10-Q/A 1 balqon_10qa1-093008.htm AMENDMENT NO. 1 balqon_10qa1-093008.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
AMENDMENT NO. 1
TO
FORM 10-Q
(Mark One)
|X|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008
 
|   |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________
 
Commission File Number: 000-52337
 
BALQON CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction
of incorporation or organization)
33-0989901
(I.R.S. Employer
Identification No.)

1420 240th Street, Harbor City, California
90710
(Address of principal executive offices)
(Zip Code)
 
(310) 326-3056
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes S No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes £ No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 S
 
As of November 14, 2008, there were 25,308,348 shares of the issuer’s common stock issued and outstanding.
 
EXPLANATORY NOTE
 
The purpose of this Amendment No. 1 to Form 10-Q (“Amendment”) is to amend our initial filing of a Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, filed with the Securities and Exchange Commission (“SEC”) on November 19, 2008 (the “Initial Filing”).  Defined terms used in this Amendment but not defined herein have the meanings ascribed to them in the Initial Filing.
 
On May 18, 2009, we filed a Current Report on Form 8-K with the SEC disclosing that our management concluded that an accounting error had been made in our historical financial statements in relation to the recording of the value of stock compensation awarded in June and August 2008 and to record a note discount related to a beneficial conversion feature and warrants issued in connection with the issuance of certain convertible notes in 2008.  As a result, our financial statements for the quarterly period ended September 30, 2008 must be restated (the “Restatement”).  In light of the Restatement, the financial statements and other financial information included in the Initial Filing are being restated in this Amendment.
 
Unless specified, the disclosures provided in this document have not been updated for more current information.  Therefore, this Amendment should be read in conjunction with our other filings made with the SEC subsequent to the date of the Initial Filing.  For updated disclosure regarding our business and financial condition, please read our periodic filings for the fiscal year ended December 31, 2008 and the quarterly period ended March 31, 2009.
 
CAUTIONARY STATEMENT
 
All statements included or incorporated by reference in this Amendment, other than statements or characterizations of historical fact, are “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements concerning projected net sales, costs and expenses and gross margins; our accounting estimates, assumptions and judgments; the demand for our products; the competitive nature of and anticipated growth in our industry; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by such words as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are set forth in the “Risk Factors” section of our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission, or SEC, on May 22, 2009, which could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
 
i
 
TABLE OF CONTENTS

 
PART I
FINANCIAL INFORMATION

   
Page 
Item 1.
Financial Statements
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4.
Controls and Procedures
38
Item 4T.
Controls and Procedures
38
 
PART II
OTHER INFORMATION
 
 
  
Item 1.
Legal Proceedings
41
Item 1A.
Risk Factors
41
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3.
Defaults Upon Senior Securities
42
Item 4.
Submission of Matters to a Vote of Security Holders
42
Item 5.
Other Information
42
Item 6.
Exhibits
42
     
Exhibits Filed with this Report
  
 
ii
 
PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
BALQON CORPORATION
CONDENSED BALANCE SHEETS

   
September 30,
2008
(Unaudited)
(As Restated)
    
December 31,
2007
  
ASSETS
            
Current assets
            
Cash
   $ 543,192     $ 34  
Accounts receivable
     —       35,000  
Inventories
     106,159       —  
Costs in excess of billings and estimated earnings on uncompleted contracts
     7,098       —  
Prepaid expenses
     1,534       —  
Total current assets
     657,983       35,034  
Property and equipment, net
     79,538       21,047  
Intangible assets
     353,465       —  
Deposits
     33,641       19,241  
Total assets
   $ 1,124,627     $ 75,322  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
                
Current liabilities
                
Accounts payable and accrued expenses
   $ 417,046     $ 29,212  
Convertible promissory notes, net of discount
     861,915       —  
Notes payable to related parties, unsecured
     125,875       —  
Advances from shareholder
     47,877       57,420  
Billings in excess of costs and estimated earnings on uncompleted contracts
     —       71,264  
Total current liabilities
     1,452,713       157,896  
                 
SHAREHOLDERS’ DEFICIENCY
                
Common stock, no par value, 100,000,000 shares authorized, 18,067,000 and 16,667,000 shares issued and outstanding
     5,000       5,000  
Common stock to be issued, 5,333,000 shares
     5,333,000       —  
Additional paid in capital
     1,272,056       —  
Accumulated deficit
     (6,938,142 )     (87,574 )
Total shareholders’ deficiency
     (328,086 )     (82,574 )
Total liabilities and shareholders’ deficiency
   $ 1,124,627     $ 75,322  
 
The accompanying notes are an integral part of these condensed financial statements.
 
1
 
BALQON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2008
(As Restated)
    
2007
    
2008
(As Restated)
    
2007
  
REVENUES:
                        
Contract revenue earned
   $ 10,787     $ 188,752     $ 138,362     $ 230,898  
Sale of parts
     —       —       75,000       —  
Total revenues
     10,787       188,752       213,362       230,898  
Total cost of revenues
     17,361       107,695       170,292       138,557  
Gross (loss) profit
     (6,574 )     81,057       43,070       92,341  
OPERATING EXPENSES:
                                
General and administrative
     940,703       98,829       6,304,051       137,412  
Reverse merger expenses
     429,300       —       429,300       —  
Depreciation and amortization
     2,693       895       6,370       1,279  
Total operating expenses
     1,372,696       99,724       6,739,721       138,691  
Loss from operations
     (1,379,270 )     (18,667 )     (6,696,651 )     (46,350 )
Interest expense
     (153,917 )     —       (153,917 )     —  
NET LOSS
   $ (1,533,187 )   $ (18,667 )   $ (6,850,568 )   $ (46,350 )
Net loss per share-basic and diluted
   $ (0.07 )   $ 0.00     $ (0.37 )   $ (0.04 )
Weighted average shares outstanding, basic and diluted
     21,263,232       16,667,000       18,699,087       16,667,000  
 
The accompanying notes are an integral part of these condensed financial statements.
 
2
 
BALQON CORPORATION
CONDENSED STATEMENT OF SHAREHOLDERS’ DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (Unaudited) (As Restated)
 
   
Common Stock
    
Common Stock to be Issued
    
Additional Paid
   
Accumulated
        
   
Number
    
Amount
    
Amount
    
In Capital
    
Deficit
    
Total
  
Balance, December 31, 2007
     16,667,000     $ 5,000     $ —     $ —     $ (87,574 )   $ (82,574 )
Effect of revenue merger transaction
     1,400,000       —       —       —       —       —  
Fair value of options and warrants granted for services
     —       —       —       685,309       —       685,309  
Fair value of beneficial conversion feature and warrants issued with convertible notes
     —       —       —       586,747       —       586,747  
Fair value of 5,333,000 shares granted for services
     —       —       5,333,000       —       —       5,333,000  
Net loss
     —       —       —       —       (6,850,568 )     (6,850,568 )
Balance, September 30, 2008 (unaudited) (as restated)
     18,067,000     $ 5,000     $ 5,333,000     $ 1,272,056     $ (6,938,142 )   $ (328,086 )
 
The accompanying notes are an integral part of these condensed financial statements.
 
3
 
BALQON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)

   
Nine Months Ended
September 30,
2008
(As Restated)
    
Nine Months Ended
September 30,
2007
  
Cash flow from operating activities:
            
Net loss
   $ (6,850,568 )   $ (46,350 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                
Depreciation and amortization
     6,370       1,279  
Amortization of debt discount
     138,662       —  
Fair value of common stock granted for services
     5,333,000       —  
Fair value of options and warrants granted for services
     685,309       —  
Changes in operating assets and liabilities:
                
Accounts receivable
     35,000       (50,000 )
Inventories
     (106,159 )     —  
Costs in excess of billings on uncompleted contracts
     (7,098 )     —  
Prepaid expenses
     (1,534 )     —  
Deposits
     (14,400 )     (19,241 )
Accounts payable and accrued expenses
     387,834       11,155  
Billings in excess of costs and estimated earnings on uncompleted contracts
     (71,264 )     163,102  
Net cash provided by (used in) operating activities
     (464,847 )     59,945  
                 
Cash flows from investing activities:
                
Acquisition of furniture, equipment and software
     (64,860 )     (22,316 )
Acquisition of EMS
     (353,465 )     —  
Net cash used in investing activities
     (418,325 )     (22,316 )
                 
Cash flows from financing activities:
                
Proceeds from notes payable, related parties
     125,875       —  
Proceeds from convertible promissory notes
     1,310,000       —  
Advances from shareholder
     (9,544 )     18,364  
Net cash provided by financing activities
     1,426,331       18,364  
Increase in cash and cash equivalents
     543,158       55,993  
Cash and cash equivalents, beginning of period
     34       —  
Cash and cash equivalents, end of period
   $ 543,192     $ 55,993  
                 
Supplemental cash flow information
                
Interest Paid
   $ —     $ —  
Income taxes Paid
   $ —     $ —  

Non-cash financing activities:
            
Fair value of beneficial conversion feature and warrants issued with convertible notes
   $ 586,747     $ —  
 
The accompanying notes are an integral part of these condensed financial statements.
 
4
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
The Company
 
Balqon Corporation (the “Company”) was incorporated on April 21, 2005 as a California corporation and commenced business operations in 2006. The Company is involved in research, development and commercialization of technologies for heavy-duty electric vehicles used in off-highway applications.
 
On July 11, 2008, the Company signed a term sheet in which the Company agreed to merge with BMR Solutions, Inc., a Nevada corporation (“BMR”).  On October 24, 2008, the Company completed the merger with BMR.  Pursuant to the merger agreement, the issued and outstanding common shares of the Company were exchanged on a one-for-one basis for common shares of BMR.  After the merger was completed, Balqon’s shareholders own approximately 94% of the outstanding shares of common stock of BMR and the original shareholders of BMR own approximately 6% of the outstanding shares of common stock of BMR, not including warrants.  The transaction was accounted for as a reverse merger (recapitalization) with Balqon deemed to be the accounting acquirer and BMR deemed to be the legal acquirer.  Upon the closing, BMR, changed its name to Balqon Corporation.  The financial statements presented herein are those of the accounting acquirer given the effect of the issuance of 1,400,000 shares of common stock upon completion of the transaction and reflecting the net liabilities assumed of BMR of $80,964 as a cost of the reverse merger had it occurred as of September 30, 2008.  In addition, the Company incurred expenses of $348,336 in connection with the reverse merger.
 
Basis of Presentation of Unaudited Financial Information
 
The unaudited financial statements of the Company as of September 30, 2008 and for the nine months ended September 30, 2008 and September 30, 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting companies.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in United States of America for complete financial statements.  However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year.
 
Going Concern
 
For the nine months ended September 30, 2008 and for the year ended December 31, 2007, the Company recorded net losses of $6,850,568 and $82,744, respectively, and had an accumulated deficit of $6,938,142 at September 30, 2008.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from this uncertainty.  The Company intends to raise funds to finance operations until the Company achieves profitable operations. The Company’s capital requirements for the next 12 months, as they relate to the production of its products will continue to be significant.  If adequate funds are not available to satisfy either medium or long-term capital requirements, the Company’s operations and liquidity could be materially adversely affected and the Company could be forced to cut back its operations.
 
5
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 revenue and expenses during the reporting period.  Material estimates relate to the recognition of contract revenues and estimated costs to complete contracts in process, and recoverability of reported amounts of long-lived assets.  Actual results may differ from those estimates.
 
Revenues
 
Contract Revenue and Cost Recognition on Prototype Vehicles
 
In accounting for contracts, the Company follows the provisions of the AICPA’s Statement of Position 81-1 – Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”).  The Company recognizes revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion.  This method is used because management considers costs to be the best available measure of progress on its contracts.  Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion.  We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated.
 
Contract costs include all direct material and labor costs.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues earned.
 
Sales of Production Units and Parts
 
The Company recognizes revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectibility is reasonably assured, all of which generally occurs upon shipment of the Company’s product or delivery of the product to the destination specified by the customer.
 
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when the Company places the products with the buyer’s carrier.  The Company regularly reviews its customers’ financial positions to ensure that collectibility is reasonably assured.  Except for warranties, the Company has no post-sales obligations.
 
Product Warranties
 
The Company provides limited warranties for parts and labor at no cost to its customers within a specified time period after the sale.  The Company estimates the actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. As of September 30, 2008 and December 31, 2007, the Company had no warranty reserve nor did it incur warranty expenses during the nine month periods ended September 30, 2008 or 2007.
 
6
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Cash and Cash Equivalents
 
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
 
Accounts Receivable
 
Trade receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed.
 
The Company uses the allowance method to account for uncollectible trade receivable balances. Under the allowance method, if needed, an estimate of uncollectible customer balances is made based upon specific account balances that are considered uncollectible. Factors used to establish an allowance include the credit quality and payment history of the customer.  At September 30, 2008 and December 31, 2007, there was no allowance for doubtful accounts.
 
Inventories
 
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis.  Inventories consist of the following:

   
September 30,
2008
(Unaudited)
  
Raw materials
   $ 97,197  
Work in process
     8,962  
    $ 106,159  
 
Property and Equipment
 
Property and equipment are stated at cost. The cost of property and equipment is depreciated on the straight-line method over the following estimated useful lives:
 
Computer equipment and software
3 years
Furniture
3 years
Machinery
3 years
 
Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
 
Goodwill and Intangible Assets
 
As required by Statement of Financial Accounting Standards (“SFAS”) No. 142, management performs impairment tests of goodwill and indefinite-lived intangible assets whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. Also, as required by SFAS No. 142, management performs impairment testing of goodwill and indefinite-lived intangible assets at least annually.
 
7
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Goodwill and Intangible Assets (continued)
 
In accordance with SFAS No. 142, management tests goodwill for impairment at the reporting unit level.  The Company has only one reporting unit.  At the time of goodwill impairment testing, management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved its reporting unit. If the calculated fair value is less than the current carrying value, impairment of the Company may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing in the absence of available domestic and international transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and Company-specific historical and projected data, develops growth rates and cash flow projections for the Company.  Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate fair value of all reporting units is reconciled to the total market capitalization of the Company. The discounted cash flow valuation methodology and calculations will be used in 2009 impairment testing.
 
Impairment of Long-lived Assets
 
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” establishes guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured.  This statement also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. The Company periodically reviews, at least annually, such assets for possible impairment and expected losses. If any losses are determined to exist they are recorded in the period when such impairment is determined. Based upon management’s assessment, there are no indicators of impairment of the Company’s long lived assets at September 30, 2008 or December 31, 2007.
 
Income Taxes
 
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in the Company’s financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
 
8
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Loss Per Share
 
Basic loss per share has been computed using the weighted average number of common shares outstanding and issuable during the period. The computation of basic loss per share excludes the 1,400,000 shares issued in connection with the reverse merger (see Note 1).  Diluted loss per share is computed based on the weighted average number of common shares and all common equivalent shares outstanding during the period in which they are dilutive. Common equivalent shares consist of shares issuable upon the exercise of stock options or warrants. As of September 30, 2008 common stock equivalents composed of options exercisable into 4,562,592 shares of the Company’s common stock and warrants exercisable into 2,039,180 shares of the Company’s common stock. For the three and nine month periods ended September 30, 2008 and 2007, common equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive.
 
Stock-Based Compensation
 
We periodically issue stock instruments, including shares of our common stock, stock options, and warrants to purchase shares of our common stock to employees and non-employees in non-capital raising transactions for services and for financing costs.
 
The Company accounts for stock option and warrant grants issued and vesting to employees using SFAS No. 123(R) “Share-Based Payment” effective January 1, 2006, for all share-based payments granted based on the requirements of SFAS No. 123(R) for all awards granted to employees.
 
The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with Emerging Issues Task Force (“EITF”) Issue No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF Issue No. 00-18 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either (i) the date at which a performance commitment is reached, or (ii) at the date at which the necessary performance to earn the equity instruments is complete.
 
Financial Assets and Liabilities Measure at Fair Value
 
Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance applies to other accounting pronouncements that require or permit fair value measurements. On February 12, 2008, the Financial Accounting Standards Board (“FASB”) finalized FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 had no effect on the Company’s financial position or results of operations.
 
9
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Accounting for Warrants and Derivatives
 
Freestanding financial instruments, such as detachable warrants, must be evaluated under the authoritative accounting literature to determine whether they should be classified as assets or liabilities (derivative accounting), temporary equity, or permanent equity. Management initially evaluates whether the instruments are covered by SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” If the instrument is not governed by SFAS No. 150, then management determines whether it meets the definition of a derivative under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  To determine whether a specific warrant agreement would follow derivative accounting under SFAS No. 133, management is required to first evaluate whether the warrant would meet the definition of equity under the provisions of EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”  Financial instruments such as warrants that are classified as permanent or temporary equity are excluded from the definition of a derivative for purposes of SFAS No. 133. Financial instruments, including warrants, that are classified as assets or liabilities are considered derivatives under SFAS No. 133, and are marked to market at each reporting date, with the change in fair value recorded in the income statement. The fair values of both the warrants and conversion benefits are calculated using a Black-Scholes Model, taking into consideration factors such as the underlying price of the company’s common stock, the exercise price for warrants or the conversion price for the conversion benefit, the company’s stock volatility (or the stock volatility of peer companies with an historical active trading market), and the risk-free interest rates available for comparable time periods.
 
Under EITF Issue No. 00-19, contracts that require physical settlement or net-share settlement and contracts that give the issuer the choice of settlement (in cash or shares) are classified as equity. Contracts that require net-cash settlement or that give the counterparty a choice which includes net-cash settlement are classified as assets or liabilities, not equity. If a transaction is outside the control of the issuer and there is the possibility that the issuer could net-cash settle, then for purposes EITF Issue No. 00-19 it is assumed that the issuer will have to net-cash settle, which may preclude accounting for a contract as equity of the company except in certain circumstances where the existing common stockholders would also receive cash. Management’s judgment is required in evaluating the terms of freestanding instruments, such as warrants, and the application of authoritative accounting literature.  The outstanding warrants to purchase shares of our common stock do not contain provisions for cash settlement.
 
Concentrations
 
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and unsecured accounts receivable.
 
The Company maintains cash balances at one bank. At times, the amount on deposit exceeds the federally insured limits. Management believes that the financial institution that holds the Company’s cash is financially sound and, accordingly, minimal credit risk exists.
 
10
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Concentrations (continued)
 
For the nine months ended September 30, 2008 and 2007, contract revenue earned is from one contract with the City of Los Angeles and the South Coast Air Quality Management District (“AQMD”).   For the nine months ended September 30, 2008, sale of parts were to one customer.
 
For the nine months ended September 30, 2008 and 2007, 24% and 28%, respectively, of contract costs incurred were to a single vendor.  At September 30, 2008, accounts payable to this vendor represented 8% of total accounts payable.  At September 30, 2008, three other vendors had balances representing 35%, 27%, and 8%, respectively, of total accounts payable.
 
Registration Payment Arrangements
 
The Company accounts for registration payment arrangements under FSP EITF Issue No. 00-19-2, “Accounting for Registration Payment Arrangements.” FSP EITF Issue No. 00-19-2 specifies that the contingent obligation to make future payments under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.”  The Company has not made any provision for registration payment arrangements at September 30, 2008 as it believes none will be payable.
 
Recent Accounting Pronouncements
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133,” to improve financial reporting of 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. SFAS No. 161 applies to fiscal years and interim periods beginning after November 15, 2008.
 
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations,” which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business.  SFAS No. 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited.
 
The Company does not believe that the adoption of the above recent pronouncements will have a material effect on the Company’s results of operations, financial position, or cash flows.
 
11
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 2 – RESTATEMENT OF FINANCIAL STATEMENTS
 
On May 18, 2009, the management of the Company concluded, with the concurrence of the Audit Committee of the Company’s Board of Directors, that an accounting error had been made in the Company’s historical financial statements in relation to the recording of the value of stock-based compensation awarded in June and August 2008, and in the recording of a note discount related to a beneficial conversion feature and associated warrants issued with certain convertible notes during 2008. As a result, the Company’s financial statements for the three and nine months ended September 30, 2008 have been restated.
 
The restatements reflect a change to the fair value of common stock that was used to calculate the fair value of certain stock instruments issued during 2008. In June and August 2008 when the stock based compensation was awarded, an active market for the Company’s common stock did not exist.  Therefore, in its application of SFAS No. 123(R), the Company used an alternative valuation method to calculate the fair value of the common stock issued during June and August 2008, and in its assumptions included in its Black-Scholes valuation model to value the stock options and warrants during 2008. The alternative valuation method included consideration of a valuation conducted by a third-party specialist in August, 2008.  The Company initially valued the underlying shares of its common stock at $.015 based upon this valuation. The Company has subsequently concluded that the $1.00 conversion price per share of common stock of the Company’s convertible notes that were offered and sold in July and September 2008 (and converted by October 31, 2008) and the $1.00 per unit sale price of units consisting of one share of common stock and a warrant to purchase one share of common stock that were offered and sold in October and December 2008 were better indicators of the fair value of the Company’s common stock, and such value is now used in determining the value of the shares of common stock granted in June and August 2008, the options granted in June 2008, and in the calculation of the note discount related to a beneficial conversion feature and associated warrants granted with the convertible notes during 2008.
 
As such, the Company has restated its previously issued September 30, 2008 financial statements to reflect a fair value of $1.00 per common share in accounting for the compensation costs of shares issued for services during the period, in its option pricing models to determine the fair value of options and warrants issued for services, and in calculating the relative value of the warrants and conversion feature of its convertible notes.  The effects of the restatement on the Company’s financial statements for the nine months ended September 30, 2008 are shown below:
 
12
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)

   
September 30, 2008
  
ASSETS
  
(As Initially
Reported)
    
(Adjustment)
    
(As Restated)
(Unaudited)
  
Current assets
                  
Cash and cash equivalents
   $ 543,192     $       $ 543,192  
Accounts receivable
     —               —  
Inventories
     106,159               106,159  
Costs in excess of billings
     7,098               7,098  
Prepaid expenses
     1,534               1,534  
Total current assets
     657,983               657,983  
Property and equipment, net
     79,538               79,538  
Other assets:
                        
  Deposits
     33,641               33,641  
  Intangible assets
     353,465               353,465  
Total assets
   $ 1,124,627     $ —     $ 1,124,627  
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
                        
Current liabilities
                        
Accounts payable and accrued expenses
   $ 417,046     $       $ 417,046  
Convertible promissory notes, net
     1,310,000       (448,085 ) (3)(4)     861,915  
Notes payable to related parties
     125,875               125,875  
Advances from shareholder
     47,877               47,877  
Total current liabilities
     1,900,798       (448,085 )     1,452,713  
SHAREHOLDERS’ DEFICIENCY
                        
Common stock
     5,000               5,000  
Common stock to be issued
     77,596       5,255,404  (1)      5,333,000  
Additional paid in capital
     —       1,272,056  (2)(3)      1,272,056  
                         
Accumulated deficit
     (858,767 )     (6,079,375 )     (6,938,142 )
Total shareholders’ deficiency
     (776,171 )     448,085       (328,086 )
Total liabilities and shareholders’ deficiency
   $ 1,124,627     $ —     $ 1,124,627  
 

13
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)

   
Nine Months Ended September 30, 2008
  
   
(As Initially Reported)
    
(Adjustment)
    
(As Restated)
(Unaudited)
  
REVENUES
                  
Contract revenue earned
   $ 138,362     $       $ 138,362  
Sale of parts
     75,000               75,000  
Total revenues
     213,362               213,362  
COSTS OF REVENUES
                        
Total cost of revenues
     170,292               170,292  
Gross profit
     43,070               43,070  
OPERATING EXPENSES
                        
General and administrative
     363,338       5,940,713  (1)(2)     6,304,051  
Reverse merger expenses
     429,300               429,300  
Depreciation and amortization
     6,370               6,370  
Total operating expenses
     799,008       5,940,713       6,739,721  
Loss from operations
     (755,938 )     (5,940,713 )     (6,696,651 )
Interest expense
     (15,255 )     (138,662 )(4)     (153,917 )
NET LOSS
   $ (771,193 )   $ (6,079,375 )   $ (6,850,568 )
Net loss per share – basic and diluted
   $ (0.04 )           $ (0.37 )
Weighted average shares outstanding, basic and diluted
     18,699,087               18,699,087  
 
14
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)

   
Nine Months Ended September 30, 2008
  
   
(As Initially Reported)
    
(Adjustments)
    
(As Restated)
(Unaudited)
  
Cash flow from operating activities:
                  
Net loss
   $ (771,193 )   $ (6,079,375 )   $ (6,850,568 )
Adjustments to reconcile net loss to net cash used in operating activities:
                        
Depreciation and amortization
     6,370               6,370  
Amortization of debt discount
     —       138,662  (4)     138,662  (2)
Fair value of common stock granted for services
     77,596       5,255,404  (1)     5,333,000  
Fair value of options and warrants granted for services
     —       685,309  (2)     685,309  
Changes in operating assets and liabilities
                        
Accounts receivable
     35,000               35,000  
Inventories
     (106,159 )             (106,159 )
Costs in excess of billings on uncompleted contracts
     (7,098 )             (7,098 )
Prepaid expenses
     (1,534 )             (1,534 )
Deposits
     (14,400 )             (14,400 )
Accounts payable and accrued expense
     387,834               387,834  
Billings in excess of costs and estimated earnings on
                        
uncompleted contracts
     (71,264 )             (71,264 )
Net cash used in operating activities
     (464,848 )     —       (464,848 )
Cash flows from investing activities:
                        
Acquisition of furniture, equipment and software
     (64,860 )             (64,860 )
Acquisition of EMS
     (353,465 )             (353,465 )
Net cash used in investing activities
     (418,325 )     —       (418,325 )
Cash flows from financing activities:
                        
Proceeds from notes payable, related parties
     125,875               125,875  
Proceeds from  issuance of convertible notes, net
     1,310,000               1,310,000  
Advances from shareholder
     (9,544 )             (9,544 )
Net cash provided by financing activities
     1,426,331     $ —       1,426,331  
Increase in cash and cash equivalents
     543,158               543,158  
Cash and cash equivalents, beginning of year
     34               34  
Cash and cash equivalents, end of year
   $ 543,192     $ —     $ 543,192  
Non-cash financing activities:
                        
Fair value of beneficial conversion feature and warrants issued with convertible notes
   $ —     $ 586,747  (3)   $ 586,747  
 
15
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)
 
Description of adjustments:
 
 
(1)
To record $5,255,404 of additional stock-based compensation for the value of common stock granted during 2008.
 
 
(2)
To record $685,309 of additional stock-based compensation for the value of stock options and warrants granted during 2008.
 
 
(3)
To record $586,747 of note discount related to the beneficial conversion feature and warrants issued with the convertible notes.
 
 
(4)
To record $138,662 of amortization expense on the note discount.
 
NOTE 3 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
In May 2007, the Company received a $527,000 contract with the City of Los Angeles and the AQMD to develop a prototype short-range heavy-duty electric truck. This zero-emissions, heavy-duty, all-electric truck is currently being tested at the Port of Los Angeles as a short-range vehicle used for hauling fully loaded 40-foot cargo containers around the Port of Los Angeles.  At September 30, 2008, the contract was estimated to be approximately 99% complete.
 
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts” and the liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents costs incurred or billings in excess of revenue recognized at September 30, 2008 and December 31, 2007 as follows:

   
September 30, 2008
(Unaudited)
    
December 31,
2007
  
Costs incurred on uncompleted contracts
   $ 367,384     $ 280,263  
Estimated earnings
     139,518       102,473  
      506,902       382,736  
Less, billings to date
     514,000       454,000  
    $ 7,098     $ (71,264 )
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts
   $ 7,098     $ —  
Billings in excess of costs and estimated earnings on uncompleted contracts
   $ —     $ 71,264  
 
16
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 4 - PROPERTY AND EQUIPMENT
 
Property and equipment are comprised as follows:
 
   
September 30, 2008
(Unaudited)
    
December 31,
2007
  
Computer equipment and software
   $ 36,898     $ 9,052  
Office furniture
     24,476       9,172  
Machinery
     6,395       6,395  
Leasehold improvements
     21,711       —  
Total property and equipment, cost
     89,480       24,619  
Less: accumulated depreciation
     (9,942 )     (3,572 )
Property and equipment, net
   $ 79,538     $ 21,047  
 
Depreciation expense for the nine months ended September 30, 2008 and 2007 was $6,370 and $1,279, respectively.
 
NOTE 5 – BUSINESS ACQUISITION
 
On September 9, 2008, the Company acquired substantially all of the assets of Electric MotorSports, LLC (“EMS”), an Ohio limited liability company that was owned by Mr. Robert Gruenwald.  The assets acquired included goodwill and intellectual properties used in the development and manufacture of flux vector inverters.
 
Prior to the acquisition of EMS’s assets, EMS was a supplier of flux vector inverters that were used to develop the Company’s first electric vehicle prototype, the Nautilus E30. EMS had been in the business of developing, manufacturing and selling flux vector inverters since 1997. At the time of the acquisition, the Company was contracting with EMS to provide engineering design services that were provided to the Company by EMS’ sole member, Robert Gruenwald.
 
The acquisition of EMS was accounted for as a purchase in accordance with SFAS No. 141 “Business Combinations.”  As such, the results of operations of EMS are included in the financial statements of Balqon Corporation beginning September 9, 2008. During this period the Company did not engage in the business of selling flux vector inverters. The expenses of EMS during the period since the acquisition are primarily the salary and related benefits of the Company’s Vice President Research and Development, Mr. Robert Gruenwald.
 
17
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 5 – BUSINESS ACQUISITION (continued)
 
The purchase price of the assets was $350,000, of which $250,000 was paid in cash and the Company issued an unsecured promissory note for the balance of $100,000.  The note is due on March 9, 2009 (see Note 7).  The $350,000 purchase price, together with legal costs of $3,465 incurred in connection with this asset purchase, resulted in a total purchase price of the EMS assets of $353,465.  The Company engaged an independent valuation firm to assist management in the allocation of the purchase price of the assets.  The methods used to value the assets acquired in this transaction included the discounted cash flow and excess earnings methods. The intellectual property assets acquired included all (i) patents, patent applications, patent disclosures and inventions, (ii) trademarks, service marks, trade dress, trade names, logos and corporate names and registrations together with all of the goodwill associated therewith, (iii) copyrights and copyrightable works, (iv) trade secrets, ideas, formulas, compositions, inventions, know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, and other related intangible properties. Based on management’s assessment, including the consideration of the results of the independent valuation report, the Company allocated the purchase price to the following assets as of the acquisition date as follows:

Intellectual property assets
   $ 186,965  
Goodwill
     166,500  
Total
   $ 353,465  
 
The amounts of intangible assets and accumulated amortization for the year ended September 30, 2008 and December 31, 2007 are as follows:
 
   
September 31,
2008
    
December 31,
2007
  
Amortized intangible assets:
            
Intellectual property assets
   $ 186,965     $ —  
Accumulated amortization
     —       —  
Totals
   $ 186,965     $ —  
 
The intangible production assets are being amortized over a three year period under the straight-line method.
 
18
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 5 – BUSINESS ACQUISITION (continued)
 
Pro forma statements of operations for the current and prior periods, as though the business acquisition had been completed as of the beginning of the earliest period presented are as follows:

   
Nine months ended September 30, 2008
(Unaudited)
    
Nine months ended September 30, 2007
(Unaudited)
  
Revenues
   $ 354,863     $ 310,406  
Cost of  revenues
     267,886       123,999  
Gross profit
     86,977       186,407  
Operating expenses
     6,968,617       194,946  
Net loss
     (6,881,640 )     (8,539 )
Net loss per share – basic and diluted
     (0.27 )     (0.01 )
 
NOTE 6 – CONVERTIBLE PROMISSORY NOTES
 
The convertible promissory notes are comprised as follows as of September 30, 2008:

   
September 30,
2008
(Unaudited)
  
Convertible promissory notes, interest at 10% per annum payable at maturity, due January 2, 2009
   $ 1,310,000  
Less: valuation discount
     (448,085 )
Convertible notes, net
   $ 861,915  
 
On July 11, 2008, the Company raised $500,000 through the issuance of senior secured convertible promissory notes, secured by substantially all the assets of the Company, to five accredited investors (the “July Private Placement”).  The notes were due January 2, 2009, bore interest at 10% per annum due at maturity, and were secured by all the assets of the Company.  The notes were are convertible into shares of common stock of the Company at a conversion price of $1.00 per share.  In connection with the July Private Placement, the Company issued warrants to acquire 500,000 shares of common stock at an exercise price of $1.50 per share (see Note 10).
 
On September 15, 2008, the Company raised $810,000 through the issuance of senior unsecured convertible promissory notes to 15 accredited investors (the “September Private Placement”).  The notes were due January 2, 2009, bore interest at 10% per annum due at maturity, and were secured by all the assets of the Company.  The notes were convertible into shares of common stock of the Company at a conversion price of $1.00 per share.  In connection with the September Private Placement, the Company also issued warrants to acquire 810,000 shares of common stock at an exercise price of $1.50 per share (see Note 10).
 
19
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 6 – CONVERTIBLE PROMISSORY NOTES (continued)
 
The Company determined that the relative fair value of the warrants was $293,374 and the value of the beneficial conversion feature was $293,334.  The relatively fair value was determined using the methodology prescribed by APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.”  These amounts were calculated by a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of 58.43%, a risk free interest rate of 2.42%, and no expected dividend yield.  The Black-Scholes calculation of the fair value of the warrants also included the assumption that the fair value of the  underlying shares of common stock was $1.00.  In October 2008, when the warrants were granted, an active market for the Company’s common stock did not exist. As such, management determined the fair value of the shares of common stock underlying the warrants to be $1.00 per share using the $1.00 conversion price per share of common stock of the Company’s convertible notes that were offered and sold in July and September 2008 (and converted October 31, 2008) and the $1.00 per unit sale price of units consisting of one share of common stock and a warrant to purchase one share of common stock that were offered and sold in October and December 2008, which management believes are the best indicators of the fair value of the Company’s common stock on the measurement dates. The relative value of the warrants of $293,374 and the beneficial conversion feature of $293,374 was recorded by the Company as a loan discount of  $586,748, which the Company was to amortize to interest expense over the original life of the loan.  The Company amortized note discount of $138,662 through September 30, 2008, and the unamortized loan discount of that date was $448,085 which has been reflected as a reduction to the convertible notes payable.
 
On October 24, 2008, the notes issued in the July Private Placement and September Private Placement were converted into 1,310,000 shares of common stock of the Company’s immediately preceding the closing of the merger between the Company and BMR (see Note 1).
 
NOTE 7 – NOTES PAYABLE—RELATED PARTIES, UNSECURED
 
Notes payable to related parties, unsecured, consists of the following at:
 
 
September 30,
2008
(Unaudited)
    
December 31,
2007
  
Notes payable to related parties, unsecured, interest at 6% per annum payable at maturity, due December 6, 2008
 $ 25,875     $ —  
               
Note payable to related parties, issued in connection with the acquisition of EMS (see Note 5), unsecured, interest              
at the prime rate (5% at September 30 2008) per annum, payable at maturity, due March 9, 2009
   100,000          
               
Total notes payable to related parties
 $ 125,875     $ —  
 
20
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 8 – INCOME TAXES
 
The Company has federal and state net operating loss carryforwards that can be used through 2019 to offset taxable income, and accordingly, has not recorded a provision for income taxes in the current year.
 
Significant components of the Company’s deferred income tax liability at September 30, 2008, December 31, 2007 are as follows:
 
   
September 30,
2008
(Unaudited)
    
December 31,
2007
  
Deferred tax assets:
            
Net operating loss carryforward
   $ 2,699,124     $ 29,775  
Total deferred tax assets
     2,699,124       29,775  
Valuation allowance
     (2,699,124 )     (29,775 )
Net deferred income tax asset
   $ —     $ —  
 
In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset.  Accordingly, a valuation allowance for the deferred tax asset has been recorded.
 
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.” The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2008 or December 31, 2007, the Company did not have a liability for unrecognized tax uncertainties.
 
NOTE 9 – SHAREHOLDER’S EQUITY
 
The Company was capitalized on April 21, 2005 when it issued 16,667,000 shares of no par common stock for $5,000 to its founding shareholder.
 
On June 4, 2008, the Board of Directors of the Company approved a 16,667:1 stock split of the Company’s no par common stock.  All share amounts in the accompanying financial statements are presented as if the stock split occurred at the beginning of the period presented.
 
21
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 9 – SHAREHOLDER’S EQUITY (continued)
 
Shares Issued for Services
 
On June 4, 2008, the Board of Directors issued 4,500,090 shares of common stock to consultants for services rendered.  The shares were valued at $4,500,090.  Included in the 4,500,090 shares of common stock granted to consultants on June 4, 2008, are 1,250,025 shares of common stock valued at $1,250,025, that were granted to the brother of the founding shareholder.  On August 28, 2008, the Company granted 500,000 shares of common stock valued at $500,000 to three consultants for services rendered.  Also on August 28, 2008, the Company issued 332,910 shares of common stock valued at $332,910 to its CEO and founding shareholder.
 
In June and August 2008, when the shares discussed above were granted, an active market for the Company’s common stock did not exist. As such, management determined the value of the shares of common stock issued in June and August 2008 to be $1.00 per share using the $1.00 conversion price per share of common stock of the Company’s convertible notes that were offered and sold in July and September 2008 (and converted October 31, 2008) and the $1.00 per unit sale price of units consisting of one share of common stock and a warrant to purchase one share of common stock that were offered and sold in October and December 2008, which management believes are the best indicators of the fair value of the Company’s common stock on the measurement date.
 
NOTE 10 – STOCK OPTIONS AND WARRANTS
 
Stock Options
 
At September 30, 2008, options shares outstanding are as follows:
 
   
Shares
    
Weighted
Average
Exercise
Price
  
Balance at January 1, 2008
     —       —  
Granted
     4,562,592     $ 2.00  
Exercised
     —       —  
Cancelled
     —       —  
Balance at September 30, 2008 (unaudited)
     4,562,592     $ 2.00  
 
22
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 10 – STOCK OPTIONS AND WARRANTS (continued)
 
Stock Options (continued)
 
On June 4, 2008, the Company granted options to purchase 4,562,592 shares of common stock at $1.50 to $2.50 per share to an employee and two consultants. The options vested immediately on the date granted, and expire between June 30, 2010 and June 30, 2012.  The Company determined that the fair value of the options issued was $590,877 calculated by a Black-Scholes option pricing model using as assumptions an expected life of one to three years, an industry volatility of 58.43%, a risk free interest rate of 2.42%, and no expected dividend yield. The Black-Scholes calculation of the fair value of the options also included the assumption that the fair value of the  underlying shares of common stock was $1.00.  In June 2008, when the options discussed above were granted, an active market for the Company’s common stock did not exist. As such, management determined the fair value of the shares of common stock underlying the options issued in June 2008 to be $1.00 per share using the $1.00 conversion price per share of common stock of the Company’s convertible notes that were offered and sold in July and September 2008 (and converted October 31, 2008) and the $1.00 per unit sale price of units consisting of one share of common stock and a warrant to purchase one share of common stock that were offered and sold in October and December 2008, which management believes are the best indicators of the fair value of the Company’s common stock on the measurement date.
 
The following table summarizes information about stock options outstanding and exercisable as of September 30, 2008:
 
   
Options Outstanding
    
Options Exercisable
  
Range of
Exercise
Prices
  
Number
of Shares
Underlying
Options
    
Weighted
Average
Exercise
Price
    
Weighted
Average
Remaining Contractual
Life (in years)
    
Number
of Shares
    
Weighted
Average
Exercise Price
  
$1.50
    
1,520,864
      
$1.50
      
1.0
      
1,520,864
      
$1.50
  
$2.00
    
1,520,864
      
$2.00
 
    
2.0
      
1,520,864
      
$2.00
  
$2.50
    
1,520,864
      
$2.50
      
3.0
      
1,520,864
      
$2.50
  
     
4,562,592
                      
4,562,592
          
 
At September 30, 2008, there was no aggregate intrinsic value of the 4,562,592 options outstanding and exercisable.  At September 30, 2008, all options were vested and there were no unvested options outstanding.
 
23
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 10 – STOCK OPTIONS AND WARRANTS (continued)
 
Warrants
 
At September 30, 2008, warrant shares outstanding are as follows:
 
   
Shares
    
Weighted
Average Exercise Price
  
Balance at January 1, 2008
     —       —  
Granted
     2,039,180       $1.68  
Exercised
     —       —  
Cancelled
     —       —  
Balance at September 30, 2008
     2,039,180       $1.68  
 
On June 4, 2008, the Company granted a warrant to purchase 729,180 shares of the Company’s common stock at an exercise price of $1.50 to $2.50 per share to a consultant (the “Marlin Warrants”). The Company determined that the fair value of the warrants issued to this consultant was $94,432 as calculated by a Black-Scholes option pricing model using as assumptions an expected life of one to three years, an industry volatility of 58.43%, a risk free interest rate of 2.42%, and no expected dividend yield. The Black-Scholes calculation of the fair value of the warrants also included the assumption that the fair value of the  underlying shares of common stock was $1.00.  In June 2008, when the warrants discussed above were granted, an active market for the Company’s common stock did not exist. As such, management determined the fair value of the shares of common stock underlying the warrants issued in June 2008 to be $1.00 per share using the $1.00 conversion price per share of common stock of the Company’s convertible notes that were offered and sold in July and September 2008 (and converted October 31, 2008) and the $1.00 per unit sale price of units consisting of one share of common stock and a warrant to purchase one share of common stock that were offered and sold in October and December 2008, which management believes are the best indicators of the fair value of the Company’s common stock on the measurement date.
 
On September 15, 2008, the Company issued warrants to purchase 1,310,000 shares of the Company’s common stock at an exercise price of $1.50 per share in connection with the issuance of convertible promissory notes entered into with investors on July 11, 2008 and September 15, 2008 (See Note 6).
 
The following table summarizes information about stock warrants outstanding and exercisable as of September 30, 2008:
 
   
Warrants Outstanding
    
Warrants Exercisable
  
Range of
Exercise
Prices
  
Number
of Shares
Underlying
Warrants
    
Weighted
Average
Exercise
Price
    
Weighted
Average
Remaining Contractual
Life (in years)
    
Number
of Shares
    
Weighted
Average
Exercise Price
  
$1.50
    
1,553,060
        
$1.50
      
2.8
       1,553,060      
 
$1.50
  
$2.00
     243,060        
$2.00
      
2.0
       243,060        
$2.00
  
$2.50
     243,060        
$2.50
      
3.0
       243,060        
$2.50
  
      2,039,180                         2,039,180            
 
At September 30, 2008, there was no aggregate intrinsic value of the warrants outstanding and exercisable.
 
24
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 11 – COMMITMENTS AND CONTINGENCIES
 
Contract
 
On June 25, 2008, the Company entered into an agreement with the City of Los Angeles to produce and deliver 20 electric yard hostlers, 5 short-haul electric drayage trucks, and associated equipment including chargers, batteries and controllers for a total of $5,383,750.  In September 2008, the Company began work on the first units it intends to produce and expects to deliver all the vehicles and associated equipment to the City of Los Angeles during 2009.
 
The Company agreed to move its research and production facilities to the City of Los Angeles by December 2009.  The Company also agreed to pay the City of Los Angeles a royalty fee of $1,000 per electric vehicle it sells to a purchaser or lessee other than the City of Los Angeles or the AQMD.
 
Employment Contracts
 
On April 30, 2008, the Company signed an employment agreement with its CEO.  The employment agreement is effective from April 30, 2008 and provides for, among other items, the CEO to receive compensation of $250,000 per annum during the first and second year of the agreement, and at least $300,000 per annum thereafter.
 
On August 1, 2008, the Company signed an employment agreement with its Vice President Engineering.  The employment agreement is effective from August 1, 2008 and provides for, among other items, the VP Engineering to receive compensation of $150,000 per annum during the first year of the agreement, and $175,000 per annum thereafter.
 
On September 9, 2008, the Company signed an employment agreement with its Vice President Research & Development.  The employment agreement is effective from September 9, 2008 and provides for, among other items, the VP Research & Development to receive compensation of $150,000 per annum during the first year of the agreement, and $175,000 per annum thereafter.
 
Leases
 
The Company leases its research and development facilities located in Santa Ana, California under a lease that expires on May 31, 2009. The lease has a current monthly payment of $3,206.  On August 1, 2008, the Company entered into a three year lease of manufacturing facilities located in Harbor City, California that expires on July 31, 2011. The lease has a base monthly rent of $10,540.
 
Rent expense for the nine months ended September 30, 2008 and 2007 was $65,216 and $14,536, respectively.
 
25
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 11 – COMMITMENTS AND CONTINGENCIES
 
Leases (continued)
 
The following is a schedule by years of future minimum rental payments required under the non-cancelable operating leases described above as of September 30, 2008:
 
 
 
Years ending December 31:      
2009
   $ 96,833  
2010
     139,440  
2011
     122,880  
2012
     71,680  
Thereafter
     —  
 
NOTE 12 - SUBSEQUENT EVENTS
 
On October 24, 2008, the merger (see Note 1) was completed and Balqon Corporation, a California corporation (“Balqon California”), merged with and into BMR and BMR changed its name to Balqon Corporation.
 
On October 24, 2008, immediately preceding the closing of the merger with Balqon Corporation (formerly BMR) (see Note 1), Balqon California raised an aggregate of $575,000 through the issuance of 575,000 shares of common stock at $1.00 per share to six accredited investors (the “October Private Placement”).  In connection with this offering, Balqon California also issued three-year warrants to purchase an aggregate of 575,000 shares of common stock at an exercise price of $1.50 per share (the “October Warrants”).
 
On October 24, 2008, immediately preceding the closing of the merger (see Note 1), Balqon Corporation (formerly BMR) issued warrants (the “BMR Warrants”) to purchase an aggregate of 184,598 shares of common stock.  One-third of the BMR Warrants have an exercise price of $1.50 per share and expire on October 24, 2009, one-third of the BMR Warrants have an exercise price of $2.00 per share and expire on October 24, 2010, and one-third of the BMR Warrants have an exercise price of $2.50 per share and expire on October 24, 2011. The Company determined that the fair value of the BMR Warrants to be $23,906.
 
Balqon California, in connection with the July Private Placement, the September Private Placement and the October Private Placement, entered into certain registration rights agreements (collectively, the “Balqon Registration Rights Agreements”).  Under the Balqon Registration Rights Agreements, Balqon Corporation (formerly BMR) is obligated to register for resale an aggregate of 3,793,348 shares of common stock, of which an aggregate of 1,885,000 shares of common stock underly the July Warrants, September Warrants and the October Warrants.  Immediately preceding the consummation of the merger with Balqon California, Balqon Corporation (formerly BMR) also entered a registration rights agreement (the “BMR Registration Rights Agreement”) with its stockholders to register for resale an aggregate of 1,400,000 shares of BMR’s common stock and with the holders of the BMR Warrants to register for resale and aggregate of 184,598 shares of common stock underlying the BMR Warrants.
 
26
 
BALQON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)
 
NOTE 12 - SUBSEQUENT EVENTS (continued)
 
The Company is obligated under the Balqon Registration Rights Agreements and the BMR Registration Rights Agreement to file, on or before December 23, 2008, a registration statement with the Securities and Exchange Commission, registering for resale all shares of common stock covered by the Balqon Registration Rights Agreements and BMR Registration Rights Agreements.
 
On October 24, 2008, immediately preceding the consummation of the merger with Balqon California (see Note 1), Balqon Corporation (formerly BMR) adopted the 2008 Stock Incentive Plan (“2008 Plan”).  Initially, 7,500,000 shares of common stock are authorized for issuance under the 2008 Plan.
 
On October 24, 2008, the notes issued in the July and September Private Placements, including accrued interest thereon, were converted into an aggregate of 1,333,348 shares of common stock of the Company.
 

27
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our unaudited condensed financial statements for the three and nine months ended September 30, 2008 and the related notes and the other financial information included elsewhere in this report. This report and our financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business strategies. Our actual results could differ materially from those expressed in these forward-looking statements as a result of any number of factors, including those set forth under the “Risk Factors” section of our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on May 22, 2009.  The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation:
 
 
·
the projected growth or contraction in the industries within which we operate;
 
 
·
our business strategy for expanding, maintaining or contracting our presence in these markets;
 
 
·
anticipated trends in our financial condition and results of operations; and
 
 
·
our ability to distinguish ourselves from our current and future competitors.
 
We do not undertake to update, revise or correct any forward-looking statements.
 
Any of the factors described above, elsewhere in this report or in the “Risk Factors” section of our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on May 22, 2009 could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.
 
Overview
 
As of the date of this filing, we develop, assemble and market heavy-duty electric vehicles, flux vector inverters, and heavy-duty electric drive systems.  As of the date of this filing, we sell our heavy-duty electric vehicles and plan to begin selling our other products in the near future.  In May 2007, we entered into an agreement with the South Coast Air Quality Management District, or AQMD, to develop and test a heavy-duty zero emissions electric drayage tractor.  Under the terms of this agreement with the AQMD, which agreement is referred to in this prospectus as the AQMD Development Agreement, the AQMD agreed to pay us up to $527,000 for the development and testing of the heavy-duty drayage tractor.  The City of Los Angeles agreed with the AQMD to fund 50% of the total development costs related to the drayage tractor.  All of our revenues for the nine months ended September 30, 2008, were associated with the AQMD Development Agreement.  The revenues and costs associated with the AQMD Development Agreement are recorded as contract revenues and costs, in accordance with the AICPA’s Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-type Contracts.”  As such, the costs associated with the development of our demonstration vehicle are recorded as “contract costs,” not as research and development expenses.  Our net revenues decreased by $17,536, or 8%, to $213,362 for the nine months ended September 30, 2008 as compared to $230,898 for the nine months ended September 30, 2007.  We reported a net loss of $6,850,568 for the nine months ended September 30, 2008 as compared to a net loss of $46,350 for the nine months ended September 30, 2007.  The decline in financial performance during the nine months ended September 30, 2008 is a direct result of two key factors. First, the ramp up of our business in the latter months of 2007 (our business operations commenced on May 1, 2007), as a result, the revenues and expenses of the nine months ended September 30, 2007 reflect only five months of operations. Second, during the nine months ended September 30, 2008, in addition to increased expenses for the ramp up of our business, we incurred $429,300 of legal, accounting, and consulting expenses relating to the reverse merger and $5,940,713 of fair value of stock based compensation associated with the issuance of options and common stock during the nine months ended September 30, 2008.  While our business activities resulted in a revenue decrease of 8%, we experienced increased cost of revenues of $31,735, or 23%, and increased operating and other expenses of $6,754,947, or 4,871% over the comparable period of 2007.
 
28
 
Merger Transaction
 
On October 24, 2008, we completed an Agreement and Plan of Merger, or Merger Transaction, with Balqon Corporation, a California corporation, or Balqon California, and changed our name to Balqon Corporation.  Upon completion of the Merger Transaction, we acquired the business of Balqon California.  In connection with the Merger Transaction, we issued an aggregate of 23,908,348 shares of our common stock to the shareholders of Balqon California which resulted in a change in control of our company.  The Merger Transaction has been accounted for as a recapitalization of Balqon California with Balqon California being the accounting acquiror.  As a result, the historical financial statements of Balqon California are now the historical financial statements of the legal acquiror, Balqon Corporation (formerly BMR Solutions, Inc.).
 
In connection with the Merger Transaction, we issued an aggregate of 23,908,348 shares of our common stock to the shareholders of Balqon California.  In addition, the holders of warrants to acquire an aggregate of 2,614,180 shares of common stock of Balqon California were deemed to hold warrants to acquire an equal number of shares of our common stock upon completion of the Merger Transaction.  In connection with the Merger Transaction, we also issued under our 2008 Plan options to purchase an aggregate of 4,562,592 shares of our common stock to certain of our directors and employees who held options to purchase an equal number of shares of Balqon California’s common stock immediately prior to the completion of the Merger Transaction.  In connection with the consummation of the Merger Transaction, we cancelled 6,377,500 shares of our issued and outstanding common stock held by certain of our stockholders such that concurrent with the closing of the Merger Transaction we had approximately 1,400,000 shares of common stock issued and outstanding.
 
At the time of the closing of the Merger Transaction, we were engaged in the business of providing local delivery and transportation of mattresses, furniture and futons in Southern California.  Our current business is comprised solely of the business of Balqon California.
 
Acquisition of Electric MotorSports, LLC
 
When we consummated the Merger Transaction, we acquired substantially all of the assets of Electric MotorSports, LLC, or EMS, that Balqon California had acquired in September 2008.  In September 2008, Balqon California entered into an agreement with EMS and its sole member, Robert Gruenwald, to acquire substantially all the assets of EMS, including all intellectual property assets used in the development and manufacture of flux vector inverters.  At the time of the acquisition, EMS had been engaged in developing, designing and manufacturing flux vector inverters within the automotive and material handling equipment industries since 1997.  As a result of this acquisition, Balqon California acquired proprietary technology and designs that we currently use in our heavy-duty electric vehicles. Since its inception in 1997, EMS has sold over 250 inverters for use in applications including industrial conveyor systems, electric buses, delivery trucks, a monorail system and mining vehicles.  EMS sold products primarily to OEMs of electric buses, mining vehicles and specialty automotive vehicles. We believe that the acquisition of EMS’s technology and knowhow provides us with the ability to further develop, market and sell flux vector inverters for use in heavy-duty applications.
 
29
 
Critical Accounting Policies
 
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe that the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements:
 
Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 revenue and expenses during the reporting period.  Material estimates relate to the recognition of contract revenues and estimated costs to complete contracts in process, and recoverability of reported amounts of long-lived assets.  Actual results may differ from those estimates.
 
Revenues
 
Contract Revenue and Cost Recognition on Prototype Vehicles.  In accounting for contracts, we follow the provisions of the AICPA’s Statement of Position 81-1,  “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”  We recognize revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion.  This method is used because management considers costs to be the best available measure of progress on its contracts.  Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion.  We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated.
 
Contract costs include all direct material and labor costs.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues earned.
 
Sales of Production Units and Parts.  We recognize revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectibility is reasonably assured, all of which generally occurs upon shipment of our product or delivery of the product to the destination specified by the customer.
 
30
 
We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when we place the products with the buyer’s carrier.  We regularly reviews our customers’ financial positions to ensure that collectibility is reasonably assured.  Except for warranties, we have no post-sales obligations.
 
Product Warranties
 
We provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale.  We estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. As of December 31, 2007 and September 30, 2008, we had no warranty reserve nor did we incur warranty expenses during the nine month period ended September 30, 2008 or 2007.
 
Stock-Based Compensation
 
We periodically issue stock instruments, including shares of our common stock, stock options, and warrants to purchase shares of our common stock to employees and non-employees in non-capital raising transactions for services and for financing costs.
 
We adopted SFAS No. 123(R), “Accounting for Stock-Based Compensation” effective January 1, 2006, and are using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. We account for stock option and warrant grants issued and vesting to non-employees in accordance with Emerging Issues Task Force, or EITF, Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” whereby the fair value of the stock compensation is based on the measurement date as determined at either (i) the date at which a performance commitment is reached, or (ii) at the date at which the necessary performance to earn the equity instrument is complete.
 
We estimate the fair value of stock options and warrants pursuant to SFAS No. 123R using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is based on the average volatility of the trading prices of comparable companies and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.
 
We estimate the fair value of shares of common stock issued for services based on the closing price of our common stock on the date shares are granted.  For periods prior to the consummation of the Merger Transaction, there was no readily available market quotations for our shares of common stock and, as such, we used alternative methods to value shares of our common stock including valuations based upon the conversion price per share of common stock of our convertible notes and the sale price of units consisting of one share of our common stock and warrants to purchase one share of common stock, which management believes were the best indicators of the fair value of our common stock.
 
31
 
Goodwill and Intangible Assets
 
As required by SFAS No. 142, management performs impairment tests of goodwill and indefinite-lived intangible assets whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. Also, as required by SFAS No. 142, management performs impairment testing of goodwill and indefinite-lived intangible assets at least annually.
 
In accordance with SFAS No. 142, management tests goodwill for impairment at the reporting unit level.  We only have one reporting unit.  At the time of goodwill impairment testing, management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved with its reporting unit. If the calculated fair value is less than the current carrying value, impairment may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing in the absence of available domestic and international transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital, or WACC, methodology. The WACC methodology considers market and industry data as well as Balqon-specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and Balqon-specific historical and projected data, develops growth rates and cash flow projections for Balqon.  Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate fair value of all reporting units is reconciled to our total market capitalization. The discounted cash flow valuation methodology and calculations will be used in 2009 impairment testing.
 
Impairment of Long-Lived Assets
 
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured.  This statement also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. We periodically review, at least annually, such assets for possible impairment and expected losses. If any losses are determined to exist they are recorded in the period when such impairment is determined. Based upon management’s assessment, there are no indicators of impairment of our long lived assets at September 30, 2008 or December 31, 2007.
 
Income Taxes
 
We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
 
32
 
Accounting for Warrants and Derivatives
 
Freestanding financial instruments, such as detachable warrants, must be evaluated under the authoritative accounting literature to determine whether they should be classified as assets or liabilities (derivative accounting), temporary equity, or permanent equity. Management initially evaluates whether the instruments are covered by SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” If the instrument is not governed by SFAS No. 150, then management determines whether it meets the definition of a derivative under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  To determine whether a specific warrant agreement would follow derivative accounting under SFAS No. 133, management is required to first evaluate whether the warrant would meet the definition of equity under the provisions of EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”  Financial instruments such as warrants that are classified as permanent or temporary equity are excluded from the definition of a derivative for purposes of SFAS No. 133. Financial instruments, including warrants, that are classified as assets or liabilities are considered derivatives under SFAS No. 133, and are marked to market at each reporting date, with the change in fair value recorded in the income statement. The fair values of both the warrants and conversion benefits are calculated using a Black-Scholes Model, taking into consideration factors such as the underlying price of our common stock, the exercise price for warrants or the conversion price for the conversion benefit, the volatility of our stock (or the stock volatility of peer companies with an historical active trading market), and the risk-free interest rates available for comparable time periods.
 
Under EITF Issue No. 00-19, contracts that require physical settlement or net-share settlement and contracts that give the issuer the choice of settlement (in cash or shares) are classified as equity. Contracts that require net-cash settlement or that give the counterparty a choice which includes net-cash settlement are classified as assets or liabilities, not equity. If a transaction is outside the control of the issuer and there is the possibility that the issuer could net-cash settle, then for purposes EITF Issue No. 00-19 it is assumed that the issuer will have to net-cash settle, which may preclude accounting for a contract as equity except in certain circumstances where the existing common stockholders would also receive cash. Management’s judgment is required in evaluating the terms of freestanding instruments, such as warrants, and the application of authoritative accounting literature.  The outstanding warrants to purchase shares of our common stock do not contain provisions for cash settlement.
 
Results of Operations
 
We have based our financial statements on the assumption of our operations continuing as a going concern.  As of September 30, 2008, we had a working capital deficit of approximately $794,730, had an accumulated deficit of $6,938,142 and reported a net loss for the nine months ended September 30, 2008 of $6,850,568, which raise substantial doubt about our ability to continue as a going concern.  Plans for correcting these deficiencies include the future sales of our products and technologies and the raising of capital, which are expected to help provide us with the liquidity necessary to meet operating expenses.  During July, September and October 2008, Balqon California raised approximately $1,885,000 in connection with private placements of convertible promissory notes, common stock and warrants.  Over the longer-term, we plan to achieve profitability through our operations from the sale of our high capacity electric vehicles.  Our financial statements do not include any adjustments relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue our existence.
 
33
 
The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net revenues. The columns present the following:
 
 
·
The first two data columns in each table show the absolute results for each period presented.
 
 
·
The columns entitled “Dollar Variance” and “Percentage Variance” show the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.
 
 
·
The last two columns in each table show the results for each period as a percentage of net revenues.
 
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007

     
Nine Months Ended
September 30,
    
Dollar
Variance
    
Percentage
Variance
    
Results as a Percentage
of Net Revenues for the
Nine Months Ended
September 30,
  
   
2008
(Unaudited)
    
2007
(Unaudited)
    
Favorable
(Unfavorable)
    
Favorable
(Unfavorable)
    
2008
    
2007
  
Net revenues
   $ 213,362     $ 230,898     $ (17,536 )     (8 )%     100 %     100 %
Cost of revenues
     170,292       138,557       (31,735 )     (23 )%     80 %     60 %
Gross profit
     43,070       92,341       (49,271 )     (53 )%     20 %     40 %
Operating and interest expenses
     6,893,638       138,691       (6,754,947 )     (4,871 )%     3,231 %     60 %
Net loss
   $ (6,850,568 )   $ (46,350 )   $ (6,804,218 )     (14,680 )%     (3,211 )%     (20 )%
 
Net Revenues.  The $17,536 decrease in net revenues is comprised of decreased contract revenues of $92,536 offset by increased net revenues of $75,000 relating to product sales. The product sale occurred during April 2008 in connection with the sale of a battery charger system to the City of Los Angeles. Contract revenues decreased due to progress work on our $527,000 AQMD Development Agreement.  During the nine months ended September 30, 2007, 44% of the AQMD Development Agreement was completed while during the nine months ended September 30, 2008, 26% of the AQMD Development Agreement was completed. This difference in progress work on the contact caused the $92,536 reduction of contract revenues between the respective nine month periods.
 
Gross Profit.  The $49,271 decrease in gross profit was primarily due to the decrease in contract revenues between the periods and an 8% profit margin on the April 2008 sale of a battery charger system.
 
Operating and Interest Expenses.  The $6,754,947 increase in operating and interest expenses is due largely to the $429,300 of legal, accounting, audit and consulting fees incurred in connection with the reverse merger transaction and $5,940,713 of fair value of stock based compensation associated with the issuance of options and shares of our common stock during the nine months ended September 30, 2008. The additional $384,934 of increased operating and interest expenses are attributable to the ramp-up of our business during the nine months ended September 30, 2008 and the fact that the results for the nine months ended September 30, 2007 reflect only five months of actual business operations.
 
34
 
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007

   
Three Months Ended
September 30,
    
Dollar
Variance
    
Percentage
Variance
    
Results as a Percentage
of Net Revenues for the
Three Months Ended
September 30,
  
   
2008
(Unaudited)
    
2007
(Unaudited)
    
Favorable
(Unfavorable)
    
Favorable
(Unfavorable)
    
2008
    
2007
  
Net revenues
   $ 10,787     $ 188,752     $ (177,965 )     (94 )%     100 %     100 %
Cost of revenues
     17,361       107,695       90,334       84 %     161 %     57 %
Gross profit (loss)
     (6,574 )     81,057       (87,631 )     (108 )%     (61 )%     43 %
Operating and interest expenses
     1,526,613       99,724       (1,426,889 )     (1,430 )%     14,152 %     53 %
Net loss
   $ (1,533,187 )   $ (18,667 )   $ (1,514,520 )     (8,113 )%     (14,213 )%     (10 )%
 
Net Revenues.  The $177,965 decrease in net revenues is comprised of decreased contract revenues due to increased progress work on our $527,000 AQMD Development Agreement.  During the three months ended September 30, 2007, 36% of the AQMD contract was completed resulting in $188,752 of contract revenues while during the three months ended September 30, 2008, 2% of the AQMD Development Agreement was completed resulting in contract revenues of $10,787.
 
Gross Profit.  The $87,631 decrease in gross profit was primarily due to the decrease in revenues between the periods.
 
Operating and Interest Expenses.  The $1,426,889 increase in operating and interest expenses is due largely to the $429,300 of legal, accounting, audit and consulting fees incurred in connection with the reverse merger transaction and $820,790 of fair value of stock based compensation associated with the issuance of shares of our common stock during the three months ended September 30, 2008.
 
Liquidity and Capital Resources
 
During the year ended December 31, 2007 and the nine months ended September 30, 2008, we funded our operations primarily with cash flow from financing activities, principally secured loans from convertible debentures, unsecured loans from shareholders and other parties. As of September 30, 2008, we had a working capital deficiency of $794,730 as compared to a working capital deficiency of $122,862 at December 31, 2007.  At September 30, 2008 and December 31, 2007 we had an accumulated deficit of $ 6,938,142 and $87,574, respectively, and cash and cash equivalents of $543,192 and $34, respectively.
 
Our available capital resources at September 30, 2008 consisted primarily of approximately $543,192 in cash and cash equivalents.  We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if any, and future debt and/or equity financings, if any.
 
Cash used in operating activities for the nine months ended September 30, 2008 was $464,847 as compared to $59,945 of cash provided by operating activities for the nine months ended September 30, 2007, and includes a net loss of $6,850,568, depreciation and amortization of $6,370, stock granted for services of $5,333,000, options and warrants granted for services for $685,309, and changes in operating assets and liabilities of $222,379.  Material changes in asset and liabilities at September 30, 2008 as compared to December 31, 2007 that affected these results include:
 
 
·
a decrease in accounts receivable of $35,000;
 
 
·
an  increase in inventory of $106,159;
 
35
 
 
·
an increase in costs in excess of billings on uncompleted contracts of $7,098;
 
 
·
an increase in prepaid expenses of $1,534;
 
 
·
an increase in deposits of $14,400;
 
 
·
a net increase in accounts payable and accrued expenses of $387,834; and
 
 
·
a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of $71,264.
 
Cash used in investing activities totaled $418,325 for the nine months ended September 30, 2008 as compared to $22,316 of cash used in investing activities for the nine months ended September 30, 2007.
 
Cash provided by financing activities totaled $1,426,331 for the nine months ended September 30, 2008 as compared to $18,364 for the nine months ended September 30, 2007.
 
In July 2008, Balqon California raised an aggregate of $500,000 through the issuance of senior secured convertible promissory notes to five accredited investors.  The senior secured convertible promissory notes had a conversion price of $1.00 per share.  In connection with this offering, Balqon California also issued three-year warrants to acquire up to an aggregate of 500,000 shares of common stock at an exercise price of $1.50 per share. The senior secured convertible promissory notes were converted into an aggregate of 500,000 shares of common stock of Balqon California immediately preceding the closing of the Merger Transaction.
 
In September 2008, Balqon California raised an aggregate of $810,000 through the issuance of convertible promissory notes to 15 accredited investors.  The convertible promissory notes had a conversion price of $1.00 per share.  In connection with this offering, Balqon California also issued three-year warrants to acquire up to an aggregate of 810,000 shares of common stock at an exercise price of $1.50 per share. The convertible promissory notes were converted into an aggregate of 810,000 shares of common stock of Balqon California immediately preceding the closing of the Merger Transaction.
 
In October 2008, Balqon California raised an aggregate of $575,000 through the issuance of an aggregate of 575,000 shares of common stock to six accredited investors.  In connection with this offering, Balqon California also issued three-year warrants to purchase an aggregate of 575,000 shares of common stock at an exercise price of $1.50 per share.
 
We are obligated under registration rights agreements related to the private placement offerings described above to file, on or before December 23, 2008, a registration statement with the SEC, registering for resale shares of common stock and the shares of common stock underlying the warrants, issued in connection with the above private placement transactions.
 
Our continued operations are dependent on securing additional sources of liquidity through debt and/or equity financing.  As indicated above, our financial statements as of September 30, 2008 and for the year ended December 31, 2007 have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in this report and in notes to our condensed financial statements included in this report, we have suffered recurring losses from operations and at December 31, 2007 and September 30, 2008 we had substantial net capital and working capital deficiencies. These factors, among others, raised substantial doubt about our ability to continue as a going concern and, with respect to our financial position on December 31, 2007, led our independent registered public accounting firm to include in their report an explanatory paragraph related to our ability to continue as a going concern. The condensed financial statements included in this document do not include any adjustments that might result from the outcome of this uncertainty.
 
36
 
We have been, and currently are, working toward identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future.  Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
 
If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product and service development efforts.
 
Backlog
 
As of November 14, 2008, we had a backlog of approximately $5.7 million.  Our backlog includes a contract to produce and deliver 21 electric yard tractors, 5 short-haul electric drayage tractors, and associated equipment including batteries and controllers.
 
Effects of Inflation
 
The impact of inflation and changing prices has not been significant on the financial condition or results of operations of our company.
 
Impacts of New Accounting Pronouncements
 
In March 2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133,” to improve financial reporting of 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. SFAS No. 161 applies to fiscal years and interim periods beginning after November 15, 2008.  We do not believe that the adoption of SFAS No. 161 will have a material effect on our results of operations, financial position, or cash flows.
 
In December 2007, FASB issued SFAS Statement No. 141 (R), “Business Combinations,” which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business.  SFAS  No. 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited.  We do not believe that the adoption of SFAS No. 141(R) will have a material effect on our results of operations, financial position, or cash flows.
 
37
 
We do not believe that the adoption of the above recent pronouncements will have a material effect on our results of operations, financial position or cash flow.  Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Not applicable.
 
ITEM 4T.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our principal accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it 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.  Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2008 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
 
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations, changes in shareholder’s equity and cash flows for the periods presented.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
 
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
38
 
 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2008 based on the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on the results of management’s assessment and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2008 our internal control over financial reporting was not effective due to the material weaknesses described below.
 
Material Weaknesses
 
1.           In conjunction with preparing our registration statement on Form S-1, and after receiving comments from the Staff of the SEC relating to our registration statement on Form S-1, management reviewed, in the first quarter of 2009, our recording of the value of stock-based compensation awarded in June and August 2008, and the recording of a note discount related to a beneficial conversion feature and associated warrants issued with certain convertible notes during 2008. As a result of this review, management concluded that our controls over the key valuation assumptions of our stock-based compensation and note discount related to a beneficial conversion feature and associated warrants issued with convertible notes were not in accordance with generally accepted accounting principles and that our expenses for the year ended December 31, 2008 and for each of the quarterly periods ended June 30, 2008 and September 30, 2008, had been misstated.  Based upon this conclusion, our Audit Committee and senior management decided, in the second quarter of 2009, to restate our financial statements as of and for the year ended December 31, 2008 and for each of the quarterly periods ended June 30, 2008 and September 30, 2008.
 
Management evaluated the impact of this restatement on our assessment of our disclosure controls and procedures and concluded that the control deficiency that resulted in the incorrect recording of stock-based compensation and note discount related to a beneficial conversion feature and associated warrants issued with convertible notes represented a material weakness.
 
2.           As a result of our restatement of prior periods’ financial results, as discussed above, we were unable to meet our requirements to timely file our Form 10-Q for the quarterly period ended March 31, 2009. Management evaluated the impact of our inability to timely file periodic reports with the SEC on our assessment of disclosure controls and procedures and concluded that the control deficiency that resulted in the inability to timely make these filings represented a material weakness.
 
39
 
Remediation of Material Weaknesses
 
To remediate the material weaknesses identified above, we have done the following subsequent to December 31, 2008, in the periods specified below, which correspond to the two material weaknesses identified above.
 
1.           We revised our methodology for recording the value of stock-based compensation and the recording of note discount related to a beneficial conversion feature and associated warrants issued with convertible notes. We previously valued the stock, options, and warrants associated with compensation and convertible notes based on an alternative valuation methodology that was determined by management with assistance from an independent third party valuation specialist during a time when the company was still a private enterprise. Upon further examination of our valuation methodology and largely in consideration of the $1.00 conversion price per share of common stock of our convertible notes that were offered and sold in July and September 2008 (and converted by October 31, 2008) and the $1.00 per unit sale price of units consisting of one share of common stock and a warrant to purchase one share of common stock that were offered and sold in October and December 2008, we concluded that the $1.00 valuation per share was a better indicator of value than the $0.015 per share valuation that was determined under the alternative valuation methodology previously used by us.  We have determined the effect of the correction on our previously issued financial statements and have restated our financial statements for the year ended December 31, 2008 and quarterly periods ended June 30, 2008 and September 30, 2008.  The revision of our valuation methodology as it relates to stock-based compensation and the recording of note discount related to a beneficial conversion feature and associated warrants issued with convertible notes was completed in the second quarter of 2009. We began using this new methodology for the quarter ended June 30, 2008 and all periods included in this report now reflect this change.  In addition, this methodology applies to all periods subsequent to December 31, 2008.
 
Management believes that the remediation described in item 1 immediately above has remediated the corresponding material weakness also described above.
 
2.           In connection with making the changes discussed above to our disclosure controls and procedures, in addition to working with our independent auditors, in the second quarter of 2009 we created a new position – Corporate Compliance Director – to assist us in making timely required filings with the Securities and Exchange Commission and ensuring the accuracy of our financial reporting and the effectiveness of our disclosure controls and procedures. The individual that we have assigned to the position of Corporate Compliance Director holds both a bachelors and masters degree, is a certified public accountant, and is experienced in compliance with generally accepted accounting principles, SEC reporting, and taxation matters. In the second quarter of 2009 we further improved our ability to timely make required filings by allocating part of the time of our administrative assistant who possesses relevant administrative and accounting experience to assist in promptly compiling information needed to meet our disclosure controls and procedure obligations. Also in the second quarter of 2009 we established a Disclosure Committee comprised of the Chief Executive Officer, the Chief Financial Officer and the Corporate Compliance Director.  It is anticipated that the Disclosure Committee will meet monthly and more frequently as reporting deadlines approach, to ensure that we comply timely with our disclosure obligations under the Securities Exchange Act of 1934, as amended.
 
Management expects that the remediation described in item 2 immediately above will remediate the corresponding material weakness also describe above by December 31, 2009. Management is unable, however, to estimate our capital or other expenditures associated with the allocation of time of certain of our personnel to assist us in generating reports and schedules necessary to timely file our periodic reports or our additional capital or other expenditures related to higher fees paid to our independent auditors in connection with their review of this remediation.
 
40
 
Inherent Limitations on the Effectiveness of Controls
 
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
 
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
We are not party to any legal proceedings.
 
ITEM 1A.
RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on May 22, 2009, which could materially affect our business, financial condition and results of operations.  The risks described in our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on May 22, 2009 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
 
41
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Reference is made to the disclosures in Item 3.02 of our Amendment No. 2 to our Current Report on Form 8-K for October 24, 2008 filed with the SEC on June 17, 2009.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
ITEM 5.
OTHER INFORMATION
 
Our Current Report on Form 8-K for October 24, 2008 filed with the SEC on October 30, 2008, as amended on November 5, 2008, is hereby amended by deleting the risk factor titled “Shares of our common stock eligible, or to become eligible, for public sale could adversely affect our stock price and make it difficult for us to raise additional capital through sales of equity securities” on page 30 of the report in its entirety and replacing it with the following:
 
“Shares of our common stock eligible, or to become eligible, for public sale could adversely affect our stock price and make it difficult for us to raise additional capital through sales of equity securities.
 
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time.  As of October 24, 2008, we had outstanding 25,308,348 shares of common stock, of which 24,898,348 shares of common stock were restricted under the Securities Act.  As of October 24, 2008, we also had outstanding options and warrants that were exercisable for approximately 7,361,370 shares of common stock.  Sales of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price of our common stock. Any adverse effect on the market price of our common stock could make it difficult for us to raise additional capital through sales of equity securities at a time and at a price that we deem appropriate.”
 
ITEM 6.
EXHIBITS
 
Exhibit
Number
Description

31.1
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)

31.2
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 (*)
 
32.1
Certification of President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
___________________
(*)                 Filed herewith.

42
 
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.
 
  BALQON CORPORATION  
       
Dated: June 17, 2009
By:
/s/ BALWINDER SAMRA  
   
Balwinder Samra, Chief Executive Officer
(principal executive officer)
  
 
43
 
EXHIBITS FILED WITH THIS REPORT

Exhibit
Number
Description

 
31.1
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002

 
31.2
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002

 
32.1
Certification of President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
44