UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 
 AMENDMENT
NO. 1
 TO
 FORM
10-K
  (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the fiscal year ended December 31, 2008
 OR
  o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the transition period from
____________ to _____________
  Commission
file number: 000-52337
  BALQON
CORPORATION
 (Exact
name of registrant as specified in its charter)
  Nevada
                (State
      or other jurisdiction of incorporation or organization)
              33-0989901
                (I.R.S.
      Employer Identification No.)1420
      240th Street, Harbor City, California 90710
                (Address
      of principal executive offices)
              92705
                (Zip
      Code)
  Registrant’s
telephone number, including area code: (714) 836-6342
  Securities
registered pursuant to Section 12(b) of the Act:
 None
  Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, $0.001 par value
 (Title of
class)
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yeso    Nox
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yeso    Nox
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.  Yesx Noo
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yeso    Noo
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):
  Large Accelerated
      Filer o
                Accelerated filer
      oNon-Accelerated
      Filer   o    (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).  Yeso Nox
  The
aggregate market value of the voting common equity held by nonaffiliates of the
registrant, computed by reference to the average bid and asked price on
June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, cannot be computed as the registrant’s common
stock was not trading on such date.  The registrant has no non-voting
common equity.
  The
number of shares outstanding of the Registrant’s common stock, $0.001 par value,
as of May 20, 2009 was 25,518,348.
  DOCUMENTS
INCORPORATED BY REFERENCE
 None
  1





BALQON
CORPORATION


AMENDMENT
NO. 1 TO ANNUAL REPORT ON


FORM
10-K


FOR
THE YEAR ENDED DECEMBER 31, 2008





TABLE
OF CONTENTS


PagePART
      IItem
      1.
                Business
                3Item
      1A.
                Risk
      Factors
                19Item
      1B.
                Unresloved
      Staff Comments
                31Item
      2
                Properties
                32Item
      3
                Legal
      Proceedings
                32Item
      4
                Submission
      of Matters to a Vote of Security Holders
                32PART
      IIItem
      5
                Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                33Item
      6
                Selected
      Financial Data
                35Item
      7
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                35Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                45Item
      8
                Financial
      Statements and Supplementary Data
                45Item
      9
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                45Item
      9A.
                Controls
      and Procedures
                45Item
      9A (T).
                Controls
      and Procedures
                46PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                49Item
      11.
                Executive
      Compensation
                54Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                71Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                72Item
      14.
                Principal
      Accountant Fees and Services
                79PART
      IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                80




2




CAUTIONARY
STATEMENT




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




PART
I




Item 1.
            Business.




Overview




We
design, assemble and market heavy-duty electric vehicles for use in the
transportation of containers and heavy loads at facilities such as marine
terminals, rail yards, industrial warehouses, intermodal facilities (facilities
where freight is transferred from one mode of transportation to another without
actual handling of the freight itself when changing modes), military bases and
industrial plants.  We currently sell our heavy-duty electric vehicles
for use at the Port of Los Angeles and have also sold a heavy duty electric
vehicle for use in a demonstration program to the South Coast Air Quality
Management District, or AQMD.  We also market, and plan to sell,
components of our heavy duty electric vehicles that we have developed, including
our heavy duty electric drive systems and flux vector inverters, which control
the speed of electric motors by varying the input frequency and voltage from the
batteries.  In 2008, we released our first zero emissions heavy-duty
vehicle, the Nautilus E30, which is part of our Nautilus product line that is
designed to target applications requiring transportation of cargo containers
weighing over 60,000 pounds.




Fossil
fuel powered equipment used to transport containers in off-highway applications
have experienced minimal improvements in emission and propulsion technology over
the past two decades.  As a result, sea ports and intermodal
facilities throughout the world have experienced increased levels of
pollution.  We believe that the life-cycle costs of our heavy-duty
electric vehicles are lower than the current operating costs of fossil fuel
based vehicles in high idling off-highway and on-highway
applications.  A key element of our strategy is to market and sell, on
a world-wide basis, our zero emissions heavy-duty electric vehicles in high
idling off-highway and on-highway applications as a cost effective and
environmentally friendly alternative to fossil fuel based heavy-duty
vehicles.  In addition, we plan to market and sell on a worldwide
basis our heavy-duty electric drive systems and flux vector inverters to
original equipment manufacturers,
or OEMs, for use in heavy-duty electric vehicles and heavy-duty material
handling equipment.




3




Our
Nautilus E30 drayage tractor, a vehicle used to haul heavy loads in short haul
operations, which can tow over 60,000 pounds at speeds of up to 45 miles per
hour and has a range of between 30 and 60 miles on a single battery charge, has
successfully completed initial testing at the Port of Los Angeles.  As
a result of this successful testing, we received purchase orders for an
additional five Nautilus E30 electric drayage tractors and 21 Nautilus E20
electric yard tractors.  Prior to releasing our Nautilus product line,
we spent two years developing our heavy duty electric drive system that couples
an electric motor directly to an automatic transmission which provides high
torque to pull heavy loads during start-stop applications. In addition, in 2008
we acquired the assets of a company that had developed a high capacity 240 kW
flux vector inverter that is Society of Automation Engineers, or SAE, J1939
controller area network, or CAN Bus, capable.  SAE J1939 CAN Bus is a
standard communication protocol used in the automotive industry to communicate
and diagnose between vehicle components.  For example, diesel engine
manufacturers use SAE J1939 CAN Bus communications to control emissions and
transmission operations in off-highway and on-highway vehicle
applications.  Our flux vector inverters have been designed to
communicate with other vehicle components on the same SAE J1939 CAN Bus thereby
allowing us to incorporate our heavy-duty electric drive system into other
fossil fuel vehicle platforms including container lift trucks, reach stackers,
roll-on/roll-off tractors, drayage vehicles and high capacity
forklifts.




Company
History




We are a
Nevada corporation that was incorporated on November 21, 2001, as BMR Solutions,
Inc.  From inception to May 2006, we were engaged in the business
of providing Internet website hosting and development services.  In
May 2006, we underwent a change in management and adopted a new business plan of
providing local delivery and transportation of mattresses, furniture and futons
in Southern California.  On September 15, 2008, we entered into an
Agreement and Plan of Merger, or Merger Agreement, with Balqon Corporation, a
California corporation, or Balqon California, and our wholly-owned subsidiary
Balqon Acquisition Corp., or Acquisition Subsidiary.  Upon the closing
of the Merger Agreement on October 24, 2008, Balqon California merged with
and into Acquisition Subsidiary with Acquisition Subsidiary surviving and
immediately thereafter, Acquisition Subsidiary merged with and into our company
and at that time we also changed our name from BMR Solutions, Inc. to Balqon
Corporation.  Our current business is comprised solely of the business
of Balqon California.  Balqon California was incorporated on April 21,
2005 and commenced operations in 2006.




In
September 2008, Balqon California entered into an agreement with Electric
Motorsports, LLC, or EMS, and its sole member, Robert Gruenwald, to acquire
certain of the assets of EMS, including all intellectual property
assets.  At the time of the acquisition, EMS had been engaged in
developing, designing and manufacturing flux vector inverters within the
automotive and material handling equipment industries since 1997.  At
the time of the acquisition, Mr. Gruenwald was, and continues to be, our
Vice President Research and Development.  See “Item 13. Certain
Relationships and Related Transactions, and Director Independence—Balqon
California’s Transactions Prior to the Consummation of the Merger
Transaction.”  As a result of this acquisition, Balqon California
acquired proprietary technology and designs that we currently use in our
heavy-duty electric vehicles. Since its inception in 1997, EMS has sold over 250
inverters for use in applications including industrial conveyor systems,
electric buses, delivery trucks, a monorail system and mining
vehicles.  EMS sold products primarily to OEMs of electric buses,
mining vehicles and specialty automotive vehicles. We believe that the
acquisition of EMS’s technology and knowhow provides us with the ability to
further develop, market and sell flux vector inverters for use in heavy-duty
applications.  For example, we plan to sell these flux vector
inverters to OEMs for use in existing fossil fuel based vehicle
platforms.




4




In
October 2006, the management of Balqon California met with representatives of
the Port of Los Angeles and the AQMD, to propose the use of zero emissions
electric tractors at the port terminal facilities located in San Pedro and Los
Angeles, California.  In April 2007, Balqon California entered into an
agreement with the AQMD, or AQMD Development Agreement, to develop a heavy-duty
zero emissions electric drayage tractor to be used for demonstration and testing
purposes at the Port of Los Angeles.  Under the terms of the AQMD
Development Agreement, which was co-funded by the AQMD and the Port of Los
Angeles, the AQMD agreed to pay Balqon California up to $527,000 for the
development of this electric tractor.  In January 2008, Balqon
California delivered to the AQMD and commenced testing a heavy-duty electric
drayage tractor incorporating what is now our proprietary flux vector inverter
technology and heavy-duty electric drive system at the Port of Los Angeles. The
zero emissions electric tractor has since successfully passed rigorous testing
by the Port of Los Angeles.




In May
2008, Balqon California received a purchase order from the AQMD for one Nautilus
E20 electric yard tractor to be used in a loaner program under which the AQMD
will loan the tractor to various terminal operators to demonstrate the benefits
of using zero emissions electric vehicles in off-highway container
transportation applications.  In June 2008, Balqon California 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, all of which will
be used at the Port of Los Angeles.




The
purchase order from the AQMD is pursuant to a Purchase and Service Agreement
with the AQMD, dated May 15, 2008, or AQMD Purchase Agreement, under which
we are obligated to deliver one Nautilus E20 heavy-duty electric yard tractor to
the AQMD for use in a loaner program that will allow the owners of multiple
terminals to test the electric yard tractor in anticipation of a
purchase.  The term of the AQMD Purchase Agreement expires on
May 15, 2010.  Under the terms of the AQMD Purchase Agreement,
the AQMD will pay us up to an aggregate of $300,000 for products delivered and
services provided under the agreement, which amount includes $280,000 to be paid
for the delivery of a operational yard tractor, a replacement battery pack and a
battery charger. Under the terms of the
AQMD Purchase Agreement, we are also obligated to install and remove chargers at
least five times at five different sites. In addition, we are obligated to pay
the AQMD a royalty fee of $1,000 per electric vehicle sold or leased to anyone
other than the AQMD or the Port of Los Angeles.  The royalty fee will
be adjusted for inflation every five years.  Under the terms of the
AQMD Purchase Agreement, the AQMD has the right to use data collected during the
test phase and has a royalty free, nonexclusive, irrevocable license to produce
any copyrighted material produced under the AQMD Purchase
Agreement.




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,
under which we are obligated to produce and deliver to the City of Los Angeles
20 electric yard tractors, five electric drayage tractors and certain additional
components.  The City of Los Angeles Agreement is for a term of three
years.  Under the terms of the City of Los Angeles Agreement, the City
of Los Angeles will pay us up to an aggregate of $5,383,750, comprised of
$189,950 for each Nautilus E20 yard tractor, $208,500 for each Nautilus E30
drayage tractor, and $542,250 for the delivery of five sets of battery
chargers.  Under the terms of the City of Los Angeles Agreement, we
are also obligated to pay the City of Los Angeles a royalty fee of $1,000 per
electric vehicle sold or leased to any party other than the City of Los Angeles
or the AQMD.  The royalty fee will be adjusted for inflation every
five years.




In March
2009, we delivered the Nautilus E20 to the AQMD under the terms of the AQMD
Purchase Agreement.  As of May 20, 2009 we have delivered 2 Nautilus
E20s to the Port of Los Angeles under the terms of the City of Los Angeles
Agreement.




5




Electric Vehicle Industry




Over the
past twenty years, the electric vehicle industry has grown rapidly as a result
of increasing demand for environmentally friendly modes of
transportation.  The high price of fossil fuel and heightened
environmental concerns over greenhouse gas emissions worldwide have resulted in
increased demand for electric and hybrid vehicles.  Similarly, there
has been increase in demand for battery powered low or zero emissions vehicles
in off-highway material handling applications.




We
believe that potentially large electric vehicle markets are developing in a
wide-range of vehicle platforms for a variety reasons, including improved fuel
economy, lower emissions, greater reliability, lower maintenance costs, improved
performance and vehicle control.  Of these myriad reasons, improved
fuel economy has emerged as a significant factor in the development and
potential growth of the emerging electric vehicle markets as crude oil prices
rise, and consumers and businesses alike contend with higher gasoline and diesel
prices.




During
2007, crude oil consumption in the United States, as reported by the United
States Department of Energy in the Transportation Energy Data Book, averaged
approximately 21 million barrels per day, which represents an average annual
percentage increase in consumption of approximately 1% over a period of ten
years.  According to data published by the United States Department of
Energy, of the amount of crude oil consumed in the United States in 2007,
approximately 68% was consumed by the transportation industry which has seen an
increase in consumption of approximately 1.5% per year over a ten year
period.  The United States Department of Energy also reports that
increases in crude oil based fuel demand worldwide has resulted in accelerated
growth of fuel costs worldwide.  We believe that the cost of fuel will
continue to remain high relative to historic levels, and therefore believe that
electric vehicles will offer a cost effective and environmentally efficient
alternative solution to fossil fuel based vehicles.




We
believe that the continued liberalization of global trade coupled with the
growth in container packaging of goods has resulted in the use of larger
container ships which, in turn, has resulted in a commensurate increase in ship
capacities.  This increase in the size of container ships has resulted
in concentrated growth at larger ports which, in turn, has resulted in a higher
rate of increase in air pollution at these ports, thereby requiring more
stringent environmental regulations.




As a
result of increased imports from South Asia to the United States over the past
five years, the number of twenty-foot equivalent units, or TEUs, transported to
ports and through intermodal facilities located on the west coast of the United
States has also increased.This expansion in trade
has resulted in increased pollution at the largest ports on the west coast of
the United States, resulting in more stringent requirements on vehicle emissions
in many of these areas.  For example, the Port of Los Angeles and the
Port of Long Beachrecentlyapproved a comprehensive
“Clean Air Action Plan” aimed at reducing pollution and health risks associated
with mobile air emissions resulting from activities at these
ports.  See “—Recent Initiatives.”  We believe that electric
trucks are the leading cost competitive solution to reduce the environmental
impact of increased activity and pollution at ports and intermodal facilities
located on the west coast of the United States.




In light
of these recent regulatory initiatives, and the identification of heavy-duty
truck pollution as the most significant source of air pollution at ports, we
believe that the demand for heavy-duty electric vehicles will
increase.  In response to this anticipated increase in demand, we have
developed and will continue to develop zero emissions heavy-duty vehicle
platforms as an alternative to current fossil fuel based container
transportation solutions.  In addition to being incorporated into our
heavy-duty electric vehicles, our heavy-duty electric drive systems can also be
incorporated into drayage vehicles, container lift trucks, roll-on/roll-off
trucks, reach stackers and large industrial forklifts.  In addition,
we also believe that our
heavy-duty electric drive system is ideally suited for vehicles used in
connection with short-haul inner city on-highway delivery of goods to retail or
industrial facilities.




6




The
electric vehicle industry is highly competitive and characterized by rapid
technological advancements.  Most of the technological advancements
target the on-highway consumer automotive markets. We believe that technological
improvements in battery technology have increased the probability of production
electric vehicles reaching consumer markets by 2012. The success of electric
vehicles in the consumer market industry is generally based on vehicle range,
speed and acquisition cost, while success of electric vehicles in the
off-highway heavy-duty markets is based on product customization, productivity,
functionality, durability and after market support. In response to what we
believe to be the market needs, our fully integrated heavy-duty electric drive
system that incorporates an electric motor, transmission, flux vector inverter
and communication components into a single integrated unit allow us the agility
and adaptability to enter various heavy-duty vehicle market niches through
incorporation of our technologies into varied vehicle platforms. We have ensured
adaptability to a variety of application needs through the design of our flux
vector inverter which determines key performance features of the vehicle such as
speed, acceleration and energy consumption and which is software configurable
thereby allowing us to adapt to specific application needs in the field. Our
operational strategy to partner with existing chassis manufacturers in each
niche market provides our customers with a proven vehicle platform and
established service support worldwide while providing us with a capital
efficient model to enter a number of market segments.




Heavy-Duty
Electric Vehicles Industry




Industries
related to container transportation have seen modest improvements in vehicle
technology over the past five decades. This is mainly a result of low duty cycle
needs for vehicles operated in terminals or in short-haul drayage applications
which, in turn, has resulted in the use of older model and higher-polluting
vehicles in these applications. The high growth rates at large ports has
resulted in an increase in the population of these older model vehicles which,
in turn, has resulted in increased regulatory oversight within port facilities
that historically were relatively unregulated. We believe that this increase in
regulatory oversight, coupled with continued increases in fossil fuel costs,
have resulted in the opportunity for electric vehicles to be a commercially
viable environmental solution in these markets. We believe that the benefits of
zero emissions and lower operating costs of electric vehicles, when compared to
fossil fuel powered or hybrid vehicles, provides us with an opportunity to
market cost-effective heavy-duty zero emissions electric vehicles to a number of
markets worldwide.




We believe that as the monetary and environmental costs of fossil
fuels increase, environmental regulations will continue to be promulgated
worldwide to ensure significant decreases in harmful
emissions.  Efforts to reduce greenhouse gas emissions during the past
five years using alternative fuels such as compressed natural gas and liquefied
petroleum gas have resulted in modest improvements in air quality.  We
believe that stringent environmental regulations will result in an increased
demand for cost effective zero emissions technologies that can be incorporated
into current vehicle platforms to replace current fossil fuel-based
vehicles.  Furthermore, we believe that electric vehicles will be the
ideal solution in resolving emissions and operating cost issues faced by the
heavy-duty electric vehicle industry.




Heavy-Duty
Material Handling Equipment Industry




Our fully
integrated heavy-duty electric drive system design provides us with ability to
incorporate our zero emissions technology into material handling equipment
platforms that are used in high load carrying capacity
applications.  Heavy load carrying capacity material handling
equipment is used to transport containers or cargo at marine terminals, on cargo
vessels and within industries, such as the lumber, concrete,
paper and steel industries, that have been generally unregulated in terms of
emissions generated by equipment utilizing off-highway engines. Increases in
fuel costs and regulatory oversight provides us with the opportunity to
transition this industry to zero emissions product solutions.




7




Our
heavy-duty electric drive systems are designed to target the needs of industries
that utilize 10 to 45 ton capacity forklifts, 20 to 45 ton capacity reach
stackers, 20 to 45 ton capacity roll-on/roll-off trucks and 8 to 45 ton capacity
container lift trucks, all of which are primarily used in ports and rail yards
to stack empty containers or to load and unload ships, barges or rail carts.
High capacity forklifts are also used to load and unload below deck cargo at
smaller ports. In addition, these forklifts are used in industrial facilities to
transport heavy metals, concrete, paper and lumber. A reach stacker is a
material handling equipment equipped with a hydraulic boom assembly that can
lift and move containers from barges, ships or rail carts. Reach stackers are
more cost effective and productive at smaller port facilities as compared to
fixed gantry crane systems. Roll-on/roll-off trucks are used to transport
containers onto barges or under-deck facilities mainly at small ports, providing
agility in loading and unloading operations. Container lift trucks are used at
ports and rail yards to stack empty or loaded containers within terminal or
intermodal facilities. These container lifts can stack empty containers up to
six containers high and are used to save valuable space at container handling
facilities.




All of
the heavy-duty material handling equipment described above utilize fossil fuel
propulsion systems and are customized for each application. Most of this
equipment is considered industrial equipment and therefore regulated under
off-highway emissions and safety standards. We believe that due to the high
idling and start/stop nature of these applications, electric propulsion systems
can be more cost effective and environmentally friendly in these market niches.
We are developing modified configurations of our current heavy-duty electric
drive system to provide alternative zero emissions product solutions for our
targeted applications.




Our
Competitive Strengths




Our
heavy-duty electric yard tractors and our fully integrated heavy-duty electric
drive system provides us with the opportunity to incorporate our zero emissions
technology into existing vehicles and material handling equipment used in high
load carrying capacity applications. Growing public awareness of the
relationship between burning fossil fuels, health risks and global warming has
increased the demand for a cost effective alternative to vehicles powered by
fossil fuels.  We believe the following competitive strengths serve as
a foundation for our strategy:




·
            Quality,
      Excellence and Reliability.  We believe that our
      proprietary technologies and designs, including our SAE J1939 CAN Bus and
      diagnostic capable high capacity liquid cooled flux vector inverters and
      fully integrated and configurable heavy-duty electric drive system
      increase the reliability of electric vehicles.  Our flux vector
      inverters have been sold for over 10 years by EMS and have proven
      reliability in a wide range of
applications.




·
            Heavy-Duty
      Electric Vehicle Technology.Our first
      product releases, the Nautilus E30 electric drayage tractor and the
      Nautilus E20 electric yard tractor, incorporate an electric motor that is
      directly coupled to a heavy-duty automatic transmission, which allows for
      the ability to transport heavy
loads.




·
            Low
      Operating Costs.Most
      current fossil fuel powered vehicle designs consume energy during vehicle
      idling.  Our vehicles, powered with electric motors, shut off
      during idling
      applications which results in lower operating costs and less wear and tear
      on drive train components.  These features reduce maintenance
      costs and increase vehicle life. We believe that
      our strategy to target high idling off-highway applications further
      enhances the benefits of using our electric vehicles in our targeted
      applications.






8




·
            High
      Efficiency.Our vehicles are powered by electric motors which produce higher
      levels of torque at lower speeds than fossil fuel powered motors and are
      therefore more suitable for heavy-duty applications that operate for short
      periods of time between starts and stops. In addition, our
      heavy duty electric drive system is equipped with a regenerative braking
      system which captures the energy back into the batteries during stops,
      saving brake wear and increasing energy efficiency as compared to fossil
      fuel powered vehicles.




·
            Highly
      Configurable Technology.  Our
      proprietary technologies can be configured to serve a variety of platforms
      and the specific needs of our customers.  All components in our
      fully integrated heavy-duty electric drive system communicate over an SAE
      J1939 CAN Bus system that allows us to configure key parameters of a
      vehicle’s performance through uploading of proprietary
      software.  This capability allows us to configure a vehicle to
      specific application needs with minimum hardware changes.  In
      addition , this capability provides us with full diagnostic capability to
      monitor and diagnose the performance of various components in the field
      during the life of the vehicle.  We believe that our fully
      integrated heavy-duty electric drive system, which includes an electric
      motor, transmission, flux vector inverter and communication software
      installed into a single assembly provides us with ability to incorporate
      our technologies across various product platforms such as container reach
      stackers, drayage vehicles, forklifts and straddle carriers, and positions
      us to be a leader in the heavy-duty vehicle industry.  We
      believe that this flexibility and configurability will enable us to serve
      a wider variety of markets and product
  applications.




·
            Experienced
      Management Team and Access to an Extensive Distribution
      Network.  Our senior
      management team has over 80 years of combined experience in the electric
      vehicle industry and has extensive experience in startup technology
      companies within this industry. In addition, members of our senior
      management have significant experience within the transportation
      industry.




Our
Strategy




As one of
the few companies focused on heavy-duty electric vehicles and material handling
equipment, we are dedicated to providing cost effective solutions to the
heavy-duty electric vehicle and material handling equipment
markets.  Our business strategy is based on our belief that electric
vehicles are inherently more cost effective and reliable than fossil fuel
powered vehicles.  We believe that despite the limitation in battery
energy density as compared to fossil fuel applications, there are a significant
number of off-highway high idling niche applications that can benefit from the
use of zero emissions electric vehicles and material handling
equipment.  The primary elements of our business strategy
include:




Increase our
current market presence and selectively pursue new
opportunities.  We intend to use our products to pursue new
opportunities and capture market share within the heavy-duty electric vehicle
market.  In addition to producing and selling heavy-duty electric
vehicles, we currently market and plan to sell our flux vector inverters and
heavy-duty electric drive systems to other industry OEMs that manufacture
heavy-duty vehicles and material handling equipment. We are currently focused on
heavy-duty vehicle and material handling equipment applications requiring
heavy-duty electric drive systems exceeding 100 kW requirements. While the release of our
Nautilus E30 and Nautilus E20 electric tractors has proven that the use of
electric vehicles is technologically feasible in heavy-duty applications, we
believe that the use of electric vehicles in heavy-duty applications is also
economically beneficial. Our objective is to incorporate our
heavy-duty electric drive system into products that vertically integrate into
all aspects of heavy-duty transportation of cargo and containers in off-highway
applications.




9




Develop
technologies that can be easily adapted for use in various
platforms.Our proprietary
heavy-duty electric drive system has been built as an assembly that can be
readily modified to meet different vehicle platform
specifications.  For example, our heavy-duty electric drive systems
can be incorporated into container handlers, reach stackers, gantry cranes,
large industrial forklifts, roll-on/roll-off trucks and drayage
vehicles.  We believe that our ability to incorporate our technology
into other product lines will help to diversify our revenue stream across
diverse target markets and provide us with additional growth opportunities in
the future.  Our operations strategy focuses on integration of our
heavy-duty electric drive systems and battery packs into existing vehicle
platforms and sourcing component fabrication processes through local
suppliers.




Implement
retrofit business model on existing yard tractors to accelerate market
changeover.Our proprietary heavy-duty electric drive and battery
management systems can be retrofitted into existing yard tractor vehicle
platforms.  We believe that the increase in fuel costs and the
adoption of environmental regulations calling for lower emissions will
accelerate market changeover to lower or zero emissions vehicle alternatives in
the heavy-duty vehicle industry. Furthermore, we believe that most vehicles are
being replaced prematurely due to the end of life of certain key components such
as the vehicle’s engine and transmission assembly. We intend to either sell
replacement vehicles or provide our heavy-duty electric drive system that can be
retrofitted into existing fossil fuel powered vehicles.  Our
integrated heavy-duty electric drive systems can be incorporated into most yard
tractor vehicle platforms currently in use at ports, marine terminals,
intermodal facilities, mail facilities, distribution centers and industrial
warehouses.




Develop global
sales and service network. We plan to build a global distribution system
that utilizes regional dealers to promote, sell and service our vehicles
worldwide. Several members of our senior management have significant experience
in managing global dealer networks for material handling and electric vehicle
manufacturers.




Provide superior
after market service.We believe that after market service is
the key to success in the heavy-duty electric vehicle and material handling
equipment markets.  Our heavy duty electric vehicles are designed with
a fully integrated diagnostic system that monitors the performance of all
critical components during the life of the vehicle and makes such performance
related data available in connection with our after-market
services.  The availability of such performance related data will
enable us to provide our customers with prevention based service schedules, and
thereby reduce repair costs.




Build capital
efficient industry alliances.We purchase several components
and assemblies for the production of our vehicles from leading manufactures
within our industry.  Our integrated heavy-duty electric drive system,
which is preassembled and installed into vehicle chassis upon receipt, reduces
our need to maintain a high inventory of chassis.  In addition, the
purchase of vehicle assemblies from leading manufacturers also reduces our need
for capital investment in inventory that would otherwise be required to
manufacture chassis.  This operation strategy provides us with the
ability to focus a significant portion of our available capital into research
and development, design, marketing and sales of our products while using high
quality components from other manufacturers.




Our
Technology




We have
developed and acquired proprietary technologies that we believe provides us with
a significant competitive advantage within the industries we
compete.  In 2007, Balqon California completed the development of a
heavy-duty electric drive system that incorporates an automatic five speed transmission
and electric motor coupled with an in-line drive system resulting in high torque
at low speeds without compromising top end speed. This heavy-duty electric drive
system also includes a 240 kW liquid cooled flux vector inverter with SAE
J1939 CAN Bus capability that provides efficient transfer of energy from
batteries to an electric motor resulting the vehicle being able to tow more than
60,000 pounds of load at a maximum speed of 45 mph.




10




Flux
Vector Inverter Technology




Our flux
vector inverters are micro-processer controlled inverters designed to control
motor speed through varying voltage and frequency.  The ability to
control speed in heavy-duty applications is obtained through use of our
proprietary software which is customized to meet each application
need.  In addition, hardware components of our flux vector inverters
are varied to produce different configurations ranging in power from 40 kW
to 240 kW.  Although our flux vector inverters are available in
both analog and SAE J1939 digital communication capabilities, we only utilize
SAE J1939 capable inverters to provide efficient communication and diagnosis of
complete vehicle systems in our heavy-duty electric vehicles.  Based
on power requirements, our inverters can be manufactured to meet specific motor
or vehicle requirements ranging from electric motorcycles to high capacity
on-highway or off-highway vehicles.  Due to the software centric
design capability of our flux vector inverter technology, we have the capability
to remotely modify, diagnose and monitor key performance parameters to meet
specific application requirements.  Our inverters have a capacity of
over 200 kW at a voltage range of 200 to 800 volts, which we believe makes
them ideally suited for high load carrying applications.  These flux
vector inverters have been used in electric buses, mining vehicles and other
specialty vehicles applications with over one million miles logged in actual
operations.




CAN
Bus Diagnostic System




All key
components of our heavy-duty electric traction drive system, including the
electric motor, transmission, flux vector inverter, contactors, fuses, accessory
motor and inverter, are connected through our proprietary CAN Bus diagnostic
system. Our CAN Bus system monitors, measures, communicates, stores and
diagnoses key performance parameters of our heavy-duty electric drive system
components and provides an intuitive vehicle status display of all vehicle
systems to the operator through a digital dash display mounted in the truck
cabin.  The display communicates the status of all major traction and
accessory systems providing real time information to the
operator.  The diagnostic system also records daily energy
consumption, fuel economy, fault codes, and the thermal status of major
components on the vehicle.  Our CAN Bus diagnostic system can also
communicate information to a central data system on a wireless network and store
key application parameters that can be reviewed to determine energy efficiency
and performance of the vehicle.  In addition, our CAN Bus diagnostic
system provides the vehicle user with the ability to optimize drive efficiency
levels to meet specific application needs.




Battery
Management System




We have
designed and developed an automatic battery management system that monitors and
maintains battery packs in conjunction with our CAN Bus diagnostic
system.  This battery management system records daily energy usage and
charge energy received and then automatically determines battery watering
intervals and maintains battery water levels after the completion of a charge
cycle without operator intervention.  This system also accurately
monitors battery usage over the life of a vehicle, allowing end users of our
vehicles to accurately determine the life cycle of the battery.  We
believe that this system increases battery life and reduces maintenance costs of
a vehicle.




11




Products




Heavy-Duty
Electric Vehicles




Our
current product line of zero emissions heavy-duty electric vehicles, named
Nautilus, are the flagships of our product portfolio.  Our Nautilus
product line consists of two product configurations, Nautilus E30 and Nautilus
E20, with each model featuring our proprietary heavy-duty electric drive system
and battery management system.  We are also developing a heavy-duty
electric truck, the Mule M150, which is a high-capacity on-highway delivery
truck targeting inner city delivery applications.




Our
heavy-duty electric vehicles include our heavy-duty electric drive systems that
feature an automatic five speed transmission coupled to an electric motor driven
by our proprietary liquid cooled flux vector inverters.  Our flux
vector inverter and transmission are SAE J1939 CAN Bus capable which allows
seamless communication and monitoring of all vehicle systems on a real time
basis.  This capability also allows us to monitor and modify key
parameters in the field to optimize vehicle efficiency and performance to
application needs.  Our heavy-duty electric vehicles also include our
quick-change battery packs that are equipped with our battery management
system.




Nautilus
E20 – Electric Yard Tractor




The
Nautilus E20is a
zero emissions electric tractor that is a smaller wheelbase version of our
Nautilus E30 and is designed for “in-terminal” operations to transport
containers at shipyards, rail yards, intermodal facilities, industrial plants,
distribution warehouses, food production facilities, military bases and mail
facilities.  The Nautilus E20 can tow 60,000 pound cargo containers at
a speed of up to 25 miles per hour with a range of 30 to 60 miles per battery
charge.




The
Nautilus E20 features our heavy-duty electric drive system and quick-change
battery pack incorporated into a yard tractor chassis.  The Nautilus
E20 is designed with a short wheel base and lifting fifth wheel which improves
the maneuverability of the vehicle and its efficiency in high duty cycle
applications.  The Nautilus E20 complies with all applicable
regulations associated with off-highway use vehicles.




The
battery pack of the Nautilus E20 contains 140 kW hour commercially
available long-life tubular lead acid traction batteries used in applications
requiring high power and energy density. The vehicle contains two battery packs
that can be replaced with fully charged battery packs in less than five minutes
thereby increasing the range of the vehicle in longer shift
operations.  The battery packs are equipped with a forced air cooling
and a battery watering system that increases battery life and reduces
maintenance costs. In addition, the battery packs include our advanced battery
management system that communicates via a CAN Bus system to a central computer
recording energy usage, temperature and efficiency data.




The
Nautilus E20 is equipped with smart fast charger technology that can charge up
to four vehicles simultaneously in four hours.  The smart charger can
also provide up to 60% of the charge in one hour to meet peak demands during
daily operations.




Nautilus
E30 – Electric Drayage Tractor




The
Nautilus E30is
anoff-highway
electric drayage zero emissions tractor designed for short haul or “drayage”
operations such as the transportation of containers from ship yards to rail
yards or local warehouses.  This tractor has a load capacity of 60,000
pounds and can travel at a speed of up to 45 miles per hour
and has a range of between 30 to 60 miles per battery charge.  We plan
to obtain on-highway certification from the United States Department of
Transportation for the Nautilus E30.




12




The
Nautilus E30 is equipped with tandem axles which allows the vehicle to tow loads
greater than 60,000 pounds in off-highway applications. In addition, the vehicle
is equipped with a higher capacity electric motor and flux vector inverter to
provide the ability to tow loads in excess of 60,000 pounds at higher speeds.
The vehicle is designed with an ABS braking system and five speed transmission
to allow operations at higher speeds in off-highwayapplications.




The
Nautilus E30 battery packs contain 160 kW hour commercially available
long-life tubular lead acid traction batteries used in applications requiring
high power and energy density.  In order to provide increased range in
certain applications, our battery pack is designed to be replaced with fully
charged battery packs in the field resulting in a vehicle range of over 80
miles.




Mule
M150 – Electric Truck




We are
currently developing and designing our first on-highway heavy-duty electric
truck for short-haul off-highway applications.  Our Mule M150 is
expected to be a zero emissions electric truck incorporating a heavy-duty
transmission and drive axles and is expected to be competitive in performance
with current Class 6 fossil fuel powered vehicles in short-haul
markets.  It is anticipated that the Mule M150 will be able to travel
at a speed of up to 55 miles per hour and will have a range of over 80 miles on
single charge.  The Mule M150 will be designed as a zero emissions
solution for short haul on-highway routes in inner cities, port facilities and
airports for the distribution of goods and cargo.




We expect
that the Mule M150 will feature various flatbed configurations including cargo
box trucks, trash trucks and application specific fuel trucks used at large
airports.  We intend to partner with cargo bed OEMs to provide various
configurations currently available in similar sized fossil fuel powered
vehicles.  We expect to release the Mule M150 in 2009.




Heavy-Duty
Electric Drive Systems




Our fully
integrated heavy-duty electric drive systems have been designed and developed
with a view towards use in existing vehicle platforms in the container
transportation and material handling equipment industries.  Our
heavy-duty electric drive system includes a high efficiency alternating current,
or AC, electric motor design that is directly coupled to a five speed automatic
transmission system and powered by our proprietary liquid cooled flux vector
inverters.  Our use of an automatic transmission provides us with a
high torque to weight ratio which is essential in heavy load carrying
applications.




We
assemble all the components of our drive system into a single integrated unit
that can be readily installed into the existing engine compartment of many
trucks, tractors, and material handling equipment.  Our proprietary
flux vector inverter is SAE J1939 CAN Bus capable which allows for
communication with existing electrical and transmission components on fossil
fuel powered vehicles. We believe that this feature provides us with an
opportunity to design and develop new vehicle platforms and enter new
off-highway market niches, thereby expanding our overall product
offerings.




Our
heavy-duty electric drive system, which is designed and developed for use in
heavy-duty electric vehicles, can also be readily integrated into other vehicle
platforms with minor modifications to its current design.  Our
heavy-duty electric drive system has been tested to tow loads of over 50 tons on
a reliable basis which provides us with an opportunity to retrofit vehicles such
as container forklifts, reach stackers and roll-on/roll-off
vehicles.




We are
currently seeking strategic partnerships with OEMs of heavy-duty vehicles and
material handling equipment to develop zero emissions solutions for their
current vehicle platforms.




13




Flux
Vector Inverters




Our
proprietary variable flux vector inverters range in power from 40 kW to
240 kW.  Our flux vector inverters are available in liquid cooled
or air cooled versions depending on application, duty cycle and power
requirements.  Our flux vector inverters are available with analog or
digital output based on application needs. Our heavy duty flux vector inverters
are also SAE J1939 CAN Bus capable which allows our customers to fully integrate
our inverter into their own vehicle diagnostic systems.  Our
proprietary software in the processor allows the inverter to be customized for
use in electric vehicles, hybrid vehicles, plug-in hybrids and other
applications.  Prior to our acquisition of EMS, EMS sold its flux
vector invertersfor use in electric
buses, mining equipment and other automobiles.  Our inverters can
operate between 200 to 800 volts direct current, or DC, and can be used in
stationary and mobile applications.  As of the date of this report, we
have two outstanding purchase orders for our flux vector inverters from electric
bus and hybrid drive system manufacturers.




We
design, manufacture, assemble and test our inverters at our Harbor City
facility.  We have designed our inverters for high-vibration mobile
applications which includes a wash down enclosure design that allows the
inverter to be used in outdoor rugged mobile applications.  In
addition, our inverters include a liquid cooling system that results in a higher
efficiency and reliability.  Our below 100 kW inverters are
available in air cooled versions and are ideal for use in industrial vehicles,
light duty pickup trucks and recreational vehicles.  Our heavy-duty
inverters, which include a liquid cooling system, are ideal for use in
heavy-duty electric vehicles such as electric tractors, forklifts, buses,
delivery vans, Class 4-6 cargo trucks and mining vehicles.




Service, Parts and Consumables




We plan
to sell our products through an authorized sales and service dealer
network.Our
products require periodic maintenance and replacement of certain vehicle
components.  We plan to sell these components through a trained and
authorized dealer network.  Batteries, which are a key component in
our vehicles, require replacement after a certain period of use based on
application. We believe that our quick replacement battery packs that feature
our battery management systems, given its integrated design with our heavy-duty
electric drive system and communication systems, will require replacement only
through authorized service dealers.  Periodically we may also provide
vehicle upgrades or accessories to enhance performance and efficiency of our
vehicles in the field, which we expect will provide additional revenues through
sales of aftermarket parts marketed through our trained dealer
network.  Currently, sales and service of our products are being
performed by our staff located at our facility in Harbor City.




Manufacturing
and Assembly




Our
executive offices and our  manufacturingand
assembly facility is also located in Harbor City, California.  We
lease a 15,500 square foot manufacturing and assembly facility in Harbor City,
California.


Key
components used in the assembly of our proprietary flux vector inverters,
heavy-duty electric drive systems, battery modules, charging system,
transmissions and vehicle chassis, are supplied to us by large global
manufacturers that we believe have the production capacity to meet our current
and projected future production requirements.  Our key components are
supplied with manufacturer’s warranties which meet or
exceed the warranties provided to our customers.  We sell all of our
products with a minimum of a one-year limited warranty with a prorated warranty
on batteries based on usage.  In addition, suppliers of our key
components have an extensive global sales and service network to support our
dealers and customer service needs in a timely manner.  Our management
team has extensive experience in global sourcing of automotive components and
has implemented a procurement and management system to monitor material costs on
a real-time basis.




14




Final
assembly of our heavy-duty electric vehicles and heavy-duty electric drive
systems is conducted at our Harbor City location. We also assemble and test our
battery management systems and charging systems at the same location. We have also located our
engineering and procurement offices at our Harbor City facility to support our
production needs. We estimate that our current manufacturing capacity at this
facility provides us with the ability to substantially increase sales with the
addition of direct labor personnel and relatively modest capital equipment
expenditures.  We believe that our facilities in Harbor City are
sufficient to meet our anticipated production needs over the next three
years.




Customers




In 2008,
we received a purchase order from the City of Los Angeles for 20 Nautilus E20
yard tractors and five Nautilus E30 drayage tractors and a purchase order from
the AQMD for one Nautilus E20 for use as a demonstration vehicle at marine
terminals and industrial facilities.  Our acquisition of the
intellectual property assets of EMS provides us with an installed base of flux
vector inverters used in light and medium duty applications such as delivery
trucks, automobiles and vans.  We plan to sell our heavy-duty electric
drive systems and flux vector inverters to OEMs for use in heavy-duty vehicles
and heavy-duty material handling equipment.




Sales
and Marketing




Our sales
and marketing strategy focuses on establishing Balqon Corporation as the premier
provider of heavy-duty electric vehicles and heavy-duty electric drive systems
by building an active customer base.




Heavy-Duty
Electric Vehicle Sales




We
currently use Internet advertising and public relations campaigns to promote our
products in domestic and international markets.  We plan to market,
sell and service our heavy-duty vehicles through an authorized and trained
worldwide dealer network which we are in the process of establishing. We expect
that our dealers will beassigned geographic
territories, the sizes of which will vary based on a dealer’s infrastructure and
ability to adequately perform sales and service functions. We expect that
authorized dealers will receive discounts along with installation fees as deemed
appropriate for each territory and the dealer’s annual sales. In order to
promote sales growth we intend to implement a scaled discount structure based on
annual sales or performance to yearly goals and objectives. In addition, we plan
to provide marketing incentives to dealers in terms of cooperation on trade
shows, providing demonstration equipment, marketing collateral materials, etc.
as deemed necessary to increase sales and gain market share.




As we
grow our business through the expansion of our dealernetwork, we plan to
establish facilities to provide sales and service support to our customers in
countries outside the United States. We currently have dealers that are
marketing our Nautilus E20 yard tractor in western Canada and South
Korea.




OEM
Sales




We
currently market and plan to sell our heavy-duty electric drive systems and flux
vector inverters directly to OEMs in the automotive and material handling
equipment industries. We plan to target OEMs that manufacture vehicle platforms
that do not directly compete with our heavy-duty electric vehicle product line.
In addition, we plan to develop long term agreements with adequate protections
for our proprietary technologies prior to developing assemblies or component
configurations that meet OEM product needs.  We plan to develop a
business development organization that will focus solely on OEM relationships
worldwide.  We expect that this organization will be supported by
engineering and manufacturing personnel on as needed basis.




15




Competition




Our
competitors in our addressed markets consist of small to large global
corporations providing heavy-duty vehicles powered by fossil fuels. Currently,
we are not aware of any other new or current vehicle manufacturer providing zero
emissions heavy-duty electric yard tractors in our addressed markets. Our
competitors have substantially greater customer bases, businesses, and financial
resources than us, and are currently engaged in the development of products and
technologies related to hybrid drive systems that utilize current fossil fuel
based drive systems combined with electric or hydraulic propulsion
systems.




Heavy-Duty
Electric Vehicles




Our
primary competition in the heavy-duty electric vehicle market are vehicles
designed to operate with diesel propulsion systems.  We also compete
with other fuel powered vehicles such as bio-diesel, compressed natural gas,
plug-in hybrid and liquid natural gas powered vehicles.




Our
competitors vary based on off-highway and on-highway market segments. Our
Nautilus product line primarily addresses the off-highway, in-terminal
applications for container transportation.  We expect that our Mule
product line will address short haul on-highway applications for load carrying
applications. We believe that we are the first manufacturer addressing these
heavy load short haul applications with zero emissions technologies and
therefore expect most of our competitors to be current manufacturers of
on-highway fossil fuel-based vehicles. Our competitors sell their products
through qualified dealer networks which sell, promote and service their
products. In most cases, qualified dealers are assigned territories and are
compensated for any vehicle or aftermarket parts shipped into their
territory.




These
competitors are Kalmar Industries Corp, Capacity of Texas, Inc., MAFI Transport
Systems GmbH, MOL Transport Solutions, Vision
Industries Corp, and
Terberg DTS UK Ltd.  We consider Kalmar Industries Corp. and Capacity
of Texas, Inc. to be two manufacturers that have global presence, while Terberg
DTS UK Ltd. and MOL Transport Solutions have a regional presence in
Europe.


We expect
that our Mule product line will address applications related to short-haul
transportation of cargo at ports, airports, rail yards and inner cities. We
anticipate that the Mule product line will target customized market niches where
air pollution is a key driver for vehicle selection. In this product category
our competitors include large automotive vehicle manufacturers such as Kenworth
Truck Company, Peterbilt Motors Company, Mack Trucks, Inc. and Freightliner
Trucks. Our success in this market niche will depend
upon increased regulatory incentives for use of zero emissions vehicles. We will
also focus our efforts in promoting sales of these vehicles in international
markets for distribution of goods and consumables in congested inner city
areas.




Material
Handling Equipment Industry




Our
competitors in the heavy-duty material handling equipment industry consist of
fossil fuel equipment manufacturers of forklifts, reach stackers,
roll-on/roll-off vehicles and container forklifts. Our competitors sell their
products through global distribution networks and are currently developing
alternative fuel or hybrid configurations of their current products to address
new regulatory requirements related to engine emissions.




16




We
believe that our strategy to partner with current OEMs of heavy duty material
handling equipment will provide us an early market entry into zero emissions
markets in the heavy-duty material handling equipment
industry.  Significant steps have been taken during the past 20 years
to transition the material handling industry from fossil fuel based to electric
power based vehicle designs.  This effort has been limited to light
and medium duty applications.  Our strategy to provide full integrated
heavy-duty electric drive systems to this industry is consistent with this
transition towards zero emission vehicles in off-highway
applications.




Our
current competitors within this industry include fossil fuel powered OEMs such
as Kalmar Industries Corp., Hyster Company, Linde Material Handling GmbH,
Svetruck AB, Mitsubishi Heavy Industries, Ltd., TCM Corporation and
Mitsui & Co., Inc. Most of these competitors have a global presence and
provide additional value added services such as equipment leasing, contract
labor and full maintenance contracts.  We believe that our strategy to
enter the material handling equipment market as a provider of heavy-duty
electric drive systems benefits both the customers and OEMs within this
industry.




Flux
Vector Inverters




Electric
vehicle propulsion systems consist of mainly two types of motor technologies, DC
and AC.  DC powered systems are more dominant and cost effective in
lower voltage and load carrying applications. We believe that during the past
five years, cost effective AC systems have started to gain market share in lower
cost products mainly due to inherent lower maintenance costs of AC propulsion
systems.




Heavy
duty electric vehicles require higher power and voltage rated propulsion systems
requiring high level of safety, diagnostics and customization.  Our
competitors in this market consist of manufacturers of high capacity variable
frequency inverters.  These manufacturers market directly to OEMs or
vehicle manufacturers.  Our current competitors in the marketplace
include Enova Systems Inc., Azure Dynamics Inc., UQM Technologies, Inc. and
Raser Technologies, Inc.




Product
Development




Product
development is spearheaded by members of our senior management who evaluate the
development of new products and new market applications for existing
products.  We believe our future success depends on our ability to
introduce product enhancements integrating new battery technologies into current
vehicle designs increasing the range of our vehicles for on-highway
applications.




Our
research and development team has over 80 years of combined experience in the
development of electric vehicle technologies. We focus our efforts into seamless
integration of leading technologies into a product
configuration that is cost competitive in a market niche. We utilize the most
advanced CAD design systems to reduce time to market of our new
products.




We
believe in our market driven approach to the development of new technologies and
product configurations. We place increased emphasis on developing zero emissions
technologies that are cost effective and that reliably address today’s market
needs. We continue to develop our proprietary flux inverter technology to
address higher capacity market niches, meanwhile we are also actively engaged in
identifying suppliers for higher energy density battery technology.




17




Intellectual
Property




We
believe that we have a broad intellectual property portfolio.  We
primarily own intellectual property protecting the proprietary technology for
the flux vector inverters designed by us.  Our portfolio consists of a
trade name, trade secrets and proprietary processes.




Currently,
we rely on common law rights to protect our trade name “Balqon.”  The
common law rights protect the use of this mark used to identify our
products.  It is possible that our competitors will adopt product or
service names similar to ours, thereby impeding our ability to build brand
identity and possibly leading to customer confusion.  Our inability to
protect our trade name will have a material adverse effect on our business,
results of operations, and financial condition.  We also rely on trade
secrets and proprietary know-how and employ various methods to protect our
proprietary technology and concepts.  However, such methods may not
afford complete protection, and there can be no assurance that others will not
independently develop similar know-how or obtain access to our know-how and
concepts.  There can be no assurance that we will be able to
adequately protect our intellectual property.  Third parties may
assert infringement claims against us or against third parties upon whom we rely
and, in the event of an unfavorable ruling on any claim, we may be unable to
obtain a license or similar agreement to use trade secrets that we rely upon to
conduct our business.




Government
Regulation




The
trucking industry within the United States is regulated by the United States
Department of Transportation and by various state agencies.  We are
also subject to federal, state and local laws and regulations applied to
businesses generally. We believe that our products are in conformity with all
applicable laws in all relevant jurisdictions.




Our
electric vehicles are designed to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed.  Government regulations regarding the manufacture, sale and
implementation of products and systems similar to our electric trucks are
subject to future change. We cannot predict what impact, if any, such changes
may have upon our business.




Recent
Initiatives




Recent
regulations adopted by the Port of Los Angeles and the Port of Long Beach, which
are referred to in this report collectively as the San Pedro Bay Ports, have
resulted in increased attention on alternative fuel vehicles generally and our
heavy-duty electric vehicles specifically.  In November 2006, the San
Pedro Bay Ports approved a comprehensive five-year “Clean Air Action Plan” aimed at reducing
pollution and health risks associated with the air emissions resulting from
activities of the San Pedro Bay Ports. According
to the Port of Los Angeles, one ofthe goals
of the “Clean Air Action Plan” is an 80% reduction in port-related
truck pollution.  The Clean Air Action Plan outlines a “Clean Trucks
Program” that calls for the San Pedro Bay Ports to
scrap and replace approximately 16,000 drayage tractors being used at the San
Pedro Bay Ports with the assistance of San Pedro Bay Ports.  The Clean
Air Action Plan also provides for grants andloan
subsidies thatwill be sponsored and administered jointly by the San
Pedro Bay Ports.  Under the Clean Trucks Program, trucks manufactured
prior to 1989 have been banned from entering the San Pedro Bay Ports’ shipping
terminals.  Additionally, by 2012, all trucks that fail to meet 2007
emission standards will be banned from entering the San Pedro Bay
Ports.  The San Pedro Bay Ports are also providing financial
assistance to truckers to acquire trucks that comply with their new
requirements.  As a result of these regulations, the emphasis on
energy independence and general increased interest in environmentally friendly
alternatives, we believe that the demand for our heavy-duty electric vehicles
will increase significantly over the next several years.




18




The Port
of Los Angeles estimates that on an annual basis, more than two million truck
drayage trips take place between the port terminals and rail and warehouse
facilities within five to ten miles of the port.  Because of the
significant number of trips, the Port of Los Angeles and the City of Los Angeles
have expressed confidence that an emissions-free fleet of trucks will cut noise
and air pollution at the Port of Los Angeles.




The Port
of Los Angeles has estimated that if our heavy-duty electric vehicles were used
for the estimated 1.2 million truck trips that occurred in 2006 between the
ports and a near-dock rail yard, the average pollution discharge generated would
be reduced by approximately 35,605 tons of tailpipe emissions, including
approximately 22 tons of diesel particulate matter, 427 tons of localized
nitrogen oxide emissions, 168 tons of carbon and 34,987 tons of carbon
dioxide.




The
increased focus on environmentally friendly and energy efficient solutions at
ports in Southern California is further exemplified by a program recently
announced by the AQMD that provides financial incentives and assistance for
truck owners and operators to replace older trucks with newer, environmentally
friendlier solutions.  Under The Carl Moyer Fleet Modernization
Program, the AQMD is providing funding assistance for heavy-duty on-highway
truck fleet modernization in the South Coast Air Basin. This program is designed
to assist truck owners and operators to replace pre-1990 heavy-duty diesel
trucks with newer diesel-fueled trucks or trucks with less emissions than their
diesel fueled counterparts.  The AQMD has approximately $6 million
available for funding and could pay up to 80% of the cost of replacing a
pre-1990 heavy-duty diesel truck.




Employees




As of
May 20, 2009, we employed twelve employeeson a full-time basis.  None of our employees are represented by
labor unions, and there have not been any work stoppages at our
facilities.  We generally consider our relationships with our
employees to be satisfactory.  In addition, from time to time, we
utilize outside consultants or contractors for specific
assignments.




Internet
Website




Our
Internet website is www.balqon.com.  The
content of our Internet website does not constitute a part of this
report.




Item
1A.                 Risk
Factors.




The
following summarizes material risks that investors should carefully consider
before deciding to buy or maintain an investment in our common
stock.  Any of the following risks, if they actually occur, would
likely harm our business, financial condition and results of
operations.  As a result, the trading price of our common stock could
decline, and investors could lose the money they paid to buy our common
stock.




Risks
Relating to Our Business




We
have a history of only nominal revenues, have incurred significant losses,
expect continued losses and may never achieve profitability. If we continue to
incur losses, we may have to curtail our operations, which may prevent us from
successfully deploying our heavy-duty electric vehicles, flux vector inverters,
heavy-duty electric drive systems and battery management systems as well as
operating and expanding our business.




19




We have a
history of only nominal revenues, have not been profitable and expect continued
losses. Historically, we have relied upon cash from financing activities to fund
substantially all of the cash requirements of our activities and have incurred
significant losses and experienced negative cash flow. As of December 31,
2008, we had an accumulated deficit of
$8,020,855.  Forour fiscal years ended
December 31, 2008 and 2007, we incurred a net loss of $7,933,281 and
$82,744, respectively.  We cannot predict when we will become
profitable or if we ever will become profitable, we may continue to incur losses
for an indeterminate period of time and may never achieve or sustain
profitability. An extended period of losses and negative cash flow may prevent
us from successfully producing and selling our heavy-duty electric vehicles,
flux vector inverters, heavy-duty electric drive systems and battery management
systems and operating or expanding our business. As a result of our financial
condition, our independent auditors have issued a report questioning our ability
to continue as a going concern.




Our
significant losses have resulted principally from costs incurred in connection
with the development of our heavy-duty electric vehicles and from costs
associated with our administrative activities. We expect our operating expenses
to dramatically increase as a result of our planned production and sale of our
heavy-duty electric vehicles.  Since we have only recently completed
the development of our heavy-duty electric vehicles, have no significant
operating history and have delivered only two heavy-duty electric vehicles as of
the date of this report, we cannot assure you that our business will ever become
profitable or that we will ever generate sufficient revenues to meet our
expenses and support our planned activities. Even if we are able to achieve
profitability, we may be unable to sustain or increase our profitability on a
quarterly or annual basis.




Our
independent auditors have issued a report questioning our ability to continue as
a going concern. This report may impair our ability to raise additional
financing and adversely affect the price of our common stock.




The
report of our independent auditors contained in our financial statements for the
years ended December 31, 2008 and 2007 includes a paragraph that explains
that we have incurred substantial losses. This report raises substantial doubt
about our ability to continue as a going concern. Reports of independent
auditors questioning a company’s ability to continue as a going concern are
generally viewed unfavorably by analysts and investors. This report may make it
difficult for us to raise additional debt or equity financing necessary to
continue the development and deployment of our heavy-duty electric vehicles,
flux vector inverters and heavy-duty electric drive systems. We urge potential
investors to review this report before making a decision to invest in Balqon
Corporation.




We
have material weaknesses in our internal control over financial reporting
structure which until remedied, may cause errors in our financial statements
that could require a restatement or 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.
  We have
identified two material weaknessesin
our internal control over financial reporting and cannot assure you that
additional material weaknesses will not be identified in the future. If our
internal control over financial reporting or disclosure controls and procedures are not
effective, there may be errors in our financial statements that could require a
restatement or 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.


20




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.




The
current global financial crisis and uncertainty in global economic conditions
may have significant negative effects on our customers and our suppliers and may
therefore affect our business, results of operations, and financial
condition.




The
current global financial crisis—which has included, among other things,
significant reductions in available capital and liquidity from banks and other
providers of credit, substantial reductions and/or fluctuations in equity and
currency values worldwide, and concerns that the worldwide economy may enter
into a prolonged recessionary period—may have a significant negative effect on
our business and operating results.The potential effects
of the current global financial crisis are difficult to forecast and mitigate.
As a consequence, our operating results for a particular period are difficult to
predict, and, therefore, prior results are not necessarily indicative of results
to be expected in future periods.




The
current economic crisis may affect our current and potential, direct and
indirect, customers’ access to capital or willingness to spend capital on our
products, and/or their levels of cash liquidity with which or willingness to pay
for products that they will order or have already ordered from
us.  The effect of the current economic conditions on our customers
may therefore lead to decreased demand, including order delays or cancellations,
which in turn may result in lower revenue and adversely affect our business,
results of operations and financial condition.




Likewise,
the current global financial crisis may negatively affect our suppliers’ access
to capital and liquidity with which to maintain their inventories, production
levels, and/or product quality, and could cause them to raise prices or lower
production levels, or result in their ceasing operations.  The
challenges that our suppliers’ may face in selling their products or otherwise
in operating their businesses may lead to our inability to obtain the materials
we use to manufacture our products. These actions could cause reductions in our
revenue, increased price competition and increased operating costs, which could
adversely affect our business, results of operations and financial
condition.




21




The
current global financial crisis and uncertainty in global economic conditions
may have significant negative effects on our access to credit and our ability to
raise capital.




If the
current global financial crisis adversely affects Bridge Bank, National
Association, Bridge Bank may not have the ability to provide us with access to
the funds available under our credit facility, resulting in our access to cash
and our ability to operate our business being negatively
affected.  Additionally, the financial market disruption may make it
difficult for us to raise additional capital or obtain additional credit, when
needed, on acceptable terms or at all.




The
current global financial crisis and uncertainty in global economic conditions
could prevent us from accurately forecasting demand for our products which could
adversely affect our operating results or market share.




The
current market instability makes it increasingly difficult for us, our customers
and our suppliers to accurately forecast future product demand
trends.  If, as a result, we produce excess products our inventory
carrying costs will increase and result in obsolete
inventory.  Alternatively, due to the forecasting difficulty caused by
the unstable economic conditions, we may be unable to satisfy demand for our
products which may in turn result in a loss of market share.




The
current global financial crisis may lead to a reduction in federal, state and
local environmental initiatives and spending, which could adversely affect our
business.




Our
ability to obtain future public sector work is largely a function of the level
of government funding available.  In January 2009, a new federal
administration took office, and it is widely expected that the new
administration will increase environmental spending.  However, as a
result of the current economic crisis, federal, state and local government
agencies are facing potentially significant budget shortfalls as a result of
declining tax and other revenues, which may cause them to defer or cancel
planned environmental and infrastructure projects.  If environmental
spending is reduced, it may affect our current contracts as well as our ability
to procurer additional government contracts, which could adversely affect our
business, results of operations and financial condition.




We
need and may be unable to obtain additional financing on satisfactory terms,
which may require us to accept financing on burdensome terms that may cause
substantial dilution to our shareholders and impose onerous financial
restrictions on our business.




We
require significant additional financing. Deteriorating global economic
conditions, including the recent turmoil in the United States capital markets,
may cause prolonged declines in investor confidence in and accessibility to
capital markets. Future financing may not be available on a timely basis, in
sufficient amounts or on terms acceptable to us. Any future financing will
likely dilute existing stockholders’ equity. Any debt financing or other
financing of securities senior to our common stock 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 and results of
operations because we could lose any then-existing sources of financing and our
ability to secure new sources of financing may be impaired.




We
depend on the services of Balwinder Samra, and the loss of him could adversely
affect our ability to achieve our business objectives.




22




Our
continued success depends in part upon the continued service of Balwinder Samra,
who is our President and Chief Executive Officer.  Mr. Samra is
critical to the overall management of Balqon Corporation as well as to the
development of our technologies, our culture and our strategic direction and is
instrumental in developing and maintaining close ties with our customer
base.  Although we have entered into an employment agreement with
Mr. Samra, the agreement does not guarantee the service of Mr. Samra
for a specified period of time.  In addition, we do not maintain a
“key-person” life insurance policy on Mr. Samra.  The loss of
Mr. Samra could significantly delay or prevent the achievement of our
business objectives.  Consequently, the loss of Mr. Samra could
adversely affect our business, financial condition and results of
operations.




Our
results of operations could be adversely affected as a result of impairments of
goodwill and other intangible assets.




In
connection with the recent acquisition of certain of the assets of EMS, we
recorded approximately $166,500 in goodwill and $186,965  of intangible
assets based on the application of purchase accounting. Statement of Financial
Accounting Standards, or SFAS, No. 142 provides that goodwill and other
intangible assets that have indefinite useful lives not be amortized, but
instead be tested at least annually for impairment, and intangible assets that
have finite useful lives continue to be amortized over their useful lives.
SFAS No. 142 provides specific guidance for testing goodwill and other
non-amortized intangible assets for impairment. SFAS No. 142 requires
management to make certain estimates and assumptions when allocating goodwill to
reporting units and determining the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of market conditions,
projected cash flows, investment rates, cost of capital and growth rates, which
could significantly impact the reported value of goodwill and other intangible
assets. Fair value is determined using a combination of the discounted cash
flow, market multiple and market capitalization valuation approaches. Absent any
impairment indicators, we perform our impairment tests annually during the
fourth quarter. Any future impairments, including impairments of the goodwill or
intangible assets recorded in connection with the acquisition of certain of the
assets of EMS, would negatively impact our results of operations for the period
in which the impairment is recognized.




Our
failure to manage our growth effectively could prevent us from achieving our
goals.




Our
strategy envisions a period of growth that may impose a significant burden on
our administrative, financial and operational resources.  The growth
of our business will require significant investments of capital and management’s
close attention.  Our ability to effectively manage our growth will
require us to substantially expand the capabilities of our administrative and
operational resources and to attract, train, manage and retain qualified
management, engineers and other personnel.  We may be unable to do
so.  In addition, our failure to successfully manage our growth could
result in our sales not increasing commensurately with our capital
investments.  If we are unable to successfully manage our growth, we
may be unable to achieve our goals.




We
have very limited operating experience; therefore, regardless of the viability
or market acceptance of heavy-duty electric vehicles, we may be unable to
achieve profitability or realize our other business goals.




The
production of our heavy-duty electric vehicles is the result of a new venture.
We have been engaged primarily in research and development of heavy-duty
electric vehicles technologies since 2006, and we have only recently begun
shipments of our electric vehicles.  Our success will depend in large
part on our ability to address problems, expenses and delays frequently
associated with bringing a new product to market.  We may not be able
to successfully sell our products even if our heavy-duty electric vehicles prove
to be a viable solution and achieve market acceptance. Consequently, we may be
unable to achieve profitability or realize our other business
goals.




23




We
are targeting a new and evolving market and we cannot be certain that our
business strategy will be successful.




The
market for heavy-duty electric vehicles is relatively new and rapidly
changing.  We cannot accurately predict the size of this market or its
potential growth. Our vehicles represent only one possible solution for
alternative fuel vehicles for container transportation and other material
handling equipment applications.  Use of electric vehicles for
container transportation at terminals and/or other facilities has not been
adopted as an industry standard and it may not be adopted on a broad
scale.  The new and evolving nature of the market that we intend to
target makes an accurate evaluation of our business prospects and the
formulation of a viable business strategy very difficult. Thus, our business
strategy may be faulty or even obsolete and as a result, we may not properly
plan for or address many obstacles to success, including the
following:





·
            the
      timing and necessity of substantial expenditures for the development,
      production and sale of our heavy-duty electric
  vehicles;


·
            the
      emergence of newer, more competitive technologies and
      products;


·
            the
      future cost of batteries used in our
systems;


·
            applicable
      regulatory requirements;


·
            the
      reluctance of potential customers to consider new
      technologies;


·
            the
      failure to strategically position ourselves in relation to joint venture
      or strategic partners, and potential and actual
    competitors;


·
            the
      failure of our heavy-duty electric vehicles to satisfy the needs of the
      markets that we intend to target and the resulting lack of widespread or
      adequate acceptance of our heavy-duty electric vehicles;
    and


·
            the
      difficulties in managing rapid growth of operations and
      personnel.






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 drive system technologies, improvements
to current drive system technologies and new alternative drive system
technologies, including other fuel systems.  Each of our target
markets is currently serviced by existing manufacturers with existing customers
and suppliers using proven and widely accepted fossil fuel powered
technologies.  Additionally, there are competitors working on
developing technologies such as cleaner diesel engines, bio-diesel, fuel cells,
natural gas and hybrid battery/internal combustion engines in each of our
targeted markets. Many of
these existing and potential competitors, including Kalmar Industries Corp, MOL
Transport Solutions, Vision
Industries, Corp,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.  In order for our
products to be successful against competing technologies, especially diesel
engines, they must offer advantages in one or more of these areas: emissions
performance; fuel economy; engine performance; power density; engine and fuel
system weight; and engine and fuel system price.  There can be no
assurance that our products will be able to offer advantages in all or any of
these areas.  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.




24




Our
lack of purchase orders and commitments other than our contracts with the City
of Los Angeles and the AQMD for our heavy-duty electric vehicles could lead to a
rapid decline in our sales and profitability.




We have
received purchase orders covering a total of 26 heavy-duty electric vehicles
from the City of Los Angeles and the AQMD.  These purchase orders
represent the only orders for our heavy-duty electric vehicles that we have
received through the date of this report.  In March 2009, we delivered
one vehicle to the AQMD and thereby fulfilled our purchase order for an electric
vehicle from the AQMD.  As of May 20, 2009, we have also
delivered two electric vehicles to the City of Los Angeles against its purchase
order for 25 of our electric vehicles.  If we are unable to fill the
remainder of our order from the City of Los Angeles or obtain additional orders
for our products, our sales and financial condition will decline.




Products
within the industries in which we operate are subject to rapid technological
changes.  If we fail to accurately anticipate and adapt to these
changes, the products we sell will become obsolete, causing a decline in our
sales and profitability.




The
industries within which we compete are subject to rapid technological change and
frequent new product introductions and enhancements which often cause product
obsolescence.  We believe that our future success depends on our
ability to continue to enhance our existing products and their technologies
capabilities, and to develop and manufacture in a timely manner new products
with improved technology.  We may incur substantial unanticipated
costs to ensure product functionality and reliability early in its products’
life cycles.  If we are not successful in the introduction and
manufacture of new products or in the development
and introduction, in a timely manner, of new products or enhancements to our
existing products and technologies that satisfy customer needs and achieve
market acceptance, our sales and profitability will decline.




We
obtain some of the components and subassemblies included in our products from a
single source or limited group of suppliers, the partial or complete loss of
which could have an adverse effect on our sales and profitability.




We obtain
some of the components and subassemblies for our products from a single source
or a limited group of suppliers.  Although we seek to reduce
dependence on these sole and limited source suppliers, the partial or complete
loss of these sources could adversely affect our sales and profitability and
damage customer relationships by impeding our ability to fulfill our customers’
orders.  Further, a significant increase in the price of one or more
of these components or subassemblies could adversely affect our profit margins
and profitability if no lower-priced alternative source is
available.




We
manufacture and assemble all of our products at one facility.  Any
prolonged disruption in the operations of this facility would result in a
decline in our sales and profitability.




We
assemble our heavy-duty electric vehicles and heavy-duty electric drive systems
and we manufacture and assemble our flux vector invertors in a facility located
in Harbor City, California.  Any prolonged disruption in the
operations of our manufacturing and assembly facility, whether due to technical
or labor difficulties, destruction of or damage to this facility as a result of
an earthquake, fire or any other reason, would result in a decline in our sales
and profitability.




25




Because
we believe that proprietary rights are material to our success, misappropriation
of those rights or claims of infringement or legal actions related to
intellectual property could adversely impact our financial
condition.




We
currently rely on a combination of contractual rights, copyrights, trade names
and trade secrets to protect our proprietary rights. However, although our flux
vector inverters, heavy-duty electric drive systems, and theirconstituent components
could benefit from patent protection, we have chosen to retain the proprietary
rights associated with our flux vector inverters, heavy-duty electric drive
systems, and battery management systems predominantly as trade secrets. Although
we currently rely to a great extent on trade secret protection for much of our
technology, we cannot assure you that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
comparable or superior technologies or obtain unauthorized access to our
proprietary technology.




We own,
license or have otherwise obtained the right to use certain technologies
incorporated in our flux vector inverters.  We may receive
infringement claims from third parties relating to our products and
technologies. In those cases, we intend to investigate the validity of the
claims and, if we believe the claims have merit, to respond through licensing or
other appropriate actions. To the extent claims relate to technology included in
components purchased from third-party vendors for incorporation into our
products, we would forward those claims to the appropriate vendor. If we or our
component manufacturers are unable to license or otherwise provide any necessary
technology on a cost-effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.




Fluctuation
in the price, availability and quality of materials could increase our cost of
goods and decrease our profitability.




We
purchase materials directly from various suppliers. The prices we charge for our
products are dependent in part on the cost of materials used to produce them.
The price, availability and quality of our materials may fluctuate
substantially, depending on a variety of factors, including demand, supply
conditions, transportation costs, government regulation, economic climates and
other unpredictable factors. Any material price increases could increase our
cost of goods and decrease our profitability unless we are able to pass higher
prices on to our customers. We do not have any long-term written agreements with
any of these suppliers and do not anticipate entering into any such agreements
in the near future.




Our
limited production, commercial launch activities and continued field tests could
encounter problems.




We are
currently conducting, and plan to continue to conduct, limited production and
field tests on a number of our products as part of our product development cycle
and we are working on scaling up our production capabilities.  These
production readiness activities and additional field tests may encounter
problems and delays for a number of reasons, including the failure of our
technology, the failure of the technology of others, the failure to combine
these technologies properly and the failure to maintain and service the test
prototypes properly.  Some of these potential problems and delays are
beyond our control.  Any problem or perceived problem with our limited
production and field tests could hurt our reputation and the reputation of our
products and delay their commercial launch.




Demand
for our heavy-duty electric vehicles may fluctuate as the price of diesel fuel
changes.




If diesel
fuel prices decrease to a level such that using our heavy-duty electric vehicles
does not result in fuel cost savings, potential customers may not purchase our
heavy-duty electric vehicles. Any decrease in demand for our heavy-duty electric
vehicles could have a material adverse effect on our business, prospects,
financial condition and results of operations. If in the future we need to
reduce the price of our heavy-duty electric vehicles to keep them competitive
with the life cycle cost of diesel fuel powered vehicles, our business might
suffer and our revenue might decline.




26




Significant
changes in government regulation may hinder our sales.




The
production, distribution and sale in the United States of our products are
subject to various federal, state, and local statutes and regulations. New
statutes and regulations may also be instituted in the future. If a regulatory
authority finds that a current or future product is not in compliance with any
of these regulations, we may be fined, or our product may have to be recalled,
thus adversely affecting our financial condition and operations.




If
we do not properly manage foreign sales and operations, our business could
suffer.




We expect
that a significant portion of our future revenues will be derived from sales
outside of the United States, and we may operate in jurisdictions where we may
lack sufficient expertise, local knowledge or contacts.  Establishment
of an international market for our products may take longer and cost more to
develop than we anticipate, and is subject to inherent risks, including
unexpected changes in government policies, trade barriers, significant
regulation, difficulty in staffing and managing foreign operations, longer
payment cycles, and foreign exchange controls that restrict or prohibit
repatriation of funds.  As a result, if we do not properly manage
foreign sales and operations, our business could suffer.




Our
inability to diversify our operations may subject us to economic fluctuations
within the heavy-duty electric vehicle industry.




Our
limited financial resources reduce the likelihood that we will be able to
diversify our operations. Our probable inability to diversify our activities
into more than one business area will subject us to economic fluctuations within
the heavy-duty electric vehicle industry and therefore increase the risks
associated with our operations.




Risks
Relating to Ownership of Our Common Stock




We
cannot predict the extent to which an active public trading market for our
common stock will develop or be sustained.  If a public trading market
does not develop or cannot be sustained, you may be unable to liquidate your
investment in Balqon Corporation.




We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained due to a number of factors, including the fact that we
are a small company that is relatively unknown to stock analysts, stock brokers,
institutional investors, and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares of common stock until such time as we became more seasoned and viable. As
a consequence, there may be periods of several days or more when trading
activity in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price. We
cannot give you any assurance that a public trading market for our common stock
will be sustained.  If such a market cannot be sustained, you may be
unable to liquidate your investment in Balqon Corporation.




In
addition, the market price for our common stock may be particularly volatile
given our status as a relatively small company with a presumably small and
thinly-traded “float” that could lead to wide fluctuations in our share price.
You may be unable to sell your common stock at or above your purchase price if
at all, which may result in substantial losses to you.




27




Our
common stock may be subject to significant price volatility which may have an
adverse effect on your ability to liquidate your investment in our common
stock.




The
market for our common stock may be characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will be
more volatile than a seasoned issuer for the indefinite future. The potential
volatility in our share price is attributable to a number of factors. First, our
common shares may be sporadically and/or thinly traded. As a consequence of this
lack of liquidity, the trading of relatively small quantities of shares by our
stockholders may disproportionately influence the price of those shares in
either direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares are sold on
the market without commensurate demand, as compared to a seasoned issuer that
could better absorb those sales without adverse impact on its share price.
Secondly, an investment in us is a speculative or “risky” investment due to our
lack of meaningful revenues or any profits to date and uncertainty of future
market acceptance for current and potential products. As a consequence of this
enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned
issuer.




Voting
power of a majority of our common stock is held by our president and chief
executive officer, who, as a result, is able to control or exercise significant
influence over the outcome of matters to be voted on by our
stockholders.




Balwinder
Samra, our President and Chief Executive Officer, has voting power equal to
approximately 71% of all votes eligible to be cast at a meeting of our
stockholders.  As a result of his significant ownership interest,
Mr. Samra will be able to control or exercise significant influence with
respect to the election of directors, offers to acquire Balqon Corporation and
other matters submitted to a vote of all of our stockholders.




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




We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time.  As of May 20, 2009, we had
outstanding 25,518,348 shares of common stock, of which 25,133,348 shares of
common stock were restricted under the Securities Act.  As of
May 20, 2009, we also had outstanding options and warrants that were
exercisable for approximately 7,936,370 shares of common stock and notes
convertible into 365,000 shares of our common stock. Sales of shares of our
common stock in the public market, or the perception that sales could occur,
could adversely affect the market price of our common stock. Any adverse effect
on the market price of our common stock could make it difficult for us to raise
additional capital through sales of equity securities at a time and at a price
that we deem appropriate.




28




The
exercise of outstanding options and warrants to purchase our common stock and
the conversion into common stock of our outstanding convertible notes could
substantially dilute your investment, impede our ability to obtain additional
financing, and cause us to incur additional expenses.




Under the
terms of our outstanding options and warrants to purchase our common stock
issued to employees and others and the terms of our outstanding convertible
notes, the holders are given an opportunity to profit from a rise in the market
price of our common stock that, upon the exercise of the options and/or warrants
or the conversion of the notes, could result in dilution in the interests of our
other stockholders.  The terms on which we may obtain additional
financing may be adversely affected by the existence and potentially dilutive
impact of our outstanding options, warrants and convertible notes.  In
addition, holders of the warrants and convertible notes have registration rights
with respect to the common stock underlying such warrants and convertible notes,
the registration of which will cause us to incur a substantial
expense.




The
market price of our common stock and the value of your investment could
substantially decline if our warrants, options or convertible notes are
exercised or converted into shares of our common stock and resold into the
market, or if a perception exists that a substantial number of shares will be
issued upon exercise or conversion of our warrants, options or convertible notes
and then resold into the market.




If the
exercise or conversion prices of our warrants, options and convertible notes are
lower than the price at which you made your investment, immediate dilution of
the value of your investment will occur. In addition, sales of a substantial
number of shares of common stock issued upon exercise or conversion of our
warrants, options and convertible notes, or even the perception that such sales
could occur, could adversely affect the market price of our common
stock.  You could, therefore, experience a substantial decline in the value of
your investment as a result of both the actual and potential exercise or
conversion of our warrants, options or convertible notes.




Because
we may be subject to the “Penny Stock” rules, the level of trading activity in
our common stock may be reduced.




Our
common stock is quoted on the OTC Bulletin Board.  The last reported
sale price per share of our common stock on May 20, 2009, was
$3.05.  As a result, our common stock will most likely constitute
“Penny Stock.” Broker-dealer practices in connection with transactions in Penny
Stocks are regulated by rules adopted by the Securities and Exchange Commission,
or SEC.  Penny Stocks are generally equity securities with a price per
share of less than $5.00 (other than securities registered on certain national
exchanges).  The Penny Stock rules require a broker-dealer, prior to a
transaction in Penny Stocks not exempt from the rules, to deliver a standardized
risk disclosure document that provides information about Penny Stocks and the
nature and level of risks in the Penny Stock market.  The
broker-dealer must also provide the customer with current bid and offer
quotations for the Penny Stock, the compensation of the broker-dealer and the
salesperson in the transaction, and monthly accounting statements showing the
market value of each Penny Stock held in the customer’s account. In addition,
the broker-dealer must make a special written determination that the Penny Stock
is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction.  These requirements may have the effect
of reducing the level of trading activity in a Penny Stock, such as our common
stock, and investors in our common stock may find it difficult to sell their
shares.




29




Because
our common stock is not listed on a national securities exchange, you may find
it difficult to dispose of or obtain quotations for our common
stock.




Our
common stock is quoted on the OTC Bulletin Board under the symbol
“BLQN.”  Because our stock is quoted on the OTC Bulletin Board rather
than on a national securities exchange, you may find it difficult to either
dispose of, or to obtain quotations as to the price of, our common
stock.




Our
articles of incorporation, our bylaws and Nevada law each contain provisions
that could discourage transactions resulting in a change in control of Balqon
Corporation, which may negatively affect the market price of our common
stock.




Our
articles of incorporation and our bylaws contain provisions that may enable our
board of directors to discourage, delay or prevent a change in the ownership of
Balqon Corporation or in our management. In addition, these provisions could
limit the price that investors would be willing to pay in the future for shares
of our common stock. These provisions include the following:




·
            our
      board of directors is authorized, without prior stockholder approval, to
      create and issue preferred stock, commonly referred to as “blank check”
      preferred stock, with rights senior to those of our common stock;
      and




·
            our
      board of directors is expressly authorized to make, alter or repeal our
      bylaws.




In
addition, we may be subject to the restrictions contained in Sections 78.378
through 78.3793 of the Nevada Revised Statutes which provide, subject to certain
exceptions and conditions, that if a person acquires a “controlling interest,”
which is equal to either one-fifth or more but less than one-third, one-third or
more but less than a majority, or a majority or more of the voting power of a
corporation, that person is an “interested stockholder” and may not vote that
person’s shares. The effect of these restrictions may be to discourage, delay or
prevent a change in control of Balqon Corporation.




Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act of 2002 could result in a restatement of our
financial statements, cause investors to lose confidence in our financial
statements and our company and have a material adverse effect on our business
and stock price.




We
produce our financial statements in accordance with accounting principles
generally accepted in the United States.  Effective internal controls
are necessary for us to provide reliable financial reports to help mitigate the
risk of fraud and to operate successfully as a publicly traded company. As a
public company, we are required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, or Section 404, which will require annual management
assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent registered public accounting firm that
addresses both management’s assessments and our internal controls.  We
are currently subject to the requirement that we provide management’s assessment
regarding internal control over financial reporting.  The requirement
that we provide our auditor’s attestation will apply to us starting with our
annual report for the year ending December 31, 2009.




Testing
and maintaining internal controls can divert our management’s attention from
other matters that are important to our business. We may not be able to conclude
on an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404 or our independent registered public
accounting firm may not be able or willing to issue a favorable assessment if we
conclude that our internal controls over financial reporting are effective. If
either we are unable to conclude that we have effective internal controls over
financial reporting or our independent registered public accounting firm is
unable to provide us with an unqualified report as required by Section 404,
investors could lose confidence in our reported financial information and our
company, which could result in a decline in the market price of our common
stock, and cause us to fail to meet our reporting obligations in the future,
which in turn could impact our ability to raise additional financing if needed
in the future.




30




The
requirements of being a public company, including compliance with the reporting
requirements of the Securities Exchange Act of 1934 and the requirements of the
Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and
distract management, and we may be unable to comply with these requirements in a
timely or cost-effective manner.




As a
public company, we need to comply with laws, regulations and requirements,
certain corporate governance provisions of the Sarbanes-Oxley act of 2002,
related regulations of the SEC, and requirements of the principal trading market
upon which our common stock may trade, with which we are not required to comply
as a private company.  As a result, we will incur significant legal,
accounting and other expenses that we did not incur as a private
company.  Complying with these statutes, regulations and requirements
will occupy a significant amount of the time of our board of directors and
management, will require us to have additional finance and accounting staff, may
make it more difficult to attract and retain qualified officers and members of
our board of directors, particularly to serve on our audit committee, and make
some activities more difficult, time consuming and costly.  We will
need to:





·
            institute
      a more comprehensive compliance
function;


·
            establish
      new internal policies, such as those relating to disclosure controls and
      procedures and insider trading;


·
            design,
      establish, evaluate and maintain a system of internal control over
      financial reporting in compliance with the requirements of the
      Sarbanes-Oxley Act of 2002 and the related rules and regulations of the
      SEC and the Public Company Accounting Oversight
  Board;


·
            prepare
      and distribute periodic reports in compliance with our obligations under
      the federal securities laws including the Securities Exchange Act of 1934,
      or Exchange Act;


·
            involve
      and retain to a greater degree outside counsel and accountants in the
      above activities; and


·
            establish
      an investor relations function.




If we are
unable to accomplish these objectives in a timely and effective fashion, our
ability to comply with our financial reporting requirements and other rules that
apply to reporting companies could be impaired.  If our finance and
accounting personnel insufficiently support us in fulfilling these
public-company compliance obligations, or if we are unable to hire adequate
finance and accounting personnel, we could face significant legal liability,
which could have a material adverse effect on our financial condition and
results of operations.  Furthermore, if we identify any issues in
complying with those requirements (for example, if we or our independent
registered public accountants identified a material weakness or significant
deficiency in our internal control over financial reporting), we could incur
additional costs rectifying those issues, and the existence of those issues
could adversely affect, our reputation or investor perceptions of
us.




Item
      1B.
            Unresolved
      Staff Comments.




Not
Applicable.




31




Item
      2.
            Properties.


Our
executive offices located at 1420 240th Street, Harbor City, California
90710.  Our manufacturing and assembly facility is also located at the
same address in Harbor City, California, where we occupy approximately 15,500
square feet of office, manufacturing and assembly space.  Our
manufacturing and assembly space is being used for final assembly of our
electric drive systems, battery modules, flux vector inverters and heavy-duty
electric vehicles.  We lease our Harbor City facility for $10,540 a
month.  During 2008, we also leased facilities in Santa Ana for $3,206
a month.  During each of the years ended December 31, 2008 and
2007, we reported $98,008 and $25,787, respectively, in lease
expenses.


We
believe that our existing facilities are sufficient to meet our present needs
and anticipated needs for the foreseeable future.




Item 3.
            Legal
      Proceedings.




We are
not a party to any material pending legal proceedings.




Item
      4.
            Submission
      of Matters to a Vote of Security
Holders.




None.




32




PART
II




Item 5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities.




Market
Price and Holders




Our
common stock became eligible for quotation on the OTC Bulletin Board under the
symbol “BMRU” on April 10, 2007.  On October 31, 2008, as a
result of the Merger Transaction, our common stock became eligible for quotation
on the OTC Bulletin Board under the symbol “BLQN.”  Shares of our
common stock began trading on the OTC Bulletin Board on November 20,
2008.  Between November 20, 2008 and December 31, 2008, the
reported high and low closing bid price of our common stock on the OTC Bulletin
Board was $2.00 and $1.50, respectively.On May 20, 2009, the
last reported sale price of our common stock on the OTC Bulletin Board was $3.05
per share.




As of May
20, 2009, we had 25,518,348 shares of common stock outstanding held of record by
approximately 70stockholders.  These
holders of record include depositories that hold shares of stock for brokerage
firms which, in turn, hold shares of stock for numerous beneficial
owners.




Dividend
Policy




We
currently anticipate that we will not declare or pay cash dividends on our
common stock in the foreseeable future.  We will pay dividends on our
common stock only if and when declared by our board of directors.  The
ability of our board of directors to declare a dividend is subject to
restrictions imposed by Nevada and California law.  In determining
whether to declare dividends, our board of directors will consider these
restrictions as well as our financial condition, results of operations, working
capital requirements, future prospects and other factors it considers
relevant.




Equity
Compensation Plan




The
information provided in Part III-Item 12 of this Annual Report under the
heading “—Equity Compensation Plan Information” is incorporated herein by
reference.




Recent
Sales of Unregistered Securities




On June
30, 2006, we sold 1,090,000 shares of our common stock to four investors at
$0.10 per share, or gross proceeds of $109,000. The proceeds of $109,000 were
used for working capital purposes.




On August
1, 2007, we sold 250,000 shares of our common stock to two investors at $0.10
per share, or gross proceeds of $25,000. The proceeds of $25,000 were used for
working capital purposes.




On
October 24, 2008, immediately preceding the closing of the Merger Transaction,
we issued warrants to purchase an aggregate of 184,598 shares of common stock
(the “BMR Warrants”) to seven accredited investors in consideration of services
provided. One-third of the BMR Warrants have an exercise price of $1.50 per
share and expire on October 24, 2009, one-third of the BMR Warrants have an
exercise price of $2.00 per share and expire on October 24, 2010 and one-third
of the BMR Warrants have an exercise price of $2.50 per share and expire on
October 24, 2011.




33




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.  Of the Warrants issued to Balqon California, (i)
warrants to purchase 243,060 shares have an exercise price of $1.50 per share
and expire on June 30, 2010; (ii) warrants to purchase 243,060 shares have an
exercise price of $2.00 per share and expire on June 30, 2011; (iii) warrants to
purchase 243,060 shares have an exercise price of $2.50 per share and expire on
June 30, 2012; (iv) warrants to purchase 500,000 shares have an exercise price
of $1.50 per share and expire on July 2011; (v) warrants to purchase 810,000
shares have an exercise price of $1.50 per share and expire on September 2011;
and (vi) warrants to purchase 575,000 shares have an exercise price of $1.50 per
share and expire on October 2011.  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.




On
December 22, 2008, we entered into an agreement with 10 accredited investors for
the sale by us of an aggregate of 210,000 shares of our common stock at a
purchase price of $1.00 per share for total aggregate proceeds of
$210,000.  Additionally, we issued three-year warrants to purchase an
aggregate of 210,000 shares of common stock at an exercise price of $1.50 per
share.




Between
March 25 2009 and May 20, 2009, we entered into agreements with 18 accredited
investors for the sale by us of an aggregate of $365,000 of 10% Unsecured
Subordinated Convertible Promissory Noteswhich are convertible into an
aggregate of 365,000 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 365,000 shares of common
stock at an exercise price of $1.50 per share.




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.




Sales
by Balqon California Prior to the Merger Transaction




In June
2008, Balqon California issued options to purchase 4,166,751 shares of common
stock to Balwinder Samra in consideration of services rendered.




In June
2008, Balqon California issued 333,340 shares of common stock and options to
purchase 83,334 shares of common stock to Henry Velasquez in consideration of
engineering and design consulting services rendered.




In June
2008, Balqon California issued 1,250,025 shares of common stock and options to
purchase 312,507 shares of common stock to Amarpal Samra in consideration of
business strategy consulting services rendered.




In June
2008, Balqon California issued 2,916,725 shares of common stock and warrants to
purchase 729,180 shares of common stock to Marlin Financial in consideration of
business strategy and financial advisory services rendered and to be
rendered.




In August
2008, Balqon California issued 832,910 shares of common stock to 4 accredited
investors in consideration of services provided.




34




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
      6.
            Selected
      Financial Data.




Not
applicable.




Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.




The
following discussion and analysis should be read in conjunction with our
financial statements and the related notes to financial statements included
elsewhere in this report.  This report and our financial statements
and notes to financial statements contain forward-looking statements, which
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance and
our current beliefs regarding revenues we might generate and profits we might
earn if we are successful in implementing our business strategies. Our actual
results could differ materially from those expressed in these forward-looking
statements as a result of any number of factors, including those set forth under
the “Risk Factors” section and elsewhere in this report. The forward-looking
statements and associated risks may include, relate to or be qualified by other
important factors, including, without limitation:




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




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




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




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




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




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




Overview




We
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
AQMD to develop and test a heavy-duty zero emissions electric drayage
tractor.  Under the terms of 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 Port of Los Angeles agreed with the
AQMD to fund 50% of the total development
costs.  All of our revenues for 2007 and 63% of our revenues for 2008
were associated with the AQMD Development Agreement.  The remaining
37% of revenues for 2008 were from the sale of parts to the Port of Los Angeles.
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.




35




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 the City of Los Angeles Agreement.




Our total
revenues decreased by $179,076, or 47%,
to $203,660 for the year ended December 31, 2008 as compared to $382,736 for the
year ended December 31, 2007.  We reported a net loss of $7,933,281
for the year ended December 31, 2008 as compared to a net loss of $82,744 for
the year ended December 31, 2007.  The decline in financial
performance during 2008 as compared to 2007 is a direct result of having 73% of
the progress work on the AQMD Development Agreement completed during 2007 while
only 19% of the progress work on this contract was completed during
2008.  We experienced increased expenses in 2008 associated with the
ramp up of our business including leasing production facilities in Harbor City,
California, hiring full-time senior management and production personnel. We
incurred  legal and consulting expenses relating to the reverse merger
of $414,384 and 5,940,713 of fair value of stock based
compensation.  While our business activities resulted in a revenue
decrease of approximately 47%, we experienced decreased cost of revenues of
$142,210, or 51%, and increased operating and other expenses of $7,813,671, or
4,218%, over 2007.  The $7,998,888 of operating and other expenses
incurred during 2008 includes $414,384 of expenses relating to the Merger
Transaction described below and 6,036,882
of fair value of stock based compensation.


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.  See “Item 13. Certain
Relationships and Related Transactions, and Director Independence – Merger
Transaction.”




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.




36




Critical
Accounting Policies




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




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




Estimates




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




Revenues
  Contract Revenue and Cost
Recognition on Prototype Vehicles.
  In
accounting for contracts, we follow the provisions of the AICPA’s Statement of
Position 81-1,  “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.”  We recognize revenues using the
percentage-of-completion method of accounting by relating contract costs
incurred to date to the total estimated costs at completion.  This
method is used because management considers costs to be the best available
measure of progress on its contracts.  Contract losses are provided
for in their entirety in the period that they become known, without regard to
the percentage-of-completion.  We also recognize as revenues costs
associated with claims and unapproved change orders to the extent it is probable
that such claims and change orders will result in additional contract revenue,
and the amount of such additional revenue can be reliably
estimated.
  Contract
costs include all direct material and labor costs.  The liability
“Billings in excess of costs and estimated earnings on uncompleted contracts”
represents billings in excess of revenues earned.
  Sales of Production Units
and Parts.
  We
recognize revenue from the sale of completed production units and parts when
there is persuasive evidence that an arrangement exists, delivery of the product
has occurred and title has passed, the selling price is both fixed and
determinable, and collectibility is reasonably assured, all of which generally
occurs upon shipment of our product or delivery of the product to the
destination specified by the customer.
  37
  We
determine whether delivery has occurred based on when title transfers and the
risks and rewards of ownership have transferred to the buyer, which usually
occurs when we place the products with the buyer’s carrier.  We
regularly reviews our customers’ financial positions to ensure that
collectibility is reasonably assured.  Except for warranties, we have
no post-sales obligations.
  Product
warranties
  We
provide limited warranties for parts and labor at no cost to our customers
within a specified time period after the sale.  We estimate the actual
historical warranty claims coupled with an analysis of unfulfilled claims at the
balance sheet date. As of December 31, 2008, we had no warranty reserve nor did
we incur warranty expenses during the years ended December 31, 2008 or
2007.
  Stock-Based
Compensation
  We
periodically issue stock instruments, including shares of our common stock,
stock options and warrants to purchase shares of our common stock to employees
and non-employees in non-capital raising transactions for services and for
financing costs. We adopted SFAS No. 123(R), “Accounting for Stock-Based
Compensation” effective January 1, 2006, and are using the modified prospective
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of
SFAS No. 123(R) for all awards granted to employees prior to the effective date
of SFAS No. 123(R) that remain unvested on the effective date. We account for
stock option and warrant grants issued and vesting to non-employees in
accordance with Emerging Issues Task Force, or EITF, Issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF Issue
No. 00-18, “Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees” whereby the fair value of the stock
compensation is based on the measurement date as determined at either (i) the
date at which a performance commitment is reached, or (ii) at the date at which
the necessary performance to earn the equity instrument is
complete.
  Goodwill
and Intangible Assets
  As
required by SFAS No. 142, management performs impairment tests of goodwill
and indefinite-lived intangible assets whenever an event occurs or circumstances
change that indicate impairment has more likely than not occurred. Also, as
required by SFAS No. 142, management performs impairment testing of
goodwill and indefinite-lived intangible assets at least annually.
  In
accordance with SFAS No. 142, management tests goodwill for impairment at
the reporting unit level.  We only have one reporting
unit.  At the time of goodwill impairment testing, management
determines fair value through the use of a discounted cash flow valuation model
incorporating discount rates commensurate with the risks involved 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.
  38
  Impairment
of Long-Lived Assets
  SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,
established guidelines regarding when impairment losses on long-lived assets,
which include property and equipment, should be recognized and how impairment
losses should be measured.  This statement also provides a single
accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. We periodically review, at least annually, such assets for
possible impairment and expected losses. If any losses are determined to exist
they are recorded in the period when such impairment is determined. Based upon
management’s assessment, there are no indicators of impairment of our long lived
assets at December 31, 2008 or 2007.
  Income
Taxes
  We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets are recognized for the future tax consequences of transactions that have
been recognized in our financial statements or tax returns. A valuation
allowance is provided when it is more likely than not that some portion or the
entire deferred tax asset will not be realized.
  Accounting
for Warrants and Derivatives
  Freestanding
financial instruments, such as detachable warrants, must be evaluated under the
authoritative accounting literature to determine whether they should be
classified as assets or liabilities (derivative accounting), temporary equity,
or permanent equity. Management initially evaluates whether the instruments are
covered by SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” If the instrument is not
governed by SFAS No. 150, then management determines whether it meets the
definition of a derivative under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  To determine whether a specific
warrant agreement would follow derivative accounting under SFAS No. 133,
management is required to first evaluate whether the warrant would meet the
definition of equity under the provisions of EITF Issue No. 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”  Financial instruments such as warrants that are
classified as permanent or temporary equity are excluded from the definition of
a derivative for purposes of SFAS No. 133. Financial instruments, including
warrants, that are classified as assets or liabilities are considered
derivatives under SFAS No. 133, and are marked to market at each reporting date,
with the change in fair value recorded in the income statement. The fair values
of both the warrants and conversion benefits are calculated using a
Black-Scholes Model, taking into consideration factors such as the underlying
price of our common stock, the exercise price for warrants or the conversion
price for the conversion benefit, the volatility of our stock (or the stock
volatility of peer companies with an historical active trading market), and the
risk-free interest rates available for comparable time periods.
  39
  Under
EITF Issue No. 00-19, contracts that require physical settlement or net-share
settlement and contracts that give the issuer the choice of settlement (in cash
or shares) are classified as equity. Contracts that require net-cash settlement
or that give the counterparty a choice which includes net-cash settlement are
classified as assets or liabilities, not equity. If a transaction is outside the
control of the issuer and there is the possibility that the issuer could
net-cash settle, then for purposes EITF Issue No. 00-19 it is assumed that the
issuer will have to net-cash settle, which may preclude accounting for a
contract as equity except in certain circumstances where the existing common
stockholders would also receive cash. Management’s judgment is required in
evaluating the terms of freestanding instruments, such as warrants, and the
application of authoritative accounting literature.  The outstanding
warrants to purchase shares of our common stock do not contain provisions for
cash settlement.
  Results
of Operations
  We have
based our financial statements on the assumption of our operations continuing as
a going concern.  As of December 31, 2008, we had working capital
of $194,074, had an accumulated deficit of $8,020,855 and reported a net loss
for the year ended December 31, 2008 of $7,933,281,which raise substantial
doubt about our ability to continue as a going concern.Our plans for correcting
these deficiencies include the future sales of our products and technologies and
the raising of capital, which are expected to help provide us with the liquidity
necessary to meet operating expenses.  During July, September and
October 2008, Balqon California raised approximately $1,885,000 in connection
with private placements of convertible promissory notes, common stock and
warrants.  During December 2008, we raised $210,000 in connection with
a private placement of our common stock and warrants. Between March 25,
2009 and May 20, 2009 we raised an aggregate of $365,000 in connection with
a private placement of our convertible notes and warrants.  Over the
longer-term, we plan to achieve profitability through our operations from the
sale of our high capacity electric vehicles.  Our financial statements
do not include any adjustments relating to the recoverability and classification
of the recorded asset amounts or the amounts and classification of liabilities
that might be necessary should we be unable to continue our
existence.
  The
tables presented below, which compare our results of operations for 2007 and
2008, present the results for each period, the change in those results from one
period to another in both dollars and percentage change, and the results for
each period as a percentage of net revenues. The columns present the
following:
  ·
              The
      first two data columns in each table show the absolute results for each
      period presented.
  ·
              The
      columns entitled “Dollar Variance” and “Percentage Variance” show the
      change in results, both in dollars and percentages. These two columns show
      favorable changes as a positive and unfavorable changes as negative. For
      example, when our net revenues increase from one period to the next, that
      change is shown as a positive number in both columns. Conversely, when
      expenses increase from one period to the next, that change is shown as a
      negative in both columns.
  ·
              The
      last two columns in each table show the results for each period as a
      percentage of net revenues.


40




Year
      Ended
              December
      31,
            
            
            Dollar

              Variance
            
            
            Percentage

              Variance
            
            
            Results
      as aPercentage
              ofNet
      Revenuesfor
      the
              Years
      Ended
              December
      31,2008
                (as
      Restated)
            
            
            2007
            
            
            Favorable
                (Unfavorable)
            
            
            Favorable
                (Unfavorable)
            
            
            2008
                (as
      Restated)
            
            
            2007Net
      revenues
            
            $
            203,660
            
            
            $
            382,736
            
            
            $
            (179,076
            )
            
            
            (47
            )%
            
            
            100
            %
            
            
            100
            %Cost
      of
      revenues
            
            
            138,053
            
            
            
            280,263
            
            
            
            142,210
            
            
            
            51
            %
            
            
            68
            %
            
            
            73
            %Gross
      profit
            
            
            65,607
            
            
            
            102,473
            
            
            
            (36,866
            )
            
            
            (36
            )%
            
            
            32
            %
            
            
            27
            %Operating
      and interest expenses
            
            
            7,998,888
            
            
            
            185,217
            
            
            
            (7,813,671
            )
            
            
            (4,218
            )%
            
            
            3928
            %
            
            
            48
            %Net
      loss
            
            $
            (7,933,281
            )
            
            $
            (82,744
            )
            
            $
            (7,850,537
            )
            
            
            (9,488
            )%
            
            
            (3,895
            )%
            
            
            (22
            )%




Net Revenues.  The
$179,076 decrease in net revenues is comprised of decreased contract revenues of
$254,076 offset by increased net revenues of $75,000 relating to the sale of
parts to the City of Los Angeles in April 2008 under the terms of the City of
Los Angeles Agreement.  Contract revenues decreased in 2008 due to the
reduced progress work on our AQMD Development Agreement in 2008 as compared to
2007.  During 2007, 72.3% of the $527,000 AQMD Development Agreement
was completed yielding contract revenues of $382,736. During 2008, 19.2% of the
AQMD Development Agreement was completed yielding contract revenues of $128,660.
We anticipate that our future revenues will be comprised of sales revenues
related to our heavy-duty electric vehicles, flux vector inverters and our other
products under the City of Los Angeles Agreement and otherwise.




Gross Profit.  The
$36,866 decrease in gross profit was due to the decrease in contract revenues
between the periods and the 8% profit margin associated with the sale of a
battery charger system in April 2008. We anticipate that our gross profit margin
will be approximately 24% of net revenues for 2009 based on the current costs
incurred associated with the 25 electric vehicles for the Port of Los Angeles
that are currently under production at our Harbor City facility.




Operating and Interest
Expenses.  The
$7,813,671 increase inoperating
and interest expenses was due largely to the $414,384 of legal and consulting
fees incurred in connection with the Merger Transaction and fair value of stock
based compensation of $6,036,882.
The additional $1,362,405of increased operating expenses were attributable to amounts
expended in establishing our production facilities andthe
ramp-up of our business during 2008 and the fact that the results for 2007
reflect only eight months of actual business operations.  We expect
that over the near term, our general and administrative expenses will increase
as a result of increased management personnel, opening of new manufacturing
facilities, additional operational personnel to manufacture electric vehicle,
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 a registration
statement with the SEC.  Our research and development expenses for the
year ended December 31, 2008 were $44,023.  We had no research and
development expenses during the year ended December 31, 2007.  The increase
in research and development expenses is largely attributable to the expenses
attributed to the employment of our vice president of research and development
who was hired during the year ended December 31, 2008.  While our
general and administrative expenses are expected to increase over the near term,
these expenses as a percentage of net revenues are expected to decrease as we
increase our net revenues.




Liquidity
and Capital Resources




During
2007 and 2008, 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 December 31, 2008, we had
working capital of $194,074 as compared to a working capital deficiency of
$122,862 at December 31, 2007.  At December 31, 2008 and 2007 we
had an accumulated deficit of $8,020,855 and$87,574, respectively, and cash and cash equivalents of $355,615 and $34,
respectively.




41




Our
available capital resources at December 31, 2008 consisted primarily of
approximately $355,615 in cash and cash equivalents.  We expect that
our future available capital resources will consist primarily of cash on hand,
cash generated from our business, if any, and future debt and/or equity
financings, if any.




Cash used
in operating activities for 2008 was $1,328,569 as compared to $34,127of cash
used in operating activities for 2007, and includes a net loss of $7,933,281,
depreciation and amortization of $29,836 and changes in operating assets and
liabilities of $54,086.  Material changes in asset and liabilities at
December 31, 2008 as compared to December 31, 2007 that affected these
results include:




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


·
            an
      increase in inventory of
$1,159,601;


·
            an
      increase in prepaid expenses of
$43,020;


·
            an
      increase in deposits of $14,400;


·
            a
      netincreasein accounts
      payable and accrued expenses of $1,196,595;
and


·
            a
      decrease in billings in excess of costs and estimated earnings on
      uncompleted contracts of $68,660.




Cash used
in investing activities totaled $336,068 for 2008 as compared to $22,316 of cash
used in investing activities for 2007.




Cash
provided by financing activities totaled $2,020,217 for 2008 as compared to
$56,477 for 2007.




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




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




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




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




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




42




Between
March 25, 2009 and May 20, 2009, we raised an aggregate of $365,000 through the
issuance of convertible notes to 18accredited
investors.  In connection with this offering, which is referred to in
this report as the March 2009 private placement, we also issued three-year
warrants to purchase an aggregate of 365,000 shares of common stock at an
exercise price of $1.50 per share.




We are
obligated under registration rights agreements related to the private placements
in July, September, October, November and December 2008 to file, on or before
December 23, 2008, a registration statement with the SEC, registering for
resale shares of common stock and the shares of common stock underlying the
warrants, issued in connection with the above private placement
transactions.  See “Selling Security Holders—Registration Rights
Agreements.”  We filed the registration statement with the SEC on
December 23, 2008 and are in the process of responding to comments made by
the staff of the SEC.




We are
obligated under registration rights agreements related to the March 2009 private
placement to file, after the registration statement we filed with the SEC on
December 23, 2008 is declared effective, 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.  Effective February 26, 2009,
we entered into a Business Financing Modification Agreement which modified the
initial financing agreement with Bridge Bank.  The amended financing
agreement with Bridge Bank provides us with an accounts receivable based credit
facility in the aggregate amount of up to $5,000,000.  Under the terms
of the credit facility, we may not borrow in excess of $500,000 unless and until
we receive 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
credit facility is formula-based and generally provides that the outstanding
borrowings under the credit facility may not exceed an aggregate of 80% of
eligible accounts receivable.  We must immediately pay any advance
made under the credit facility within 90 days of the earlier of (i) the invoice
date of the receivable that substantiated the advance or (ii) the date on which
the advance was made.




Interest
on the credit facility is payable monthly.  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).




43




Our plan
of operations for the next twelve months includes completion and delivery of the
remaining heavy-duty electric vehicles under the City of Los Angeles Agreement,
together with associated equipment including batteries and controllers. We also
expect to receive additional orders for our products over the next twelve
months. We expect that the anticipated gross margin from the sales of these
products will provide additional liquidity and capital resources.  Our
ability to increase the number of orders for our products and/or to achieve
sufficient gross margin through the sale of products to provide us with
meaningful additional liquidity and capital resources is subject to, among other
things, the effect of the current global economic crisis and our ability to
raise additional capital.  See “Item 1A. Risk Factors.”




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 seven 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
consolidated financial statements as of December 31, 2008 and for the year
ended December 31, 2007 have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. As discussed in this report and in notes to our
consolidated financial statements included in this report, we have suffered
recurring losses from operations and at December 31, 2008 we had an
accumulated deficit of $8,020,854.  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
consolidated financial statements included in this report do not include any
adjustments that might result from the outcome of this uncertainty.




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




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




Backlog




As of
May 20, 2009, we had a backlog of approximately $4.6
million.  Our backlog includes a contract to produce and deliver 18
electric yard tractors, 5 electric drayage tractors, and associated equipment
including batteries and controllers.  We believe that products in our
backlog will be shipped during 2009.




44




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, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 141(R), “Business Combinations,” which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business.  SFAS  No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 22, 2008. Earlier adoption is prohibited.




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




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




Item
7A.                 Quantitative
and Qualitative Disclosures About Market Risk.




Not
applicable.




Item
      8.
            Financial
      Statements and Supplementary Data.




Reference
is made to the financial statements included in this Report, which begin at page
F-1.




Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.




Not
applicable.




Item
      9A.
            Controls
      and Procedures.




Not
applicable.




45




Item
      9A(T).
            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
theExchange 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 informationrequired 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 December 31, 2008 that our disclosure
controls and procedures were noteffective at the
reasonable assurance level due to the material weaknesses described
below.
  In light of the material weaknesses described below, we
performed additional analysis and other post-closing procedures to ensure that
our financial statements were prepared in
accordance with generally accepted accounting principles. Accordingly, we
believe that the financial statements included in this report fairly present, in
all material respects, our financial condition, results of operations, changes
in shareholder’s equity and cash flows for the periods
presented.
  Management’s Report on
Internal Control Over Financial Reporting
  Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes inaccordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
  (i)          
 pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets;
  (ii)           provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in
accordance with authorizations of our management and directors;
and
  (iii)          provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets
that could havea material effect on our
financial statements.
  All internal control systems, no matter how well
designed, have inherent limitations.  Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and
reporting.  Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies orprocedures may deteriorate.
  A material weakness is a control deficiency
(within the meaning of Public Company Accounting Oversight Board (PCAOB)
Auditing Standard No. 5) or combination of control deficiencies, that results in
more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis.
  46
  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
FinancialOfficer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2008 based on the framework in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Based on the
results of management’s assessment and evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that as of December 31, 2008 our internal
control over financial reporting was not effective due tothe material
weaknesses described below.
  Material Weaknesses
  1.  In conjunction with preparing our
registration statement on Form S-1, and after receiving comments from the Staff
of the SEC relating to our registration statement on Form S-1, management
reviewed, in the first quarter of 2009, our
recording of the value of stock-based compensation awarded in June and August
2008, and the recording of a note discount related to a beneficial conversion
feature and associated warrants issued with certain convertible notes during
2008. As a result of this review, management concluded that our controls over
the key valuation assumptions of our stock-based compensation and note discount
related to a beneficial conversion feature and associated warrants issued withconvertible notes were not in accordance with generally
accepted accounting principles and that our expenses for the year ended December
31, 2008 and for each of the quarterly periods ended June 30, 2008 and September
30, 2008, had been misstated.  Based upon this
conclusion, our Audit Committee and senior management decided, in the second
quarter of 2009, to restate our financial statements as of and for the year
ended December 31, 2008 and for each of the quarterly periods ended June 30,
2008 and September30, 2008.
  Management evaluated the impact of this restatement on
our assessment of our disclosure controls and procedures and concluded that the
control deficiency that resulted in the incorrect recording of stock-based
compensation and note discount related to a
beneficial conversion feature and associated warrants issued with convertible
notes represented a material weakness.
  2.  As a result of our restatement of prior
periods’financial results, as discussed above, we were unable
to meet our requirements to timely file our
Form 10-Q for the quarterly period ended March 31, 2009. Management evaluated
the impact of our inability to timely file periodic reports with the SEC on our
assessment of disclosure controls and procedures and concluded that the
control deficiency that resulted in the inability to timely
make these filings represented a material weakness.
  Remediation of Material Weaknesses
  To remediate the material weaknesses identified above,
we have done the following subsequent to December 31, 2008,in the periods specified below, which correspond to the
two material weaknesses identified above.
  1. We revised our methodology for recording the value of
stock-based compensation and the recording of note discount related to a
beneficial conversion feature and
associated warrants issued with convertible notes. We previously valued the
stock, options, and warrants associated with compensation and convertible notes
based on an alternative valuation methodology that was determined by management
with assistance from an independent third party valuation specialist
during a time when the company was still a private enterprise. Upon further
examination of our valuation methodology and largely in consideration of the
sales in July and September of convertible notes with a $1.00 per
share conversion price, we concluded that the $1.00 valuation per share was a
better indicator of value than the $0.015 per share valuation that was
determined under the alternative valuation methodology previously used by
us.  We havedetermined the effect of the correction on our previously
issued financial statements and have restated our financial statements for the
year ended December 31, 2008 and quarterly periods ended June 30, 2008 and
September 30, 2008.  The revision of our valuation methodology
as it relates to stock-based compensation and the recording of note discount
related to a beneficial conversion feature and associated warrants issued with
convertible notes was completed in the second quarter of 2009. We began using
thisnew methodology for the quarter ended June 30, 2008 and all periods included in
this report now reflect this change.  In addition, this methodology
applies to all periods subsequent to December 31, 2008.
  Management believes that the remediation describedin item 1 immediately above has remediated
the corresponding material weakness also described above.
  47
  2. In connection with making the changes discussed above
to our disclosure controls and procedures, in addition to working with our
independent auditors, in the second quarter
of 2009 we created a new position–Corporate
Compliance Director–to assist us in making timely required filings with the
Securities and Exchange Commission and ensuring the accuracy of our financial
reporting and the effectivenessof 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 of1934, as
amended.
  Management expects that the remediation described in
item 2 immediately above will remediate the corresponding material weakness also
describe above by December 31, 2009. Management is unable, however, to estimate
our capital or other expenditures
associated with the allocation of time of certain of our personnel to assist us
in generating reports and schedules necessary to timely file our periodic
reports or our additional capital or other expenditures related to higher fees
paid to our independent auditors in connection with their review of
this remediation.
  Attestation Report of the Independent Registered Public
Accounting Firm
  This report does not include an attestation report of
our independent registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not
subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the SEC that permit us to provide only
management’s report in this report.
  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 howwell 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. Overtime,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
  Changes in Internal Control over Financial
Reporting
  There has been no change in our internal control over
financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently
completed fiscal year that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.


48




PART
III




Item
      10.
            Directors,
      Executive Officers and Corporate
Governance.




Directors
and Executive Officers




Our
directors and executive officers as of May 20, 2009 are as
follows:





Name
            Age
            Positions
      HeldBalwinder
      Samra(1)(2)
            47
            President,
      Chief Executive Officer and Chairman of the BoardRobert
      Miranda
            56
            Chief
      Financial OfficerHenry
      Velasquez(1)
            33
            Vice
      President Engineering and DirectorRobert
      Gruenwald
            50
            Vice
      President Research and DevelopmentAmarpal
      Singh Samra(1)(2)
            48
            Director







(1)
            Member
      of our Audit Committee, Compensation Committee and Nominating and
      Corporate Governance Committee.


(2)
            There
      are no family relationships among our executive officers and directors,
      except that Balwinder Samra is the brother of Amarpal Singh
      Samra.




Balwinder Samra was appointed
as our President, Chief Executive Officer, Chairman of the Board and a director
in connection with the consummation of the Merger Transaction.  Mr.
Samra was the President, Chief Executive Officer and Chairman of the Board of
Balqon California from May 2005 to the closing of the Merger
Transaction.  Prior to that, Mr. Samra was president and chief
executive officer of EVI, a leading manufacturer of electric buses, trucks and
trailers.  From 1991 to 2000, Mr. Samra was Corporate Vice
President of Taylor-Dunn Manufacturing, a leading manufacturer of electric
industrial vehicles and tow tractors.  At Taylor-Dunn, Mr. Samra
was responsible for worldwide marketing, dealer sales and
operations.  Mr. Samra holds a B. S. degree in Chemistry from
Punjab University, India.




Robert Miranda was appointed
as our Chief Financial Officer in connection with the consummation of the Merger
Transaction.  From October 2008 to the closing of the Merger
Transaction, Mr. Miranda served as Chief Financial Officer of Balqon
California.  Since October 2007, Mr. Miranda has been the
managing director of Miranda & Associates, a professional accountancy
corporation.  From March 2003 through October 2007, Mr. Miranda
was a Global Operations Director at Jefferson Wells, where he specialized in
providing Sarbanes-Oxley compliance reviews for public
companies.  Mr. Miranda was a national director at Deloitte &
Touche where he participated in numerous audits, corporate finance
transactions, mergers, and acquisitions.  Mr. Miranda is a
licensed Certified Public Accountant and has over 35 years of experience in
accounting, Sarbanes-Oxley compliance, auditing, business consulting, strategic
planning and advisory services.  Mr. Miranda holds a B.S. degree
in Business Administration from the University of Southern California, a
certificate from the Owner/President Management Program from the Harvard
Business School and membership in the American Institute of Certified Public
Accountants.




Henry Velasquezwas appointed
as our Vice President Engineering and a director in connection with the
consummation of the Merger Transaction.  From October 2008 to the
closing of the Merger Transaction, Mr. Velasquez was Vice President
Engineering and a member of the board of directors of Balqon
California.  From January 2007 to August 2008 Mr. Velasquez
was a Senior Engineer at Honda Access America.  From October 2000
to January 2007, Mr. Velasquez was an Engineer at
Snugtop.  Mr. Velasquez has over 10 years of experience in
designing mechanical components, chassis and suspension systems for trucks,
buses, trailers and utility vehicles.  Mr. Velasquez has been awarded
one United States patent related to
composite body designs for pickup trucks.  Mr. Velasquez holds a
B.S. degree in Mechanical Engineering from Loyola Marymount University, Los
Angeles, California.




49




Robert Gruenwald was
appointed as our Vice President Research and Development in connection with the
consummation of the Merger Transaction.  From 1997 to 2008, Mr.
Gruenwald served as the President and Chief Engineer of EMS, where he designed
and manufactured inverters for electric vehicles used in a variety of
industries.  From 1991 to 2000, Mr. Gruenwald served as the Manager of
Product Development for Magnetek, where he was involved with the design and
development of electric vehicles and electric vehicle components and
software.  Mr. Gruenwald also served as a senior electrical controls
engineer for H-K Systems and an electrical designer for Procter &
Gamble.  Mr. Gruenwald has thirty years of experience in electrical
engineering and design.  Mr. Gruenwald has been named an inventor on
four United States patents related to hybrid electric vehicles.  Mr.
Gruenwald holds an A.S. degree in Electrical Engineering Technology from the
University of Cincinnati.




Amarpal Singh Samrawas
appointed a director in connection with the consummation of the Merger
Transaction.  From May 2005 to the closing of the Merger Transaction,
Mr. Samra served as a member of the board of directors of Balqon
California.  Since August 2008, Mr. Samra has been employed by
Gemidis, a company that develops liquid crystal on silicon for television
images.  From April 1999 to October 2005, Mr. Samra was
the Senior Vice President and General Manager – Global Business Unit for
Infocus, a company that develops data video projectors.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Exchange Act requires our executive officers, directors and persons
who beneficially own more than 10% of a registered class of our equity
securities, or reporting persons, to file initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities
with the SEC. The reporting persons are required by the SEC regulations to
furnish us with copies of all reports that they file.




Based
solely upon a review of copies of the reports furnished to us during our fiscal
year ended December 31, 2008 and thereafter, our knowledge that disclosure on
Form 5 is not required, and any written representations received by us from
reporting persons that no other reports were required, we believe that all
Section 16(a) filing requirements applicable to our reporting persons, except
for Marla Andre, Marlin Financial Group, Inc. and Robert Gruenwald, during 2008
were complied with.  During 2008, Marlin Financial Group, Inc. did not
file one report, a Form 4, required by Section 16(a) on a timely basis and
in addition, Marlin Financial Group, Inc. did not report three transactions on a
timely basis.  During 2008, Mr. Gruenwald failed to file one Form 3
and one Form 4 and in addition, Mr. Gruenwald did not report one transaction
during 2008.  Marla Andre did not file a Form 5 for the fiscal year
ended December 31, 2008, and we have not received a written representation from
Ms. Andre stating that no Form 5 is required.




Composition
of the Board of Directors




Our board
of directors has responsibility for our overall corporate governance and meets
regularly throughout the year.  Our Articles of Incorporation provide
that our board of directors will be divided as equally as possible into three
classes.  Our bylaws provide that our board of directors may fix the
exact number of directors between one and fifteen.  Our board of
directors has fixed the number of directors at three.  Our board of
directors was reconstituted in connection with the Merger
Transaction.  As a result, at our next annual meeting of stockholders,
our stockholders will elect one individual to each of the three classes of our
board of directors such that one director will serve until the first, second and
third succeeding annual meeting of stockholders, respectively.  After
our next annual meeting, at each annual meeting of stockholders,
directors are to be elected for a term of three years to succeed those directors
whose terms expire on that annual meeting date and our directors hold office
until the third succeeding annual meeting of stockholders, until their
successors are elected or until their earlier death, resignation or
removal.




50




Our
directors are kept informed of our business through discussions with our
executive officers, by reviewing materials provided to them and by participating
in meetings of our board of directors and its committees.




Our
executive officers are appointed by and serve at the discretion of our board of
directors. There are no family relationships among our executive officers and
directors, except that Balwinder Samra is the brother of Amarpal Singh
Samra.




As
discussed below, we have adopted procedures by which stockholders may elect
nominees to our board of directors.




Corporate
Governance




Our board
of directors believes that good corporate governance is paramount to ensure that
Balqon Corporation is managed for the long-term benefit of our
stockholders.  Our board of directors has adopted corporate governance
guidelines that guide its actions with respect to, among other things, the
composition of the board of directors and its decision making processes, board
of directors meetings and involvement of management, the board of director’s
standing committees and procedures for appointing members of the committees, and
its performance evaluation for our Chief Executive Officer.




Our board
of directors has adopted a Code of Ethics and Corporate Conduct that applies to
all of our directors, officers and employees and an additional Code of Business
Ethics that applies to our Chief Executive Officer and senior financial
officers.  The Code of Ethics, as applied to our principal executive
officer, principal financial officer and principal accounting officer
constitutes our “code of ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002.




We intend
to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to
amendments to or waivers from provisions of these codes that relate to one or
more of the items set forth in Item 406(b) of Regulation S-K, by describing on
our Internet website, located at http://www.balqon.com,
within four business days following the date of a waiver or a substantive
amendment, the date of the waiver or amendment, the nature of the amendment or
waiver, and the name of the person to whom the waiver was
granted.  Information on our Internet website is not, and shall not be
deemed to be, a part of this report or incorporated into any other filings we
make with the SEC.




Director
Independence




On an
annual basis, each of our directors and executive officers is obligated to
complete a director and officer questionnaire that requires disclosure of any
transactions with Balqon Corporation in which a director or executive officer,
or any member of his or her immediate family, have a direct or indirect material
interest.  Following completion of these questionnaires, the board of
directors, with the assistance of the Nominating and Corporate Governance
Committee, makes an annual determination as to the independence of each director
using the current standards for “independence” established by the SEC and NASDAQ
Market Place Rules, additional criteria set forth in our corporate governance
guidelines and consideration of any other material relationship a director may
have with Balqon Corporation.




In
October 2008, our board of directors determined that none of the directors are
independent under these standards.  In addition, K. John Shukur,
who served on our board of directors during the fiscal year ended
December 31, 2008, was not independent under these
standards.  Our board of directors intends to appoint at least two
persons who qualify as “independent” under the current NASDAQ Marketplace Rules
to our board of directors in the near future.  See “Certain
Relationships and Related Transactions” below.




51




Stockholder
Communications with our Board of Directors




Our board
of directors has implemented a process by which stockholders may send written
communications directly to the attention of our board of directors or any
individual member of our board of directors.  Mr. Velasquez, the
Chairman of our Audit Committee, is responsible for monitoring communications
from stockholders and providing copies of such communications to the other
directors as he considers appropriate.  Communications will be
forwarded to all directors if they relate to substantive matters and include
suggestions or comments that Mr. Velasquez considers to be important for
the directors to consider.  Stockholders who wish to communicate with
our board of directors can write to Mr. Henry Velasquez, The Board of
Directors, Balqon Corporation, 1420 240th Street,
Harbor City, California 90710.




Board
of Directors, Committees and Meetings




Our
business, property and affairs are managed under the direction of our board of
directors. Directors are kept informed of our business through discussions with
our executive officers, by reviewing materials provided to them and by
participating in meetings of our board of directors and its committees. Our
bylaws provide that our board of directors shall consist of at least six
directors.




During
2008, our board of directors did not hold any meetings.  Members of
our board of directors and its committees consulted informally with management
from time to time and acted at various times by written consent without a
meeting during 2008.




It is our
policy to invite and encourage our directors to attend our annual
meetings.  We did not hold an annual meeting during the fiscal year
ended December 31, 2008.




Our board
of directors has established standing Audit, Compensation and Nominating and
Corporate Governance Committees.  Each committee has a written charter
that is reviewed annually and revised as appropriate.  Our board of
directors intends to appoint at least two independent directors to our board of
directors and each of its committees in the near future.




Audit
Committee




Our Audit
Committee selects our independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors, and reviews our
financial statements for each interim period and for our year end.




Our Audit
Committee operates pursuant to a charter approved by our board of directors and
our Audit Committee, according to the rules and regulations of the
SEC.  Our Audit Committee consists of Balwinder Samra, Henry Velasquez
and Amarpal Samra.  Mr. Velasquez serves as the Chairman of our
Audit Committee.  Our board of directors has determined that none of
Balwinder Samra, Henry Velasquez and Amarpal Samra are “independent” under our
Corporate Governance Guidelines, and the NASDAQ Marketplace Rules and none
satisfies the other requirements under SEC rules regarding audit committee
membership.  None of the members of our Audit Committee qualify as an
“audit committee financial expert”
under applicable SEC rules and regulations governing the composition of the
Audit Committee, or satisfies the “financial sophistication” requirements of the
NASDAQ Marketplace Rules.




52




Compensation
Committee




Our
Compensation Committee is responsible for establishing and administering our
overall policies on compensation and the compensation to be provided to our
executive officers, including, among other things, annual salaries and bonuses,
stock options, stock grants, other stock-based awards, and other incentive
compensation arrangements.  In addition, the Compensation Committee
reviews the philosophy and policies behind the salary, bonus and stock
compensation arrangements for all other employees.  Although our
Compensation Committee makes all compensation decisions as to our executive
officers, our Chief Executive Officer makes recommendations to our Compensation
Committee regarding compensation for the other named executive
officers.  Our Compensation Committee has the authority to administer
our 2008 Stock Incentive Plan, or 2008 Plan, with respect to grants to executive
officers and directors, and also has authority to make equity awards under our
2008 Plan to all other eligible individuals.  However, our board of
directors may retain, reassume or exercise from time to time the power to
administer our 2008 Plan.




The
Compensation Committee evaluates both performance and compensation to ensure
that the total compensation paid to our executive officers is fair, reasonable
and competitive so that we can attract and retain superior employees in key
positions.  The Compensation Committee believes that compensation
packages offered to our executives, including the named executive officers,
should include both cash and equity-based compensation that reward performance
as measured against established goals.  The Compensation Committee has
the authority to retain consultants, and other advisors and in furtherance of
the foregoing objectives.




Our
Compensation Committee operates pursuant to a charter approved by our board of
directors and our Compensation Committee.  Our Compensation Committee
consists of Balwinder Samra, Henry Velasquez and Amarpal
Samra.  Mr. Amarpal Samra acts as Chairman of our Compensation
Committee.  Our board of directors has determined that none of the
members of our Compensation Committee is “independent” under the NASDAQ
Marketplace Rules.




Nominating
and Corporate Governance Committee




Our
Nominating and Corporate Governance Committee selects nominees for our board of
directors.  The Nominating and Corporate Governance Committee will
consider candidates for director recommended by any stockholder that is the
beneficial owner of shares representing more than 1% of the then-outstanding
shares of our common stock and who has beneficially owned those shares for at
least one year.  The Nominating and Corporate Governance Committee
will evaluate those recommendations by applying its regular nominee criteria and
considering the additional information described in the Nominating and Corporate
Governance Committee’s below-referenced charter.  Stockholders that
desire to recommend candidates for the board of directors for evaluation may do
so by contacting Balqon Corporation in writing, identifying the potential
candidate and providing background and other relevant
information.  Our Nominating and Corporate Governance Committee
utilizes a variety of methods for identifying and evaluating nominees for
director.  Candidates may also come to the attention of the Nominating
and Corporate Governance Committee through current members of our board of
directors, professional search firms and other persons.  In evaluating
potential candidates, our Nominating and Corporate Governance Committee will
take into account a number of factors, including, among others, the
following:





·
            the
      candidate’s independence from
management;


·
            whether
      the candidate has relevant business
experience;


·
            judgment,
      skill, integrity and reputation;


·
            existing
      commitments to other businesses;


·
            corporate
      governance background;


·
            financial
      and accounting background, to enable the committee to determine whether
      the candidate would be suitable for Audit Committee membership;
      and


·
            the
      size and composition of our board of
directors.




53




Our
Nominating and Corporate Governance Committee operates pursuant to a charter
approved by our board of directors and our Nominating and Corporate Governance
Committee.  Our Nominating and Corporate Governance Committee consists
of Balwinder Samra, Henry Velasquez and Amarpal
Samra.  Mr. Balwinder Samra acts as chairman of our Nominating
and Corporate Governance Committee.  Our board of directors has
determined that none of the members of our Nominating and Corporate Governance
Committee is “independent” under the NASDAQ Marketplace Rules.




Item
      11.
            Executive
      Compensation.




Compensation
of Directors




We use a
combination of cash and stock-based incentive compensation to attract and retain
qualified candidates to serve on our board of directors.  In setting
the compensation of directors, we consider the significant amount of time that
members of the board of directors spend in fulfilling their duties to Balqon
Corporation as well as the experience level we require to serve on our board of
directors.  The board of directors, through its Compensation
Committee, annually reviews the compensation and compensation policies for
members of the board of directors.  In recommending director
compensation, the Compensation Committee is guided by three goals:





·
            compensation
      should fairly pay directors for work required in a company of our size and
      scope;


·
            compensation
      should align directors’ interests with the long-term interests of our
      stockholders; and


·
            the
      structure of the compensation should be clearly disclosed to our
      stockholders.




Each of
our directors is paid $6,000 per year for serving on the board of
directors.  Our directors do not receive additional compensation for
serving on the various committees of the board of
directors.  Directors are reimbursed for certain reasonable documented
expenses in connection with attendance at meetings of our board of directors and
its committees.  Employee directors do not receive compensation in
connection with their service as directors.




Director
Compensation Table – 2008




The
following table summarizes for the twelve months ended December 31, 2008, the
compensation awarded to or paid to, or earned by, Amarpal Samra, the only member
of our board of directors who is not a named executive officers.  The
following table also summarizes for the twelve months ended December 31,
2008, the compensation awarded to or paid to, or earned by, the former member of
our board of directors.  Our former director, K. John Shukur, was the
sole member of our board of directors between October 1, 2007 and October 24,
2008.  Mr. Shukur resigned as a member of our board of directors when
our board was reconstituted in connection with the Merger
Transaction.







Name
            
            Fees
      Earned or Paid in Cash
                ($)
            
            
            Stock
      Awards
                ($)(1)
            
            
            Option
                Awards
                ($)(1)
            
            
            All
      Other Compensation
                ($)
            
            
            Total
                ($)Amarpal
      Samra
            
            
            1,500
            
            
            
            1,250,025
            (2)
            
            
            40,471
            (3)
            
            
            —
            
            
            
            1,291,996K.
      John Shukur
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —







(1)
            The
      amount reflected in this column is the compensation cost we recognized for
      financial statement reporting purposes during 2008 under SFAS No.
      123(R).  The fair value of each grant is estimated on the date
      of grant using the Black-Scholes pricing model with the following
      weighted-average assumptions for
2008:




54




Dividend
      yield
            0%Expected
      volatility
            58.43%Risk-free
      interest rates
            2.42%Expected
      option life (in years)
            3Weighted-average
      exercise price per common share
            $2.00


(2)
            In
      June 2008, Mr. Samra was granted 1,250,025 shares of common stock in
      consideration of business strategy consulting services rendered to Balqon
      California, which shares were converted into the same number of shares of
      our common stock in connection with the Merger Transaction.  As
      of December 31, 2008, Mr. Samra held 1,250,025 shares of our common
      stock.


(3)
            In
      June 2008, Mr. Samra was issued options to purchase 312,507 shares of
      common stock to in consideration of business strategy consulting services
      rendered to Balqon California, which options were converted into options
      to purchase the same number of shares of our common stock under our 2008
      Plan in connection with the Merger Transaction.  As of December
      31, 2008, Mr. Samra held options to purchase 312,507 shares of our common
      stock.




Compensation
of Executive Officers




Summary
Compensation Table




Upon
consummation of the Merger Transaction on October 24, 2008, our executive
officers were reconstituted and none of our current executive officers served as
our executive officers during the years ended December 31, 2006 and December 31,
2007.  The following table provides information concerning the
compensation for all individuals who served as our principal executive officer
during the year ended December 31, 2008 and our two highest paid executive
officers who were serving as an executive officer on December 31,
2008.  These individuals are collectively referred to in this report
as the “named executive officers.”




K. John
Shukur, was our only executive officer from October 1, 2007 to
October 24, 2008.  Mr. Shukur resigned his positions in
connection with the Merger Transaction that was consummated on October 24,
2008.







Name and Principal Position
            Year
            Salary
                ($)(1)
            Stock
      Awards
                ($)(2)
            Option
      Awards
                ($)(2)
            All
      other Compensation
              ($)
            Total
                ($)Balwinder
      Samra
              President
      and Chief Executive Officer
            2008
            212,205
            332,910
            539,614
            1,500(3)
            1,086,229Robert
      Miranda
              Chief
      Financial Officer
            2008
            176,855(4)
            100,000
            —
            —
            276,855Henry
      Velasquez
              Vice
      President Engineering and Director
            2008
            71,712
            333,340
            40,471
            1,500(3)
            447,023K.
      John Shukur
              Former
      President, Chief Financial Officer and Secretary
            2008
            —
            —
            —
            —
            —2007
            —
            —
            —
            —
            —





(1)
            Represents
      compensation received for services provided as an executive officer of
      Balqon California and Balqon
Corporation.


(2)
            The
      amount reflected in this column is the compensation cost we recognized for
      financial statement reporting purposes during 2008 under SFAS No. 123(R)
      for grants made to our named executive officers during
      2008.  The fair value of each grant is estimated on the date of
      grant using the Black-Scholes pricing model with the following
      weighted-average assumptions for
2008:




55




Dividend
      yield
            0%Expected
      volatility
            58.43%Risk-free
      interest rates
            2.42%Expected
      option life (in years)
            3Weighted-average
      exercise price per common share
            $2.00


(3)
            Represents
      $1,500 paid as fees for services provided as a member of our board of
      directors.


(4)
            Represents
      the portion of the total consulting fees paid to Miranda & Associates,
      a professional accountancy corporation wholly-owned by Mr. Miranda, in
      consideration of services, attributable to the services provided by Mr.
      Miranda as an executive officer of Balqon California and Balqon
      Corporation.




Employment
Agreements




Employment
Agreement, dated October 24, 2008, between the Company and Balwinder
Samra




On
October 24, 2008, we entered into an executive employment agreement with Mr.
Samra.  Under the terms of the executive employment agreement, Mr.
Samra has agreed to serve as our Chairman of the Board, President and Chief
Executive Officer on an at-will basis.




The
agreement provides for an initial base salary of $250,000 per year with an
increase to $300,000 after the second anniversary of the effective date of the
employment agreement, paid vacation of at least six weeks per year and a monthly
automobile allowance of at least $750. Mr. Samra is eligible to receive
increases and annual cash incentive bonuses based on our net revenues as shown
on our Form 10-K for the previous fiscal year as compared to the internal
forecasts proposed at or about the beginning of the previous fiscal year by our
Chief Financial Officer and approved by our Audit Committee, as
follows:  (A) if the net revenues forecast is met, the incentive
bonus will equal 25% of his base salary and (B) if the net revenue forecast
is exceeded by more than 50%, the incentive bonus will equal 50% of his base
salary.  Mr. Samra is also eligible to participate in benefit and
incentive programs we may offer. We have agreed to nominate Mr. Samra as a
Class III member of our board of directors and to seek stockholder approval of
the nomination at our 2009 annual meeting of stockholders.  We have
also agreed to maintain in effect a directors’ and officers’ liability insurance
policy with a minimum limit of liability of $3 million and that we would
enter into an indemnification agreement with Mr. Samra upon terms mutually
acceptable to us and Mr. Samra.




The
employment agreement contains non-competition provisions that prohibit Mr. Samra
from engaging or participating in a competitive business or soliciting our
customer or employees during his employment with us and for two years afterward.
The agreement also contains provisions that restrict disclosure by Mr. Samra of
our confidential information and assign ownership to us of inventions related to
our business that are created by him during his employment and for two years
afterward.




We may
terminate the agreement at any time, with or without due cause. “Due cause”
includes any intentional misapplication of our funds or other material assets,
or any other act of dishonesty injurious to us, or conviction of a felony or a
crime involving moral turpitude. “Due cause” also includes abuse of controlled
substances or alcohol and breach, nonperformance or nonobservance of any of the
terms of the agreement, provided that Mr. Samra fails to satisfactorily
remedy the performance problem following 30 days’ written notice.




Mr. Samra
may terminate the agreement at any time, with or without good reason. However,
termination for good reason must occur within 90 days of the occurrence of an
event constituting good reason, and Mr. Samra must furnish us with written
notice of the event within 30 days after the initial existence of the event and
provide us with at least a 30-day cure period. “Good reason” includes: a
material diminution in his authority, duties, responsibilities, titles or
offices; a purported reduction in Mr. Samra’s base salary amounting to a
material diminution in his salary to an amount less than the greater of $250,000
or 10% below the base salary in effect at the time of the reduction; our failure
to timely cure or diligently initiate a cure of any material breach within 30
days after Mr. Samra gives us written notice of the breach.




56




If we
terminate Mr. Samra’s employment for due cause or due to Mr. Samra’s breach
of his employment agreement by refusing to continue his employment, or if Mr.
Samra terminates his employment without good reason, then all compensation and
benefits for Mr. Samra will cease, other than amounts under retirement and
benefit plans and programs that were earned and vested by the date of
termination, pro rata annual salary through the date of termination, any stock
options that were vested as of the date of termination, and accrued vacation as
required by California law.




If Mr.
Samra becomes incapacitated, we may terminate his employment under the agreement
upon 30 days’ prior written notice.  Upon Mr. Samra’s death, the
agreement terminates immediately. If Mr. Samra’s employment terminates due
to his incapacity or death, Mr. Samra or his estate or legal representative will
be entitled to receive benefits under our retirement and benefits plans and
programs that were earned and vested at the date of termination, a prorated
incentive bonus for the fiscal year in which incapacity or death occurred (to
the extent he would otherwise be eligible), and a lump sum cash payment in an
amount equal to one year of his then current annual salary.




If Mr.
Samra’s employment terminates for good reason or other than as a result of due
cause, incapacity, death or retirement, Mr. Samra will be entitled to his salary
through the end of the month in which termination occurs plus credit for accrued
vacation, and a prorated incentive bonus, if eligible, for the fiscal year
during which termination occurred. In addition, under those circumstances, he
will be entitled to receive (i) a severance payment equal to (A) two times his
then current annual salary and (B) two times the amount of the average
incentive bonus paid during the two calendar years preceding the date of
termination, (ii) all medical insurance benefits to which he was entitled
immediately prior to the date of termination for a period of eighteen months or
the date that Mr. Samra’s continued participation in our medical insurance plan
was not possible under the plan, whichever was earlier, and (iii) a
lump-sum cash payment equal to eighteen times the estimated monthly COBRA
premiums at the time of termination (taking into account all known or anticipated
premium increases) to be used by Mr. Samra to maintain his medical insurance
coverage for an additional eighteen months.  If our medical insurance
plan does not allow Mr. Samra’s continued participation, then we will be
required to pay to Mr. Samra, in monthly installments, the monthly premium or
premiums for COBRA coverage, covering the eighteen month period described in
clause (ii) in the preceding sentence.




Immediately
preceding the occurrence of a change in control, and regardless of whether
Mr. Samra’s employment terminates and/or he receives severance payments as
a result of the change in control, Mr. Samra will be entitled to receive a
payment equal to (A) two times his then current annual salary and
(B) two times the amount of the average incentive bonus paid during the two
calendar years preceding the date of termination.  A “change in
control” includes the following circumstances:




(a)           the
acquisition by any person or group of beneficial ownership of securities
entitled to vote generally in the election of our directors (“voting
securities”) that represent 40% or more of the combined voting power of our then
outstanding voting securities or 50% or more of the combined fair market value
of our then outstanding stock, other than:




(i)             an
acquisition by a trustee or other fiduciary holding securities under any
employee benefit plan (or related trust) sponsored or maintained by us or any
person controlled by us or by any employee benefit plan (or related trust)
sponsored or maintained by us or any person controlled by us, or




57




(ii)            an
acquisition of voting securities by us or a corporation owned, directly or
indirectly, by our stockholders in substantially the same proportions as their
ownership of our stock;




(b)           a
majority of members of our board is replaced during any 12-month period by
directors whose appointment or election is not endorsed by a majority of members
of our board before the date of the appointment or election, excluding any
individual whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of directors
or other actual or threatened solicitation of proxies or consents by or on
behalf of a person other than our board;




(c)           the
acquisition by any person or group, or combined acquisitions during the 12-month
period ending on the date of the most recent acquisition by such person or
group, of ownership of assets from us that have a total gross fair market value
equal to or more than 40% of the total gross fair market value of all of our
assets immediately before such acquisition; and




(d)           stockholder
approval of a complete liquidation or dissolution of our company.




Regardless
of circumstance (a) above, however, if we make an acquisition of our securities
that (x) causes our voting securities beneficially owned by a person or group to
represent 40% or more of the combined voting power of our then outstanding
voting securities or (y) causes our stock beneficially owned by a person or
group to represent 50% or more of the combined fair market value of our then
outstanding stock, the acquisition will not be considered an acquisition by any
person or group for purposes of circumstance (a) unless the person or group
subsequently becomes the beneficial owner of additional securities of Balqon
Corporation.




For
purposes of circumstance (a) above, the calculation of voting power will be made
as if the date of the acquisition were a record date for a vote of our
stockholders, and for purposes of circumstance (c) above,
the calculation of voting power will be made as if the date of the consummation
of the transaction were a record date for a vote of our
stockholders.




Regardless
of the above, there will be no change in control event when there is a transfer
to an entity that is controlled by our stockholders immediately after the
transfer.  A transfer of assets by us is not treated as a change in
control if the assets are transferred to: a stockholder of Balqon Corporation
(immediately before the asset transfer) in exchange for or with respect to the
stockholders’ stock; an entity, 50% or more of the total value or voting power
of which is owned, directly or indirectly, by us; a person or group that owns,
directly or indirectly, 50% or more of the total value or voting power of all of
our outstanding stock; or an entity, at least 50% of the total value or voting
power of which is owned, directly or indirectly, by a person or group described
in the immediately preceding clause.




Employment
Agreement, dated October 24, 2008, between the Company and Henry
Velasquez




On
October 24, 2008, we entered into an executive employment agreement with Mr.
Henry Velasquez.  Under the terms of the executive employment
agreement, Mr. Velasquez has agreed to serve as our Vice President Engineering
on an at-will basis.  The employment agreement has an effective date
of October 24, 2008.




The
agreement provides for an initial base salary of $150,000 per year with an
increase to $175,000 per year after the second anniversary of the effective date
of the employment agreement, respectively, and paid vacation of at least four
weeks per year.  Mr. Velasquez is eligible to receive salary increases
and annual cash incentive bonuses at the discretion of our Compensation
Committee.  Mr. Velasquez is also eligible to participate in
benefit and incentive programs we may offer. We have agreed to maintain in
effect a directors’ and officers’ liability insurance policy with a minimum
limit of liability of $3 million and that we would enter into an indemnification
agreement with Mr. Velasquez upon terms mutually acceptable to us and Mr.
Velasquez.




58




The
agreement contains non-competition provisions that prohibit Mr. Velasquez from
engaging or participating in a competitive business or soliciting our customer
or employees during his employment with us and for two years afterward. The
agreement also contains provisions that restrict disclosure by Mr. Velasquez of
our confidential information and assign ownership to us of inventions related to
our business that are created by him during his employment and for two years
afterward.




We may
terminate the agreement at any time, with or without due cause. “Due cause”
includes any intentional misapplication of our funds or other material assets,
or any other act of dishonesty injurious to us, or conviction of a felony or a
crime involving moral turpitude. “Due cause” also includes abuse of controlled
substances or alcohol and breach, nonperformance or nonobservance of any of the
terms of the agreement, provided that Mr. Velasquez fails to satisfactorily
remedy the performance problem following 30 days’ written notice.




Mr.
Velasquez may terminate the agreement at any time, with or without good reason.
However, termination for good reason must occur within 90 days of the occurrence
of an event constituting good reason, and Mr. Velasquez must furnish us with
written notice of the event within 30 days after the initial existence of the
event and provide us with at least a 30-day cure period. “Good reason” includes:
a material diminution in his authority, duties, responsibilities, titles or
offices; a purported reduction in Mr. Velasquez’s base salary amounting to
a material diminution in his salary to an amount less than the greater of
$150,000 or 10% below the base salary in effect at the time of the reduction;
our failure to timely cure or diligently initiate a cure of any material breach
within 30 days after Mr. Velasquez gives us written notice of the
breach.




If we
terminate Mr. Velasquez’s employment for due cause or due to Mr.
Velasquez’s breach of his employment agreement by refusing to continue his
employment, or if Mr. Velasquez a terminates his employment without good reason,
then all compensation and benefits for Mr. Velasquez will cease, other than
amounts under retirement and benefit plans and programs that were earned and
vested by the date of termination, pro rata annual salary through the date of
termination, any stock options that were vested as of the date of termination,
and accrued vacation as required by California law.




If Mr.
Velasquez becomes incapacitated, we may terminate his employment under the
agreement upon 30 days’ prior written notice.  Upon Mr. Velasquez’s
death, the agreement terminates immediately. If Mr. Velasquez’s employment
terminates due to his incapacity or death, Mr. Velasquez or his estate or legal
representative will be entitled to receive benefits under our retirement and
benefits plans and programs that were earned and vested at the date of
termination, a prorated incentive bonus for the fiscal year in which incapacity
or death occurred (to the extent he would otherwise be eligible), and a lump sum
cash payment in an amount equal to one year of his then current annual
salary.




If Mr.
Velasquez’s employment terminates for good reason or other than as a result of
due cause, incapacity, death or retirement, Mr. Velasquez will be entitled to
his salary through the end of the month in which termination occurs plus credit
for accrued vacation, and a prorated incentive bonus, if eligible, for the
fiscal year during which termination occurred. In addition, under those
circumstances, if Mr. Velasquez enters into a separation and release agreement
with us, then he will be entitled to receive (i) a severance payment equal to
two times his then current annual salary, (ii) all medical insurance
benefits to which he was entitled immediately prior to the date of termination
for a period of eighteen months or the date that Mr. Velasquez’s continued
participation in our medical insurance plan was not possible under the plan,
whichever was earlier, and (iii) a lump-sum cash payment equal to eighteen
times the estimated monthly COBRA premiums at the time of termination (taking
into account all known or anticipated premium increases) to be used by Mr.
Velasquez to maintain his medical insurance coverage for an additional eighteen
months.  If our medical insurance plan does not allow Mr. Velasquez’s
continued participation, then we will be required to pay to Mr. Velasquez, in
monthly installments, the monthly premium or premiums for COBRA coverage,
covering the eighteen month period described in clause (ii) in the
preceding sentence.




59




Issuances
of Stock Options Under our 2008 Plan




In June
2008, in consideration of services provided to Balqon California, Balqon
California issued options to purchase 4,166,751 shares of Balqon California’s
common stock to Balwinder Samra and options to purchase 83,334 shares of common
stock to Henry Velasquez.  These options vested immediately upon
grant.  In connection with the Merger Transaction, all outstanding
options to purchase shares of Balqon California’s common stock were converted
into options to purchase shares of our common stock under our 2008
Plan.




2008
Stock Incentive Plan




Our 2008
Plan is intended to promote Balqon Corporation’s interests by providing eligible
persons in our service with the opportunity to acquire a proprietary or economic
interest, or otherwise increase their proprietary or economic interest, in our
company as an incentive for them to remain in such service and render superior
performance during such service.  The 2008 Plan consists of two
equity-based incentive programs, the Discretionary Grant Program and the Stock
Issuance Program. Principal features of each program are summarized
below.




Administration




The
Compensation Committee of our board of directors has the exclusive authority to
administer the Discretionary Grant and Stock Issuance Programs with respect to
option grants, restricted stock awards, restricted stock units, stock
appreciation rights, direct stock issuances and other stock-based awards, or
equity awards, made to executive officers and non-employee board members, and
also has the authority to make equity awards under those programs to all other
eligible individuals. However, our board of directors may retain, reassume or
exercise from time to time the power to administer those programs. Equity awards
made to members of the Compensation Committee must be authorized and approved by
a disinterested majority of our board of directors.




The term
“plan administrator,” as used in this summary, means the Compensation Committee
or our board of directors, to the extent either entity is acting within the
scope of its administrative jurisdiction under the 2008 Plan.




Share
Reserve




Initially,
7,500,000 shares of common stock are authorized for issuance under the 2008
Plan.  The 2008 Plan was adopted by our board of directors on
October 24, 2008.  We expect to submit the 2008 Plan for approval
by our stockholders by no later than October 24, 2009.  As of
March 27, 2009, options to purchase 4,562,592 shares of common stock were issued
and outstanding under the 2008 Plan.




No
participant in the 2008 Plan may be granted equity awards for more than
5,000,000 shares of common stock per calendar year. This share-limitation is
intended to assure that any deductions to which we would otherwise be entitled,
either upon the exercise of stock options or stock appreciation rights granted
under the Discretionary Grant Program with an exercise price per share equal to
the fair market value per share of our common stock on the grant date or upon
the subsequent sale of the shares purchased under those options, will not be
subject to the $1.0 million limitation on the income tax deductibility of
compensation paid per covered executive officer imposed under Internal Revenue
Code Section 162(m). In addition, shares issued under the Stock Issuance
Program may qualify as performance-based compensation that is not subject to the
Internal Revenue Code Section 162(m) limitation, if the issuance of those
shares is approved by the Compensation Committee and the vesting is tied solely
to the attainment of the corporate performance milestones discussed below in the
summary description of that program.




60




The
shares of common stock issuable under the 2008 Plan may be drawn from shares of
our authorized but unissued shares or from shares reacquired by us, including
shares repurchased on the open market. Shares subject to any outstanding equity
awards under the 2008 Plan that expire or otherwise terminate before those
shares are issued will be available for subsequent awards. Unvested shares
issued under the 2008 Plan and subsequently repurchased by us at the option
exercise or direct issue price paid per share, pursuant to our repurchase rights
under the 2008 Plan, will be added back to the number of shares reserved for
issuance under the 2008 Plan and will be available for subsequent
reissuance.




If the
exercise price of an option under the 2008 Plan is paid with shares of common
stock, then the authorized reserve of common stock under the 2008 Plan will be
reduced only by the net number of new shares issued under the exercised stock
option. If shares of common stock otherwise issuable under the 2008 Plan are
withheld in satisfaction of the withholding taxes incurred in connection with
the issuance, exercise or vesting of an equity award, then the number of shares
of common stock available for issuance under the 2008 Plan will be reduced only
by the net number of shares issued pursuant to that equity award. The withheld
shares will not reduce the share reserve. Upon the exercise of any stock
appreciation right granted




under the
2008 Plan, the share reserve will only be reduced by the net number of shares
actually issued upon exercise, and not by the gross number of shares as to which
the stock appreciation right is exercised.




Eligibility




Officers,
employees, non-employee directors, and consultants and independent advisors who
are under written contract and whose securities issued pursuant to the 2008
Plan, all of whom are in our service or the service of any parent or subsidiary
of ours, whether now existing or subsequently established, are eligible to
participate in the Discretionary Grant and Stock Issuance Programs.




Valuation




The fair
market value per share of our common stock on any relevant date under the 2008
Plan will be deemed to be equal to the closing selling price per share of our
common stock at the close of regular hours trading on the OTC Bulletin Board on
that date, as the price is reported by the Financial Industry Regulatory
Authority. If there is no closing selling price for our common stock on the date
in question, the fair market value will be the closing selling price on the last
preceding date for which a quotation exists.  In the absence of an
established market for our common stock or if the plan administrator determines
in good faith that our common stock is too thinly traded for fair market value
to be determined in the manner described above, the fair market value per share
of our common stock will be determined in good faith by the plan
administrator.




Discretionary
Grant Program




The plan
administrator has complete discretion under the Discretionary Grant Program to
determine which eligible individuals are to receive equity awards under that
program, the time or times when those equity awards are to be made, the number
of shares subject to each award, the time or times when each equity award is to
vest and become exercisable, the maximum term for which the equity award is to
remain outstanding and the status of any granted option as either an incentive
stock option or a non-statutory option under the federal tax laws.




61




Stock Options. Each granted
option will have an exercise price per share determined by the plan
administrator, provided that the exercise price will not be less than 100% of
the fair market value of a share on the grant date.  No granted option
will have a term in excess of ten years.  Incentive options granted to
an employee who beneficially owns more than 10% of our outstanding common stock
must have exercise prices not less than 110% of the fair market value of a share
on the grant date and a term of not more than five years measured from the grant
date. Options generally will become exercisable in one or more installments over
a specified period of service measured from the grant date. However, options may
be structured so that they will be immediately exercisable for any or all of the
option shares. Any unvested shares acquired under immediately exercisable
options will be subject to repurchase, at the exercise price paid per share, if
the optionee ceases service with us prior to vesting in those
shares.




An
optionee who ceases service with us other than due to misconduct will have a
limited time within which to exercise outstanding options for any shares for
which those options are vested and exercisable at the time of cessation of
service. The plan administrator has complete discretion to extend the period
following the optionee’s cessation of service during which outstanding options
may be exercised (but not beyond the expiration date) and/or to accelerate the
exercisability or vesting of options in whole or in part; provided, that options
will remain exercisable for no less than 30 days from the date of the optionee’s
cessation of service (or no less than six months if the cessation is caused by
death or disability). Discretion may be
exercised at any time while the options remain outstanding, whether before or
after the optionee’s actual cessation of service.




Stock Appreciation Rights.
The plan administrator has the authority to issue the following three types of
stock appreciation rights under the Discretionary Grant Program:




·
            Tandem
      stock appreciation rights, which provide the holders with the right, upon
      approval of the plan administrator, to surrender their options for an
      appreciation distribution in an amount equal to the excess of the fair
      market value of the vested shares of common stock subject to the
      surrendered option over the aggregate exercise price payable for those
      shares.




·
            Standalone
      stock appreciation rights, which allow the holders to exercise those
      rights as to a specific number of shares of common stock and receive in
      exchange an appreciation distribution in an amount equal to the excess of
      the fair market value on the exercise date of the shares of common stock
      as to which those rights are exercised over the aggregate base price in
      effect for those shares. The base price per share may not be less than the
      fair market value per share of the common stock on the date the standalone
      stock appreciation right is granted, and the right may not have a term in
      excess of ten years.




·
            Limited
      stock appreciation rights, which may be included in one or more option
      grants made under the Discretionary Grant Program to executive officers or
      directors who are subject to the short-swing profit liability provisions
      of Section 16 of the Exchange Act. Upon the successful completion of
      a hostile takeover for more than 50% of our outstanding voting securities
      or a change in a majority of our board as a result of one or more
      contested elections for board membership over a period of up to 36
      consecutive months, each outstanding option with a limited stock
      appreciation right may be surrendered in return for a cash distribution
      per surrendered option share equal to the excess of the fair market value
      per share at the time the option is surrendered or, if greater and the
      option is a non-statutory option, the highest price paid per share in the
      transaction, over the exercise price payable per share under the
      option.




62




Payments
with respect to exercised tandem or standalone stock appreciation rights may, at
the discretion of the plan administrator, be made in cash or in shares of common
stock. All payments with respect to exercised limited stock appreciation rights
will be made in cash. Upon cessation of service with us, the holder of one or
more stock appreciation rights will have a limited period within which to
exercise those rights as to any shares as to which those stock appreciation
rights are vested and exercisable at the time of cessation of service. The plan
administrator will have complete discretion to extend the period following the
holder’s cessation of service during which his or her outstanding stock
appreciation rights may be exercised and/or to accelerate the exercisability or
vesting of the stock appreciation rights in whole or in part. Discretion may be
exercised at any time while the stock appreciation rights remain outstanding,
whether before or after the holder’s actual cessation of service.




Repricing. The plan
administrator has the authority, with the consent of the affected holders, to
effect the cancellation of any or all outstanding options or stock appreciation
rights under the Discretionary Grant Program and to grant in exchange one or
more of the following: (i) new options or stock appreciation rights covering the
same or a different number of shares of common stock but with an exercise or
base price per share not less than the fair market value per share of common
stock on the new grant date or (ii) cash or shares of common stock, whether
vested or unvested, equal in value to the value of the cancelled options or
stock appreciation rights. The plan administrator also has the authority with
or, if the affected holder is not subject to the short-swing profit liability of
Section 16 under the Exchange Act, then without, the consent of the
affected holders, to reduce the exercise or base price of one or more
outstanding stock options or stock appreciation
rights to the then current fair market value per share of common stock or to
issue new stock options or stock appreciation rights with a lower exercise or
base price in immediate cancellation of outstanding stock options or stock
appreciation rights with a higher exercise or base price.  However, no
exchange or cancellation of outstanding options or stock appreciation rights may
be effected so as to constitute the deferral of compensation or an additional
deferral feature that would subject the stock options or stock appreciation
rights to Internal Revenue Code Section 409A or to the Treasury Regulations
promulgated thereunder.




Stock
Issuance Program




Shares of
common stock may be issued under the Stock Issuance Program for valid
consideration under the Nevada General Corporation Law as the plan administrator
deems appropriate, including cash, past services or other property. In addition,
restricted shares of common stock may be issued pursuant to restricted stock
awards that vest in one or more installments over the recipient’s period of
service or upon attainment of specified performance objectives. Shares of common
stock may also be issued under the program pursuant to restricted stock units or
other stock-based awards that entitle the recipients to receive the shares
underlying those awards upon the attainment of designated performance goals, the
satisfaction of specified service requirements and/or upon the expiration of a
designated time period following the vesting of those awards or units, including
without limitation, a deferred distribution date following the termination of
the recipient’s service with us.




The plan
administrator will have complete discretion under the Stock Issuance Program to
determine which eligible individuals are to receive equity awards under the
program, the time or times when those equity awards are to be made, the number
of shares subject to each equity award, the vesting schedule to be in effect for
the equity award and the consideration, if any, payable per share. The shares
issued pursuant to an equity award may be fully vested upon issuance or may vest
upon the completion of a designated service period and/or the attainment of
pre-established performance goals.




63




To assure
that the compensation attributable to one or more equity awards under the Stock
Issuance Program will qualify as performance-based compensation that will not be
subject to the $1.0 million limitation on the income tax deductibility of the
compensation paid per covered executive officer imposed under Internal Revenue
Code Section 162(m), the Compensation Committee will also have the
discretionary authority to structure one or more equity awards under the Stock
Issuance Program so that the shares subject to those particular awards will vest
only upon the achievement of certain pre-established corporate performance
goals. Goals may be based on one or more of the following criteria:
(i) return on total stockholders’ equity; (ii) net income per share; (iii)
net income or operating income; (iv) earnings before interest, taxes,
depreciation, amortization and stock-based compensation costs, or operating
income before depreciation and amortization; (v) sales or revenue targets; (vi)
return on assets, capital or investment; (vii) cash flow; (viii) market share;
(ix) cost reduction goals; (x) budget comparisons; (xi) implementation or
completion of projects or processes strategic or critical to our business
operations; (xii) measures of customer satisfaction; (xiii) any combination of,
or a specified increase in, any of the foregoing; and (xiv) the formation of
joint ventures, research and development collaborations, marketing or customer
service collaborations, or the completion of other corporate transactions
intended to enhance our revenue or profitability or expand our customer base;
provided, however, that for purposes of items (ii), (iii) and (vii) above, the
Compensation Committee may, at the time the equity awards are made, specify
certain adjustments to those items as reported in accordance with generally
accepted accounting principles in the United States, or GAAP, which will exclude
from the calculation of those performance goals one or more of the following:
certain charges related to acquisitions, stock-based compensation, employer
payroll tax expense on certain stock option exercises, settlement costs,
restructuring costs, gains or losses on strategic investments, non-operating
gains, certain other non-cash charges, valuation allowance on deferred tax assets,
and the related income tax effects, purchases of property and equipment, and any
extraordinary non-recurring items as described in Accounting Principles Board
Opinion No. 30 or its successor, provided that those adjustments are in
conformity with those reported by us on a non-GAAP basis. In addition,
performance goals may be based upon the attainment of specified levels of our
performance under one or more of the measures described above relative to the
performance of other entities and may also be based on the performance of any of
our business groups or divisions thereof or any parent or subsidiary.
Performance goals may include a minimum threshold level of performance below
which no award will be earned, levels of performance at which specified portions
of an award will be earned, and a maximum level of performance at which an award
will be fully earned. The Compensation Committee may provide that, if the actual
level of attainment for any performance objective is between two specified
levels, the amount of the award attributable to that performance objective shall
be interpolated on a straight-line basis.




The plan
administrator will have the discretionary authority at any time to accelerate
the vesting of any and all shares of restricted stock or other unvested shares
outstanding under the Stock Issuance Program. However, no vesting requirements
tied to the attainment of performance objectives may be waived with respect to
shares that were intended at the time of issuance to qualify as
performance-based compensation under Internal Revenue Code Section 162(m),
except in the event of certain involuntary terminations or changes in control or
ownership.




Outstanding
restricted stock units or other stock-based awards under the Stock Issuance
Program will automatically terminate, and no shares of common stock will
actually be issued in satisfaction of those awards, if the performance goals or
service requirements established for those awards are not attained. The plan
administrator, however, will have the discretionary authority to issue shares of
common stock in satisfaction of one or more outstanding restricted stock units
or other stock-based awards as to which the designated performance goals or
service requirements are not attained. However, no vesting requirements tied to
the attainment of performance objectives may be waived with respect to awards
that were intended at the time of issuance to qualify as performance-based
compensation under Internal Revenue Code Section 162(m), except in the
event of certain involuntary terminations or changes in control or
ownership.




64




General
Provisions




Acceleration.  If a
change in control occurs, each outstanding equity award under the Discretionary
Grant Program will automatically accelerate in full, unless (i) that award is
assumed by the successor corporation or otherwise continued in effect, (ii) the
award is replaced with a cash retention program that preserves the spread
existing on the unvested shares subject to that equity award (the excess of the
fair market value of those shares over the exercise or base price in effect for
the shares) and provides for subsequent payout of that spread in accordance with
the same vesting schedule in effect for those shares, or (iii) the acceleration
of the award is subject to other limitations imposed by the plan administrator.
In addition, all unvested shares outstanding under the Discretionary Grant and
Stock Issuance Programs will immediately vest upon the change in control, except
to the extent our repurchase rights with respect to those shares are to be
assigned to the successor corporation or otherwise continued in effect or
accelerated vesting is precluded by other limitations imposed by the plan
administrator. Each outstanding equity award under the Stock Issuance Program
will vest as to the number of shares of common stock subject to that award
immediately prior to the change in control, unless that equity award is assumed
by the successor corporation or otherwise continued in effect or replaced with a
cash retention program similar to the program described in clause (ii) above or
unless vesting is precluded by its terms.  Immediately following a
change in control, all outstanding awards under the Discretionary Grant Program
will terminate and cease to be outstanding except to the extent assumed by the
successor corporation or its parent or otherwise expressly continued in full
force and effect pursuant to the terms of the change in control
transaction.




The plan
administrator will have the discretion to structure one or more equity awards
under the Discretionary Grant and Stock Issuance Programs so that those equity
awards will vest in full either immediately upon a change in control or in the
event the individual’s service with us or the successor entity is terminated
(actually or constructively) within a designated period following a change in
control transaction, whether or not those equity awards are to be assumed or
otherwise continued in effect or replaced with a cash retention
program.




A change
in control will be deemed to have occurred if, in a single transaction or series
of related transactions:




(i)            any
person (as that term is used in Section 13(d) and 14(d) of the Exchange
Act), or persons acting as a group, other than a trustee or fiduciary holding
securities under an employment benefit program, is or becomes a beneficial owner
(as defined in Rule 13-3 under the Exchange Act), directly or indirectly of
securities representing 51% or more of the combined voting power of our company,
or




(ii)           there
is a merger, consolidation, or other business combination transaction of us with
or into another corporation, entity or person, other than a transaction in which
the holders of at least a majority of the shares of our voting capital stock
outstanding immediately prior to such transaction continue to hold (either by
such shares remaining outstanding or by their being converted into shares of
voting capital stock of the surviving entity) a majority of the total voting
power represented by the shares of voting capital stock of our company (or the
surviving entity) outstanding immediately after the transaction, or




(iii)           all
or substantially all of our assets are sold.




Stockholder Rights and Option
Transferability. The holder of an option or stock appreciation right will
have no stockholder rights with respect to the shares subject to that option or
stock appreciation right unless and until the holder exercises the option or
stock appreciation right and becomes a holder of record of shares of common
stock distributed upon exercise of the award. Incentive options are not
assignable or transferable other than by will or the laws of inheritance
following the optionee’s death, and during the optionee’s lifetime, may only be
exercised by the optionee. However, non-statutory options and stock appreciation
rights may be transferred or assigned during the holder’s lifetime to one or
more members of the holder’s family or to a trust established for the benefit of
the holder and/or one or more family members or to the holder’s former spouse,
to the extent the transfer is in connection with the holder’s estate plan or
pursuant to a domestic relations order.




65




A
participant will have certain stockholder rights with respect to shares of
common stock issued to the participant under the Stock Issuance Program, whether
or not the participant’s interest in those shares is vested. Accordingly, the
participant will have the right to vote the shares and to receive any regular
cash dividends paid on the shares, but will not have the right to transfer the
shares prior to vesting. A participant will not have any stockholder rights with
respect to the shares of common stock subject to restricted stock units or other
stock-based awards until the awards vest and the shares of common stock are
actually issued. However, dividend-equivalent units may be paid or credited,
either in cash or in actual or phantom shares of common stock, on outstanding
restricted stock units or other stock-based awards, subject to terms and
conditions the plan administrator deems appropriate.




Changes in Capitalization. If
any change is made to the outstanding shares of common stock by reason of any
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares or other change in corporate structure effected without our receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the 2008 Plan, (ii) the maximum number
and/or class of securities for which any one person may be granted equity awards
under the 2008
Plan per calendar year, (iii) the number and/or class of securities and the
exercise price or base price per share in effect under each outstanding option
or stock appreciation right, and (iv) the number and/or class of securities
subject to each outstanding restricted stock unit or other stock-based award
under the 2008 Plan and the cash consideration, if any, payable per share. All
adjustments will be designed to preclude any dilution or enlargement of benefits
under the 2008 Plan and the outstanding equity awards thereunder.




Special Tax Election. Subject
to applicable laws, rules and regulations, the plan administrator may permit any
or all holders of equity awards to utilize any or all of the following methods
to satisfy all or part of the federal and state income and employment
withholding taxes to which they may become subject in connection with the
issuance, exercise or vesting of those equity awards:




Stock Withholding: The
election to have us withhold, from the shares otherwise issuable upon the
issuance, exercise or vesting of an equity award, a portion of those shares with
an aggregate fair market value equal to the percentage of the withholding taxes
(not to exceed 100%) designated by the holder and make a cash payment equal to
the fair market value directly to the appropriate taxing authorities on the
individual’s behalf.




Stock Delivery: The election
to deliver to us certain shares of common stock previously acquired by the
holder (other than in connection with the issuance, exercise or vesting that
triggered the withholding taxes) with an aggregate fair market value equal to
the percentage of the withholding taxes (not to exceed 100%) designated by the
holder.




Sale and Remittance: The
election to deliver to us, to the extent the award is issued or exercised for
vested shares, through a special sale and remittance procedure pursuant to which
the optionee or participant will concurrently provide irrevocable instructions
to a brokerage firm to effect the immediate sale of the purchased or issued
shares and remit to us, out of the sale proceeds available on the settlement
date, sufficient funds to cover the withholding taxes we are required to
withhold by reason of the issuance, exercise or vesting.




66




Amendment,
Suspension and Termination




Our board
of directors may suspend or terminate the 2008 Plan at any time.  Our
board of directors may amend or modify the 2008 Plan, subject to any required
stockholder approval. Once Stockholder approval is obtained for the
establishment of the 2008 Plan, Stockholder approval will be required for any
amendment that materially increases the number of shares available for issuance
under the 2008 Plan, materially expands the class of individuals eligible to
receive equity awards under the 2008 Plan, materially increases the benefits
accruing to optionees and other participants under the 2008 Plan or materially
reduces the price at which shares of common stock may be issued or purchased
under the 2008 Plan, materially extends the term of the 2008 Plan, expands the
types of awards available for issuance under the 2008 Plan, or as to which
stockholder approval is required by applicable laws, rules or
regulations.




Unless
sooner terminated by our board, the 2008 Plan will terminate on the earliest to
occur of: (i) October 24, 2018; (ii) the date on which all shares
available for issuance under the 2008 Plan have been issued as fully-vested
shares; and (iii) the termination of all outstanding equity awards in
connection with certain changes in control or ownership.




Federal
Income Tax Consequences




The
following discussion summarizes income tax consequences of the 2008 Plan under
current federal income tax law and is intended for general information only. In
addition, the tax consequences described below are subject to the limitations of
Internal Revenue Code Section 162(m), as discussed in further detail below.
Other federal taxes and foreign, state and local income taxes are not discussed,
and may vary depending upon individual circumstances and from locality to
locality.




Option Grants. Options
granted under the 2008 Plan may be either incentive stock options, which satisfy
the requirements of Internal Revenue Code Section 422, or non-statutory
stock options, which are not intended to meet those requirements. The federal
income tax treatment for the two types of options differs as
follows:




Incentive Stock Options. No
taxable income is recognized by the optionee at the time of the option grant,
and, if there is no disqualifying disposition at the time of exercise, no
taxable income is recognized for regular tax purposes at the time the option is
exercised, although taxable income may arise at that time for alternative
minimum tax purposes equal to the excess of the fair market value of the
purchased shares at the time over the exercise price paid for those
shares.




The
optionee will recognize taxable income in the year in which the purchased shares
are sold or otherwise made the subject of certain dispositions. For federal tax
purposes, dispositions are divided into two categories: qualifying and
disqualifying. A qualifying disposition occurs if the sale or other disposition
is made more than two years after the date the option for the shares involved in
the sale or disposition was granted and more than one year after the date the
option was exercised for those shares. If either of these two requirements is
not satisfied, a disqualifying disposition will result.




Upon a
qualifying disposition, the optionee will recognize long-term capital gain in an
amount equal to the excess of the amount realized upon the sale or other
disposition of the purchased shares over the exercise price paid for the shares.
If there is a disqualifying disposition of the shares, the excess of the fair
market value of those shares on the exercise date over the exercise price paid
for the shares will be taxable as ordinary income to the optionee. Any
additional gain or any loss recognized upon the disposition will be taxable as a
capital gain or capital loss.




67




If the
optionee makes a disqualifying disposition of the purchased shares, we will be
entitled to an income tax deduction, for our taxable year in which the
disposition occurs, equal to the excess of the fair market value of the shares
on the option exercise date over the exercise price paid for the shares. If the
optionee makes a qualifying disposition, we will not be entitled to any income
tax deduction.




Non-Statutory Stock Options.
No taxable income is recognized by an optionee upon the grant of a non-statutory
option. The optionee will, in general, recognize ordinary income, in the year in
which the option is exercised, equal to the excess of the fair market value of
the purchased shares on the exercise date over the exercise price paid for the
shares, and we will be required to collect certain withholding taxes applicable
to the income from the optionee.




We will
be entitled to an income tax deduction equal to the amount of any ordinary
income recognized by the optionee with respect to an exercised non-statutory
option. The deduction will in
general be allowed for our taxable year in which the ordinary income is
recognized by the optionee.




If the
shares acquired upon exercise of the non-statutory option are unvested and
subject to repurchase in the event of the optionee’s cessation of service prior
to vesting in those shares, the optionee will not recognize any taxable income
at the time of exercise but will have to report as ordinary income, as and when
our repurchase right lapses, an amount equal to the excess of the fair market
value of the shares on the date the repurchase right lapses over the exercise
price paid for the shares. The optionee may elect under Internal Revenue Code
Section 83(b) to include as ordinary income in the year of exercise of the
option an amount equal to the excess of the fair market value of the purchased
shares on the exercise date over the exercise price paid for the shares. If a
timely Internal Revenue Code Section 83(b) election is made, the optionee
will not recognize any additional income as and when the repurchase right
lapses.




Stock Appreciation Rights. No
taxable income is recognized upon receipt of a stock appreciation right. The
holder will recognize ordinary income in the year in which the stock
appreciation right is exercised, in an amount equal to the excess of the fair
market value of the underlying shares of common stock on the exercise date over
the base price in effect for the exercised right, and we will be required to
collect certain withholding taxes applicable to the income from the
holder.




We will
be entitled to an income tax deduction equal to the amount of any ordinary
income recognized by the holder in connection with the exercise of a stock
appreciation right. The deduction will in general be allowed for our taxable
year in which the ordinary income is recognized by the holder.




Direct Stock Issuances.Stock granted under the
2008 Plan may include issuances such as unrestricted stock grants, restricted
stock grants and restricted stock units. The federal income tax treatment for
such stock issuances are as follows:




Unrestricted Stock Grants.
The holder will recognize ordinary income in the year in which shares are
actually issued to the holder. The amount of that income will be equal to the
fair market value of the shares on the date of issuance, and we will be required
to collect certain withholding taxes applicable to the income from the
holder.




We will
be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder at the time the shares are issued. The deduction will
in general be allowed for our taxable year in which the ordinary income is
recognized by the holder.




68




Restricted Stock Grants. No
taxable income is recognized upon receipt of stock that qualifies as
performance-based compensation unless the recipient elects to have the value of
the stock (without consideration of any effect of the vesting conditions)
included in income on the date of receipt. The recipient may elect under
Internal Revenue Code Section 83(b) to include as ordinary income in the
year the shares are actually issued an amount equal to the fair market value of
the shares. If a timely Internal Revenue Code Section 83(b) election is
made, the holder will not recognize any additional income when the vesting
conditions lapse and will not be entitled to a deduction in the event the stock
is forfeited as a result of failure to vest.




If the
holder does not file an election under Internal Revenue Code Section 83(b),
he will not recognize income until the shares vest. At that time, the holder
will recognize ordinary income in an amount equal to the fair market value of
the shares on the date the shares vest. We will be required to collect certain
withholding taxes applicable to the income of the holder at that
time.




We will
be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder at the time the shares are issued, if the holder elects
to file an election under Internal Revenue Code Section 83(b), or we will
be entitled to an income tax deduction at the time the vesting conditions occur,
if the holder does not elect to file an election under Internal Revenue Code
Section 83(b).




Restricted Stock Units. No
taxable income is recognized upon receipt of a restricted stock unit award. The
holder will recognize ordinary income in the year in which the shares subject to
that unit are actually issued to the holder. The amount of that income will be
equal to the fair market value of the shares on the date of issuance, and we
will be required to collect certain withholding taxes applicable to the income
from the holder.




We will
be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder at the time the shares are issued. The deduction will
in general be allowed for our taxable year in which the ordinary income is
recognized by the holder.




Internal Revenue Code Section
409A.  It is the intention of Balqon Corporation that no option
or stock appreciation right granted under the 2008 Plan will be “deferred
compensation” that is subject to Internal Revenue Code Section
409A.




Deductibility
of Executive Compensation




We
anticipate that any compensation deemed paid by us in connection with
disqualifying dispositions of incentive stock option shares or the exercise of
non-statutory stock options or stock appreciation rights with exercise prices or
base prices equal to or greater than the fair market value of the underlying
shares on the grant date will qualify as performance-based compensation for
purposes of Internal Revenue Code Section 162(m) and will not have to be
taken into account for purposes of the $1.0 million limitation per covered
individual on the deductibility of the compensation paid to certain executive
officers, provided that the grants are approved by a committee of at least two
independent directors.  Accordingly, all compensation deemed paid with
respect to those options or stock appreciation rights should remain deductible
without limitation under Internal Revenue Code Section 162(m). However, any
compensation deemed paid by us in connection with shares issued under the Stock
Issuance Program will be subject to the $1.0 million limitation on deductibility
per covered individual, except to the extent the vesting of those shares is
based solely on one or more of the performance milestones specified above in the
summary of the terms of the Stock Issuance Program.




69




Accounting
Treatment




Pursuant
to the accounting standards established by SFAS No. 123(R), “Share-Based
Payment,” we are required to recognize all share-based payments, including
grants of stock options, restricted stock units and employee stock purchase
rights, in our financial statements effective January 1, 2006. Accordingly,
stock options that are granted to our employees and non-employee board members
will have to be valued at fair value as of the grant date under an appropriate
valuation formula, and that value will have to be charged as stock-based
compensation expense against our reported GAAP earnings over the designated
vesting period of the award. Similar option expensing will be required for any
unvested options outstanding on January 1, 2006, with the grant date fair value
of those unvested options to be expensed against our reported earnings over the
remaining vesting period. For shares issuable upon the vesting of restricted
stock units awarded under the 2008 Plan, we will be required to expense over the
vesting period a compensation cost equal to the fair market value of the
underlying shares on the date of the award. If any other shares are unvested at
the time of their direct issuance, the fair market value of those shares at that
time will be charged to our
reported earnings ratably over the vesting period. This accounting treatment for
restricted stock units and direct stock issuances will be applicable whether
vesting is tied to service periods or performance goals. The issuance of a
fully-vested stock bonus will result in an immediate charge to our earnings
equal to the fair market value of the bonus shares on the issuance
date.




Stock
options and stock appreciation rights granted to non-employee consultants will
result in a direct charge to our reported earnings based on the fair value of
the grant measured on the vesting date of each installment of the underlying
shares. Accordingly, the charge will take into account the appreciation in the
fair value of the grant over the period between the grant date and the vesting
date of each installment comprising that grant.




Interests
of Related Parties




The 2008
Plan provides that our officers, employees, non-employee directors, and certain
consultants and independent advisors will be eligible to receive awards under
the 2008 Plan.




As
discussed above, we may be eligible in certain circumstances to receive a tax
deduction for certain executive compensation resulting from awards under the
2008 Plan that would otherwise be disallowed under Internal Revenue Code
Section 162(m).




Possible
Anti-Takeover Effects




Although
not intended as an anti-takeover measure by our board of directors, one of the
possible effects of the 2008 Plan could be to place additional shares, and to
increase the percentage of the total number of shares outstanding, or to place
other incentive compensation, in the hands of the directors and officers of
Balqon Corporation.  Those persons may be viewed as part of, or
friendly to, incumbent management and may, therefore, under some circumstances
be expected to make investment and voting decisions in response to a hostile
takeover attempt that may serve to discourage or render more difficult the
accomplishment of the attempt.




In
addition, options or other incentive compensation may, in the discretion of the
plan administrator, contain a provision providing for the acceleration of the
exercisability of outstanding, but unexercisable, installments upon the first
public announcement of a tender offer, merger, consolidation, sale of all or
substantially all of our assets, or other attempted changes in the control of
Balqon Corporation.  In the opinion of our board of directors, this
acceleration provision merely ensures that optionees under the 2008 Plan will be
able to exercise their options or obtain their incentive compensation as
intended by our board of directors and stockholders prior to any extraordinary
corporate transaction which might serve to limit or restrict that
right.  Our board of directors is, however, presently unaware of any
threat of hostile takeover involving Balqon Corporation.




70




Outstanding
Equity Awards At Fiscal Year-End – 2008




The
following table sets forth information about outstanding equity awards held by
our named executive officers as of December 31, 2008.




Option
      AwardsName
            Number
      of Securities
                UnderlyingUnexercised
                Options
      (#) Exercisable (1)
            Option
                Exercise
                Price
      ($)
            Option
                Expiration
                DateBalwinder
      Samra
            1,388,917
            $1.50
            6/30/20101,388,917
            $2.00
            6/30/20111,388,917
            $2.50
            6/30/2012Robert
      Miranda
            —
            —
            —Henry
      Velasquez
            27,778
            $1.50
            6/30/201027,778
            $2.00
            6/30/201127,778
            $2.50
            6/30/2012K.
      John Shukur
            —
            —
            —







(1)
            All
      options represented in this table were granted in June 2008 in
      consideration of services provided to Balqon California and vested
      immediately upon grant.  In connection with the Merger
      Transaction, all outstanding options to purchase shares of Balqon
      California’s common stock were converted into options to purchase shares
      of our common stock.




Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




The
following table sets forth information with respect to the beneficial ownership
of our voting stock as of May 20, 2009, the date of the table,
by:





·
            each
      person known by us to beneficially own more than 5% of the outstanding
      shares any class of our voting
stock;


·
            each
      of our directors;


·
            each
      of our current executive officers identified at the beginning of the
      “Management” section of this
report;


·
            our
      former executive officer, K. John Shukur;
  and


·
            all
      of our current directors and executive officers as a
  group.




Beneficial
ownership is determined in accordance with the rules of the SEC, and includes
voting or investment power with respect to the securities.  To our
knowledge, except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table below have sole voting and
investment power with respect to all shares of voting stock shown as
beneficially owned by them.  Except as indicated by footnote, all
shares of common stock underlying derivative securities, if any, that are
currently exercisable or convertible or are scheduled to become exercisable or
convertible for or into shares of common stock within 60 days after the date of
the table are deemed to be outstanding for the purpose of calculating the
percentage ownership of each listed person or group but are not deemed to be
outstanding as to any other person or group.  Percentage of beneficial
ownership of our common stock is based on 25,518,348shares of common stock
outstanding as of the date of the table.




71




The
address of each of the following stockholders, unless otherwise indicated below,
is c/o Balqon Corporation, 1420
240th Street, Harbor
City, California 90710. The
address for K. John Shukur is 1184 Rutland Road, Suite 2, Newport Beach,
California 92660.  The address for Marlin Financial Group, Inc. is
9812 Falls Road, Suite 114-198, Potomac, Maryland 20854.  Messrs.
Balwinder Samra, Miranda, Velasquez and Gruenwald are executive officers of
Balqon Corporation.  Messrs. Balwinder Samra, Velasquez and Amarpal
Samra are directors of Balqon Corporation.  Amarpal Samra is the
brother of Balwinder Samra.


Name
      of Beneficial Owner
            Title
      of Class
            Amount
      andNature
                ofBeneficial
      Ownership
            Percent
                of
      ClassBalwinder
      Samra
            Common
            21,166,661(1)
            71.30%Robert
      Mirand
            Common
            100,000
            *Henry
      Velasquez
            Common
            416,674(2)
            1.63%Robert
      Gruenwald
            Common
            250,000
            *Amarpal
      Singh Samra
            Common
            1,562,532(3)
            6.05%Marlin
      Financial Group, Inc.
            Common
            3,045,905(4)
            11.59%K.
      John Shukur
            Common
            110,000(5)
            *All
      directors and executive officersas
      a group (5 persons)
            Common
            23,495,867(6)
            78.11%





*
            Less
      than 1%.


(1)
            Includes
      4,166,751 shares of common stock underlying
  options.


(2)
            Includes
      83,334 shares of common stock underlying
  options.


(3)
            Includes
      312,507 shares of common stock underlying
  options.


(4)
            Includes
      754,180 shares of common stock underlying warrants.  Based
      exclusively on the Form 4s filed by Marlin Financial Group, Inc. on
      January 23, 2009 and October 31, 2008, and the Form 3 filed by
      Marlin Financial Group, Inc. on October 28, 2008.  Includes
      754,180shares
      of common stock underlying warrants.Mark
      Levin has the power to vote and dispose of the shares beneficially held by
      Marlin Financial Group, Inc. as its
president.


(5)
            Includes
      30,000 shares of common stock underlying
  warrants.


(6)
            Includes
      4,562,592 shares of common stock underlying
  options.




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.




Director
Independence




On an
annual basis, each of our directors and executive officers is obligated to
complete a director and officer questionnaire that requires disclosure of any
transactions with Balqon Corporation in which a director or executive officer,
or any member of his or her immediate family, have a direct or indirect material
interest.  Following completion of these questionnaires, the board of
directors, with the assistance of the Nominating and Corporate Governance
Committee, makes an annual determination as to the independence of each director
using the current standards for “independence” established by the SEC and NASDAQ
Market Place Rules, additional criteria set forth in our corporate governance
guidelines and consideration of any other material relationship a director may
have with Balqon Corporation.




In
October 2008, our board of directors determined that none of the directors are
independent under these standards.  In addition, K. John Shukur, who
served on our board of directors during the fiscal year ended December 31,
2008, was not independent under these standards.  Our board of directors
intends to appoint at least two persons who qualify as “independent” under the
current NASDAQ Marketplace Rules to our board of directors in the near
future.




72




Policy
Regarding Related Party Transactions




We
recognize that related party transactions present a heightened risk of conflicts
of interest and in connection with this offering, have adopted a policy to which
all related party transactions shall be subject.  Pursuant to the
policy, the Audit Committee of our board of directors will review the relevant
facts and circumstances of all related party transactions, including, but not
limited to, whether the transaction is on terms comparable to those that could
be obtained in arm’s-length dealings with an unrelated third party and the
extent of the related party’s interest in the transaction.  Pursuant
to the policy, no director may participate in any approval of a related party
transaction to which he or she is a related party.




The Audit
Committee will then, in its sole discretion, either approve or disapprove the
transaction.  If advance Audit Committee approval of a transaction is
not feasible, the transaction may be preliminarily entered into by management,
subject to ratification of the transaction by the Audit Committee at the Audit
Committee’s next regularly scheduled meeting.  If at that meeting the
Audit Committee does not ratify the transaction, management shall make all
reasonable efforts to cancel or annul such transaction.




Certain
types of transactions, which would otherwise require individual review, have
been preapproved by the Audit Committee.  These types of transactions
include, for example, (i) compensation to an officer or director where such
compensation is required to be disclosed in our proxy statement,
(ii) transactions where the interest of the related party arises only by
way of a directorship or minority stake in another organization that is a party
to the transaction and (iii) transactions involving competitive bids or
fixed rates.




Merger
Transaction




Pursuant
to the  Merger Transaction we issued to the shareholders of Balqon
Californiaan
aggregate of 23,908,348 shares of our common stock upon conversion of the same
number of shares of Balqon California’scommon
stock.  The 1:1 exchange ratio was determined by arms-length
negotiations between Balqon Corporation (formerly, BMR Solutions, Inc.) and
Balqon California and was not based on any particular valuation or other
financial data with respect to either company or a comparison of comparable
companies or transactions. We did not issue any shares of our common stock to
our then existing shareholders at the time of the closing of the Merger
Transaction, except for shares issued to those shareholders who at that time
were also shareholders of Balqon California.




In
addition to the 23,908,348 shares common stock we issued to the shareholders of
Balqon California, 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 Stock Incentive Plan, or 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 John Shukur, Mark Andre, Marla Andre, Ryan
Neely, Brian Mirrotto, Eric Peterson, Peggy Hancock and James L. Mirrotto such
that concurrent with the closing of the Merger Transaction we had approximately
1,400,000 shares of common stock issued and outstanding.  The shares
were cancelled as a result of our agreement with Balqon California to have
1,400,000 shares of common stock outstanding at the closing of the Merger
Transaction.




73




At the
closing of the Merger Transaction five of shareholders who held shares of our
common stock immediately prior to the closing of the Merger Transaction,
Anderson Hinsch, Thomas Chen, Ryan Neely, Michael Muellerleile and Jeffrey M.
Hoss, were issued 565,123 shares of our common stock upon conversion of the same
number of shares of Balqon California’scommon stock that they
held immediately prior to the closing of the Merger Transaction.  At
the closing of the Merger Transaction, we also issued to these five shareholders
warrants to purchase an aggregate of 550,000 shares of our common stock upon
conversion of warrants to purchase shares the same number of shares of Balqon
California that they held immediately prior to the closing of the Merger
Transaction.  Immediately prior to the closing of the Merger
Transaction, these five shareholders held an aggregate of 325,000 shares of our
common stock and warrants to purchase an aggregate of 144,598 shares of our
common stock.  As of March 27, 2009, these five shareholders hold an
aggregate of 890,291 shares of our common stock comprised of (i) the 325,000
shares of our common stock they held immediately prior to the closing of the
Merger Transaction and (ii) the 565,123 shares of our common stock they were
issued in connection with the Merger Transaction.  As of March 27,
2009, these five shareholders also hold warrants to purchase an aggregate of
644,598 shares of our common stock, comprised of (i) warrants to purchase an
aggregate of 144,598 shares of our common stock they held immediately prior to
the closing of the Merger Transaction and (ii) warrants to purchase an aggregate
of 550,000 shares of our common stock that they were issued in connection with
the Merger Transaction.




In
connection with the Merger Transaction we issued to (i) Balwinder Samra,
our President and Chief Executive Officer, 16,999,910 shares of our common stock
upon conversion of the same number of shares of common stock of Balqon
Californiaheld by
Mr. Samra and options to purchase 4,166,751 shares of common stock upon
conversion of options to purchase the same number of shares of common stock of
Balqon California held by Mr. Samra; (ii) Robert Miranda, our Chief
Financial Officer, 100,000 shares of our common stock upon conversion of the
same number of shares of common stock of Balqon Californiaheld by Mr. Miranda;
(iii) Henry Velasquez, our Vice President Engineering and a director of our
company, 333,340 shares of our common stock upon conversion of the same number
of shares of common stock of Balqon Californiaheld by
Mr. Velasquez and options to purchase 83,334 shares of common stock upon
conversion of options to purchase the same number of shares of common stock of
Balqon California held by Mr. Velasquez; (iv) Robert Gruenwald, our Vice
President Research and Development 250,000 shares of our common stock upon
conversion of the same number of shares of common stock of Balqon
Californiaheld by
Mr. Gruenwald; and (v) Amarpal Singh Samra, a director of our company, 1,250,025
shares of our common stock upon conversion of the same number of shares of
common stock of Balqon Californiaheld by Mr. Samra and
options to purchase 312,507 shares of common stock upon conversion of options to
purchase the same number of shares of common stock of Balqon California held by
Mr. Samra.  As a result of the Merger Transaction each of
Mr. Balwinder Samra and Mr. Amarpal Samra became the beneficial owners of
more than 5% of our common stock.  The options issues to Messrs.
Balwinder Samra, Amarpal Samra, and Henry Velasquez were issued under our 2008
Plan.  One-third of these options have an exercise price of $1.50 per
share and expire on June 30, 2010, one-third of these options have an
exercise price of $2.00 per share and expire on June 30, 2011, and
one-third of these options have an exercise price of $2.50 per share and expire
on June 30, 2012.




In
connection with the Merger Transaction we also issued to Marlin Financial Group,
Inc. 2,916,725 shares of our common stock upon conversion of the same number of
shares of common stock of Balqon Californiaheld by Marlin Financial
Group, Inc. and warrants to purchase 729,180 shares of our common stock upon the
conversion of warrants to purchase shares the same number shares of common stock
of Balqon Corporation.  One-third of the warrants have an exercise
price of $1.50 per share and expires on June 30, 2010, one-third of the
warrants have an exercise price of $2.00 per share and expires on June 30,
2011, and one-third of the warrants have an exercise price of $2.50 per share
and expires on June 30,
2012.  As a result of the Merger Transaction, Marlin Financial Group,
Inc. became the beneficial owner of more than 5% of our common
stock.




74




Employment,
Compensation and Consulting Agreements




We are or
have been a party to compensation arrangements with our
directors.  See “—Compen­sation of Directors.”  On
October 24, 2008, we entered into an executive employment agreement with each of
Balwinder Samra and Henry Velasquez.  See “—Compensation of Executive
Officers —Employment Agreements” for a description of Mr. Samra’s and Mr.
Velasquez’s executive employment agreements.  On March 27, 2009, we
entered into an executive employment agreement with Robert Gruenwald to be
effective on October 24, 2008.




Employment
Agreement, dated effective October 24, 2008, between the Company and Robert
Gruenwald




On March
27, 2009, we entered into an executive employment agreement with Mr. Robert
Gruenwald.  Under the terms of the executive employment agreement, Mr.
Gruenwald has agreed to serve as our Vice President Research and Development on
an at-will basis.  The employment agreement has an effective date of
October 24, 2008.




The
agreement provides for an initial base salary of $150,000 per year with an
increase to $175,000 and $200,000 per year after the second and third
anniversary of the effective date of the employment agreement, respectively, and
paid vacation of at least four weeks per year.  Mr. Gruenwald is
eligible to receive salary increases and annual cash incentive bonuses at the
discretion of our Compensation Committee.  Mr. Gruenwald is also
eligible to participate in benefit and incentive programs we may offer. We have
agreed to maintain in effect a directors’ and officers’ liability insurance
policy with a minimum limit of liability of $3 million and that we would enter
into an indemnification agreement with Mr. Gruenwald upon terms mutually
acceptable to us and Mr. Gruenwald.




The
agreement contains non-competition provisions that prohibit Mr. Gruenwald from
engaging or participating in a competitive business or soliciting our customer
or employees during his employment with us and for two years afterward. The
agreement also contains provisions that restrict disclosure by Mr. Gruenwald of
our confidential information and assign ownership to us of inventions related to
our business that are created by him during his employment and for two years
afterward.




We may
terminate the agreement at any time, with or without due cause. “Due cause”
includes any intentional misapplication of our funds or other material assets,
or any other act of dishonesty injurious to us, or conviction of a felony or a
crime involving moral turpitude. “Due cause” also includes abuse of controlled
substances or alcohol and breach, nonperformance or nonobservance of any of the
terms of the agreement, provided that Mr. Gruenwald fails to satisfactorily
remedy the performance problem following 30 days’ written notice.




Mr.
Gruenwald may terminate the agreement at any time, with or without good reason.
However, termination for good reason must occur within 90 days of the occurrence
of an event constituting good reason, and Mr. Gruenwald must furnish us with
written notice of the event within 30 days after the initial existence of the
event and provide us with at least a 30-day cure period. “Good reason” includes:
a material diminution in his authority, duties, responsibilities, titles or
offices; a purported reduction in Mr. Gruenwald’s base salary amounting to
a material diminution in his salary to an amount less than the greater of
$150,000 or 10% below the base salary in effect at the time of the reduction;
our failure to timely cure or
diligently initiate a cure of any material breach within 30 days after
Mr. Gruenwald gives us written notice of the breach.




75




If we
terminate Mr. Gruenwald’s employment for due cause or due to Mr.
Gruenwald’s breach of his employment agreement by refusing to continue his
employment, or if Mr. Gruenwald a terminates his employment without good reason,
then all compensation and benefits for Mr. Gruenwald will cease, other than
amounts under retirement and benefit plans and programs that were earned and
vested by the date of termination, pro rata annual salary through the date of
termination, any stock options that were vested as of the date of termination,
and accrued vacation as required by California law.




If Mr.
Gruenwald becomes incapacitated, we may terminate his employment under the
agreement upon 30 days’ prior written notice.  Upon Mr. Gruenwald’s
death, the agreement terminates immediately. If Mr. Gruenwald’s employment
terminates due to his incapacity or death, Mr. Gruenwald or his estate or legal
representative will be entitled to receive benefits under our retirement and
benefits plans and programs that were earned and vested at the date of
termination, a prorated incentive bonus for the fiscal year in which incapacity
or death occurred (to the extent he would otherwise be eligible), and a lump sum
cash payment in an amount equal to one year of his then current annual
salary.




If Mr.
Gruenwald’s employment terminates for good reason or other than as a result of
due cause, incapacity, death or retirement, Mr. Gruenwald will be entitled to
his salary through the end of the month in which termination occurs plus credit
for accrued vacation, and a prorated incentive bonus, if eligible, for the
fiscal year during which termination occurred. In addition, under those
circumstances, if Mr. Gruenwald enters into a separation and release agreement
with us, then he will be entitled to receive (i) a severance payment equal to
two times his then current annual salary, (ii) all medical insurance
benefits to which he was entitled immediately prior to the date of termination
for a period of eighteen months or the date that Mr. Gruenwald’s continued
participation in our medical insurance plan was not possible under the plan,
whichever was earlier, and (iii) a lump-sum cash payment equal to eighteen
times the estimated monthly COBRA premiums at the time of termination (taking
into account all known or anticipated premium increases) to be used by Mr.
Gruenwald to maintain his medical insurance coverage for an additional eighteen
months.  If our medical insurance plan does not allow Mr. Gruenwald’s
continued participation, then we will be required to pay to Mr. Gruenwald, in
monthly installments, the monthly premium or premiums for COBRA coverage,
covering the eighteen month period described in clause (ii) in the
preceding sentence.




Indemnification
Agreements




On
October 24, 2008, we entered into an indemnification agreement with each of our
directors and executive officers other than Mr. Gruenwald.  We entered
into an indemnification agreement with Mr. Gruenwald on March 27,
2009.  The indemnification agreements and our articles of
incorporation and bylaws require us to indemnify our directors and officers to
the fullest extent permitted by Nevadalaw.




Balqon
Corporation’s Transactions Prior to the Consummation of the Merger
Transaction




From
August 2006 to November 9, 2006, Mark Andre, our former director and executive
officer, provided approximately 1,000 square feet of office space to us in
exchange for $1,400 per month on a month to month basis.  Effective
November 10, 2006, this amount was increased to $1,500 per month. We paid $1,400
per month directly to Mr. Andre’s landlord on this arrangement, with $560 per
month treated as rent expense and the remaining $840 per month charged to
compensation. The rent expense of $560 per month is the estimated fair value of
the facilities provided. Effective November 10, 2006, the rent and
compensation on this arrangement was increased to $600 and $900 per month,
respectively.


76




Mark
Andre, our former director and executive officer, is the brother in law of John
Danna, an owner of one of our major customers prior to the Merger
Transaction.




Balqon
California’s Transactions Prior to the Consummation of the Merger
Transaction




During
the fiscal years ended December 31, 2006 and 2007, Balwinder Samra loaned $943
and $56,477, respectively, to Balqon California to fund its
operations.  Between January 1, 2008 and September 30, 2008,
Mr. Samra loaned an additional $1,957to
Balqon California to help fund its operations.  These loans were
recorded as “Advances from Shareholder” on Balqon California’s financial
statements.  As of December 31, 2008 and March  31, 2008, Mr.
Samra was owed a total of $47,877as
a result of these loans.   During the fiscal year ended December
31, 2008, we paid $22,543in
principal anddid
not make anyin
interest payments under the loans provided by Mr. Samra.


Between
January 1, 2008 and September 30, 2008, Miranda & Associates, a
professional accountancy corporation wholly-owned by Robert Miranda, our chief
financial officer, was paid a total of $38,000 in consulting fees in
consideration of accounting and advisory services. As of September 30,
2008, Miranda & Associates was owed $19,875for accounting and advisory
services rendered.




In June
2008, Balqon California issued options to purchase 4,166,751 shares of common
stock to Balwinder Samra in consideration of services rendered.  The
fair value of the options was determined to be $539,614 determined using a
Black-Scholes option pricing model with the following assumptions: 3.98% average
risk-free interest rate; 56.14% expected volatility; one to three year expected
term, and 0% dividend yield.




In June
2008, Balqon California issued 333,340 shares of common stock and options to
purchase 83,334 shares of common stock to Henry Velasquez in consideration of
engineering and design consulting services rendered.  The value of the
common stock was determined to be $333,340 based upon the conversion price of
$1.00 per share of our convertible notes that were offered and sold in July and
September 2008 prior to the closing of the Merger Transaction.  The
fair value of the options was determined to be $10,792 using a Black-Scholes
option pricing model with the following assumptions: 3.98% average risk-free
interest rate; 56.14% expected volatility; one to three year expected term, and
0% dividend yield.




In June
2008, Balqon California issued 1,250,025 shares of common stock and options to
purchase 312,507 shares of common stock to Amarpal Samra in consideration of
business strategy consulting services rendered.  The value of the
common stock was determined to be $1,250,025 based upon the conversion price of
$1.00 per share of our convertible notes that were offered and sold in July and
September 2008 prior to the closing of the Merger Transaction.  The
fair value of the options was determined to be $40,471 using a Black-Scholes
option pricing model with the following assumptions: 3.98% average risk-free
interest rate; 56.14% expected volatility; one to three year expected term, and
0% dividend yield.




In June
2008, Balqon California issued 2,916,725 shares of common stock and warrants to
purchase 729,180 shares of common stock to Marlin Financial in consideration of
business strategy and financial advisory services rendered and to be
rendered.  The value of the common stock was determined to be
$2,916,725 based upon the conversion price of $1.00 per share of our convertible
notes that were offered and sold in July and September 2008 prior to the closing
of the Merger Transaction.  The fair value of the options was
determined to be $94,432 using a Black-Scholes option pricing model with the
following assumptions: 3.98% average risk-free interest rate; 56.14% expected
volatility; one to three year expected term, and 0% dividend yield.




77




In August
2008, Balqon California issued 100,000 shares of common stock to Robert Miranda,
its current Chief Financial Officer, in consideration of business strategy
consulting services rendered.  The value of the common stock was
determined to be $100,000 based upon the conversion price of $1.00 per share of
our convertible notes that were offered and sold in July and September 2008
prior to the closing of the Merger Transaction.




In August
2008, Balqon California issued 250,000 shares of common stock to Robert
Gruenwald in consideration of services provided.  The value of the
common stock was determined be $250,000 based upon the conversion price of $1.00
per share of our convertible notes that were offered and sold in July and
September 2008 prior to the closing of the Merger Transaction.




In August
2008, Balqon California issued 332,910 shares of common stock to Balwinder Samra
in consideration of services rendered.  The value of the common stock
was determined be $332,910 based upon the conversion price of $1.00 per share of
our convertible notes that were offered and sold in July and September 2008
prior to the closing of the Merger Transaction.




On
September 9, 2008, Balqon California entered into a Asset and Purchase Agreement
with EMS, and its sole member, Robert Gruenwald, to acquire certain of the
assets of EMS, including all intellectual property assets for an aggregate
purchase price of $350,000 of which $250,000 was paid in cash at closing and
$100,000 was paid in the form of a promissory note issued to EMS.  The
promissory note issued to EMS bares an interest rate of 5% per annum payable at
maturity.  All amounts due and payable under the promissory note
became due and payable on March 9, 2009.  As of March 27, 2009,
$100,000 in principal remains outstanding under the promissory note issued to
EMS.  During the fiscal year ended December 31, 2008, we did not make
any payments of principal or interest due under the promissory note to
EMS.




On June
24, 2008, we issued a promissory note in the amount of $25,875 to Marlin
Financial Group, Inc.  The promissory note issued to Marlin Financial
Group, Inc. bares an interest rate of 6% per annum payable at maturity and
became due and payable on December 6, 2008.  As of March 27, 2009,
$875 in principal remains outstanding under the promissory note issued to Marlin
Financial Group, Inc.  During the fiscal year ended December 31, 2008,
we paid $25,000 in principal and did not make any interest payments due under
the promissory note to Marlin Financial Group, Inc.




December
2008 Private Placement




In
connection with the private placement transaction consummated on December 22,
2008, we issued to Marlin Financial Group, Inc. 25,000 shares of our common
stock and warrants to purchase 25,000 shares of our common stock at an exercise
price of $1.50.




Fees
Paid to Miranda & Associates




Between
September 30, 2008 and December 31, 2008, Miranda & Associates, a
professional accountancy corporation wholly-owned by Robert Miranda, our chief
financial officer, was paid a total of $196,980 in consulting fees in
consideration of accounting and advisory services. As of December  31,
2008, Miranda & Associates was owed $12,500 for accounting and advisory
services rendered.




78




Item
14.                  Principal
Accounting Fees and Services.




Weinberg &
Company, P.A.




The
following table presents the aggregate fees billed to us for professional audit
services rendered by Weinberg & Company, P.A., or Weinberg, for the
year ended December 31, 2008.  We appointed Weinberg as our
independent registered public accounting firm on October 24, 2008.





2008Audit
      Fees
            
            $
            28,873Audit-Related
      Fees
            
            
            18,242Tax
      Fees
            
            
            —All
      Other Fees
            
            
            —Total
            
            $
            47,115




Audit
Fees.  Consist of amounts billed for professional services
rendered for the audit of our annual consolidated financial statements included
in our Annual Report on Form 10-K, and reviews of our interim consolidated
financial statements included in our Quarterly Report on Forms 10-Q and our
Registration Statement on Form S-1, including amendments thereto.




Audit-Related
Fees.  Audit-Related Fees consist of fees billed for
professional services that are reasonably related to the performance of the
audit or review of our consolidated financial statements but are not reported
under “Audit Fees.”




Tax Fees.Tax Fees
consist of fees for professional services for tax compliance activities,
including the preparation of federal and state tax returns and related
compliance matters.




All Other
Fees.  Consists of amounts billed for services other than those
noted above.




Our Audit
Committee has determined that all non-audit services provided by Weinberg are
and were compatible with maintaining Weinberg’s audit independence.




Our Audit
Committee is responsible for approving all audit, audit-related, tax and other
services.  The Audit Committee pre-approves all auditing services and
permitted non-audit services, including all fees and terms to be performed for
us by our independent registered public accounting firm at the beginning of the
fiscal year.  Non-audit services are reviewed and pre-approved by
project at the beginning of the fiscal year.  Any additional non-audit
services contemplated by us after the beginning of the fiscal year are submitted
to the Audit Committee chairman for pre-approval prior to engaging the
independent auditor for such services.  These interim pre-approvals
are reviewed with the full Audit Committee at its next meeting for
ratification.  During 2008, all services performed by Weinberg were
pre-approved by our Audit Committee in accordance with these policies and
applicable SEC regulations.




79




PART
IV




Item
      15.
            Exhibits
      and Financial Statement Schedules.




(a)(1)  Financial
Statements.




Reference
is made to the financial statements listed on and attached following the Index
to Financial Statements contained at page F-1 of this report.




(a)(2)
and (c) Financial Statement Schedules.




Not
applicable.




(a)(3)
and (b) Exhibits.






Exhibit
                Number
            
            Description2.1
            
            Agreement
      and Plan of Merger, dated September 15, 2008, among the Registrant, Balqon
      California and a newly-created, wholly-owned subsidiary of the Registrant,
      Balqon Acquisition Corp. (1)(###)2.2
            
            Amendment
      No. 1 to Agreement and Plan of Merger, dated October 15, 2008, among the
      Registrant, Balqon California and a newly-created, wholly-owned subsidiary
      of the Registrant, Balqon Acquisition Corp. (2)2.3
            
            Asset
      Purchase Agreement, dated September 9, 2008, by and between Electric
      Motor Sports, LLC and Balqon California (7)(###)3.1
            
            Articles
      of Incorporation of the Registrant (3)3.2
            
            Bylaws
      of the Registrant (3)4.1
            
            Article
      Thirteenth of the Articles of Incorporation of the Registrant (contained
      in Exhibit 3.1 to this Registration Statement) (3)4.2
            
            Sections
      2 and 6 of the Bylaws of the Registrant (contained in Exhibit 3.2 to
      this Registration Statement) (3)4.3
            
            Form
      of Warrants issued by Balqon California to certain security holders to
      purchase an aggregate of 500,000 shares of commons stock
      (4)(##)4.4
            
            Form
      of Warrants issued by Balqon California to certain security holders to
      purchase an aggregate of 810,000 shares of common stock
      (4)(##)4.5
            
            Form
      of Warrants issued by Balqon California to certain security holders to
      purchase an aggregate of 575,000 shares of common stock
      (4)(##)4.6
            
            Form
      of Warrant to purchase common stock issued by Balqon California to Marlin
      Financial Group, Inc. (one-third of these warrants are exercisable at an
      exercise price of $1.50 per share until June 30, 2010, one-third of these
      warrants are exercisable at an exercise price of $2.00 per share until
      June 30, 2011, and one-third of these warrants are exercisable at an
      exercise price of $2.50 per share until June 30, 2012)
  (4)




80






Exhibit
                Number
            
            Description4.7
            
            Form
      of Warrants issued by the Registrant to certain security holders to
      purchase an aggregate of 184,598 shares of common stock (one-third of
      these warrants are exercisable at an exercise price of $1.50 per share
      until October 24, 2009, one-third of these warrants are exercisable at an
      exercise price of $2.00 per share until October 24, 2010, and one-third of
      these warrants are exercisable at an exercise price of $2.50 per share
      until October 24, 2011) (4)(##)4.8
            
            Form
      of Warrants issued by the Registrant to certain security holders to
      purchase an aggregate of 210,000 shares of common stock
  (5)4.9
            
            Form
      of Warrants issued by the Registrant to certain security holders to
      purchase an aggregate of 365,000 shares of common stock
  (7)10.1
            
            Balqon
      Corporation 2008 Stock Incentive Plan (4)(#)10.2
            
            Form
      of Stock Option Agreement under 2008 Stock Incentive Plan
      (4)(#)10.3
            
            Form
      of Indemnification Agreement for officers and directors
    (4)(#)10.4
            
            Employment
      Agreement, dated October 24, 2008, by and between Balwinder Samra and the
      Registrant (4)(#)10.5
            
            Employment
      Agreement, dated October 24, 2008, by and between Henry Velasquez and the
      Registrant (4)(#)10.6
            
            Amended
      and Restated Registration Rights Agreement, dated September 15, 2008,
      by and between Balqon California and certain security holders
      (7)(##)10.7
            
            Registration
      Rights Agreement, dated September 15, 2008, by and between Balqon
      California and certain security holders (7)(##)10.8
            
            Registration
      Rights Agreement, dated October 24, 2008, by and between Balqon California
      and certain security holders (4)(##)10.9
            
            Registration
      Rights Agreement dated October 24, 2008, by and between the Registrant and
      certain security holders (which agreement relates to the registration
      rights of the stockholders holding 1,400,000 shares of our common stock
      immediately prior to the Merger Transaction) (4)(##)10.10
            
            Purchase
      Agreement, dated June 26, 2008, between the City of Los Angeles and Balqon
      California (*)(##)10.11
            
            Purchase
      and Service Agreement, dated May 15, 2008, between the South Coast Air
      Quality Management District and Balqon California
  (7)(##)10.12
            
            Lease
      Agreement for 1420 240th Street, Harbor City, California 90710, between
      Allan D. and Gloria G. Singer, Trustees for the U.D.T. Trust dated June 6,
      1984 and Balqon California dated June 17, 2008 (*)(##)10.13
            
            Lease
      agreement, dated May 21, 2007, by and between 1701 E. Edinger, LLC, and
      Balqon California (*)(##)10.14
            
            First
      Modification to Lease, dated June 18, 2008, by and between 1701 E.
      Edinger, LLC, and Balqon California
(4)(##)




81


Exhibit
                Number
            
            Description10.15
            
            Registration
      Rights Agreement, dated December 22, 2008, by and between the Registrant
      and certain security holders (5)10.16
            
            Business
      Financing Agreement, dated February 18, 2009, between Bridge Bank,
      National Association and theRegistrant(6)10.17
            
            Business
      Financing Modification Agreement, dated February 26, 2009, between
      Bridge Bank, National Association and the Registrant
(6)10.18
            
            Promissory
      Note, dated September 9, 2009, in the amount of $100,000, issued to
      Electric Motor Sports, LLC (7)10.19
            
            Employment
      Agreement, dated October 24, 2008, by and between Robert Gruenwald and the
      Registrant (7)(#)10.20
            
            Agreement,
      dated May 2007, by and between the South Coast Air Quality Management
      District and Balqon California (7)10.21
            
            Stock
      and Warrant Purchase Agreement, dated August 28, 2008, by and between
      Marlin Financial Group, Inc. and Balqon California (*)10.22
            
            Amendment
      No. 1 to Stock and Warrant Purchase Agreement, dated March 30, 2009, by
      and between Marlin Financial Group, Inc. and the Registrant
      (7)10.23
            
            Amendment
      No. 2 to Stock and Warrant Purchase Agreement, dated May 21, 2009, by and
      between Marlin Financial Group, Inc. and the Registrant
  (*)10.24
            
            Form
      of 10% Unsecured Subordinated Convertible Promissory Notes issued in March
      2009, in the aggregate principal amount of $365,000, which are convertible
      into an aggregate of 365,000 shares of our common stock
  (7)14.1
            
            Code
      of Ethics (4)14.2
            
            Code
      of Ethics for Chief Executive Officer and Senior Financial Officers
      (4)31.1
            
            Certification
      of Principal Executive Officer 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
      of Principal Financial Officer 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 Chief Executive Officer and Chief Executive Officer Pursuant to
      18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (*)99.1
            
            Consent
      of John Kinross-Kennedy (7)





(#)
            Management
      contract or compensatory plan, contract or arrangement.(##)
            The
      rights and obligations of Balqon California under this agreement were
      assumed by the registrant in connection with the Merger
      Transaction.(###)
            The
      schedules to the agreement have not been filed.  The agreement
      contains certain representations and warranties made by the parties
      thereto. The assertions embodied in such representations and warranties
      are not necessarily assertions of fact, but a mechanism for the parties to
      allocate risk. Accordingly, investors should not rely on the
      representation and warranties as characterizations of the actual state of
      facts or for any other purpose at the time they were made or
      otherwise.  The agreements are not intended as a document for
      investors to obtain factual information about the current state of affairs
      of the parties to the agreement.  Rather, investors should look
      to other disclosures contained in Balqon Corporation’s reports under the
      Exchange Act.(*)
            Filed
      herewith.(1)
            Filed as an exhibit
      to the Registrant’scurrent report on Form 8-K with the Securities
      and Exchange Commission filed on September 19,
  2008.


(2)
            Filed
      as an exhibit to the Registrant’s current report on Form 8-K with the
      Securities and Exchange Commission filed on October 21,
    2008.


(3)
            Filed
      as an exhibit to the Registrant’s Registration Statement on Form SB-2
      filed with the Securities and Exchange Commission on September 19,
      2006.


(4)
            Filed
      as an exhibit to the Registrant’s current report on Form 8-K filed
      with the Securities and Exchange Commission on October 30,
      2008.


(5)
            Filed
      as an exhibit to the Registrant’s Registration Statement on Form S-1
      filed with the Securities and Exchange Commission on December 23,
      2008.


(6)
            Filed
      as an exhibit to the Registrant’s Current Report on Form 8-K with the
      Securities and Exchange Commission filed on March 3,
      2009.


(7)
            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.




82




BALQON
CORPORATION





INDEX
TO FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
              F-1Balance
      Sheets as of December 31, 2008 (as Restated) and 2007
              F-2Statements
      of Operations for the Years Ended December 31, 2008 (as Restated) and
      2007
              F-3Statement
      of Shareholder’s Equity (Deficiency) for the Years Ended December 31, 2008
      (as Restated) and 2007
              F-4Statements
      of Cash Flows for the Years Ended December 31, 2008 (as Restated) and
      2007
              F-5Notes
      to Financial Statements for the Years Ended December 31, 2008 (as
      Restated) and 2007
              F-6
  83





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Shareholders of


Balqon
Corporation


Santa
Ana, California





We have
audited the accompanying balance sheets of Balqon Corporation (the “Company”) as
of December 31, 2008 (as restated) and 2007, and the related statements of
operations, stockholders’ equity (deficiency) and cash flows for the years ended
December 31, 2008 (as restated) and 2007.  These financial statements
are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2008
(as restated) and 2007, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.  The Company has experienced recurring
losses since inception and has an accumulated deficit. These conditions raise
substantial doubt regarding the Company’s ability to continue as a going
concern.  Management’s plans in regard to these matters are described
in Note 1 to the financial statements.  The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.





As
discussed in Note 2 “Restatement of Financial Statements” to the financial
statements, the Company has restated its 2008 financial statements.




/s/
      Weinberg & Company, P.A.Weinberg
      & Company, P.A.
                
                Los Angeles, California
                March 23, 2009, except for Notes 2, 8, nd 9 as to which the date is
      May 18, 2009




F-1




BALQON
CORPORATION


BALANCE
SHEETS





December
      31,
                2008
                (as
      Restated)
            
            
            December
      31,
                2007ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            355,615
            
            
            $
            34Accounts
      receivable
            
            
            —
            
            
            
            35,000Inventories
            
            
            1,159,601
            
            
            
            —Prepaid
      expenses
            
            
            43,020
            
            
            
            —Total
      current assets
            
            
            1,558,236
            
            
            
            35,034Property
      and equipment, net
            
            
            89,393
            
            
            
            21,047Other
      assets:Deposits
            
            
            33,641
            
            
            
            19,241Intangible
      production costs, net
            
            
            171,385
            
            
            
            —Goodwill
            
            
            166,500
            
            
            
            —Total
      assets
            
            $
            2,019,155
            
            
            $
            75,322LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIENCY)Current
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            1,225,807
            
            
            $
            29,212Notes
      payable to related parties
            
            
            100,875
            
            
            
            —Advances
      from shareholder
            
            
            34,877
            
            
            
            57,420Billings
      in excess of costs and estimated earningson
      uncompleted contracts
            
            
            2,604
            
            
            
            71,264Total
      current liabilities
            
            
            1,364,163
            
            
            
            157,896SHAREHOLDERS’
      EQUITY (DEFICIENCY)Common
      stock, $0.001 par value, 100,000,000 shares authorized,25,518,348
      and 16,667,000 shares issued and outstanding
            
            
            25,518
            
            
            
            5,000Additional
      paid in capital
            
            
            8,650,329
            
            
            
            —Accumulated
      deficit
            
            
            (8,020,855
            )
            
            
            (87,574
            )Total
      shareholders’ equity (deficiency)
            
            
            654,992
            
            
            
            (82,574
            )Total
      liabilities and shareholders’ equity (deficiency)
            
            $
            2,019,155
            
            
            $
            (75,322
            )






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




F-2




BALQON
CORPORATION


STATEMENTS
OF OPERATIONS






Years
      Ended
                December
      31,2008
                (as
      Restated)
            
            
            2007REVENUESContract
      revenue earned
            
            $
            128,660
            
            
            $
            382,736Sale
      of parts
            
            
            75,000
            
            
            
            —Total
      revenues
            
            
            203,660
            
            
            
            382,736COSTS
      OF REVENUESContract
      costs
            
            
            69,078
            
            
            
            280,263Costs
      of parts
            
            
            68,975
            
            
            
            —Total
      cost of revenues
            
            
            138,053
            
            
            
            280,263Gross
      profit
            
            
            65,607
            
            
            
            102,473OPERATING
      EXPENSESGeneral
      and administrative
            
            
            6,897,041
            
            
            
            182,035Research
      & development
            
            
            44,023
            
            
            
            —Reverse
      merger expenses
            
            
            414,384
            
            
            
            —Depreciation
      and amortization
            
            
            29,836
            
            
            
            3,182Total
      operating expenses
            
            
            7,385,284
            
            
            
            185,217Loss
      from operations
            
            
            (7,319,677
            )
            
            
            (82,744
            )Interest
      expense
            
            
            (613,604
            )
            
            
            —NET
      LOSS
            
            $
            (7,933,281
            )
            
            $
            (82,744
            )Net
      loss per share – basic and diluted
            
            $
            (0.39
            )
            
            $
            (0.00
            )Weighted
      average shares outstanding, basic and diluted
            
            
            20,206,507
            
            
            
            16,667,000






The accompanying notes are
an integral part of these financial statements.
  F-3




BALQON
CORPORATION


STATEMENTS
OF SHAREHOLDERS’ EQUITY (DEFICIENCY)


FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007









Common
      Stock, $0.001 par value
            
            
            Additional
            
            
            AccumulatedNumber
            
            
            Amount
            
            
            Paid
      in Capital
            
            
            Deficit
            
            
            TotalBalance,
      January 1, 2007
            
            
            16,667,000
            
            
            $
            5,000
            
            
            $
            —
            
            
            $
            (4,830
            )
            
            $
            170Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (82,744
            )
            
            
            (82,744
            )Balance,
      December 31, 2007
            
            
            16,667,000
            
            
            
            5,000
            
            
            
            —
            
            
            
            (87,574
            )
            
            
            (82,574
            )Fair
      value of shares granted for services
            
            
            5,333,000
            
            
            
            5,333
            
            
            
            5,327,667
            
            
            
            —
            
            
            
            5,333,000Fair
      value of options and warrants granted for services
            
            
            
            
            
            
            
            
            
            
            709,215
            
            
            
            —
            
            
            
            709,215Fair
      value of conversion feature on warrantsissued
      with convertible notes
            
            
            
            
            
            
            
            
            
            
            586,747
            
            
            
            —
            
            
            
            586,747Effect
      of reverse merger transaction
            
            
            1,400,000
            
            
            
            13,067
            
            
            
            (13,067
            )
            
            
            —
            
            
            
            —Shares
      issued for cash
            
            
            785,000
            
            
            
            785
            
            
            
            707,753
            
            
            
            —
            
            
            
            708,538Shares
      issued upon conversion of convertible notes
            
            
            1,333,348
            
            
            
            1,333
            
            
            
            1,332,015
            
            
            
            —
            
            
            
            1,333,348Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (7,933,281
            )
            
            
            (7,933,281
            )Balance,
      December 31, 2008 (as Restated)
            
            
            25,518,348
            
            
            $
            25,518
            
            
            $
            8,650,329
            
            
            $
            (8,020,855
            )
            
            $
            654,992






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




F-4




BALQON
CORPORATION


STATEMENTS
OF CASH FLOWS






Years
      Ended
                December
      31,2008
                (As
      Restated)
            
            
            2007Cash
      flow from operating activities:Net
      loss
            
            $
            (7,933,281
            )
            
            $
            (82,744
            )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization
            
            
            29,836
            
            
            
            3,182Fair
      value of common stock granted for services
            
            
            5,333,000
            
            
            
            —Fair
      value of options and warrants granted for services
            
            
            709,215
            
            
            
            —Amortization
      of Note Discount
            
            
            586,747Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            35,000
            
            
            
            (35,000
            )Inventories
            
            
            (1,159,601
            )
            
            
            —Prepaid
      expenses
            
            
            (43,020
            )
            
            
            —Deposits
            
            
            (14,400
            )
            
            
            (19,241
            )Accounts
      payable and accrued expense
            
            
            1,196,595
            
            
            
            28,412Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
            
            
            (68,660
            )
            
            
            71,264Net
      cash used in operating activities
            
            
            (1,328,569
            )
            
            
            (34,127
            )Cash
      flows from investing activities:Acquisition
      of furniture, equipment and software
            
            
            (82,603
            )
            
            
            (22,316
            )Acquisition
      of EMS
            
            
            (253,465
            )
            
            
            —Net
      cash used in investing activities
            
            
            (336,068
            )
            
            
            (22,316
            )Cash
      flows from financing activities:Proceeds
      from notes payable, related parties
            
            
            25,875
            
            
            
            —Payment
      of notes payable, related parties
            
            
            (25,000
            )Proceeds
      from  issuance of convertible notes, net
            
            
            1,333,348
            
            
            
            —Proceeds
      from sale of common stock
            
            
            708,538Advances
      from shareholder
            
            
            (22,543
            )
            
            
            56,477Net
      cash provided by financing activities
            
            
            2,020,218
            
            
            
            56,477Increase
      in cash and cash equivalents
            
            
            355,581
            
            
            
            34Cash
      and cash equivalents, beginning of year
            
            
            34
            
            
            
            —Cash
      and cash equivalents, end of year
            
            $
            355,615
            
            
            $
            34Supplemental
      cash flow informationInterest
      Paid
            
            $
            26,857
            
            
            $
            —Income
      taxes Paid
            
            $
            —
            
            
            $
            —Supplemental
      non cash financing and investing activitiesNote
      payable issued in connection with acquisition of EMS
            
            $
            100,000
            
            
            $
            —Fair
      value of conversion feature of warrants related to issuance of convertible
      notes
            
            $
            586,747
            
            
            $
            586,747Conversion
      of notes payable to common stock
            
            $
            1,333,348
            
            
            $
            1,333,348






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




F-5




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


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.  The Company incurred additional costs of $374,019 in
connection with the reverse merger that are reflected as costs in the
accompanying December 31, 2008 statement of operations.


Going
Concern




For the
year ended December 31, 2008, the Company had a net loss of $7,933,281 and
utilized cash of $1,328,569 in operations, and had an accumulated deficit of
$8,020,855 at December 31, 2008.  These matters raise substantial
doubt about the Company’s ability to continue as a going concern.  The
financial statements do not include any adjustments that might result from this
uncertainty.  The Company intends to raise funds to finance operations
until the Company achieves profitable operations. The Company’s capital
requirements for the next 12 months, as they relate to the production of its
products will continue to be significant.  If adequate funds are not
available to satisfy either medium or long-term capital requirements, the
Company’s operations and liquidity could be materially adversely affected and
the Company could be forced to cut back its operations.




F-6


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


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




Estimates




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




Revenues




Contract
Revenue and Cost Recognition on Prototype Vehicles
  In
accounting for contracts, the Company follows the provisions of the AICPA’s
Statement of Position 81-1 – Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (“SOP
81-1”).  The Company recognizes revenues using the
percentage-of-completion method of accounting by relating contract costs
incurred to date to the total estimated costs at completion.  This
method is used because management considers costs to be the best available
measure of progress on its contracts.  Contract losses are provided
for in their entirety in the period that they become known, without regard to
the percentage-of-completion.  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.
  F-7


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


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




Revenues
(continued)




Contract
costs include all direct material and labor costs.  The liability
“billings in excess of costs and estimated earnings on uncompleted contracts”
represents billings in excess of revenues earned.
  Sales
of Production Units and Parts
  The
Company recognizes revenue from the sale of completed production units and parts
when there is persuasive evidence that an arrangement exists, delivery of the
product has occurred and title has passed, the selling price is both fixed and
determinable, and collectibility is reasonably assured, all of which generally
occurs upon shipment of the Company’s product or delivery of the product to the
destination specified by the customer.
  The
Company determines whether delivery has occurred based on when title transfers
and the risks and rewards of ownership have transferred to the buyer, which
usually occurs when the Company places the products with the buyer’s
carrier.  The Company regularly reviews its customers’ financial
positions to ensure that collectibility is reasonably assured.  Except
for warranties, the Company has no post-sales obligations.
  Product
Warranties
  The
Company provides limited warranties for parts and labor at no cost to its
customers within a specified time period after the sale.  The Company
estimates the actual historical warranty claims coupled with an analysis of
unfulfilled claims at the balance sheet date. As of March 31, 2009, the Company
had no warranty reserve nor did it incur warranty expenses during the three
month periods ended March 31, 2009 or 2008.




Cash
and Cash Equivalents




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




F-8


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


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




Accounts
Receivable




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




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




Inventories




Inventories
consist of raw materials to be used for assembly and are stated at the lower of
cost or market. Cost is determined principally on a first-in-first-out average
cost basis






Property
and Equipment




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




Computer
      equipment and software
              3
      yearsFurniture
              3
      yearsMachinery
              3
      years
 Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful life of the asset or the lease term.
  Goodwill
and Intangible Assets
  As
required by Statement
of Financial
Accounting Standards (“SFAS”) No.
142, management performs impairment tests of goodwill and indefinite-lived
intangible assets whenever an event occurs or circumstances change that indicate
impairment has more likely than not occurred. Also, as required by SFAS No. 142,
management performs impairment testing of goodwill and indefinite-lived
intangible assets at least annually.
  F-9
  BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007
   NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
  Goodwill and Intangible
Assets (continued)
 In
accordance with SFAS No. 142, management tests goodwill for impairment at
the reporting unit level.  The Company has only one reporting
unit.  At the time of goodwill impairment testing, management
determines fair value through the use of a discounted cash flow valuation model
incorporating discount rates commensurate with the risks involved its reporting
unit. If the calculated fair value is less than the current carrying value,
impairment of the Company may exist. The use of a discounted cash flow valuation
model to determine estimated fair value is common practice in impairment testing
in the absence of available domestic and international transactional market
evidence to determine the fair value. The key assumptions used in the discounted
cash flow valuation model for impairment testing include discount rates, growth
rates, cash flow projections and terminal value rates. Discount rates are set by
using the Weighted Average Cost of Capital (WACC) methodology. The WACC
methodology considers market and industry data as well as Company-specific risk
factors for each reporting unit in determining the appropriate discount rates to
be used. The discount rate utilized is indicative of the return an investor
would expect to receive for investing in such a business. Operational
management, considering industry and Company-specific historical and projected
data, develops growth rates and cash flow projections for the
Company.  Terminal value rate determination follows common methodology
of capturing the present value of perpetual cash flow estimates beyond the last
projected period assuming a constant "WACC" and low long-term growth rates. As
an indicator that each reporting unit has been valued appropriately through the
use of the discounted cash flow valuation model, the aggregate fair value of all
reporting units is reconciled to the total market capitalization of the Company.
The discounted cash flow valuation methodology and calculations will be used in
2009 impairment testing.  Our first measurement period will be in the
third quarter of
2009.
  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 during the years ended December 31, 2008 and
2007.


Income
Taxes




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




F-10


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007
   NOTE 1 –NATURE
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)


Loss
Per Share




Basic
loss per share has been computed using the weighted average number of common
shares outstanding and issuable during the period. The computation of basic loss
per share includes the 1,400,000 shares issued in connection with the reverse
merger since October 24, 2008, the date of the merger (see
Note 1).  Diluted loss per share is computed based on the
weighted average number of common shares and all common equivalent shares
outstanding during the period in which they are dilutive. Common equivalent
shares consist of shares issuable upon the exercise of stock options or
warrants. As of December 31, 2008 common stock equivalents composed of options
exercisable into 4,562,592 shares of the Company’s common stock and warrants
exercisable into 3,008,778 shares of the Company’s common stock. For the years
ended December 31, 2008 and 2007, common equivalent shares have been excluded
from the calculation of loss per share as their effect is
anti-dilutive.




Stock-Based
Compensation




The
Company periodically issues stock purchase options to employees and
non-employees in non-capital raising transactions for services rendered, for
financing costs and on a merit basis. Stock purchase options issued to
nonemployees are issued as warrants with the warrants sharing the same vesting
and exercise attributes of the company’s stock purchase options issued to
employees.




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




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




Financial
Assets and Liabilities Measured at Fair Value




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




F-11




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007
 NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
 Accounting
for Warrants and Derivatives
  Freestanding
financial instruments, such as detachable warrants, must be evaluated under the
authoritative accounting literature to determine whether they should be
classified as assets or liabilities (derivative accounting), temporary equity,
or permanent equity.Management
initially evaluates whether the instruments are covered by SFAS No. 150,
“Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity.”If
the instrument is not governed by SFAS No. 150, then management determines
whether it meets the definition of a derivative under SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities.”To
determine whether a specific warrant agreement would follow derivative
accounting under SFAS No. 133, managementis
required to first evaluate whether the warrant would meet the definition of
equity under the provisions of EITF Issue No. 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own
Stock.”Financialinstruments
such as warrants that are classified as permanent or temporary equity are
excluded from the definition of a derivative for purposes of SFAS No. 133.
Financial instruments, including warrants, that are classified as assets or
liabilities are considered
derivatives under SFAS No. 133, and are marked to market at each reporting date,
with the change in fair value recorded in the income statement. The fair values
of both the warrants and conversion benefits are calculated using a
Black-Scholes Model, taking
into consideration factors such as the underlying price of the
company’s common
stock, the exercise price for warrants or the conversion price for the
conversion benefit, the company’s stock
volatility (or the stock volatility of peer companies with an
historical active trading market), and the risk-free interest rates available
for comparable time periods.
  Under
EITF Issue No. 00-19, contracts that require physical settlement or net-share
settlement and contracts that give the issuer the choice of
settlement (in cash or shares) are classified as equity. Contracts that require
net-cash settlement or that give the counterparty a choice which includes
net-cash settlement are classified as assets or liabilities, not equity. If a
transaction is outsidethe
control of the issuer and there is the possibility that the issuer could
net-cash settle, then for purposes EITF Issue No. 00-19 it is assumed that the
issuer will have to net-cash settle, which may preclude accounting for a
contract as equity of thecompany
except in certain circumstances where the existing common stockholders would
also receive cash. Management’s
judgment is required in evaluating the terms of freestanding instruments, such
as warrants, and the application of authoritative accountingliterature.  The
outstanding warrants to purchase shares of our common stock do not contain
provisions for cash settlement.


F-12


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


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
years ended December 31, 2008 and 2007, contract revenue earned was from one
development contract with the South
Coast Air Quality Management District (“AQMD”).  For
the year ended December 31, 2008, sale of parts were to one
customer.


For the
year ended December 31, 2007, 35%, 31% and 13%, respectively, of contract
costs incurred were to three vendors.  At December 31, 2007, accounts
payable to one of these vendors represented 95% of total accounts
payable.




For the
year ended December 31, 2008, 39%, 14% and 10%, respectively, of costs of
revenue were to three vendors.  At December 31, 2008, accounts
payable to the largest vendor represented 30% of total accounts payable
balances. Accounts payable to other two largest vendors represented 52% and 13%,
respectively, of total accounts payable at December 31, 2008.




Research
and Development Costs




The
Company accounts for research and development costs in accordance with SFAS No.
2, “Accounting for Research and Development Costs.” In accordance with SFAS No.
2 research and development costs are expensed as incurred.




Registration
Payment Arrangements




The
Company accounts for registration payment arrangements under FSP EITF Issue
No. 00-19-2, “Accounting for Registration Payment Arrangements.” FSP EITF
Issue No. 00-19-2 specifies that the contingent obligation to make future
payments under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, “Accounting for
Contingencies.”  The Company has not made any provision for
registration payment arrangements at December 31, 2008 or 2007 as it believes
none will be payable.




F-13




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


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




Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which
establishes accounting principles and disclosure requirements for all
transactions in which a company obtains control over another
business.  SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 22, 2008. Earlier
adoption is prohibited.




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




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




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.




NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS




On May
18, 2009, the management of the Company, concluded, with the concurrence of the
Audit Committee of the Company’s Board of Directors, that an accounting error
had been made in the Company’s historical financial statements in relation to
the recording of the value of stock-based compensation awarded in June and
August 2008, and in the recording of a note discount related to a beneficial
conversion feature and associated warrants issued with certain convertible notes
during 2008. As result, the Company’s financial statements for the year ended
December 31, 2008 are being amended and restated.
  The
restatements reflect a change to the fair value of common stock that was used to
calculate the fair value of certain stock instruments issued during 2008. In
June and August 2008 when the stock based compensation was awarded, an active
market for the Company’s common stock did not exist.  Therefore, in
its application of SFAS No. 123(R) and APB No. 14, the Company used an
alternative valuation method to calculate the fair value of the common stock
issued during June and August 2008, and in its assumptions included in its
Black-Scholes valuation model to value the stock options and warrants during
2008. The alternative valuation method included consideration of a valuation
conducted by a third-party specialist in August, 2008.  The Company
valued the underlying shares of its common stock at $.015 based upon this
valuation. The Company has subsequently concluded that the $1.00 conversion
price per share of common stock of the Company’s convertible notes that were
offered and sold in July and September 2008 (and converted by October 31, 2008)
and the sale of common stock and warrants made in October and December 2008 were
better indicators of the fair value of the Company’s common stock, and such
value is now used in determining the value of the shares of common stock issued
in June and August 2008, the options issued in June 2008, and in the calculation
of the note discount related to a beneficial conversion feature and associated
warrants issued with the convertible notes during 2008.


F-14




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)




As such,
the Company is restating its previously issued December 31, 2008 financial
statements to reflect a fair value of $1.00 per common share in accounting for
the compensation costs of shares issued for services during the year, in its
option pricing models to determine the fair value of options and warrants issued
for services, and in calculating the relative value of the warrants and
conversion feature of its convertible notes.  The effects of the
restatement on the previously filed annual report on Form 10-K for the year
ended December 31, 2008 are shown below:





December
      31, 2008ASSETS
            
            (As
      initially
                reported)
            
            (Adjustment)
            
            (As
      restated)Current
      assetsCash
      and cash equivalents
            
            $
            355,615
            
            
            
            $
            355,615Accounts
      receivable
            
            
            —
            
            
            
            
            —Inventories
            
            
            1,159,601
            
            
            
            
            1,159,601Prepaid
      expenses
            
            
            43,020
            
            
            
            
            43,020Total
      current assets
            
            
            1,558,236
            
            
            
            
            1,558,236Property
      and equipment, net
            
            
            89,393
            
            
            
            
            89,393Other
      assets:Deposits
            
            
            33,641
            
            
            
            
            33,641Intangible production costs, net
            
            
            171,385
            
            
            
            
            171,385Goodwill
            
            
            166,500
            
            
            
            
            166,500Total
      assets
            
            $
            2,019,155
            
            
            
            $
            2,019,155LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            1,225,807
            
            
            
            $
            1,225,807Notes
      payable to related parties
            
            
            100,875
            
            
            
            
            100,875Advances
      from shareholder
            
            
            34,877
            
            
            
            
            34,877Billings
      in excess of costs and estimated earningson
      uncompleted contracts
            
            
            2,604
            
            
            
            
            2,604Total
      current liabilities
            
            
            1,364,163
            
            
            
            
            1,364,163SHAREHOLDERS’
      EQUITYCommon
      stock
            
            
            25,518
            
            
            
            
            25,518Additional
      paid in capital
            
            
            2,122,869
            
            6,527,460
            (1,2,3)
            
            8,650,329Accumulated
      deficit
            
            
            (1,493,395
            )
            (6,527,460
            )
            
            (8,020,855
            )Total
      shareholders’ equity
            
            
            654,992
            
            
            
            
            654,992Total
      liabilities and shareholders’ equity
            
            $
            2,019,155
            
            
            
            $
            2,019,155




F-15


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)




Year
      Ended December 31, 2008(As
      initially
                reported)
            
            
            (Adjustment)
            
            
            (As
      restated)REVENUESContract
      revenue earned
            
            $
            128,660
            
            
            
            
            
            $
            128,660Sale
      of parts
            
            
            75,000
            
            
            
            
            
            
            75,000Total
      revenues
            
            
            203,660
            
            
            
            
            
            
            203,660COSTS
      OF REVENUESContract
      costs
            
            
            69,078
            
            
            
            
            
            
            69,078Costs
      of parts
            
            
            68,975
            
            
            
            
            
            
            68,975Total
      cost of revenues
            
            
            138,053
            
            
            
            
            
            
            138,053Gross
      profit
            
            
            65,607
            
            
            
            
            
            
            65,607OPERATING
      EXPENSESGeneral
      and administrative
            
            
            956,328
            
            
            
            5,940,713
            (1,
      2)
            
            
            6,897,041Research
      and development
            
            
            44,023
            
            
            
            
            
            
            
            44,023Reverse
      merger expenses
            
            
            414,384
            
            
            
            
            
            
            
            414,384Depreciation
      and amortization
            
            
            29,836
            
            
            
            
            
            
            
            29,836Total
      operating expenses
            
            
            1,444,571
            
            
            
            5,940,713
            
            
            
            7,385,284Loss
      from operations
            
            
            (1,378,964
            )
            
            
            (5,940,713
            )
            
            
            (7,319,677
            )Interest
      expense
            
            
            (26,857
            )
            
            
            586,747
            (3)
            
            
            (613,604
            )NET
      LOSS
            
            $
            (1,405,821
            )
            
            
            (6,527,460
            )
            
            $
            (7,933,281
            )Net
      loss per share – basic and diluted
            
            $
            (0.07
            )
            
            $
            (0.31
            )
            
            $
            (0.39
            )Weighted
      average shares outstanding, basic and diluted
            
            
            20,206,507
            
            
            
            
            
            
            
            20,206,507




F-16


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)





Year
      Ended December 31, 2008(As
      initially reported)
            
            
            (Adjustments)
            
            
            (As
      restated)Cash
      flow from operating activities:Net
      loss
            
            $
            (1,405,821
            )
            
            
            (6,527,460
            )
            
            $
            (7,933,281
            )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization
            
            
            29,836
            
            
            
            
            
            
            
            29,836Fair
      value of common stock granted for services
            
            
            77,596
            
            
            
            5,255,404
            (1)
            
            
            5,333,000Fair
      value of options and warrants granted for services
            
            
            23,906
            
            
            
            685,309
            (2)
            
            
            709,215Fair
      value of beneficial conversion feature of warrants
            
            
            —
            
            
            
            586,747
            (3)
            
            
            586,747Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            35,000
            
            
            
            
            
            
            
            35,000Inventories
            
            
            (1,159,601
            )
            
            
            
            
            
            
            (1,159,601
            )Prepaid
      expenses
            
            
            (43,020
            )
            
            
            
            
            
            
            (43,020
            )Deposits
            
            
            (14,400
            )
            
            
            
            
            
            
            (14,400
            )Accounts
      payable and accrued expense
            
            
            1,196,595
            
            
            
            
            
            
            
            1,196,595Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
            
            
            (68,660
            )
            
            
            
            
            
            
            (68,660
            )Net
      cash used in operating activities
            
            
            (1,328,569
            )
            
            
            
            
            
            
            (1,328,569
            )Cash
      flows from investing activities:Acquisition
      of furniture, equipment and software
            
            
            (82,603
            )
            
            
            
            
            
            
            (82,603
            )Acquisition
      of EMS
            
            
            (253,465
            )
            
            
            
            
            
            
            (253,465
            )Net
      cash used in investing activities
            
            
            (336,068
            )
            
            
            
            
            
            
            (336,068
            )Cash
      flows from financing activities:Proceeds
      from notes payable, related parties
            
            
            25,875
            
            
            
            
            
            
            
            25,875Payment
      of notes payable, related parties
            
            
            (25,000
            )
            
            
            
            
            
            
            (25,000
            )Proceeds
      from  issuance of convertible notes, net
            
            
            1,333,348
            
            
            
            
            
            
            
            1,333,348Proceeds
      from sale of common stock
            
            
            708,538
            
            
            
            
            
            
            
            708,538Advances
      from shareholder
            
            
            (22,543
            )
            
            
            
            
            
            
            (22,543
            )Net
      cash provided by financing activities
            
            
            2,020,218
            
            
            
            
            
            
            
            2,020,218Increase
      in cash and cash equivalents
            
            
            355,581
            
            
            
            
            
            
            
            355,581Cash
      and cash equivalents, beginning of year
            
            
            34
            
            
            
            
            
            
            
            34Cash
      and cash equivalents, end of year
            
            $
            355,615
            
            
            
            
            
            
            $
            355,615




F-17


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
2 – RESTATEMENT OF FINANCIAL STATEMENTS (continued)




Description
of adjustments:




1.
            To
      record $5,255,404 of additional stock-based compensation for the value of
      common stock, stock options, and warrants issued during
    2008.




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




3.
            To
      record $586,747 of beneficial conversion feature interest costs on
      convertible debentures that were converted to common stock during the
      year.




NOTE
3 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS




In May
2007, the Company entered into a $527,000 contract with the AQMD to develop a
prototype zero-emissions short-range heavy-duty all-electric truck used for
hauling fully loaded 40-foot cargo containers around the Port of Los
Angeles.  This contract is being accounted for under the percentage of
completion method.  At December 31, 2008, the contract was estimated
to be approximately 98% complete.




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





December
      31, 2008
            
            
            December
      31,
                2007Costs
      incurred on uncompleted contracts
            
            $
            349,341
            
            
            $
            280,263Estimated
      earnings
            
            
            162,055
            
            
            
            102,473511,396
            
            
            
            382,736Less,
      billings to date
            
            
            514,000
            
            
            
            454,000$
            (2,604
            )
            
            $
            (71,264
            )Included
      in accompanying balance sheets under the following
    captions:Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
            
            $
            2,604
            
            
            $
            71,264




F-18


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
4 - PROPERTY AND EQUIPMENT




Property
and equipment are comprised as follows:




December
      31, 2008
            
            
            December
      31, 2007Computer
      equipment and software
            
            $
            52,390
            
            
            $
            9,052Office
      furniture
            
            
            26,725
            
            
            
            9,172Machinery
            
            
            6,395
            
            
            
            6,395Leasehold
      improvements
            
            
            21,711
            
            
            
            —Total
      property and equipment, cost
            
            
            107,221
            
            
            
            24,619Less:
      accumulated depreciation
            
            
            (17,828
            )
            
            
            (3,572
            )Property
      and equipment, net
            
            $
            89,393
            
            
            $
            21,047




Depreciation
expense for the years ended December 31, 2008 and 2007 was $14,256 and
$3,182, respectively.




NOTE
5 – BUSINESS ACQUISITION




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




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




The
results of operations of EMS are included in the financial statements of Balqon
Corporation for the period of September 9, 2008 through December 31, 2008.
During this period the Company did not engage in the business of selling flux
vector inverters. The expenses of EMS during the period since the acquisition
are primarily the salary and related benefits of the Company’s Vice President
Research and Development, Mr. Robert Gruenwald.




The
purchase price of the assets was $350,000, of which $250,000 was paid in cash
and the Company issued an unsecured promissory note for the balance of $100,000
is due in two installments of $50,000 each on April 10, 2009 and
May 10, 2009 (see Note 6).  The $350,000 purchase price,
together with legal costs of $3,465 incurred in connection with this asset
purchase, resulted in a total purchase price of the EMS assets of $353,465. The
Company engaged an independent valuation firm to assist management in the
allocation of the purchase price of the assets.  The methods used to
value the assets acquired in this transaction included the discounted cash flow
and excess earnings methods. The intellectual property assets acquired included
all (i) patents, patent applications, patent disclosures and inventions, (ii)
trademarks, service marks, trade dress, trade names, logos and corporate names
and registrations together with all of the goodwill associated
therewith, (iii) copyrights and copyrightable works, (iv) trade secrets,
ideas, formulas, compositions, inventions, know-how, manufacturing and
production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data, and other
related intangible properties.  Based on management’s assessment,
including the utilization
of the results of the independent valuation report, the Company allocated the
purchase price to the following assets as of the acquisition date as
follows:




F-19


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
5 – BUSINESS ACQUISITION (continued)





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




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




December
      31,
                2008
            
            
            December
      31,
                2007Amortized
      intangible assets:Intellectual
      property assets
            
            $
            186,965
            
            
            $
            —Accumulated
      amortization
            
            
            (15,580
            )
            
            
            —Totals
            
            $
            171,385
            
            
            $
            —




The
intangible production assets are being amortized over a three year period under
the straight-line method.  Amortization expense for the period
September 9 through December 31, 2008 was $15,580. Amortization expense over the
remaining amortization period is estimated to be as follows:





Year Ending December 31,2009
            
            $
            62,3222010
            
            
            62,3222011
            
            
            46,741




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





2008
                (Unaudited)
            
            
            2007
                (Unaudited)Revenues
            
            $
            332,596
            
            
            $
            494,585Cost
      of  revenues
            
            
            240,135
            
            
            
            337,954Gross
      profit
            
            
            92,461
            
            
            
            156,631Operating
      expenses
            
            
            7,356,132
            
            
            
            233,710Other
      (expense)
            
            
            (613,604
            )
            
            
            —Net
      (loss)
            
            $
            (7,877,275
            )
            
            $
            (77,079
            )Net
      loss per share – basic and diluted
            
            $
            (0.38
            )
            
            $
            (0.00
            )




F-20


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
6 – NOTES PAYABLE TO RELATED PARTIES




Notes
payable consists of the following at:




December
      31, 2008
            
            
            December
      31, 2007Note
      payable to a shareholder, unsecured, interest at 6%per
      annum payable at maturity, due December 6, 2008
            
            $
            875
            
            
            $
            —Note
      payable to a shareholder, issued in connection withthe
      acquisition of EMS (see Note 5), unsecured, interest atthe
      prime rate (5% at December 31, 2008) per annum, payableat
      maturity, due in two principal installments; $50,000 onApril
      10, 2009 and $51,000 on May 10, 2009, plus accrued
      interest
            
            
            100,000
            
            
            
            —Total
      notes payable
            
            $
            100,875
            
            
            $
            —




NOTE
7 – INCOME TAXES




At
December 31, 2008, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $8,091,000 for Federal and
for statepurposes. The Federal carryforward expires in 2027 and the
state carryforward expires in 2017. 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.




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





December31,
                2008
            
            
            December31,
                2007Deferred
      income tax asset:Net
      operating loss carryforward
            
            $
            3,220,000
            
            
            $
            83,230Valuation
      allowance
            
            
            (3,220,000
            )
            
            
            (83,230
            )Net
      deferred income tax asset
            
            $
            —
            
            
            $
            —





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





Year
      Ended December 31,2008
            
            
            2007Tax
      expense at the U.S. statutory income
      tax
            
            
            (34.0
            )%
            
            
            (34.0
            )%State
      tax net of federal tax benefit
            
            
            (5.8
            )%
            
            
            —
            %Increase
      in the valuation allowance
            
            
            39.8
            %
            
            
            34.0
            %Effective
      tax rate
            
            
            —
            %
            
            
            —
            %




F-21




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
7 – INCOME TAXES (continued)




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 December 31, 2008, the Company does not have
a liability for unrecognized tax benefits.




NOTE
8 – SHAREHOLDERS’ EQUITY




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




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




Shares
Issued For Services




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




The
Company was private on the date the shares discussed above were granted and
there was no readily available market quotations for the Company’s shares of
common stock.  As such, the shares granted prior to the reverse merger
transaction were valued by management at $1.00 per share, which valuation was
based upon the conversion price of $1.00 per share of  our convertible
notes that were offered and sold in July and September 2008 (and converted by
October 31, 2008), which management believes is the best indicator of the fair
value of our common shares at the measurement date.




F-22


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
8 – SHAREHOLDERS’ EQUITY (continued)




Shares Issued For
Cash




During
2008, the Company raised aggregate net proceeds of $708,538 (after closing
costs) through the issuance of 785,000 shares of its common
stock.  The shares were sold in units that allowed the investor to
acquire one share of common stock and one warrant to acquire one share of common
stock at a price of $1.00 per unit as follows:




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




(B)
            On
      December 22, 2008, Balqon Corporation (formerly BMR) raised an aggregate
      of $210,000 through the issuance of 210,000 shares of common stock at
      $1.00 per share to ten accredited investors (the “December Private
      Placement”). In connection with this offering, Balqon Corporation
      (formerly BMR) also issued three-year warrants to purchase an aggregate of
      210,000 shares of common stock at an exercise price of $1.50 per share
      (the “December Warrants”).




Shares
Issued Upon Conversion of Convertible Notes




During
July and September 2008, the Company raised an aggregate of
$1,310,000 through the issuance to accredited investors of senior secured
convertible promissory notes (the “July Private Placement” and the “September
Private Placement”). The notes were due January 2, 2009, bore interest at a
rate of 10% per annum that was due at maturity, and were secured by
substantially all of the assets of the Company.  The notes were
convertible into shares of common stock of the Company at a conversion price of
$1.00 per share.  In connection with the placement, the Company also
issued warrants to acquire 1,310,000 shares of 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, spinoff, rights offering, or recapitalization through a large,
nonrecurring cash dividend.


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




F-23


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
8 – SHAREHOLDERS’ EQUITY (continued)




Shares
Issued Upon Conversion of Convertible Notes (continued)




The
Company determined that the relative fair value of the warrants was
$293,374.  The relatively fair value was determined using the
methodology prescribed by APB No. 14, “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants”.  These amounts were calculated
by a Black-Scholes option pricing model using as assumptions an expected life of
3 years, an industry volatility of 58.43%, a risk free interest rate of 2.42%,
and no expected dividend yield. Because the Company was private on the date the
warrants were granted and there was no readily available market quotations for
the Company’s shares of common stock, the fair value of the warrants granted
were valued using a fair value of $1.00 per share, which is based the value per
common share paid by third party investors upon the closing of the merger
transaction on October 24, 2008.  The relative value of the warrants
of $293,374 and the beneficial conversion feature of $293,374 was recorded by
the Company as a loan discount of  $586,748, which the Company was to
amortize to interest expense over the original life of the loan.  The
Company amortized note discount of $138,663 through October 24, 2008, the date
at which the notes were converted, and expensed the remainder of the loan
discount of $448,085 at the date of conversion.  As such $586,748 was
reflected as interest expense in the accompanying statement of operations for
the year ending December 31, 2008




NOTE
9 – STOCK OPTIONS AND WARRANTS




Stock
Options




At
December 31, 2008, options shares outstanding are as follows:




Shares
            
            
            Weighted
                Average
                Exercise
                PriceBalance
      at January 1, 2008
            
            
            —
            
            
            
            —Granted
            
            
            4,562,592
            
            
            $
            2.00Exercised
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —Balance
      at December 31, 2008
            
            
            4,562,592
            
            
            $
            2.00




On June
4, 2008, the Company granted options to purchase 4,562,592shares of common
stock at $1.50 to $2.50 per share to an employee and two consultants. The
options vested immediately on the date granted, and expire between June 30,
2010 and June 30, 2012.  The Company determined that the fair
value of the options issued was $586,747 calculated by a Black-Scholes option
pricing model using as assumptions an expected life of one to three years, an
industry volatility of 58.43%, a risk free interest rate of 2.42%, and no
expected dividend yield. Because the Company was private on the date the options
were granted and there was no readily available market quotations for the
Company’s shares of common stock, the Black-Scholes calculation of the fair
value of the options granted includes the assumption that the fair value of the
underlying common shares was $1.00 per share, which is based on the conversion
price of $1.00 per share of the convertible notes that were offered and sold in
July and September 2008 (and converted by October
31, 2008), which management believes is the best indicator of the fair value of
its common shares at the measurement date.




F-24


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
9 – STOCK OPTIONS AND WARRANTS (continued)




Stock
Options (continued)




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




The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2008:




Options
      Outstanding
            
            
            Options
      ExercisableRange
      of
              Exercise
              Prices
            
            
            Number
                of
      Shares
                Underlying
                Options
            
            
            Weighted
                Average
                Exercise
                Price
            
            
            Weighted
                Average
                Remaining
      Contractual
                Life
      (in years)
            
            
            Number
                of
      Shares
            
            
            Weighted
                Average
                Exercise
      Price$
            1.50
            
            
            
            1,520,864
            
            
            $
            1.50
            
            
            
            1.0
            
            
            
            1,520,864
            
            
            $
            1.50$
            2.00
            
            
            
            1,520,864
            
            
            $
            2.00
            
            
            
            2.0
            
            
            
            1,520,864
            
            
            $
            2.00$
            2.50
            
            
            
            1,520,864
            
            
            $
            2.50
            
            
            
            3.0
            
            
            
            1,520,864
            
            
            $
            2.504,562,592
            
            
            
            
            
            
            
            
            
            
            
            4,562,592




At
December 31, 2008, the aggregate intrinsic value of the 4,562,592 options
outstanding and exercisable was $590,877.  At December 31, 2008, all
options were vested and there were no unvested options outstanding.




Warrants




At
December 31, 2008, warrants shares outstanding are as follows:




Shares
            
            
            Weighted
                Average
      Exercise
                PriceBalance
      at January 1, 2008
            
            
            —
            
            
            
            —Granted
            
            
            3,008,778
            
            
            $
            1.50Exercised
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —Balance
      at December 31, 2008
            
            
            3,008,778
            
            
            $
            1.50




F-25




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
9 – STOCK OPTIONS AND WARRANTS (continued)




Warrants
(continued)




On June
4, 2008, the Company granted a warrant to purchase 729,180 shares of the
Company’s common stock at an exercise price of $1.50 to $2.50 per share to a
consultant (the “Marlin Warrants”). The Company determined that the fair
value of the warrants issued to this consultant was $94,432 as calculated by a
Black-Scholes option pricing model using as assumptions an expected life of one
to three years, an industry volatility of 58.43%, a risk free interest rate of
2.42%, and no expected dividend yield. Because the Company was private on the
date the options were granted and there was no readily available market
quotations for the Company’s shares of common stock, the Black-Scholes of the
fair value of the options granted includes the assumption that the fair value ofthe underlying common shares was $1.00 per share, $1.00 per share, which
is based on the value per common share paid by third party investors upon the
closing of the merger transaction on October 24, 2008.




On
September 15, 2008, the Company issued warrants to purchase 1,310,000 shares of
the Company’s common stock at an exercise price of $1.50 per share in connection
with the issuance of convertible promissory notes entered into with investors on
July 11, 2008 and September 15, 2008 (see Note 8).




On
October 24, 2008, immediately preceding the closing of the merger (see
Note 1), Balqon Corporation (formerly BMR) issued warrants (the “BMR Warrants”)to purchase an aggregate of
184,598 shares of common stock. One-third of the BMR Warrants have an exercise
price of $1.50 per share and expire on October 24, 2009, one-third of the
BMR Warrants have an exercise price of $2.00 per share and expire on
October 24, 2010, and one-third of the BMR Warrants have an exercise price
of $2.50 per share and expire on October 24, 2011. The Company determined
that the fair value of the warrants was $23,906 as calculated by a Black-Scholes
option pricing model using as assumptions a market price of the stockof
$1.00 per share based upon sales of securities around the same date, an expected
life of 3 years, an industry volatility of 58.43%, a risk free interest rate of
2.42%, and no expected dividend yield.




During
2008, the Company sold units to acquire one share of common stock and one
warrant to acquire a share of common stock at a price of $1 per unit (see
Note 8). In connection with the sale of these units, on October 24, 2008,
the Company issued three-year warrants to purchase 575,000 shares of the
Company’s common stock at an exercise price of $1.50 per share in connection
with the issuance of 575,000 common shares to six accredited
investors.  On December 22, 2008, the Company issued three-year
warrants to purchase an aggregate of 210,000 shares of common stock at an
exercise price of $1.50 per share.  The Company did not allocate a
value to these warrants since the amount would be an allocation between paid in
capital of the common stock and warrants, and have no effect on the overall paid
in capital.




F-26


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
9 – STOCK OPTIONS AND WARRANTS (continued)




Warrants
(continued)




The
following table summarizes information about stock warrants outstanding and
exercisable as of December 31, 2008:





Warrants
      Outstanding
            
            
            Warrants
      ExercisableRange
      of
              Exercise
              Prices
            
            
            Number
                of
      Shares
                Underlying
                Warrants
            
            
            Weighted
                Average
                Exercise
                Price
            
            
            Weighted
                Average
                Remaining
      Contractual
                Life
      (in years)
            
            
            Number
                of
      Shares
            
            
            Weighted
                Average
                Exercise
      Price$
            1.50
            
            
            
            2,399,594
            
            
            $
            1.50
            
            
            
            2.8
            
            
            
            2,399,594
            
            
            $
            1.50$
            2.00
            
            
            
            304,592
            
            
            $
            2.00
            
            
            
            2.0
            
            
            
            304,592
            
            
            $
            2.00$
            2.50
            
            
            
            304,592
            
            
            $
            2.50
            
            
            
            3.0
            
            
            
            304,592
            
            
            $
            2.503,008,778
            
            
            
            
            
            
            
            
            
            
            
            3,008,778





At
December 31, 2008, the aggregate intrinsic value of the warrants outstanding and
exercisable was $705,085.




NOTE
10 – COMMITMENTS AND CONTINGENCIES




Contract




On June
25, 2008, the Company entered into an agreement with the City of Los Angeles to
manufacture 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 Angelesin 2009.  The
Company will recognize revenues from the sale of these vehicles and associated
equipment at the time that delivery of product has occurred and title has
transferred.




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




On May 14, 2008, the
Company entered into an agreement with the AQMD to manufacture and deliver
one  electric yard hostler and associated equipment including
batteries, battery chargers , and equipment maintenance services for a total of
$300,000. The Company will recognize revenues from the sale of this vehicle and
associated equipment at the time that delivery of the product has occurred and
title has transferred. The
Company also agreed to paythe 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.




F-27




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
10 – COMMITMENTS AND CONTINGENCIES (continued)




Employment
Contracts




On
October 24, 2008, the Company signed an at will employment agreement with its
CEO. The employment agreement is effective October 24, 2008 and provides for,
among other items, the CEO to receive compensation of $250,000 per year with an
increase to $300,000 per year after the second anniversary of the effective date
of the employment agreement.





On
October 24, 2008, the Company signed an at will employment agreement with its
Vice President Engineering. The employment agreement is effective October 24,
2008 and provides for, among other items, the Vice President Engineering to
receive compensation of $150,000 per year with an increase to $175,000 per year
after the second anniversary of the effective date of the
agreement.




On March
27, 2009, the Company signed an at will employment agreement with its Vice
President Research and Development. The employment agreement is effective
October 24, 2008 and provides for, among other items, the Vice President
Research and Development to receive compensation of $150,000 per year with an
increase to $175,000 and $200,000 per year after the second and third
anniversary, respectively, of the effective date of the agreement.




Leases




The
Company currentlyleases facilities located in Santa Ana,California under a lease
that expires on May




Rent
expense for the years ended December 31, 2008 and 2007 was $98,008 and $25,787,
respectively.




The
following is a schedule by years of future minimum rental payments required
under the non-cancelable operating leases described above as of December 31,
2008:




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


F-28




BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE 10 – COMMITMENTS AND
CONTINGENCIES (continued)




Registration
Rights Agreements




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




Under the
Balqon California Registration Rights Agreements, Balqon Corporation
Registration Rights Agreements and the BMR Registration Rights Agreement, Balqon
Corporation (formerly BMR) filed a registration statement with the SEC on
December 23, 2008, registering for resale all shares of common stock covered by
the Balqon Registration Rights Agreements, Balqon Corporation Registration
Rights Agreements and BMR Registration Rights Agreement.




NOTE
11 - SUBSEQUENT EVENTS




Bank
Financing Agreement




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”). On February 27, 2009, the Company executed a Business
Financing Modification Agreement, dated February 26, 2009, which modified the
Initial Agreement (the “Modification Agreement,” 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.




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.




F-29


BALQON
CORPORATION
 
 NOTES
TO FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 (AS RESTATED) AND 2007


NOTE
11 - SUBSEQUENT EVENTS (continued)




Bank
Financing Agreement (continued)




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 the Lender
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, the Lender may accelerate the
payment of the principal balance requiring the Company 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 the Company’s personal property (subject to customary exceptions). The
Credit Agreement may be terminated at any time by either party to the Credit
Agreement. If the Company terminates the Credit Agreement prior to February 18,
2010, the Company 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
Agreement by 80% (or such greater or lesser percentage as the Lender may
establish from time to time).




Sale
of 10% Unsecured Subordinated Convertible Promissory Notes




Between
March 25, 2009 and May 20, 2009, the Company entered into agreements with 18
accredited investors for the sale by the Company of an aggregate of $365,000 of
10% Unsecured Subordinated Convertible Promissory Notes which are convertible
into an aggregate of 365,000 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 365,000 shares of the Company’s common stock at an
exercise price of $1.50 per share.




F-30




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this 21st day of May,
2009.




BALQON
      CORPORATIONBy:
                /s/ BALWINDER
      SAMRABalwinder
      Samra,
                  Chairman
      of the Board, President and
                    Chief
      Executive Officer (principal executive
officer)
 . By:
                  /s/ ROBERT
      MIRANDARobert
      Miranda,
                    Chief
      Financial Officer (principal financial
officer)
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Name
                
                Title
                
                Date/s/
      BALWINDER SAMRA
                
                President,
      Chief Executive Officer and
                
                May
      21, 2009Balwinder
      Samra
                
                Director
      (principal executive officer)/s/
      ROBERT MIRANDA
                
                Chief
      Financial Officer (principal financial
                
                May
      21, 2009Robert
      Miranda
                
                officer
      and principal accounting officer)/s/
      HENRY VELASQUEZ
                
                Director
                
                May
      21, 2009Henry
      Velasquez/s/
      AMARPAL SINGH SAMRA
                
                Director
                
                May
      21, 2009Amarpal
      Singh Samra


84




BALQON
CORPORATION


EXHIBITS
ATTACHED TO THIS REPORT





Exhibit
              Number
            
            Description10.10
            
            Purchase
      Agreement, dated June 26, 2008, between the City of Los Angeles and Balqon
      California10.12
            
            Lease
      Agreement for 1420 240th Street, Harbor City, California 90710, between
      Allan D. and Gloria G. Singer, Trustees for the U.D.T. Trust dated June 6,
      1984 and Balqon California dated June 17, 200810.13
            
            Lease
      agreement, dated May 21, 2007, by and between 1701 E. Edinger, LLC, and
      Balqon California10.21
            
            Stock
      and Warrant Purchase Agreement, dated August 28, 2008, by and between
      Marlin Financial Group, Inc. and Balqon California10.23
            
            Amendment
      No. 2 to Stock and Warrant Purchase Agreement, dated May 21, 2009, by and
      between Marlin Financial Group,
      Inc. and
      Registrant31.1
            
            Certification
      of Principal Executive Officer 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
      of Principal Financial Officer 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 Chief Executive Officer and Chief Executive Officer Pursuant to
      18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002








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