UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




AMENDMENT
NO. 1


TO


FORM
10-Q


(Mark
One)


|X|
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended September 30,
2008




|   |
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from _________ to __________




Commission
File Number: 000-52337




BALQON
CORPORATION


(Exact
name of registrant as specified in its charter)





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





1420
      240th Street, Harbor City, California
                  90710(Address
      of principal executive offices)
                  (Zip
      Code)




(310)
326-3056


(Registrant’s
telephone number, including area code)




Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes S No £




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




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





Large
      accelerated filer   ̈
            Accelerated
      filer   ̈Non-accelerated
      filer   ̈ (Do not check if
      a smaller reporting company)
            Smaller
      reporting company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £ No S




As of
November 14, 2008, there were 25,308,348 shares of the issuer’s common
stock issued and outstanding.










EXPLANATORY
NOTE




The
purpose of this Amendment No. 1 to Form 10-Q (“Amendment”) is to amend our
initial filing of a Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2008, filed with the Securities and Exchange Commission
(“SEC”) on November 19, 2008 (the “Initial Filing”).  Defined
terms used in this Amendment but not defined herein have the meanings ascribed
to them in the Initial Filing.




On May
18, 2009, we filed a Current Report on Form 8-K with the SEC disclosing that our
management concluded that an accounting error had been made in our historical
financial statements in relation to the recording of the value of stock
compensation awarded in June and August 2008 and to record a note discount
related to a beneficial conversion feature and warrants issued in connection
with the issuance of certain convertible notes in 2008.  As a result,
our financial statements for the quarterly period ended September 30, 2008 must
be restated (the “Restatement”).  In light of the Restatement, the
financial statements and other financial information included in the Initial
Filing are being restated in this Amendment.




Unless
specified, the disclosures provided in this document have not been updated for
more current information.  Therefore, this Amendment should be read in
conjunction with our other filings made with the SEC subsequent to the date of
the Initial Filing.  For updated disclosure regarding our business and
financial condition, please read our periodic filings for the fiscal year ended
December 31, 2008 and the quarterly period ended March 31, 2009.




CAUTIONARY
STATEMENT




All statements included or incorporated
by reference in this Amendment, other than statements or characterizations of
historical fact, are “forward-looking statements.” Examples of forward-looking
statements include, but are not limited to, statements concerning projected net
sales, costs and expenses and gross margins; our accounting estimates,
assumptions and judgments; the demand for our products; the competitive nature
of and anticipated growth in our industry; and our prospective needs for
additional capital. These forward-looking statements are based on our current
expectations, estimates, approximations and projections about our industry and
business, management’s beliefs, and certain assumptions made by us, all of which
are subject to change. Forward-looking statements can often be identified by
such words as “anticipates,” “expects,” “intends,” “plans,” “predicts,”
“believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,”
“potential,” “continue,” “ongoing,” similar expressions and variations or
negatives of these words. These statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions that are
difficult to predict. Therefore, our actual results could differ materially and
adversely from those expressed in any forward-looking statements as a result of
various factors, some of which are set forth in the “Risk Factors” section of
our Amendment No. 1 to our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission, or
SEC, on May 22, 2009, which could cause our financial results, including
our net income or loss or growth in net income or loss to differ materially from
prior results, which in turn could, among other things, cause the price of our
common stock to fluctuate substantially. These forward-looking statements speak
only as of the date of this report. We undertake no obligation to revise or
update publicly any forward-looking statement for any reason, except as
otherwise required by law.




i




TABLE
OF CONTENTS







PART
I


FINANCIAL
INFORMATION





PageItem
      1.
                                  Financial
      Statements
                                  1Item
      2.
                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                  28Item
      3.
                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                  38Item
      4.
                                  Controls
      and Procedures
                                  38Item
      4T.
                                  Controls
      and Procedures
                                  38PART
      IIOTHER
      INFORMATIONItem
      1.
                                  Legal
      Proceedings
                                  41Item
      1A.
                                  Risk
      Factors
                                  41Item
      2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  42Item
      3.
                                  Defaults
      Upon Senior Securities
                                  42Item
      4.
                                  Submission
      of Matters to a Vote of Security Holders
                                  42Item
      5.
                                  Other
      Information
                                  42Item
      6.
                                  Exhibits
                                  42Exhibits
      Filed with this Report


ii


PART
I – FINANCIAL INFORMATION


ITEM
      1.
            FINANCIAL
      STATEMENTS




BALQON
CORPORATION


CONDENSED
BALANCE SHEETS





September 30,
                  2008
                  (Unaudited)
                  (As
      Restated)
              
              
              December
      31,
                  2007ASSETSCurrent
      assetsCash
              
              $
              543,192
              
              
              $
              34Accounts
      receivable
              
              
              —
              
              
              
              35,000Inventories
              
              
              106,159
              
              
              
              —Costs
      in excess of billings and estimated earningson
      uncompleted contracts
              
              
              7,098
              
              
              
              —Prepaid
      expenses
              
              
              1,534
              
              
              
              —Total
      current assets
              
              
              657,983
              
              
              
              35,034Property
      and equipment, net
              
              
              79,538
              
              
              
              21,047Intangible
      assets
              
              
              353,465
              
              
              
              —Deposits
              
              
              33,641
              
              
              
              19,241Total
      assets
              
              $
              1,124,627
              
              
              $
              75,322LIABILITIES
      AND SHAREHOLDERS’ DEFICIENCYCurrent
      liabilitiesAccounts
      payable and accrued expenses
              
              $
              417,046
              
              
              $
              29,212Convertible
      promissory notes, net of discount
              
              
              861,915
              
              
              
              —Notes
      payable to related parties, unsecured
              
              
              125,875
              
              
              
              —Advances
      from shareholder
              
              
              47,877
              
              
              
              57,420Billings
      in excess of costs and estimated earningson
      uncompleted contracts
              
              
              —
              
              
              
              71,264Total
      current liabilities
              
              
              1,452,713
              
              
              
              157,896SHAREHOLDERS’
      DEFICIENCYCommon
      stock, no par value, 100,000,000 shares authorized,18,067,000
      and 16,667,000 shares issued and outstanding
              
              
              5,000
              
              
              
              5,000Common
      stock to be issued, 5,333,000 shares
              
              
              5,333,000
              
              
              
              —Additional
      paid in capital
              
              
              1,272,056
              
              
              
              —Accumulated
      deficit
              
              
              (6,938,142
              )
              
              
              (87,574
              )Total
      shareholders’ deficiency
              
              
              (328,086
              )
              
              
              (82,574
              )Total
      liabilities and shareholders’ deficiency
              
              $
              1,124,627
              
              
              $
              75,322




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


1




BALQON
CORPORATION


CONDENSED
STATEMENTS OF OPERATIONS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




Three
      Months Ended
                  September
      30,
              
              
              Nine
      Months Ended
                  September
      30,2008
                  (As
      Restated)
              
              
              2007
              
              
              2008
                  (As
      Restated)
              
              
              2007REVENUES:Contract
      revenue earned
              
              $
              10,787
              
              
              $
              188,752
              
              
              $
              138,362
              
              
              $
              230,898Sale
      of parts
              
              
              —
              
              
              
              —
              
              
              
              75,000
              
              
              
              —Total
      revenues
              
              
              10,787
              
              
              
              188,752
              
              
              
              213,362
              
              
              
              230,898Total
      cost of revenues
              
              
              17,361
              
              
              
              107,695
              
              
              
              170,292
              
              
              
              138,557Gross
      (loss) profit
              
              
              (6,574
              )
              
              
              81,057
              
              
              
              43,070
              
              
              
              92,341OPERATING
      EXPENSES:General
      and administrative
              
              
              940,703
              
              
              
              98,829
              
              
              
              6,304,051
              
              
              
              137,412Reverse
      merger expenses
              
              
              429,300
              
              
              
              —
              
              
              
              429,300
              
              
              
              —Depreciation
      and amortization
              
              
              2,693
              
              
              
              895
              
              
              
              6,370
              
              
              
              1,279Total
      operating expenses
              
              
              1,372,696
              
              
              
              99,724
              
              
              
              6,739,721
              
              
              
              138,691Loss
      from operations
              
              
              (1,379,270
              )
              
              
              (18,667
              )
              
              
              (6,696,651
              )
              
              
              (46,350
              )Interest
      expense
              
              
              (153,917
              )
              
              
              —
              
              
              
              (153,917
              )
              
              
              —NET
      LOSS
              
              $
              (1,533,187
              )
              
              $
              (18,667
              )
              
              $
              (6,850,568
              )
              
              $
              (46,350
              )Net
      loss per share-basic and diluted
              
              $
              (0.07
              )
              
              $
              0.00
              
              
              $
              (0.37
              )
              
              $
              (0.04
              )Weighted
      average shares outstanding, basic and diluted
              
              
              21,263,232
              
              
              
              16,667,000
              
              
              
              18,699,087
              
              
              
              16,667,000




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


2




BALQON
CORPORATION


CONDENSED
STATEMENT OF SHAREHOLDERS’ DEFICIENCY


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (Unaudited) (As
Restated)




Common
      Stock
                
                
                Common
      Stock to be Issued
                
                
                Additional Paid
                
                
                AccumulatedNumber
                
                
                Amount
                
                
                Amount
                
                
                In
      Capital
                
                
                Deficit
                
                
                TotalBalance,
      December 31, 2007
                
                
                16,667,000
                
                
                $
                5,000
                
                
                $
                —
                
                
                $
                —
                
                
                $
                (87,574
                )
                
                $
                (82,574
                )Effect
      of revenue merger transaction
                
                
                1,400,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Fair
      value of options and warrants granted for services
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                685,309
                
                
                
                —
                
                
                
                685,309Fair
      value of beneficial conversion feature and warrants issued with
      convertible notes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                586,747
                
                
                
                —
                
                
                
                586,747Fair
      value of 5,333,000 shares granted for services
                
                
                —
                
                
                
                —
                
                
                
                5,333,000
                
                
                
                —
                
                
                
                —
                
                
                
                5,333,000Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (6,850,568
                )
                
                
                (6,850,568
                )Balance,
      September 30, 2008 (unaudited) (as restated)
                
                
                18,067,000
                
                
                $
                5,000
                
                
                $
                5,333,000
                
                
                $
                1,272,056
                
                
                $
                (6,938,142
                )
                
                $
                (328,086
                )




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


3




BALQON
CORPORATION


CONDENSED
STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)





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





Non-cash
      financing activities:Fair
      value of beneficial conversion feature and warrants issued with
      convertible notes
                
                $
                586,747
                
                
                $
                —




The
accompanying notes are an integral part of these condensed financial
statements.
  4


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES




The
Company




Balqon
Corporation (the “Company”) was incorporated on April 21, 2005 as a California
corporation and commenced business operations in 2006. The Company is involved
in research, development and commercialization of technologies for heavy-duty
electric vehicles used in off-highway applications.




On July
11, 2008, the Company signed a term sheet in which the Company agreed to merge
with BMR Solutions, Inc., a Nevada corporation (“BMR”).  On October
24, 2008, the Company completed the merger with BMR.  Pursuant to the
merger agreement, the issued and outstanding common shares of the Company were
exchanged on a one-for-one basis for common shares of BMR.  After the
merger was completed, Balqon’s shareholders own approximately 94% of the
outstanding shares of common stock of BMR and the original shareholders of BMR
own approximately 6% of the outstanding shares of common stock of BMR, not
including warrants.  The transaction was accounted for as a reverse
merger (recapitalization) with Balqon deemed to be the accounting acquirer and
BMR deemed to be the legal acquirer.  Upon the closing, BMR, changed
its name to Balqon Corporation.  The financial statements presented
herein are those of the accounting acquirer given the effect of the issuance of
1,400,000 shares of common stock upon completion of the transaction and
reflecting the net liabilities assumed of BMR of $80,964 as a cost of the
reverse merger had it occurred as of September 30, 2008.  In addition,
the Company incurred expenses of $348,336 in connection with the reverse
merger.




Basis
of Presentation of Unaudited Financial Information




The
unaudited financial statements of the Company as of September 30, 2008 and
for the nine months ended September 30, 2008 and September 30, 2007
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and pursuant
to the requirements for reporting on Form 10-Q and Regulation S-K for scaled
disclosures for smaller reporting companies.  Accordingly, they do not
include all the information and footnotes required by accounting principles
generally accepted in United States of America for complete financial
statements.  However, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion
of management, necessary for the fair presentation of the financial position and
the results of operations. Results shown for interim periods are not necessarily
indicative of the results to be obtained for a full fiscal year.




Going
Concern




For the
nine months ended September 30, 2008 and for the year ended December 31,
2007, the Company recorded net losses of $6,850,568 and $82,744, respectively,
and had an accumulated deficit of $6,938,142 at September 30,
2008.  These matters raise substantial doubt about the Company’s
ability to continue as a going concern.  The financial statements do
not include any adjustments that might result from this
uncertainty.  The Company intends to raise funds to finance operations
until the Company achieves profitable operations. The Company’s capital
requirements for the next 12 months, as they relate to the production of its
products will continue to be significant.  If adequate funds are not
available to satisfy either medium or long-term capital requirements, the
Company’s operations and liquidity could be materially adversely affected and
the Company could be forced to cut back its operations.




5


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




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




Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Material estimates relate to the recognition of
contract revenues and estimated costs to complete contracts in process, and
recoverability of reported amounts of long-lived assets.  Actual
results may differ from those estimates.




Revenues




Contract
Revenue and Cost Recognition on Prototype Vehicles




In
accounting for contracts, the Company follows the provisions of the AICPA’s
Statement of Position 81-1 – Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (“SOP
81-1”).  The Company recognizes revenues using the
percentage-of-completion method of accounting by relating contract costs
incurred to date to the total estimated costs at completion.  This
method is used because management considers costs to be the best available
measure of progress on its contracts.  Contract losses are provided
for in their entirety in the period that they become known, without regard to
the percentage-of-completion.  We also recognize as revenues costs
associated with claims and unapproved change orders to the extent it is probable
that such claims and change orders will result in additional contract revenue,
and the amount of such additional revenue can be reliably
estimated.




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




Sales
of Production Units and Parts




The
Company recognizes revenue from the sale of completed production units and parts
when there is persuasive evidence that an arrangement exists, delivery of the
product has occurred and title has passed, the selling price is both fixed and
determinable, and collectibility is reasonably assured, all of which generally
occurs upon shipment of the Company’s product or delivery of the product to the
destination specified by the customer.




The
Company determines whether delivery has occurred based on when title transfers
and the risks and rewards of ownership have transferred to the buyer, which
usually occurs when the Company places the products with the buyer’s
carrier.  The Company regularly reviews its customers’ financial
positions to ensure that collectibility is reasonably assured.  Except
for warranties, the Company has no post-sales obligations.




Product
Warranties




The
Company provides limited warranties for parts and labor at no cost to its
customers within a specified time period after the sale.  The Company
estimates the actual historical warranty claims coupled with an analysis of
unfulfilled claims at the balance sheet date. As of September 30, 2008 and
December 31, 2007, the Company had no warranty reserve nor did it incur
warranty expenses during the nine month periods ended September 30, 2008 or
2007.




6


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)


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




Cash
and Cash Equivalents




The
Company considers all highly liquid instruments with maturity of three months or
less at the time of issuance to be cash equivalents.




Accounts
Receivable




Trade
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts, as needed.




The
Company uses the allowance method to account for uncollectible trade receivable
balances. Under the allowance method, if needed, an estimate of uncollectible
customer balances is made based upon specific account balances that are
considered uncollectible. Factors used to establish an allowance include the
credit quality and payment history of the customer.  At
September 30, 2008 and December 31, 2007, there was no allowance for
doubtful accounts.




Inventories




Inventories
are stated at the lower of cost or market. Cost is determined principally on a
first-in-first-out average cost basis.  Inventories consist of the
following:





September
      30,
                  2008
                  (Unaudited)Raw
      materials
              
              $
              97,197Work
      in process
              
              
              8,962$
              106,159




Property
and Equipment




Property
and equipment are stated at cost. The cost of property and equipment is
depreciated on the straight-line method over the following estimated useful
lives:




Computer
      equipment and software
                    3
      yearsFurniture
                    3
      yearsMachinery
                    3
      years






Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful life of the asset or the lease term.




Goodwill
and Intangible Assets




As
required by Statement of Financial Accounting Standards (“SFAS”) No. 142,
management performs impairment tests of goodwill and indefinite-lived intangible
assets whenever an event occurs or circumstances change that indicate impairment
has more likely than not occurred. Also, as required by SFAS No. 142,
management performs impairment testing of goodwill and indefinite-lived
intangible assets at least annually.




7


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




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




Goodwill
and Intangible Assets (continued)




In
accordance with SFAS No. 142, management tests goodwill for impairment at
the reporting unit level.  The Company has only one reporting
unit.  At the time of goodwill impairment testing, management
determines fair value through the use of a discounted cash flow valuation model
incorporating discount rates commensurate with the risks involved its reporting
unit. If the calculated fair value is less than the current carrying value,
impairment of the Company may exist. The use of a discounted cash flow valuation
model to determine estimated fair value is common practice in impairment testing
in the absence of available domestic and international transactional market
evidence to determine the fair value. The key assumptions used in the discounted
cash flow valuation model for impairment testing include discount rates, growth
rates, cash flow projections and terminal value rates. Discount rates are set by
using the Weighted Average Cost of Capital (“WACC”) methodology. The WACC
methodology considers market and industry data as well as Company-specific risk
factors for each reporting unit in determining the appropriate discount rates to
be used. The discount rate utilized is indicative of the return an investor
would expect to receive for investing in such a business. Operational
management, considering industry and Company-specific historical and projected
data, develops growth rates and cash flow projections for the
Company.  Terminal value rate determination follows common methodology
of capturing the present value of perpetual cash flow estimates beyond the last
projected period assuming a constant WACC and low long-term growth rates. As an
indicator that each reporting unit has been valued appropriately through the use
of the discounted cash flow valuation model, the aggregate fair value of all
reporting units is reconciled to the total market capitalization of the Company.
The discounted cash flow valuation methodology and calculations will be used in
2009 impairment testing.




Impairment
of Long-lived Assets




SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
establishes guidelines regarding when impairment losses on long-lived assets,
which include property and equipment, should be recognized and how impairment
losses should be measured.  This statement also provides a single
accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. The Company periodically reviews, at least annually, such assets
for possible impairment and expected losses. If any losses are determined to
exist they are recorded in the period when such impairment is determined. Based
upon management’s assessment, there are no indicators of impairment of the
Company’s long lived assets at September 30, 2008 or December 31,
2007.




Income
Taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.” Under SFAS No. 109, income taxes are recognized for the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets are recognized for the future tax consequences of
transactions that have been recognized in the Company’s financial statements or
tax returns. A valuation allowance is provided when it is more likely than not
that some portion or the entire deferred tax asset will not be
realized.




8


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




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




Loss
Per Share




Basic
loss per share has been computed using the weighted average number of common
shares outstanding and issuable during the period. The computation of basic loss
per share excludes the 1,400,000 shares issued in connection with the reverse
merger (see Note 1).  Diluted loss per share is computed based on
the weighted average number of common shares and all common equivalent shares
outstanding during the period in which they are dilutive. Common equivalent
shares consist of shares issuable upon the exercise of stock options or
warrants. As of September 30, 2008 common stock equivalents composed of options
exercisable into 4,562,592 shares of the Company’s common stock and warrants
exercisable into 2,039,180 shares of the Company’s common stock. For the three
and nine month periods ended September 30, 2008 and 2007, common equivalent
shares have been excluded from the calculation of loss per share as their effect
is anti-dilutive.




Stock-Based
Compensation




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




The
Company accounts for stock option and warrant grants issued and vesting to
employees using SFAS No. 123(R) “Share-Based Payment” effective January 1, 2006,
for all share-based payments granted based on the requirements of SFAS No.
123(R) for all awards granted to employees.




The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with Emerging Issues Task Force (“EITF”) Issue No.
96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF Issue
No. 00-18 “Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees” whereas the value of the stock
compensation is based upon the measurement date as determined at either (i) the
date at which a performance commitment is reached, or (ii) at the date at which
the necessary performance to earn the equity instruments is
complete.




Financial
Assets and Liabilities Measure at Fair Value




Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements.” This Statement defines fair value for certain financial and
nonfinancial assets and liabilities that are recorded at fair value, establishes
a framework for measuring fair value, and expands disclosures about fair value
measurements. This guidance applies to other accounting pronouncements that
require or permit fair value measurements. On February 12, 2008, the Financial
Accounting Standards Board (“FASB”) finalized FASB Staff Position (“FSP”) No.
157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective
date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years, except for those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The adoption
of SFAS No. 157 had no effect on the Company’s financial position or results of
operations.




9


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




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




Accounting
for Warrants and Derivatives




Freestanding
financial instruments, such as detachable warrants, must be evaluated under the
authoritative accounting literature to determine whether they should be
classified as assets or liabilities (derivative accounting), temporary equity,
or permanent equity. Management initially evaluates whether the instruments are
covered by SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” If the instrument is not
governed by SFAS No. 150, then management determines whether it meets the
definition of a derivative under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  To determine whether a specific
warrant agreement would follow derivative accounting under SFAS No. 133,
management is required to first evaluate whether the warrant would meet the
definition of equity under the provisions of EITF Issue No. 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”  Financial instruments such as warrants that are
classified as permanent or temporary equity are excluded from the definition of
a derivative for purposes of SFAS No. 133. Financial instruments, including
warrants, that are classified as assets or liabilities are considered
derivatives under SFAS No. 133, and are marked to market at each reporting date,
with the change in fair value recorded in the income statement. The fair values
of both the warrants and conversion benefits are calculated using a
Black-Scholes Model, taking into consideration factors such as the underlying
price of the company’s common stock, the exercise price for warrants or the
conversion price for the conversion benefit, the company’s stock volatility (or
the stock volatility of peer companies with an historical active trading
market), and the risk-free interest rates available for comparable time
periods.




Under
EITF Issue No. 00-19, contracts that require physical settlement or net-share
settlement and contracts that give the issuer the choice of settlement (in cash
or shares) are classified as equity. Contracts that require net-cash settlement
or that give the counterparty a choice which includes net-cash settlement are
classified as assets or liabilities, not equity. If a transaction is outside the
control of the issuer and there is the possibility that the issuer could
net-cash settle, then for purposes EITF Issue No. 00-19 it is assumed that the
issuer will have to net-cash settle, which may preclude accounting for a
contract as equity of the company except in certain circumstances where the
existing common stockholders would also receive cash. Management’s judgment is
required in evaluating the terms of freestanding instruments, such as warrants,
and the application of authoritative accounting literature.  The
outstanding warrants to purchase shares of our common stock do not contain
provisions for cash settlement.




Concentrations




Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured accounts
receivable.




The
Company maintains cash balances at one bank. At times, the amount on deposit
exceeds the federally insured limits. Management believes that the financial
institution that holds the Company’s cash is financially sound and, accordingly,
minimal credit risk exists.




10


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




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




Concentrations
(continued)




For the
nine months ended September 30, 2008 and 2007, contract revenue earned is
from one contract with the City of Los Angeles and the South Coast Air Quality
Management District (“AQMD”).   For the nine months ended
September 30, 2008, sale of parts were to one customer.




For the
nine months ended September 30, 2008 and 2007, 24% and 28%, respectively,
of contract costs incurred were to a single vendor.  At
September 30, 2008, accounts payable to this vendor represented 8% of total
accounts payable.  At September 30, 2008, three other vendors had
balances representing 35%, 27%, and 8%, respectively, of total accounts
payable.




Registration
Payment Arrangements




The
Company accounts for registration payment arrangements under FSP EITF Issue
No. 00-19-2, “Accounting for Registration Payment Arrangements.” FSP EITF
Issue No. 00-19-2 specifies that the contingent obligation to make future
payments under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, “Accounting for
Contingencies.”  The Company has not made any provision for
registration payment arrangements at September 30, 2008 as it believes none will
be payable.




Recent
Accounting Pronouncements




In March
2008, the FASB issued SFAS No. 161,“Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133,” to improve financial reporting of derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance and cash flows. SFAS No. 161 applies to fiscal years and interim
periods beginning after November 15, 2008.




In
December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations,” which
establishes accounting principles and disclosure requirements for all
transactions in which a company obtains control over another
business.  SFAS No. 141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited.




The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s results of operations, financial
position, or cash flows.




11


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS




On May
18, 2009, the management of the Company concluded, with the concurrence of the
Audit Committee of the Company’s Board of Directors, that an accounting error
had been made in the Company’s historical financial statements in relation to
the recording of the value of stock-based compensation awarded in June and
August 2008, and in the recording of a note discount related to a beneficial
conversion feature and associated warrants issued with certain convertible notes
during 2008. As a result, the Company’s financial statements for the three and
nine months ended September 30, 2008 have been restated.




The
restatements reflect a change to the fair value of common stock that was used to
calculate the fair value of certain stock instruments issued during 2008. In
June and August 2008 when the stock based compensation was awarded, an active
market for the Company’s common stock did not exist.  Therefore, in
its application of SFAS No. 123(R), the Company used an alternative valuation
method to calculate the fair value of the common stock issued during June and
August 2008, and in its assumptions included in its Black-Scholes valuation
model to value the stock options and warrants during 2008. The alternative
valuation method included consideration of a valuation conducted by a
third-party specialist in August, 2008.  The Company initially valued
the underlying shares of its common stock at $.015 based upon this valuation.
The Company has subsequently concluded that the $1.00 conversion price per share
of common stock of the Company’s convertible notes that were offered and sold in
July and September 2008 (and converted by October 31, 2008) and the $1.00 per
unit sale price of units consisting of one share of common stock and a warrant
to purchase one share of common stock that were offered and sold in October and
December 2008 were better indicators of the fair value of the Company’s common
stock, and such value is now used in determining the value of the shares of
common stock granted in June and August 2008, the options granted in June 2008,
and in the calculation of the note discount related to a beneficial conversion
feature and associated warrants granted with the convertible notes during
2008.




As such,
the Company has restated its previously issued September 30, 2008 financial
statements to reflect a fair value of $1.00 per common share in accounting for
the compensation costs of shares issued for services during the period, in its
option pricing models to determine the fair value of options and warrants issued
for services, and in calculating the relative value of the warrants and
conversion feature of its convertible notes.  The effects of the
restatement on the Company’s financial statements for the nine months ended
September 30, 2008 are shown below:




12


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
            2
      – RESTATEMENT OF FINANCIAL STATEMENTS
  (continued)





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







13


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)





Nine
      Months Ended September 30, 2008(As
      Initially Reported)
              
              
              (Adjustment)
              
              
              (As
      Restated)
                  (Unaudited)REVENUESContract
      revenue earned
              
              $
              138,362
              
              
              $
              
              
              
              $
              138,362Sale
      of parts
              
              
              75,000
              
              
              
              
              
              
              
              75,000Total
      revenues
              
              
              213,362
              
              
              
              
              
              
              
              213,362COSTS
      OF REVENUESTotal
      cost of revenues
              
              
              170,292
              
              
              
              
              
              
              
              170,292Gross
      profit
              
              
              43,070
              
              
              
              
              
              
              
              43,070OPERATING
      EXPENSESGeneral
      and administrative
              
              
              363,338
              
              
              
              5,940,713
              (1)(2)
              
              
              6,304,051Reverse
      merger expenses
              
              
              429,300
              
              
              
              
              
              
              
              429,300Depreciation
      and amortization
              
              
              6,370
              
              
              
              
              
              
              
              6,370Total
      operating expenses
              
              
              799,008
              
              
              
              5,940,713
              
              
              
              6,739,721Loss
      from operations
              
              
              (755,938
              )
              
              
              (5,940,713
              )
              
              
              (6,696,651
              )Interest
      expense
              
              
              (15,255
              )
              
              
              (138,662
              )(4)
              
              
              (153,917
              )NET
      LOSS
              
              $
              (771,193
              )
              
              $
              (6,079,375
              )
              
              $
              (6,850,568
              )Net
      loss per share – basic and diluted
              
              $
              (0.04
              )
              
              
              
              
              
              $
              (0.37
              )Weighted
      average shares outstanding, basic and diluted
              
              
              18,699,087
              
              
              
              
              
              
              
              18,699,087




14


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)





Nine
      Months Ended September 30, 2008(As
      Initially Reported)
              
              
              (Adjustments)
              
              
              (As
      Restated)
                  (Unaudited)Cash
      flow from operating activities:Net
      loss
              
              $
              (771,193
              )
              
              $
              (6,079,375
              )
              
              $
              (6,850,568
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              6,370
              
              
              
              
              
              
              
              6,370Amortization
      of debt discount
              
              
              —
              
              
              
              138,662
              (4)
              
              
              138,662
              (2)Fair
      value of common stock granted for services
              
              
              77,596
              
              
              
              5,255,404
              (1)
              
              
              5,333,000Fair
      value of options and warrants granted for services
              
              
              —
              
              
              
              685,309
              (2)
              
              
              685,309Changes
      in operating assets and liabilitiesAccounts
      receivable
              
              
              35,000
              
              
              
              
              
              
              
              35,000Inventories
              
              
              (106,159
              )
              
              
              
              
              
              
              (106,159
              )Costs
      in excess of billings on uncompleted contracts
              
              
              (7,098
              )
              
              
              
              
              
              
              (7,098
              )Prepaid
      expenses
              
              
              (1,534
              )
              
              
              
              
              
              
              (1,534
              )Deposits
              
              
              (14,400
              )
              
              
              
              
              
              
              (14,400
              )Accounts
      payable and accrued expense
              
              
              387,834
              
              
              
              
              
              
              
              387,834Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
              
              
              (71,264
              )
              
              
              
              
              
              
              (71,264
              )Net
      cash used in operating activities
              
              
              (464,848
              )
              
              
              —
              
              
              
              (464,848
              )Cash
      flows from investing activities:Acquisition
      of furniture, equipment and software
              
              
              (64,860
              )
              
              
              
              
              
              
              (64,860
              )Acquisition
      of EMS
              
              
              (353,465
              )
              
              
              
              
              
              
              (353,465
              )Net
      cash used in investing activities
              
              
              (418,325
              )
              
              
              —
              
              
              
              (418,325
              )Cash
      flows from financing activities:Proceeds
      from notes payable, related parties
              
              
              125,875
              
              
              
              
              
              
              
              125,875Proceeds
      from  issuance of convertible notes, net
              
              
              1,310,000
              
              
              
              
              
              
              
              1,310,000Advances
      from shareholder
              
              
              (9,544
              )
              
              
              
              
              
              
              (9,544
              )Net
      cash provided by financing activities
              
              
              1,426,331
              
              
              $
              —
              
              
              
              1,426,331Increase
      in cash and cash equivalents
              
              
              543,158
              
              
              
              
              
              
              
              543,158Cash
      and cash equivalents, beginning of year
              
              
              34
              
              
              
              
              
              
              
              34Cash
      and cash equivalents, end of year
              
              $
              543,192
              
              
              $
              —
              
              
              $
              543,192Non-cash
      financing activities:Fair
      value of beneficial conversion feature and warrants issued with
      convertible notes
              
              $
              —
              
              
              $
              586,747
              (3)
              
              $
              586,747




15


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)




Description
of adjustments:




(1)
            To
      record $5,255,404 of additional stock-based compensation for the value of
      common stock granted during 2008.




(2)
            To
      record $685,309 of additional stock-based compensation for the value of
      stock options and warrants granted during
2008.




(3)
            To
      record $586,747 of note discount related to the beneficial conversion
      feature and warrants issued with the convertible
  notes.




(4)
            To
      record $138,662 of amortization expense on the note
    discount.




NOTE
3 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS




In May
2007, the Company received a $527,000 contract with the City of Los Angeles and
the AQMD to develop a prototype short-range heavy-duty electric truck. This
zero-emissions, heavy-duty, all-electric truck is currently being tested at the
Port of Los Angeles as a short-range vehicle used for hauling fully loaded
40-foot cargo containers around the Port of Los Angeles.  At September
30, 2008, the contract was estimated to be approximately 99%
complete.




The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts” and the liability, “Billings in excess of costs and estimated
earnings on uncompleted contracts,” represents costs incurred or billings in
excess of revenue recognized at September 30, 2008 and December 31, 2007 as
follows:





September 30,
      2008
                  (Unaudited)
              
              
              December
      31,
                  2007Costs
      incurred on uncompleted contracts
              
              $
              367,384
              
              
              $
              280,263Estimated
      earnings
              
              
              139,518
              
              
              
              102,473506,902
              
              
              
              382,736Less,
      billings to date
              
              
              514,000
              
              
              
              454,000$
              7,098
              
              
              $
              (71,264
              )Included
      in accompanying balance sheets under the following captions:
                Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              $
              7,098
              
              
              $
              —Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
              
              $
              —
              
              
              $
              71,264




16


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
4 - PROPERTY AND EQUIPMENT




Property
and equipment are comprised as follows:




September 30,
      2008
                  (Unaudited)
              
              
              December
      31,
                  2007Computer
      equipment and software
              
              $
              36,898
              
              
              $
              9,052Office
      furniture
              
              
              24,476
              
              
              
              9,172Machinery
              
              
              6,395
              
              
              
              6,395Leasehold
      improvements
              
              
              21,711
              
              
              
              —Total
      property and equipment, cost
              
              
              89,480
              
              
              
              24,619Less:
      accumulated depreciation
              
              
              (9,942
              )
              
              
              (3,572
              )Property
      and equipment, net
              
              $
              79,538
              
              
              $
              21,047




Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $6,370
and $1,279, respectively.




NOTE
5 – BUSINESS ACQUISITION




On
September 9, 2008, the Company acquired substantially all of the assets of
Electric MotorSports, LLC (“EMS”), an Ohio limited liability company that was
owned by Mr. Robert Gruenwald.  The assets acquired included goodwill
and intellectual properties used in the development and manufacture of flux
vector inverters.




Prior to
the acquisition of EMS’s assets, EMS was a supplier of flux vector inverters
that were used to develop the Company’s first electric vehicle prototype, the
Nautilus E30. EMS had been in the business of developing, manufacturing and
selling flux vector inverters since 1997. At the time of the acquisition, the
Company was contracting with EMS to provide engineering design services that
were provided to the Company by EMS’ sole member, Robert Gruenwald.




The
acquisition of EMS was accounted for as a purchase in accordance with SFAS No.
141 “Business Combinations.”  As such, the results of operations of
EMS are included in the financial statements of Balqon Corporation beginning
September 9, 2008. During this period the Company did not engage in the business
of selling flux vector inverters. The expenses of EMS during the period since
the acquisition are primarily the salary and related benefits of the Company’s
Vice President Research and Development, Mr. Robert Gruenwald.




17


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
5 – BUSINESS ACQUISITION (continued)




The
purchase price of the assets was $350,000, of which $250,000 was paid in cash
and the Company issued an unsecured promissory note for the balance of
$100,000.  The note is due on March 9, 2009 (see
Note 7).  The $350,000 purchase price, together with legal costs
of $3,465 incurred in connection with this asset purchase, resulted in a total
purchase price of the EMS assets of $353,465.  The Company engaged an
independent valuation firm to assist management in the allocation of the
purchase price of the assets.  The methods used to value the assets
acquired in this transaction included the discounted cash flow and excess
earnings methods. The intellectual property assets acquired included all
(i) patents, patent applications, patent disclosures and inventions, (ii)
trademarks, service marks, trade dress, trade names, logos and corporate names
and registrations together with all of the goodwill associated therewith, (iii)
copyrights and copyrightable works, (iv) trade secrets, ideas, formulas,
compositions, inventions, know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, and other related intangible
properties. Based on management’s assessment, including the consideration
of the results of the independent valuation report, the Company allocated the
purchase price to the following assets as of the acquisition date as
follows:





Intellectual
      property assets
                  
                  $
                  186,965Goodwill
                  
                  
                  166,500Total
                  
                  $
                  353,465




The
amounts of intangible assets and accumulated amortization for the year ended
September 30, 2008 and December 31, 2007 are as follows:




September
      31,
                  2008
              
              
              December
      31,
                  2007Amortized
      intangible assets:Intellectual
      property assets
              
              $
              186,965
              
              
              $
              —Accumulated
      amortization
              
              
              —
              
              
              
              —Totals
              
              $
              186,965
              
              
              $
              —




The
intangible production assets are being amortized over a three year period under
the straight-line method.




18


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
5 – BUSINESS ACQUISITION (continued)




Pro forma
statements of operations for the current and prior periods, as though the
business acquisition had been completed as of the beginning of the earliest
period presented are as follows:





Nine
      months ended September 30, 2008
                  (Unaudited)
              
              
              Nine
      months ended September 30, 2007
                  (Unaudited)Revenues
              
              $
              354,863
              
              
              $
              310,406Cost
      of  revenues
              
              
              267,886
              
              
              
              123,999Gross
      profit
              
              
              86,977
              
              
              
              186,407Operating
      expenses
              
              
              6,968,617
              
              
              
              194,946Net
      loss
              
              
              (6,881,640
              )
              
              
              (8,539
              )Net
      loss per share – basic and diluted
              
              
              (0.27
              )
              
              
              (0.01
              )




NOTE
6 – CONVERTIBLE PROMISSORY NOTES




The
convertible promissory notes are comprised as follows as of September 30,
2008:





September 30,
                  2008
                  (Unaudited)Convertible
      promissory notes, interest at 10% per annum payable at maturity, due
      January 2, 2009
              
              $
              1,310,000Less:
      valuation discount
              
              
              (448,085
              )Convertible
      notes, net
              
              $
              861,915




On July
11, 2008, the Company raised $500,000 through the issuance of senior secured
convertible promissory notes, secured by substantially all the assets of the
Company, to five accredited investors (the “July Private
Placement”).  The notes were due January 2, 2009, bore interest
at 10% per annum due at maturity, and were secured by all the assets of the
Company.  The notes were are convertible into shares of common stock
of the Company at a conversion price of $1.00 per share.  In
connection with the July Private Placement, the Company issued warrants to
acquire 500,000 shares of common stock at an exercise price of $1.50 per share
(see Note 10).




On
September 15, 2008, the Company raised $810,000 through the issuance of senior
unsecured convertible promissory notes to 15 accredited investors (the
“September Private Placement”).  The notes were due January 2, 2009,
bore interest at 10% per annum due at maturity, and were secured by all the
assets of the Company.  The notes were convertible into shares of
common stock of the Company at a conversion price of $1.00 per
share.  In connection with the September Private Placement, the
Company also issued warrants to acquire 810,000 shares of common stock at an
exercise price of $1.50 per share (see Note 10).




19


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
6 – CONVERTIBLE PROMISSORY NOTES (continued)




The
Company determined that the relative fair value of the warrants was $293,374 and
the value of the beneficial conversion feature was $293,334.  The
relatively fair value was determined using the methodology prescribed by APB No.
14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants.”  These amounts were calculated by a Black-Scholes option
pricing model using as assumptions an expected life of 3 years, an industry
volatility of 58.43%, a risk free interest rate of 2.42%, and no expected
dividend yield.  The Black-Scholes calculation of the fair value of
the warrants also included the assumption that the fair value of
the  underlying shares of common stock was $1.00.  In
October 2008, when the warrants were granted, an active market for the Company’s
common stock did not exist. As such, management determined the fair value of the
shares of common stock underlying the warrants to be $1.00 per share using the
$1.00 conversion price per share of common stock of the Company’s convertible
notes that were offered and sold in July and September 2008 (and converted
October 31, 2008) and the $1.00 per unit sale price of units consisting of one
share of common stock and a warrant to purchase one share of common stock that
were offered and sold in October and December 2008, which management believes
are the best indicators of the fair value of the Company’s common stock on the
measurement dates. The relative value of the warrants of $293,374 and the
beneficial conversion feature of $293,374 was recorded by the Company as a loan
discount of  $586,748, which the Company was to amortize to interest
expense over the original life of the loan.  The Company amortized
note discount of $138,662 through September 30, 2008, and the unamortized
loan discount of that date was $448,085 which has been reflected as a reduction
to the convertible notes payable.




On
October 24, 2008, the notes issued in the July Private Placement and September
Private Placement were converted into 1,310,000 shares of common stock of the
Company’s immediately preceding the closing of the merger between the Company
and BMR (see Note 1).




NOTE
7 – NOTES PAYABLE—RELATED PARTIES, UNSECURED




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




September 30,
                  2008
                  (Unaudited)
              
              
              December
      31,
                  2007Notes
      payable to
      related parties, unsecured, interest at 6% per annum payable at maturity,
      due December 6, 2008
              $
              25,875
              
              
              $
              —Note
      payable to related parties, issued in connection with the acquisition of
      EMS (see Note 5), unsecured, interestat
      the prime rate (5% at September 30 2008) per annum, payable at
      maturity, due March 9, 2009
              
              100,000Total
      notes payable to related parties
              $
              125,875
              
              
              $
              —




20


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
8 – INCOME TAXES




The
Company has federal and state net operating loss carryforwards that can be used
through 2019 to offset taxable income, and accordingly, has not recorded a
provision for income taxes in the current year.




Significant
components of the Company’s deferred income tax liability at September 30,
2008, December 31, 2007 are as follows:




September 30,
                  2008
                  (Unaudited)
              
              
              December
      31,
                  2007Deferred
      tax assets:Net
      operating loss carryforward
              
              $
              2,699,124
              
              
              $
              29,775Total
      deferred tax assets
              
              
              2,699,124
              
              
              
              29,775Valuation
      allowance
              
              
              (2,699,124
              )
              
              
              (29,775
              )Net
      deferred income tax asset
              
              $
              —
              
              
              $
              —




In the
Company’s opinion, it is uncertain whether they will generate sufficient taxable
income in the future to fully utilize the net deferred tax
asset.  Accordingly, a valuation allowance for the deferred tax asset
has been recorded.




Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.” The
Interpretation addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. At the date of adoption, and as of
September 30, 2008 or December 31, 2007, the Company did not have a
liability for unrecognized tax uncertainties.




NOTE
9 – SHAREHOLDER’S EQUITY




The
Company was capitalized on April 21, 2005 when it issued 16,667,000 shares of no
par common stock for $5,000 to its founding shareholder.




On June
4, 2008, the Board of Directors of the Company approved a 16,667:1 stock split
of the Company’s no par common stock.  All share amounts in the
accompanying financial statements are presented as if the stock split occurred
at the beginning of the period presented.




21


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
9 – SHAREHOLDER’S EQUITY (continued)




Shares
Issued for Services




On June
4, 2008, the Board of Directors issued 4,500,090 shares of common stock to
consultants for services rendered.  The shares were valued at
$4,500,090.  Included in the 4,500,090 shares of common stock granted
to consultants on June 4, 2008, are 1,250,025 shares of common stock valued at
$1,250,025, that were granted to the brother of the founding
shareholder.  On August 28, 2008, the Company granted 500,000 shares
of common stock valued at $500,000 to three consultants for services
rendered.  Also on August 28, 2008, the Company issued 332,910 shares
of common stock valued at $332,910 to its CEO and founding
shareholder.




In June
and August 2008, when the shares discussed above were granted, an active market
for the Company’s common stock did not exist. As such, management determined the
value of the shares of common stock issued in June and August 2008 to be $1.00
per share using the $1.00 conversion price per share of common stock of the
Company’s convertible notes that were offered and sold in July and September
2008 (and converted October 31, 2008) and the $1.00 per unit sale price of units
consisting of one share of common stock and a warrant to purchase one share of
common stock that were offered and sold in October and December 2008, which
management believes are the best indicators of the fair value of the Company’s
common stock on the measurement date.




NOTE
10 – STOCK OPTIONS AND WARRANTS




Stock
Options




At
September 30, 2008, options shares outstanding are as follows:




Shares
              
              
              Weighted
                  Average
                  Exercise
                  PriceBalance
      at January 1, 2008
              
              
              —
              
              
              
              —Granted
              
              
              4,562,592
              
              
              $
              2.00Exercised
              
              
              —
              
              
              
              —Cancelled
              
              
              —
              
              
              
              —Balance
      at September 30, 2008 (unaudited)
              
              
              4,562,592
              
              
              $
              2.00




22


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
10 – STOCK OPTIONS AND WARRANTS (continued)




Stock
Options (continued)




On June
4, 2008, the Company granted options to purchase 4,562,592 shares of common
stock at $1.50 to $2.50 per share to an employee and two consultants. The
options vested immediately on the date granted, and expire between June 30,
2010 and June 30, 2012.  The Company determined that the fair
value of the options issued was $590,877 calculated by a Black-Scholes option
pricing model using as assumptions an expected life of one to three years, an
industry volatility of 58.43%, a risk free interest rate of 2.42%, and no
expected dividend yield. The Black-Scholes calculation of the fair value of the
options also included the assumption that the fair value of
the  underlying shares of common stock was $1.00.  In June
2008, when the options discussed above were granted, an active market for the
Company’s common stock did not exist. As such, management determined the fair
value of the shares of common stock underlying the options issued in June 2008
to be $1.00 per share using the $1.00 conversion price per share of common stock
of the Company’s convertible notes that were offered and sold in July and
September 2008 (and converted October 31, 2008) and the $1.00 per unit sale
price of units consisting of one share of common stock and a warrant to purchase
one share of common stock that were offered and sold in October and December
2008, which management believes are the best indicators of the fair value of the
Company’s common stock on the measurement date.




The
following table summarizes information about stock options outstanding and
exercisable as of September 30, 2008:




Options
      Outstanding
                
                
                Options
      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
                
                
                
                1.0
                
                
                
                1,520,864
                
                
                
                $1.50$2.00
                
                
                1,520,864
                
                
                
                $2.00
                
                
                
                2.0
                
                
                
                1,520,864
                
                
                
                $2.00$2.50
                
                
                1,520,864
                
                
                
                $2.50
                
                
                
                3.0
                
                
                
                1,520,864
                
                
                
                $2.504,562,592
                
                
                
                
                
                
                
                
                
                
                
                4,562,592




At
September30,
2008, there was no aggregate intrinsicvalue of the 4,562,592 options
outstanding and exercisable.  At September 30, 2008, all options were
vested and there were no unvested options outstanding.




23


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
10 – STOCK OPTIONS AND WARRANTS (continued)




Warrants




At
September 30, 2008, warrant shares outstanding are as follows:




Shares
                  
                  
                  Weighted
                      Average
      Exercise PriceBalance
      at January 1, 2008
                  
                  
                  —
                  
                  
                  
                  —Granted
                  
                  
                  2,039,180
                  
                  
                  
                  $1.68Exercised
                  
                  
                  —
                  
                  
                  
                  —Cancelled
                  
                  
                  —
                  
                  
                  
                  —Balance
      at September 30, 2008
                  
                  
                  2,039,180
                  
                  
                  
                  $1.68




On June
4, 2008, the Company granted a warrant to purchase 729,180 shares of the
Company’s common stock at an exercise price of $1.50 to $2.50 per share to a
consultant (the “Marlin Warrants”). The Company determined that the fair value
of the warrants issued to this consultant was $94,432 as calculated by a
Black-Scholes option pricing model using as assumptions an expected life of one
to three years, an industry volatility of 58.43%, a risk free interest rate of
2.42%, and no expected dividend yield. The Black-Scholes calculation of the fair
value of the warrants also included the assumption that the fair value of
the  underlying shares of common stock was $1.00.  In June
2008, when the warrants discussed above were granted, an active market for the
Company’s common stock did not exist. As such, management determined the fair
value of the shares of common stock underlying the warrants issued in June 2008
to be $1.00 per share using the $1.00 conversion price per share of common stock
of the Company’s convertible notes that were offered and sold in July and
September 2008 (and converted October 31, 2008) and the $1.00 per unit sale
price of units consisting of one share of common stock and a warrant to purchase
one share of common stock that were offered and sold in October and December
2008, which management believes are the best indicators of the fair value of the
Company’s common stock on the measurement date.




On
September 15, 2008, the Company issued warrants to purchase 1,310,000 shares of
the Company’s common stock at an exercise price of $1.50 per share in connection
with the issuance of convertible promissory notes entered into with investors on
July 11, 2008 and September 15, 2008 (See Note 6).




The
following table summarizes information about stock warrants outstanding and
exercisable as of September 30, 2008:




Warrants
      Outstanding
                
                
                Warrants
      ExercisableRange
      of
                  Exercise
                  Prices
                
                Number
                    of
      Shares
                    Underlying
                    Warrants
                
                
                Weighted
                    Average
                    Exercise
                    Price
                
                
                Weighted
                    Average
                    Remaining
      Contractual
                    Life
      (in years)
                
                
                Number
                    of
      Shares
                
                
                Weighted
                    Average
                    Exercise
      Price$1.50
                
                
                1,553,060
                
                
                
                
                $1.50
                
                
                
                2.8
                
                
                
                1,553,060
                
                
                
                
                $1.50$2.00
                
                
                243,060
                
                
                
                
                $2.00
                
                
                
                2.0
                
                
                
                243,060
                
                
                
                
                $2.00$2.50
                
                
                243,060
                
                
                
                
                $2.50
                
                
                
                3.0
                
                
                
                243,060
                
                
                
                
                $2.502,039,180
                
                
                
                
                
                
                
                
                
                
                
                
                2,039,180




At September 30, 2008, there
was no aggregateintrinsic value of the warrants outstanding and
exercisable.




24


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
11 – COMMITMENTS AND CONTINGENCIES




Contract




On June
25, 2008, the Company entered into an agreement with the City of Los Angeles to
produce and deliver 20 electric yard hostlers, 5 short-haul electric drayage
trucks, and associated equipment including chargers, batteries and controllers
for a total of $5,383,750.  In September 2008, the Company began work
on the first units it intends to produce and expects to deliver all the vehicles
and associated equipment to the City of Los Angeles during 2009.




The
Company agreed to move its research and production facilities to the City of Los
Angeles by December 2009.  The Company also agreed to pay the City of
Los Angeles a royalty fee of $1,000 per electric vehicle it sells to a purchaser
or lessee other than the City of Los Angeles or the AQMD.




Employment
Contracts




On April
30, 2008, the Company signed an employment agreement with its
CEO.  The employment agreement is effective from April 30, 2008 and
provides for, among other items, the CEO to receive compensation of $250,000 per
annum during the first and second year of the agreement, and at least $300,000
per annum thereafter.




On August
1, 2008, the Company signed an employment agreement with its Vice President
Engineering.  The employment agreement is effective from August 1,
2008 and provides for, among other items, the VP Engineering to receive
compensation of $150,000 per annum during the first year of the agreement, and
$175,000 per annum thereafter.




On
September 9, 2008, the Company signed an employment agreement with its Vice
President Research & Development.  The employment agreement is
effective from September 9, 2008 and provides for, among other items, the VP
Research & Development to receive compensation of $150,000 per annum during
the first year of the agreement, and $175,000 per annum thereafter.




Leases




The
Company leases its research and development facilities located in Santa Ana,
California under a lease that expires on May 31, 2009. The lease has a current
monthly payment of $3,206.  On August 1, 2008, the Company entered
into a three year lease of manufacturing facilities located in Harbor City,
California that expires on July 31, 2011. The lease has a base monthly rent of
$10,540.




Rent
expense for the nine months ended September 30, 2008 and 2007 was $65,216
and $14,536, respectively.




25


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
11 – COMMITMENTS AND CONTINGENCIES




Leases
(continued)




The
following is a schedule by years of future minimum rental payments required
under the non-cancelable operating leases described above as of
September 30, 2008:








Years
      ending December 31:2009
                          
                          $
                          96,8332010
                          
                          
                          139,4402011
                          
                          
                          122,8802012
                          
                          
                          71,680Thereafter
                          
                          
                          —






NOTE
12 - SUBSEQUENT EVENTS




On
October 24, 2008, the merger (see Note 1) was completed and Balqon
Corporation, a California corporation (“Balqon California”), merged with and
into BMR and BMR changed its name to Balqon Corporation.




On
October 24, 2008, immediately preceding the closing of the merger with
Balqon Corporation (formerly BMR) (see Note 1), Balqon California raised an
aggregate of $575,000 through the issuance of 575,000 shares of common stock at
$1.00 per share to six accredited investors (the “October Private
Placement”).  In connection with this offering, Balqon California also
issued three-year warrants to purchase an aggregate of 575,000 shares of common
stock at an exercise price of $1.50 per share (the “October
Warrants”).




On
October 24, 2008, immediately preceding the closing of the merger (see
Note 1), Balqon Corporation (formerly BMR) issued warrants (the “BMR
Warrants”) to purchase an aggregate of 184,598 shares of common
stock.  One-third of the BMR Warrants have an exercise price of $1.50
per share and expire on October 24, 2009, one-third of the BMR Warrants
have an exercise price of $2.00 per share and expire on October 24, 2010,
and one-third of the BMR Warrants have an exercise price of $2.50 per share and
expire on October 24, 2011. The Company determined that the fair value of
the BMR Warrants to be $23,906.




Balqon
California, in connection with the July Private Placement, the September Private
Placement and the October Private Placement, entered into certain registration
rights agreements (collectively, the “Balqon Registration Rights
Agreements”).  Under the Balqon Registration Rights Agreements, Balqon
Corporation (formerly BMR) is obligated to register for resale an aggregate of
3,793,348 shares of common stock, of which an aggregate of 1,885,000 shares of
common stock underly the July Warrants, September Warrants and the October
Warrants.  Immediately preceding the consummation of the merger with
Balqon California, Balqon Corporation (formerly BMR) also entered a registration
rights agreement (the “BMR Registration Rights Agreement”) with its stockholders
to register for resale an aggregate of 1,400,000 shares of BMR’s common stock
and with the holders of the BMR Warrants to register for resale and aggregate of
184,598 shares of common stock underlying the BMR Warrants.




26


BALQON
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)




NOTE
12 - SUBSEQUENT EVENTS (continued)




The
Company is obligated under the Balqon Registration Rights Agreements and the BMR
Registration Rights Agreement to file, on or before December 23, 2008, a
registration statement with the Securities and Exchange Commission, registering
for resale all shares of common stock covered by the Balqon Registration Rights
Agreements and BMR Registration Rights Agreements.




On
October 24, 2008, immediately preceding the consummation of the merger with
Balqon California (see Note 1), Balqon Corporation (formerly BMR) adopted
the 2008 Stock Incentive Plan (“2008 Plan”).  Initially, 7,500,000
shares of common stock are authorized for issuance under the 2008
Plan.




On
October 24, 2008, the notes issued in the July and September Private Placements,
including accrued interest thereon, were converted into an aggregate of
1,333,348 shares of common stock of the Company.







27




ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




The
following discussion and analysis should be read in conjunction with our
unaudited condensed financial statements for the three and nine months ended
September 30, 2008 and the related notes and the other financial
information included elsewhere in this report. This report and our financial
statements and notes to financial statements contain forward-looking statements,
which generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic
performance and our current beliefs regarding revenues we might generate and
profits we might earn if we are successful in implementing our business
strategies. Our actual results could differ materially from those expressed in
these forward-looking statements as a result of any number of factors, including
those set forth under the “Risk Factors” section of our Amendment No. 1 to
our Annual Report on Form 10-K for the year ended December 31, 2008
filed with the SEC on May 22, 2009.  The forward-looking
statements and associated risks may include, relate to or be qualified by other
important factors, including, without limitation:




·
            the
      projected growth or contraction in the industries within which we
      operate;




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




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




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




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




Any of
the factors described above, elsewhere in this report or in the “Risk Factors”
section of our Amendment No. 1 to our Annual Report on Form 10-K for
the year ended December 31, 2009 filed with the SEC on May 22, 2009
could cause our financial results, including our net income or loss or growth in
net income or loss to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.




Overview




As of the
date of this filing, we develop, assemble and market heavy-duty electric
vehicles, flux vector inverters, and heavy-duty electric drive
systems.  As of the date of this filing, we sell our heavy-duty
electric vehicles and plan to begin selling our other products in the near
future.  In May 2007, we entered into an agreement with the South
Coast Air Quality Management District, or AQMD, to develop and test a heavy-duty
zero emissions electric drayage tractor.  Under the terms of this
agreement with the AQMD, which agreement is referred to in this prospectus as
the AQMD Development Agreement, the AQMD agreed to pay us up to $527,000 for the
development and testing of the heavy-duty drayage tractor.  The City
of Los Angeles agreed with the AQMD to fund 50% of the total development costs
related to the drayage tractor.  All of our revenues for the nine
months ended September 30, 2008, were associated with the AQMD Development
Agreement.  The revenues and costs associated with the AQMD
Development Agreement are recorded as contract revenues and costs, in accordance
with the AICPA’s Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-type Contracts.”  As such,
the costs associated with the development of our demonstration vehicle are
recorded as “contract costs,” not as research and development
expenses.  Our net revenues decreased by $17,536, or 8%, to $213,362
for the nine months ended September 30, 2008 as compared to $230,898 for
the nine months ended September 30, 2007.  We reported a net loss
of $6,850,568 for the nine months ended September 30, 2008 as compared to a
net loss of $46,350 for the nine months ended September 30,
2007.  The decline in financial performance during the nine months
ended September 30, 2008 is a direct result of two key factors. First, the
ramp up of our business in the latter months of 2007 (our business operations
commenced on May 1, 2007), as a result, the revenues and expenses of the nine
months ended September 30, 2007 reflect only five months of operations.
Second, during the nine months ended September 30, 2008, in addition to
increased expenses for the ramp up of our business, we incurred $429,300 of
legal, accounting, and consulting expenses relating to the reverse merger and
$5,940,713 of fair value of stock based compensation associated with the
issuance of options and common stock during the nine months ended
September 30, 2008.  While our business activities resulted in a
revenue decrease of 8%, we experienced increased cost of revenues of $31,735, or
23%, and increased operating and other expenses of $6,754,947, or 4,871% over
the comparable period of 2007.




28




MergerTransaction




On
October 24, 2008, we completed an Agreement and Plan of Merger, or Merger
Transaction, with Balqon Corporation, a California corporation, or Balqon
California, and changed our name to Balqon Corporation.  Upon
completion of the Merger Transaction, we acquired the business of Balqon
California.  In connection with the Merger Transaction, we issued an
aggregate of 23,908,348 shares of our common stock to the shareholders of Balqon
California which resulted in a change in control of our company.  The
Merger Transaction has been accounted for as a recapitalization of Balqon
California with Balqon California being the accounting acquiror.  As a
result, the historical financial statements of Balqon California are now the
historical financial statements of the legal acquiror, Balqon Corporation
(formerly BMR Solutions, Inc.).




In
connection with the Merger Transaction, we issued an aggregate of 23,908,348
shares of our common stock to the shareholders of Balqon
California.  In addition, the holders of warrants to acquire an
aggregate of 2,614,180 shares of common stock of Balqon California were deemed
to hold warrants to acquire an equal number of shares of our common stock upon
completion of the Merger Transaction.  In connection with the Merger
Transaction, we also issued under our 2008 Plan options to purchase an aggregate
of 4,562,592 shares of our common stock to certain of our directors and
employees who held options to purchase an equal number of shares of Balqon
California’s common stock immediately prior to the completion of the Merger
Transaction.  In connection with the consummation of the Merger
Transaction, we cancelled 6,377,500 shares of our issued and outstanding common
stock held by certain of our stockholders such that concurrent with the closing
of the Merger Transaction we had approximately 1,400,000 shares of common stock
issued and outstanding.




At the
time of the closing of the Merger Transaction, we were engaged in the business
of providing local delivery and transportation of mattresses, furniture and
futons in Southern California.  Our current business is comprised
solely of the business of Balqon California.




Acquisition
of Electric MotorSports, LLC




When we
consummated the Merger Transaction, we acquired substantially all of the assets
of Electric MotorSports, LLC, or EMS, that Balqon California had acquired in
September 2008.  In September 2008, Balqon California entered into an
agreement with EMS and its sole member, Robert Gruenwald, to acquire
substantially all the assets of EMS, including all intellectual property assets
used in the development and manufacture of flux vector inverters.  At
the time of the acquisition, EMS had been engaged in developing, designing and
manufacturing flux vector inverters within the automotive and material handling
equipment industries since 1997.  As a result of this acquisition,
Balqon California acquired proprietary technology and designs that we currently
use in our heavy-duty electric vehicles. Since its inception in 1997, EMS has
sold over 250 inverters for use in applications including industrial conveyor
systems, electric buses, delivery trucks, a monorail system and mining
vehicles.  EMS sold products primarily to OEMs of electric buses,
mining vehicles and specialty automotive vehicles. We believe that the
acquisition of EMS’s technology and knowhow provides us with the ability to
further develop, market and sell flux vector inverters for use in heavy-duty
applications.




29


Critical
Accounting Policies




Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.




We
believe that the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
financial statements:




Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Material estimates relate to the recognition of
contract revenues and estimated costs to complete contracts in process, and
recoverability of reported amounts of long-lived assets.  Actual
results may differ from those estimates.




Revenues




Contract Revenue and Cost
Recognition on Prototype Vehicles.  In accounting for
contracts, we follow the provisions of the AICPA’s Statement of Position
81-1,  “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.”  We recognize revenues using the
percentage-of-completion method of accounting by relating contract costs
incurred to date to the total estimated costs at completion.  This
method is used because management considers costs to be the best available
measure of progress on its contracts.  Contract losses are provided
for in their entirety in the period that they become known, without regard to
the percentage-of-completion.  We also recognize as revenues costs
associated with claims and unapproved change orders to the extent it is probable
that such claims and change orders will result in additional contract revenue,
and the amount of such additional revenue can be reliably
estimated.




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




Sales of Production Units
and Parts.  We recognize revenue from the sale of completed
production units and parts when there is persuasive evidence that an arrangement
exists, delivery of the product has occurred and title has passed, the selling
price is both fixed and determinable, and collectibility is reasonably assured,
all of which generally occurs upon shipment of our product or delivery of the
product to the destination specified by the customer.




30




We
determine whether delivery has occurred based on when title transfers and the
risks and rewards of ownership have transferred to the buyer, which usually
occurs when we place the products with the buyer’s carrier.  We
regularly reviews our customers’ financial positions to ensure that
collectibility is reasonably assured.  Except for warranties, we have
no post-sales obligations.




Product
Warranties




We
provide limited warranties for parts and labor at no cost to our customers
within a specified time period after the sale.  We estimate the actual
historical warranty claims coupled with an analysis of unfulfilled claims at the
balance sheet date. As of December 31, 2007 and September 30, 2008, we
had no warranty reserve nor did we incur warranty expenses during the nine month
period ended September 30, 2008 or 2007.




Stock-Based
Compensation




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




We
adopted SFAS No. 123(R), “Accounting for Stock-Based Compensation” effective
January 1, 2006, and are using the modified prospective method in which
compensation cost is recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123(R) for all share-based payments granted after
the effective date and (b) based on the requirements of SFAS No. 123(R) for all
awards granted to employees prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date. We account for stock option and warrant
grants issued and vesting to non-employees in accordance with Emerging Issues
Task Force, or EITF, Issue No. 96-18, “Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services,” and EITF Issue No. 00-18, “Accounting Recognition
for Certain Transactions involving Equity Instruments Granted to Other Than
Employees” whereby the fair value of the stock compensation is based on the
measurement date as determined at either (i) the date at which a performance
commitment is reached, or (ii) at the date at which the necessary performance to
earn the equity instrument is complete.




We
estimate the fair value of stock options and warrants pursuant to SFAS No. 123R
using the Black-Scholes option-pricing model, which was developed for use in
estimating the fair value of options that have no vesting restrictions and are
fully transferable. This model requires the input of subjective assumptions,
including the expected price volatility of the underlying stock and the expected
life of stock options. Projected data related to the expected volatility of
stock options is based on the average volatility of the trading prices of
comparable companies and the expected life of stock options is based upon the
average term and vesting schedules of the options. Changes in these subjective
assumptions can materially affect the fair value of the estimate, and therefore
the existing valuation models do not provide a precise measure of the fair value
of our employee stock options.




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




31




Goodwill
and Intangible Assets




As
required by SFAS No. 142, management performs impairment tests of goodwill
and indefinite-lived intangible assets whenever an event occurs or circumstances
change that indicate impairment has more likely than not occurred. Also, as
required by SFAS No. 142, management performs impairment testing of
goodwill and indefinite-lived intangible assets at least annually.




In
accordance with SFAS No. 142, management tests goodwill for impairment at
the reporting unit level.  We only have one reporting
unit.  At the time of goodwill impairment testing, management
determines fair value through the use of a discounted cash flow valuation model
incorporating discount rates commensurate with the risks involved with its
reporting unit. If the calculated fair value is less than the current carrying
value, impairment may exist. The use of a discounted cash flow valuation model
to determine estimated fair value is common practice in impairment testing in
the absence of available domestic and international transactional market
evidence to determine the fair value. The key assumptions used in the discounted
cash flow valuation model for impairment testing include discount rates, growth
rates, cash flow projections and terminal value rates. Discount rates are set by
using the Weighted Average Cost of Capital, or WACC, methodology. The WACC
methodology considers market and industry data as well as Balqon-specific risk
factors for each reporting unit in determining the appropriate discount rates to
be used. The discount rate utilized is indicative of the return an investor
would expect to receive for investing in such a business. Operational
management, considering industry and Balqon-specific historical and projected
data, develops growth rates and cash flow projections for
Balqon.  Terminal value rate determination follows common methodology
of capturing the present value of perpetual cash flow estimates beyond the last
projected period assuming a constant WACC and low long-term growth rates. As an
indicator that each reporting unit has been valued appropriately through the use
of the discounted cash flow valuation model, the aggregate fair value of all
reporting units is reconciled to our total market capitalization. The discounted
cash flow valuation methodology and calculations will be used in 2009 impairment
testing.




Impairment
of Long-Lived Assets




SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
established guidelines regarding when impairment losses on long-lived assets,
which include property and equipment, should be recognized and how impairment
losses should be measured.  This statement also provides a single
accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. We periodically review, at least annually, such assets for
possible impairment and expected losses. If any losses are determined to exist
they are recorded in the period when such impairment is determined. Based upon
management’s assessment, there are no indicators of impairment of our long lived
assets at September 30, 2008 or December 31, 2007.




Income
Taxes




We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets are recognized for the future tax consequences of transactions that have
been recognized in our financial statements or tax returns. A valuation
allowance is provided when it is more likely than not that some portion or the
entire deferred tax asset will not be realized.




32




Accounting
for Warrants and Derivatives




Freestanding
financial instruments, such as detachable warrants, must be evaluated under the
authoritative accounting literature to determine whether they should be
classified as assets or liabilities (derivative accounting), temporary equity,
or permanent equity. Management initially evaluates whether the instruments are
covered by SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” If the instrument is not
governed by SFAS No. 150, then management determines whether it meets the
definition of a derivative under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  To determine whether a specific
warrant agreement would follow derivative accounting under SFAS No. 133,
management is required to first evaluate whether the warrant would meet the
definition of equity under the provisions of EITF Issue No. 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”  Financial instruments such as warrants that are
classified as permanent or temporary equity are excluded from the definition of
a derivative for purposes of SFAS No. 133. Financial instruments, including
warrants, that are classified as assets or liabilities are considered
derivatives under SFAS No. 133, and are marked to market at each reporting date,
with the change in fair value recorded in the income statement. The fair values
of both the warrants and conversion benefits are calculated using a
Black-Scholes Model, taking into consideration factors such as the underlying
price of our common stock, the exercise price for warrants or the conversion
price for the conversion benefit, the volatility of our stock (or the stock
volatility of peer companies with an historical active trading market), and the
risk-free interest rates available for comparable time periods.




Under
EITF Issue No. 00-19, contracts that require physical settlement or net-share
settlement and contracts that give the issuer the choice of settlement (in cash
or shares) are classified as equity. Contracts that require net-cash settlement
or that give the counterparty a choice which includes net-cash settlement are
classified as assets or liabilities, not equity. If a transaction is outside the
control of the issuer and there is the possibility that the issuer could
net-cash settle, then for purposes EITF Issue No. 00-19 it is assumed that the
issuer will have to net-cash settle, which may preclude accounting for a
contract as equity except in certain circumstances where the existing common
stockholders would also receive cash. Management’s judgment is required in
evaluating the terms of freestanding instruments, such as warrants, and the
application of authoritative accounting literature.  The outstanding
warrants to purchase shares of our common stock do not contain provisions for
cash settlement.




Results of
Operations




We have
based our financial statements on the assumption of our operations continuing as
a going concern.  As of September 30, 2008, we had a working
capital deficit of approximately $794,730, had an accumulated deficit of
$6,938,142 and reported a net loss for the nine months ended September 30,
2008 of $6,850,568, which raise substantial doubt about our ability to continue
as a going concern.  Plans for correcting these deficiencies include
the future sales of our products and technologies and the raising of capital,
which are expected to help provide us with the liquidity necessary to meet
operating expenses.  During July, September and October 2008, Balqon
California raised approximately $1,885,000 in connection with private placements
of convertible promissory notes, common stock and warrants.  Over the
longer-term, we plan to achieve profitability through our operations from the
sale of our high capacity electric vehicles.  Our financial statements
do not include any adjustments relating to the recoverability and classification
of the recorded asset amounts or the amounts and classification of liabilities
that might be necessary should we be unable to continue our
existence.




33




The
tables presented below, which compare our results of operations from one period
to another, present the results for each period, the change in those results
from one period to another in both dollars and percentage change, and the
results for each period as a percentage of net revenues. The columns present the
following:




·
            The
      first two data columns in each table show the absolute results for each
      period presented.




·
            The
      columns entitled “Dollar Variance” and “Percentage Variance” show the
      change in results, both in dollars and percentages. These two columns show
      favorable changes as a positive and unfavorable changes as negative. For
      example, when our net revenues increase from one period to the next, that
      change is shown as a positive number in both columns. Conversely, when
      expenses increase from one period to the next, that change is shown as a
      negative in both columns.




·
            The
      last two columns in each table show the results for each period as a
      percentage of net revenues.




Nine
Months Ended September 30, 2008 Compared to the Nine Months Ended
September 30, 2007





Nine
      Months Ended
                                    September 30,
                                
                                
                                DollarVariance
                                
                                
                                PercentageVariance
                                
                                
                                Results
      as a Percentage
                                    of
      Net Revenues for the
                                    Nine
      Months Ended
                                    September 30,2008
                                    (Unaudited)
                                
                                
                                2007
                                    (Unaudited)
                                
                                
                                Favorable
                                    (Unfavorable)
                                
                                
                                Favorable
                                    (Unfavorable)
                                
                                
                                2008
                                
                                
                                2007Net
      revenues
                                
                                $
                                213,362
                                
                                
                                $
                                230,898
                                
                                
                                $
                                (17,536
                                )
                                
                                
                                (8
                                )%
                                
                                
                                100
                                %
                                
                                
                                100
                                %Cost
      of revenues
                                
                                
                                170,292
                                
                                
                                
                                138,557
                                
                                
                                
                                (31,735
                                )
                                
                                
                                (23
                                )%
                                
                                
                                80
                                %
                                
                                
                                60
                                %Gross
      profit
                                
                                
                                43,070
                                
                                
                                
                                92,341
                                
                                
                                
                                (49,271
                                )
                                
                                
                                (53
                                )%
                                
                                
                                20
                                %
                                
                                
                                40
                                %Operating
      and interest expenses
                                
                                
                                6,893,638
                                
                                
                                
                                138,691
                                
                                
                                
                                (6,754,947
                                )
                                
                                
                                (4,871
                                )%
                                
                                
                                3,231
                                %
                                
                                
                                60
                                %Net
      loss
                                
                                $
                                (6,850,568
                                )
                                
                                $
                                (46,350
                                )
                                
                                $
                                (6,804,218
                                )
                                
                                
                                (14,680
                                )%
                                
                                
                                (3,211
                                )%
                                
                                
                                (20
                                )%




Net Revenues.  The
$17,536 decrease in net revenues is comprised of decreased contract revenues of
$92,536 offset by increased net revenues of $75,000 relating to product sales.
The product sale occurred during April 2008 in connection with the sale of a
battery charger system to the City of Los Angeles. Contract revenues decreased
due to progress work on our $527,000 AQMD Development
Agreement.  During the nine months ended September 30, 2007, 44%
of the AQMD Development Agreement was completed while during the nine months
ended September 30, 2008, 26% of the AQMD Development Agreement was
completed. This difference in progress work on the contact caused the $92,536
reduction of contract revenues between the respective nine month
periods.




Gross Profit.  The
$49,271 decrease in gross profit was primarily due to the decrease in contract
revenues between the periods and an 8% profit margin on the April 2008 sale of a
battery charger system.




Operating and Interest
Expenses.  The $6,754,947 increase inoperating and interest
expenses is due largely to the $429,300 of legal, accounting, audit and
consulting fees incurred in connection with the reverse merger transaction and
$5,940,713 of fair value of stock based compensation associated with the
issuance of options and shares of our common stock during the nine months ended
September 30, 2008. The additional $384,934 of increased operating and
interest expenses are attributable to the ramp-up of our business during the
nine months ended September 30, 2008 and the fact that the results for the
nine months ended September 30, 2007 reflect only five months of actual
business operations.




34




Three
Months Ended September 30, 2008 Compared to the Three Months Ended
September 30, 2007





Three
      Months Ended
                                  September 30,
                              
                              
                              DollarVariance
                              
                              
                              PercentageVariance
                              
                              
                              Results
      as a Percentage
                                  of
      Net Revenues for the
                                  Three
      Months Ended
                                  September 30,2008
                                  (Unaudited)
                              
                              
                              2007
                                  (Unaudited)
                              
                              
                              Favorable
                                  (Unfavorable)
                              
                              
                              Favorable
                                  (Unfavorable)
                              
                              
                              2008
                              
                              
                              2007Net
      revenues
                              
                              $
                              10,787
                              
                              
                              $
                              188,752
                              
                              
                              $
                              (177,965
                              )
                              
                              
                              (94
                              )%
                              
                              
                              100
                              %
                              
                              
                              100
                              %Cost
      of revenues
                              
                              
                              17,361
                              
                              
                              
                              107,695
                              
                              
                              
                              90,334
                              
                              
                              
                              84
                              %
                              
                              
                              161
                              %
                              
                              
                              57
                              %Gross
      profit (loss)
                              
                              
                              (6,574
                              )
                              
                              
                              81,057
                              
                              
                              
                              (87,631
                              )
                              
                              
                              (108
                              )%
                              
                              
                              (61
                              )%
                              
                              
                              43
                              %Operating
      and interest expenses
                              
                              
                              1,526,613
                              
                              
                              
                              99,724
                              
                              
                              
                              (1,426,889
                              )
                              
                              
                              (1,430
                              )%
                              
                              
                              14,152
                              %
                              
                              
                              53
                              %Net
      loss
                              
                              $
                              (1,533,187
                              )
                              
                              $
                              (18,667
                              )
                              
                              $
                              (1,514,520
                              )
                              
                              
                              (8,113
                              )%
                              
                              
                              (14,213
                              )%
                              
                              
                              (10
                              )%




Net Revenues.  The
$177,965 decrease in net revenues is comprised of decreased contract revenues
due to increased progress work on our $527,000 AQMD Development
Agreement.  During the three months ended September 30, 2007, 36%
of the AQMD contract was completed resulting in $188,752 of contract revenues
while during the three months ended September 30, 2008, 2% of the AQMD
Development Agreement was completed resulting in contract revenues of
$10,787.




Gross Profit.  The
$87,631 decrease in gross profit was primarily due to the decrease in revenues
between the periods.




Operating and Interest
Expenses.  The $1,426,889 increase inoperating and interest
expenses is due largely to the $429,300 of legal, accounting, audit and
consulting fees incurred in connection with the reverse merger transaction and
$820,790 of fair value of stock based compensation associated with the issuance
of shares of our common stock during the three months ended September 30,
2008.




Liquidity
and Capital Resources




During
the year ended December 31, 2007 and the nine months ended
September 30, 2008, we funded our operations primarily with cash flow from
financing activities, principally secured loans from convertible debentures,
unsecured loans from shareholders and other parties. As of September 30,
2008, we had a working capital deficiency of $794,730 as compared to a working
capital deficiency of $122,862 at December 31, 2007.  At
September 30, 2008 and December 31, 2007 we had an accumulated deficit
of $ 6,938,142 and $87,574, respectively, and cash and cash equivalents of
$543,192 and $34, respectively.




Our
available capital resources at September 30, 2008 consisted primarily of
approximately $543,192 in cash and cash equivalents.  We expect that
our future available capital resources will consist primarily of cash on hand,
cash generated from our business, if any, and future debt and/or equity
financings, if any.




Cash used
in operating activities for the nine months ended September 30, 2008 was
$464,847 as compared to $59,945 of cash provided by operating activities for the
nine months ended September 30, 2007, and includes a net loss of
$6,850,568, depreciation and amortization of $6,370, stock granted for services
of $5,333,000, options and warrants granted for services for $685,309, and
changes in operating assets and liabilities of $222,379.  Material
changes in asset and liabilities at September 30, 2008 as compared to
December 31, 2007 that affected these results include:




·
            a
      decrease in accounts receivable of
$35,000;




·
            an  increase
      in inventory of $106,159;




35


·
            an
      increase in costs in excess of billings on uncompleted contracts of
      $7,098;




·
            an
      increase in prepaid expenses of
$1,534;




·
            an
      increase in deposits of $14,400;




·
            a
      netincreasein accounts
      payable and accrued expenses of $387,834;
and




·
            a
      decrease in billings in excess of costs and estimated earnings on
      uncompleted contracts of $71,264.




Cash used
in investing activities totaled $418,325 for the nine months ended
September 30, 2008 as compared to $22,316 of cash used in investing
activities for the nine months ended September 30, 2007.




Cash
provided by financing activities totaled $1,426,331 for the nine months ended
September 30, 2008 as compared to $18,364 for the nine months ended
September 30, 2007.




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




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




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




We are
obligated under registration rights agreements related to the private placement
offerings described above to file, on or before December 23, 2008, a
registration statement with the SEC, registering for resale shares of common
stock and the shares of common stock underlying the warrants, issued in
connection with the above private placement transactions.




Our
continued operations are dependent on securing additional sources of liquidity
through debt and/or equity financing.  As indicated above, our
financial statements as of September 30, 2008 and for the year ended
December 31, 2007 have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. As discussed in this report and in notes to our
condensed financial statements included in this report, we have suffered
recurring losses from operations and at December 31, 2007 and
September 30, 2008 we had substantial net capital and working capital
deficiencies. These factors, among others, raised substantial doubt about our
ability to continue as a going concern and, with respect to our financial
position on December 31, 2007, led our independent registered public
accounting firm to include in their report an explanatory paragraph related to
our ability to continue as a going concern. The condensed financial statements
included in this document do not include any adjustments that might result from
the outcome of this uncertainty.




36




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




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




Backlog




As of
November 14, 2008, we had a backlog of approximately $5.7
million.  Our backlog includes a contract to produce and deliver 21
electric yard tractors, 5 short-haul electric drayage tractors, and associated
equipment including batteries and controllers.




Effects
of Inflation




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




Impacts
of New Accounting Pronouncements




In March
2008, the Financial Accounting Standards Board, or FASB, issued SFAS No.
161,“Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133,” to improve financial reporting of derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance and cash flows. SFAS No. 161 applies to fiscal years and interim
periods beginning after November 15, 2008.  We do not believe
that the adoption of SFAS No. 161 will have a material effect on our results of
operations, financial position, or cash flows.




In
December 2007, FASB issued SFAS Statement No. 141 (R), “Business Combinations,”
which establishes accounting principles and disclosure requirements for all
transactions in which a company obtains control over another
business.  SFAS  No. 141 (R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Earlier adoption is prohibited.  We do not believe that the
adoption of SFAS No. 141(R) will have a material effect on our results of
operations, financial position, or cash flows.




37




We do not
believe that the adoption of the above recent pronouncements will have a
material effect on our results of operations, financial position or cash
flow.  Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA and the SEC did not or are
not believed by management to have a material impact on our present or future
financial statements.




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
Applicable.




ITEM
      4.
            CONTROLS
      AND PROCEDURES




Not
applicable.




ITEM
      4T.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
our principal accounting officer, of the effectiveness of the design and
operation of our disclosure controls and procedures.  The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange
Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and
forms.  Disclosure controls and procedures also include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.  Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded as of September 30, 2008
that our disclosure controls and procedures were not effective at the reasonable
assurance level due to the material weaknesses described below.




In light
of the material weaknesses described below, we performed additional analysis and
other post-closing procedures to ensure that our financial statements were
prepared in accordance with generally accepted accounting principles.
Accordingly, we believe that the financial statements included in this report
fairly present, in all material respects, our financial condition, results of
operations, changes in shareholder’s equity and cash flows for the periods
presented.




Management’s
Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that:




(i)
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;




38


(ii)
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and




(iii)
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on our financial
statements.




All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and reporting.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




A
material weakness is a control deficiency (within the meaning of Public Company
Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of
control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of September
30, 2008 based on the framework in Internal Control–Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Based on the results of management’s assessment and evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that as of
September 30, 2008 our internal control over financial reporting was not
effective due to the material weaknesses described below.




Material
Weaknesses




1.           In
conjunction with preparing our registration statement on Form S-1, and after
receiving comments from the Staff of the SEC relating to our registration
statement on Form S-1, management reviewed, in the first quarter of 2009, our
recording of the value of stock-based compensation awarded in June and August
2008, and the recording of a note discount related to a beneficial conversion
feature and associated warrants issued with certain convertible notes during
2008. As a result of this review, management concluded that our controls over
the key valuation assumptions of our stock-based compensation and note discount
related to a beneficial conversion feature and associated warrants issued with
convertible notes were not in accordance with generally accepted accounting
principles and that our expenses for the year ended December 31, 2008 and for
each of the quarterly periods ended June 30, 2008 and September 30, 2008, had
been misstated.  Based upon this conclusion, our Audit Committee and
senior management decided, in the second quarter of 2009, to restate our
financial statements as of and for the year ended December 31, 2008 and for each
of the quarterly periods ended June 30, 2008 and September 30,
2008.




Management
evaluated the impact of this restatement on our assessment of our disclosure
controls and procedures and concluded that the control deficiency that resulted
in the incorrect recording of stock-based compensation and note discount related
to a beneficial conversion feature and associated warrants issued with
convertible notes represented a material weakness.




2.           As
a result of our restatement of prior periods’ financial results, as discussed
above, we were unable to meet our requirements to timely file our Form 10-Q for
the quarterly period ended March 31, 2009. Management evaluated the impact
of our inability to timely file periodic reports with the SEC on our assessment
of disclosure controls and procedures and concluded that the control deficiency
that resulted in the inability to timely make these filings represented a
material weakness.




39




Remediation
of Material Weaknesses




To
remediate the material weaknesses identified above, we have done the following
subsequent to December 31, 2008, in the periods specified below, which
correspond to the two material weaknesses identified above.




1.           We
revised our methodology for recording the value of stock-based compensation and
the recording of note discount related to a beneficial conversion feature and
associated warrants issued with convertible notes. We previously valued the
stock, options, and warrants associated with compensation and convertible notes
based on an alternative valuation methodology that was determined by management
with assistance from an independent third party valuation specialist during a
time when the company was still a private enterprise. Upon further examination
of our valuation methodology and largely in consideration of the $1.00
conversion price per share of common stock of our convertible notes that were
offered and sold in July and September 2008 (and converted by October 31, 2008)
and the $1.00 per unit sale price of units consisting of one share of common
stock and a warrant to purchase one share of common stock that were offered and
sold in October and December 2008, we concluded that the $1.00 valuation per
share was a better indicator of value than the $0.015 per share valuation that
was determined under the alternative valuation methodology previously used by
us.  We have determined the effect of the correction on our previously
issued financial statements and have restated our financial statements for the
year ended December 31, 2008 and quarterly periods ended June 30, 2008 and
September 30, 2008.  The revision of our valuation methodology as it
relates to stock-based compensation and the recording of note discount related
to a beneficial conversion feature and associated warrants issued with
convertible notes was completed in the second quarter of 2009. We began using
this new methodology for the quarter ended June 30, 2008 and all periods
included in this report now reflect this change.  In addition, this
methodology applies to all periods subsequent to December 31, 2008.




Management
believes that the remediation described in item 1 immediately above has
remediated the corresponding material weakness also described
above.




2.           In
connection with making the changes discussed above to our disclosure controls
and procedures, in addition to working with our independent auditors, in the
second quarter of 2009 we created a new position – Corporate Compliance Director
– to assist us in making timely required filings with the Securities and
Exchange Commission and ensuring the accuracy of our financial reporting and the
effectiveness of our disclosure controls and procedures. The individual that we
have assigned to the position of Corporate Compliance Director holds both a
bachelors and masters degree, is a certified public accountant, and is
experienced in compliance with generally accepted accounting principles, SEC
reporting, and taxation matters. In the second quarter of 2009 we further
improved our ability to timely make required filings by allocating part of the
time of our administrative assistant who possesses relevant administrative and
accounting experience to assist in promptly compiling information needed to meet
our disclosure controls and procedureobligations. Also in the
second quarter of 2009 we established a Disclosure Committee comprised of the
Chief Executive Officer, the Chief Financial Officer and the Corporate
Compliance Director.  It is anticipated that the Disclosure Committee
will meet monthly and more frequently as reporting deadlines approach, to ensure
that we comply timely with our disclosure obligations under the Securities
Exchange Act of 1934, as amended.




Management
expects that the remediation described in item 2 immediately above will
remediate the corresponding material weakness also describe above by December
31, 2009. Management is unable, however, to estimate our capital or other
expenditures associated with the allocation of time of certain of our personnel
to assist us in generating reports and schedules necessary to timely file our
periodic reports or our additional capital or other expenditures related to
higher fees paid to our independent auditors in connection with their review of
this remediation.




40




Inherent
Limitations on the Effectiveness of Controls




Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
systems are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in a
cost-effective control system, no evaluation of internal control over financial
reporting can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any,
have been or will be detected.




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




Changes
in Internal Control over Financial Reporting




There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.




PART
II – OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




We are
not party to any legal proceedings.




ITEM
      1A.
            RISK
      FACTORS




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed under “Risk Factors” in our Amendment No. 1
to our Annual Report on Form 10-K for the year ended December 31, 2008
filed with the SEC on May 22, 2009, which could materially affect our
business, financial condition and results of operations.  The risks
described in our Amendment No. 1 to our Annual Report on Form 10-K for
the year ended December 31, 2008 filed with the SEC on May 22, 2009
are not the only risks we face. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and results of
operations.




41




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




Reference
is made to the disclosures in Item 3.02 of our Amendment No. 2 to our
Current Report on Form 8-K for October 24, 2008 filed with the SEC on
June 17, 2009.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




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




None.




ITEM
      5.
            OTHER
      INFORMATION




Our
Current Report on Form 8-K for October 24, 2008 filed with the SEC on
October 30, 2008, as amended on November 5, 2008, is hereby amended by
deleting the risk factor titled “Shares of our common stock eligible,
or to become eligible, for public sale could adversely affect our stock price
and make it difficult for us to raise additional capital through sales of equity
securities” on page 30 of the report in its entirety and replacing it
with the following:




“Shares of our
common stock eligible, or to become eligible, for public sale could adversely
affect our stock price and make it difficult for us to raise additional capital
through sales of equity securities.




We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time.  As of October 24, 2008, we
had outstanding 25,308,348 shares of common stock, of which 24,898,348 shares of
common stock were restricted under the Securities Act.  As of
October 24, 2008, we also had outstanding options and warrants that were
exercisable for approximately 7,361,370 shares of common stock.  Sales
of shares of our common stock in the public market, or the perception that sales
could occur, could adversely affect the market price of our common stock. Any
adverse effect on the market price of our common stock could make it difficult
for us to raise additional capital through sales of equity securities at a time
and at a price that we deem appropriate.”




ITEM
      6.
            EXHIBITS




Exhibit


Number
            Description





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





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




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


___________________


(*)                 Filed
herewith.





42




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




BALQON
      CORPORATIONDated:
      June 17, 2009
              By:
              /s/ BALWINDER
      SAMRABalwinder
      Samra, Chief Executive Officer
                (principal executive officer)




43




EXHIBITS
FILED WITH THIS REPORT





Exhibit


Number
            Description





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





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





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






44