date and
number of share eligible to be purchased with the warrants are summarized in the
following table:





Series of warrant
                        
                        Number of shares
                        
                        
                        Exercise price
                        
                        Contractual termSeries A
                        
                        
                        7,098,632
                        
                        
                        $
                        3.52
                        
                        5.0 years




The
Series A preferred stock has liquidation rights senior to common stock and to
any other class or series of stock issued by the Company not designated as
ranking senior to or pari passu with the Series A Preferred Share.  In
the event of a liquidation of the Company, holders of Series A preferred stock
are entitled to receive a distribution equal to $2.5357 per share of Series A
preferred stock prior to any distribution to the holders of common stock or any
other stock that ranks junior to the Series A Preferred Shares. The Preferred
Shareholders are not entitled to dividends unless paid to Common Shareholders.
Any dividend paid will have the same record and payment date and terms as the
dividend payable to the Common Stock. The Series A preferred stock will
participate based on their respective as-if conversion rates if the Company
declares any dividends.  Holders of Series A Preferred Shares also
have voting rights required by applicable law and the relevant number of votes
shall be equal to the number of shares of Common Stock issuable upon conversion
of Series A Preferred Shares. At any time, the Preferred Stock is convertible
into 1 share of Common Stock adjusted from time to time to the Conversion Rate.
The Conversion Rate is computed as the Liquidation Preference Amount ($2.5357
per share) divided by the Conversion Price. The Conversion Price is initially
$2.5357 per share but can adjust for anti-dilution.





The
Warrants were issued at an exercise price of $3.52 per share. The exercise price
can adjust for dilutive events.  The Warrants are immediately
exercisable. However, if after exercise the holder would become a holder of
greater than 9.9% of common stock they cannot exercise without filing a waiver
with the company.  The waiver is required to be filed 61 days prior to
exercise and by filing the waiver the restriction is removed. (Since the company
is required to accept the waiver this restriction is not considered significant
in valuing the warrant.) The Warrants expire 5 years from the date of issuance.
The Warrants are freely transferable upon registration. The Warrants are subject
to the same Registration Rights Agreement as that of the Preferred Stock. If a
registration statement providing for the resale of the Common Stock issued upon
exercise of the Warrant is not declared effective after 180 days after the
issuance date, the Warrants can be cashless exercised. Also, the Warrants have
Buy-in Rights similar to those of the Preferred Stock.





The gross
proceeds of the transaction were $15 million. The proceeds from the transaction
were allocated to the Series A preferred stock, warrants and beneficial
conversion feature based on the relative fair value of the securities. The
Company evaluated whether a relative fair value approach or residual fair value
approach was more appropriate given the terms and accounting treatment related
to the financial instruments involved. Given that the Warrants will not be
classified as a liability, the relative fair value method was used. The Warrants
were first valued using the Black-Scholes valuation model. The Company valued
the Warrants at issuance at $1.84 per warrant with the following
assumptions:  common stock fair market value of $2.55, expected life
of 5 year, volatility of 100% and an interest rate of 4.5%.


27


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





10.
            PREFERRED
      STOCK AND WARRANTS (Continued)





The
Company recognized a beneficial conversion feature discount on the Series A
preferred stock at its intrinsic value, which was the fair value of the common
stock at the commitment date for the Series A preferred stock investment, less
the effective conversion price but limited to the $15 million of proceeds
received from the sale. The Company recognized the $7.8 million beneficial
conversion feature in the equity as a transfer from retained earnings to
additional paid in capital as dividends in the accompanying consolidated
financial statements on the date of issuance of the Series A preferred shares
since the Series A preferred shares were convertible at the issuance
date.





On July
18, 2008 the Company sold 1,971,842 shares of Series A Preferred Stock and
various stock purchase warrants for cash consideration totaling $5 million
dollars (the “July 2008 Financing”). The exercise price, expiration date and
number of share eligible to be purchased with the warrants are summarized in the
following table:





Series
      of warrant
                      
                      Number of shares
                      
                      
                      Exercise price
                      
                      Contractual termSeries A
                      
                      
                      2,366,211
                      
                      
                      $
                      3.52
                      
                      5.0 years





The
Series A preferred stock has liquidation rights senior to common stock and to
any other class or series of stock issued by the Company not designated as
ranking senior to or pari passu with the Series A Preferred Share.  In
the event of a liquidation of the Company, holders of Series A preferred stock
are entitled to receive a distribution equal to $2.5357 per share of Series A
preferred stock prior to any distribution to the holders of common stock or any
other stock that ranks junior to the Series A Preferred Shares. The Preferred
Shareholders are not entitled to dividends unless paid to Common Shareholders.
Any dividend paid will have the same record and payment date and terms as the
dividend payable to the Common Stock. The Series A preferred stock will
participate based on their respective as-if conversion rates if the Company
declares any dividends.  Holders of Series A Preferred Shares also
have voting rights required by applicable law and the relevant number of votes
shall be equal to the number of shares of Common Stock issuable upon conversion
of Series A Preferred Shares. At any time, the Preferred Stock is convertible
into 1 share of Common Stock adjusted from time to time to the Conversion Rate.
The Conversion Rate is computed as the Liquidation Preference Amount ($2.5357
per share) divided by the Conversion Price. The Conversion Price is initially
$2.5357 per share but can adjust for anti-dilution.





The
Warrants were issued at an exercise price of $3.52 per share. The exercise price
can adjust for dilutive events.  The Warrants are immediately
exercisable. However, if after exercise the holder would become a holder of
greater than 9.9% of common stock they cannot exercise without filing a waiver
with the company.  The waiver is required to be filed 61 days prior to
exercise and by filing the waiver the restriction is removed. (Since the company
is required to accept the waiver this restriction is not considered significant
in valuing the warrant.) The Warrants expire 5 years from the date of issuance.
The Warrants are freely transferable upon registration. The Warrants are subject
to the same Registration Rights Agreement as that of the Preferred Stock. If a
registration statement providing for the resale of the Common Stock issued upon
exercise of the Warrant is not declared effective after 180 days after the
issuance date, the Warrants can be cashless exercised. Also, the Warrants have
Buy-in Rights similar to those of the Preferred Stock.





28


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





10.
            PREFERRED
      STOCK AND WARRANTS (Continued)





The gross
proceeds of the transaction were $5 million. The proceeds from the transaction
were allocated to the Series A preferred stock, warrants and beneficial
conversion feature based on the relative fair value of the securities. The
Company evaluated whether a relative fair value approach or residual fair value
approach was more appropriate given the terms and accounting treatment related
to the financial instruments involved. Given that the Warrants will not be
classified as a liability, the relative fair value method was used. The Warrants
were first valued using the Black-Scholes valuation model. The Company valued
the Warrants at issuance at $1.84 per warrant with the following assumptions:
common stock fair market value of $2.55, expected life of 5 year, volatility of
100% and an interest rate of 4.5%.





The
Company recognized a beneficial conversion feature discount on the Series A
preferred stock at its intrinsic value, which was the fair value of the common
stock at the commitment date for the Series A preferred stock investment, less
the effective conversion price but limited to the $5 million of proceeds
received from the sale. The Company recognized the $2.6 million beneficial
conversion feature in the equity as a transfer from retained earnings to
additional paid in capital as dividends in the accompanying consolidated
financial statements on the date of issuance of the Series A preferred shares
since the Series A preferred shares were convertible at the issuance
date.





In
connection with the June 2008 Financing and the July 2008 Financing, in the
event of the Company’s failure to timely convert, additional damages would
become due. In the event the Company does not have sufficient shares or is
prohibited by law or regulation, then the holder can require cash redemption.
The redemption price would equal 130% of the Liquidation Preference Amount plus
additional amounts based on the difference between the bid prices on the
conversion date and the date the Company has sufficient shares. The holder can
also void the conversion or exercise its Buy-in Rights. The Buy-in-Rights
entitle the holder to be protected in the case that the Company is unable to
deliver the shares upon conversion while the holder has transacted to sell such
underlying shares to a third party. In addition, in the event of a merger,
consolidation or similar capital reorganization (prior to conversion) the
holders can request to be redeemed at 110% of liquidation value.





Further,
if the Company fails to obtain a listing on NASDAQ or the NYSE Amex Equities
(Formerly American Stock Exchange), then 1,000,000 shares of common stock of the
company will be given to the investors. The company is accounting for these
penalties in accordance with FAS 5 - Accounting for Contingencies, whereby the
penalty will not be recorded as a liability until and if it is probable the
penalty will be incurred. No penalty has been recorded in the accompanying
consolidated financial statements for this instance.





11.
            CAPITALIZATION





As a
result of the Group’s reverse-merger on June 9, 2008, the Group’s capital
structure has been changed. The number of common stock was 22,112,500 after
reverse-merger. The common stock is $22,363 and $22,113 with paid-in capital
$30,666,631 as of September 30, 2009 and 2008 respectively.


29




SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





12.
INCOME TAXES





(a)
            The
      Company is registered in the State of Florida whereas its subsidiary, Shen
      Kun being incorporated in the British Virgin Islands is not subject to any
      income tax and conducts all of its business through its PRC subsidiary, SK
      Ceramic Valves and VIE, Shengkai (see note
1).





SK
Ceramic Valves, and Shengkai, being registered in the PRC, are subject to PRC’s
Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income
Taxes (“EIT”) is generally imposed at 25% since January 1, 2008.





A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:





For the three months ended September 30,2009
                            
                            
                            2008U.S.
      statutory rate
                            
                            
                            34
                            %
                            
                            
                            34
                            %Foreign
      income not recognized in the U.S.
                            
                            
                            (34
                            )%
                            
                            
                            (34
                            )%PRC
      Enterprise Income Tax
                            
                            
                            25
                            %
                            
                            
                            25
                            %Provision
      for income tax
                            
                            
                            25
                            %
                            
                            
                            25
                            %





(b)
            The
      PRC Enterprise Income Tax rate was changed to 25% from 33% since January
      1, 2008. The effective tax rate for the three months ended September
      30,2009 and 2008 both were 25%.





Income
before income tax expenses of $5,328,450, and $4,152,512 for the three months
ended September 30, 2009 and 2008 respectively, was attributed to subsidiaries
with operations in China. Income tax expense related to China income for the
three months ended September 30, 2009, and 2008 are $1,280,003, and $1,026,195,
respectively.




30


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





13.
            EARNINGS
      PER SHARE





The
calculation of the basic and diluted earnings per share attributable to the
common stock holders is based on the following data:





For the three months ended September 30,2009
                                                              
                                                              
                                                              2008Earnings:Net
      income for the year
                                                              
                                                              $
                                                              4,048,447
                                                              
                                                              
                                                              $
                                                              3,126,317Non-Cash
      Dividends on convertible preferred stock
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (2,560,186
                                                              )Earnings
      for the purpose of basicearnings
      per share
                                                              
                                                              $
                                                              4,048,447
                                                              
                                                              
                                                              $
                                                              566,131Effect
      of dilutive potential common stock
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Earnings
      for the purpose of dilutiveearnings
      per share
                                                              
                                                              $
                                                              4,048,447
                                                              
                                                              
                                                              $
                                                              566,131Number
      of shares:Weighted
      average number of commonstock
      for the purpose of basic earningsper
      share
                                                              
                                                              
                                                              22,362,500
                                                              
                                                              
                                                              
                                                              22,112,500Effect
      of dilutive potential common stock-
      conversion of convertible preferred stock
                                                              
                                                              
                                                              7,637,368
                                                              
                                                              
                                                              
                                                              7,887,368Weighted
      average number of commonstock
      for the purpose of dilutive earningsper
      share
                                                              
                                                              
                                                              29,999,868
                                                              
                                                              
                                                              
                                                              29,999,868Earnings
      per share:Basic
      earnings per share
                                                              
                                                              $
                                                              0.181
                                                              
                                                              
                                                              $
                                                              0.026Dilutive
      earnings per share
                                                              
                                                              $
                                                              0.135
                                                              
                                                              
                                                              $
                                                              0.019




31


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Stated
in US Dollars)(Unaudited)





14.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.  The
carrying amounts of financial assets and liabilities, such as cash and cash
equivalents, accounts receivable, other receivables, accounts payable, and other
payables, approximate their fair values because of the short maturity of these
instruments and market rates of interest available to the Group.




15.
            COMMITMENTS
      AND CONTINGENCY





A new
manufacturing facility and a headquarters’ building are under construction on a
plot of land in Tianjin, China which was obtained in October, 2008. Certain
construction contracts including the main superstructure were executed. The
total amount of executed contracts was $20,650,221 (RMB141,197,951) of which
$413,643 (RMB2,828,323) was paid as at September 30, 2009. The balance of
$20,236,578 (RMB138,369,628) will be settled within one year.




16.
            SEGMENT
      INFORMATION





The Group
is principally engaged in one segment of the manufacturing and selling of
ceramic valve in the PRC. Nearly all revenues are generated in the PRC and
nearly all identifiable assets of the Group are located in the PRC. Accordingly,
no segmental analysis is presented.




32


Item
2.             Management’s Discussion and Analysis
or Plan of Operation





Cautionary
Notice Regarding Forward-Looking Statements





In this
quarterly report, references to “Shengkai,” “SKII,” “the Company,” “we,” “us,”
and “our” refer to Shengkai Innovations, Inc.





We make
certain forward-looking statements in this report. Statements concerning our
future operations, prospects, strategies, financial condition, future economic
performance (including growth and earnings), demand for our services, and other
statements of our plans, beliefs, or expectations, including the statements
contained under the captions “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business,” as well as captions elsewhere
in this document, are forward-looking statements. In some cases these statements
are identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,”
“may,” “should,” “will,” “would,” and similar expressions. We intend such
forward-looking statements to be covered by the safe harbor provisions contained
in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)
and in Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). The forward-looking statements we make are not guarantees of
future performance and are subject to various assumptions, risks, and other
factors that could cause actual results to differ materially from those
suggested by these forward-looking statements. Because such statements are
subject to risks and uncertainties, actual results may differ materially from
those expressed or implied by the forward-looking statements. Indeed, it is
likely that some of our assumptions will prove to be incorrect. Our actual
results and financial position will vary from those projected or implied in the
forward-looking statements and the variances may be material. You are cautioned
not to place undue reliance on such forward-looking statements. These risks and
uncertainties, together with the other risks described from time to time in
reports and documents that we file with the SEC should be considered in
evaluating forward-looking statements.





The
nature of our business makes predicting the future trends of our revenue,
expenses, and net income difficult. Thus, our ability to predict results or the
actual effect of our future plans or strategies is inherently uncertain. The
risks and uncertainties involved in our business could affect the matters
referred to in any forward-looking statements and it is possible that our actual
results may differ materially from the anticipated results indicated in these
forward-looking statements. Important factors that could cause actual results to
differ from those in the forward-looking statements include, without limitation,
the following:





·
            the
      effect of political, economic, and market conditions and geopolitical
      events;


·
            legislative
      and regulatory changes that affect our
business;


·
            the
      availability of funds and working
capital;


·
            the
      actions and initiatives of current and potential
    competitors;


·
            investor
      sentiment; and


·
            our
      reputation.





We do not
undertake any responsibility to publicly release any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this report. Additionally, we do not undertake any
responsibility to update you on the occurrence of any unanticipated events which
may cause actual results to differ from those expressed or implied by any
forward-looking statements.





The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto as filed with
the SEC and other financial information contained elsewhere in this
Report.





Overview





We were
incorporated in Florida on December 8, 2004 and have since undergone a change in
business. In October 2008, our shareholders approved our name change from
“Southern Sauce Company, Inc.” to “Shengkai Innovations, Inc.”





As
a result of the reverse merger, financing and related
transactions described in our current report on Form 8-K/A filed with the
SEC on June 23, 2008, the Company ceased to be a shell company and became a
holding company for entities that, through contractual relationships, control
the business of Shengkai Industrial Technology Development Co., Ltd, a company
organized under the laws of the PRC that designs, manufactures and sells ceramic
valves. Because Shengkai Industrial Technology Development Co., Ltd.’s
operations are the only significant operations of the Company and its
affiliates, this discussion and analysis focuses on the business results of
Shengkai Industrial Technology Development Co., Ltd., comparing its results in
the three months ended September 30, 2009 to the three months ended September
30, 2008.


33




Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




The
following discussion of the financial condition and results of operation of the
Company for the three months ended September 30, 2009 and 2008 should be read in
conjunction with the financial statements and the notes to those statements that
are included elsewhere in this registration statement. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this registration
statement. We use terms such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” and similar expressions to identify forward-looking
statements.





General





Shengkai,
the entity through which we run our operations, is a prominent ceramic valve
manufacturer. We have more than 15 years of experience and possess a unique
method for creating ceramic valves.





We
believe that Shengkai is the one of the few ceramic valve manufacturers in the
world with research and development, engineering, and production capacity for
structural ceramics. Shengkai’s product categories include a broad range of
valves in all industries that are sold throughout China, to North America, and
other countries in the Asia-Pacific region. Totaling over 300 customers,
Shengkai became a supplier of the CPCC in 2005 and a member of the PetroChina
supply network in 2006, after a six-year application process.




Results
of Operations




Comparison of the
Three Months Ended September 30, 2009 and 2008





Revenue





Revenue
for the three months ended September 30, 2009 was $11,110,169, an increase of
$1,912,922 or 20.8% from $9,197,247 for the comparable period in
2008.  Approximately 94.5% of our sources of revenue came from
customers in the electric power, petrochemical and chemical industries. The
electric power industry was still the most significant market contributor to our
revenue, contributing approximately 70.3% of total revenue for the three months
ended September 30, 2009. Revenue from the electric power industry was
approximately $7.8 million for the three months ended September 30, 2009, an
increase of approximately $0.8 million or 11.4% from approximately $7.0 million
for the comparable period in 2008. The increase was primarily attributable to
the increase of sales in our new series of products  and increased
orders from existing customers. The new series of production include ceramic
control valves and high temperature and high pressure globe valves. Revenue from
the petrochemical and chemical industry, our biggest potential market, was
approximately $2.7 million  for the three months ended September 30,
2009, an increase of approximately $1.3 million or 92.9% from approximately $1.4
million  for the comparable period in 2008.  Revenue from
other industries, including the aluminum and  metallurgy industries,
was approximately $0.6 million for the three months ended September 30, 2009, a
decrease of approximately $0.2 million  or 25% from approximately $0.8
million for the comparable period in 2008.





At
present we are still experiencing a deficiency of production capacity. A new
manufacturing facility is under construction  and the manufacturing
plant is expected to be completed during the first quarter of calendar year
2010. Completion of the Company’s headquarters building is estimated to be in
the second quarter of calendar year 2010.





Gross
Profit





Gross
profit for the three months ended September 30, 2009 was $6,790,078, an increase
of $1,200,405 or 21.5% compared to $5,589,673 for the comparable period in 2008.
The gross profit margin for the three months ended September 30, 2009 also
increased to 61.1% from 60.8% for the comparable period in 2008. The increase
was primarily attributable to the fact that we slightly increased our selling
price during the period.


34





Selling
Expenses





Selling
expenses for the three months ended September 30, 2009 was $1,001,612, an
increase of $130,775 or 15.0%, from $870,837 for the comparable period in 2008.
The major selling expense was commission paid to agents for introducing business
to us, which totaled approximately $0.9 million for the three months ended
September 30, 2009, an increase of approximately $0.2 million or 28.6% from
approximately $0.7 million the three months ended September 30, 2008. Another
major selling expense was exhibition and seminar expense, which was $49,434 for
the three months ended September 30, 2009, a decrease of $30,594 from $80,028
for the three months ended September 30, 2008.





General and Administrative
Expenses





General
and administrative expenses for the three months ended September 30, 2009 was
$747,728, an increase of $151,242 or 25.4% compared to $596,486 for the
comparable period in 2008. The increase was primarily attributable to research
and development, from $109,891to $158,148 over the comparable periods of 2008
and 2009, an increase of $48,257 or 43.9%.  Another reason was the
increase in expenses incurred in connectionwith the fulfillment of certain
listing requirements including legal advisory fees, investment relation
expenses, and the recruitment of new personnel.





Interest
expense




There was
no interest expense for the three months ended September 30, 2009. No short or
long term loans were outstanding for the three months ended September 30,
2009.





Income Tax
Expenses





Income
tax for the three months ended September 30, 2009 was $1,280,003, an increase of
$253,808 or 24.7%  from $1,026,195 for the comparable period in 2008.
The effective tax rates were 25% for the three months ended September 30, 2009
and 2008 respectively. The PRC government decreased the income tax rate on
enterprises from 33% to 25% with effect from January 1, 2008.





Liquidity
and Capital Resources





Cash and Cash
Equivalents




Our cash
and cash equivalents as at the beginning of the three months ended September 30,
2009 was $38,988,958 and increased to $41,075,839 by the end of the period, an
increase of $2,086,881 or 5.4%. The net change in cash and cash equivalents
represented a decrease of $5,253,318 or 71.6% from $7,340,199 for the comparable
period in 2008.





Net cash provided by
operating activities





Net cash
provided by operating activities was $2,960,736 for the three months ended
September 30, 2009, a decrease of $222,394 or 7.0% from $3,183,130 for the
comparable period in 2008. Net income increased $922,130 or 29.5% from
$3,126,317 for the comparable period in 2008. On the other hand, the change in
trade receivable increased by $1,468,033 over the three months ended September
30, 2008 and 2009. The decrease in cash from operating activities was also the
result of a decrease of notes payable over the comparable periods.





Net cash used in investing
activities




Net cash
used in investing activities was $915,965 for the three months ended September
30, 2009, compared to $488,323 for the three months ended September 30, 2008, an
increase of $427,642 or 87.6%.




35




Net cash used in financing
activities





There
were no financing activities for the three months ended September 30, 2009. Net
cash provided by financing activities was $4,613,790 for the three months ended
September 30, 2008, which was attributable to the completion of
our second private placement in July 2008.





Capital
Expenditures




In
October 2008, we successfully won a bid on a land use right over a plot of land
approximately 43,566.3 square meters in size. The land is located in Tianjin,
China and the bid price was $1.8 million (approximately RMB12.6 million). We
signed a formal contract was signed with the government on Jan 23, 2009 and
pursuant to the contractpaid the bid price in full by Mar 25, 2009. The land was
purchased with plans to construct corporate headquarters and to build a new
manufacturing facility to expand our production
capacity.  Expenditures made under related construction contracts
totaled $20,650,221 (RMB141,197,951), of which $413,643 (RMB2,828,323) was paid
as of September 30, 2009. The balance of $$20,236,578 (RMB138,369,628) will be
settled within one year. In order to complete such expansion of production
capacity, we would need to substantially increase our capital
expenditures.





Trends





We are
not aware of any trends, events or uncertainties that have or are reasonably
likely to have a material impact on our short-term or long-term liquidity.





Inflation





We
believe that inflation has not had a material or significant impact on our
revenue or our results of operations.





Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our financial position, results of operations, and cash flows.




The
following table summarizes our contractual obligations as of September 30, 2009,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




Totals
                      
                      
                      Less Than
                        1 Year
                      
                      
                      1 to 3
                        Years
                      
                      ThereafterCapital
      expenditures (1)
                      
                      $
                      20,236,578
                      
                      
                      $
                      20,236,578
                      
                      
                      $
                      -




(1)
Capital expenditure is commitment for the construction of a new manufacturing
facility. See Note 15 - Commitment and Contingency in the notes to the financial
statements, included elsewhere in this report. The Company entered into certain
construction contracts for building a new manufacturing facility and a
headquarters building. The total amount of executed contracts
was $20,650,221, of which $413,643 was paid as at the period ended
September 30, 2009. The construction of both the manufacturing facility and the
headquarters building is estimated to be completed during this fiscal
year.





Off
Balance Sheet Arrangements





None.





Critical
Accounting Policies and Estimates





The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and
assumptions that affect the 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. Management makes these estimates using the best information
available at the time the estimates are made. However, actual results could
differ materially from those estimates (See Note 2 in the Notes to Financial
Statements).


36





Revenue
recognition





Net
revenue represents the invoiced value of goods sold recognized upon the delivery
of goods to customers, net of value added tax (“VAT”), after allowances for
returns and discounts and the value of services rendered. Revenue is recognized
when the following four criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed or determinable, and
collectability is reasonably assured.




Intangible
assets





Intangible
assets represent land use rights, patent rights and other assets (such as use of
software) in the PRC. Land use rights are carried at cost and amortized on a
straight-line basis over the period of rights of 50 years commencing from the
date of acquisition of equitable interest. Patent rights are carried at cost and
amortized on a straight-line basis over the period of rights of 10 years
commencing from the date of acquisition of equitable interest.




Foreign
currency translation





The
accompanying financial statements are presented in United States dollars. The
functional currency of Shengkai is the Renminbi (RMB). The financial statements
are translated into United States dollars from RMB at year-end exchange rates as
to assets and liabilities and average exchange rates as to revenues and
expenses. Capital accounts are translated at their historical exchange rates
when the capital transactions occurred.




New
Financial Accounting Pronouncements




In June
2009, FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB
Interpretation No. 46(R)(“Statement No. 167”). Statement
No. 167 amends FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities an interpretation of ARB No. 51 (“FIN 46R”) to require an
analysis to determine whether a company has a controlling financial interest in
a variable interest entity. This analysis identifies the primary beneficiary of
a variable interest entity as the enterprise that has a) the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance and b) the obligation to absorb losses of the
entity that could potentially be significant to the variable interest entity or
the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. The statement requires an ongoing
assessment of whether a company is the primary beneficiary of a variable
interest entity when the holders of the entity, as a group, lose power, through
voting or similar rights, to direct the actions that most significantly affect
the entity’s economic performance. This statement also enhances disclosures
about a company’s involvement in variable interest entities. Statement
No. 167 is effective as of the beginning of the first annual reporting
period that begins after November 15, 2009. Although Statement No. 167
has not been incorporated into the Codification, in accordance with ASC 105, the
standard shall remain authoritative until it is integrated. The Company does not
expect the adoption of Statement No. 167 to have a material impact on its
financial position or results of operations.




In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140 (“Statement
No. 166”). Statement No. 166 revises FASB Statement of Financial
Accounting Standards No. 140, Accounting for Transfers and
Extinguishment of Liabilities a replacement of FASB Statement 125
(“Statement No. 140”) and requires additional disclosures about transfers
of financial assets, including securitization transactions, and any continuing
exposure to the risks related to transferred financial assets. It also
eliminates the concept of a “qualifying special-purpose entity”, changes the
requirements for derecognizing financial assets, and enhances disclosure
requirements. Statement No. 166 is effective prospectively, for annual
periods beginning after November 15, 2009, and interim and annual periods
thereafter. Although Statement No. 166 has not been incorporated into the
Codification, in accordance with ASC 105, the standard shall remain
authoritative until it is integrated. The Company does not expect the adoption
of Statement No. 166 will have a material impact on its financial position
or results of operations.


37




In August
2009, the FASB issued ASC Update No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820): Measuring Liabilities at Fair Value (“ASC Update
No. 2009-05”). This update amends ASC 820, Fair Value Measurements and
Disclosures and provides further guidance on measuring the fair value of
a liability. The guidance establishes the types of valuation techniques to be
used to value a liability when a quoted market price in an active market for the
identical liability is not available, such as the use of an identical or similar
liability when traded as an asset. The guidance also further clarifies that a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are both Level 1 fair value measurements. If adjustments are required
to be applied to the quoted price, it results in a level 2 or 3 fair value
measurement. The guidance provided in the update is effective for the first
reporting period (including interim periods) beginning after issuance. The
Company does not expect that the implementation of ASC Update No. 2009-05
will have a material effect on its financial position or results of
operations.




In
September 2009, the FASB issued ASC Update No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820): Investments in Certain Entities that Calculate Net
Asset Value per Share (or Its Equivalent) (“ASC Update
No. 2009-12”). This update sets forth guidance on using the net asset value
per share provided by an investee to estimate the fair value of an alternative
investment. Specifically, the update permits a reporting entity to measure the
fair value of this type of investment on the basis of the net asset value per
share of the investment (or its equivalent) if all or substantially all of the
underlying investments used in the calculation of the net asset value is
consistent with ASC 820. The update also requires additional disclosures by each
major category of investment, including, but not limited to, fair value of
underlying investments in the major category, significant investment strategies,
redemption restrictions, and unfunded commitments related to investments in the
major category. The amendments in this update are effective for interim and
annual periods ending after December 15, 2009 with early application
permitted. The Company does not expect that the implementation of ASC Update
No. 2009-12 will have a material effect on its financial position or
results of operations.





The
management of the Company does not anticipate that the adoption of these three
standards will have a material impact on these financial
statements.





Item
      3.
            Quantitative
      and Qualitative Disclosures about Market
Risk.





N/A.





Item
      4.
            Controls
      and Procedures.





Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





Pursuant
to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation
with the participation of the Company’s management, including Wang Chen, the
Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s
disclosure controls and procedures (as defined under Rule 13a-15(e) under the
Exchange Act) as of the three months ended September 30, 2009. Based upon that
evaluation, the Company’s CEO concluded that the Company’s disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the
Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including the
Company’s CEO, as appropriate, to allow timely decisions regarding required
disclosure.




Changes in internal
controls





Our
management, with the participation of our Chief Executive Officer, performed an
evaluation as to whether any change in our internal controls over financial
reporting occurred during the quarter ended September 30, 2009.  Based
on that evaluation, our Chief Executive Officer concluded that no change
occurred in the Company's internal controls over financial reporting during the
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.




38





PART
II – OTHER INFORMATION





Item 1.
            Legal Proceedings.





To our knowledge, there is no material
litigation pending or threatened against us.





Item 1A. Risk
Factors.





N/A.





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





None.





Item
      3.
            Defaults
      Upon Senior Securities.





To our knowledge, there are no material
defaults upon senior securities.





Item
      4.
            Submission
      of Matters to a Vote of Securities
Holders.





None.





Item
      5.
            Other
      Information.





None.





Item
      6.
            Exhibits.





(a)
Exhibits





31.1
            Certification
      Required Under Section 302 of Sarbanes-Oxley Act of
  2002.





32.1
            Certification
      Required Under Section 906 of Sarbanes-Oxley Act of
  2002.




39





SIGNATURES




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





SHENGKAI
      INNOVATIONS, INC.Date:
      November 16, 2009
                By:
                /s/ Wang ChenName:  Wang
      ChenTitle:   Chief
      Executive Officer and Director
                  (principal
      executive officer, principal
                  financial
      officer, and principal accounting
                  officer
      )




40