UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 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 March 31, 2010




OR




o
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)
90710

(Zip Code)




Registrant’s telephone number, including area code: (310) 326-3056




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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o




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




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):




Large Accelerated Filer  o
Accelerated Filer  oNon-Accelerated Filer (do not check if Smaller Reporting Company)  o
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  o   No  x




The number of shares outstanding of the Registrant’s common stock, $0.001 par value, as of May 7, 2010was 25,718,348.




DOCUMENTS INCORPORATED BY REFERENCE


None







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.  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 industries; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industries 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 words such 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 listed under “Risk Factors” in Part II, Item 1A of this Report. 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.











BALQON CORPORATION


QUARTERLY REPORT ON


FORM 10-Q





TABLE OF CONTENTS




Page


PART I
 FINANCIAL INFORMATION
  ITEM 1.
Condensed Financial Statements
1ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
19ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
30ITEM 4.
Controls and Procedures
30ITEM 4T.
Controls and Procedures
30
  PART II
 OTHER INFORMATION
  ITEM 1.
Legal Proceedings
32ITEM 1A.
Risk Factors
32ITEM 2.
Unregistered sales of Equity Securities and Use of Proceeds
32ITEM 3.
Defaults Upon Senior Securities
33ITEM 4.
(Removed and Reserved).
33ITEM 5.
Other Information
33ITEM 6.
Exhibits
34





PART I




ITEM 1.
Condensed Financial Statements





BALQON CORPORATION


CONDENSED BALANCE SHEETS





March 31,

2010

(Unaudited)


December31,

2009ASSETSCurrent assetsCash and cash equivalents

$
527,284


$
118,635Accounts receivable


3,848



167,925Costs and estimated earnings in excess of billings on uncompleted contracts


34,224



—Inventories


1,239,588



1,002,748Prepaid expenses


36,746



53,382Total current assets


1,841,690



1,342,690Property and equipment, net


106,870



122,251Other assets:Deposits


14,400



14,400Trade secrets, net


93,483



109,063Goodwill


166,500



166,500Total assets

$
2,222,943


$
1,754,904LIABILITIES AND SHAREHOLDERS’ DEFICIENCYCurrent liabilitiesAccounts payable and accrued expenses

$
1,535,353


$
1,587,388Customer deposit


1,159,601



1,159,601Loan payable, Bank


—



128,150Notes payable to related parties


40,000



25,000Advances from shareholder


5,018



5,018Billings in excess of costs and estimated earningson uncompleted contracts


—



650Total current liabilities


2,739,972



2,905,807Convertible notes payable, net of discount


321,730



209,510SHAREHOLDERS’ DEFICIENCYCommon stock, $0.001 par value, 100,000,000 shares authorized,

25,718,348 and 25,518,348 shares issued and outstanding, respectively


25,718



25,518Additional paid in capital


11,172,129



9,650,329Accumulated deficit


(12,036,606
)


(11,036,260
)Total shareholders’ deficiency


(838,759
)


(1,360,413
)Total liabilities and shareholders’ deficiency

$
2,222,943


$
1,754,904


The accompanying notes are an integral part of these condensed financial statements




1





BALQON CORPORATION


CONDENSED STATEMENTS OF OPERATIONS


FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)





Three Months Ended

March 31,2010


2009REVENUES


38,067



776,650COSTS OF REVENUES


37,592



747,620Gross profit


475



29,030OPERATING EXPENSESGeneral and administrative


745,380



546,125Research and development


65,543



60,945Depreciation and amortization


33,139



23,238Total operating expenses


844,062



630,308Loss from operations


(843,587
)


(601,278
)Interest expense


(156,759
)


(1,250
)NET LOSS

$
(1,000,346
)

$
(602,528
)Net loss per share – basic and diluted

$
0.04


$
0.02Weighted average shares outstanding, basic and diluted


25,647,237



25,518,348




The accompanying notes are an integral part of these condensed financial statements
  2





BALQON CORPORATION


CONDENSED STATEMENT OF SHAREHOLDERS’ DEFICIENCY


FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)




Common Stock,

$0.001 Par Value


Additional


AccumulatedNumber


Amount


Paid in Capital


Deficit


TotalBalance, December 31, 2009


25,518,348


$
25,518


$
9,650,329


$
(11,036,260
)

$
(1,360,413
)Fair value of shares granted for services


200,000



200



207,800



—



208,000Fair value of warrants granted for services


—



—



14,000



—



14,000Fair value of beneficial conversion feature and warrants

issued with convertible notes


—



—



1,300,000



—



1,300,000Net loss


—



—



—



(1,000,346
)


(1,000,346
)Balance, March 31, 2010


25,718,348


$
25,718


$
11,172,129


$
(12,036,606
)

$
(838,759
)




The accompanying notes are an integral part of these condensed financial statements
  3
  BALQON CORPORATION


CONDENSED STATEMENTS OF CASH FLOWS


FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)





Three Months Ended

March 31,2010


2009Cash flow from operating activities:Net loss

$
(1,000,346
)

$
(602,528
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


33,139



23,238Fair value of common stock granted for services


208,000



—Fair value of warrants granted for services


14,000



—Amortization of note discount


112,219



—Changes in operating assets and liabilities:Accounts receivable


164,077



(775,750
)Costs and estimated earnings in excess of billings on uncompleted contracts


(34,224
)Inventories


(236,840
)


434,609Prepaid expenses


16,636



21,058Accounts payable and accrued expenses


(52,034
)


55,330Billings in excess of costs and estimated earnings onuncompleted contracts


(650
)


—Net cash used in operating activities


(776,023
)


(844,043
)Cash flows from investing activities:Acquisition of furniture, equipment and software


(2,178
)


(8,986
)Net cash used in investing activities


(2,178
)


(8,986
)Cash flows from financing activities:Proceeds from (payment of) loan payable, Bank


(128,150
)


497,038Proceeds from notes payable, related parties


15,000



—Payment of notes payable, related parties


—



(875
)Proceeds from  issuance of unsecured convertible notes


1,300,000



50,000Advances from shareholder


—



(9,000
)Net cash provided by financing activities


1,186,850



537,163Increase (decrease) in cash and cash equivalents


408,649



(315,866
)Cash and cash equivalents, beginning of period


118,635



355,615Cash and cash equivalents, end of period

$
527,284


$
39,749Supplemental cash flow informationInterest Paid

$
25,205


$
—Income taxes Paid

$
—


$
—Supplemental schedule of non cash financing and investing activitiesFair value of beneficial conversion feature and warrants issued with convertible notes

$
1,300,000


$
50,000




The accompanying notes are an integral part of these condensed financial statements
  4
  BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009




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”).  Upon the closing, BMR changed its name to Balqon Corporation (the “Company”).  The Company develops, assembles and markets heavy-duty electric vehicles, flux vector motor controllers and heavy-duty electric drive systems.




Going Concern




For the three months ended March 31, 2010, the Company recorded a net loss of $1,000,346, utilized cash in operations of $776,023, and had a working capital deficit of $898,282 and a shareholders’ deficiency of $838,759 as of March 31, 2010. 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.  Subsequent to March 31, 2010, the Company raised an additional $200,000 through the sale of its convertible promissory notes (see note 11).




Basis of Presentation of Unaudited Financial Information




The unaudited financial statements of the Company for the three months ended March 31, 2010 and 2009 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 balance sheet information as of December 31, 2009 was derived from the audited financial statements included in the Company's financial statements as of and for the years ended December 31, 2009 and 2008 to Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2010. These financial statements should be read in conjunction with that report.




Estimates




The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) 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.




5





BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





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




Revenues




Contract Revenue and Cost Recognition on Prototype Vehicles




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 asset “costs and estimated earnings in excess of billings on uncompleted contracts” represents costs incurred in excess of revenues billed. The liability “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues earned.




The Company accounted for a grant from the City of Los Angeles (“City of Los Angeles Grant”) pursuant to current accounting guidelines, which provide that revenues for cost-reimbursement contract are 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 collectability 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 collectability 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 March 31, 2010, the Company had no warranty reserve nor did it incur warranty expenses during the three month periods ended March 31, 2010 or 2009.





6





BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





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




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:




March 31, 2010 (Unaudited)


December 31,

2009Raw materials

$
1,197,468


$
948,583Work in process


42,120



—In-transit


—



54,165Total

$
1,239,588


$
1,002,748




Goodwill and Intangible Assets




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.




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 with 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 was used in 2009 impairment testing.  The Company’s first measurement period was in the




7





BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





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




Goodwill and Intangible Assets (continued)




fourth quarter of 2009 and the Company determined that there were no indicators of impairment of its recorded goodwill or intangibles.




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.




Impairment of Long-Lived Assets




The Financial Accounting Standards Board (“FASB”) has established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured.  This statement also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. 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 during the years ended December 31, 2009 and 2008.  Based upon management’s assessment, there were no indicators of impairment of the Company’s long-lived assets at March 31, 2010 or December 31, 2009.




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 March 31, 2010, common stock equivalents comprised of options exercisable into 4,562,592 shares of the Company’s common stock, warrants exercisable into 5,696,575 shares of the Company’s common stock and notes convertible into 2,733,329 shares of the Company’s common stock.  For the three month periods ended March 31, 2010 and 2009, common stock equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive.




8




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009




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




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 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.




Financial Assets and Liabilities Measured at Fair Value




The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis.  Financial assets recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value.  Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:




Level 1
Quoted prices in active markets for identical assets or liabilities.




Level 2
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.




Level 3
Unobservable inputs based on the Company’s assumptions.




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 three months ended March 31, 2010, 92% of total revenues were from one customer, the City of Los Angeles.  For the three months ended March 31, 2009, revenues were from contracts with the City of Los Angeles and the South Coast Air Quality Management District (“AQMD”).




For the three months ended March 31, 2010, 93% of costs of revenue were to one vendor.  At March 31, 2010, accounts payable to the largest vendor represented 31% of total accounts payable balances. Accounts payable to other two largest vendors represented 30% and 7%, respectively, of total accounts payable.




For the three months ended March 31, 2009, 14.8% of costs of sales incurred was to a single vendor.  At March 31, 2009, accounts payable to this vendor represented 25.7% of total accounts payable.  At March 31, 2009, three other vendors had balances representing 31%, 18% and 9%, respectively, of total accounts payable.





9





BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





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




Recent Accounting Pronouncements




In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, 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 software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.  The Company believes that the adoption of this new guidance will not have a material impact on its financial statements.




In January 2010, the FASB issued guidance on improving disclosures about fair value measurements to add new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 roll-forward.   The guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to present the Level 3 roll-forward on a gross basis, which is effective for fiscal years beginning after December 15, 2010.  The adoption of this guidance was limited to the form and content of disclosures, and will not have a material impact on the Company’s results of operations or financial condition.




Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.




NOTE 2 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS




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 incurred in connection with the installation, demonstration and evaluation of lithium-ion powered battery packs in two of the Company’s heavy-duty electric vehicles.  Under the terms of the grant, the City of Los Angeles is required to reimburse the Company for up to $360,000 of the costs incurred upon the demonstration of a Nautilus E30 and a Nautilus E20 installed with lithium-ion batteries to the City of Los Angeles for testing, and up to an additional $40,000 of the costs incurred upon completion of testing required under the terms of the grant.  This contract is being accounted for under the percentage of completion method.  At March 31, 2010 and December 31, 2009, the contract was estimated to be approximately 99% and 90% complete, respectively.




10




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 2 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (continued)




The asset, “costs in excess of billings and estimated earnings on uncompleted contracts” and the liability, “billings in excess of costs and estimated earnings on uncompleted contracts,” represents costs incurred or billings in excess of revenue recognized at March 31, 2010 and December 31, 2009 as follows:





March 31,

2010

(Unaudited)


December 31,

2009Costs incurred on uncompleted contracts

$
394,224


$
359,350Estimated earnings


—



—394,224



359,350Less, billings to date


360,000



360,000$
34,224


$
(650
)Included in accompanying balance sheets under the following captions:Costs and estimated earnings in excess of billings on uncompleted contracts

$
34,224


$
—Billings in excess of costs and estimated earnings on uncompleted contracts

$
—


$
650




NOTE 3 - PROPERTY AND EQUIPMENT




Property and equipment are comprised as follows:




March 31,

2010

(Unaudited)


December 31,

2009Computer equipment and software

$
102,140


$
100,742Office furniture


28,484



27,704Equipment


27,704



27,704Leasehold improvements


21,711



21,711Total property and equipment, cost


180,039



177,861Less: accumulated depreciation


(73,169
)


(55,610
)Property and equipment, net

$
106,870


$
122,251




Depreciation and amortization expense on property and equipment for the three months ended March 31, 2010 and 2009 was $17,559 and $7,658, respectively.




11




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 4 – NOTES PAYABLE—RELATED PARTIES, UNSECURED




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




March 31, 2010

(Unaudited)


December 31,

2009Notes payable to a shareholder, unsecured, interest at 8% per annum payable at maturity, due December 31, 2010

$
15,000


$
—Note payable to a shareholder, issued in connection with the acquisition of EMS, unsecured, interest at the prime rate per annum, payable on June 15, 2010, plus accrued interest


25,000



25,000Total notes payable

$
40,000


$
25,000




NOTE 5 – LOAN PAYABLE – BRIDGE BANK




On February 25, 2009, the Company executed a Business Financing Agreement (the “Credit Agreement”) with Bridge Bank, National Association (the “Lender”). 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”). 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 December 31, 2009).  The Credit Agreement may be terminated at any time by either party to the Credit Agreement.




At March 31, 2010 there was no balance outstanding and $3,078 was available under the terms of the Credit Facility. At December 31, 2009, $128,150 was outstanding and $6,190 was available under the terms of the Credit Facility.


12




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 6 – 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 on March 31, 2010 and December 31, 2009 was as follows:




March 31, 2010 (Unaudited)


December 31,

2009Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012

$
1,000,000


$
1,000,000Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012


1,300,000



—Notes payable


2,300,000



1,000,000Less: note discount


(1,978,270
)


(790,490
)Total notes payable, net

$
321,730


$
209,510




Between March 25, 2009 and June 23, 2009, the Company entered into agreements with 34 accredited 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.




The Company determined that the relative fair value of the warrants was $639,061.  The relative 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.




Between February 5, 2010 and March 31, 2010, the Company entered into agreements with seven accredited investors for the sale by the Company of an aggregate of $1,300,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,733,329 shares of the Company’s common stock at a conversion price of $0.75 per share of common stock, subject to adjustment.  Additionally, the Company issued three-year warrants to purchase an aggregate of 1,733,329 shares of the Company’s common stock at an exercise price of $0.50 per share.  The proceeds of $1,300,000 are allocated to working capital.




The Company determined that the relative fair value of the warrants was $633,269.  The relative fair value was determined using the methodology prescribed by current accounting guidance.  The Company




13




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 6 – SUBORDINATED UNSECURED CONVERTIBLE PROMISSORY NOTES (continued)




determined the initial fair value of the beneficial conversion feature was approximately $666,731. These amounts were calculated under a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of between 95% and 116%, a risk free interest rate of 1.47%, and no expected dividend yield. The relative value of the warrants of $633,269 and the beneficial conversion feature of $666,731 was recorded by the Company as a loan discount of $1,300,000, which the Company is amortizing to interest expense over the life of the notes.




At March 31, 2010, the total discount of $1,798,270 is offset against the balance of the convertible notes for financial statement presentation. At December 31, 2009 the total discount of $790,490 is offset against the balance of the convertible notes for financial statement presentation. During the three month period ended March 31, 2010 and March 31, 2009, amortization of loan discount was $112,219 and none, respectively.




NOTE 7 – INCOME TAXES




At March 31, 2010, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $11,500,000 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.




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





March 31,

2010 (Unaudited)


December 31,

2009Deferred income tax asset:Net operating loss carryforward

$
4,596,566


$
4,374,000Valuation allowance


(4,596,566
)


(4,374,000
)Net deferred income tax asset

$
—


$
—




14





BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 7 – INCOME TAXES (continued)




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





March 31,

2010

(Unaudited)


December 31,

2009Tax expense at the U.S. statutory income tax


(34.0
)%


(34.0
)%State tax net of federal tax benefit


(5.8
)%


(5.8
)%Increase in the valuation allowance


39.8
%


39.8
%Effective tax rate


—
%


—
%




The Company adopted authoritative guidance issued by the GAAP 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 50 percent likelihood of being realized upon ultimate settlement. 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 March 31, 2010 and December 31, 2009, the Company does not have a liability for unrecognized tax benefits.




NOTE 8 – SHAREHOLDERS’ EQUITY




On February 2, 2010, the Company issued 200,000 shares of its common stock in consideration of consulting services rendered, or to be rendered, from February 1, 2010 through July 31, 2010. The aggregate fair value of these shares was determined to be $208,000 based on the closing price of the Company’s shares on February 2, 2010.




During February and March, 2010, the Company raised an aggregate of $1,300,000 from the sale of 10% Unsecured Subordinated Convertible Promissory Notes. In connection with the sale of certain of these notes, the Company issued three year warrants to purchase 15,999 shares of its common stock at an exercise price of $0.50 per share in consideration of finder services rendered.  The Company determined that the aggregate fair value of these warrants was $14,000.  The fair value was determined using the methodology prescribed by current accounting guidance.  These amounts were calculated under a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of between 95% and 116%, a risk free interest rate of 1.47%, and no expected dividend yield.




15




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
  NOTE 9 – STOCK OPTIONS AND WARRANTS




Stock Options




At March 31, 2010, options shares outstanding were as follows:




Shares


Weighted

Average

Exercise

PriceBalance at January 1, 2010


4,562,592


$
2.00Granted


—



—Exercised


—



—Cancelled


—



—Balance at March 31, 2010


4,562,592


$
2.00




The following table summarizes information about stock options outstanding and exercisable as of March 31, 2010:




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



0.25



1,520,864


$
1.50$2.00


1,520,864


$
2.00



1.27



1,520,864


$
2.00$2.50


1,520,864


$
2.50



2.28



1,520,864


$
2.504,562,592











4,562,592




At March 31, 2010, the aggregate intrinsic value of the 4,562,592 options outstanding and exercisable was zero.  At March 31, 2010, all options were vested and there were no unvested options outstanding.




Warrants




At March 31, 2010, warrants shares outstanding were as follows:




Shares


Weighted

Average Exercise PriceBalance at January 1, 2010


3,947,247


$
1.50Granted


1,749,328


$
0.50Exercised


—



—Cancelled


—



—Balance at March 31, 2010


5,696,575


$
1.27




16





BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 9 – STOCK OPTIONS AND WARRANTS (continued)




Warrants (continued)




During February and March 2010, the Company raised an aggregate of $1,300,000 through the issuance of its 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,733,329 shares of the Company’s common stock at a conversion price of $0.50 per share of common stock, subject to adjustment, to 7 accredited investors.  In connection with this offering, the Company also issued three year warrants to purchase an aggregate of 1,733,329 shares of common stock at an exercise price of $0.50 per share.




During February and March 2010, in connection with the sale of certain of the 10% Unsecured Subordinated Convertible Promissory Notes, the Company issued three year warrants to  purchase 15,999 shares of its common stock at an exercise price of $0.50 per share to two accredited investors in consideration of finder services rendered.




The following table summarizes information about stock warrants outstanding and exercisable as of March 31, 2010:




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$0.50


1,749,328


$
0.50



2.5



1,749,328


$
0.50$1.50


3,338,062


$
1.50



1.7



3,338,062


$
1.50$2.00


304,592


$
2.00



1.1



304,592


$
2.00$2.50


304,592


$
2.50



2.1



304,592


$
2.505,696,575











5,696,575




At March 31, 2010, the aggregate intrinsic value of the warrants outstanding and exercisable was zero.




NOTE 10 – COMMITMENTS AND CONTINGENCIES




City of Los Angeles Agreement




On June 26, 2008, the Company entered into an agreement with the City of Los Angeles to manufacture and deliver 20 electric yard tractors, 5 short-haul electric tractors, and associated equipment including chargers, batteries and controllers for a total of $5,383,750. As of December 31, 2009, the Company had delivered 14 electric yard tractors to the City of Los Angeles.




As of March 31, 2010, the Company had delivered 14 electric yard tractors to the City of Los Angeles. The Company expects to deliver the remaining 6 electric yard tractors, 5 short-haul electric tractors and associated equipment to the City of Los Angelesby September 30, 2010.  Of the Company’s backlog of $2,747,856 on March 31, 2010, $2,406,200 was attributable to the eleven electric vehicles and associated parts the Company is required to deliver under its agreement with the City of Los Angeles.




17




BALQON CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





NOTE 10 – COMMITMENTS AND CONTINGENCIES (continued)




City of Los Angeles Agreement (continued)




Under its agreement with the City of Los Angeles, the Company agreed to move its research and production facilities to the City of Los Angeles and also agreed to pay the City of Los Angeles a royalty fee of $1,000 per electric vehicle it sells to a purchaser other than the City of Los Angeles or the AQMD.




During 2009, under the terms of the Company’s agreement with the City of Los Angeles, the Company requested and was issued an advance payment in the amount of $1,159,601.  This advance payment was recorded as a customer deposit.  This customer deposit will be applied against the Company’s final invoices under its purchase order for 25 electric vehicles.




NOTE 11 - SUBSEQUENT EVENTS




Sale of 10% Unsecured Subordinated Convertible Promissory Notes




Between April 5 and 12, 2010, the Company entered into agreements with four accredited investors for the sale by the Company of an aggregate of $200,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 266,664 shares of the Company’s common stock at a conversion price of $0.75 per share of common stock, subject to adjustment.  Additionally, the Company issued three-year warrants to purchase an aggregate of 266,664 shares of the Company’s common stock at an exercise price of $0.50 per share.  The proceeds of $200,000 are allocated to working capital.




The Company determined that the relative fair value of the warrants was $77,907.  The relative 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 $122,093. These amounts were calculated under a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of between 95% and 116%, a risk free interest rate of 1.47%, and no expected dividend yield. The relative value of the warrants of $77,907 and the beneficial conversion feature of $122,093 will be recorded by the Company as a loan discount of $200,000, which the Company will amortize to interest expense over the life of the notes.




18


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 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;




·
our business strategy for expanding, maintaining or contracting our presence in these markets;




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




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




We do not undertake to update, revise or correct any forward-looking statements.




Any of the factors described above, elsewhere in this report or in the “Risk Factors” section of this report could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.




Overview




We design, assemble and market zero-emissions heavy-duty electric vehicles for use in the transportation of containers and heavy loads at facilities such as marine terminals, rail yards, industrial warehouses, intermodal facilities (facilities where freight is transferred from one mode of transportation to another without actual handling of the freight itself when changing modes), military bases and industrial plants.  We currently sell our heavy-duty electric vehicles for use at the Port of Los Angeles and have also sold a heavy-duty electric vehicle for use in a demonstration program to the California South Coast Air Quality Management District, or AQMD.  We also design, assemble and market components for electric vehicles including flux vector motor controllers (which control the speed of an electric motor by varying the input frequency and voltage from a vehicle’s batteries), electric drive systems (each system includes an electric motor, a flux vector motor controller, a transmission assembly and related propulsion software) and battery modules (which features our proprietary battery management system, or BMS, an electronic device mounted on each battery cell to monitor the state of charge of the battery, including its temperature, voltage and current during charge and discharge cycles) to original equipment manufacturers, or OEMs, of automotive products.




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.




19




In May 2008, we received a purchase order from the AQMD for one of our Nautilus E20 heavy-duty electric yard tractors.  We delivered a Nautilus E20 to the AQMD in March 2009.  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 short-haul 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.  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 working capital constraints, we have revised our initial forecast, and we now believe that we will deliver the remaining 6 Nautilus XE20s and 5 Nautilus XE30s to the City of Los Angeles by September 30, 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 modules in two of our zero emissions Nautilus vehicles, or Lithium-ion Grant.  In 2009, we released our lithium-ion battery powered product line of heavy-duty electric trucks and tractors with the capability to transport over 30 tons of load in off-highway and on-highway applications.  In 2009, we also upgraded all our heavy-duty electric vehicles from lead acid batteries to lithium-ion batteries.  Prior to the incorporation of lithium-ion battery modules into our electric vehicles, our Nautilus product line featured predecessors of the Nautilus XE20 and Nautilus XE30, the Nautilus E20 and Nautilus E30, respectively, which were powered by lead acid battery modules.  As of the date of this report, our product portfolio features two products in our Nautilus product line, the Nautilus XE20, a heavy-duty electric yard tractor, and the Nautilus XE30, a heavy-duty electric short-haul tractor.  In addition, our product portfolio features  a heavy-duty Class 7 and Class 8 electric truck, the Mule M150, which is designed as a zero emissions solution to transport loads of up to 7 tons in short-haul on-highway applications.




In January 2010, we released our lithium-ion battery powered yard tractor, the Nautilus XE20, with a range of 95 miles and maximum speed of 25 miles per hour under unloaded conditions.  The Nautilus XE20 incorporates our latest drive system and proprietary BMS on a Autocar Xspotter yard tractor chassis.




In February 2010, we successfully completed eight weeks of cold weather testing on our Nautilus XE20 in actual industrial applications during two eight hour shift operations at temperatures below 10°F under loads exceeding 30 tons.




During the three months ended March 31, 2010, we expanded our sales force to include dealers in Argentina and Columbia.  In February 2010, we entered into an agreement with Autoelevadores Yale,a leading distributor of material handling equipment and electric vehicles in Argentina, under which Autoelevadores Yaleagreed to distribute our heavy-duty electric vehicles in Argentina.  Autoelevadores Yalealso provides servicing and parts for our products in the region.  In March 2010, we entered into an agreement with Industrias Ivor, a leading distributor of material handling equipment in Colombia.  The agreement calls for Industrial Ivor to provide sales and service for our off-highway and on-highway product lines in Colombia.




In March 2010, we completed design and testing of our proprietary BMS, which monitors battery condition and balances battery cells during charge and discharge cycles.  Our proprietary software allows our BMS to be used on any battery cell chemistry.  We use our proprietary BMS in all our heavy-duty electric vehicles.  In addition, we market our battery modules to other OEMs worldwide.  As of the date of this filing, we have  received purchase orders for our battery modules and heavy-duty electric drive systems from OEMs of electric and hybrid buses.




20




Our total revenues decreased by $738,583, or 95%, to $38,067 for the three months ended March 31, 2010 as compared to $776,650 for the three months ended March 31, 2009.  We reported a net loss of $1,000,346 for the three months ended March 31, 2010 as compared to a net loss of $602,528 for the three months ended March 31, 2009.  The decline in our financial performance during the first quarter of 2010 is a result of the lack of vehicle sales during the three months ended March 31, 2010 as compared to the sales of two vehicles and a battery charger during the three months ended March 31, 2009.  The lack of sales during the three months ended March 31, 2010 is a direct result of a lack in working capital during the three months ended March 31, 2010.




All of our revenues for the three months ended March 31, 2009 were from the sale of a battery charger and one electric truck to the City of Los Angeles and one electric truck to the AQMD. During the three months ended March 31, 2010, 92% of our revenues were derived from progress work on the Lithium-ion Grant and the remaining 8% of revenues were from the sale of parts to a commercial customer.  The revenues and costs associated with the Lithium-ion Grant are recorded as contract revenues and costs. As such, the costs associated with the development of our demonstration vehicle are recorded as “contract costs,” not as research and development expenses.




During the three months ended March 31, 2010, we received purchase orders in the aggregate amount of $172,018 from two customers for our flux vector motor controllers and a purchase order from an international customer in the amount of $152,218 for our electric drive systems.




While $2,406,200 of our current backlog of $2,747,856 for our heavy-duty electric vehicles is attributable to our outstanding purchase order from the City of Los Angeles, we are actively pursuing a more diversified customer base and we believe that we will sell, in the aggregate, over 500 of our heavy-duty electric vehicles to customers other than the AQMD or the City of Los Angeles by December 31, 2011.  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 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 XE30 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, Asia, Latin America and Europe, and additional governmental incentives and funding that we believe will become available for electric vehicles, which, in turn, are expected to improve the competitive advantage of our electric vehicles.




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:




21




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 recognize revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion.  This method is used because management considers costs to be the best available measure of progress on its contracts.  Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion.  We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated.




Contract costs include all direct material and labor costs.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues earned.




Sales of Production Units and Parts.  We recognize revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability 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 reviews our customers’ financial positions to ensure that collectability is reasonably assured.  Except for warranties, we have no post-sales obligations.




Product Warranties




We provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale.  We estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. As of March 31, 2010 and December 31, 2009, we had no warranty reserve nor did we incur warranty expenses during the quarterly periods ended March 31, 2010 or 2009.




Stock-Based Compensation




We periodically issue stock instruments, including shares of our common stock, stock options and warrants to purchase shares of our common stock to employees and non-employees in non-capital raising transactions for services and for financing costs.




We adopted “Accounting for Stock-Based Compensation,” effective January 1, 2006, and are using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date that remain unvested on the effective date. We account for stock option and warrant grants issued and vesting to non-employees whereby the fair value of the stock compensation is based on the measurement date as determined at either (i) the date at which a performance commitment is reached, or (ii) at the date at which the necessary performance to earn the equity instrument is complete.




22




We estimate the fair value of stock options and warrants using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is based on the average volatility of the trading prices of comparable companies and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.




We estimate the fair value of shares of common stock issued for services based on the closing price of our common stock on the date shares are granted.  For periods prior to the consummation of the Merger Transaction, there was no readily available market quotations for our shares of common stock and, as such, we used alternative methods to value shares of our common stock including valuations based upon the conversion price per share of common stock of our convertible notes and the sale price of units consisting of one share of our common stock and warrants to purchase one share of common stock, which management believes were the best indicators of the fair value of our common stock.




Goodwill and Intangible Assets




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.   Management performs impairment testing of goodwill and indefinite-lived intangible assets at least annually.




Management tests goodwill for impairment at the reporting unit level.  We only have one reporting unit.  At the time of goodwill impairment testing, management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved with its reporting unit. If the calculated fair value is less than the current carrying value, impairment may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing in the absence of available domestic and international transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital, or WACC, methodology. The WACC methodology considers market and industry data as well as Balqon-specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and Balqon-specific historical and projected data, develops growth rates and cash flow projections for Balqon.  Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate fair value of all reporting units is reconciled to our total market capitalization. The discounted cash flow valuation methodology and calculations will be used in 2009 impairment testing.  Our first impairment test of the goodwill and trade secrets we acquired from EMS was conducted during the fourth quarter of 2009.  This impairment test did not indicate that the goodwill and trade secrets we acquired from EMS were impaired as of December 31, 2009.




23




We review 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, we write-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, we record an impairment loss equal to the excess of the carrying value over the fair value of the assets.  Our estimate of fair value is based on the best information available to us, in the absence of quoted market prices.  We generally calculate fair value as the present value of estimated future cash flows that we expect 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, we amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.




Impairment of Long-Lived Assets




The Financial Accounting Standards Board, or FASB, has established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured.  Guidance of the FASB 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 March 31, 2010 or December 31, 2009.




Income Taxes




We recognize income taxes 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 March 31, 2010, we had a working capital deficiency of $898,282, an accumulated deficit of $12,036,606 and reported a net loss for the quarter ended March 31, 2010 of $1,000,346, 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.




During July, September and October 2008, Balqon California raised approximately $1,885,000 in connection with private placements of convertible promissory notes, common stock and warrants.  During December 2008, we raised $210,000 in connection with a private placement of our common stock and warrants. During March 2009 and June 2009, we raised an aggregate of $1,000,000 in connection with a private placement of convertible notes and warrants.  Between February 5, 2010 and April 12, 2010, we raised $1,500,000 in connection with a private placement of convertible notes and warrants.




Over the longer-term, we plan to achieve profitability through our operations from the sale of our heavy-duty electric vehicles and drive systems.  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.




24




The tables presented below, which compare our results of operations for the three months ended March 31, 2009 and 2010, 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

March 31,


Dollar

Variance


Percentage

Variance


Results as a Percentage

of Net Revenues for the

Three Months Ended

March 31,2010


2009


Favorable

(Unfavorable)


Favorable

(Unfavorable)


2010


2009Net revenues

$
38,067


$
776,650


$
(738,583
)


(95
)%


100
%


100
%Cost of revenues


37,593



747,620



710,027



95
%


99
%


96
%Gross profit


475



29,030



(28,555
)


(98
)%


1
%


4
%Operating and interest expenses


1,000,821



631,558



(369,263
)


(58
)%


2,629
%


81
%Net loss

$
(1,000,346
)

$
(602,528
)

$
(397,818
)


66
%


(2,628
)%


(78
)%




Net Revenues.  The decrease in revenues is a result of the lack of sales of our electric vehicles during the three months ended March 31, 2010 as compared to the sales of two vehicles and a battery charger during the three months ended March 31, 2009. During the three months ended March 31, 2010, our revenues included contract revenues of $34,874 from progress work toward completion of the Lithium-Ion Grant.




Gross Profit.  During the three months ended ending March 31, 2010, costs of revenues decreased by $710,027 largely due to the lack of sales. The gross profit margin of 3% during the three months ended March 31, 2010 is comprised of a 15% gross margin on the sale of $3,193 of parts, reduced by a zero gross profit on the Lithium-Ion Grant. The gross profit of 4% realized during the three months ended March 31, 2009 is comprised of a 12.2% gross profit on the sale of vehicles and parts, offset by 4% direct labor and 4.4% manufacturing overhead costs.  We anticipate that our gross profit margin will be approximately 18% of net revenues for the year ending December 31, 2010 based on current cost data for the remaining 11 electrical vehicles that must be delivered under the City of Los Angeles Agreement and the pricing of orders we expect to receive during 2010.




Operating and Interest Expenses.  The increase in operating and interest expenses was comprised of a $199,254 increase in general & administrative expenses, a $4,598 increase in research & development expenses, a $9,901 increase in depreciation and amortization, and a $155,509 increase in interest expenses.




The $199,254 increase in general and administrative expenses is attributable to several factors, including an increase in consulting fees of $232,080 for investor relations and finder services,  an increase in salaries, wages and benefits of $74,674, an increase in travel expenses of $29,648 due to increased marketing activities; offset by a decrease of $138,832 in expenses for legal, accounting, audit and professional fees, offset by other net increases of $1,684.




25




Interest expense during the three months ended March 31, 2010 increased by $155,509, due to interest costs incurred in connection with our credit facility with Bridge Bank, interest incurred on $2,300,000 in principal of our 10% unsecured subordinated convertible promissory notes and $122,219 of amortization of the beneficial conversion feature interest cost incurred on our issuance of convertible notes and warrants.




While our general and administrative expenses are expected to increase over the near term, these expenses as a percentage of net revenues are expected to decrease as we increase our net revenues.  We expect that over the near term, our general and administrative expenses will increase as a result of increased management personnel, opening of new manufacturing facilities, additional operational personnel to manufacture electric vehicles, 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 Securities and Exchange Commission, or SEC, and the filing of a registration statement with the SEC.




Liquidity and Capital Resources




During the three months ended March 31, 2010, we funded our operations primarily with cash flow from financing activities, which included the issuance of secured and unsecured debt and the issuance of equity securities.  As of March 31, 2010, we had a working capital deficiency of $898,282 as compared to a working capital deficiency of $1,563,117 at December 31, 2009.  At March 31, 2010 and December 31, 2009 we had an accumulated deficit of $12,036,606 and $11,036,260, respectively, and cash and cash equivalents of $527,284 and $118,635, respectively.




During 2009, under the terms of the City of Los Angeles Agreement, we were issued an advance in the amount of $1,159,601 against a purchase order for 25 electric vehicles issued under the City of Los Angeles Agreement.




Our available capital resources at March 31, 2010 consisted primarily of approximately $527,284 in cash and cash equivalents.  We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if any, and future debt and/or equity financings, if any.




Cash used in operating activities for the three months ended March 31, 2010 was $776,023 as compared to $844,043 of cash used in operating activities for the three months ended March 31, 2008, and includes a net loss of $1,000,346, depreciation and amortization of $33,139, fair value of common stock and warrants of $222,000, amortization of note discount of $112,219 and net decrease in operating assets and liabilities of $143,035.  Material changes in asset and liabilities at March 31, 2010 as compared to December 31, 2009 that affected these results include:




·
a decrease in accounts receivable of $164,077;


·
an increase in costs and estimated earnings in excess of billings on uncompleted contracts of $34,224;


·
an increase in inventory of $236,840;


·
a decrease in prepaid expenses of $16,636; and


·
a netdecreasein accounts payable and accrued expenses of $52,034.




Cash used in investing activities totaled $2,178 for the three months ended March 31, 2010 as compared to $8,986 of cash used in investing activities for the three months ended March 31, 2009.




26




Cash provided by financing activities totaled $1,186,850 for the three months ended March 31, 2010 as compared to $537,163 for three months ended March 31, 2009.




In July 2008, Balqon California raised an aggregate of $500,000 through the issuance of senior secured convertible promissory notes to five accredited investors.  The senior secured convertible promissory notes had a conversion price of $1.00 per share.  In connection with this offering, Balqon California also issued three-yearwarrants to acquire up to an aggregate of 500,000 shares of common stock at an exercise price of $1.50 per share. The senior secured convertible promissory notes were converted into an aggregate of 514,582 shares of common stock of Balqon California immediately preceding the closing of the Merger Transaction.




In September 2008, Balqon California raised an aggregate of $810,000 through the issuance of convertible promissory notes to 15 accredited investors.  The convertible promissory notes had a conversion price of $1.00 per share.  In connection with this offering, Balqon California also issued three-year warrants to acquire up to an aggregate of 810,000 shares of common stock at an exercise price of $1.50 per share. The convertible promissory notes were converted into an aggregate of 818,766 shares of common stock of Balqon California immediately preceding the closing of the Merger Transaction.




In October 2008, Balqon California raised an aggregate of $575,000 through the issuance of an aggregate of 575,000 shares of common stock to six accredited investors.  In connection with this offering, Balqon California also issued three-year warrants to purchase an aggregate of 575,000 shares of common stock at an exercise price of $1.50 per share.




In June 2008, Balqon California issued 2,916,725 shares of common stock and warrants to purchase 729,180 shares of common stock to Marlin Financial in consideration of business strategy and financial advisory services rendered to Balqon California.  In consideration of such issuance, Marlin Financial Group, Inc. acted as a finder in connection with the private placement offerings completed in September 2008 and October 2008.




In December 2008, we raised an aggregate of $210,000 through the issuance of 210,000 shares of common stock to ten accredited investors.  In connection with this offering, we also issued three-year warrants to purchase an aggregate of 210,000 shares of common stock at an exercise price of $1.50 per share.




During March 2009 and June 2009, we raised an aggregate of $1,000,000 through the issuance of convertible notes to 34accredited investors.  The convertible notes are convertibles into an aggregate of 1,000,000 shares of our common stock.  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.




Between February 5, 2010 and April 12, 2010, we raised an aggregate of $1,500,000 through the issuance of convertible notes to 11 accredited investors (of which $1,300,000 was raised during the three months ended March 31, 2010).  The convertible notes are convertibles into an aggregate of 1,999,993 shares of our common stock.  In connection with this offering, we also issued three-year warrants to purchase an aggregate of 1,999,993 shares of common stock at an exercise price of $0.50 per share.




We are obligated under registration rights agreements related to 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 transactions consummated between March 2009 and April 2010.




27




Effective February 18, 2009, we entered into a Business Financing Agreement with Bridge Bank, National Association, or the Bridge Bank Agreement.  The Bridge Bank Agreement, as amended to date, provides 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 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.  Interest on the credit facility is payable monthly.  As of March 31, 2010, there were no borrowings outstanding under the facility and availability under the credit facility was $3,078.  As of December 31, 2009, eligible accounts receivable was $167,925 and availability under the credit facility was $6,190.




The interest rate on our credit facility 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.




Our plan of operations for the next 12 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 chargers. We also expect to receive additional orders for our products over the next 12 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 2010, we expect to incur approximately $500,000 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 15 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 March 31, 2010 and December 31, 2009 and for the year ended December 31, 2009 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 March 31, 2010 we had an accumulated deficit of $12,036,606.  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, 2009, 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.




28




We have been, and currently are, working toward identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future.  Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.




If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product and service development efforts.




Backlog




As of May 7, 2010, we had a backlog of approximately $2,747,856.  Our backlog includes $2,406,200 from a contract to produce and deliver six electric yard tractors and five electric short-haul tractors (and associated equipment), flux vector motor controllers, drive systems and battery modules. We believe that products in our backlog will be shipped by December 31, 2010. Our backlog includes an order in the amount of $152,218 from an international customer to purchase our electric drive systems and orders in the aggregate amount of $172,018 from two customers to purchase our flux vector motor controllers.




Effects of Inflation




The impact of inflation and changing prices has not been significant on the financial condition or results of operations of our company.




Impacts of New Accounting Pronouncements




In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, 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 software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.  We believe the adoption of this new guidance will not have a material impact on our financial statements.




29




In January 2010, the FASB issued guidance on improving disclosures about fair value measurements to add new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 roll-forward.   The guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to present the Level 3 roll-forward on a gross basis, which is effective for fiscal years beginning after December 15, 2010.  The adoption of this guidance was limited to the form and content of disclosures, and will not have a material impact on our results of operations or financial condition.




Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.




ITEM 3.
Quantitative andQualitative 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 March 31, 2010 that our disclosure controls and procedures were effective at the reasonable assurance level.




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.




30




These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.




Changes in Internal Control over Financial Reporting




There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





31




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 Annual Report on Form 10-K for December 31, 2009 filed with the SEC on March 31, 2010, which could materially affect our business, financial condition and results of operations.  The risks described below and in our Annual Report on Form 10-K for December 31, 2009 filed with the SEC on March 31, 2010, 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.




ITEM 2. Unregistered sales of Equity Securities and Use of Proceeds




On February 2, 2010, we issued 200,000 shares of its common stock to an accredited investor in consideration of consulting services (for investor relations) to be rendered between February 2010 and August 2010.




Between February 5, 2010 and April 12, 2010, we entered into agreements with 11 accredited investors for the sale by us of an aggregate of $1,500,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,999,993 shares of our common stock at a conversion price of $0.75 per share of common stock, subject to adjustment.  Additionally, we issued to these investors three-year warrants to purchase an aggregate of 1,999,993 shares of common stock at an exercise price of $0.50 per share.  The proceeds of $1,500,000 are allocated to working capital.  In connection with the sale of certain of the 10% Unsecured Subordinated Convertible Promissory Notes, we (i) paid $12,000 in finder’s fees and (ii) issued three year warrants to purchase 15,999 shares of our common stock at an exercise price of $0.50 per share to two accredited investors in consideration of finder services rendered.  In addition, on March 5, 2010, in connection with the sale of $500,000 in principal amount of our 10% Unsecured Subordinated Convertible Promissory Notes, we granted to a certain accredited investor a right to buy, on or before May 15, 2010, up to an additional $500,000 in principal amount of our 10% Unsecured Subordinated Convertible Promissory Notes convertible into up to 666,666 shares of common stock at a conversion price of $0.75 per share and warrants exercisable into 666,666 shares of common stock at an exercise price of $0.50 per share for an aggregate purchase price of $500,000, which right was not exercised on or before May 15, 2010.  In addition, on April 5, 2010, in connection with the sale of an aggregate of $150,000 in principal amount of our 10% Unsecured Subordinated Convertible Promissory Notes, we granted to three accredited investors the right to buy, on or before May 15, 2010, an aggregate of up to an additional $150,000 in principal amount of our 10% Unsecured Subordinated Convertible Promissory Notes convertible into up to 199,998 shares of common stock at a conversion price of $0.75 per share and warrants exercisable into 199,998 shares of common stock at an exercise price of $0.50 per share for an aggregate purchase price of $150,000, which right was not exercised on or before May 15, 2010.




The issuances of our securities described above were made in reliance upon the exemption from registration available under Section 4(2) of the Securities Act, among others, as transactions not involving a public offering.  This exemption was claimed on the basis that these transactions did not involve any public offering and the purchasers in each offering were accredited or sophisticated and had sufficient access to the kind of information registration would provide. In each case, appropriate investment representations were obtained and certificates representing the securities were issued with restrictive legends.  Each investor was given adequate access to sufficient information about us to make an informed investment decision. Except as set forth above, there were no commissions paid on the sale or issuance of the securities described above.




32




ITEM 3. Defaults Upon Senior Securities




None




ITEM 4. (Removed and Reserved).




ITEM 5. Other Information




None





33




ITEM 6. Exhibits





Exhibit

Number

Description4.1

Form of 10% Unsecured Subordinated Convertible Promissory Notes issued to certain security holders in the aggregate principal amount of $1,500,000, which are convertible into an aggregate of 1,999,993 shares of our common stock (subject to adjustment)(1)4.2

Form of Warrants issued by the Registrant to certain security holders to purchase an aggregate of 1,999,993 shares of common stock (subject to adjustment)(1)4.3

Form of Warrants issued by the Registrant to certain security holders to purchase an aggregate of 15,999 shares of common stock in consideration of finder services (subject to adjustment) (*)31.1

Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)31.2

Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)32.1

Certification of President Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*)


_________________________


(*)           Filed herewith.


(1)
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.





34




Signatures




Pursuant to the requirements of Section 13 or 15(d) 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 on this 17th day of May, 2010.




BALQON CORPORATIONBy:
/S/ BALWINDER SAMRABalwinder Samra,Chairman of the Board, President andChief Executive Officer (principal executive officer)




35





BALQON CORPORATION


EXHIBITS FILED WITH THIS REPORT





Exhibit

Number

Description4.3

Form of Warrants issued by the Registrant to certain security holders to purchase an aggregate of 15,999 shares of common stock in consideration of finder services (subject to adjustment)31.1

Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 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 Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002