UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




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,
2009







|   |
            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 website, 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 periods 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 13, 2009, there were 25,518,348 shares of the issuer’s common
stock issued and outstanding.










CAUTIONARY
STATEMENT




All statements included or incorporated
by reference in this Quarterly Report on Form 10-Q, other than statements or
characterizations of historical fact, are “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
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
contained in this report and contained in our Amendment No. 1 to 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
  PagePART
      I
                              FINANCIAL
      INFORMATIONItem
      1.
                            Financial
      Statements
                            1Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            18Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            29Item
      4.
                            Controls
      and Procedures
                            29Item
      4T.
                            Controls
      and Procedures
                            29PART II

                                OTHER
      INFORMATIONItem
      1
                            Legal
      Proceedings
                            31Item
      1A.
                            Risk
      Factors
                            31Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            33Item
      3.
                            Defaults
      Upon Senior Securities
                            33Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            33Item
      5.
                            Other
      Information
                            33Item
      6.
                            Exhibits
                            33Exhibits
      Filed with this Report


ii





PART
I – FINANCIAL INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS




BALQON
CORPORATION


CONDENSED
BALANCE SHEETS




September 30,
                  2009
              
              
              December 31,(Unaudited)
              
              
              2008ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              176,306
              
              
              $
              355,615Accounts
      receivable
              
              
              797,546
              
              
              
              —Inventories
              
              
              1,047,688
              
              
              
              1,159,601Prepaid
      expenses
              
              
              43,512
              
              
              
              43,020Total
      current assets
              
              
              2,065,052
              
              
              
              1,558,236Property
      and equipment, net
              
              
              84,557
              
              
              
              89,393Other
      assets:Deposits
              
              
              18,273
              
              
              
              33,641Trade
      secrets, net of $62,320 and $15,580 ofaccumulated
      amortization, respectively
              
              
              124,645
              
              
              
              171,385Goodwill
              
              
              166,500
              
              
              
              166,500Total
      assets
              
              $
              2,459,027
              
              
              $
              2,019,155LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilitiesAccounts
      payable and accrued expenses
              
              $
              1,208,448
              
              
              $
              1,225,807Customer
      deposit
              
              
              1,159,601
              
              
              
              —Loan
      payable, Bridge Bank
              
              
              256,300
              
              
              
              —Notes
      payable to related parties
              
              
              25,000
              
              
              
              100,875Advances
      from shareholder
              
              
              7,795
              
              
              
              34,877Billings
      in excess of costs and estimated earningson
      uncompleted contracts
              
              
              3,255
              
              
              
              2,604Total
      current liabilities
              
              
              2,660,399
              
              
              
              1,364,163Convertible
      notes payable, net of $879,093 discount
              
              
              120,907
              
              
              
              —Total
      liabilities
              
              
              2,781,306
              
              
              
              1,364,163SHAREHOLDERS’
      EQUITY (DEFICIT)Common
      stock, $0.001 par value, 100,000,000 shares authorized,25,518,348
      shares issued and outstanding
              
              
              25,518
              
              
              
              25,518Additional
      paid in capital
              
              
              9,650,329
              
              
              
              8,650,329Accumulated
      deficit
              
              
              (9,998,126
              )
              
              
              (8,020,855
              )Total
      shareholders’ equity (deficit)
              
              
              (322,279
              )
              
              
              654,992Total
      liabilities and shareholders’ equity (deficit)
              
              $
              2,459,027
              
              
              $
              2,019,155
  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, 2009 AND 2008
(Unaudited)




Three
      Months Ended
                  September 30,
              
              
              Nine
      Months Ended
                  September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008REVENUES
              
              $
              780,158
              
              
              $
              10,787
              
              
              $
              3,055,958
              
              
              $
              213,362COST
      OF REVENUES
              
              
              656,088
              
              
              
              17,361
              
              
              
              2,849,777
              
              
              
              170,292GROSS
      PROFIT (LOSS)
              
              
              124,070
              
              
              
              (6,574
              )
              
              
              206,181
              
              
              
              43,070OPERATING
      EXPENSES:General
      and administrative
              
              
              557,166
              
              
              
              940,703
              
              
              
              1,782,451
              
              
              
              6,304,051Reverse
      merger expenses
              
              
              —
              
              
              
              429,300
              
              
              
              —
              
              
              
              429,300Research
      and development
              
              
              34,615
              
              
              
              —
              
              
              
              132,579
              
              
              
              —Depreciation
      and amortization
              
              
              23,638
              
              
              
              2,693
              
              
              
              70,514
              
              
              
              6,370Total
      operating expenses
              
              
              615,419
              
              
              
              1,372,696
              
              
              
              1,985,544
              
              
              
              6,739,721Loss
      from operations
              
              
              (491,349
              )
              
              
              (1,379,270
              )
              
              
              (1,779,363
              )
              
              
              (6,696,651
              )Interest
      expense
              
              
              (125,350
              )
              
              
              (153,917
              )
              
              
              (197,908
              )
              
              
              (153,917
              )NET
      LOSS
              
              $
              (616,699
              )
              
              $
              (1,533,187
              )
              
              $
              (1,977,271
              )
              
              $
              (6,850,568
              )Net
      loss per share-basic and diluted
              
              $
              (0.02
              )
              
              $
              (0.07
              )
              
              $
              (0.08
              )
              
              $
              (0.37
              )Weighted
      average shares outstanding, basic and diluted
              
              
              25,518,348
              
              
              
              21,263,232
              
              
              
              25,518,348
              
              
              
              18,699,087
  The
accompanying notes are an integral part of these condensed financial
statements.
  2


BALQON
CORPORATION


CONDENSED
STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (Unaudited)




Common
      Stock
                                        
                                        
                                        Additional
                                          Paid
      in
                                        
                                        
                                        AccumulatedNumber
                                        
                                        
                                        Amount
                                        
                                        
                                        Capital
                                        
                                        
                                        Deficit
                                        
                                        
                                        TotalBalance,
      December 31, 2008
                                        
                                        
                                        25,518,348
                                        
                                        
                                        $
                                        25,518
                                        
                                        
                                        $
                                        8,650,329
                                        
                                        
                                        $
                                        (8,020,855
                                        )
                                        
                                        $
                                        654,992Fair
      value of beneficial conversion feature andwarrants
      issued with convertible notes
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,000,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,000,000Net
      loss
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (1,977,271
                                        )
                                        
                                        
                                        (1,977,271
                                        )Balance,
      September 30, 2009 (unaudited)
                                        
                                        
                                        25,518,348
                                        
                                        
                                        $
                                        25,518
                                        
                                        
                                        $
                                        9,650,329
                                        
                                        
                                        $
                                        (9,998,126
                                        )
                                        
                                        $
                                        (322,279
                                        )




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, 2009 AND 2008 (Unaudited)





Nine
      Months Ended
                  September 30,2009
              
              
              2008Cash
      flow from operating activities:Net
      loss
              
              $
              (1,977,271
              )
              
              $
              (6,850,568
              )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
              
              
              70,514
              
              
              
              6,370Fair
      value of common stock granted for services
              
              
              —
              
              
              
              5,333,000Fair
      value of options and warrants granted for services
              
              
              —
              
              
              
              685,309Amortization
      of note discount
              
              
              120,907
              
              
              
              138,662Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (797,546
              )
              
              
              35,000Customer
      advance
              
              
              1,159,601
              
              
              
              —Inventories
              
              
              111,913
              
              
              
              (106,159
              )Costs
      in excess of billings on uncompleted contracts
              
              
              —
              
              
              
              (7,098
              )Prepaid
      expenses
              
              
              (492
              )
              
              
              (1,534
              )Deposits
              
              
              —
              
              
              
              (14,400
              )Accounts
      payable and accrued expense
              
              
              (17,359
              )
              
              
              387,834Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
              
              
              650
              
              
              
              (71,264
              )Net
      cash used in operating activities
              
              
              (1,329,083
              )
              
              
              (464,847
              )Cash
      flows from investing activities:Acquisition
      of property and equipment
              
              
              (18,938
              )
              
              
              (64,860
              )Acquisition
      of Electric MotorSports, LLC
              
              
              —
              
              
              
              (353,465
              )Refund
      of deposit
              
              
              15,368
              
              
              
              —Net
      cash used in investing activities
              
              
              (3,570
              )
              
              
              (418,325
              )Cash
      flows from financing activities:Net
      proceeds on loan payable
              
              
              256,300
              
              
              
              —Proceeds
      from senior secured promissory notes
              
              
              1,000,000
              
              
              
              1,310,000Proceeds
      from note payable
              
              
              —
              
              
              
              125,875Repayment
      of notes payable to related party
              
              
              (75,875
              )
              
              
              —Advances
      from shareholder
              
              
              (27,081
              )
              
              
              (9,544
              )Net
      cash provided by financing activities
              
              
              1,153,344
              
              
              
              1,426,331Decrease
      in cash and cash equivalents
              
              
              (179,309
              )
              
              
              (543,158
              )Cash
      and cash equivalents, beginning of period
              
              
              355,615
              
              
              
              34Cash
      and cash equivalents, end of period
              
              $
              176,306
              
              
              $
              543,192Supplemental
      cash flow informationInterest
      paid
              
              $
              53,645
              
              
              $
              15,255Income
      taxes paid
              
              $
              —
              
              
              $
              —Supplemental
      non-cash investing and financing informationFair
      value of beneficial conversion and warrants recorded as note
      discount
              
              $
              1,000,000
              
              
              $
              586,747
  The accompanying notes are
an integral part of these condensed financial statements.
  4


BALQON
CORPORATION




NOTES
TO CONDENSED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (Unaudited)







NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES




The
Company




Balqon
Corporation, a California corporation (“Balqon California”) was incorporated on
April 21, 2005 and commenced business operations in 2006.  On
October 24, 2008, Balqon California completed a merger with BMR Solutions,
Inc., a Nevada corporation (“BMR”).  Pursuant to the merger agreement,
the issued and outstanding common shares of Balqon California were exchanged on
a one-for-one basis for common shares of BMR.  After the merger was
completed, the Balqon California’s shareholders owned approximately 94% of the
outstanding shares of common stock of BMR and the original shareholders of BMR
owned 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 California 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 “Company”).  The
financial statements presented herein are those of the accounting acquirer
(i.e., Balqon California) 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 $40,365 as a cost of the reverse merger. In
addition, the Company incurred expenses of $374,019 in connection with the
reverse merger.




The
Company develops, assembles and markets heavy-duty electric vehicles, flux
vector inverters and heavy-duty electric drive systems.




Going
Concern




For the
nine months ended September 30, 2009 and for the year ended
December 31, 2008, the Company recorded net losses of $1,977,271 and
$7,933,281, respectively, and had a working capital deficit of $595,347 and a
stockholders’ deficit of $322,279 at September 30, 2009.  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 NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)




Basis
of Presentation of Unaudited Financial Information




The
unaudited financial statements of the Company as of September 30, 2009 and
for the three andnine months ended
September 30, 2009 and 2008 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.  The condensed balance sheet information as
of December 31, 2008 was derived from the audited financial statements
included in the Company’s restated financial statements as of and for the years
ended December 31, 2008 and 2007 included in Amendment No. 1 to Form
10-K filed with the Securities and Exchange Commission (“SEC”) on May 22,
2009. These financial statements should be read in conjunction with that
report.




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 guidance of the Financial
Accounting Standards Board (“FASB”).  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.  The Company also
recognizes 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.




6




BALQON
CORPORATION




NOTES
TO CONDENSED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)




Revenues
(continued)




Contract
Revenue and Cost Recognition on Prototype Vehicles (continued)




The
Company accounted for a certain grant from the City of Los Angeles (“City of Los
Angeles Grant”) pursuant to current accounting guidelines, which provide that
sales for cost-reimbursement contract is recorded as costs are incurred and
include estimated earned fees in the proportion that costs incurred to date bear
to total estimated costs.




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, 2009 and
December 31, 2008, the Company had no warranty reserve nor did it incur
warranty expenses during the nine month periods ended September 30, 2009 or
2008.




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,
                    2009
                
                
                December 31,
                    2008(unaudited)Raw
      materials
                
                $
                1,047,688
                
                
                $
                1,044,816In-transit
                
                
                —
                
                
                
                114,785$
                1,047,688
                
                
                $
                1,159,601




7





BALQON
CORPORATION




NOTES
TO CONDENSED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)




Goodwill
and Intangible Assets




As
required by the FASB, 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,
management performs impairment testing of goodwill and indefinite-lived
intangible assets at least annually.




In
accordance with guidance of the FASB, 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
the 2009 impairment testing to be completed at the end of the fiscal year ending
December 31, 2009.




In
accordance with guidance of the FASB, the Company reviews intangible assets
subject to amortization at least annually to determine if any adverse conditions
exist or a change in circumstances has occurred that would indicate impairment
or a change in the remaining useful life.  If the carrying value of an
asset exceeds its undiscounted cash flows, the Company writes down the carrying
value of the intangible asset to its fair value in the period
identified.  If the carrying value of assets is determined not to be
recoverable, the Company records an impairment loss equal to the excess of the
carrying value over the fair value of the assets.  The Company’s
estimate of fair value is based on the best information available, in the
absence of quoted market prices.  The Company generally calculates
fair value as the present value of estimated future cash flows that the Company
expects to generate from the asset using a discounted cash flow income approach
as described above.  If the estimate of an intangible asset’s
remaining useful life is changed, the Company amortizes the remaining carrying
value of the intangible asset prospectively over the revised remaining useful
life.  Based upon management’s assessment, there were no indicators of
impairment of the Company’s goodwill or intangible assets at September 30,
2009 or December 31, 2008.




8




BALQON
CORPORATION




NOTES
TO CONDENSED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)




Impairment
of Long-Lived Assets




The FASB
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, 2009 or December 31,
2008.




Loss
Per Share




Basic
loss per share has been computed using the weighted average number of common
shares outstanding and issuable during the period. 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, 2009, common stock equivalents
comprised of options exercisable into 4,562,592 shares of the Company’s common
stock, warrants exercisable into 4,008,778 shares of the Company’s common stock
and notes convertible into 1,000,000 shares of the Company’s common stock. For
the nine month periods ended September 30, 2009 and 2008, common stock
equivalent shares have been excluded from the calculation of loss per share as
their effect is anti-dilutive.




Stock-Based
Compensation




The
Company periodically issues stock instruments, including shares of its 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
rendered and for financing costs.  Stock-based compensation is
measured at the grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period.  Options to
purchase shares of the Company’s common stock vest and expire according to the
terms established at the grant date.




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.




For the
nine months ended September 30, 2009 and 2008, revenues are from contracts
with the City of Los Angeles and the South Coast Air Quality Management District
(“AQMD”).




For the
nine months ended September 30, 2009, 19.6% of cost of sales were comprised
of purchases from a single vendor.  At September 30, 2009,
accounts payable to this vendor represented 41% of total accounts
payable.  At September 30, 2009, three other vendors had balances
representing 35%, 7%, and 6%, respectively, of total accounts
payable.




9


BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)




Recent
Accounting Pronouncements




In
June 2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
(“GAAP”).  The FASB Accounting Standards CodificationTM
(“Codification”) has become the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP.  All
existing accounting standard documents are superseded by the Codification and
any accounting literature not included in the Codification will not be
authoritative.  However, rules and interpretive releases of the SEC
issued under the authority of federal securities laws will continue to be
sources of authoritative GAAP for SEC registrants.  The Codification
is effective for interim and annual reporting periods ending after
September 15, 2009.  Therefore, beginning with the quarter ending
September 30, 2009, all references made to GAAP in the Company’s financial
statements now use the new Codification numbering system.  Other than
the manner in which new accounting guidance is referenced, the adoption of these
changes had no impact on the Company’s financial statements.




On
July 1, 2009, the Company adopted authoritative guidance issued by the FASB
on business combinations.  The guidance retains the fundamental
requirements that the acquisition method of accounting (previously referred to
as the purchase method of accounting) be used for all business combinations, but
requires a number of changes, including changes in the way assets and
liabilities are recognized and measured as a result of business
combinations.  It also requires the capitalization of in-process
research and development at fair value and requires the expensing of
acquisition-related costs as incurred.  The Company has applied this
guidance to business combinations completed since July 1,
2009.  Adoption of the new guidance did not have a material impact on
the Company’s historical financial statements.




In
October 2009, the FASB issued authoritative guidance on revenue recognition
that will become effective for the Company beginning July 1, 2010, with
earlier adoption permitted.  Under the new guidance, tangible products
that have software components that are essential to the functionality of the
tangible product will no longer be within the scope of the currently existing
software revenue recognition guidance, and software-enabled products will now be
subject to other relevant revenue recognition guidance.  The Company
believes that the adoption of this new guidance will not have a material impact
on the Company’s financial statements.




In
May 2009, the FASB issued new requirements for reporting subsequent events.
These requirements set forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.  Disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date is
also required.  The adoption of these changes did not have a material
impact on the Company’s financial statements.




Other
recent accounting pronouncements issued by the FASB did not or are not believed
by management to have a
material impact on the Company’s present or future financial
statements.




10


BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
2 - PROPERTY AND EQUIPMENT




Property
and equipment are comprised as follows:





September 30,
                    2009
                
                
                December 31,
                    2008(Unaudited)Computer
      equipment and software
                
                $
                70,350
                
                
                $
                52,390Office
      furniture
                
                
                27,703
                
                
                
                26,725Machinery
                
                
                6,395
                
                
                
                6,395Leasehold
      improvements
                
                
                21,711
                
                
                
                21,711Total
      property and equipment, cost
                
                
                126,159
                
                
                
                107,221Less:
      accumulated depreciation
                
                
                (
      41,602
                )
                
                
                (17,828
                )Property
      and equipment, net
                
                $
                84,557
                
                
                $
                89,393




Depreciation
and amortization expense on property and equipment for the nine months ended
September 30, 2009 and 2008 was $23,774 and $6,370,
respectively.




NOTE
3 – 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 Company’s Vice President Research and
Development.  The assets acquired included goodwill and trade secrets
used in the development and manufacture of flux vector inverters.  The
acquisition was accounted for as a purchase in accordance with current
accounting guidance.




The
following unaudited pro forma operating data shown below presents the results of
operations for the three and nine months ended September 30, 2008, as if
the acquisition of EMS had occurred on the last day of the immediately preceding
fiscal period.  Accordingly, transaction costs related to the
acquisition are not included in the loss from operations shown below. The pro
forma results are not necessarily indicative of the financial results that might
have occurred had the acquisition actually taken place on the respective dates,
or of future results of operations.





Three
      Months
                    Ended
                    September 30,
                    2008
                
                
                Nine
      Months
                    Ended
                    September 30,
                    2008(Unaudited)
                
                
                (Unaudited)Revenues
                
                $
                363,292
                
                
                $
                691,313Net
      loss
                
                $
                (1,295,714
                )
                
                $
                (6,619,849
                )Net
      loss per share-basic and diluted
                
                $
                (0.07
                )
                
                $
                (0.31
                )Weighted
      average shares outstanding-basic and diluted
                
                
                18,699,087
                
                
                
                21,263,232
  11


BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)


NOTE
4 – LOAN PAYABLE – BRIDGE BANK




On
February 25, 2009, the Company executed a Business Financing Agreement,
dated February 18, 2009, with Bridge Bank, National Association (the
“Lender”) (the “Initial Agreement”).  The initial agreement has been
amended by Business Financing Modification Agreements dated effective
February 26, 2009 and August 4, 2009, respectively (the “Modification
Agreements,” and together with the Initial Agreement the “Credit
Agreement”).  The Credit Agreement provides the Company with an
accounts receivable based credit facility in the aggregate amount of up to
$2,000,000 (the “Credit Facility”).  At September 30, 2009,
$256,300 was outstanding and $381,737was
available under the terms of the Credit Facility.




The
Credit Facility is formula-based and generally provides that the outstanding
borrowings under the Credit Facility may not exceed an aggregate of 80% of
eligible accounts receivable. The Company must immediately pay any advance made
under the Credit Facility within 90 days of the earlier of (i) the invoice date
of the receivable that substantiated the advance or (ii) the date on which the
advance was made.  The Credit Facility is secured by a continuing
first priority security interest in all the Company’s personal property (subject
to customary exceptions).  Interest on the Credit Facility is payable
monthly, at the per annum prime rate as published by the Lender plus two
percentage points, subject to a minimum rate of 6.0% per annum (6% at
September 30, 2009).  The Credit Agreement matures on
February 24, 2010 and may be terminated at any time by either party to the
Credit Agreement.




NOTE
5 – SUBORDINATED UNSECURED CONVERTIBLE PROMISSORY NOTES




The
amounts payable under these notes, less note discount related to the beneficial
conversion feature and warrants issued with the convertible notes is as
follows:





September 30,
                    2009
                
                
                December 31,
                    2008(Unaudited)Subordinated
      unsecured convertible notes payable,
                  interest
      at 10% per annum payable quarterly, due
                  March 31,
      2012
                
                $
                1,000,000
                
                
                $
                —Less:
      note discount
                
                
                (879,093
                )
                
                
                —Total
      notes payable, net
                
                $
                120,907
                
                
                $
                —




Between
March 25, 2009 and June 23, 2009, the Company entered into agreements
with 34accredited
investors for the sale by the Company of an aggregate of $1,000,000 of 10%
Unsecured Subordinated Convertible Promissory Notes which are convertible into
an aggregate of 1,000,000 shares of the Company’s common stock at a conversion
price of $1.00 per share of common stock, subject to
adjustment.  Additionally, the Company issued three-year warrants to
purchase an aggregate of 1,000,000 shares of the Company’s common stock at an
exercise price of $1.50 per share.  The conversion price is only
subject to adjustment based on stock splits, stock dividends, spin-offs, rights
offerings, or recapitalization through a large, nonrecurring cash
dividend.




12


BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)






NOTE
5 – SUBORDINATED UNSECURED CONVERTIBLE PROMISSORY NOTES (continued)




The
Company determined that the relative fair value of the warrants was
$639,061.  The relatively fair value was determined using the
methodology prescribed by current accounting guidance.  The Company
determined the initial fair value of the beneficial conversion feature was
approximately $360,939. These amounts were calculated under a Black-Scholes
option pricing model using as assumptions an expected life of 3 years, an
industry volatility of 54.39%, a risk free interest rate of 1.15%, and no
expected dividend yield. The relative value of the warrants of $639,061 and the
beneficial conversion feature of $360,939 was recorded by the Company as a loan
discount of $1,000,000, which the Company is amortizing to interest expense over
the life of the notes.  At September 30, 2009, the total discount
(less amortization of $120,907) of $879,093 is offset against the balance of the
convertible notes.




NOTE
6 – NOTE PAYABLE - RELATED PARTIES, UNSECURED




Note
payable to related parties, unsecured, consists of the following
at:




September 30,
                  2009
              
              
              December 31,
                  2008(Unaudited)Notes
      payable to a shareholder, unsecured, interest at 6% per
                annumpayable
      at maturity, due December 6, 2008
              
              $
              —
              
              
              $
              875Note
      payable to a shareholder, issued in conjunction with the
                acquisitionof
      EMS (see Note 3), unsecured, interest at the
                prime
      rate (5% at June 30, 2009)per
      annum, payable at maturity,
                due
      in three principal installments: $50,000 onMay 15,
      2009,
                $25,000
      on July 15, 2009, and $25,000 on December 30, 2009,
                plus
      interest.
              
              
              25,000
              
              
              
              100,000Total
      notes payable
              
              $
              25,000
              
              
              $
              100,875




NOTE
7 – INCOME TAXES




At
September 30, 2009, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $9,846,000 for federal and for state purposes. The
Federal carryforward expires in 2028 and the state carryforward expires in 2018.
Given the Company’s history of net operating losses, management has determined
that it is more likely than not the Company will be able to realize the tax
benefit of the carryforwards.




Accordingly,
the Company has not recognized a deferred tax asset for this benefit. Upon the
attainment of taxable income by the Company, management will assess the
likelihood of realizing the tax benefit associated with the use of the
carryforwards and will recognize a deferred tax asset at that time.




Current
standards require that a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax assets will not be
realized.




13


BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)




NOTE
7 – INCOME TAXES (continued)




Significant
components of the Company’s deferred income tax assets are as
follows:




September 30,
                    2009(Unaudited)Deferred
      income tax asset:Net
      operating loss carryforward
                
                $
                4,015,000Valuation
      allowance
                
                
                (4,015,000
                )Net
      deferred income tax asset
                
                $
                —




Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:




Nine
      Months
                    Ended
                    September 30,
                    2009Tax
      expense at the U.S. statutory income tax
                
                
                (34.0)%State
      tax net of federal tax benefit
                
                
                (5.8)%Increase
      in valuation allowance
                
                
                39.8%Effective
      tax rate
                
                
                —%




The
Company adopted authoritative guidance issued by the FASB which 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 the
current accounting guidelines, 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.  The current accounting guidelines also provide guidance
on derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and require increased disclosures. At the date of
adoption, and as of September 30, 2009, the Company does not have a
liability for unrecognized tax benefits.




14




BALQON
CORPORATION




NOTES
TO CONDENSED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)






NOTE
8 – STOCK OPTIONS AND WARRANTS




Stock
Options




At
September 30, 2009, options shares outstanding are as follows:




Shares
                
                
                Average
                    Exercise
                    PriceBalance
      at January 1, 2009
                
                
                4,562,592
                
                
                $
                2.00Granted
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Cancelled
                
                
                —
                
                
                
                —Balance
      at September 30, 2009 (unaudited)
                
                
                4,562,592
                
                
                $
                2.00




The
following table summarizes information about stock options outstanding and
exercisable as of September 30, 2009:





Options
      Outstanding
              
              Options
      ExercisableRange
      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
              
              0.75
              
              1,520,864
              
              $1.50$2.00
              
              1,520,864
              
              $2.00
              
              1.75
              
              1,520,864
              
              $2.00$2.50
              
              1,520,864
              
              $2.50
              
              2.75
              
              1,520,864
              
              $2.504,562,592
              
              
              
              
              
              4,562,592




At
September 30, 2009, the aggregate intrinsic value of the 4,562,592 options
outstanding and exercisable was $76,043.  At September 30, 2009,
all options were vested and there were no unvested options
outstanding.




Warrants




At
September 30, 2009, warrants shares outstanding are as
follows:




Shares
                
                
                Average
                    Exercise
                    PriceBalance
      at January 1, 2009
                
                
                3,008,778
                
                
                $
                1.50Granted
                
                
                1,000,000
                
                
                $
                1.50Exercised
                
                
                —
                
                
                
                —Cancelled
                
                
                —
                
                
                
                —Balance
      at September 30, 2009 (unaudited)
                
                
                4,008,778
                
                
                $
                1.50





15




BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)


NOTE
8 – STOCK OPTIONS AND WARRANTS (continued)




Warrants
(continued)




The
following table summarizes information about stock warrants outstanding and
exercisable as of September 30, 2009:





Warrants
      Outstanding
                  
                  Warrants
      ExercisableRange
      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
                  
                  3,399,594
                  
                  $1.50
                  
                  1.8
                  
                  3,399,594
                  
                  $1.50$2.00
                  
                  304,592
                  
                  $2.00
                  
                  1.6
                  
                  304,592
                  
                  $2.00$2.50
                  
                  304,592
                  
                  $2.50
                  
                  2.4
                  
                  304,592
                  
                  $2.504,008,778
                  
                  
                  
                  
                  
                  4,008,778





At
September 30, 2009, the aggregate intrinsic value of the warrants
outstanding and exercisable was $169,980.




NOTE
9 – COMMITMENTS AND CONTINGENCIES




On
June 26, 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 has agreed to pay to each of the City of Los Angeles and the AQMD a
royalty fee of $1,000 per electric vehicle it sells to a purchaser other than
the City of Los Angeles or the AQMD.




In
June 2009, the Company entered into an agreement (the “Autocar Agreement”)
with Autocar, LLC (“Autocar”), a manufacturer and marketer of severe service
heavy-duty trucks, under which the Company agreed with Autocar to collaborate on
the development, marketing and sale of on-road Class 7 and Class 8
zero emissions electric trucks to be used in short haul drayage and trash
hauling applications (the “Autocar Truck”).  Under the terms of the
Autocar Agreement, the Company agreed to purchase Department of Transportation
compliant chassis designed for cab-over-engine-heavy-duty vehicles (the “Autocar
Chassis”) exclusively from Autocar for a period of at least three
years.  The Autocar Agreement is for an initial term commencing on
June 9, 2009 and ending 36 months after the first sale of an Autocar Truck
by us to an end user (the “First Sale”).  After the initial term, the
Autocar Agreement will automatically continue for successive one-year terms
until it is terminated at the end of its term by either party giving the other
party notice of termination at least 60 days prior to the end of the applicable
term.  Under the Autocar Agreement, the Company agreed to purchase: a
minimum of 50 Autocar Chassis during the first twelve month period after the
First Sale (with at least 5 Autocar Chassis being purchased by December 9,
2009), a minimum of 75 Autocar Chassis during the second twelve month period
after the First Sale, and a minimum of 112 Autocar Chassis during the third
twelve month period after the First Sale.




16




BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)


NOTE
9 – COMMITMENTS AND CONTINGENCIES (continued)




In
May 2009, the Company received a grant of up to $400,000 from the City of
Los Angeles to reimburse the Company for costs it incurs in connection with the
installation, demonstration and evaluation of lithium-ion powered battery packs
in two of the Company’s zero emissions Nautilus
vehicles.  Reimbursement of up to $360,000 of the costs incurred shall
be payable to the Company upon the delivery of a Nautilus E30 and a Nautilus E20
installed with lithium-ion batteries to the City of Los Angeles for testing, and
reimbursement of up to $40,000 of the costs incurred shall be payable to the
Company upon completion of testing required under the terms of the
grant.  Upon completion of the testing of these two vehicles, one
Nautilus E20 and one Nautilus E30, the City of Los Angles will have the right to
purchase these test vehicles against its existing purchase order with the
Company.  In June 2009, the Company completed assembly of a
Nautilus E30 retrofitted with 280 kilowatt hours (“kWh”) lithium-ion battery
packs, and an initial testing of this Nautilus E30 demonstrated a range of over
150 miles on a single charge under unloaded conditions. As of November 13,
2009, the Company has retrofitted 5 Nautilus E20s with 140 kWh lithium-ion
battery packs, and initial testing of this Nautilus E20 demonstrated a range of
over 95 miles on a single charge under unloaded conditions.




As of
September 30, 2009, the Company has invoiced the City of Los Angeles
$360,000 in accordance with the City of Los Angeles grant.  Through
the nine months ended September 30, 2009, the Company has incurred $359,349
of costs related to the City of Los Angeles grant and has recognized the same
amount as revenue. The billings in excess of cost equal to $650 is reflected as
a liability in the Company’s balance sheet for September 30,
2009.




NOTE
10 - SUBSEQUENT EVENTS




In connection with the preparation of the
Company’s financial statements for the fiscal period ended September 30,
2009, subsequent events through November 16, 2009, the date the financial
statements were available for issuance, have been evaluated and no significant
subsequent events were identified.




17




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
financial statements and the related notes to financial statements 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 and elsewhere in this
report. 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;




·
            a
      loss of one of our key customers;




·
            our
      ability to develop and market products that compete effectively in our
      targeted market segments;




·
            our
      ability to meet customer demand;




·
            our
      ability, through the implementation of our long-term business strategy, to
      become profitable and/or generate sufficient cash
  flows;




·
            current
      and future economic, business and regulatory conditions, as well as the
      fluctuations in the price of commodities such as oil, which may, in turn,
      affect demand for our products;




·
            anticipated
      trends in our financial condition and results of operations;
      and




·
            our
      ability to distinguish ourselves from our current and future
      competitors.




We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors discussed under the “Risk Factors” in this report and other reports
filed as well as any cautionary language in this report or any of our other
reports or filings, including Amendment No. 1 to our Annual Report on Form 10-K
filed with the SEC on May 22, 2009, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we described in our forward-looking statements. We
undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date of this report unless
and to the extent required by applicable law.




18




Overview




We
currently develop, assemble and market heavy-duty electric vehicles, flux vector
inverters, and heavy-duty electric drive systems.  We currently 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 report 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.  The revenues and costs associated with the AQMD
Development Agreement are recorded as contract revenues and costs, in accordance
with the current accounting guidelines.  As such, the costs associated
with the development of our demonstration vehicle are recorded as “contract
costs,” not as research and development expenses.  All of our revenues
for the three months ended September 30, 2008 were associated with the AQMD
Development Agreement and the sale of a battery charger to the City of Los
Angeles.




In
addition to incorporating our heavy-duty electric traction drive systems and
flux vector inverters into our heavy-duty electric vehicles, we are marketing,
and plan to sell, our heavy-duty electric traction drive systems and flux vector
inverters to original equipment manufacturers, or OEMs, of heavy-duty material
handling equipment and vehicles.  Our heavy-duty electric traction
drive systems are designed to target the needs of industries that use heavy-duty
vehicles or equipment, such as capacity forklifts, to transport heavy loads in
off-highway applications. These heavy-duty electric propulsion systems provide
high torque to pull heavy loads during start-stop applications.  Our
flux vector inverters can operate at 200 volts to 800 volts direct
current.  Our flux vector inverters, which are currently used in
electric buses, mining equipment and other applications, are Society of
Automation Engineers, or SAE, J1939 controller area network, or CAN Bus, capable
and, as a result, provide us with the ability to incorporate our technologies
into existing vehicle platforms including container lift trucks, reach stackers,
roll-on/roll-off tractors, drayage vehicles and high capacity
forklifts.  SAE J1935 CAN Bus is a standard communication protocol
used in the automotive industry to communicate and diagnose between vehicle
components.




In May
2008, we received a purchase order from the AQMD for one of our Nautilus E20
heavy-duty electric yard tractors.  In June 2008, we received a
purchase order from the City of Los Angeles for 20 Nautilus E20 heavy-duty
electric yard tractors and five Nautilus E30 drayage tractors.  The
purchase order from the City of Los Angeles is pursuant to an agreement with the
City of Los Angeles, dated June 26, 2008, or City of Los Angeles
Agreement.  As of November 13,
2009, we have delivered 12 Nautilus E20s to the City of Los Angeles and one
Nautilus E20 to the AQMD.  All of the Nautilus E20s we delivered
during the third quarter of 2009 were equipped with lithium-ion battery packs.
Previously, we believed that we would deliver the 25 Nautilus tractors ordered
under the City of Los Angeles purchase order by December 31,
2009.  However, primarily due to anticipated
production delays related to implementation of lithium-ion battery packs
in our electric vehicles, we have revised our initial forecast, and we now
believe that we will deliver the remaining 8Nautilus
E20s and 5 Nautilus E30s to the City of Los Angeles by March 31,
2010.


In
May 2009, we received a grant of up to $400,000 from the City of Los
Angeles to reimburse us for costs we incur in connection with the installation,
demonstration and evaluation of lithium-ion powered battery packs in two of our
zero emissions Nautilus vehicles.  In June 2009, we completed
assembly of a Nautilus E30 retrofitted with 280 kilowatt hours, or kWh,
lithium-ion battery packs, and an initial testing of this Nautilus E30
demonstrated a range of over 150 miles on a single charge under unloaded
conditions.  As of the date of this report, we have retrofitted a
Nautilus E20 with 140 kWh lithium-ion battery packs, and initial testing of this
Nautilus E20 demonstrated a range of over 95 miles on a single charge under
unloaded conditions. As of the date of this report, we continue to test the
Nautilus E30 and Nautilus E20 that have been retrofitted to demonstrate what we
believe to be the additional range and performance benefits of lithium-ion
batteries in our current Nautilus product line.




19




While our
current backlog for our heavy-duty electric vehicles consists solely of our
outstanding purchase order from the City of Los Angeles, we are actively
pursuing a more diversified customer base.  We anticipate that a
majority of future sales of our heavy-duty electric vehicles will be made
directly to end users, such as large terminal operators, shipping companies and
OEMs, rather than directly to governmental agencies such as the AQMD and the
City of Los Angeles.  Our expectation that a majority of our future
sales of our heavy-duty electric vehicles will be made directly to end users is
based, in part, on the results of our initial test of the Nautilus E30 powered
by lithium-ion batteries and our agreement with Autocar, LLC, or Autocar, to
collaborate on the development, marketing and sale of on-highway Class 7
and Class 8 zero emissionselectric
vehicles.  In addition, we expect to use Autocar’s existing authorized
dealer network to sell our heavy-duty electric vehicles.  Our
expectations regarding future customers are also based on our current on-going
discussions with potential customers located in Canada and Europe, and
additional governmental incentives and funding that we believe will become
available for electric vehicles which we believe will improve the competitive
advantage of our electric vehicles.




Our total
revenues increased by $769,371, or 7,132%, to $780,158 for the three months
ended September 30, 2009 as compared to $10,787 for the three months ended
September 30, 2008 and increased by $2,842,596, or 1,332%, to $3,055,958
for the nine months ended September 30, 2009 as compared to $213,362 for
the nine months ended September 30, 2008. This increase in revenues is
largely the result of sales of our electric vehicles and related equipment, that
commenced during February 2009.  We reported a net loss of $616,699
and $1,977,271 for the three and nine months ended September 30, 2009,
respectively, as compared to a net loss of $1,533,187 and $6,850,568 for the
three and nine months ended September 30, 2008,
respectively.  Our cost of revenues increased to $656,088 for the
third quarter of 2009 as compared to $17,361 for the same period in 2008 and
increased to $2,849,777 for the first nine months of 2009 as compared to
$170,292 for the same period in 2008.  Operating and other expenses
decreased to $740,769 for the third quarter of 2009 as compared to $1,526,613
for the same period in 2008 and decreased to $2,183,452 for the first nine
months of 2009 as compared to $6,893,638 for the same period in
2008.  The significant decrease in operating expenses in the 2009
periods as compared to the 2008 periods is primarily the result of us incurring
$5,185,399 of stock-based compensation expense in the 2008 periods as compared
to us incurring no stock-based compensation expense in the 2009
periods.




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 from BMR Solutions, Inc. 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.




20




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.




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 guidance of the Financial Accounting
Standards Board, or FASB. 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.




We
accounted for a certain grant from the City of Los Angeles pursuant to the
provisions current accounting guidelines, which provide that sales for
cost-reimbursement contract is recorded as costs are incurred and include
estimated earned fees in the proportion that costs incurred to date bear to
total estimated costs.




21




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.




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 review its 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 its 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 September 30, 2009 and December 31, 2008, we
had no warranty reserve nor did we incur warranty expenses during the nine month
periods ended September 30, 2009 or 2008.




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 rendered and
for financing costs.  Stock-based compensation is measured at the
grant date, based on the fair value of the award, and is recognized as expense
over the requisite service period.  Options to purchase shares of our
common stock vest and expire according to the terms established at the grant
date.




Goodwill
and Intangible Assets




As
required by the FASB, 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,
management performs impairment testing of goodwill and indefinite-lived
intangible assets at least annually.




22




In
accordance with guidance of the FASB, management tests goodwill for impairment
at the reporting unit level.  We have 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 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 the 2009 impairment
testing to be completed at the end of the fiscal year ending December 31,
2009.




Based
upon management’s assessment, there are no indicators of impairment of the
Company’s goodwill or intangible assets at September 30, 2009 or December
31, 2008.




Impairment
of Long-Lived Assets




The FASB
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. 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, 2009 or December 31, 2008.




Income
Taxes




We
account for income taxes in accordance current accounting
guidelines.  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.




Results
of Operations




We have
based our financial statements on the assumption of our operations continuing as
a going concern.  As of September 30, 2009, we had working
capital deficit of $595,347, had an accumulated deficit of $9,998,126 and we
reported a net loss for the three and nine month periods ended
September 30, 2009 of $616,699 and $1,977,271, respectively,which raise substantial
doubt about our ability to continue as a going concern.Our 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.  Over the longer-term, we plan
to achieve profitability through our operations from the sale of our heavy-duty
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.




23




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.




Three
Months Ended September 30, 2009 Compared to the Three Months Ended
September 30, 2008





Three
      Months Ended

                  September 30,
                
                
                Dollar

                  Variance
                
                
                Percentage

                  Variance
                
                
                Results
      as a Percentage

                  of
      Net Revenues for the
                    Three
      Months Ended
                    September 30,2009
                    (Unaudited)
                
                
                2008
                    (Unaudited)
                
                
                Favorable
                    (Unfavorable)
                
                
                Favorable
                    (Unfavorable)
                
                
                2009
                
                
                2008Net
      revenues
                
                $
                780,158
                
                
                $
                10,787
                
                
                $
                769,371
                
                
                
                7,132
                %
                
                
                100
                %
                
                
                100
                %Cost
      of revenues
                
                
                656,088
                
                
                
                17,361
                
                
                
                (638,727
                )
                
                
                (3,679
                )%
                
                
                84
                %
                
                
                161
                %Gross
      profit (loss)
                
                
                124,070
                
                
                
                (6,574
                )
                
                
                130,644
                
                
                
                1,987
                %
                
                
                16
                %
                
                
                61
                %Operating
      and interest expenses
                
                
                740,769
                
                
                
                1,526,613
                
                
                
                785,844
                
                
                
                51
                %
                
                
                95
                %
                
                
                14,152
                %Net
      loss
                
                $
                (616,699
                )
                
                $
                (1,533,187
                )
                
                $
                916,488
                
                
                
                60
                %
                
                
                (79
                )%
                
                
                (14,213
                )%




Net
Revenues.  The increase in net revenues is comprised of the
sale of parts and four electric trucks for an aggregate sales price of $721,823
and a net increase of $47,548 in contract revenues earned.  The
contract revenues were related to the completion of the integration of
lithium-ion battery packs in a Nautilus E30 pursuant to a grant we received from
the City of Los Angeles.  We anticipate that our future revenues will
be comprised primarily of sales of our heavy-duty electric vehicles, flux vector
inverters and our other products to customers including the City of Los Angeles,
OEMs, and end-users of heavy-duty electric vehicles.  Our revenues
during the three months ended September 30, 2009 were comprised solely of
sales to customers in the United States.  We believe that a
substantial portion of our sales in the future will be made to customers located
outside of the United States.




Gross Profit.  The
decrease in gross profit was due to a 16% gross margin associated with the sales
of a battery system and electric trucks during the quarter ending
September 30, 2009 compared to a 61% gross margin associated with contract
revenues earned under the AQMD Development Agreement during the quarter ending
September 30,  2008. The decrease in gross margin during the
three months ended September 30, 2009 was largely attributable to increased
material costs and lower than anticipated production volume resulting in higher
overhead costs.  Our gross margin during the quarter ending
September 30, 2009 was 16%, as compared to a lower gross margin of 4%
during the quarter ending June 30, 2009.  We anticipate that our
gross profit margin associated with sales of our electric vehicles will be
approximately 24% of revenues once we reach our projected annual production
volume.




24




Operating and Interest
Expenses.  Operating and interest expenses incurred during the
three months ended September 30, 2009 was $740,769 as compared to
$1,526,613 incurred during the same period in 2008, a decrease of
$785,844.  This decrease in operating and interest expenses was
largely due to the legal, accounting, audit and consulting fees incurred in
connection with the merger transaction we consummated in October
2008.  We expect that over the near term, our general and
administrative expenses will increase as a result of increased management
personnel, increased legal and accounting fees associated with increased
corporate governance activities in response to the Sarbanes-Oxley Act of 2002
and recently adopted rules and regulations of the SEC.




Our
research and development expenses for the three months ended September 30,
2009 were $34,615.  We had no research and development expenses during the
three months ended September 30, 2008.  The increase in research and
development expenses is largely attributable to the expenses associated with the
employment of our vice president of research and development that was hired
during the year ended December 31, 2008.




Nine
Months Ended September 30, 2009 Compared to the Nine Months Ended
September 30, 2008




Nine
      Months Ended
                    September 30,
                  
                  
                  DollarVariance
                  
                  
                  PercentageVariance
                  
                  
                  Results
      as a Percentage
                    of
      Net Revenues for the
                      Nine
      Months Ended
                      September 30,2009
                      (Unaudited)
                  
                  
                  2008
                      (Unaudited)
                  
                  
                  Favorable
                      (Unfavorable)
                  
                  
                  Favorable
                      (Unfavorable)
                  
                  
                  2009
                  
                  
                  2008Net
      revenues
                  
                  $
                  3,055,958
                  
                  
                  $
                  213,362
                  
                  
                  $
                  2,842,596
                  
                  
                  
                  1,332
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %Cost
      of revenues
                  
                  
                  2,849,777
                  
                  
                  
                  170,292
                  
                  
                  
                  (2,679,485
                  )
                  
                  
                  (1,574
                  )%
                  
                  
                  93
                  %
                  
                  
                  80
                  %Gross
      profit
                  
                  
                  206,181
                  
                  
                  
                  43,070
                  
                  
                  
                  163,111
                  
                  
                  
                  379
                  %
                  
                  
                  7
                  %
                  
                  
                  20
                  %Operating
      and interest expenses
                  
                  
                  2,183,452
                  
                  
                  
                  6,893,638
                  
                  
                  
                  (4,710,186
                  )
                  
                  
                  68
                  %
                  
                  
                  71
                  %
                  
                  
                  3,231
                  %Net
      loss
                  
                  $
                  (1,977,271
                  )
                  
                  $
                  (6,850,568
                  )
                  
                  $
                  4,873,297
                  
                  
                  
                  71
                  %
                  
                  
                  (65
                  )%
                  
                  
                  (3,211
                  )%




Net
Revenues. The increase in revenues
was comprised primarily of sales of eleven Nautilus E20 electric vehicles to the
City of Los Angeles and a Nautilus E20 to the AQMD.  We also
recognized $359,350 in contract revenues resulting from the grant we received
from the City of Los Angeles.  Sales during the nine months ended
September 30, 2009 were $3,055,958 as compared to $213,362 for the nine
months ended September 30, 2008.  Our revenues during the nine
months ended September 30, 2009 were comprised solely of sales to customers
in the United States.




Gross Profit.The $163,111 increase in
gross profit for the nine months ended September 30, 2009 as compared to
the same period in 2008 was due to increased revenues during the 2009 period.
The reduction in
gross margin from 20% of net revenues for the 2008 period to 7% of net revenues
for the 2009 period was primarily due to changes in revenue mix, increases in
material and overhead costs related to lower than anticipated production volume
and higher manufacturing overhead costs related to establishing a production
line at our Harbor City facility.




Operating and Interest
Expenses.  The decrease in operating and interest expenses is
primarily attributable to stock-based compensation expense of $5,185,399 that
was incurred during the nine months ended September 30, 2008 as compared to
no stock-based compensation expense being incurred during the nine months ended
September 30, 2009.




25




Liquidity
and Capital Resources




During
the nine months ended September 30, 2009, we funded our operations
primarily with cash flow from financing activities, which included the issuance
of secured and unsecured debt and the issuance of convertible notes and warrants
to purchase common stock.  As of September 30, 2009, we had a
working capital deficit of $595,347 as compared to working capital of $194,073
at December 31, 2008.  At September 30, 2009 and
December 31, 2008, we had an accumulated deficit of $9,998,126 and
$8,020,855, respectively, and cash and cash equivalents of $176,306 and
$355,615, respectively.  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, 2009 was
$1,329,083 as compared to $464,847 of cash used by operating activities for the
same period in 2008, and includes a net loss of $1,977,271, depreciation and
amortization of $70,514 and net decrease in operating assets and liabilities of
$648,188.  Material changes in asset and liabilities at
September 30, 2009 as compared to September 30, 2008 that affected
these results include:




·
            an
      increase in accounts receivable of
$797,546;




·
            an
      increase  in customer advance of
  $1,159,601;




·
            a
      decrease in inventory of $111,913;
and




·
            a
      netincreasein accounts
      payable and accrued expenses of
$17,359.




Cash used
in investing activities totaled $3,570 for the nine months ended
September 30, 2009 as compared to $418,325 of cash used in investing
activities for the same period in 2008.




Cash
provided by financing activities totaled $1,153,344 for the nine months ended
September 30, 2009 as compared to $1,426,331 for the same period in
2008.




During
March nd June 2009, we raised an aggregate of $ 1,000,000 through the
issuance of  our 10% Unsecured Subordinated Convertible Promissory Notes
which are convertible into an aggregate of 1,000,000 shares of the Company’s
common stock at a conversion price of $1.00 per share of common stock, subject
to adjustment, to 34accredited
investors.  Interest on our convertible notes is payable on a
quarterly basis.   In connection with this offering, we also
issued three-year warrants to purchase an aggregate of 1,000,000 shares of
common stock at an exercise price of $1.50 per share.




We are
obligated under registration rights agreements related to the above described
private placement to file a registration statement with the SEC, registering for
resale the shares of common stock underlying the convertible notes and warrants
issued in the private placement transaction.




Effective
February 18, 2009, we entered into a Business Financing Agreement with
Bridge Bank, National Association, or Bridge Bank.  Under the terms of
the financing agreement with Bridge Bank, as modified on February 26, 2009
and August 10, 2009, Bridge Bank has provided us with an accounts
receivable based credit facility in the aggregate amount of up
to  $2,000,000.




The
credit facility is formula-based and generally provides that the outstanding
borrowings under the credit facility may not exceed an aggregate of 80% of
eligible accounts receivable.  We mustimmediately
pay any advance made under the credit facility within 90 days of the earlier of
the invoice date of the receivable that substantiated the advance or the date on
which the advance was made.




26




Interest
on the credit facility is payable monthly.  The interest rate is
variable and is adjusted monthly based on the per annum prime rate as published
by Bridge Bank plus two percentage points, subject to a minimum rate of 6.0% per
annum.




In the
event of a default and continuation of a default, Bridge Bank may accelerate the
payment of the principal balance requiring us to pay the entire indebtedness
outstanding on that date.  Upon the occurrence and during the
continuation of an event of default, the interest rate applicable to the
outstanding balance borrowed under the credit facility will be increased by five
percentage points above the per annum interest rate that would otherwise be
applicable.




The
credit facility is secured by a continuing first priority security interest in
all of our personal property (subject to customary exceptions).  The
credit facility may be terminated at any time by either party.  If we
terminate the credit facility prior to February 18, 2010, we will owe a
termination fee equal to 1.00% of the dollar amount resulting from dividing the
credit limit then in effect under the credit facility by 80% (or such greater or
lesser percentage as Bridge Bank may establish from time to time).




Our plan
of operations for the next twelve months includes completion and delivery of the
remaining heavy-duty electric vehicles under the City of Los Angeles Agreement,
together with associated equipment including batteries and controllers. We also
expect to receive additional orders for our products over the next twelve
months. We expect that the anticipated gross margin from the sales of these
products will provide additional liquidity and capital resources.  Our
ability to increase the number of orders for our products and/or to achieve
sufficient gross margin through the sale of products to provide us with
meaningful additional liquidity and capital resources is subject to, among other
things, the effect of the current global economic crisis and our ability to
raise additional capital.




During
2009, we expect to incur approximately $200,000 in research and development
expenses. We believe that we presently have sufficient plant and production
equipment to meet our current operational plan and we do not intend to dispose
of any plant and equipment.




We
presently have 13 employees and expect to hire additional personnel to meet
production demands of increased product sales. Until these new sales
materialize, our present staff is sufficient to meet our current operational
plan.




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, 2009 and for the year ended
December 31, 2008 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
financial statements included in this report, we have suffered recurring losses
from operations and at September 30, 2009 we had an accumulated deficit of
$9,998,126.  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, 2008, 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 financial statements
included in this report do not include any adjustments that might result from
the outcome of this uncertainty.




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.




27




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
September 30, 2009, we had a backlog of approximately $
3,100,000.  As of September 30, 2009, our backlog included a
contract to produce and deliver 8 electric yard tractors, 5 electric drayage
tractors to the City of Los Angeles, and associated equipment including
batteries and controllers.  We believe that products in our backlog
will be shipped prior to March 31, 2010.




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
June 2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles, or
GAAP.  The FASB Accounting Standards CodificationTM, or Codification
has become the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in accordance with GAAP.  All existing accounting standard
documents are superseded by the Codification and any accounting literature not
included in the Codification will not be authoritative.  However,
rules and interpretive releases of the SEC issued under the authority of federal
securities laws will continue to be sources of authoritative GAAP for SEC
registrants.  The Codification is effective for interim and annual
reporting periods ending after September 15, 2009.  Therefore,
beginning with the quarter ending September 30, 2009, all references made
to GAAP in our financial statements now use the new Codification numbering
system.  Other than the manner in which new accounting guidance is
referenced, the adoption of these changes had no impact on our financial
statements.




On
July 1, 2009, we adopted authoritative guidance issued by the FASB on
business combinations.  The guidance retains the fundamental
requirements that the acquisition method of accounting (previously referred to
as the purchase method of accounting) be used for all business combinations, but
requires a number of changes, including changes in the way assets and
liabilities are recognized and measured as a result of business
combinations.  It also requires the capitalization of in-process
research and development at fair value and requires the expensing of
acquisition-related costs as incurred.  We have applied this guidance
to business combinations completed since July 1, 2009.  Adoption
of the new guidance did not have a material impact on our historical financial
statements.




28




In
October 2009, the FASB issued authoritative guidance on revenue recognition
that will become effective for us beginning July 1, 2010, with earlier
adoption permitted.  Under the new guidance, tangible products that
have software components that are essential to the functionality of the tangible
product will no longer be within the scope of the currently existing software
revenue recognition guidance, and software-enabled products will now be subject
to other relevant revenue recognition guidance.  We believe that the
adoption of this new guidance will not have a material impact on the our
financial statements.




In
May 2009, the FASB issued new requirements for reporting subsequent events.
These requirements set forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.  Disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date is
also required.  The adoption of these changes did not have a material
impact on our financial statements.




Other
recent accounting pronouncements issued by the FASB 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,
2009 that our disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weakness described
below.




In light
of the material weakness 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.




29




As a
result of our restatement of 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, 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.




In
connection with remediating our material weakness, 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
procedures. Also in the second quarter of 2009 we established a Disclosure
Committee comprised of the CFO, Corporate Compliance Director, and the
administrative assistant.  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 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.




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.




30




Changes
in Internal Control over Financial Reporting




After
completing the evaluation required by Rule 13a-15(d), our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
not identified any
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 most recently
completed fiscal quarter 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 below and under “Risk Factors” in our Amendment
No. 1 to our Annual Report on Form 10-K for 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
below and in our Amendment No. 1 to our Annual Report on Form 10-K for
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.




We
have a material weakness in our internal control over financial reporting
structure which until remedied, may cause our filings to not be made timely and
investors may lose confidence in our reported financial information, which could
lead to a decline in our stock price.




We have
identified a material weaknessin our internal control
over financial reporting and cannot assure you that additional material
weaknesses will not be identified in the future.  Management has
concluded that a control deficiency that resulted in our inability to timely
file periodic reports with the SEC represented material weakness in our internal
control over financial reporting.  If our internal control over
financial reporting or disclosure controls and procedures are not effective, our
filings may not be timely and investors may lose confidence in our reported
financial information, which could lead to a decline in our stock
price.




Section
404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness
of our internal control over financial reporting as of the end of each year, and
to include a management report assessing the effectiveness of our internal
control over financial reporting in each Annual Report on
Form 10-K.




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be 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. Controls can be
circumvented by the individual acts of some persons, by collusion of two or more people,
or by management override of the controls. Over time, controls may become
inadequate because changes in conditions or deterioration in the degree of
compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.




31




As a
result, we cannot assure you that significant deficiencies or material
weaknesses in our internal control over financial reporting will not be
identified in the future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their implementation,
could result in significant deficiencies or material weaknesses, cause us to
fail to timely meet our periodic reporting obligations, or result in material
misstatements in our financial statements. Any such failure could also adversely
affect the results of periodic management evaluations regarding disclosure
controls and the effectiveness of our internal control over financial reporting
required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. The existence of a material weakness could result in
errors in our financial statements that could result in a restatement of
financial statements, cause us to fail to timely meet our reporting obligations
and cause investors to lose confidence in our reported financial information,
leading to a decline in our stock price.




The
industries within which we compete are highly competitive.  Many of
our competitors have greater financial and other resources and greater name
recognition than we do and one or more of these competitors could use their
greater financial and other resources or greater name recognition to gain market
share at our expense.




The
industries within which we compete are highly competitive. New developments in
technology may negatively affect the development or sale of some or all of our
products or make our products uncompetitive or obsolete.  Competition
for our products may come from current fossil fuel based drive system
technologies, improvements to current drive system technologies and new
alternative fuel drive system technologies.  Each of our target
markets is currently serviced by existing manufacturers with existing customers
and suppliers using proven and widely accepted fossil fuel powered drive
systems.  Additionally, there are competitors working on developing
technologies such as cleaner diesel engines, bio-diesel, fuel cells, natural gas
and hybrid electric/internal combustion engines in each of our targeted
markets.  Our products compete directly with heavy-duty fossil fuel
powered vehicles which are lower in price and higher in key performance
specifications such as range, speed and load carrying capacity.  In
addition, our competitors have a long history of producing high volume products
with established dealer and service networks.  Many of our existing
and potential competitors, including Kalmar Industries Corp, MOL Transport
Solutions, Terberg DTS UK Ltd., Kenworth Truck Company, Freightliner Trucks,
Mack Trucks, Inc. and Peterbilt Motors Company, have substantially greater
financial resources, more extensive engineering, manufacturing, marketing and
customer service and support capabilities, larger installed bases of current
generation products, as well as greater name recognition than we do. As a
result, our competitors may be able to compete more aggressively and sustain
that competition over a larger period of time than we could.  Each of
these competitors has the potential to capture market share in various markets,
which could have a material adverse effect on our position in the industry and
our financial results.




We also
face competition from small to medium size manufacturers of alternative fuel
heavy-duty drive systems such has Cummins Inc., Westport Innovations Inc., US
Hybrid Corporation and Vision Industries Corp.  These competitors’
products target new and retrofit markets with drive systems powered by natural
gas, electric hybrid and fuel cell powered vehicles.  These small to
medium size manufacturers offer products competitive in price to our current
product line and these products are expected to exceed the performance of our
products in key performance specifications such as range and
speed.  There can be no assurance that our zero emissions products
will be able to offer competitive advantages over alternative
fuel powered vehicles being developed by our competitors.   Our
lack of resources relative to many of our significant competitors may cause us
to fail to anticipate or respond adequately to new developments and other
competitive pressures.  This failure could reduce our competitiveness
and cause a decline in our market share, sales and profitability.




32




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




None.




ITEM
      5.
            OTHER
      INFORMATION




None.




ITEM
      6.
            EXHIBITS





ExhibitNumber
                      
                      Description31.1
                      
                      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.(1)
              Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q with the
      Securities and Exchange Commission filed on August 14,
      2009.




33




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
      CORPORATIONDated:  November 16,
      2009
                    By:
                    /s/ BALWINDER
      SAMRABalwinder
      Samra, Chief Executive Officer
                      (principal
      executive officer)




34





EXHIBITS
FILED WITH THIS REPORT





ExhibitNumber
                        
                        Description31.1
                        
                        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
      200231.2
                        
                        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
      200232.1
                        
                        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