UNITED
STATES





SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


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


For
the quarterly period ended March 31, 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)




SOUTHERN SAUCE COMPANY,
INC.


(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 xNo  ̈





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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: 22,112,500 shares of common stock, $.001 par
value, were outstanding as of May 12, 2009.





TABLE
OF CONTENTS





PagePART
      IItem
      1.
                Financial
      Statements
                3Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                29Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                35Item
      4T.
                Controls
      and Procedures
                35PART
      IIItem
      1.
                Legal
      Proceedings
                36Item
      1A.
                Risk
      Factors
                36Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                36Item
      3.
                Defaults
      Upon Senior Securities
                36Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                36Item
      5.
                Other
      Information
                36Item
      6.
                Exhibits
                36SIGNATURES
                37




2


PART
I – FINANCIAL INFORMATION


Item 1. Financial
Statements





SHENGKAI INNOVATIONS,
INC.





CONTENTS
                        
                        PAGESREPORT
      OF INDEPENDENT REGISTERED PUBLICACCOUNTING
    FIRM
                        
                        4CONSOLIDATED
      BALANCE SHEETS
                        
                        5 –
      6CONSOLIDATED
      STATEMENTS OF INCOME
                        
                        7CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                        
                        8CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                        
                        9 –
      10NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                        
                        11 –
      28




3


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., ACA., LL.B.,


C.P.A.(Practising)





To: The
Board of Directors and Stockholders ofShengkai Innovations, Inc.





Report of Independent
Registered Public Accounting Firm





We have
reviewed the accompanying interim balance sheets of Shengkai Innovations, Inc.
as of March 31, 2009 and 2008, and the related statements of income,
stockholders’ equity and cash flows for the nine-month periods then ended, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). All information included in these financial statements is the
representation of the management of Shengkai Innovations, Inc.





A review
consists principally of inquiries of company personnel and analytical procedures
applied to financial data. It is substantially less in scope than an audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), 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 financial statements in order for them to be in conformity
with U.S. generally accepted accounting principles.




Hong
      Kong
              Albert
      Wong & Co.May
      13, 2009
              Certified
      Public Accountants


4





SHENGKAI
INNOVATIONS, INC.


CONSOLIDATED
BALANCE SHEETS


AS
AT MARCH 31, 2009 AND JUNE 30, 2008


(Stated
in US Dollars)





Note
                    
                    
                    March 31, 2009
                    
                    
                    June 30, 2008(Unaudited)
                    
                    
                    (Audited)ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    
                    
                    
                    $
                    33,394,974
                    
                    
                    $
                    21,313,484Pledged
      deposits
                    
                    
                    4
                    
                    
                    
                    1,037,093
                    
                    
                    
                    500,000Trade
      receivables
                    
                    
                    
                    
                    
                    
                    4,750,967
                    
                    
                    
                    3,596,318Notes
      receivable
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    8,732Other
      receivables
                    
                    
                    5
                    
                    
                    
                    18,744
                    
                    
                    
                    19,791Deposits
      and prepaid expenses
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    2,543Advances
      to suppliers
                    
                    
                    
                    
                    
                    
                    825,834
                    
                    
                    
                    12,350Inventories
                    
                    
                    6
                    
                    
                    
                    1,333,680
                    
                    
                    
                    725,327Total
      current assets
                    
                    
                    
                    
                    
                    $
                    41,361,292
                    
                    
                    $
                    26,178,545Property,
      plant and equipment, net
                    
                    
                    7
                    
                    
                    
                    2,529,670
                    
                    
                    
                    2,523,062Intangible
      assets, net
                    
                    
                    8
                    
                    
                    
                    8,046,948
                    
                    
                    
                    6,699,932Deposits
      on purchase of computer system
                    
                    
                    15
                    
                    
                    
                    4,382,377
                    
                    
                    
                    4,365,668TOTAL
      ASSETS
                    
                    
                    
                    
                    
                    $
                    56,320,287
                    
                    
                    $
                    39,767,207LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesNotes
      payable
                    
                    
                    
                    
                    
                    $
                    1,472,000
                    
                    
                    $
                    -Accounts
      payable
                    
                    
                    
                    
                    
                    
                    1,138,609
                    
                    
                    
                    938,483Advances
      from customers
                    
                    
                    
                    
                    
                    
                    590,610
                    
                    
                    
                    29,852Other
      payables
                    
                    
                    9
                    
                    
                    
                    775,856
                    
                    
                    
                    549,626Accruals
                    
                    
                    
                    
                    
                    
                    69,361
                    
                    
                    
                    116,673Income
      tax payable
                    
                    
                    
                    
                    
                    
                    1,166,528
                    
                    
                    
                    951,031Total
      current liabilities
                    
                    
                    
                    
                    
                    $
                    5,212,964
                    
                    
                    $
                    2,585,665TOTAL
      LIABILITIES
                    
                    
                    
                    
                    
                    $
                    5,212,964
                    
                    
                    $
                    2,585,665Commitments
      and contingencies
                    
                    
                    15
                    
                    
                    $
                    -
                    
                    
                    $
                    -





See
accompanying notes to consolidated financial statements


5




SHENGKAI
INNOVATIONS, INC.


CONSOLIDATED
BALANCE SHEETS (Continued)


AS
AT MARCH 31, 2009 AND JUNE 30, 2008


(Stated
in US Dollars)





Note
                  
                  
                  March 31, 2009
                  
                  
                  June 30, 2008(Unaudited)
                  
                  
                  (Audited)STOCKHOLDERS’
      EQUITYPreferred
      stock – $0.001 par value 15,000,000 share authorized ; 7,887,368 and
      5,915,526 shares issued and outstanding as of March 31, 2009 and June 30,
      2008 respectively
                  
                  
                  10
                  
                  
                  $
                  7,887
                  
                  
                  $
                  5,916Common
      stock - $0.001 par value 50,000,000 shares authorized; 22,112,500 shares
      issued and outstanding as of March 31, 2009 and June 30,
    2008
                  
                  
                  11
                  
                  
                  
                  22,113
                  
                  
                  
                  22,113Additional
      paid-in capital
                  
                  
                  11
                  
                  
                  
                  30,666,631
                  
                  
                  
                  23,494,626Statutory
      reserves
                  
                  
                  
                  
                  
                  
                  4,692,290
                  
                  
                  
                  2,875,066Retained
      earnings
                  
                  
                  
                  
                  
                  
                  13,057,820
                  
                  
                  
                  8,257,303Accumulated
      other comprehensive Income
                  
                  
                  
                  
                  
                  
                  2,660,582
                  
                  
                  
                  2,526,518$
                  51,107,323
                  
                  
                  $
                  37,181,542TOTAL
      LIABILITIES ANDSTOCKHOLDERS’
      EQUITY
                  
                  
                  
                  
                  
                  $
                  56,320,287
                  
                  
                  $
                  39,767,207





See
accompanying notes to financial statements


6





SHENGKAI
INNOVATIONS, INC.


CONSOLIDATED
STATEMENTS OF INCOME


FOR
THE THREE- MONTHS AND NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





Nine
      months ended March 31,
                  
                  
                  Three
      months ended March 31,Notes
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      revenues
                  
                  
                  
                  
                  $
                  27,315,359
                  
                  
                  $
                  24,028,336
                  
                  
                  $
                  9,975,305
                  
                  
                  $
                  9,817,525Cost
      of sales
                  
                  
                  
                  
                  
                  (10,764,238
                  )
                  
                  
                  (9,600,818
                  )
                  
                  
                  (3,752,577
                  )
                  
                  
                  (3,821,221
                  )Gross
      profit
                  
                  
                  
                  
                  $
                  16,551,121
                  
                  
                  $
                  14,427,518
                  
                  
                  $
                  6,222,728
                  
                  
                  $
                  5,996,304Operating
      expenses:Selling
                  
                  
                  
                  
                  
                  (2,731,973
                  )
                  
                  
                  (2,253,599
                  )
                  
                  
                  (975,497
                  )
                  
                  
                  (906,222
                  )General
      and administrative
                  
                  
                  
                  
                  
                  (1,830,263
                  )
                  
                  
                  (1,339,870
                  )
                  
                  
                  (728,078
                  )
                  
                  
                  (557,554
                  )Operating
      income
                  
                  
                  
                  
                  $
                  11,988,885
                  
                  
                  $
                  10,834,049
                  
                  
                  $
                  4,519,153
                  
                  
                  $
                  4,532,528Other
      income
                  
                  
                  
                  
                  
                  77,265
                  
                  
                  
                  9,074
                  
                  
                  
                  69,949
                  
                  
                  
                  132Interest
      income
                  
                  
                  
                  
                  
                  162,263
                  
                  
                  
                  11,882
                  
                  
                  
                  96,152
                  
                  
                  
                  4,859Income
      before income tax
                  
                  
                  
                  
                  $
                  12,228,413
                  
                  
                  $
                  10,855,005
                  
                  
                  $
                  4,685,254
                  
                  
                  $
                  4,537,519Income
      tax
                  
                  
                  12
                  
                  
                  
                  (3,050,486
                  )
                  
                  
                  (3,195,892
                  )
                  
                  
                  (1,166,205
                  )
                  
                  
                  (1,141,338
                  )Net
      income
                  
                  
                  
                  
                  
                  $
                  9,177,927
                  
                  
                  $
                  7,659,113
                  
                  
                  $
                  3,519,049
                  
                  
                  $
                  3,396,181Basic
      earnings per share before dividend
                  
                  
                  13
                  
                  
                  $
                  0.415
                  
                  
                  $
                  0.373
                  
                  
                  $
                  0.159
                  
                  
                  $
                  0.165Basic
      earnings per share after dividend
                  
                  
                  13
                  
                  
                  $
                  0.299
                  
                  
                  $
                  0.373
                  
                  
                  $
                  0.159
                  
                  
                  $
                  0.165Diluted
      earnings per shareafter
      dividend
                  
                  
                  13
                  
                  
                  $
                  0.221
                  
                  
                  $
                  0.373
                  
                  
                  $
                  0.117
                  
                  
                  $
                  0.165Basic
      weighted average share outstanding
                  
                  
                  13
                  
                  
                  
                  22,112,500
                  
                  
                  
                  20,550,000
                  
                  
                  
                  22,112,500
                  
                  
                  
                  20,550,000Diluted
      weighted averageshare
      outstanding
                  
                  
                  13
                  
                  
                  
                  29,999,868
                  
                  
                  
                  20,550,000
                  
                  
                  
                  29,999,868
                  
                  
                  
                  20,550,000





See
accompanying notes to financial statements


7





SHENGKAI
INNOVATIONS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’EQUITY


FOR
THE YEAR ENDED JUNE 30, 2008 AND NINE-MONTHS ENDED MARCH 31, 2009


(Stated
in US Dollars) (Unaudited)





AccumulatedCommon
      stock
                
                
                
                
                
                Additional
                
                
                
                
                
                
                
                
                otherNumber
                
                
                
                
                
                Preferred
                
                
                paid-in
                
                
                Statutory
                
                
                Retained
                
                
                comprehensiveof
      share
                
                
                Amount
                
                
                stock
                
                
                capital
                
                
                reserves
                
                
                earnings
                
                
                income
                
                
                TotalBalance,
      July 1, 2007
                
                
                20,550,000
                
                
                $
                20,550
                
                
                $
                -
                
                
                $
                10,452,168
                
                
                $
                1,665,187
                
                
                $
                7,122,377
                
                
                $
                1,155,685
                
                
                $
                20,415,967Reduction
      of registered capital of a subsidiary
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (8,662,637
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (8,662,637
                )Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,087,039
                
                
                
                -
                
                
                
                10,087,039Reverse
      acquisition
                
                
                1,562,500
                
                
                
                1,563
                
                
                
                -
                
                
                
                243,777
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                245,340Proceeds
      from shares issued in private placement, net of  transaction
      costs of $1,275,000
                
                
                -
                
                
                
                -
                
                
                
                5,916
                
                
                
                13,719,084
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                13,725,000Appropriations
      to  statutory reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,209,879
                
                
                
                (1,209,879
                )
                
                
                -
                
                
                
                -Dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,742,234
                
                
                
                -
                
                
                
                (7,742,234
                )
                
                
                -
                
                
                
                -Foreign
      currency  translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,370,833
                
                
                
                1,370,833Balance,
      June 30, 2008
                
                
                22,112,500
                
                
                $
                22,113
                
                
                $
                5,916
                
                
                $
                23,494,626
                
                
                $
                2,875,066
                
                
                $
                8,257,303
                
                
                $
                2,526,518
                
                
                $
                37,181,542Balance,
      July 1, 2008
                
                
                22,112,500
                
                
                $
                22,113
                
                
                $
                5,916
                
                
                $
                23,494,626
                
                
                $
                2,875,066
                
                
                $
                8,257,303
                
                
                $
                2,526,518
                
                
                $
                37,181,542Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,177,927
                
                
                
                -
                
                
                
                9,177,927Proceeds
      from shares issued in private placement, net of  transaction
      costs of $386,210
                
                
                -
                
                
                
                -
                
                
                
                1,971
                
                
                
                4,611,819
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,613,790Appropriations
      to  statutory reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,817,224
                
                
                
                (1,817,224
                )
                
                
                -
                
                
                
                -Dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,560,186
                
                
                
                -
                
                
                
                (2,560,186
                )
                
                
                -
                
                
                
                -Foreign
      currency  translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                134,064
                
                
                
                134,064Balance,
      March, 2009
                
                
                22,112,500
                
                
                $
                22,113
                
                
                $
                7,887
                
                
                $
                30,666,631
                
                
                $
                4,692,290
                
                
                $
                13,057,820
                
                
                $
                2,660,582
                
                
                $
                51,107,323





See
accompanying notes to financial statements


8





SHENGKAI
INNOVATIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





Nine
      months ended March 31,2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income
                      
                      $
                      9,177,927
                      
                      
                      $
                      7,659,113Depreciation
                      
                      
                      125,490
                      
                      
                      
                      116,304Amortization
                      
                      
                      573,995
                      
                      
                      
                      531,631Adjustments
      to reconcile net income to net  cash provided by operating
      activities:Trade
      receivables
                      
                      
                      (1,139,996
                      )
                      
                      
                      (2,646,767
                      )Notes
      receivables
                      
                      
                      8,758
                      
                      
                      
                      -Other
      receivables
                      
                      
                      1,122
                      
                      
                      
                      40,958Deposits
      and prepaid expenses
                      
                      
                      2,551
                      
                      
                      
                      25,281Amounts
      due from directors and shareholders
                      
                      
                      -
                      
                      
                      
                      36,104Advances
      to suppliers
                      
                      
                      (812,803
                      )
                      
                      
                      133,778Inventories
                      
                      
                      (605,105
                      )
                      
                      
                      547,985Notes
      payable
                      
                      
                      1,470,853
                      
                      
                      
                      (34,105
                      )Accounts
      payable
                      
                      
                      196,381
                      
                      
                      
                      8,278Advances
      from customers
                      
                      
                      560,207
                      
                      
                      
                      193,363Other
      payables
                      
                      
                      223,953
                      
                      
                      
                      (593,067
                      )Accruals
                      
                      
                      (47,714
                      )
                      
                      
                      (34,779
                      )Income
      tax payable
                      
                      
                      211,692
                      
                      
                      
                      258,139Net
      cash provided by operating activities
                      
                      $
                      9,947,311
                      
                      
                      $
                      6,242,216Cash
      flows from investing activitiesPurchase
      of property, plant and equipment
                      
                      $
                      (122,443
                      )
                      
                      $
                      (190,591
                      )Sales
      proceeds of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      17,769Payment
      of deposit of computer system
                      
                      
                      -
                      
                      
                      
                      (4,055,769
                      )Payment
      of land use right
                      
                      
                      (1,894,339
                      )
                      
                      
                      -Increase
      in pledged deposits
                      
                      
                      (536,674
                      )
                      
                      
                      -Decrease
      in pledged deposits
                      
                      
                      -
                      
                      
                      
                      24,213Net
      cash used in investing activities
                      
                      $
                      (2,553,456
                      )
                      
                      $
                      (4,204,378
                      )Cash
      flows from financing activitiesProceeds
      from stock issued, net of transaction costs of $386,210
                      
                      $
                      4,613,790
                      
                      
                      $
                      -Net
      cash provided by financing activities
                      
                      $
                      4,613,790
                      
                      
                      $
                      -


9


SHENGKAI
INNOVATIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





Nine
      months ended March 31,2009
                    
                    
                    2008Net
      cash and cash equivalents sourced
                    
                    $
                    12,007,645
                    
                    
                    $
                    2,037,838Effect
      of foreign currency translation on cash  and cash
      equivalents
                    
                    
                    73,845
                    
                    
                    
                    253,880Cash
      and cash equivalents–beginning of year
                    
                    
                    21,313,484
                    
                    
                    
                    1,691,476Cash
      and cash equivalents–end of year
                    
                    $
                    33,394,974
                    
                    
                    $
                    3,983,194Supplementary
      cash flow information:Interest
      received
                    
                    $
                    162,750
                    
                    
                    $
                    16,637Tax
      paid
                    
                    
                    2,838,793
                    
                    
                    
                    2,937,754





See
accompanying notes to financial statements


10


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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 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 Statements of Financial Accounting Standards (“SFAS”) No. 141. “Business
Combinations”. For financial reporting purposes, this transaction is classified
as a recapitalization of the Company and the historical financial statements of
Shen Kun. The accompanying audited consolidated financial statements were
retroactively adjusted to reflect the effects of the recapitalized. The
1,562,500 shares of Shengkai Innovations, Inc. outstanding prior to the stock
exchange transaction were accounted for at the net book value at the time of the
transaction, which was a deficit of $62,206. Accordingly, the consolidated
statements of income include the results of operations of Tianjin Shengkai
Industrial Technology Development Co., Ltd from the acquisition date through
March 31, 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.





On
October 23, 2008, the Company changed its name from Southern Sauce Company, Inc.
to Shengkai Innovations, Inc.


11


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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 subsidiaries
                  
                  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.


12


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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 represent restricted cash of deposits on account to secure notes
payable and deposit for investor and public relation affairs as at March 31,
2009 and deposit for investor and public relation affairs as at June 30,
2008.





(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.


13


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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
SFAS No. 144. 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
recognised 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 are 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.





(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.





March 31,
                                      2009
                                    
                                    
                                    June 30,
                                      2008Cash
      on hand
                                    
                                    $
                                    5,708
                                    
                                    
                                    $
                                    4,880Agricultural
      Bank of China
                                    
                                    
                                    -
                                    
                                    
                                    
                                    421Bank
      of China
                                    
                                    
                                    17,864
                                    
                                    
                                    
                                    12,888Industrial
      and Commercial Bank of China
                                    
                                    
                                    774,234
                                    
                                    
                                    
                                    8,317,060Industrial
      Bank Co. Ltd.
                                    
                                    
                                    5,042,948
                                    
                                    
                                    
                                    37,070Shanghai
      Pudong Development Bank
                                    
                                    
                                    27,538,504
                                    
                                    
                                    
                                    12,939,316The
      Hong Kong and Shanghai BankingCorporation
      Limited
                                    
                                    
                                    15,716
                                    
                                    
                                    
                                    1,849$
                                    33,394,974
                                    
                                    
                                    $
                                    21,313,484




14


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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
collectibility 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)
            Advertising





The
Company expensed all advertising costs as incurred.  Advertising
expenses included in the selling expenses were $80,170 and $26,572 for the nine
months ended March 31, 2009 and 2008 respectively.





(n)
            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 were $491,884 and $66,052 for the nine months ended
March 31, 2009 and 2008 respectively.





(o)
            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 nine months ended March 31, 2009 and 2008
were $26,875 and $49,777 respectively.





15


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(p)
            Income
      tax





The Group
accounts for income taxes 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 taxes
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.





(q)
            Foreign
      currency translation





The
accompanying financial statements are presented in United States
dollars.  The reporting currency of the Group is the U.S. dollar
(USD). 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:





March
      31, 2009Balance
      sheet
                  RMB
      6.8456 to US$1.00Statements
      of income
                  RMB
      6.8509 to US$1.00June
      30, 2008Balance
      sheet
                  RMB
      6.8718 to US$1.00Statements
      of income
                  RMB
      7.2906 to US$1.00March
      31, 2008Balance
      sheet
                  RMB
      7.0222 to US$1.00Statements
      of income
                  RMB
      7.3969 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.


16




SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(r)
            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 March 31, 2009 and June 30, 2008
amounted to $33,389,266 and $21,308,604 respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.





(s)
            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 $4,692,290 and
$2,875,066 as of March 31, 2009 and June 30, 2008 respectively.





(t)
            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.


17





SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(u)
            Recent
      accounting pronouncements





In
      December 2007, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standard (“SFAS”) No. 160, "Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB No.
      51”.  SFAS 160 establishes accounting and reporting standards
      for the noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary.  SFAS 160 is effective for
      fiscal years, and interim periods within those fiscal years, beginning on
      or after December 15, 2008.  As such, the Company is required to
      adopt these provisions at the beginning of the fiscal year ended June 30,
      2009.  The Company is currently evaluating the impact of SFAS
      160 on its consolidated financial statements but does not expect it to
      have a material effect





In
      December 2007, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standard (“SFAS”) No. 141(R), "Business
      Combinations”.  SFAS 141(R) establishes principles and
      requirements for how the acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, an
      any noncontrolling interest in the acquiree, recognizes and measures the
      goodwill acquired in the business combination or a gain from a bargain
      purchase, and determines what information to disclose to enable users of
      the financial statements to evaluate the nature and financial effects of
      the business combination.  SFAS 141(R) is effective for fiscal
      years, and interim periods within those fiscal years, beginning on or
      after December 15, 2008.  As such, the Company is required to
      adopt these provisions at the beginning of the fiscal year ended June 30,
      2009.  The Company is currently evaluating the impact of SFAS
      141(R) on its consolidated financial statements but does not expect it to
      have a material effect.





In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (“SFAS”) No. 161 “Disclosures about Derivative Instruments
and Hedging Activities”. SFAS 161 is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently evaluating the impact of SFAS 161 on its consolidated
financial statements but does not expect it to have a material
effect.





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. This Staff Position is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
Application of this FSP is not currently applicable to the Company as the
Company’s intangible assets consist of land used rights which has a fixed useful
life of 50 years.




18


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(u)
              Recent
      accounting pronouncements
(Continued)





In May
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60 (SFAS
163).  This statement clarifies accounting for financial guarantee
insurance contracts by insurance enterprises under FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises.  SFAS 163 is
effective for fiscal years and interim periods within those years, beginning
after December 15, 2008.  As the Company does not issue financial
guarantee insurance contracts, it does not expect the adoption of this standard
to have an effect on its financial position or results of
operations.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the
independent auditors, as the entity is responsible for selecting accounting
principles for financial statements that are presented in conformity with GAAP.
SFAS 162 is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards. SFAS 162 is not expected to have a material impact on the
Company’s financial statements.





3.
            CONCENTRATIONS
      OF CREDIT RISK AND MAJOR CUSTOMERS





Financial
instruments which potentially expose the Group to concentrations of credit risk,
consists of cash and trade receivables as of March 31, 2009 and June 30, 2008.
The Group performs ongoing evaluations of its cash position and credit
evaluations to ensure sound collections and minimize credit losses
exposure.





As of
March 31, 2009 and June 30, 2008, almost 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
nine months ended  March 31, 2009 and 2008, nearly all of the Group’s
sales were generated from the PRC. In addition, nearly all accounts receivable
as of  March 31, 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
nine months ended  March 31, 2009, and 2008, there was no customer who
accounts for 10% or more of the Group’s revenue.


19





SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





3.
            CONCENTRATIONS
      OF CREDIT RISK AND MAJOR CUSTOMERS
(Continued)





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


March
      31, 2009
                  
                  
                  June
      30, 2008Customer
      A
                  
                  $
                  1,168,634
                  
                  
                  $
                  -Customer
      B
                  
                  
                  -
                  
                  
                  
                  851,262Customer
      C
                  
                  
                  -
                  
                  
                  
                  772,723Customer
      D
                  
                  
                  -
                  
                  
                  
                  415,440





4.
            PLEDGED
      DEPOSITS





Pledged
deposits were restricted cash of deposits on account to secure notes payables
and deposit for investor and public relation affairs.





5.
            OTHER
      RECEIVABLES





Other
receivables are comprised of the following:





March
      31, 2009
                            
                            
                            June
      30, 2008Tender
      deposits
                            
                            $
                            -
                            
                            
                            $
                            10,623Sundry
                            
                            
                            18,744
                            
                            
                            
                            9,168$
                            18,744
                            
                            
                            $
                            19,791





6.
            INVENTORIES





Inventories
are comprised of the following:





March
      31, 2009
                                
                                
                                June
      30, 2008Finished
      goods
                                
                                $
                                175,897
                                
                                
                                $
                                298,411Work
      in process
                                
                                
                                -
                                
                                
                                
                                15,264Raw
      materials
                                
                                
                                1,157,783
                                
                                
                                
                                411,652$
                                1,333,680
                                
                                
                                $
                                725,327




20


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





7.
            PLANT
      AND EQUIPMENT, NET





Property,
plant and equipment, net is comprised of the following:






March
      31, 2009
                                            
                                            
                                            June
      30, 2008At
      costBuildings
                                            
                                            $
                                            2,050,741
                                            
                                            
                                            $
                                            2,042,921Machinery
      and equipment
                                            
                                            
                                            693,938
                                            
                                            
                                            
                                            631,830Office
      equipment
                                            
                                            
                                            154,201
                                            
                                            
                                            
                                            135,637Motor
      vehicles
                                            
                                            
                                            416,115
                                            
                                            
                                            
                                            369,897$
                                            3,314,995
                                            
                                            
                                            $
                                            3,180,285Less:
      accumulated depreciation
                                            
                                            
                                            (785,325
                                            )
                                            
                                            
                                            (657,223
                                            )$
                                            2,529,670
                                            
                                            
                                            $
                                            2,523,062





Depreciation
expenses included in the cost of sales for the nine months
ended  March 31, 2009 and 2008 were $81,993 and $70,831 respectively,
depreciation expenses in the general and administrative expenses for the nine
months ended  March 31, 2009 and 2008 were $43,497 and $45,473
respectively.


21


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





8.
              INTANGIBLE
      ASSETS, NET





Intangible
assets, net are comprised of the following:





March
      31, 2009
                                                                          
                                                                          
                                                                          June
      30, 2008Land
      use rights, at cost
                                                                          
                                                                          $
                                                                          2,788,043
                                                                          
                                                                          
                                                                          $
                                                                          888,825Less:
      accumulated amortization
                                                                          
                                                                          
                                                                          (298,217
                                                                          )
                                                                          
                                                                          
                                                                          (283,748
                                                                          )$
                                                                          2,489,826
                                                                          
                                                                          
                                                                          $
                                                                          605,077Patent
      rights, at costs
                                                                          
                                                                          $
                                                                          7,450,041
                                                                          
                                                                          
                                                                          $
                                                                          7,421,636Less:
      accumulated amortization
                                                                          
                                                                          
                                                                          (1,899,030
                                                                          )
                                                                          
                                                                          
                                                                          (1,335,167
                                                                          )$
                                                                          5,551,011
                                                                          
                                                                          
                                                                          $
                                                                          6,086,469Others,
      at costs
                                                                          
                                                                          $
                                                                          19,910
                                                                          
                                                                          
                                                                          $
                                                                          19,835Less:
      accumulated amortization
                                                                          
                                                                          
                                                                          (13,799
                                                                          )
                                                                          
                                                                          
                                                                          (11,449
                                                                          )$
                                                                          6,111
                                                                          
                                                                          
                                                                          $
                                                                          8,386$
                                                                          8,046,948
                                                                          
                                                                          
                                                                          $
                                                                          6,699,932





Amortization
expenses included in the general and administrative expenses for the nine months
ended  March 31, 2009 and 2008 were $573,995 and $531,631
respectively.





9.
              OTHER
      PAYABLES





Other
payables are comprised of the following:





March
      31, 2009
                            
                            
                            June
      30, 2008Commission
      payables
                            
                            $
                            302,494
                            
                            
                            $
                            180,291Retention
      money for construction
                            
                            
                            16,634
                            
                            
                            
                            -Sundry
      PRC taxes payables
                            
                            
                            444,954
                            
                            
                            
                            352,521Sundry
                            
                            
                            11,774
                            
                            
                            
                            16,814$
                            775,856
                            
                            
                            $
                            549,626




22


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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.


23


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





10.
            PREFERRED
      STOCK AND WARRANTS (Continued)





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%.





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.




24


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





10.
              PREFERRED
      STOCK AND WARRANTS
(Continued)





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 $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 American 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.


25


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 2009 AND 2008


(Stated
in US Dollars) (Unaudited)





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 $22,113 with additional paid-in capital
$30,666,631 and $23,494,626 as at  March 31, 2009 and June 30, 2008
respectively.





12.  INCOME
TAX





The
Company is registered in the State of Florida and which conducts all of its
business through its PRC subsidiaries, is not subject to any income tax. The
subsidiaries are SK Ceramic Valves and 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 taxes computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:





For
      the nine months ended March 31,2009
                        
                        
                        2008U.S.
      statutory rate
                        
                        
                        34
                        %
                        
                        
                        34
                        %Foreign
      income not recognized in the U.S.
                        
                        
                        (34
                        )%
                        
                        
                        (34
                        )%PRC
      EIT
                        
                        
                        25
                        %
                        
                        
                        25
                        %Provision
      for income taxes
                        
                        
                        25
                        %
                        
                        
                        25
                        %





The PRC
EIT rate was changed to 25% from 33% since January 1, 2008.





Income
before income tax expenses of $12,228,413, and $10,855,005 for the nine months
ended March 31, 2009, and 2008 respectively, was attributed to subsidiaries with
operations in China. Income tax expense related to China income for the nine
months ended March 31, 2009, and 2008 are $3,050,486, and $3,195,892
respectively.





The Group
uses the asset and liability method, where deferred tax assets and
liabilities  are  determined based in the expected future
tax consequences of temporary differences between the carrying amounts of assets
and liabilities for financial and income tax reporting purposes. There are no
material temporary differences and therefore no deferred tax asset or
liabilities as at March 31, 2009 and 2008.


26


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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 nine months ended March 31,2009
                                                    
                                                    
                                                    2008Earnings:Net
      income for the period
                                                    
                                                    $
                                                    9,177,927
                                                    
                                                    
                                                    $
                                                    7,659,113Non-cash
      Dividends on convertible preferred stock
                                                    
                                                    
                                                    (2,560,186
                                                    )
                                                    
                                                    
                                                    -Earnings
      for the purpose of basic earnings per share
                                                    
                                                    $
                                                    6,617,741
                                                    
                                                    
                                                    $
                                                    7,659,113Effect
      of dilutive potential common stock
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Earnings
      for the purpose of dilutive earnings per share
                                                    
                                                    $
                                                    6,617,741
                                                    
                                                    
                                                    $
                                                    7,659,113Number
      of shares:Weighted
      average number of common stock for the purpose of basic earnings per
      share
                                                    
                                                    
                                                    22,112,500
                                                    
                                                    
                                                    
                                                    20,550,000Effect
      of dilutive potential common stock - conversion of convertible preferred
      stock
                                                    
                                                    
                                                    7,887,368
                                                    
                                                    
                                                    
                                                    -Weighted
      average number of common stock for the purpose of dilutive earnings per
      share
                                                    
                                                    
                                                    29,999,868
                                                    
                                                    
                                                    
                                                    20,550,000Earnings
      per share:Basic
      earnings per share before dividend
                                                    
                                                    $
                                                    0.415
                                                    
                                                    
                                                    $
                                                    0.373Basic
      earnings per share after dividend
                                                    
                                                    $
                                                    0.299
                                                    
                                                    
                                                    $
                                                    0.373Dilutive
      earnings per share after dividend
                                                    
                                                    $
                                                    0.221
                                                    
                                                    
                                                    $
                                                    0.373


27


SHENGKAI
INNOVATIONS, INC.


NOTES
TO FINANCIAL STATEMENTS


FOR
THE NINE-MONTHS ENDED MARCH 31, 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, trade receivables, 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





The
Company entered into an agreement with a technology development company to
purchase a computer system in improving the quality of ceramic valve production
(the Computer System) during the third quarter of 2007. The Company expected the
Computer System would be delivered within 2 years and the total costs were
$8,764,754 (RMB60,000,000). The Company further entered into a supplementary
agreement with the technology development company in February 2009 and reduced
the scale of the Computer System in the original contract. The contract cost was
reduced to $4,382,377(RMB 30,000,000) accordingly, which had already been fully
paid. The Computer System will be delivered before June 30, 2009 according to
the supplementary agreement.





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 PRC and nearly
all identifiable assets of the Group are located in the PRC. Accordingly, no
segmental analysis is presented.


28


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 and nine months ended March 31, 2009 to the three months and
nine months ended March 31, 2008.


29




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 and nine months ended March 31, 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 14 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 March 31, 2009 and 2008





Revenue





Revenue
for the three months ended March 31, 2009 was $9,975,305, an increase of
$157,780 or 1.6% from $9,817,525 for the comparable period in
2008.  Approximately 97% of our revenue came from customers in the
electric power, petrochemical and chemical industries. The electric power
industry was still the significant market to our revenue, contributing
approximately 75% of total revenue for the three months ended March 31, 2009.
Revenue from the electric power industry was approximately $7.5 million for the
three months ended March 31, 2009, a decrease of approximately $1.7 million or
19% from approximately $9.26 million for the comparable period in 2008. Due to
constraints inproduction capacity that resulted from our efforts to
develop  the petrochemical market, sales revenue from the electricity
market has declined. Revenue from the petrochemical and chemical industry, our
biggest potential market, was approximately $2.2 million for the three months
ended March 31, 2009, an increase of approximately $1.9 million
or  633.3% from approximately $0.3 million for the comparable period
in 2008. The increase is primarily attributable to our shift in targeting of and
strengthening of marketing efforts for the petrochemical industryas our new
sales market from the electric power industry, which was our primary market in
2008.  Revenue from other industries, including the aluminum
and  metallurgy industries, was approximately $0.28 million for the
three months ended March 31, 2009, an increase of approximately $0.02
million  or 7.7% from approximately $0.26 million for the comparable
period in 2008.





At
present we are experiencing a deficiency of production capacity to meet demand
for our products. We are in the progress to expand our production capacity after
external financing from two private placements in June and July
2008.





Gross
Profit





Gross
profit for the three months ended March 31, 2009 was $6,222,728, an increase of
$226,424 or  3.8% compared to $5,996,304 for the comparable period in
2008. The gross profit margin for the three months ended March 31, 2009 also
increased to  62.4% from  61.1% for the comparable period in
2008.


30


Selling
Expenses





Selling
expenses for the three months ended March 31, 2009 was $975,497, an increase of
$69,275 or 7.6% from $906,222 for the comparable period in 2008. Commission paid
to the agents for introducing new customers to us was approximately $0.8 million
for the three months ended March 31, 2009. Another major selling expense was
exhibition expense which was $110,785 in March 31, 2009, an increase of $104,375
from $6,410 in March 31, 2008. This increase was mainly attributable to more
frequently attending exhibitions to find new local and oversea
customers.





General and Administrative
Expenses





General
and administrative expenses for the three months ended March 31, 2009 were $
728,078, an increase of $170,524 or 30.6% compared to $557,554 for the
comparable period in 2008. The increase was primarily attributable to increases
in technology development expense, from $45,481 to $269,717 over the comparable
periods of 2008 and 2009, representing an increase of $224,236 or
493.0%.





Interest
expense




There was
no interest expense for the three months ended March 31, 2009. No short or long
term loans were outstanding for the three months ended March 31,
2009.





Income Tax
Expenses





Income
tax for the three months ended March 31, 2009 was $1,166,205, an increase of
$24,867 or  2.2%  from $1,141,338 for the comparable period
in 2008.





Comparison
of the Nine Months Ended March 31, 2009 and 2008





Revenue





Revenue
for the nine months ended March 31, 2009 was $27,315,359, an increase of
$3,287,023 or 13.7% from $24,028,336  for the comparable period in
2008.  Approximately 96% of our revenue came from customers in the
electric power, petrochemical and chemical industries. The electric power
industry was still the significant market to our revenue, contributing
approximately 77% of total revenue for the nine months ended March 31, 2009.
Revenue from the electric power industry was approximately $21.0 million for the
nine months ended March 31, 2009, an increase of approximately $1.2
million  or 6.1% from approximately $19.8 million for the comparable
period in 2008. The increase was primarily attributable to the broadening of our
customer base and increased orders from existing customers. Revenue from the
petrochemical and chemical industry, our biggest potential market, was
approximately $5.0 million for the nine months ended March 31, 2009, an increase
of approximately $3.7 million or 284.6% from approximately $1.3 million for the
comparable period in 2008. The increase is primarily attributable to our shift
in targeting of and strengthening of marketing efforts for the petrochemical
industry as our new sales market from the electric power industry, which was our
primary market in 2008.  Revenue from other industries, including the
aluminum and  metallurgy industries, was approximately $1.2 million
for the nine months ended March 31, 2009, an decrease of approximately $ 1.8
million or 60.0 % from approximately $3.0 million for the comparable period in
2008. The decrease is primarily attributable to adverse influences of the
economic crisis, which have led some projects to be cancelled.





At
present we are experiencing a deficiency of production capacity to meet demand
for our products. We are in the progress to expand our production capacity after
external financing from two private placements in June and July
2008.





Gross
Profit





Gross
profit for the nine months ended March 31, 2009 was $16,551,121, an increase of
$2,123,603 or 14.7% compared to $14,427,518 for the comparable period in 2008.
The gross profit margin for the nine months ended March 31, 2009 slightly
increased to 60.6% from 60.0% for the comparable period in
2008.


31


Selling
Expenses





Selling
expenses for the nine months ended March 31, 2009 was $2,731,973, an increase of
$478,374 or 21.2% from $2,253,599 for the comparable period in 2008. The major
selling expense was commission paid to the agents for introducing new customers
to us, which was approximately $2.2 million for the nine months ended March 31,
2009, an increase of approximately $0.2 million or 10.0% from approximately $2.0
million for the comparable period in March 31, 2008. Another major selling
expense was exhibition expense, which was $306,162 in March 31, 2009, an
increase of $290,166 from $15,996 in March 31, 2008. This increase was primarily
attributable to more frequently attending exhibitions to find new local and
oversea customers.





General and Administrative
Expenses





General
and administrative expenses for the nine months ended March 31, 2009 were
$1,830,263, an increase of $490,393 or 36.6% compared to $1,339,870 for the
comparable period in 2008. The increase was primarily attributable to increases
in technology development expenses, from $49,328 to $491,884 over the comparable
periods of 2008 and 2009, representing an increase of $442,556 or
897.2%.  Another reason was the increase in the expenses related to
preparation for the reverse merger and private placement transactions in June
and July 2008.





Interest
expense




There was
no interest expense for the nine months ended March 31, 2009. No short or long
term loans were outstanding for the nine months ended March 31,
2009.





Income Tax
Expenses





Income
tax for the nine months ended March 31, 2009 was $3,050,486, a decrease of
$145,406 or 4.5%  from $3,195,892 for the comparable period in 2008.
We incurred this decrease due to the PRC government’s decrease of  the
Enterprise Income Tax rate from 33% to 25% beginning January 1, 2008, which
reduced income tax expenses by approximately $0.9 million from those expenses
that would have been incurred if the previous tax rate was applied.





Liquidity
and Capital Resources





Cash and Cash
Equivalents




Our cash
and cash equivalents as at the beginning of the nine months ended March 31, 2009
was $21,313,484  and increased to $33,394,974 by the end of the
period, an increase of $12,081,490 or  56.7%. The net change in
cash and cash equivalents represented an increase of $9,789,772 or 427.2% from
$2,291,718 for the comparable period in 2008. The increase was primarily
attributable to a increase in cash provided by financing activities and
operating activities.




Net cash provided by
operating activities





Net cash
provided by operating activities was $9,947,311 for the nine months ended March
31, 2009, an increase of $3,705,095 or 59.4% from $6,242,216 for the comparable
period in 2008. Net income was increase of $1,518,815 or 19.8% from $7,659,113
for the comparable period in 2008. In addition, the changes in trade receivables
and notes payable were increased by $1,506,771 and
$1,504,958  respectively over the nine months ended March 31, 2008 and
2009. On the other hand, the increases  in inventory made net cash
outflow increase by  $1,153,090 over the two comparable periods in
2008 and 2009.





Net cash used in investing
activities




Net cash
used in investing activities was $2,553,456  for the nine months ended
March 31, 2009, compared to $4,204,378 for the nine months ended March 31, 2008,
an increase of $1,650,922 or  39.3%. The major expense for the past
nine months periods was the $1.9 million payment for a land use
right. During the nine month period ended March 31, 2008, the major expense
was the deposit payment for a computer system of $4 million.


32


Net cash used in financing
activities





Net cash
provided by financing activities was $4,613,790 for the nine months ended March
31, 2009, primarily comprised of the second private placement transaction
reported on our current report on Form 8-K filed with the SEC on July 24, 2008.
There was no net cash provided by financing activities for the nine months ended
March 31, 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 is RMB12.6 million (approximately $1.9 million). The
formal contract was signed with the government on Jan 23, 2009, and we settled
the bid price in full in March 2009. The purpose of the acquisition of land is
for expansion of production capacity.  Such expansion of production
capacity, once completed, would 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.





The
Company originally had a capital commitment on purchase of a computer systems
and patent applications since the Company entered into an agreement with a
technology development company to purchase a computer system in improving the
quality of ceramic valve production (the “Computer System”) during the third
quarter of 2007. The Company expected the Computer System would be delivered
within 2 years and the total costs were $8,764,754 (RMB60,000,000). However, the
Company subsequently entered into a supplementary agreement with the technology
development company in February 2009 and reduced the scale of the Computer
System in the original contract. The contract cost was reduced to $4,382,377(RMB
30,000,000) accordingly, which had already been fully paid. The Computer System
will be delivered before June 30, 2009 according to the supplementary agreement.
See Note 15 – Commitments and Contingency in the notes to the financial
statements, included elsewhere in this report.





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).




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.


33


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
September 2007, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
years.





In
September 2007, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108, the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods, based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2007. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2007 by recording correcting adjustments to the carrying values of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.





In
February 2007, FASB issued Statement of Financial Accounting Standards No.
(“SFAS”) 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”).
SFAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. Entities that elect the fair value option
will report unrealized gains and losses in earnings at each subsequent reporting
date. The fair value option may be elected on an instrument-by-instrument basis,
with a few exceptions. SFAS 159 also establishes presentation and disclosure
requirements to facilitate comparisons between entities that choose different
measurement attributes for similar assets and liabilities. The requirements of
SFAS 159 are effective for our fiscal year beginning on October 1,
2008.





In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (“SFAS”) No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ended June 30, 2009.
The Company is currently evaluating the impact of SFAS 160 on its consolidated
financial statements but does not expect it to have a material
effect.





In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (“SFAS”) No. 141(R), "Business Combinations”. SFAS
141(R) establishes principles and requirements for how the acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, an any noncontrolling interest in the acquiree, recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. As
such, the Company is required to adopt these provisions at the beginning of the
fiscal year ended June 30, 2009. The Company is currently evaluating the impact
of SFAS 141(R) on its consolidated financial statements but does not expect it
to have a material effect.


34


In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (“SFAS”) No. 161 “Disclosures about Derivative Instruments
and Hedging Activities”. SFAS 161 is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently evaluating the impact of SFAS 161 on its consolidated
financial statements but does not expect it to have a material
effect.




In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination
of  the Useful Life of Intangible Assets, which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. This Staff Position is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. Application of this FSP is not currently applicable to the Company
as the Company’s intangible assets consist of land used rights which has a fixed
useful life of 50 years.





In May
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60 (SFAS
163).  This statement clarifies accounting for financial guarantee
insurance contracts by insurance enterprises under FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises.  SFAS 163 is
effective for fiscal years and interim periods within those years, beginning
after December 15, 2008.  As the Company does not issue financial
guarantee insurance contracts, it does not expect the adoption of this standard
to have an effect on its financial position or results of
operations.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the
independent auditors, as the entity is responsible for selecting accounting
principles for financial statements that are presented in conformity with GAAP.
SFAS 162 is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards. SFAS 162 is not expected to have a material impact on the
Company’s financial statements.





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 nine months ended March 31, 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.


35


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 March 31, 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 March 31, 2009 that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial
reporting.





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.


36


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:
      May 15, 2009
                  By:
                  /s/
      Wang ChenName:  Wang
      ChenTitle:   Chief
      Executive Officer and Director
                    (principal
      executive officer, principal financial officer, and principal accounting
      officer )


37