UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
  (Mark
One)
  |X|
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
      the quarterly period ended June 30,
      2009
  |   |
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from _____ to ________
  Commission
File Number: 000-52337
  BALQON
CORPORATION
 (Exact
name of registrant as specified in its charter)
  Nevada
                  (State
      or other jurisdiction
                  of
      incorporation or organization)
                33-0989901
                  (I.R.S.
      Employer
                  Identification
      No.)
  1420 240th Street,
Harbor City, California
 (Address
of principal executive offices)
  90710
 (Zip
Code)
  (310)
326-3056
 (Registrant’s
telephone number, including area code)
  Not
Applicable
 (Former
name, former address and former fiscal year, if changed since last
report)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes S No £
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter periods that the registrant was required to
submit and post such files).  Yes £ No £
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer   ̈
                Accelerated
      filer   ̈Non-accelerated
      filer   ̈ (Do not check if
      a smaller reporting company)
                Smaller
      reporting company  x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £ No S
  As of
August 12, 2009, there were 25,518,348 shares of the issuer’s common stock
issued and outstanding.
  
 
 CAUTIONARY
STATEMENT
  All statements included or incorporated
by reference in this Quarterly Report on Form 10-Q, other than statements or
characterizations of historical fact, are “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Examples of forward-looking statements include, but are not limited to,
statements concerning projected net sales, costs and expenses and gross margins;
our accounting estimates, assumptions and judgments; the demand for our
products; the competitive nature of and anticipated growth in our industry; and
our prospective needs for additional capital. These forward-looking statements
are based on our current expectations, estimates, approximations and projections
about our industry and business, management’s beliefs, and certain assumptions
made by us, all of which are subject to change. Forward-looking statements can
often be identified by such words as “anticipates,” “expects,” “intends,”
“plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,”
“would,” “could,” “potential,” “continue,” “ongoing,” similar expressions and
variations or negatives of these words. These statements are not guarantees of
future performance and are subject to risks, uncertainties and assumptions that
are difficult to predict. Therefore, our actual results could differ materially
and adversely from those expressed in any forward-looking statements as a result
of various factors, some of which are set forth in the “Risk Factors” section
contained in this report and contained in our Amendment No. 1 to Annual
Report on Form 10-K for the year ended December 31, 2008 filed with the
Securities and Exchange Commission, or SEC, on May 22, 2009, which could cause
our financial results, including our net income or loss or growth in net income
or loss to differ materially from prior results, which in turn could, among
other things, cause the price of our common stock to fluctuate substantially.
These forward-looking statements speak only as of the date of this report. We
undertake no obligation to revise or update publicly any forward-looking
statement for any reason, except as otherwise required by
law.
  
   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
                                    18Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    29Item
      4.
                                    Controls
      and Procedures
                                    29Item
      4T.
                                    Controls
      and Procedures
                                    29PART
      IOTHER
      INFORMATIONItem
      1.
                                    Legal
      Proceedings
                                    31Item
      1A.
                                    Risk
      Factors
                                    31Item
      2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                    32Item
      3.
                                    Defaults
      Upon Senior Securities
                                    33Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    33Item
      5.
                                    Other
      Information
                                    33Item
      6.
                                    Exhibits
                                    33Exhibits
      Filed with this Report
  ITEM
      1.
              FINANCIAL
      STATEMENTS
  BALQON
CORPORATION
 CONDENSED
BALANCE SHEETS
   June
      30,
                    2009
                    (Unaudited)
                
                
                December
      31,
                    2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                897,035
                
                
                $
                355,615Accounts
      receivable
                
                
                1,859,475
                
                
                
                —Inventories
                
                
                835,744
                
                
                
                1,159,601Prepaid
      expenses
                
                
                67,300
                
                
                
                43,020Total
      current assets
                
                
                3,659,554
                
                
                
                1,558,236Property
      and equipment, net
                
                
                88,464
                
                
                
                89,393Other
      assets:Deposits
                
                
                18,273
                
                
                
                33,641Trade
      secrets, net of $46,740 and $15,580 of
                  accumulated
      amortization, respectively
                
                
                140,225
                
                
                
                171,385Goodwill
                
                
                166,500
                
                
                
                166,500Total
      assets
                
                $
                4,073,016
                
                
                $
                2,019,155LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                
                $
                1,690,265
                
                
                $
                1,225,807Customer
      deposit
                
                
                1,159,601
                
                
                
                —Loan
      payable, Bridge Bank
                
                
                770,500
                
                
                
                —Notes
      payable to related parties
                
                
                50,000
                
                
                
                100,875Advances
      from shareholder
                
                
                14,590
                
                
                
                34,877Billings
      in excess of costs and estimated earnings
                  on
      uncompleted contracts
                
                
                61,589
                
                
                
                2,604Total
      current liabilities
                
                
                3,746,545
                
                
                
                1,364,163Convertible
      notes payable, net of $968,000 discount
                
                
                32,000
                
                
                
                —Total
      liabilities
                
                
                3,778,545
                
                
                
                1,364,163SHAREHOLDERS’
      EQUITYCommon
      stock, $0.001 par value, 100,000,000 shares authorized,
                  25,518,348
      shares issued and outstanding
                
                
                25,518
                
                
                
                25,518Additional
      paid in capital
                
                
                9,650,329
                
                
                
                8,650,329Accumulated
      deficit
                
                
                (9,381,376
                )
                
                
                (8,020,855
                )Total
      shareholders’ equity
                
                
                294,471
                
                
                
                654,992Total
      liabilities and shareholders’ equity
                
                $
                4,073,016
                
                
                $
                2,019,155
   The accompanying notes are
an integral part of these condensed financial statements.
  1
  BALQON
CORPORATION
 CONDENSED
STATEMENTS OF OPERATIONS
 FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (Unaudited)
 
 
 Three
      Months Ended
                    June
      30,
                
                
                Six
      Months Ended
                    June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008REVENUES
                
                $
                1,499,150
                
                
                $
                142,575
                
                
                $
                2,275,800
                
                
                $
                202,575COST
      OF REVENUES
                
                
                1,446,069
                
                
                
                68,975
                
                
                
                2,193,689
                
                
                
                152,931GROSS
      PROFIT
                
                
                53,081
                
                
                
                73,600
                
                
                
                82,111
                
                
                
                49,644OPERATING
      EXPENSES:General
      and administrative
                
                
                690,825
                
                
                
                5,331,065
                
                
                
                1,225,234
                
                
                
                5,363,349Research
      and development
                
                
                37,019
                
                
                
                —
                
                
                
                97,964
                
                
                
                —Depreciation
      and amortization
                
                
                23,638
                
                
                
                3,677
                
                
                
                46,876
                
                
                
                3,677Total
      operating expenses
                
                
                751,482
                
                
                
                5,334,742
                
                
                
                1,370,074
                
                
                
                5,367,026Loss
      from operations
                
                
                (698,401
                )
                
                
                (5,261,142
                )
                
                
                (1,287,963
                )
                
                
                (5,317,382
                )Interest
      expense
                
                
                (59,593
                )
                
                
                —
                
                
                
                (72,558
                )
                
                
                —NET
      LOSS
                
                $
                (757,994
                )
                
                $
                (5,261,142
                )
                
                $
                (1,360,521
                )
                
                $
                (5,317,382
                )Net
      loss per share-basic and diluted
                
                $
                (0.03
                )
                
                $
                (0.32
                )
                
                $
                (0.05
                )
                
                $
                (0.32
                )Weighted
      average shares outstanding, basic and diluted
                
                
                25,518,348
                
                
                
                16,667,000
                
                
                
                25,518,348
                
                
                
                16,667,000
   The accompanying notes are
an integral part of these condensed financial statements.
  2
  BALQON
CORPORATION
 CONDENSED
STATEMENT OF SHAREHOLDERS’ EQUITY
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 
 Common
      Stock
                  
                  
                  Additional
Paid
                  
                  
                  AccumulatedNumber
                  
                  
                  Amount
                  
                  
                  in
      Capital
                  
                  
                  Deficit
                  
                  
                  TotalBalance,
      December 31, 2008
                  
                  
                  25,518,348
                  
                  
                  $
                  25,518
                  
                  
                  $
                  8,650,329
                  
                  
                  $
                  (8,020,855
                  )
                  
                  $
                  654,992Fair
      value of beneficialconversion
      feature
                    andwarrants
      issued with convertible notes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,000,000
                  
                  
                  
                  —
                  
                  
                  
                  1,000,000Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,360,521
                  )
                  
                  
                  (1,360,521
                  )Balance,
      June 30, 2009 (unaudited)
                  
                  
                  25,518,348
                  
                  
                  $
                  25,518
                  
                  
                  $
                  9,650,329
                  
                  
                  $
                  (9,381,376
                  )
                  
                  $
                  294,471
 The accompanying notes are
an integral part of these condensed financial statements.
 3
  BALQON
CORPORATION
 CONDENSED
STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (Unaudited)
   Six
      Months Ended
                    June 30,2009
                
                
                2008Cash
      flow from operating activities:Net
      loss
                
                $
                (1,360,521
                )
                
                $
                (5,317,382
                )Adjustments
      to reconcile net loss to net cash provided
                  by
      (used in) operating activities:Depreciation
      and amortization
                
                
                46,876
                
                
                
                3,677Fair
      value of common stock granted for services
                
                
                —
                
                
                
                4,500,090Fair
      value of options and warrants granted for services
                
                
                —
                
                
                
                685,309Amortization
      of note discount
                
                
                32,000
                
                
                
                —Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (1,859,475
                )
                
                
                35,000Customer
      advance
                
                
                1,159,601
                
                
                
                —Inventories
                
                
                323,865
                
                
                
                —Prepaid
      expenses
                
                
                (24,281
                )
                
                
                —Accounts
      payable and accrued expense
                
                
                464,451
                
                
                
                160,951Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                58,985
                
                
                
                (67,575
                )Net
      cash provided by (used in) operating activities
                
                
                (1,158,499
                )
                
                
                70Cash
      flows from investing activities:Acquisition
      of furniture, equipment and software
                
                
                (14,787
                )
                
                
                —Net
      cash used in investing activities
                
                
                (14,787
                )
                
                
                —Cash
      flows from financing activities:Net
      proceeds on loan payable
                
                
                770,500
                
                
                
                —Refund
      of building deposit
                
                
                15,368
                
                
                
                —Proceeds
      from senior secured promissory notes
                
                
                1,000,000
                
                
                
                —Proceeds
      from note payable
                
                
                —
                
                
                
                25,875Repayment
      of notes payable to related party
                
                
                (50,875
                )
                
                
                —Advances
      from shareholder
                
                
                (20,287
                )
                
                
                1,957Net
      cash provided by financing activities
                
                
                1,714,706
                
                
                
                27,832Increase
      in cash and cash equivalents
                
                
                541,420
                
                
                
                27,902Cash
      and cash equivalents, beginning of period
                
                
                355,615
                
                
                
                34Cash
      and cash equivalents, end of period
                
                $
                897,035
                
                
                $
                27,936Supplemental
      cash flow informationInterest
      paid
                
                $
                40,558
                
                
                $
                —Income
      taxes paid
                
                $
                —
                
                
                $
                —Supplemental
      non-cash investing and financing informationFair
      value of beneficial conversion and warrants recorded as note
      discount
                
                $
                1,000,000
                
                
                $
                —
   The accompanying notes are
an integral part of these condensed financial statements.
  4
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (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 develops,
assembles and markets heavy-duty electric vehicles, flux vector inverters and
heavy-duty electric drive systems.
  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, the Company’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 the Company 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 $40,365 as a cost of the
reverse merger. In addition, the Company incurred expenses of $374,019 in
connection with the reverse merger.
  Going
Concern
  For the
six months ended June 30, 2009 and for the year ended December 31, 2008, the
Company recorded net losses of $1,360,521 and $7,933,281, respectively, and had
a working capital deficit of $86,990, and an accumulated deficit of $9,381,376
at June 30, 2009.  These matters raise substantial doubt about the
Company’s ability to continue as a going concern.  The financial
statements do not include any adjustments that might result from this
uncertainty.  The Company intends to raise funds to finance operations
until the Company achieves profitable operations. The Company’s capital
requirements for the next 12 months, as they relate to the production of our
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 SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
  Basis
of Presentation of Unaudited Financial Information
  The
unaudited financial statements of the Company as of June 30, 2009 and for
the three andsix
months ended June 30, 2009 and 2008 have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the requirements for reporting on
Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting
companies.  Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in United States
of America for complete financial statements.  However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for the fair
presentation of the financial position and the results of operations. Results
shown for interim periods are not necessarily indicative of the results to be
obtained for a full fiscal year.  The condensed balance sheet information as
of December 31, 2008 was derived from the audited financial statements included
in the Company’s restated financial statements as of and for the years ended
December 31, 2008 and 2007 included in Amendment No. 1 to Form 10-K filed
with the Securities and Exchange Commission (“SEC”) on May 22, 2009. These
financial statements should be read in conjunction with that
report.
  Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Material estimates relate to the recognition of
contract revenues and estimated costs to complete contracts in process, and
recoverability of reported amounts of long-lived assets.  Actual
results may differ from those estimates.
  Revenues
  Contract
Revenue and Cost Recognition on Prototype Vehicles
  In
accounting for contracts, the Company follows the provisions of the AICPA’s
Statement of Position 81-1 – Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.  The Company
recognizes revenues using the percentage-of-completion method of accounting by
relating contract costs incurred to date to the total estimated costs at
completion.  This method is used because management considers costs to
be the best available measure of progress on its contracts.  Contract
losses are provided for in their entirety in the period that they become known,
without regard to the percentage-of-completion.  The Company also
recognizes as revenues costs associated with claims and unapproved change orders
to the extent it is probable that such claims and change orders will result in
additional contract revenue, and the amount of such additional revenue can be
reliably estimated.
  Contract
costs include all direct material and labor costs.  The liability
“billings in excess of costs and estimated earnings on uncompleted contracts”
represents billings in excess of revenues earned.
  6
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
  Revenues
(continued)
  Contract
Revenue and Cost Recognition on Prototype Vehicles (continued)
  The
Company accounted for a certain grant from the City of Los Angeles (“City of Los
Angeles Grant”) pursuant to the provisions of ARB No. 43, “Restatement and
Revision of Accounting Research Bulletins and AICPA’s Audit and Accounting Guide
for Federal Government Contractors.” Under this method, sales for
cost-reimbursement contract is recorded as costs are incurred and include
estimated earned fees in the proportion that costs incurred to date bear to
total estimated costs.
  Sales
of Production Units and Parts
  The
Company recognizes revenue from the sale of completed production units and parts
when there is persuasive evidence that an arrangement exists, delivery of the
product has occurred and title has passed, the selling price is both fixed and
determinable, and collectibility is reasonably assured, all of which generally
occurs upon shipment of the Company’s product or delivery of the product to the
destination specified by the customer.
  The
Company determines whether delivery has occurred based on when title transfers
and the risks and rewards of ownership have transferred to the buyer, which
usually occurs when the Company places the products with the buyer’s
carrier.  The Company regularly reviews its customers’ financial
positions to ensure that collectibility is reasonably assured.  Except
for warranties, the Company has no post-sales obligations.
  Product
Warranties
  The
Company provides limited warranties for parts and labor at no cost to its
customers within a specified time period after the sale.  The Company
estimates the actual historical warranty claims coupled with an analysis of
unfulfilled claims at the balance sheet date. As of June 30, 2009 and
December 31, 2008, the Company had no warranty reserve nor did it incur
warranty expenses during the six month periods ended June 30, 2009 or
2008.
  Inventories
  Inventories
are stated at the lower of cost or market. Cost is determined principally on a
first-in-first-out average cost basis.  Inventories consist of the
following:
 
 June
      30,2009(unaudited)
                  
                  
                  December
      31,
                      2008Raw
      materials
                  
                  $
                  835,744
                  
                  
                  $
                  1,044,816Work
      in process
                  
                  
                  —
                  
                  
                  
                  —In-transit
                  
                  
                  —
                  
                  
                  
                  114,785$
                  835,744
                  
                  
                  $
                  1,159,601
  7
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
  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.
  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.  The Company’s first measurement period will
be in the third quarter of 2009.
  In
accordance with SFAS No. 144, “Accounting for the Impairment and Disposal of
Long-Lived Assets,” the Company reviews intangible assets subject to
amortization at least annually to determine if any adverse conditions exist or a
change in circumstances has occurred that would indicate impairment or a change
in the remaining useful life.  If the carrying value of an asset
exceeds its undiscounted cash flows, the Company writes down the carrying value
of the intangible asset to its fair value in the period
identified.  If the carrying value of assets is determined not to be
recoverable, the Company records an impairment loss equal to the excess of the
carrying value over the fair value of the assets.  The Company’s
estimate of fair value is based on the best information available, in the
absence of quoted market prices.  The Company generally calculates
fair value as the present value of estimated future cash flows that the Company
expects to generate from the asset using a discounted cash flow income approach
as described above.  If the estimate of an intangible asset’s
remaining useful life is changed, the Company amortizes the remaining carrying
value of the intangible asset prospectively over the revised remaining useful
life.
  8
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
  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 June 30, 2009 or December 31,
2008.
  Loss
Per Share
  Basic
loss per share has been computed using the weighted average number of common
shares outstanding and issuable during the period. Diluted loss per share is
computed based on the weighted average number of common shares and all common
equivalent shares outstanding during the period in which they are dilutive.
Common equivalent shares consist of shares issuable upon the exercise of stock
options or warrants. As of June 30, 2009, common stock equivalents composed of
options convertible into 4,562,592 shares of the Company’s common stock,
warrants convertible into 4,008,778 shares of the Company’s common stock and
notes convertible into 1,000,000 shares of the Company’s common stock. For the
six month periods ended June 30, 2009 and 2008, common stock equivalent shares
have been excluded from the calculation of loss per share as their effect is
anti-dilutive.
  Stock-Based
Compensation
  The
Company periodically issues stock instruments, including shares of its common
stock, stock options, and warrants to purchase shares of its common stock to
employees and non-employees in non-capital raising transactions for services
rendered 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.
  9
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
  Concentrations
  Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured accounts
receivable.
  The
Company maintains cash balances at one bank. At times, the amount on deposit
exceeds the federally insured limits. Management believes that the financial
institution that holds the Company’s cash is financially sound and, accordingly,
minimal credit risk exists.
  For the
six months ended June 30, 2009 and 2008, revenues are from contracts with the
City of Los Angeles and the South Coast Air Quality Management District
(“AQMD”).
  For the
six months ended June 30, 2009, 19.6% of cost of sales were to a single
vendor.  At June 30, 2009, accounts payable to this vendor represented
0% of total accounts payable.  At June 30, 2009, three other vendors
had balances representing 39%, 21%, and 9%, respectively, of total accounts
payable.
  Recent
Accounting Pronouncements
  In
December 2007, SFAS No. 141R, “Business Combinations (revised 2007)” was
issued.  SFAS No. 141R replaces SFAS No. 141, “Business
Combinations.”  SFAS No. 141R requires the acquirer of a business to
recognize and measure the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at fair value. SFAS No. 141R
also requires transactions costs related to the business combination to be
expensed as incurred. SFAS No. 141R 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.  The effective date, as well as the adoption date for the
Company was January 1, 2009.  Although SFAS No. 141R may impact our
reporting in future financial periods, the Company has determined that the
standard did not have any impact on its historical financial statements at the
time of adoption.
  In April
2008 the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible
Assets,” which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142.  This pronouncement
requires enhanced disclosures concerning a company’s treatment of costs incurred
to renew or extend the term of a recognized intangible asset. FST 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although FSP 142-3 may impact
the Company’s reporting in future financial periods, the Company has determined
that the standard did not have any impact on its historical financial statements
at the time of adoption.
  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 the Company’s present or future
financial statements.
  10
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
2 - PROPERTY AND EQUIPMENT
  Property
and equipment are comprised as follows:
 
 June
      30, 2009
                      (Unaudited)
                  
                  
                  December
      31, 2008Computer
      equipment and software
                  
                  $
                  67,177
                  
                  
                  $
                  52,390Office
      furniture
                  
                  
                  26,725
                  
                  
                  
                  26,725Machinery
                  
                  
                  6,395
                  
                  
                  
                  6,395Leasehold
      improvements
                  
                  
                  21,711
                  
                  
                  
                  21,711Total
      property and equipment, cost
                  
                  
                  122,008
                  
                  
                  
                  107,221Less:
      accumulated depreciation
                  
                  
                  (
      33,544
                  )
                  
                  
                  (17,828
                  )Property
      and equipment, net
                  
                  $
                  88,464
                  
                  
                  $
                  89,393
  Depreciation
and amortization expense on property and equipment for the six months ended June
30, 2009 and 2008 was $46,876 and $3,677, respectively.
  NOTE
3 – BUSINESS ACQUISITION
  On
September 9, 2008, the Company acquired substantially all of the assets of
Electric MotorSports, LLC (“EMS”), an Ohio limited liability company that was
owned by Mr. Robert Gruenwald, the Company’s Vice President Research and
Development.  The assets acquired included goodwill and trade secrets
used in the development and manufacture of flux vector inverters.  The
acquisition was accounted for as a purchase in accordance with SFAS 141,
“Business Combinations.”
  The
following unaudited pro forma operating data shown below presents the results of
operations for the
three months ended June 30, 2008 and the six months ended June 30, 2008,
as if the acquisition of EMS had occurred on the last day of the
immediately preceding fiscal period.  Accordingly, transaction costs
related to the acquisition are not included in the loss from operations shown
below. The pro forma results are not necessarily indicative of the financial
results that might have occurred had the acquisition actually taken place on the
respective dates, or of future results of operations.
 
 Three
      Months Ended
                          June
      30, 2008
                        
                        
                        Six
      Months Ended
                          June
      30,2008(Unaudited)
                        
                        
                        (Unaudited)Revenues
                        
                        $
                        229,000
                        
                        
                        $
                        328,000Net
      loss
                        
                        $
                        (5,271,000
                        )
                        
                        $
                        (5,324,000
                        )Net
      loss per share-basic and diluted
                        
                        $
                        (0.32
                        )
                        
                        $
                        (0.32
                        )Weighted
      average shares outstanding-basic and diluted
                        
                        
                        16,667,000
                        
                        
                        
                        16,667,000
  11
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
4 – LOAN PAYABLE – BRIDGE BANK
  On
February 25, 2009, the Company executed a Business Financing Agreement, dated
February 18, 2009, with Bridge Bank, National Association (the “Lender”) (the
“Initial Agreement”).  The initial agreement has been amended by
Business Financing Modification Agreements dated effective February 26, 2009 and
August 4, 2009, respectively (the “Modification Agreements,” and together with
the Initial Agreement the “Credit Agreement”).  The Credit Agreement
provides the Company with an accounts receivable based credit facility in the
aggregate amount of up to $5,000,000 (the “Credit Facility”).  Under
the terms of the Credit Agreement, the Company may not borrow in excess of
$500,000 unless and until the Company receives an executed term sheet with
respect to an equity financing of at least $2,500,000 on terms and conditions
acceptable to the Lender.  At June 30, 2009, $770,500 was outstanding
and $0 was available under the terms of the Credit Facility. (See Note
10.)
  The
Credit Facility is formula-based and generally provides that the outstanding
borrowings under the Credit Facility may not exceed an aggregate of 80% of
eligible accounts receivable. The Company must immediately pay any advance made
under the Credit Facility within 90 days of the earlier of (i) the invoice date
of the receivable that substantiated the advance or (ii) the date on which the
advance was made.  The Credit Facility is secured by a continuing
first priority security interest in all the Company’s personal property (subject
to customary exceptions).  Interest on the Credit Facility is payable
monthly, at the per annum prime rate as published by the Lender plus two
percentage points, subject to a minimum rate of 6.0% per annum (6% at June 30,
2009).  The Credit Agreement matures on February 24, 2010 and may be
terminated at any time by either party to the Credit Agreement.
  NOTE
5 – SUBORDINATED UNSECURED CONVERTIBLE PROMISSORY NOTES
  The
amounts payable under these notes, less note discount related to the beneficial
conversion feature and warrants issued with the convertible notes is as
follows:
 
 June
      30, 2009
                      (unaudited)
                  
                  
                  December
      31, 2008Subordinated
      unsecured convertible notes payable,
                    interest
      at 10% per annum payable quarterly, due
                    March
      31, 2012
                  
                  $
                  1,000,000
                  
                  
                  $
                  —Less:
      note discount
                  
                  
                  (968,000
                  )
                  
                  
                  —Total
      notes payable, net
                  
                  $
                  32,000
                  
                  
                  $
                  —
  Between
March 25, 2009 and June 23, 2009, the Company entered into agreements with
34accredited
investors for the sale by the Company of an aggregate of $1,000,000 of 10%
Unsecured Subordinated Convertible Promissory Notes which are convertible into
an aggregate of 1,000,000 shares of the Company’s common stock at a conversion
price of $1.00 per share of common stock, subject to
adjustment.  Additionally, the Company issued three-year warrants to
purchase an aggregate of 1,000,000 shares of the Company’s common stock at an
exercise price of $1.50 per share.  The conversion price is only
subject to adjustment based on stock splits, stock dividends, spin-off, rights
offering, or recapitalization through a large, nonrecurring cash
dividend.
  12
 BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
5 – SUBORDINATED UNSECURED CONVERTIBLE PROMISSORY NOTES (continued)
  The
Company determined that the relative fair value of the warrants was
$639,061.  The relatively fair value was determined using the
methodology prescribed by APB No. 14, “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.”  The Company determined the
initial fair value of the beneficial conversion feature was approximately
$360,939.  These amounts were calculated by a Black-Scholes option
pricing model using as assumptions an expected life of 3 years, an industry
volatility of 54.39%, a risk free interest rate of 1.15%, and no expected
dividend yield. The relative value of the warrants of $639,061 and the
beneficial conversion feature of $360,939 was recorded by the Company as a loan
discount of $1,000,000, which the Company is amortizing to interest expense over
the life of the notes.  At June 30, 2009, the total discount (less
amortization of $32,000) of $968,000 is offset against the balance of the
convertible notes.
  NOTE
6 – NOTE PAYABLE - RELATED PARTIES, UNSECURED
  Note
payable to related parties, unsecured, consists of the following
at:
  June
      30, 2009
                          (Unaudited)
                      
                      
                      December
      31, 2008Notes
      payable to a shareholder, unsecured, interest at 6%
                        per
      annum payable at maturity, due December 6, 2008
                      
                      $
                      —
                      
                      
                      $
                      875Note
      payable to a shareholder, issued in conjunction with the
                        acquisition
      of EMS (see Note 3), unsecured, interest at the prime
                        rate
      (5% at June 30, 2009) per annum, payable at maturity, due in
                        three
      principal installments: $50,000 on May 15, 2009, $25,000 on
                        July
      15, 2009, and $25,000 on September 15, 2009, plus
interest.
                      
                      
                      50,000
                      
                      
                      
                      100,000Total
      notes payable
                      
                      $
                      50,000
                      
                      
                      $
                      100,875
  NOTE
7 – INCOME TAXES
  At June
30, 2009, the Company had available Federal and state net operating loss
carryforwards to reduce future taxable income. The amounts available were approximately $9,409,428
for Federal and for state purposes. The Federal carryforward expires in
2028 and the state carryforward expires in 2018. Given the Company’s history of
net operating losses, management has determined that it is more likely than not
the Company will be able to realize the tax benefit of the
carryforwards.
  Accordingly,
the Company has not recognized a deferred tax asset for this benefit. Upon the
attainment of taxable income by the Company, management will assess the
likelihood of realizing the tax benefit associated with the use of the
carryforwards and will recognize a deferred tax asset at that time.
  SFAS No.
109 requires that a valuation allowance be established when it is more likely
than not that all or a portion of deferred tax assets will not be
realized.
  13
 BALQON
CORPORATION
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
7 – INCOME TAXES (continued)
  Significant
components of the Company’s deferred income tax assets are as
follows:
  June
      30, 2009
                      (Unaudited)Deferred
      income tax asset:Net
      operating loss carryforward
                  
                  $
                  3,810,000Valuation
      allowance
                  
                  
                  (3,810,000
                  )Net
      deferred income tax asset
                  
                  $
                  —
  Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
  Six
      Months Ended June 30, 2009Tax
      expense at the U.S. statutory income tax
                                (34.0)%State
      tax net of federal tax benefit
                                (5.8)%Increase
      in valuation allowance
                                39.8%Effective
      tax rate
                                —%
  Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48,”Accounting for
Uncertainty in Income Taxes (“FIN 48”)—an interpretation of FASB
Statement No. 109, Accounting for Income Taxes.” 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 derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of June 30, 2009, the Company does not have a
liability for unrecognized tax benefits.
  14
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
8 – STOCK OPTIONS AND WARRANTS
  Stock
Options
  At June
30, 2009, options shares outstanding are as follows:
  Shares
                  
                  
                  Average
                      Exercise
                      PriceBalance
      at January 1, 2009
                  
                  
                  4,562,592
                  
                  
                  $
                  2.00Granted
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —Cancelled
                  
                  
                  —
                  
                  
                  
                  —Balance
      at June 30, 2009 (unaudited)
                  
                  
                  4,562,592
                  
                  
                  $
                  2.00
  The
following table summarizes information about stock options outstanding and
exercisable as of June 30, 2009:
  Options
      Outstanding
                  Options
      ExercisableRange
      of
                    Exercise
                    Prices
                  Number
                      of
      Shares
                      Underlying
                      Options
                  Weighted
                      Average
                      Exercise
                      Price
                  Weighted
                      Average
                      Remaining
      Contractual
                      Life
      (in years)
                  Number
                      of
      Shares
                  Weighted
                      Average
                      Exercise
      Price$1.50
                  1,520,864
                  $1.50
                  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 June
30, 2009, the aggregate intrinsic value of the 4,562,592 options outstanding and
exercisable was $4,562,592.  At June 30, 2009, all options were vested
and there were no unvested options outstanding.
  Warrants
  At June
30, 2009, warrants shares outstanding are as follows:
  Shares
                  
                  
                  Average
                      Exercise
      PriceBalance
      at January 1, 2009
                  
                  
                  3,008,778
                  
                  
                  $
                  1.50Granted
                  
                  
                  1,000,000
                  
                  
                  $
                  1.50Exercised
                  
                  
                  —
                  
                  
                  
                  —Cancelled
                  
                  
                  —
                  
                  
                  
                  —Balance
      at June 30, 2009 (unaudited)
                  
                  
                  4,008,778
                  
                  
                  $
                  1.50
  15
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
8 – STOCK OPTIONS AND WARRANTS (continued)
  Warrants
(continued)
  The
following table summarizes information about stock warrants outstanding and
exercisable as of June 30, 2009:
 
 Warrants
      Outstanding
                Warrants
      ExercisableRange
      of
                  Exercise
                  Prices
                Number
                    of
      Shares
                    Underlying
                    Warrants
                Weighted
                    Average
                    Exercise
                    Price
                Weighted
                    Average
                    RemainingContractual
                    Life
      (in years)
                Number
                    of
      Shares
                Weighted
                    Average
                    Exercise
      Price$1.50
                3,399,594
                $1.50
                2.8
                3,399,594
                $1.50$2.00
                304,592
                $2.00
                2.0
                304,592
                $2.00$2.50
                304,592
                $2.50
                3.0
                304,592
                $2.504,008,778
                
                
                4,008,778
 
 At June
30, 2009, the aggregate intrinsic value of the warrants outstanding and
exercisable was $5,556,279.
  NOTE
9 – COMMITMENTS AND CONTINGENCIES
  On June
26, 2008, the Company entered into an agreement with the City of Los Angeles to
produce and deliver 20 electric yard hostlers, 5 short-haul electric drayage
trucks, and associated equipment including chargers, batteries and controllers
for a total of $5,383,750.  In September 2008, the Company began work
on the first units it intends to produce and expects to deliver all the vehicles
and associated equipment to the City of Los Angeles during 2009.
  The
Company has agreed to pay to each of the City of Los Angeles and the AQMD a
royalty fee of $1,000 per electric vehicle it sells to a purchaser other than
the City of Los Angeles or the AQMD.
  In June
2009, the Company entered into an agreement (the “Autocar Agreement”) with
Autocar, LLC (“Autocar”), a manufacturer and marketer of severe service
heavy-duty trucks, under which the Company agreed with Autocar to collaborate on
the development, marketing and sale of on-road Class 7 and Class 8
zero emissions electric trucks to be used in short haul drayage and trash
hauling applications (the “Autocar Truck”).  Under the terms of the
Autocar Agreement, the Company agreed to purchase Department of Transportation
compliant chassis designed for cab-over-engine-heavy-duty vehicles (the “Autocar
Chassis”) exclusively from Autocar for a period of at least three
years.  The Autocar Agreement is for an initial term commencing on
June 9, 2009 and ending 36 months after the first sale of an Autocar Truck by us
to an end user (the “First Sale”).  After the initial term, the
Autocar Agreement will automatically continue for successive one-year terms
until it is terminated at the end of its term by either party giving the other
party notice of termination at least 60 days prior to the end of the applicable
term.  Under the Autocar Agreement, the Company agreed to purchase: a
minimum of 50 Autocar Chassis during the first twelve month period after the
First Sale (with at least 5 Autocar Chassis being purchased by December 9,
2009), a minimum of 75 Autocar Chassis during the second twelve month period
after the First Sale, and a minimum of 112 Autocar Chassis during the third
twelve month period after the First Sale.
  16
 BALQON
CORPORATION
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 (Unaudited)
 NOTE
9 – COMMITMENTS AND CONTINGENCIES (continued)
  In May
2009, the Company received a grant of up to $400,000 from the City of Los
Angeles to reimburse the Company for costs it incurs in connection with the
installation, demonstration and evaluation of lithium-ion powered battery packs
in two of the Company’s zero emissions Nautilus
vehicles.  Reimbursement of up to $360,000 of the costs incurred shall
be payable to the Company upon the delivery of a Nautilus E30 and a Nautilus E20
installed with lithium-ion batteries to the City of Los Angeles for testing, and
reimbursement of up to $40,000 of the costs incurred shall be payable to the
Company upon completion of testing required under the terms of the
grant.  Upon completion of the testing of these two vehicles, one
Nautilus E20 and one Nautilus E30, the City of Los Angles will have the right to
purchase these test vehicles against its existing purchase order with the
Company.  In June 2009, the Company completed assembly of a Nautilus
E30 retrofitted with 280 kilowatt hours (“kWh”) lithium-ion battery packs, and
an initial testing of this Nautilus E30 demonstrated a range of over 150 miles
on a single charge under unloaded conditions. As of August 12, 2009, the Company
has retrofitted a Nautilus E20 with 140 kWh lithium-ion battery packs, and
initial testing of this Nautilus E20 demonstrated a range of over 95 miles on a
single charge under unloaded conditions.
  As of
June 30, 2009, the Company has invoiced the City of Los Angeles $360,000 in
accordance with the City of Los Angeles grant.  Through the six months
ended June 30, 2009, the Company has incurred $301,015 of costs related to the
City of Los Angeles grant and has recognized the same amount as revenue. The
billings in excess of cost equal to $58,595 is reflected as a liability in the
Company’s balance sheet for June 30, 2009.
  NOTE
10 - SUBSEQUENT EVENTS
  On August 10, 2009 the Company executed a
Business Financing Modification Agreement with Bridge Bank, National
Association, dated as of August 4, 2009 (the “Modification Agreement”), pursuant
to which the terms of the Business Financing Agreement, dated effective February
18, 2009, between the Company and Bridge Bank, was amended.  Under the
terms of the financing agreement with Bridge Bank, as modified by a certain
Business Financing Modification Agreement dated effective as of
February 26, 2009, the Company had an accounts receivable based credit
facility in the aggregate amount of up to $5,000,000 subject to the constraint
that the Company could not borrow in excess of $500,000 unless and until it
received an executed term sheet with respect to an equity financing of at least
$2,500,000 on terms and conditions acceptable to Bridge Bank.  The
Modification Agreement amended the financing agreement to (i) reduce the credit
facility from $5,000,000 to $2,000,000 and (ii) remove the constraint under
which the Company could not borrow in excess of $500,000 unless and until it
received an executed term sheet with respect to an equity financing of at least
$2,500,000.  As of the date of this report, the financing agreement
with Bridge Bank, as amended by the Modification Agreement, provides the Company
with an accounts receivable based credit facility in the aggregate amount of up
to $2,000,000.
  17
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  The
following discussion and analysis should be read in conjunction with our
financial statements and the related notes to financial statements included
elsewhere in this report.  This report and our financial statements
and notes to financial statements contain forward-looking statements, which
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance and
our current beliefs regarding revenues we might generate and profits we might
earn if we are successful in implementing our business strategies. Our actual
results could differ materially from those expressed in these forward-looking
statements as a result of any number of factors, including those set forth under
the “Risk Factors” section of our Amendment No. 1 to our Annual Report on
Form 10-K for the year ended December 31, 2008 and elsewhere in this
report. The forward-looking statements and associated risks may include, relate
to or be qualified by other important factors, including, without
limitation:
  ·
              the
      projected growth or contraction in the industries within which we
      operate;
  ·
              a
      loss of one of our key customers;
  ·
              our
      ability to develop and market products that compete effectively in our
      targeted market segments;
  ·
              our
      ability to meet customer demand;
  ·
              our
      ability, through the implementation of our long-term business strategy, to
      become profitable and/or generate sufficient cash
  flows;
  ·
              current
      and future economic, business and regulatory conditions, as well as the
      fluctuations in the price of commodities such as oil, which may, in turn,
      affect demand for our products;
  ·
              anticipated
      trends in our financial condition and results of operations;
      and
  ·
              our
      ability to distinguish ourselves from our current and future
      competitors.
  We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors discussed under the “Risk Factors” in this report and other reports
filed as well as any cautionary language in this report or any of our other
reports or filings, including Amendment No. 1 to our Annual Report on Form 10-K
filed with the SEC on May 22, 2009, provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we described in our forward-looking statements. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date of this report unless and to the
extent required by applicable law.
  18
  Overview
  We
currently develop, assemble and market heavy-duty electric vehicles, flux vector
inverters, and heavy-duty electric drive systems.  We currently sell
our heavy-duty electric vehicles and plan to begin selling our other products in
the near future.  In May 2007, we entered into an agreement with the
South Coast Air Quality Management District, or AQMD, to develop and test a
heavy-duty zero emissions electric drayage tractor.  Under the terms
of this agreement with the AQMD, which agreement is referred to in this report
as the AQMD Development Agreement, the AQMD agreed to pay us up to $527,000 for
the development and testing of the heavy-duty drayage tractor.  The
City of Los Angeles agreed with the AQMD to fund 50% of the total development
costs related to the drayage tractor.  The revenues and costs
associated with the AQMD Development Agreement are recorded as contract revenues
and costs, in accordance with the 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.  All of our revenues for the three months ended
June 30, 2008 were associated with the AQMD Development Agreement and the sale
of a battery charger to the City of Los Angeles.
  In
addition to incorporating our heavy-duty electric traction drive systems and
flux vector inverters into our heavy-duty electric vehicles, we are marketing,
and plan to sell, our heavy-duty electric traction drive systems and flux vector
inverters to original equipment manufacturers, or OEMs, of heavy-duty material
handling equipment and vehicles.  Our heavy-duty electric traction
drive systems are designed to target the needs of industries that use heavy-duty
vehicles or equipment, such as capacity forklifts, to transport heavy loads in
off-highway applications. These heavy-duty electric propulsion systems provide
high torque to pull heavy loads during start-stop applications.  Our
flux vector inverters can operate at 200 volts to 800 volts direct
current.  Our flux vector inverters, which are currently used in
electric buses, mining equipment and other applications, are Society of
Automation Engineers, or SAE, J1939 controller area network, or CAN Bus, capable
and, as a result, provide us with the ability to incorporate our technologies
into existing vehicle platforms including container lift trucks, reach stackers,
roll-on/roll-off tractors, drayage vehicles and high capacity
forklifts.  SAE J1935 CAN Bus is a standard communication protocol
used in the automotive industry to communicate and diagnose between vehicle
components.
  In May
2008, we received a purchase order from the AQMD for one of our Nautilus E20
heavy-duty electric yard tractors.  In June 2008, we received a
purchase order from the City of Los Angeles for 20 Nautilus E20 heavy-duty
electric yard tractors and five Nautilus E30 drayage tractors.  The
purchase order from the City of Los Angeles is pursuant to an agreement with the
City of Los Angeles, dated June 26, 2008, or City of Los Angeles
Agreement.  As of August 12, 2009, we have delivered 8 Nautilus
E20s to the City of Los Angeles.  Previously, we believed that we
would deliver the 25 Nautilus tractors ordered under the City of Los Angeles
purchase order by June 30, 2009.  However, primarily due to working
capital constraints, we have revised our initial forecast, and we now believe
that we will deliver the remaining 12Nautilus E20s and 5
Nautilus E30s to the City of Los Angeles by December 31,
2009.  All of our revenues for the three months ended June 30,
2009 were from the sale of a battery charger system and 6electric trucks to the
City of Los Angeles.
  In May
2009, we received a grant of up to $400,000 from the City of Los Angeles to
reimburse us for costs we incur in connection with the installation,
demonstration and evaluation of lithium-ion powered battery packs in two of our
zero emissions Nautilus vehicles.  In June 2009, we completed assembly
of a Nautilus E30 retrofitted with 280 kilowatt hours, or kWh, lithium-ion
battery packs, and an initial testing of this Nautilus E30 demonstrated a range
of over 150 miles on a single charge under unloaded conditions.  As of
the date of this report, we have retrofitted a Nautilus E20 with 140 kWh
lithium-ion battery packs, and initial testing of this Nautilus E20 demonstrated
a range of over 95 miles on a single charge under unloaded conditions. As of the
date of this report, we continue to test the Nautilus E30 and Nautilus E20 that
have been retrofitted to demonstrate what we believe to be the additional range
and performance benefits of lithium-ion batteries in our current Nautilus
product line.
  19
  While our
current backlog for our heavy-duty electric vehicles consists solely of our
outstanding purchase order from the City of Los Angeles, we are actively
pursuing a more diversified customer base.  We anticipate that a
majority of future sales of our heavy-duty electric vehicles will be made
directly to end users, such as large terminal operators, shipping companies and
OEMs, rather than directly to governmental agencies such as the AQMD and the
City of Los Angeles.  Our expectation that a majority of our future
sales of our heavy-duty electric vehicles will be made directly to end users is
based, in part, on the results of our initial test of the Nautilus E30 powered
by lithium-ion batteries and our agreement with Autocar, LLC, or Autocar, to
collaborate on the development, marketing and sale of on-highway Class 7
and Class 8 zero emissionselectric
vehicles.  In addition, we expect to use Autocar’s existing authorized
dealer network to sell our heavy-duty electric vehicles.  Our
expectations regarding future customers are also based on our current on-going
discussions with potential customers located in Canada and Europe, and
additional governmental incentives and funding that we believe will become
available for electric vehicles which we believe will improve the competitive
advantage of our electric vehicles.
  Our total
revenues increased by $1,356,575, or 952%, to $1,499,150 for the three months
ended June 30, 2009 as compared to $142,575 for the three months ended
June 30, 2008 and increased by $2,073,225, or 1,023%, to $2,275,800 for the
six months ended June 30, 2009 as compared to $202,575 for the six months ended
June 30, 2008. This increase in revenues is largely the result of sales of our
electric vehicles and related equipment that commenced during February 2009.
We reported a net
loss of $757,994 and $1,360,521 for the three and six months ended June 30,
2009, respectively, as compared to a net loss of $5,261,142 and $5,317,382 for
the three and six months ended June 30, 2008, respectively.  Our cost
of revenues increased to $1,446,069 for the second quarter of 2009 as compared
to $68,975 for the same period in 2008 and increased to $2,193,689 for the first
six months of 2009 as compared to $152,931 for the same period in
2008.  Operating and other expenses decreased to $811,075 for the
second quarter of 2009 as compared to $5,334,742 for the same period in 2008 and
decreased to $1,442,632 for the first six months of 2009 as compared to
$5,367,026 for the same period in 2008.  The significant decrease in
operating expenses in the 2009 periods as compared to the 2008 periods is
primarily the result of us incurring $5,185,399 of stock-based compensation
expense in the 2008 periods as compared to us incurring no stock-based
compensation expense in the 2009 periods.
  Merger
Transaction
  On
October 24, 2008, we completed an Agreement and Plan of Merger, or Merger
Transaction, with Balqon Corporation, a California corporation, or Balqon
California, and changed our name from BMR Solutions, Inc. to Balqon
Corporation.  Upon completion of the Merger Transaction, we acquired
the business of Balqon California.  In connection with the Merger
Transaction, we issued an aggregate of 23,908,348 shares of our common stock to
the shareholders of Balqon California which resulted in a change in control of
our company.  The Merger Transaction has been accounted for as a
recapitalization of Balqon California, with Balqon California being the
accounting acquiror.  As a result, the historical financial statements
of Balqon California are now the historical financial statements of the legal
acquiror, Balqon Corporation (formerly, BMR Solutions, Inc.).
  In
connection with the Merger Transaction, we issued an aggregate of 23,908,348
shares of our common stock to the shareholders of Balqon
California.  In addition, the holders of warrants to acquire an
aggregate of 2,614,180 shares of common stock of Balqon California were deemed
to hold warrants to acquire an equal number of shares of our common stock upon
completion of the Merger Transaction.  In connection with the Merger
Transaction, we also issued under our 2008 Plan options to purchase an aggregate
of 4,562,592 shares of our common stock to certain of our directors and
employees who held options to purchase an equal number of shares of Balqon
California’s common stock immediately prior to the completion of the Merger
Transaction.  In connection with the consummation of the Merger
Transaction, we cancelled 6,377,500 shares of our issued and outstanding common
stock held by certain of our stockholders such that concurrent with the closing
of the Merger Transaction we had approximately 1,400,000 shares of common stock
issued and outstanding.
  20
  At the
time of the closing of the Merger Transaction, we were engaged in the business
of providing local delivery and transportation of mattresses, furniture and
futons in Southern California.  Our current business is comprised
solely of the business of Balqon California.
  Critical
Accounting Policies
  Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
  We
believe that the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
financial statements:
  Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Material estimates relate to the recognition of
contract revenues and estimated costs to complete contracts in process, and
recoverability of reported amounts of long-lived assets.  Actual
results may differ from those estimates.
  Revenues
  Contract Revenue and Cost
Recognition on Prototype Vehicles.  In accounting for
contracts, we follow the 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.
  We
accounted for a certain grant from the City of Los Angeles pursuant to the
provisions of ARB No. 43, “Restatement and Revision of Accounting Research
Bulletins and AICPA’s Audit and Accounting Guide for Federal Government
Contractors.”  Under this method, sales for cost-reimbursement
contract is recorded as costs are incurred and include estimated earned fees in
the proportion that costs incurred to date bear to total estimated
costs.
 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.
  21
  We
determine whether delivery has occurred based on when title transfers and the
risks and rewards of ownership have transferred to the buyer, which usually
occurs when we place the products with the buyer’s carrier.  We
regularly review its customers’ financial positions to ensure that
collectibility is reasonably assured.  Except for warranties, we have
no post-sales obligations.
  Product
Warranties
  We
provide limited warranties for parts and labor at no cost to its customers
within a specified time period after the sale.  We estimate the actual
historical warranty claims coupled with an analysis of unfulfilled claims at the
balance sheet date. As of June 30, 2009 and December 31, 2008, we had
no warranty reserve nor did we incur warranty expenses during the six month
periods ended June 30, 2009 or 2008.
  Stock-Based
Compensation
  We
periodically issue stock instruments, including shares of our common stock,
stock options and warrants to purchase shares of our common stock to employees
and non-employees in non-capital raising transactions for services and for
financing costs. We adopted Statement of Financial Accounting Standards, or
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.
  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 have only one reporting unit.  At
the time of goodwill impairment testing, management determines fair value
through the use of a discounted cash flow valuation model incorporating discount
rates commensurate with the risks involved its reporting unit. If the calculated
fair value is less than the current carrying value, impairment may exist. The
use of a discounted cash flow valuation model to determine estimated fair value
is common practice in impairment testing in the absence of available domestic
and international transactional market evidence to determine the fair value. The
key assumptions used in the discounted cash flow valuation model for impairment
testing include discount rates, growth rates, cash flow projections and terminal
value rates. Discount rates are set by using the Weighted Average Cost of
Capital, or WACC, methodology. The WACC methodology considers market and
industry data as well as Balqon-specific risk factors for each reporting unit in
determining the appropriate discount rates to be used. The discount rate
utilized is indicative of the return an investor would expect to receive for
investing in such a business. Operational management, considering industry and
Balqon-specific historical and projected data, develops growth rates and cash
flow projections for Balqon.  Terminal value rate determination
follows common methodology of capturing the present value of perpetual cash flow
estimates beyond the last projected period assuming a constant WACC and low
long-term growth rates. As an indicator that each reporting unit has been valued
appropriately through the use of the discounted cash flow valuation model, the
aggregate fair value of all reporting units is reconciled to our total market
capitalization. The discounted cash flow valuation methodology and calculations
will be used in 2009 impairment testing.  Our first measurement period
will be in the third quarter of 2009.
  22
  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. 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 June 30, 2009 or December 31, 2008.
  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.
  Results
of Operations
  We have
based our financial statements on the assumption of our operations continuing as
a going concern.  As of June 30, 2009, we had working capital
deficit of $86,990, had an accumulated deficit of $9,381,376 and we reported a
net loss for the three and six month periods ended June 30, 2009 of
$757,994 and $1,360,521, respectively,which raise substantial
doubt about our ability to continue as a going concern.Our plans for correcting
these deficiencies include the future sales of our products and technologies and
the raising of capital, which are expected to help provide us with the liquidity
necessary to meet operating expenses.  Over the longer-term, we plan
to achieve profitability through our operations from the sale of our heavy-duty
electric vehicles.  Our financial statements do not include any
adjustments relating to the recoverability and classification of the recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should we be unable to continue our existence.
  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.
  23
  ·
              The
      columns entitled “Dollar Variance” and “Percentage Variance” show the
      change in results, both in dollars and percentages. These two columns show
      favorable changes as a positive and unfavorable changes as negative. For
      example, when our net revenues increase from one period to the next, that
      change is shown as a positive number in both columns. Conversely, when
      expenses increase from one period to the next, that change is shown as a
      negative in both columns.
  ·
              The
      last two columns in each table show the results for each period as a
      percentage of net revenues.
  Three
Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008
 
 Three
      Months Ended
                                June
      30,
                              
                              
                              Dollar

                                Variance
                              
                              
                              Percentage
                                  Variance
                              
                              
                              Results
      as a Percentage

                                of
      Net Revenues for the
                                  Three
      Months Ended
                                  June
      30,2009
                                  (Unaudited)
                              
                              
                              2008
                                  (Unaudited)
                              
                              
                              Favorable
                                  (Unfavorable)
                              
                              
                              Favorable
                                  (Unfavorable)
                              
                              
                              2009
                              
                              
                              2008Net
      revenues
                              
                              $
                              1,499,150
                              
                              
                              $
                              142,575
                              
                              
                              $
                              1,356,575
                              
                              
                              
                              952
                              %
                              
                              
                              100
                              %
                              
                              
                              100
                              %Cost
      of revenues
                              
                              
                              1,446,069
                              
                              
                              
                              68,975
                              
                              
                              
                              (1,337,094
                              )
                              
                              
                              (1,996)
                              %
                              
                              
                              96
                              %
                              
                              
                              48
                              %Gross
      profit
                              
                              
                              53,081
                              
                              
                              
                              73,600
                              
                              
                              
                              (20,519
                              )
                              
                              
                              (28)
                              %
                              
                              
                              4
                              %
                              
                              
                              52
                              %Operating
      and interest expenses
                              
                              
                              811,075
                              
                              
                              
                              5,334,742
                              
                              
                              
                              4,523,667
                              
                              
                              
                              85
                              %
                              
                              
                              54
                              %
                              
                              
                              3,742
                              %Net
      loss
                              
                              $
                              (757,994
                              )
                              
                              $
                              (5,261,142
                              )
                              
                              $
                              4,503,148
                              
                              
                              
                              86
                              %
                              
                              
                              (51
                              )%
                              
                              
                              (3,690
                              )%
  Net Revenues.  The
increase in net revenues is comprised of the sale battery of a battery charger
system and six electric trucks for an aggregate sales price of $1,198,135 and a
net increase of
$301,015 in contract revenues earned.  The contract revenues
were related to the completion of the integration of lithium-ion battery packs
in a Nautilus E30 pursuant to a grant we received from the City of Los
Angeles.    We anticipate that our future revenues will be
comprised primarily of sales of our heavy-duty electric vehicles, flux vector
inverters and our other products to customers including the City of Los Angeles,
OEMs, and end-users of heavy-duty electric vehicles.  Our revenues
during the three months ended June 30, 2009 were comprised solely of sales
to customers in the United States.  We believe that a substantial
portion of our sales in the future will be made to customers located outside of
the United States.
  Gross
Profit.  The decrease in gross profit was due to a 4% gross
margin associated with the sales of a battery system and electric trucks during
the quarter ending June 30, 2009 compared to a 52% gross margin associated with
contract revenues earned under the AQMD Development Agreement during the quarter
ending June 30,  2008. The decrease in gross margin during the three
months ended June 30, 2009 was largely attributable to increased material costs
and lower than anticipated production volume resulting in higher overhead
costs.  We anticipate that our gross profit margin associated with
sales of our electric vehicles will be approximately 24% of revenues once we
reach our projected annual production volume.
  Operating
and Interest Expenses.  The decrease in operating and interest
expenses is attributable to the stock-based compensation expenses of $5,185,399
incurred during the three months ended June 30, 2008 as compared to no
stock-based compensation expense being incurred during the three months ended
June 30, 2009.  Operating and interest expenses excluding stock-based
compensation expense incurred during the three months ended June 30, 2009 was
$811,075 as compared to $149,343 incurred during the same period in 2008, an
increase of $661,432.  This increase in operating and interest
expenses were largely due largely to the legal, accounting, audit and consulting
fees incurred in connection with the annual audit and related filings with the
SEC that were made during the three months ended June 30, 2009. We expect that
over the near term, our general and administrative expenses will increase as a
result of increased management personnel, increased legal and accounting fees
associated with increased corporate governance activities in response to the
Sarbanes-Oxley Act of 2002 and recently adopted rules and regulations of the SEC
and the filing of an amended registration statement with the SEC.
  24
  Our
research and development expenses for the three months ended June 30, 2009 were
$37,019.  We had no research and development expenses during the three
months ended June 30, 2008.  The increase in research and development
expenses is largely attributable to the expenses associated with the employment
of our vice president of research and development that was hired during the year
ended December 31, 2008.
  Six
Months Ended June 30, 2009 Compared to the Six Months Ended June 30,
2008
 
 Six Months
      Ended
                              June
      30,
                            
                            
                            Dollar

                              Variance
                            
                            
                            Percentage
                              Variance
                            
                            
                            Results
      as a Percentage

                              of
      Net Revenues for the
                                Six
      Months Ended
                                June
      30,2009
                                (Unaudited)
                            
                            
                            2008
                                (Unaudited)
                            
                            
                            Favorable
                                (Unfavorable)
                            
                            
                            Favorable
                                (Unfavorable)
                            
                            
                            2009
                            
                            
                            2008Net
      revenues
                            
                            $
                            2,275,800
                            
                            
                            $
                            202,575
                            
                            
                            $
                            2,073,225
                            
                            
                            
                            1,023
                            %
                            
                            
                            100
                            %
                            
                            
                            100
                            %Cost
      of revenues
                            
                            
                            2,193,689
                            
                            
                            
                            152,931
                            
                            
                            
                            (2,040,758
                            )
                            
                            
                            (1,334)
                            %
                            
                            
                            96
                            %
                            
                            
                            75
                            %Gross
      profit
                            
                            
                            82,111
                            
                            
                            
                            49,644
                            
                            
                            
                            32,467
                            
                            
                            
                            65
                            %
                            
                            
                            4
                            %
                            
                            
                            25
                            %Operating
      and interest expenses
                            
                            
                            1,442,632
                            
                            
                            
                            5,367,026
                            
                            
                            
                            (3,924,394
                            )
                            
                            
                            73
                            %
                            
                            
                            63
                            %
                            
                            
                            2,649
                            %Net
      loss
                            
                            $
                            (1,360,521
                            )
                            
                            $
                            (5,317,382
                            )
                            
                            $
                            3,956,861
                            
                            
                            
                            74
                            %
                            
                            
                            (60)
                            %
                            
                            
                            (2,625
                            )%
  Net Revenues. The increase in revenues
was comprised primarily of sales of seven Nautilus E20 electric vehicles to the
City of Los Angeles and a Nautilus E20 to the AQMD.  We also
recognized $301,015 in contract revenues resulting from the grant we received
from the City of Los Angeles.  Part sales  during the six
months ended June 30, 2009 were $382,250 as compared to $75,000 for the six
months ended June 30, 2008.  Our revenues during the three months
ended June 30, 2009 were comprised solely of sales to customers in the United
States.
  Gross Profit.The $32,467 increase in
gross profit for the six months ended June 30, 2009 as compared to the same
period in 2008 was due to increased revenues during the 2009 period. The reduction in gross
margin from 25% of net revenues for the 2008 period to 4% of net revenues for
the 2009 period was primarily due to changes in revenue mix, increases in
material and overhead costs related to lower than anticipated production volume
and higher manufacturing overhead costs related to establishing a production
line at our Harbor City facility.
  Operating and Interest
Expenses.  The decrease in operating and interest expenses is
primarily attributable to stock-based compensation expense of $5,185,399 that
was incurred during the six months ended June 30, 2008 as compared to no
stock-based compensation expense being incurred during the six months ended June
30, 2009.  Operating and interest expenses excluding stock-based
compensation expense incurred during the six months ended June 30, 2009 was
$1,442,632 as compared to $331,187 incurred during the same period in 2008, an
increase of $1,111,145.  This increase in operating and interest
expenses were primarily due to the implementation of administrative, legal,
accounting and audit systems and controls to meet our filing requirements with
the SEC and the filing of an amended registration statement with the
SEC.
  25
  Liquidity
and Capital Resources
  During
the six months ended June 30, 2009, we funded our operations primarily with cash
flow from financing activities, which included the issuance of secured and
unsecured debt and the issuance of equity securities.  As of June 30,
2009, we had a working capital deficit of $86,990 as compared to working capital
of $194,074 at December 31, 2008.  At June 30, 2009 and December 31,
2008, we had an accumulated deficit of $9,381,376
and $8,020,855, respectively, and cash and cash equivalents of $897,035
and $355,615, respectively.  We expect that our future available
capital resources will consist primarily of cash on hand, cash generated from
our business, if any, and future debt and/or equity financings, if
any.
  Cash used
in operating activities for the six months ended June 30, 2009 was $1,158,499 as
compared to $70 of cash provided by operating activities for the same period in
2008, and includes a net loss of $1,360,521, depreciation and amortization of
$46,876 and net decrease in operating assets and liabilities of $
51,217.  Material changes in asset and liabilities at June 30, 2009 as
compared to June 30, 2008 that affected these results include:
  ·
              an
      increase in accounts receivable of
$1,859,475;
  ·
              an
      increase  in customer advance of
  1,159,601;
  ·
              an
      increase in billings in excess of costs and estimated earnings on
      uncompleted contracts of 58,985;
  ·
              a
      decrease in inventory of $323,865;
  ·
              a
      increase in prepaid expenses of $24,281;
and
  ·
              a
      netincreasein accounts
      payable and accrued expenses of
$464,451.
  Cash used
in investing activities totaled $14,787 for the six months ended June 30, 2009
as compared to $0 of cash used in investing activities for the same period in
2008.
  Cash
provided by financing activities totaled $1,714,706 for the six months ended
June 30, 2009 as compared to $27,832 for the same period in 2008.
  During
March 2009 and June 2009, we raised an aggregate of $ 1,000,000 through the
issuance of  our 10% Unsecured Subordinated Convertible Promissory Notes
which are convertible into an aggregate of 1,000,000 shares of the Company’s
common stock at a conversion price of $1.00 per share of common stock, subject
to adjustment, to 34accredited
investors.  Interest on our convertible notes is payable on a
quarterly basis.   In connection with this offering, we also
issued three-year warrants to purchase an aggregate of 1,000,000 shares of
common stock at an exercise price of $1.50 per share.
  We are
obligated under registration rights agreements related to the above described
private placement to file a registration statement with the SEC, registering for
resale the shares of common stock underlying the convertible notes and warrants
issued in the private placement transaction.
  Effective
February 18, 2009, we entered into a Business Financing Agreement with Bridge
Bank, National Association, or Bridge Bank.  Under the terms of the
financing agreement with Bridge Bank, as modified by a certain Business
Financing Modification Agreement dated effective as of February 26, 2009, we
were provided with an accounts receivable based credit facility in the aggregate
amount of up to $5,000,000 subject to the constraint that we could not borrow in
excess of $500,000 unless and until we received an executed term sheet with
respect to an equity financing of at least $2,500,000 on terms and conditions
acceptable to Bridge Bank.  On August 10, 2009, we executed a Business
Financing Modification Agreement with Bridge Bank, dated as of August 4, 2009,
pursuant to which the financing agreement was amended to (i) reduce the credit
facility from $5,000,000 to $2,000,000 and (ii) remove the constraint under
which we could not borrow in excess of $500,000 unless and until we received an
executed term sheet with respect to an equity financing of at least
$2,500,000.  As of the date of this report, the financing agreement
with Bridge Bank, as amended, provides us with an accounts receivable based
credit facility in the aggregate amount of up to $2,000,000.
  26
  The
credit facility is formula-based and generally provides that the outstanding
borrowings under the credit facility may not exceed an aggregate of 80% of
eligible accounts receivable.  We must immediately pay any advance
made under the credit facility within 90 days of the earlier of the invoice date
of the receivable that substantiated the advance or the date on which the
advance was made.
  Interest
on the credit facility is payable monthly.  The interest rate is
variable and is adjusted monthly based on the per annum prime rate as published
by Bridge Bank plus two percentage points, subject to a minimum rate of 6.0% per
annum.
  In the
event of a default and continuation of a default, Bridge Bank may accelerate the
payment of the principal balance requiring us to pay the entire indebtedness
outstanding on that date.  Upon the occurrence and during the
continuation of an event of default, the interest rate applicable to the
outstanding balance borrowed under the credit facility will be increased by five
percentage points above the per annum interest rate that would otherwise be
applicable.
  The
credit facility is secured by a continuing first priority security interest in
all of our personal property (subject to customary exceptions).  The
credit facility may be terminated at any time by either party.  If we
terminate the credit facility prior to February 18, 2010, we will owe a
termination fee equal to 1.00% of the dollar amount resulting from dividing the
credit limit then in effect under the credit facility by 80% (or such greater or
lesser percentage as Bridge Bank may establish from time to time).
  Our plan
of operations for the next twelve months includes completion and delivery of the
remaining heavy-duty electric vehicles under the City of Los Angeles Agreement,
together with associated equipment including batteries and chargers. We also
expect to receive additional orders for our products over the next twelve
months. We expect that the anticipated gross margin from the sales of these
products will provide additional liquidity and capital resources. Our ability to
increase the number of orders for our products and/or to achieve sufficient
gross margin through the sale of products to provide us with meaningful
additional liquidity and capital resources is subject to, among other things,
the effect of the current global economic crisis and our ability to raise
additional capital.
 During
2009, we expect to incur approximately $200,000 in research and development
expenses. We believe that we presently have sufficient plant and production
equipment to meet our current operational plan and we do not intend to dispose
of any plant and equipment.
  We
presently have 11 employees and expect to hire additional personnel to meet
production demands of increased product sales. Until these new sales
materialize, our present staff is sufficient to meet our current operational
plan.
  Our
continued operations are dependent on securing additional sources of liquidity
through debt and/or equity financing.  As indicated above, our
financial statements as of June 30, 2009 and for the year ended
December 31, 2008 have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. As discussed in this report and in notes to our
financial statements included in this report, we have suffered recurring losses
from operations and at June 30, 2009 we had an accumulated deficit of
$9,381,376.  These factors, among others, raised substantial
doubt about our ability to continue as a going concern and, with respect to our
financial position on December 31, 2008, led our independent registered public
accounting firm to include in their report an explanatory paragraph related to
our ability to continue as a going concern. The financial statements included in
this report do not include any adjustments that might result from the outcome of
this uncertainty.
  27
  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
June 30, 2009, we had a backlog of approximately $3.7 million.  As of
June 30, 2009, our backlog included a contract to produce and deliver 13electric yard tractors,
5 electric drayage tractors to the City of Loa Angeles, and associated equipment
including batteries and controllers.  We believe that products in our
backlog will be shipped during 2009.
  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
December 2007, SFAS No. 141R, “Business Combinations (revised 2007)” was
issued.  SFAS No. 141R replaces SFAS No. 141 “Business
Combinations.”  SFAS No. 141R requires the acquirer of a business
to recognize and measure the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree at fair value. SFAS
No. 141R also requires transactions costs related to the business
combination to be expensed as incurred. SFAS No. 141R 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.  The effective date, as well as the adoption date for Balqon
was January 1, 2009.  Although SFAS No. 141R may impact our
reporting in future financial periods, we have determined that the standard did
not have any impact on our historical consolidated financial statements at the
time of adoption.
  In April
2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff
Position, or FSP, No. 142-3, “Determination of the Useful Life of Intangible
Assets”, which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142.  This
pronouncement requires enhanced disclosures concerning a company’s treatment of
costs incurred to renew or extend the term of a recognized intangible asset. FSP
142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008.  The effective date, as well as the adoption
date for us was January 1, 2009.  Although FSP 142-3 may impact our
reporting in future financial periods, we have determined that the standard did
not have any impact on our historical consolidated financial statements at the
time of adoption.
  28
  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 the Company’s 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 June 30, 2009
that our disclosure controls and procedures were not effective at the reasonable
assurance level due to the material weakness described below.
  In light
of the material weakness described below, we performed additional analysis and
other post-closing procedures to ensure that our financial statements were
prepared in accordance with generally accepted accounting principles.
Accordingly, we believe that the financial statements included in this report
fairly present, in all material respects, our financial condition, results of
operations, changes in shareholder’s equity and cash flows for the periods
presented.
  As a
result of our restatement of our financial statements as of and for the year
ended December 31, 2008 and for each of the quarterly periods ended June 30,
2008 and September 30, 2008, we were unable to meet our requirements to timely
file our Form 10-Q for the quarterly period ended March 31, 2009. Management
evaluated the impact of our inability to timely file periodic reports with the
SEC on our assessment of disclosure controls and procedures and concluded that
the control deficiency that resulted in the inability to timely make these
filings represented a material weakness.
  29
  In
connection with remediating our material weakness, in addition to working with
our independent auditors, in the second quarter of 2009 we created a new
position – Corporate Compliance Director – to assist us in making timely
required filings with the Securities and Exchange Commission and ensuring the
accuracy of our financial reporting and the effectiveness of our disclosure
controls and procedures. The individual that we have assigned to the position of
Corporate Compliance Director holds both a bachelors and masters degree, is a
certified public accountant, and is experienced in compliance with generally
accepted accounting principles, SEC reporting, and taxation matters. In the
second quarter of 2009 we further improved our ability to timely make required
filings by allocating part of the time of our administrative assistant who
possesses relevant administrative and accounting experience to assist in
promptly compiling information needed to meet our disclosure controls and
procedures. Also in the second quarter of 2009 we established a Disclosure
Committee comprised of the CFO, Corporate Compliance Director, and the
administrative assistant.  It is anticipated that the Disclosure
Committee will meet monthly and more frequently as reporting deadlines approach,
to ensure that we comply timely with our disclosure obligations under the
Securities Exchange Act of 1934, as amended.
  Management
expects that the remediation described immediately above will remediate the
corresponding material weakness also describe above by December 31, 2009.
Management is unable, however, to estimate our capital or other expenditures
associated with the allocation of time of certain of our personnel to assist us
in generating reports and schedules necessary to timely file our periodic
reports or our additional capital or other expenditures related to higher fees
paid to our independent auditors in connection with their review of this
remediation.
  Inherent
Limitations on the Effectiveness of Controls
  Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
systems are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in a
cost-effective control system, no evaluation of internal control over financial
reporting can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any,
have been or will be detected.
  These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of a simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
  Changes
in Internal Control over Financial Reporting
  There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
  30
  PART
II – OTHER INFORMATION
  ITEM
      1.
              LEGAL
      PROCEEDINGS
  We are
not party to any legal proceedings.
  ITEM
      1A.
              RISK
      FACTORS
  In
addition to the other information set forth in this report, you should carefully
consider the factors discussed below and under “Risk Factors” in our Amendment
No. 1 to our Annual Report on Form 10-K for December 31, 2008 filed with the SEC
on May 22, 2009, which could materially affect our business, financial
condition and results of operations.  The risks described below and in
our Amendment No. 1 to our Annual Report on Form 10-K for December 31, 2008
filed with the SEC on May 22, 2009 are not the only risks we
face.  Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and results of operations.
  We
have a material weakness in our internal control over financial reporting
structure which until remedied, may cause our filings to not be made timely and
investors may lose confidence in our reported financial information, which could
lead to a decline in our stock price.
  We have
identified a material weaknessin our internal control
over financial reporting and cannot assure you that additional material
weaknesses will not be identified in the future.  Management has
concluded that a control deficiency that resulted in our inability to timely
file periodic reports with the SEC represented material weakness in our internal
control over financial reporting.  If our internal control over
financial reporting or disclosure controls and procedures are not effective, our
filings may not be timely and investors may lose confidence in our reported
financial information, which could lead to a decline in our stock
price.
  Section
404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness
of our internal control over financial reporting as of the end of each year, and
to include a management report assessing the effectiveness of our internal
control over financial reporting in each Annual Report on
Form 10-K.
  Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Over time, controls may
become inadequate because changes in conditions or deterioration in the degree
of compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
  As a
result, we cannot assure you that significant deficiencies or material
weaknesses in our internal control over financial reporting will not be
identified in the future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their implementation,
could result in significant deficiencies or material weaknesses, cause us to
fail to timely meet our periodic reporting obligations, or result in material
misstatements in our financial statements. Any such failure could also adversely
affect the results of periodic management evaluations regarding disclosure
controls and the effectiveness of our internal control over financial reporting
required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. The existence of a material weakness could result in
errors in our financial statements that could result in a restatement of
financial statements, cause us to fail to timely meet our reporting obligations
and cause investors to lose confidence in our reported financial information,
leading to a decline in our stock price.
  31
  The
industries within which we compete are highly competitive.  Many of
our competitors have greater financial and other resources and greater name
recognition than we do and one or more of these competitors could use their
greater financial and other resources or greater name recognition to gain market
share at our expense.
  The
industries within which we compete are highly competitive. New developments in
technology may negatively affect the development or sale of some or all of our
products or make our products uncompetitive or obsolete.  Competition
for our products may come from current fossil fuel based drive system
technologies, improvements to current drive system technologies and new
alternative fuel drive system technologies.  Each of our target
markets is currently serviced by existing manufacturers with existing customers
and suppliers using proven and widely accepted fossil fuel powered drive
systems.  Additionally, there are competitors working on developing
technologies such as cleaner diesel engines, bio-diesel, fuel cells, natural gas
and hybrid electric/internal combustion engines in each of our targeted
markets.  Our products compete directly with heavy-duty fossil fuel
powered vehicles which are lower in price and higher in key performance
specifications such as range, speed and load carrying capacity.  In
addition, our competitors have a long history of producing high volume products
with established dealer and service networks.  Many of our existing
and potential competitors, including Kalmar Industries Corp, MOL Transport
Solutions, Terberg DTS UK Ltd., Kenworth Truck Company, Freightliner Trucks,
Mack Trucks, Inc. and Peterbilt Motors Company, have substantially greater
financial resources, more extensive engineering, manufacturing, marketing and
customer service and support capabilities, larger installed bases of current
generation products, as well as greater name recognition than we do. As a
result, our competitors may be able to compete more aggressively and sustain
that competition over a larger period of time than we could.  Each of
these competitors has the potential to capture market share in various markets,
which could have a material adverse effect on our position in the industry and
our financial results.
  We also
face competition from small to medium size manufacturers of alternative fuel
heavy-duty drive systems such has Cummins Inc., Westport Innovations Inc., US
Hybrid Corporation and Vision Industries Corp.  These competitors’
products target new and retrofit markets with drive systems powered by natural
gas, electric hybrid and fuel cell powered vehicles.  These small to
medium size manufacturers offer products competitive in price to our current
product line and these products are expected to exceed the performance of our
products in key performance specifications such as range and
speed.  There can be no assurance that our zero emissions products
will be able to offer competitive advantages over alternative fuel powered
vehicles being developed by our competitors.   Our lack of
resources relative to many of our significant competitors may cause us to fail
to anticipate or respond adequately to new developments and other competitive
pressures.  This failure could reduce our competitiveness and cause a
decline in our market share, sales and profitability.
  ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  During
the three months ended June 30, 2009, we entered into agreements with 31
accredited investors for the sale by us of an aggregate of $950,000 of 10%
Unsecured Subordinated Convertible Promissory Notes which are convertible into
an aggregate of 950,000 shares of our common stock at a conversion price of
$1.00 per share of common stock, subject to adjustment.  Additionally,
we issued three-year warrants to purchase an aggregate of 950,000 shares of
common stock at an exercise price of $1.50 per share.
  32
  The
issuances of our securities described above were made in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act,
among others, as transactions not involving a public offering.  This
exemption was claimed on the basis that these transactions did not involve any
public offering and the purchasers in each offering were accredited or
sophisticated and had sufficient access to the kind of information registration
would provide. In each case, appropriate investment representations were
obtained and certificates representing the securities were issued with
restrictive legends.
  ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
  None.
  ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
  ITEM
      5.
              OTHER
      INFORMATION
  Effective
February 18, 2009, we entered into a Business Financing Agreement with
Bridge Bank, National Association.  Under the terms of the financing
agreement with Bridge Bank, as modified by a certain Business Financing
Modification Agreement dated effective as of February 26, 2009, we were
provided with an accounts receivable based credit facility in the aggregate
amount of up to $5,000,000 subject to the constraint that we could not borrow in
excess of $500,000 unless and until we received an executed term sheet with
respect to an equity financing of at least $2,500,000 on terms and conditions
acceptable to Bridge Bank.  On August 10, 2009, we executed a Business
Financing Modification Agreement with Bridge Bank, dated as of August 4, 2009,
pursuant to which the financing agreement was amended to (i) reduce the credit
facility from $5,000,000 to $2,000,000 and (ii) remove the constraint under
which we could not borrow in excess of $500,000 unless and until we received an
executed term sheet with respect to an equity financing of at least
$2,500,000.  As of the date of this report, the financing agreement
with Bridge Bank, as amended, provides us with an accounts receivable based
credit facility in the aggregate amount of up to $2,000,000.
  ITEM
      6.
              EXHIBITS
 
 Exhibit
                  Number
                Description4.1
                Form
      of Warrants issued by the Registrant to certain security holders to
      purchase an aggregate of 1,000,000 shares of common stock
    (1)10.1
                Amendment
      No. 2 to Stock and Warrant Purchase Agreement, dated May 20, 2009, by and
      between Marlin Financial Group, Inc. and the Registrant
  (2)10.2
                Form
      of 10% Unsecured Subordinated Convertible Promissory Notes issued in March
      2009, in the aggregate principal amount of $1,000,000, which are
      convertible into an aggregate of 1,000,000 shares of our common stock
      (1)10.3
                Converter
      Agreement, dated June 9, 2009, by and between the Registrant and Autocar,
      LLC (3)10.4
                Business
      Financing Modification Agreement, dated effective August 4, 2009, by and
      between the Registrant and Bridge Bank, National Association
      (*)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.
 (1)
              Filed
      as an exhibit to the Registrant’s Annual Report on Form 10-K with the
      Securities and Exchange Commission filed on March 31,
  2009.
 (2)
              Filed
      as an exhibit to the Registrant’s Amendment No. 1 to Annual Report on Form
      10-K with the Securities and Exchange Commission filed on May 22,
      2009.
 (3)
              Filed
      as an exhibit to the Registrant’s Current Report on Form 8-K with the
      Securities and Exchange Commission filed on June 15,
      2009.
  
 33
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  BALQON
      CORPORATIONDated:  August 14,
      2009
                      By:
                      /s/ BALWINDER
      SAMRABalwinder
      Samra, Chief Executive Officer
                        (principal
      executive officer)
  
 34
  EXHIBITS
FILED WITH THIS REPORT
 
 Exhibit
                    Number
                  Description10.4
                  Business
      Financing Modification Agreement, dated effective August 4, 2009, by and
      between the Registrant and Bridge Bank, National
    Association31.1
                  Certification
      Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
      amended, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of
      200231.2
                  Certification
      Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
      amended, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of
      200232.1
                  Certification
      of President and Chief Financial Officer Pursuant to 18 U.S.C. Section
      1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
   35