Shengkai Innovations 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2008

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ 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 February 13, 2009.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	10
Item 4.	Controls and Procedures	10
	PART II	10
Item 1.	Legal Proceedings	10
Item 1A.	Risk Factors	10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3.	Defaults Upon Senior Securities	11
Item 4.	Submission of Matters to a Vote of Security Holders	11
Item 5.	Other Information	11
Item 6.	Exhibits	11
SIGNATURES		12

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SHENGKAI INNOVATIONS, INC.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US dollars)(Unaudited)

SHENGKAI INNOVATIONS, INC.

CONTENTS		PAGES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2

CONSOLIDATED BALANCE SHEETS		F-3 – F-4

CONSOLIDATED STATEMENTS OF INCOME		F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY		F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS		F-7 – F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-9 – F-26

F-1

ALBERT WONG & CO.

CERTIFIED PUBLIC ACCOUNTANTS

7th Floor, Nan Dao Commercial Building

359-361 Queen’s Road Central

Hong Kong

Tel : 2851 7954

Fax: 2545 4086

ALBERT WONG

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

To: The Board of Directors and Stockholders of

Shengkai Innovations, Inc.

Report of Independent Registered Public Accounting Firm

We have reviewed the accompanying interim balance sheets of Shengkai Innovations, Inc. as of December 31, 2008 and 2007, and the related statements of income, stockholders’ equity and cash flows for the six-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.
February 11, 2009	Certified Public Accountants

F-2

SHENGKAI INNOVATIONS, INC.

CONSOLIDATED BALANCE SHEETS

AS AT DECEMBER 31, 2008 AND JUNE 30, 2008

(Stated in US Dollars)

	Note		December 31, 2008		June 30, 2008
			(Unaudited)		(Audited)
ASSETS
Current assets
Cash and cash equivalents			$	30,601,824	$	21,313,484
Pledged deposits		4		628,841		500,000
Trade receivables				3,868,069		3,596,318
Notes receivable				-		8,732
Other receivables		5		10,213		19,791
Deposits and prepaid expenses				379,329		2,543
Advances to suppliers				278,496		12,350
Inventories		6		1,271,714		725,327
Total current assets			$	37,038,486	$	26,178,545
Property, plant and equipment, net		7		2,549,773		2,523,062
Intangible assets, net		8		6,334,655		6,699,932
Deposits on purchase of computer system		15		4,376,878		4,365,668
TOTAL ASSETS			$	50,299,792	$	39,767,207
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable			$	128,841	$	-
Accounts payable				904,277		938,483
Advances from customers				230,353		29,852
Other payables		9		537,432		549,626
Accruals				112,434		116,673
Income tax payable				857,966		951,031
Total current liabilities			$	2,771,303	$	2,585,665
TOTAL LIABILITIES			$	2,771,303	$	2,585,665
Commitments and contingencies		15	$	-	$	-

See accompanying notes to consolidated financial statements

F-3

SHENGKAI INNOVATIONS, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

AS AT DECEMBER 31, 2008 AND JUNE 30, 2008

(Stated in US Dollars)

	Note		December 31, 2008		June 30, 2008
			(Unaudited)		(Audited)
STOCKHOLDERS’ EQUITY
Preferred stock – $0.001 par value 15,000,000 share authorized ; 7,887,368 and 5,915,526 shares issued and outstanding as of December 31, 2008 and June 30, 2008 respectively		10	$	7,887	$	5,916

Common stock - $0.001 par value 50,000,000 shares authorized; 22,112,500 shares issued and outstanding as of December 31, 2008 and June 30, 2008		11		22,113		22,113
Additional paid-in capital		11		30,666,631		23,494,626
Statutory reserves				4,691,725		2,875,066
Retained earnings				9,539,336		8,257,303
Accumulated other comprehensive
Income				2,600,797		2,526,518
			$	47,528,489	$	37,181,542
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	50,299,792	$	39,767,207

See accompanying notes to financial statements

F-4

SHENGKAI INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- MONTHS AND SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

			Six months ended December 31,						Three months ended December 31,
	Notes		2008			2007			2008			2007

Net revenues			$	17,340,054		$	14,210,811		$	8,142,807		$	7,605,454
Cost of sales				(7,011,661	)		(5,779,597	)		(3,404,087	)		(3,090,010	)
Gross profit			$	10,328,393		$	8,431,214		$	4,738,720		$	4,515,444
Operating expenses:
Selling				(1,756,476	)		(1,347,377	)		(885,639	)		(888,389	)
General and administrative				(1,102,185	)		(782,316	)		(505,699	)		(415,926	)
Operating income			$	7,469,732		$	6,301,521		$	3,347,382		$	3,211,129
Other income				7,316			8,942			-			8,942
Interest income				66,111			7,023			43,265			4,381
Income before income tax			$	7,543,159		$	6,317,486		$	3,390,647		$	3,224,452
Income tax		10		(1,884,281	)		(2,054,554	)		(858,086	)		(1,030,575	)
Net income			$	5,658,878		$	4,262,932		$	2,532,561		$	2,193,877
Basic earnings per share before dividend		13	$	0.256		$	0.207		$	0.115		$	0.107
Basic earnings per share after dividend		13	$	0.140		$	0.207		$	0.115		$	0.107
Diluted earnings per share after dividend		13	$	0.103		$	0.207		$	0.084		$	0.107
Basic weighted average share outstanding		13		22,112,500			20,550,000			22,112,500			20,550,000
Diluted weighted average share outstanding		13		29,999,868			20,550,000			29,999,868			20,550,000

See accompanying notes to financial statements

F-5

SHENGKAI INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY

FOR THE YEAR ENDED JUNE 30, 2008 AND SIX-MONTHS ENDED DECEMBER 31, 2008

(Stated in US Dollars) (Unaudited)

															Accumulated
	Common stock						Additional								other
	Number				Preferred		paid-in			Statutory		Retained			comprehensive
	of share		Amount		stock		capital			reserves		earnings			income		Total

Balance, July 1, 2007		20,550,000	$	20,550	$	-	$	10,452,168		$	1,665,187	$	7,122,377		$	1,155,685	$	20,415,967
Reduction of registered capital of a subsidiary		-		-		-		(8,662,637	)		-		-			-		(8,662,637	)
Net income		-		-		-		-			-		10,087,039			-		10,087,039
Reverse acquisition		1,562,500		1,563		-		243,777			-		-			-		245,340
Proceeds from shares issued in private placement, net of transaction costs of $1,275,000		-		-		5,916		13,719,084			-		-			-		13,725,000
Appropriations to statutory reserves		-		-		-		-			1,209,879		(1,209,879	)		-		-
Dividends		-		-		-		7,742,234			-		(7,742,234	)		-		-
Foreign currency translation adjustment		-		-		-		-			-		-			1,370,833		1,370,833
Balance, June 30, 2008		22,112,500	$	22,113	$	5,916	$	23,494,626		$	2,875,066	$	8,257,303		$	2,526,518	$	37,181,542
Balance, July 1, 2008		22,112,500	$	22,113	$	5,916	$	23,494,626		$	2,875,066	$	8,257,303		$	2,526,518	$	37,181,542
Net income		-		-		-		-			-		5,658,878			-		5,658,878
Proceeds from shares issued in private placement, net of transaction costs of $386,210		-		-		1,971		4,611,819			-		-			-		4,613,790
Appropriations to statutory reserves		-		-		-		-			1,816,659		(1,816,659	)		-		-
Dividends		-		-		-		2,560,186			-		(2,560,186	)		-		-
Foreign currency translation adjustment		-		-		-		-			-		-			74,279		74,279
Balance, December, 2008		22,112,500	$	22,113	$	7,887	$	30,666,631		$	4,691,725	$	9,539,336		$	2,600,797	$	47,528,489

See accompanying notes to financial statements

F-6

SHENGKAI INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

	Six months ended December 31,
	2008			2007
Cash flows from operating activities
Net income	$	5,658,878		$	4,262,932
Depreciation		83,329			75,932
Amortization		382,544			349,256

Adjustments to reconcile net income to net cash provided by operating activities:
Trade receivables		(262,560	)		(1,105,355	)
Notes receivable		8,756			(39,967	)
Other receivables		9,631			15,009
Deposits and prepaid expenses		2,550			7,639
Amounts due from directors and shareholders		-			35,578
Advances to suppliers		(266,158	)		137,178
Inventories		(544,614	)		(233,205	)
Notes payable		128,862			(33,608	)
Accounts payable		(36,621	)		(14,633	)
Advances from customers		200,458			445,372
Other payables		(13,607	)		(481,832	)
Accruals		(4,541	)		(39,557	)
Income tax payable		(95,522	)		181,621
Net cash provided by operating activities	$	5,251,385		$	3,562,360

Cash flows from investing activities
Purchase of property, plant and equipment	$	(103,563	)	$	(126,783	)
Sales proceeds of property, plant and equipment		-			17,510
Payment of deposit of computer system		-			(1,998,332	)
Deposit for land use right auction		(379,392	)		-
Increase in pledged deposits		(128,862	)		-
Decrease in pledged deposits		-			23,860
Net cash used in investing activities	$	(611,817	)	$	(2,083,745	)

Cash flows from financing activities
Proceeds from stock issued, net of transaction costs of $386,210	$	4,613,790		$	-
Net cash provided by financing activities	$	4,613,790		$	-

F-7

SHENGKAI INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

	Six months ended December 31,
	2008		2007

Net cash and cash equivalents sourced	$	9,253,358	$	1,478,615

Effect of foreign currency translation on cash and cash equivalents		34,982		110,699

Cash and cash equivalents–beginning of year		21,313,484		1,691,476
Cash and cash equivalents–end of year	$	30,601,824	$	3,280,790

Supplementary cash flow information:
Interest received	$	66,111	$	7,023
Tax paid		1,979,803		1,872,933

See accompanying notes to financial statements

F-8

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 December 31, 2008, and 2007.

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 December 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.

F-9

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 interest

Shen Kun International Limited	British Virgin Islands		100	%

Sheng Kai (Tianjin) Ceramic Valves Co., Ltd	PRC		100	%

*Tianjin Shengkai Industrial Technology Development 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.

F-10

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 December 31, 2008 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 years
Machinery and equipment	3 – 20 years
Office equipment	3 – 10 years
Motor 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.

F-11

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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.

	December 31, 2008		June 30, 2008
Cash on hand	$	4,348	$	4,880
Agricultural Bank of China		-		421
Bank of China		20,254		12,888
Industrial and Commercial Bank of China		340,389		8,317,060
Industrial Bank Co. Ltd.		6,352,012		37,070
Shanghai Pudong Development Bank		23,869,090		12,939,316
The Hong Kong and Shanghai Banking Corporation Limited		15,731		1,849
	$	30,601,824	$	21,313,484

F-12

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 $19,499 and $20,051 for the six months ended December 31, 2008 and 2007 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 $222,167 and $20,271 for the six months ended December 31, 2008 and 2007 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 six months ended December 31, 2008 and 2007 were nil and $30,847 respectively.

F-13

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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:

December 31, 2008
Balance sheet	RMB 6.8542 to US$1.00
Statements of income	RMB 6.8531 to US$1.00

June 30, 2008
Balance sheet	RMB 6.8718 to US$1.00
Statements of income	RMB 7.2906 to US$1.00

December 31, 2007
Balance sheet	RMB 7.3141 to US$1.00
Statements of income	RMB 7.5063 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.

F-14

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 December 31, 2008 and June 30, 2008 amounted to $30,597,476 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 $4,691,725 as of December 31, 2008 and June 30, 2008.

(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.

F-15

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 December 31, 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 December 31, 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 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.

F-16

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

3.	CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments which potentially expose the Group to concentrations of credit risk, consists of cash and trade receivables as of December 31, 2008 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 December 31, 2008 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 six months ended December 31, 2008 and 2007, nearly all of the Group’s sales were generated from the PRC. In addition, nearly all accounts receivable as of December 31, 2008 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 six months ended December 31, 2008, and 2007, there was no customer who accounts for 10% or more of the Group’s revenue.

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

	December 31, 2008		June 30, 2008

Customer A	$	1,050,451	$	-
Customer B		460,248		-
Customer C		397,717		-
Customer D		-		851,262
Customer E		-		772,723
Customer F		-		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.

F-17

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

5.	OTHER RECEIVABLES

Other receivables comprise the following:

	December 31, 2008		June 30, 2008

Tender deposits	$	10,213	$	10,623
Sundry		-		9,168
	$	10,213	$	19,791

6.	INVENTORIES

Inventories comprise the following:

	December 31, 2008		June 30, 2008

Finished goods	$	217,186	$	298,411
Work in process		18,710		15,264
Raw materials		1,035,818		411,652
	$	1,271,714	$	725,327

F-18

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

7.	PLANT AND EQUIPMENT, NET

Property, plant and equipment, net comprise the following:

	December 31, 2008			June 30, 2008
At cost
Buildings	$	2,048,168		$	2,042,921
Machinery and equipment		676,150			631,830
Office equipment		152,087			135,637
Motor vehicles		415,593			369,897
	$	3,291,998		$	3,180,285
Less: accumulated depreciation		(742,225	)		(657,223	)
	$	2,549,773		$	2,523,062

Depreciation expenses included in the cost of sales for the six months ended December 31, 2008 and 2007 were $54,547 and $97,554 respectively, depreciation expenses in the general and administrative expenses for the six months ended December 31, 2008 and 2007 were $28,782 and $57,003 respectively.

F-19

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

8.	INTANGIBLE ASSETS, NET

Intangible assets, net comprise the following:

	December 31, 2008			June 30, 2008

Land use rights, at cost	$	891,107		$	888,825
Less: accumulated amortization		(293,388	)		(283,748	)
	$	597,719		$	605,077
Patent rights, at costs	$	7,440,693		$	7,421,636
Less: accumulated amortization		(1,710,629	)		(1,335,167	)
	$	5,730,064		$	6,086,469
Others, at costs	$	19,886		$	19,835
Less: accumulated amortization		(13,014	)		(11,449	)
	$	6,872		$	8,386
	$	6,334,655		$	6,699,932

Amortization expenses included in the general and administrative expenses for the six months ended December 31, 2008 and 2007 were $382,544 and $719,171 respectively.

9.	OTHER PAYABLES

Other payables comprise the followings:

	December 31, 2008		June 30, 2008

Commission payables	$	224,339	$	180,291
Retention money for construction		11,008		-
Sundry PRC taxes payables		294,466		352,521
Sundry		7,619		16,814
	$	537,432	$	549,626

F-20

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 term

Series 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.

F-21

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 term

Series A	2,366,211	$3.52	5.0 years

F-22

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Stated in US Dollars) (Unaudited)

10.	PREFERRED STOCK AND WARRANTS (Continued)

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

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

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

Further, if the Company fails to obtain a listing on NASDAQ or the 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.

F-23

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 December 31, 2008 and June 30, 2008 respectively. The new capital structure was retroactively restated in the consolidated balance sheet as of December 31, 2007.

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 six months ended December 31,
	2008			2007

U.S. statutory rate		34	%		34	%
Foreign income not recognized in the U.S.		(34	%)		(34	%)
PRC EIT		25	%		33	%
Provision for income taxes		25	%		33	%

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

Income before income tax expenses of $7,543,159, and $6,317,486 for the six months ended December 31, 2008, and 2007 respectively, was attributed to subsidiaries with operations in China. Income tax expense related to China income for the six months ended December 31, 2008, and 2007 are $1,884,281, and $2,054,554 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 December 31, 2008 and 2007.

F-24

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 six months ended December 31,

Earnings:	2008			2007

Net income for the period	$	5,658,878		$	4,262,932
Non-cash Dividends on convertible preferred stock		(2,560,186	)		-

Earnings for the purpose of basic earnings per share	$	3,098,692		$	4,262,932

Effect of dilutive potential common stock		-			-

Earnings for the purpose of dilutive earnings per share	$	3,098,692		$	4,262,932

Number of shares:	��

Weighted average number of common stock for the purpose of basic earnings per share		22,112,500			20,550,000
Effect 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			20,550,000

Earnings per share:

Basic earnings per share before dividend	$	0.256		$	0.207

Basic earnings per share after dividend	$	0.140		$	0.207

Dilutive earnings per share after dividend	$	0.103		$	0.207

F-25

SHENGKAI INNOVATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX-MONTHS ENDED DECEMBER 31, 2008 AND 2007

(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 $8,544,330 (RMB60,000,000). The Company had already paid $4,272,165 (RMB30,000,000) for the Computer System and committed to pay the balance during next nine months.

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.

17.	SUBSEQUENT EVENTS

The Company successfully won a bid on a land use right over a plot of land approximately 43,566.3 square meters in size in October 2008. The land is located in Tianjin, China and the bid price is about $1.8 million (RMB12.6 million). The formal contract has been signed with the government on Jan 23, 2009 and the Company is requested to settle the price on Mar 25, 2009. The purpose of the acquisition of land is for expansion of production capacity.

F-26

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 six months ended December 31, 2008 to the three months and six months ended December 31, 2007.

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 six months ended December 31, 2008 and 2007 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 Six Months Ended December 31, 2008 and 2007

Revenue

Revenue for six months ended December 31, 2008 was $17,340,054, an increase of $3,129,243 or 22% from $14,210,811 for the comparable period in 2007. Similar to the same period of our last fiscal year, approximately 98% of our source of revenue came from customers in the electric power, petrochemical and chemical and metallurgy industries. The electric power industry was still the significant market to our revenue, contributing approximately 78.0% of total revenue for six months ended December 31, 2008. Revenue from the electric power industry was approximately $13.5 million for six months ended December 31, 2008, an increase of approximately $3.0 million or 28.6% from approximately $10.5 million for the comparable period in 2007. 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 was approximately $2.9 million for the six months ended December 31, 2008, an increase of approximately $1.9 million or 190% from approximately $1.0 million for the comparable period in 2007. The increase was primarily due to our focus on the petrochemical industry as our new sales market and the strengthening of marketing efforts in this area. Revenue from the metallurgy industry, aluminum industry and other industries was approximately $0.9 million for six months ended December 31, 2008, a decrease of approximately $1.8 million or 66.7% from approximately $2.7 million for the comparable period in 2007. This decrease was primarily attributable to some projects being cancelled as a result of negative influences of the economic crisis.

Gross Profit

Gross profit for six months ended December 31, 2008 was $10,328,393, an increase of $1,897,179 or 22.5% compared to $8,431,214 for the comparable period in 2007. The gross profit margin for six months ended December 31, 2008 also increased slightly to 59.6% from 59.3% for the comparable period in 2007.

Selling Expenses

Selling expenses for six months ended December 31, 2008 was $1,756,476, an increase of $409,099 or 30.4%, from $1,347,377 for the comparable period in 2007. The major selling expense was commission paid to the agents for introducing new customers to us, which was approximately $1.43 million at December 31, 2008, an increase of approximately $0.23 million or 19.2% from approximately $1.20 million in December 31, 2007. Another major selling expense was exhibition expense which was $195,377 in December 31, 2008, an increase of $185,930 from $9,447 in December 31, 2007. This increase was primarily attributable to more frequent attendance at exhibitions to find new local and oversea customers.

General and Administrative Expenses

General and administrative expenses for six months ended December 31, 2008 were $1,102,185, an increase of $319,869 or 40,9% compared to $782,316 for the comparable period in 2007. The increase was primarily attributable to increases in technology development expense, from $3,790 to $222,167 over the comparable periods of 2007 and 2008, representing an increase of $218,377 or 5761.9%. Another reason was the increase in the expenses related to preparation for the financing and related transactions described in our current report on Form 8-K filed with the SEC on July 24, 2008.

Interest expense

There was no interest expense for six months ended December 31, 2008 or the comparable period in 2007.

Income Tax Expenses

Income tax for six months ended December 31, 2008 was $1,884,281, an decrease of 8.3% or $170,273 from $2,054,554 for the comparable period in 2007.The PRC government decreased the income tax rate on enterprises from 33% to 25% beginning January 1, 2008, which reduced income tax expenses by around $0.6 million from those expenses that would have been incurred if the previous tax rate was applied.

Comparison of Three Months Ended December 31, 2008 and 2007

Revenue

Revenue for three months ended December 31, 2008 was $8,142,807, an increase of $537,353 or 7.1% from $7,605,454 for the comparable period in 2007. Similar to the comparable period of our last fiscal year, approximately 98.4% of our source of revenue came from customers in the electric power, petrochemical and chemical and metallurgy industries. The electric power industry was still the most significant market to our revenue, contributing approximately 79.8% of total revenue for three months ended December 31, 2008. Revenue from the electric power industry was approximately $6.5 million for three months ended December 31, 2008, an increase of approximately $1.0 million or 18.2% from approximately $5.5 million for the comparable period in 2007. The increase was primarily attributable to the broadening of our customer base. Revenue from the petrochemical and chemical industries was approximately $1.5 million for three months ended December 31, 2008, an increase of approximately $1.0 million or 200% from approximately $0.5 million for the comparable period in 2007. The increase was primarily due to our focus on the petrochemical industry as our new sales market and the strengthening of marketing efforts in this area. Revenue from metallurgy industry, aluminum industry and other industries was approximately $0.1 million for three months ended December 31, 2008, a decrease of approximately $1.5 million or 93.8% from approximately $1.6 million for the comparable period in 2007. This decrease was primarily attributable to some projects being cancelled as a result of negative influences of the economic crisis.

Gross Profit

Gross profit for three months ended December 31, 2008 was $4,738,720, an increase of $223,276 or 4.9% compared to $4,515,444 for the comparable period in 2007. The gross profit margin for three months ended December 31, 2008 decreased slightly to 58.2% from 59.4% for the comparable period in 2007. This was primarily attributable to costs related to the provision of sample products and promotional discounts to new customer to increase their confidence in our products.

Selling Expenses

Selling expenses for three months ended December 31, 2008 was $885,639, a slight decrease of $2,750 or 0.3% from $888,389 for the comparable period in 2007. The selling expenses over these two comparable periods were relatively stable.

General and Administrative Expenses

General and administrative expenses for three months ended December 31, 2008 were $505,699, an increase of $89,773 or 21.6% compared to $415,926 for the comparable period in 2007. The increase was primarily attributable to increases in technology development expense, from $184 to $112,276 over the comparable periods of 2007 and 2008, representing an increase of $112,092.

Interest expense

There was no interest expense for three months ended December 31, 2008 or the comparable period in 2007.

Income Tax Expenses

Income tax for three months ended December 31, 2008 was $858,086, a decrease of 16.7% or $172,489 from $1,030,575 for the comparable period in 2007. The PRC government decreased the income tax rate on enterprises from 33% to 25% beginning January 1, 2008, which reduced income tax expenses by nearly $0.3 million from those expenses that would have been incurred if the previous tax rate was applied.

Liquidity and Capital Resources

Cash and Cash Equivalent

Our cash and cash equivalents were $21,313,484 at the beginning of the year July 1, 2008 and increased to $30,601,824 at the six months ended December 31, 2008, an increase of $9,288,340 or 43.6%. The net change in cash and cash equivalents represented an increase of 484.4% or $7,699,026 from $1,589,314 for the comparable period in 2007. The increase was primarily attributable to an increase in cash provided by financing activities.

Net cash provided by operating activities

Net cash provided by operating activities was $5,251,385 for the six months ended December 31, 2008, an increase of $1,689,025 or 47.4% from $3,562,360 for the comparable period in 2007. Net income was $5,658,878 for six months ended December 31, 2008, an increase of $1,395,946 or 32.7% from $4,262,932 for the comparable period in 2007. In addition, the change in accounts receivable was decreased by $842,795 over the six months ended December 31, 2007 and 2008. On the other hand, the increases in advances to suppliers and inventory made net cash outflow increase by 714,745 over the two comparable periods in 2007 and 2008.

Net cash used in investing activities

Net cash used in investing activities was $611,817 for the six months ended December 31, 2008, a decrease of $1,471,928 or 70.6% from $2,083,745 for the comparable period in 2007. The change was primarily attributable to the significant deposit payment for a computer system in the six month period ended December 31, 2007 ..

Net cash provided by financing activities

Net cash provided by financing activities was $4,613,790 for the six months ended December 31, 2008, 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 six months ended December 31, 2007.

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.

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 $1.8 million). The formal contract was signed with the government on Jan 23, 2009. A deposit of RMB 2.52 million (approximately $360,000) was paid upon execution of the contract, with the balance of the bid price to be paid in full by March 25, 2009, and with additional utilities expenses in the approximate amount of US$2 million to be settled at that time. 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.

Inflation

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

Contractual Obligations

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

The following table summarizes our contractual obligations as of December 31, 2008, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

		Totals				Less Than 1 Year				1 to 3 Years			Thereafter
Capital expenditures (1)		$	$4,272,165			$	$4,272,165			$	-

(1) Capital expenditure is commitment for the purchase of computer systems and patent applications. See Note 15 – Commitments and Contingency in the notes to the financial statements, included elsewhere in this report. 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 “Company System”) on August 26, 2007. The Company expects the computer system to be delivered within 2 years and the total costs were $8,544,330 (RMB60,000,000). As of December 31, 2008, the Company has already paid $4,272,165 (RMB30,000,000) for the Computer System and is committed to pay the balance over the next nine months.

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.

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.

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 six months ended December 31, 2008. Based upon that evaluation, the Company’s CEO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controls

Our management, with the participation of our Chief Executive Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended December 31, 2008. 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 December 31, 2008 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.

On September 15, 2008, a majority of shareholders ratified the approval by the Company’s board of directors to amend the Company’s Articles of Incorporation to adopt a change in the Company’s name from “Southern Sauce Company, Inc.” to “Shengkai Innovations Co., Ltd” (the “Corporate Action”). In order to more fully comply with Florida laws and regulations related to changes in corporate names, on October 16, 2008, a majority of shareholders approved a modification to the Corporate Action that would amend the Company’s Articles of Incorporation to adopt the new corporate name, “Shengkai Innovations, Inc.” The name change took effect October 23, 2008. In conjunction with the name change, effective October 23, 2008, the Company’s common stock began trading on the Over The Counter Bulletin Board under the new symbol, “SKII.”

Item 5.

Other Information.

In October 2008, we successfully won a bid on a 50-year 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 $1.8 million). The formal contract was signed with the government on Jan 23, 2009. A deposit of RMB2.52 million (approximately $360,000) was paid upon execution of the contract, with the balance of the bid price to be paid in full by March 25, 2009, and with additional utilities expenses in the approximate amount of US$2 million to be settled at that time.

Item 6.

Exhibits.

(a) Exhibits

10.1	Land Use Agreement dated January 23, 2009, between Shengkai (Tianjin) Ceramic Valves Co., Ltd. and Tianjin Airport Industrial Park Land Bureau.

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.

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: February 13, 2009	By:	/s/ Wang Chen
		Name: Wang Chen
		Title: Chief Executive Officer and Director
		(principal executive officer, principal financial officer, and principal accounting officer )

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Shengkai Innovations (VALV) Inactive 10-Q2009 Q2 Quarterly report

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