UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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, 2013

OR

p

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: (310) 326-3056

 

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.    Yes p    No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes p   No x

 

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

 

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

 

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.  p

 

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 p	Accelerated Filer p
Non-Accelerated Filer (do not check if Smaller Reporting Company) p	Smaller Reporting Company x

 

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

 

The aggregate market value of the voting common equity held by nonaffiliates of the registrant, computed by reference to the closing price of such stock on June 28, 2013 the last business day of the registrant’s most recently completed second fiscal quarter, was $4,112,573.

 

The number of shares outstanding of the Registrant’s common stock, $0.001 par value, as of April 15, 2014 was 36,891,530.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

BALQON CORPORATION

ANNUAL REPORT ON

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2013

 

TABLE OF CONTENTS

 

Item 1.	Business	3
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosure	31
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	43
Item 9A.	Controls and Procedures	44
Item 9B.	Other Information	46
Item 10.	Directors, Executive Officers and Corporate Governance	47
Item 11.	Executive Compensation	52
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
Item 13.	Certain Relationships and Related Transactions, and Director Independence	68
Item 14.	Principal Accounting Fees and Services	71
Item 15.	Exhibits and Financial Statement Schedules	72

 

 

 

CAUTIONARY STATEMENT

 

All statements included or incorporated by reference in this 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 industry; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by 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.

 

Recent Developments

 

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs in the very near-term. See “Risk Factors.”

 

In April 2014, we received orders for two heavy duty electric drive systems from customers in Europe. Our drive and battery systems will be incorporated into electric yard tractors by our OEM partners in Europe and shipped to large retail warehousing customers. We believe these orders are the result of our successful completion of a two year demonstration of an electric yard tractor at a large distribution facility in Belgium.

 

In March 2014, we completed the development of 14 passenger battery powered airport Shuttle bus built on Ford E450 chassis. This is our first demonstration of a medium duty electric vehicle showcasing our inverter, charger and battery system technologies. During 2014, we anticipate increased sales in the medium duty truck and bus market in both domestic and international markets.

 

In March 2014, we delivered our first electric yard tractor to a large marine port in Turkey. Our model year 2014 electric yard tractor incorporates latest inverter and fast charging technologies developed during the past year. We believe our strategic relationship with an original equipment manufacturer (“OEM”) in Turkey combined with the demonstration of an electric yard tractor will yield additional sales in the region during 2014.

 

In February 2014, we installed a 400 kilo watt hour (“kWhr”) lithium battery storage system at a steel plant in the United States for an energy saving application. This installation includes an 80 kilo watt (“kW”) solar panel array that charges the batteries during the day which provides stored energy to the manufacturing plant during peak hours of operation. This project is a largest installation of our high capacity lithium battery system in a commercial application. We believe significant growth in use of solar energy in commercial applications to reduce energy costs combined with our deployment of large energy storage system will result in increased growth in sales of energy storage product line.

 

In January 2014, we signed an agreement with the California Air Quality Management District (“AQMD”) to deliver three on-road Class 8 lithium battery powered electric tractors for an aggregate amount of $ 925,000. Under this agreement we are required to develop the next generation of our Model MX30 with fast charging capabilities using direct current (“DC”) charger. We anticipate that our new DC charger will reduce charge time of our heavy duty vehicles from eight hours to two hours.

 

In October 2013, we received a purchase order to develop heavy duty plug-in hybrid refuse truck for an OEM in the United States. During the first three months of 2014, a significant portion of our engineering effort has been on completing the design and development of the hybrid heavy duty vehicle that incorporates our proprietary inverter, charging and battery system technologies with a hybrid generator that increases the range of our heavy duty vehicles. We believe that in the short term the incorporation of hybrid technologies to increase the range of our heavy duty vehicles will increase sales of our products.

 

Business Overview

 

We design, develop, manufacture and sell heavy duty electric vehicles, drive systems and lithium battery energy storage systems. We were the first company to introduce battery powered Class 8 off-road and on-highway vehicles in 2007. Since then we have introduced several medium and heavy duty high performance drive systems to global OEM’s in India, China and Europe. Since 2011, we have also successfully diversified our business model by developing lithium battery storage technologies for renewable energy applications with products ranging in size from 10 kWhr to 1 mega watt hr (mWhr) storage products.

 

The introduction of heavy duty and medium duty electric vehicles requires development of components and products that meets customers range and performance expectations, while maintaining cost competitiveness with existing fossil fuel powered vehicles. Our strategic relationship with a lithium battery manufacturer and OEM’s of trucks and buses in China, India and Europe reduces our product costs when compared with other global electric vehicle manufacturers. We believe cost competitiveness with existing technologies in vehicle and energy storage applications is a key differentiator in the markets we serve.

 

Our introduction of world’s first Class 8 battery powered electric tractor, Model XE20 with a capacity to tow a loaded container weighing 30 tons resulted the in development of our proprietary flux vector inverter, battery management and charging technologies, which we use today as core technologies to market drive systems to OEM’s worldwide. In addition adapting these core technologies to energy storage products has provided us with the ability to address a growing market for renewable energy storage in domestic and international markets.

 

In addition to developing, manufacturing and selling our own line of heavy duty electric trucks and tractors, we have also provided services for the development and integration of our core electric vehicle technologies into products of other global manufacturers of buses, trucks and tractors. Since 2011, we have successfully integrated our core technologies into five vehicle platforms in India, China and Europe and believe that the successful launch of the products by our OEM customers will result in additional sales in 2014. In 2013, we launched several configurations of energy storage products for commercial and residential markets, applications of which include backup power, peak demand reduction and demand response.

 

We believe that the energy storage market presents us with a significant growth opportunity for our core technologies and higher capacity lithium batteries. Our access to high capacity lithium batteries from our strategic partner provides us cost and performance advantage over other residential and commercial providers of energy storage products. In order to capitalize on this advantage we plan to invest further into developing new product solutions for energy storage markets.

 

Our proprietary inverter technology and lithium battery packs have enabled us to deliver heavy duty electric tractor and electric drive trains at what we believe to be a lower cost per kilowatt-hour than our competitors. Our battery systems include our proprietary Battery Management System (“BMS”) and fast chargers that are capable of charging our vehicles in less than two hours. Design and development of reliable electric drive train for heavy duty vehicles has required extensive testing and innovation over the past five years. These innovations, combined with over five years of field deployment experience of our technologies, have resulted in extensive knowhow and intellectual property that our OEM customers rely on for future product developments.

 

Our global strategy focuses on partnering with local vehicle manufacturers of fossil fuel vehicle to jointly design, develop and integrate our low cost drive train and battery systems into localized products. We believe our success in partnering with large OEM’s of trucks and buses in India, China and Europe is a result of our: (i) long term field experience with our technologies (ii) ability to provide all systems, including a drive train, battery and charger to OEM’s as a integrated electric vehicle solution (iii) ability to develop customized technologies and systems for local markets, and (iv) ability to continuously improve, innovate and incorporate new battery and drive train technologies to increase range and performance of resulting product platforms.

 

Our products include the following battery powered electric trucks and tractors: (i) the Nautilus XRE20, a heavy-duty electric yard tractor; (ii) the Nautilus MX30, a heavy-duty, Class 8 electric short-haul tractor; and (iii) the Mule M100, a heavy-duty, Class 8 electric inner city delivery truck. We also market and sell lithium battery cells and storage solutions under the brand name HIQAP™. We sell our trucks and tractors through a direct sales force and dealers, while our battery related products and accessories are marketed through our online store and retailers of energy storage products.

 

Historical Background

 

We are a Nevada corporation that was incorporated on November 21, 2001, as BMR Solutions, Inc. On September 15, 2008, we entered into a Merger Agreement with Balqon Corporation, a California corporation, or Balqon California, and our wholly-owned subsidiary Balqon Acquisition Corp., or Acquisition Subsidiary, or Merger Transaction. Upon the closing of the Merger Transaction 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 2009, we delivered the first all electric yard tractors, Nautilus XE20, to the AQMD and the City of Los Angeles. In addition we delivered a Nautilus XE30, an on-road electric drayage truck for test and demonstration. We also incorporated lithium batteries into our products and demonstrated a range of over 150 miles on single charge on our NautilusXE30.

 

In 2010, we entered into a Joint Development Agreement with the second largest truck and bus manufacturer in India to develop six prototype vehicles (trucks and buses) for the Indian market. We also signed a three year Distribution Agreement (“Distribution Agreement”) with Seven One Limited (“SOL”) under which we have been appointed as the exclusive distributor of lithium batteries manufactured by SOL. In addition, we raised $7,350,000 in gross proceeds through the sale of our convertible notes, convertible debentures, common stock and warrants in several private placement transactions with accredited investors. We also signed a lease Agreement for 10 of our Nautilus XRE20 yard tractors; with T&K logistics, a provider of logistics services for Ford Motor Company.

 

In 2011, we developed a proprietary kW high frequency charger and battery management system to reduce charge times to two hours on all of our products. In addition we developed a 1 mega watt hour energy storage system for load shaving, off-grid application. We also developed and shipped an electric drive system for a yard tractor manufacturer in Belgium to address the European market for electric yard tractors. During 2011, we spent significant research and development efforts to develop various configurations of lithium energy storage systems for telecommunication and commercial customers. We also began shipment of our Nautilus XRE20 to T&K logistics for operation at a Ford plant in Michigan and to other industrial customers. In addition, we developed and shipped a Class 7 medium duty truck, the Mule M100 to a shuttle bus manufacturer in California.

 

In 2012, we developed high energy capacity lithium battery energy storage systems for the solar, wind and telecommunication industry. We also developed lead acid replacement packs for baggage tractors used at airports and industrial warehouses. We also received a purchase order for electric drive systems from a European manufacturer of yard tractors, located in the Netherlands. Our OEM partners in Europe (Belgium and the Netherlands) introduced two new products to the market, showcasing our electric drive system. During 2012, significant resources were allocated to the development of an on-road heavy-duty electric tractor, the Nautilus MX30. Currently the vehicle is undergoing on-road testing and complies with Department of Transportation (“DOT”) regulations for on-road Class 8 tractors.

 

In 2013, we shipped energy storage systems to telecommunication industry customers in United States, Asia and Australia. We also completed development and deployment of electric yard tractors in Europe. During 2013, we completed integration of our electric drive train and battery systems in two vehicle platforms in India which are currently in demonstration phase. In 2013, we added two OEM’s as strategic partners in China and Turkey for development of heavy duty trucks and transit buses. During the last quarter of 2013, we designed and developed our first medium duty shuttle bus targeting the hospitality industry.

 

Electric Vehicle Industry

 

We are a developer, manufacturer and seller of electric vehicle and electric drive systems for heavy duty trucks, tractors and buses. We predominantly compete with vehicles powered by diesel fuel which is considered to be cause of significant air pollution in urban centers around the world. Over the past five years significant government regulations and incentives have targeted curbing diesel emissions generated by heavy-duty trucks and buses around the world.

 

Electric Buses

 

In 1985, 40% of the world’s population was living in urban centers and it is estimated that 60% of the world’s population will reside in urban centers by 2025. Most of the urban growth is the result of transitioning from an agricultural economy to an industrial economy in large developing countries like China and India. Along with a high rate of urbanization comes urban air pollution which requires deployment of new clean transportation technologies in large urban centers like Beijing, China and New Delhi, India. Since 2012, our efforts have focused on creating strategic partners in China and India anticipating government regulations and incentives promoting the use of zero emissions electric buses. We believe our strategic relationships with three large bus manufacturers in China and India to provide electric drive systems will allow us to participate in this growth market.

 

Electric buses, which require neither great range nor speed and can be partially recharged during their journeys as they stop for passengers, are seen as the most promising area for potential growth of green urban public transport. The United States-based market research and consulting firm Pike Research forecasted in August 2012 that the global market for all electric-drive buses including hybrid, battery electric and fuel cell buses will grow steadily over the next six years, with a compound annual growth rate of 26.4% from 2012 to 2018. According to Pike Research, the largest sales volumes will come in Asia Pacific, with more than 15, 000 electric buses being sold in that region in 2018, representing – 75% of the world’s total.

 

Electric Yard Tractors

 

Yard tractors, also known as a yard goat or a utility tractor rig, are primarily designed to transport containers and trailers in marine terminals, industrial warehouse, manufacturing plants, intermodal facilities and military bases. Prior to 2008, yard tractors were not considered as vehicles and therefore emission standards were not enforced on yard tractor engines. In 2009, new regulations issued by the California Air Resources Board (“CARB”) required all yard tractors to be classified as vehicles and required them to comply with heavy-duty truck emission standards. New regulations require that all yard tractors in use in California must comply with vehicle emission standards prior to year 2016.

 

In 2007, we were the first company to develop, manufacture, market and demonstrate the feasibility of electric yard tractors in the container handling industry. In 2010, our lithium battery powered yard tractor demonstrated twelve hours of use on a single charge. We have developed strategic partnerships with OEMs of diesel tractors worldwide and assisted in the integration of our electric drive system into an OEM chassis. Currently, our electric drive system is used by three of the six manufacturers of yard tractors. Electric yard tractors with our electric drive systems and are currently being demonstrated in Europe and the United States.

 

We believe that poor fuel efficiency and maintenance cost of diesel yard tractors makes electric yard tractors ideal choice for off-highway container handling applications. The continued development of the electric yard tractor market depends on its economic viability when compared to diesel tractors. In the short term, we rely on government subsidies, regulations or incentives to meet cost parity with diesel tractors, however higher diesel costs (due to increasing carbon tax on diesel) combined with lower battery costs may make us cost competitive with diesel yard tractors in the future.

 

Electric Trucks and Tractors

 

In 2006, heavy-duty trucks represented approximately 22% of the transportation emissions in the United States, up 7% from the previous decade. In 2008, the trucking industry generated about 363 million metric tons of CO₂. Class 8 trucks are the largest CO₂ emitter and fuel user, consuming 1.57 million barrels per day. Current fuel economy is estimated to be 6.0 mpg and projected to rise to 6.8 mpg by 2025.

 

Pollution restrictions in mature markets (North America and Europe) have grown steeply in recent years. Manufacturers have responded to the emission and fuel consumption challenge through introduction of new emission control technologies. Due to the high rate of heavy-duty truck growth in emerging markets, the environmental demands are tightening and reaching mature market levels. Recent adoption of Euro IV standards for new trucks in India and China indicate that emerging markets are closing the emissions gap between emerging and mature markets. Although pollutants like NO_x and diesel particulate matter have been reduced by 85% during the past 10 years, the challenge to reduce CO₂ still remains, which can only be reduced through improved fuel economy of the vehicles. Higher carbon taxes on CO₂ emissions have resulted in increase of diesel fuel cost, thereby increasing total cost of ownership (“TCO”) of heavy-duty trucks.

 

The heavy-duty truck business has always been characterized by an emphasis on TCO. In the heavy-duty European truck market, 30% of TCO is related to fuel cost, 26% to driver wages, 18% to overhead, 10% to vehicle depreciation and other 16% related to vehicle insurance, maintenance, road tax and tires. Rising fuel costs due to high CO₂ taxes combined with higher vehicle cost due to new engine emission technologies require vehicle owners to seek alternatives to lower their TCO.

 

Approximately 640,000 new heavy-duty trucks are sold in United States each year. A DOT report estimates that approximately 3% of the trucks are used in short-haul applications (less than 150 miles per day). We believe current battery technology is adequate to address short-haul application needs in the United States markets. Lower fuel and maintenance costs of electric trucks and tractors lowers the total cost of ownership in certain applications like drayage applications at the Port of Los Angeles, where 14,000 heavy-duty trucks travel less than 80 miles per day delivering containers from marine terminals to near dock rail yards. In 2012, we conducted on-road tests on our Nautilus MX30 heavy-duty electric tractor transporting fully loaded containers, with a range of 88 miles on single charge.

 

We have formed strategic partnerships with regional manufacturers in the Netherlands, Belgium, India, Turkey and China to market our heavy-duty electric drive systems for integration into existing products. In order to compete with strong growth emerging markets we plan to develop market-tailored products, technologies, brands and pricing to take advantage of our first-to-market approach.

 

Electric Vehicle Regulations

 

In the United States, regulatory incentives for electric vehicles vary from local restrictions on industry to reduce fleet level emissions to statewide regulations to reduce greenhouse gas (“GHG”) emissions generated by fuels. Currently, 32 states have set some form of executive or statutory targets for greenhouse gas emissions. States with emission targets generally have a climate action plan to reduce emissions generated by the transportation sector.

 

In California, the fuel suppliers of both diesel and gasoline are required to reduce emissions by 10% between 2010 and 2020. California’s expectation is that compliance with the standard will be achieved through a combination of lower carbon fuels and market penetration of advanced technology vehicles, including electric vehicles. In order to comply with the low carbon fuel standard one method can be purchasing market-based low carbon fuel credits from electric vehicle users or manufacturers.

 

Starting with the 2012 model year, the Corporate Average Fuel Economy standard rules require manufacturers of heavy-duty trucks to improve fleet wide fuel economy and reduce greenhouse gas emissions by approximately 15% by the year 2018. While the standards can be met by adoption of conventional technologies such as more efficient engines, we expect inherent incentives for manufacturers to pursue more advanced technologies including electric vehicles.

 

Globally, a carbon tax is the most commonly used regulatory means to directly tax fossil fuels based on GHG emissions. Carbon tax on diesel and gasoline fuel can vary from $1.00 per ton of CO₂ emissions in India to $150 per ton of CO₂ emissions in Sweden. The funds generated from taxes levied by local governments are generally used to promote use of low emissions or zero emissions technologies, such as electric vehicles.

 

Electric Vehicle Incentives

 

The United States federal government has enacted several incentive programs for electric vehicles ranging from, a plug-in electric vehicle credit between $2,500 to $7,500 for electric vehicles to manufacturing tax credits to encourage investment in the development of properties for the purpose of production of renewable energies and other technologies.

 

In 2010, President Obama signed legislation, H.R. 5809 (“Energy Policy Act”) authorizing grants, rebates or low cost loans to owners of diesel vehicles to reduce diesel emissions. Congress has appropriated $100 million per year in funding for fiscal years 2012 to 2016 under this program. We believe that since most diesel vehicles are medium or heavy-duty vehicles, these incentives may assist us in promoting heavy-duty trucks and electric drive systems.

 

Under the Energy Policy Act, 75% of new vehicles acquired by certain federal fleets must be alternative fuel vehicles. Executive Order 13423, issued in January 2007, requires federal agencies to reduce petroleum consumption by 2% per year and to continue to increase their alternative fuel used by 10% per year.

 

In 2012, California issued Executive Order B-16-2012 requiring the CARB and the California Energy Commission and other relevant agencies to support the infrastructure and manufacturing of electric vehicles. The Executive Order also requires widespread use of electric vehicles for buses and heavy duty trucks. It requires that relevant entities support deployment of 1.5 million zero emissions electric vehicles by end of 2025. The Executive Order requires 10% of California State owned fleet vehicles to be electric by 2015 and at least 25% of California State owned fleet vehicles be zero emissions by 2020.

 

California has allocated up to $12.0 million per year in grants under the hybrid and zero emissions truck and bus voucher incentive program under which electric trucks and buses may receive an incentive voucher for up to $35,000 per vehicle on a first come, first serve basis. The purpose of this program is to accelerate the deployment of hybrid and zero emissions medium and heavy-duty vehicles and vehicle technologies.

 

The Chinese government has appropriated $2.5 billion on a 10-city, 1,000 unit plan which requires the demonstration of 1,000 electric vehicles in each of 10 cities, with a particular focus on public transportation and government services. Under this project, battery powered electric buses receive a subsidy of $73,000 per bus to offset the incremental cost of an electric bus. According to HSBC Bank, China will represent 35% of the global electric vehicle market by 2020. In addition, according to the China Automotive Energy Research Center, the Chinese government to date has invested $15 billion in an electric vehicle charging infrastructure across the country.

 

In India, the federal government has proposed $1.55 billion in incentives to boost manufacturing of electric vehicles in the country. In addition, import duties have been reduced on electric vehicle parts and batteries to promote electric vehicle development. We believe this initiative will provide a 40% reduction in the cost of our drive systems to our strategic partner in the region.

 

In Europe, governments have adopted a strategy of increasing taxes on fossil fuels to support a reduction in vehicle registration taxes for electric vehicles. For example, in Belgium, the federal government has created incentives through a 30% federal tax credit (max of €9,000) for electric vehicles, while the state government in the Walloon region is offering up to a €25,000 subsidy for the purchase of electric vehicles.

 

Lithium Battery Energy Storage

 

We believe the lithium battery energy storage technology holds the promise of providing numerous benefits across the energy delivery value chain – from generation to transmission and distribution to end user. Specifically, energy storage technology is considered a key component for the integration of high levels of renewable energy (solar, wind, thermal) as part of future electricity grids. The variable production output of wind and solar plants without energy storage provides limited ability for utilities to estimate and capture the full economic value of renewable energy. Historically, one of the most important grid storage functions has been “load-leveling,” or storing off-peak electricity during periods of low demand and releasing it during periods of high demand, enabling the decreased use of high-cost peaking generation. Increased implementation and adoption of renewable energy generation (primarily solar) has increased grid volatility due to intermittency in renewable energy generation, requiring an increase in off-grid storage to store generated energy at local user levels to reduce grid volatility. Some customers, particularly large commercial and industrial customers, can capture some of the benefits of load-leveling and peak capacity via time-of-use or demand-based electricity rates. Energy storage at the utility level has primarily been through pumped hydro storage systems installed during 1970’s oil crisis. Today, new technologies like flywheels, compressed air, and battery storage are being used to add storage to manage grid volatility. We believe that small industrial, commercial and residential producers of solar energy are the fastest adopters of off-grid battery storage systems. In addition, the introduction of lithium batteries as the replacements to lead acid batteries in uninterruptible power supply systems can provide additional growth markets for lithium energy storage systems.

 

In 2010, California approved AB2514, which will require all investor-owned and publicly owned utilities to purchase new grid-connected energy storage systems or services of such systems with a minimum capacity of 2.25% of peak load by 2014, and 5% of the peak load by 2020. In Europe, carbon tax on utilities using coal, gas or fossil fuels has resulted in policies promoting use of renewable power generation. In Germany, 50% of the households are expected to be powered by solar panels by 2025, which will result in high growth for battery energy storage at residential level in the near future.

 

Higher fuel cost and emissions restrictions on stationary engines has led to the development of battery systems that can replace engine generators used in telecommunication towers. Innovative low energy consumption LED lighting has also created an opportunity for zero emissions, quiet mobile lighting products for the construction and mining industries.

 

Technologies and designs used in electric vehicles are similar to the expertise needed to develop, manufacture and sell energy storage systems. Most electric vehicle OEMs have entered the energy storage system markets to diversify their market opportunities. In 2012, we used our electric vehicle experience to develop and deploy a complete line of energy storage products ranging in energy from 10 kilowatt hour (“kWh”) to 1 megawatt hour.

 

Our Competitive Strengths

 

In the heavy duty electric vehicle market, our strategic relationships with OEM’s of electric trucks and buses combined with a portfolio of proprietary technologies related to electric drive train provides our customers with a cost effective localized product solution. We believe that our electric vehicle components and energy storage products have a global demand and the size of market relies on regional factors, such as fuel costs, regulatory controls, public awareness, air pollution and economics. We believe the following competitive strengths serve as a foundation for our strategy:

 

—

Global Strategic Partnerships. We believe our strategic partnerships with OEMs of buses and trucks combined with our first to market strategy in Europe, India and China provides a competitive advantage in developing a market for heavy-duty trucks and buses in these regions. Our first to market approach also provides us with a better understanding of market needs and allows us to establish performance and cost benchmarks for our products and technologies in these regions.

 

 

	—	Proprietary Technologies.  Our research and development efforts during the past five years have led to a portfolio of proprietary technologies and knowhow which provides our customers access to advanced electric vehicle technologies. Our ability to integrate advanced electric drive train technologies into current fossil fuel vehicle platforms in production lowers design and development costs for our OEM partners.
	—	Capital Efficient Operating Model. We rely on our OEM partners to market, sell and service localized product solutions in regions they serve. We believe our strategic partners have significant capital resources, relationships and other assets to develop new market opportunities. We believe this approach allows us to allocate appropriate capital and resources on research and development of new technologies for our customers.
	—	Experienced Management Team. 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

 

We believe that growing environmental concerns related to heavy-duty vehicle emissions combined with our belief that electric vehicles are inherently more cost effective and reliable than fossil fuel powered vehicles are the primary value propositions of our electric vehicle products. In addition, a growing need for electrical energy in the developed and developing nations has resulted in the growth and adoption of renewable energy such as solar, wind and geothermal. We believe our first to market approach combined with our strategic relationships with large OEMs in Europe and Asia allows us the opportunity to scale and lead the market for heavy-duty electric vehicles. In North America our access to low cost lithium batteries through our strategic partner also provides us with a competitive advantage in the lithium energy storage market for telecommunications, solar and renewable energy storage markets. The primary elements of our business strategy include:

 

·

Global Products and Markets: In the growing market for electric vehicles and components, we plan to continue the development of strategic relationships with OEMs of heavy-duty and medium-duty vehicles including buses, tractors, trucks and industrial equipment. In addition, we plan to market and sell our energy storage products through a distribution network in North and South America.

 

·

Diversified Markets: Our core proprietary technologies of inverters, controllers, a battery management system and chargers are applicable to electric vehicle and energy storage applications. We plan to diversify our product offerings through the development or enhancement of our proprietary technologies that address the electric vehicle and renewable energy storage markets.

 

·

Leverage Our Assets and Our Partners’ Assets: We have strategic relationships with large OEMs of heavy-duty trucks and buses in Asia and Europe. Our strategic partners have substantially large customer bases, established distribution networks and financial resources to compete in the local and global markets. We plan to leverage our strategic partners’ strengths to jointly develop products and technologies that are cost competitive and technologically superior to those of our competitors.

 

·

Competitive Cost Structure: We believe that the size of the electric vehicle and lithium energy storage market is dependent upon the cost competitiveness of our products in relation to current fossil fuel based solutions, such as diesel trucks, buses and generators. We plan to utilize the lower labor costs and production efficiencies of our strategic partners in Asia to reduce costs of our products.

 

Our Technology

 

We believe our core competencies comprise our portfolio of electric drive train technologies and vehicle engineering. Our core technologies of flux vector inverters, chargers, BMS, lithium battery packs and vehicle control software makes us one of the few companies in the world that design, develop and manufacture complete vehicle systems. We utilize our core technologies in our vehicles and market proven systems to automotive OEM’s worldwide. We believe the key to our technology is our software and operating system that integrates all of our core technologies comprised of an inverter, battery charger and BMS that monitors, computes, calibrates, communicates, diagnoses and stores critical parameters during operation.

 

In 2006, we developed inverter technology for use in the heavy duty truck and bus markets. In 2007, we completed development of the world’s first battery powered heavy-duty electric tractor for the Port of Los Angeles, which included our electric drive system powered by our proprietary flux vector motor controller (inverter) technology. In 2008, we acquired a manufacturer of electric vehicle inverters to complete our product line of inverters that range in power from 10 kW to 240 kW.

 

In 2009, we developed a lithium BMS we call QANBUSS™ for our trucks and tractors and demonstrated the world’s first lithium battery powered Class 8 truck showcasing our drive system and BMS technology. Our BMS monitors individual lithium battery cells during charge and discharge cycles using our proprietary operating system and vehicle algorithms. In 2010, we designed, developed and manufactured 300 mile range recreational vehicle equipped with our drive train and lithium batteries. In 2010, we also began an on-road demonstration of two electric buses in India equipped with lithium batteries and electric drive systems.

 

In order to improve daily range of our vehicles, in 2011 we developed high frequency rapid chargers for electric trucks and tractors ranging in power from 20 kW to 180 kW, reducing our charge time from eight hours to two hours. Our battery charger, EQON™, includes our proprietary software and operating system that seamlessly integrates with our BMS and vehicle controls.

 

Since 2012, we invested significant resources in transitioning our core vehicle technologies to energy storage systems. Energy storage systems consists of lithium battery packs that are charged by renewable energy sources such as solar and wind and then stored energy is converted to alternating current (“AC”) power for use in residential and commercial buildings. Our energy storage systems contain lithium batteries that have longer life, high energy density and higher transfer efficiency when compared to lead acid batteries. With the positive benefits of lithium batteries in storage applications comes a certain level of complexity related to charging, discharging and management of energy stored in the lithium batteries. Our long term experience in use of lithium batteries in vehicle platforms allowed us to transfer our core battery management technologies and knowhow to energy storage systems with a relatively low investment in research and development. This knowhow and access to low cost high capacity batteries from our strategic partner, has allowed us to enter the market of energy storage, which we believe is a significant growth market for our components and technologies.

 

Our Products

 

We design, develop, manufacture, market, sell and service heavy-duty trucks, tractors, electric drive systems, energy storage products and lithium batteries.

 

Electric Vehicles and Components

 

We offer a range of zero emission lithium battery powered heavy- duty tractors and trucks designed for both off-highway and on-highway applications. Our primary products are discussed below:

 

Nautilus XRE20 – Off-Highway Electric Yard Tractor

 

We are the first company to develop and deploy a lithium battery powered heavy-duty 30 ton capacity electric yard tractor in an industry dominated by diesel powered yard tractors. Our electric yard tractors are designed for off-highway use to transport containers at shipyards, rail yards, intermodal facilities, industrial plants, distribution warehouses, food production facilities, military bases and mail facilities. We believe that because our vehicles do not consume any energy while the vehicle is idling, our electric tractors have lower operating and maintenance costs during daily operations. Our tractors have a charge time of less than two hours and can operate for over 12 hours on a single charge.

 

Nautilus MX30 – Electric Short-haul Tractor

 

In 2012, we released the Nautilus MX30, a Class 8 heavy-duty electric tractor that replaced our Nautilus XE30 product. The Nautilus MX30 is built on a Freightliner truck chassis and designed to transport up to 25 ton loaded containers and trailers for short haul applications. The Nautilus MX30 features a 600 Volt, 240 kW electric proprietary drive system with maximum speed of 70 mph and range of 150 miles on single charge under unloaded conditions. The Nautilus MX30 is compliant with DOT regulations for on-road use and designed to transport containers in port applications.

 

Mule M100 – Medium-Duty Electric Truck

 

Our Mule M100, which replaced our earlier model Mule M150, is designed as a zero emissions solution for on-road inner city short-haul delivery applications. The Mule M100 is designed to transport loads of up to four tons at a top speed of 70 miles per hour and can travel up to 100 miles on a single charge and is ideal for daily, short-haul deliveries. The Mule M100 fully recharges in three hours and is DOT compliant.

 

Electric Drive Systems

 

We design, develop and manufacture electric drive systems to replace fossil fuel powered drive trains across various medium and heavy-duty product platforms. Our electric drive system includes an electric motor, our proprietary flux vector motor controller, an automatic transmission assembly and related vehicle operating software which can be configured to application needs. We jointly work with our OEM partners to design and configure our drive system for seamless integration into customer vehicle platforms. We target OEMs’ electric buses, trucks, tractors, large industrial forklifts, delivery vans, inner city delivery vehicles and material handling equipment.

 

Our current family of electric drive systems includes:

 

·

300 Volt, 240 kW electric drive systems for off-highway heavy duty tractor; medium duty on-highway electric buses, trucks and delivery vans; and

 

·

600 Volt, 240 kW electric drive systems for on-highway Class 8 heavy duty trucks, tractors and transit buses.

 

ZEVQON™ Motor Controllers

 

We develop, design, manufacture, market and sell a complete line of variable and fixed frequency inverters and controllers under the brand name ZEVQON™. ZEVQON™ is a central control device of an electric vehicle design that controls, monitors, calculates stores and communicates key vehicle parameters via a Can Bus. ZEVQON™ controllers are equipped with our proprietary vehicle operating system that contains software, algorithms and formulae that provide efficient conversion of energy from battery to propulsion. Our line of controllers range in power from 40 kW to 240 kW and operate in voltage range between 200-800 volts. Our motor controllers are used in electric buses, mining equipment, military vehicles, airport ground support equipment, delivery vans, trucks, tractors and automobiles.

 

EQON™ Battery Chargers

 

We develop, design, manufacture, market and sell a complete line of high frequency fast chargers for use in electric vehicle and energy storage applications. We offer a range of fast chargers for lithium battery charging, ranging in power from 20 kW to 180 kW. Our chargers are NEMA 3 rated for outdoor use and feature our proprietary operating system that controls, monitors, calculates stores and communicates via a Can Bus with our battery management system and vehicle controller.

 

QANBUSS™ Battery Management System

 

In 2009, we were the first company to introduce heavy duty electric tractor with lithium batteries monitored by our proprietary QUANBUSS™ BMS. Our BMS is a key to ensuring safety in a lithium battery system and designed to safeguard the cells from overcharge and over-discharge during operation. Our QUANBUSS™ features our proprietary operating system that controls, monitors, calculates stores and communicates via a Can Bus with each battery cell and reports the status of the battery system every 400ms to the vehicle or energy storage system controller. We believe that with over 30,000 hours of field operation, our QUANBUSS™ is one of the most reliable system in the industry.

 

Lithium Batteries

 

We are an exclusive distributor of lithium yttrium iron phosphate (“LYP”) batteries in North America, manufactured by Winston Battery Ltd., with capacities ranging from 20 amp hour to 1,000 amp hour. Currently, we are the only provider of high capacity 700 amp hour and 1,000 amp hour single cell mono-blocks of lithium iron phosphate batteries, ideal for heavy duty electric vehicle and energy storage applications. We believe our LYP batteries provide longer life, higher energy density, and greater transfer efficiency, thereby a lower life cycle cost than conventional lead acid batteries.

 

HIQAP ™ Energy Storage Products

 

Our HIQAP™ energy storage systems products consists of lithium batteries, a proprietary BMS and control software, fully integrated to provide efficient storage and supply of electrical energy generated by solar, wind, geothermal or grid. Energy storage systems are similar to our electric vehicle battery systems with a key differentiation of simultaneous bidirectional flow of electrical energy between components to balance the supply and demand of energy. We provide 10 kWhr to 500 kWhr energy storage system in both off-grid and on-grid applications. In 2012, we deployed 1mega watt hour HIQAP™ energy storage system for an off-grid 24/7 application. In 2013, we launched a product line ranging of energy storage systems from 10 kWhr to 35 kWhr for residential solar markets.

 

Manufacturing and Assembly

 

Our executive offices and our manufacturing and assembly facility is located in Harbor City, California, where we lease 18,754 square feet of manufacturing, assembly and office space.

 

We final assemble our vehicles, drive systems, inverters, chargers and energy storage systems at our manufacturing facility in Harbor City. We utilize manufacturing facilities of our strategic partners in Belgium, Netherlands, India and China to assemble finished vehicles for regional markets. We also utilize our manufacturing facility to conduct lithium battery testing for our customers. Our entire current inventory is warehoused at our facility in Harbor City.

 

Our manufacturing process consists of assembly, software installation, functional testing and quality control. Testing and quality control processes are also applied to components, parts, sub-assemblies, and systems such as battery systems, drive systems and chargers. We also perform charging and discharging testing on all battery systems and individual batteries prior to shipment of our vehicles, drive systems and energy storage products.

 

Our engineering and procurement offices are also located at this facility to support our production needs. Our engineering and product development efforts are focused on product improvements, innovations, and cost reductions. Prototyping, testing and pre-production of our new vehicles, assemblies and components is conducted at our assembly facility. In addition, we also utilize outside services to conduct certification testing on our vehicles.

 

We estimate that our current manufacturing and assembly capacity at this facility provides us with the ability to substantially increase sales with the addition of direct labor personnel and relatively modest capital investments in plant, tooling and equipment. We believe that our facility is sufficient to meet our anticipated production needs over the next twelve months. As our demand for certain configurations grows, we plan to outsource additional non-critical operations to qualified suppliers in United States and Asia. The supply and manufacturing of a number of components, such as transmission, motor and vehicle chassis is sourced from manufacturers in the United States and Europe. In some cases we rely on single-source vendors or limited number of sources if we believe it is advantageous to do so due to performance, quality, support, delivery, capacity and price considerations. We believe that any disruption that may occur because of our dependency on single or limited source vendors would not disproportionately disadvantage us relative to our competitors. We believe our sourced manufacturers have sufficient manufacturing capacity to meet our current and future production needs.

 

All of our products carry a minimum of a one-year limited warranty with a prorated five-year warranty on batteries based on usage. Our key components are supplied with the manufacturer’s warranties which meet or exceed the warranties we provide to our customers. 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.

 

Sales and Marketing

 

Our sales and marketing strategy focuses on users and manufacturers of renewable energy transportation and energy storage products. We use a variety of direct and indirect distribution channels, such as an online store, direct sales force, dealers, retailers and value added resellers to sell our products globally. We believe the technical nature of our product requires direct contact with a customer or end user to demonstrate the advantages of our technologies over those of our competitors. To ensure a high quality buying experience for our products, we rely on OEMs or local dealer networks to provide aftermarket support and service for our products.

 

Electric Vehicle Sales and Components

 

We market, sell and service our electric vehicles through a combination of direct sales force and an authorized and trained worldwide dealer network. In the United States, our customers are primarily local, state, federal government, port authority, large manufacturers, large distribution warehouses and military. Vehicle sales in the domestic market are primarily conducted by direct company sales. Prior to delivery we require qualification of local dealer to provide service and support to the customer during life of the vehicle. Our authorized dealers receive commissions along with installation fees as deemed appropriate to provide service and repair on products sold in assigned territory.

 

We market our electric drive systems to global OEMs of heavy duty trucks, tractors and buses. Our global strategy emphasizes first-to-market initiatives, where we identify regional OEMs who we can partner with to develop product solutions for specific market needs. We provide design services to our OEM customers which include development of new technologies and configurations that seamlessly integrate into OEM vehicle platforms. We rely on local branding and a distribution system of our OEM customers to promote completed vehicles in the region. In regions where a localization strategy may not be practical or effective, we utilize indirect distribution channels of local dealers and distributors to sell completed products manufactured by us or our OEM partners.

 

Lithium Batteries

 

We have multiple sales channels through which we engage our customers and sell lithium batteries, including online store, battery retailers and inside sales staff. Our online store, http://www.balqon.com/online-store, provides 24/7 shopping experience by providing battery information, brochures, pricing, freight costs and access to battery related technical information. These tools help customers make more informed purchasing decisions and more accurate lead times on batteries. We also offer clearance items on our online store for excess inventories and offer online specials to promote our products to new customers.

 

Our website also offers an on-line chat forum for our customers during work hours to answer technical or sales related inquiries. We also have qualified non-exclusive dealers and retailers of batteries that offer our battery products for regional markets. We offer volume discounts to our battery retailers based on annual sales.

 

Energy Storage Systems

 

We sell our energy storage systems to OEMs of solar, wind and telecommunication products. We also sell our energy storage systems to consumers and commercial customers through our online store, http://www.balqon.com/online-store, which provides a 24/7 shopping experience by providing product information, brochures, pricing, freight costs and access to technical information. We plan to increase our energy storage systems product offerings to market to residential solar customers with products that directly replace lead acid battery storage packs.

 

We utilize online advertising, tradeshows and public relations to promote our products and brands in our target markets. Our online store and website provide our customers with the most current information about our products and services. We also have a significant presence in social media where we communicate industry information in English and Chinese. We plan to expand our online presence to include information in regional languages to effectively communicate our technologies and products to global market.

 

Competition

 

Our core product offerings – heavy duty electric trucks, electric drive systems, electric vehicle inverters and lithium battery storage units directly compete in markets that consist of strong global competitors. Our competitors not only consist of companies that make directly competing products, but also indirect competitors that produce comparable products that meet similar application needs.

 

Our direct competitors in the heavy duty electric truck and bus markets are small regional manufacturers that are in early stage of product development. We believe competition from these manufacturers will intensify in regional markets as these competitors gain experience in developing new vehicle platforms that imitate some of the features and technologies of our products. Our indirect competitors in the heavy duty electric truck and bus markets are manufacturers of hybrid, clean diesel, and compressed natural gas (“CNG”) vehicles. Our typical indirect competitors are large, multinational manufacturers that often have greater financial resources and experience in the markets we address.

 

Our overall strategy across our product offerings is to offer highly regarded, technologically advanced products that are price competitive to our strategic partners and customers. Further we believe that we must partner with regional manufacturers of trucks, buses and other commercial vehicles to provide localized product platforms with outstanding aftermarket support and service. We further believe that our competitive position is dependent on our ability to maintain a technological advantage in electric drive systems and inverter technologies.

 

Our lithium battery products face significant competition from other lithium battery manufacturers located in China. In the North American market, our competitors lack organized distribution channels and after market service support. Our lower cost advantage combined with our technical expertise provides us competitive advantage over resellers of competitor products. Some of our current and potential competitors have substantial financial resources and may be able to provide such products with lower lead times and competitive prices in the future.

 

Our lithium battery energy storage systems compete with systems that utilize flooded lead acid, absorbent glass mat and gel batteries. Lithium batteries offer longer life, deep discharge and higher energy transfer efficiency when compared to lead acid battery storage products. We believe that offering superior innovation, integration and battery management technologies provides us ability to compete with the lower cost alternatives. We offer our energy storage systems to resellers of solar, wind and renewable energy systems. In addition we market our battery storage systems to manufacturers of electric trucks and buses worldwide.

 

Electric Vehicles and Components

 

In the United States market we offer and sell battery powered heavy duty trucks for both on-road and off-road use to commercial customers such as marine terminals, industrial plants, warehouses, retailers and military installations. Our direct competitors in domestic markets are small companies in early stage development of competitive products that imitate the features and technologies of our products. Our direct competitors are integrators of components such as drive systems, battery systems and chargers into vehicle platforms. We differentiate from our direct competitors through development of our own proprietary inverter, battery management and charger technologies. We have developed collaborative relationships with some of our direct competitors to market our proprietary technologies on non-competing vehicle platforms development.

 

In the United States market, our indirect competitors consist of large global corporations providing heavy-duty vehicles powered by alternative fuels such as CNG, liquid natural gas (“LNG”) or hybrid variants using combination of batteries and alternative fuels for propulsion. Our indirect competitors have a substantially greater customer base and financial resources than us, and are currently engaged in the development and demonstration of lower emission hybrid propulsion systems. Our indirect competitors also compete with us on the basis of price, operating costs, longevity and performance. In general, our electric vehicles are significantly more expensive than similar vehicles powered by other fuels including vehicles powered by diesel or LNG. We rely on government incentives, grants, regulations and subsidies to compete with alternative fuel powered vehicles. In 2013, we and our OEM partners have benefitted from local subsidies for zero emission transportation.

 

In the off-highway heavy duty tractor markets we are currently the only manufacturer of battery powered electric tractors, our Nautilus XE20 and NautilusXRE20. We have some new small direct competitors in this product category currently in the early stage of development. We have developed a collaborative relationship with some of our new competitors by marketing drive and battery systems to increase market development of zero emissions off-highway vehicles. The off-highway heavy duty tractor market is dominated by two large domestic manufacturers of diesel and CNG powered products that indirectly compete with our products. Our indirect competitors compete with us on basis of price, range and performance. We believe new regulations and incentives combined with lower operating and maintenance costs is expected to provide growth of zero emissions off-highway tractors.

 

In the United States on-highway heavy duty truck and tractor market, we currently offer our Nautilus MX30 and our Mule M100 battery powered zero emissions products. We are currently the only manufacturer of battery powered Class 8 electric tractors and trucks in the United States market. We have one fuel cell powered direct competitors in this market that offers a Class 8 tractor with longer range and higher load capacity than our Nautilus MX30. Our indirect competitors consist of large global corporations providing vehicles powered by alternative fuels or hybrid propulsion technologies. We believe the market for Class 8 battery powered vehicle in the United States is still in infancy and primarily supported by grants and incentives provided by federal and state governments. We continue to actively participate in state and federal grant programs to support development and deployment of new technologies and vehicles.

 

Our electric drive systems consists of an alternating current (“AC”) electric motor, automatic transmission, power conversion devices, controller and proprietary software that acquires, stores, processes and transmits information to manage vehicle control and performance. In addition, our electric drive systems also include lithium battery packs, a BMS and battery chargers for medium and heavy duty vehicles. Our electric drive systems and vehicle control software has been deployed and tested on several vehicle platforms for performance and reliability. Our competitors of electric drive systems consist of small retailers that integrate components from several suppliers into electric drive system kits for sale to consumers or businesses. Our competitive advantage includes price, performance, fully integrated systems for OEMs that are field tested for their heavy duty trucks and buses. In 2013, significant incentives have been approved by governments in India, China and Europe to transition from fossil fuel vehicle to zero emission electric vehicles. We believe these incentives combined with our localization strategy makes our OEM products cost competitive with fossil fuel vehicles.

 

We manufacture proprietary vehicle controllers ranging in power from 20 kW to 300 kW for use in light to heavy duty electric trucks, tractors and buses. Our vehicle controllers consist of proprietary power conversion inverter technology and vehicle control software that manages efficient conversion of battery energy to mechanical propulsion. The vehicle controller market is highly competitive with competitors ranging from low voltage (12 volt to 120 volt) vehicle controller manufacturers experienced in off-highway applications to some large well funded manufacturers of high voltage (120 volt to 700 volt) vehicle controllers for on-highway vehicle applications. Our direct competitors are large volume manufacturers of high voltage vehicle controllers of light duty passenger electric vehicles. We differentiate from our direct competitors by providing customized medium and heavy duty vehicle controllers with vehicle control software that integrates seamlessly with drive system components of our customers. We believe our competitive advantage is in our ability to provide low quantity customized vehicle controllers to medium and heavy duty manufacturers of trucks, tractors and buses.

 

Lithium Batteries

 

We are the exclusive North American distributor of LYP batteries manufactured by Winston Battery Ltd., with capacities ranging from 20 amp hour to 1,000 amp hour. Currently, we are the only provider of high capacity 700 amp hour and 1,000 amp hour single cell mono-blocks of lithium iron phosphate batteries, ideal for heavy duty electric vehicle and energy storage applications. We face significant competition from small resellers representing new manufacturers of lithium batteries from China. Most resellers are higher in cost and lack technical knowledge to provide after sales support to customers; however, these resellers have a stronger online sales presence and they provide shorter lead times to their customers. We believe our direct OEM sales model combined with technical support provides superior customer experience and value. However, some retailers with decades of experience in marketing and sales of lead acid batteries have a greater ability to reach out to smaller users of lithium batteries.

 

We believe our main competitors are manufacturers of lead acid batteries that currently dominate the battery market. The non-automotive battery market consists of deep cycle lead acid batteries and sealed lead acid batteries. The lead acid battery market consists of several large, highly competitive, well funded and experienced participants. Our competitors have substantial resources and are able to provide high quality products and services at lower cost through a well established nationwide distribution network. We believe our LYP batteries provide longer life, higher energy density, and greater transfer efficiency, thereby a lower life cycle cost than conventional lead acid batteries. Our competitors market and sell non-automotive lead acid batteries through a nationwide network for resellers, dealers and distributors with large inventories and short lead times. We believe in the short term direct sales of LYP batteries to solar, wind and renewable energy system providers provides us with the ability to sell integrated solutions at life cycle costs competitive to lead acid batteries.

 

Energy Storage Systems

 

Our energy storage systems products consists of lithium batteries, the proprietary BMS and control software, fully integrated to provide efficient storage and supply of electrical energy generated by solar, wind, geothermal or grid. Energy storage systems are similar to our electric vehicle battery systems with a key differentiation of simultaneous bidirectional flow of electrical energy between components to balance the supply and demand of energy. Our electric vehicle experience with lithium batteries provides us competitive advantage in development of lithium battery energy storage systems that are cost competitive and reliable.

 

We provide 10 kWhr to 500 kWhr energy storage system in both off-grid and on-grid applications. In this category our indirect competitors include both small and large manufacturers of lead acid battery systems that sell products through retailers and distributors of solar, wind and renewable energy. Lower acquisition cost and ease of installation is a core competitive advantages of lead acid battery systems, while low cycle life, cost of maintenance and low energy density are key disadvantages when compared to lithium battery storage systems. We believe longer battery life, higher transfer efficiency of electrical energy and no maintenance provides us the competitive advantage in energy storage applications. Our direct competitors include small integrators of lithium battery storage systems that compete with us in 10 kWhr to 20 kWhr range. Our direct competitors have long term experience in sales and marketing of energy storage systems in their regional markets, which we plan to overcome by developing collaborative relationships with our direct competitors to promote and sell our higher capacity fully integrated energy storage systems.

 

Research and Development

 

We develop the substantial majority of our products internally. Internal development of our proprietary products allows us to maintain technical control over design and development and provides seamless integration of our systems into OEMs’ vehicle platforms. Our research and development efforts focus on enhancement and development of new proprietary technologies and software that can improve performance and reduce costs of our current and future product offerings.

 

We fund our research through contracts from customers and grants from local, state or federal agencies. Our research and development effort is focused mainly on the development of electric drive systems for heavy duty trucks and buses for our OEMs. Our effort includes integration of our proprietary technologies into vehicle platforms produced by our OEM customers. In some cases our research and development effort includes qualification and integration of new sourced components to reduce costs and improve performance. In addition, significant effort was expended over the past twelve months to development of a complete line of energy storage systems, which involved development of power electronics, control systems and related software to provide fully integrated energy storage solutions.

 

During 2012, we developed and delivered a new on-road heavy duty tractor, the Nautilus MX30 and electric drive systems to OEMs of electric trucks and tractors in Europe and Asia. In addition we developed and deployed energy storage systems ranging from 10 kWhr to 1 mega watt hour (1mWhr) in storage energy to commercial, telecommunication and solar customers worldwide.

 

We incurred approximately $95,363 and $258,792 in research and development expenses during 2013 and 2012, respectively, or 6% of total revenues in 2013 and 12% of total revenues in 2012. Rapid technological advances in hardware and software, rapid global development of electric vehicle and energy storage markets, changing customer needs and frequent new product introductions and enhancements characterize the market in which we compete. We plan to continue to dedicate a significant amount of resources to research and development efforts to maintain and improve our current product offerings.

 

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 motor controllers, inverters, BMS and our proprietary vehicle operating system which contains certain software, algorithms and formulae 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 “Balqon” trade name. Common law rights protect the use of this mark which is 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.

 

Employees

 

As of April 15, 2014, we employed 8 employees on a full-time basis. None of our employees are represented by labor unions, and there have not been any work stoppages at our facility. 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, together with all other information contained in this report, including our consolidated financial statements and the related notes, before deciding to buy or maintain an investment in our common stock. If any of these risks materialize, our business, financial condition or results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment. The risks and uncertainties we describe are not the only ones facing us. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations. If any of these risks were to occur, our business, financial condition, or results of operations would likely suffer. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.

 

Risks Relating to Our Business

 

There is substantial doubt as to our ability to continue as a going concern. We need additional financing or capital which may be unavailable or costly.

 

We do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs in the very near-term. We believe that we have sufficient working capital to continue operations until August 31, 2014 unless we successfully restructure our debt, experience a significant improvement in sales and obtain other sources of liquidity. In addition, although various secured creditors holding approximately $2,006,750 in secured convertible notes and secured debentures have not exercised their rights to foreclose on all of our assets (including our intellectual property assets), no assurance can be given that these holders of secured debt will not exercise their remedies under our outstanding secured notes and secured debentures. If we cannot restructure our debt and obtain sufficient liquidity in the very near term, we may need to seek to protection under the U.S. Bankruptcy Code. As a result, our 2013 financial statements include an explanatory paragraph by our independent registered public accounting firm describing the substantial doubt as to our ability to continue as a going concern.

 

As of April 15, 2014, we were in default on $3,361,500 in principal amount of our convertible notes, in default on $770,003 of accrued interest relating to those notes and we have not paid $351,191 in payroll taxes.

 

If we seek protection under the U.S. Bankruptcy Code, all of our outstanding shares of capital stock could be cancelled and holders of our capital stock may not be entitled to any payment in respect of their shares.

 

If we seek protection under the U.S. Bankruptcy Code it is possible that all of our outstanding shares of capital stock could be cancelled and holders of capital stock may not be entitled to any payment in respect of their shares. It is also possible that our obligations to our creditors may be satisfied by the issuance of shares of capital stock in satisfaction of their claims. The value of any capital stock so issued may be less than the face value of our obligations to those creditors, and the price of any such capital stock may be volatile. In addition, in the event of a bankruptcy filing, our common stock will be suspended from trading. Accordingly, trading in our common stock may be limited, and our stockholders may not be able to resell their securities for their purchase price or at all.

 

We are seeking additional financing and may be unable to obtain this financing on a timely basis, in sufficient amounts, on terms acceptable to us or at all. Any financing we are able to obtain may be available only on burdensome terms that may cause significant dilution to our stockholders and impose onerous financial restrictions on our business.

 

We are seeking substantial additional financing. Future financing may not be available on a timely basis, in sufficient amounts, on terms acceptable to us or at all. Any equity financing may cause significant dilution to existing stockholders. 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 would expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants could 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 financing may be impaired. In addition, any prospective debt or equity financing transaction will be subject to the negotiation of definitive documents and any closing under those documents will be subject to the satisfaction of numerous conditions, many of which could be beyond our control. We may be unable to obtain additional financing from one or more lenders or equity investors, or if funding is available, it may be available only on burdensome terms that may cause significant dilution to our stockholders and impose onerous financial restrictions on our business.

 

We have a history of only nominal revenues, have incurred significant losses, expect continued losses and may take long time to achieve profitability. If we continue to incur losses, we may have to curtail our operations, which may prevent us from successfully deploying our electric drive systems, battery systems, renewable energy storage devices and electric vehicles as well as operating and expanding our business.

 

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, 2013, we had a stockholders’ deficiency of $11,152,909. For our years ended December 31, 2013 and 2012, we incurred net losses of $2,730,467 and $6,046,611, respectively. We may continue to incur losses for an indeterminate period of time and may never achieve or sustain profitability. Even if we are able to achieve profitability, we may be unable to sustain or increase our profitability on a quarterly or annual basis. An extended period of losses and negative cash flow may prevent us from successfully producing and selling our electric drive systems, lithium battery modules, flux vector motor controllers, and electric vehicles, renewable energy 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 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, 2013 and 2012 includes a paragraph that 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 motor controllers, battery systems, renewable energy systems and electric drive systems. We urge potential investors to review this report before making a decision to invest in Balqon Corporation.

 

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

 

Our 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. 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.

 

We are targeting a new and evolving market for heavy-duty electric vehicles 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 products represent only one of the possible solutions 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 products;
	—	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 products to satisfy the needs of the markets that we intend to target and the resulting lack of widespread or adequate acceptance of our products; 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 heavy-duty electric vehicle industry within which we compete is highly competitive. New developments in vehicle technology may negatively affect the development or sale of some or all of our products or make our products uncompetitive or obsolete. Competition for our products may come from current fossil fuel based drive system technologies, improvements to current drive system technologies and new alternative fuel drive system technologies. Our target market is currently serviced by existing manufacturers with existing customers and suppliers using proven and widely accepted fossil fuel powered drive systems. Additionally, we have competitors working on developing technologies such as cleaner diesel engines, bio-diesel, fuel cells, natural gas, hybrid electric/internal combustion engines, and hydrogen powered fuel cell technologies. Our products compete directly with fossil fuel powered vehicles which are lower in price and higher in key performance specifications such as range, speed and load carrying capacity. In addition, our competitors have a long history of producing high volume products with established dealer and service networks. Many of our competitors 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. Competitors for our Nautilus product line include manufacturers of fossil fuel powered vehicles, including Kalmar Industries Corp, Capacity of Texas, Inc., MAFI Transport Systems GmbH, Mol Transport Solutions and Terberg DTS (UK) Ltd. Competitors for our Mule product line include large automotive vehicle manufacturers such as Kenworth Truck Company, Freightliner Trucks, Mack Trucks, Inc., International Trucks and Peterbilt Motors Company. We also face competition from manufacturers of electric or zero-emissions vehicles, including Smith Electric Vehicles, Vision Industries Corp., Freightliner Custom Chassis and Navistar. As a result, our competitors may be able to compete more aggressively and sustain that competition over a larger period of time than we could. Each of these competitors has the potential to capture market share in various markets, which could have a material adverse effect on our position in the industry and our financial results.

 

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

 

The battery storage industry within which we compete is dominated by large lead acid battery manufacturers with significant financial resources, market knowledge and distribution systems. Our products compete directly with lead acid batteries which are lower in price than our current product offerings. In addition, we face competition from lithium battery manufacturers that offer similar products and have substantially greater financial resources and sales organizations in the global market. Competitors for our lithium battery storage products include lead acid battery manufacturers, such as Enersys, Exide Industries, Yuasa Batteries, Johnson Controls and Crown Battery. We also face competition from lithium battery manufacturers such as Caleb Battery, A123, Altairnano, Axeon and LG Chem. Our inability to maintain a low cost advantage over our lithium battery competitors may cause us to lose market share to our competitors.

 

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 technologies, and to develop and manufacture in a timely manner new products with improved technologies. 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 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 limited group of suppliers. Although we seek to qualify additional 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 current 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 approved.

 

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 electric vehicles and electric drive systems and we manufacture and assemble our flux vector motor controllers 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.

 

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. Although our flux vector motor controllers, electric drive systems, and their constituent components could benefit from patent protection, we have chosen to retain the proprietary rights associated with our flux vector motor controllers, electric drive systems, and BMSs 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 motor controllers. 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; except for SOL, 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 damage our reputation and the reputation of our products and delay their commercial launch.

 

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

 

If diesel fuel prices decrease to a level such that using our electric vehicles does not result in fuel cost savings, potential customers may not purchase our electric vehicles. Any decrease in demand for our 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 electric vehicles to keep them competitive with the life cycle cost of diesel fuel powered vehicles, our business might suffer and our revenue and profits might decline.

 

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 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 electric vehicle industry and therefore increase the risks associated with our operations.

 

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.

 

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 small and thinly-traded “public 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.

 

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 significant percentage 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 41.3% 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 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 April 15, 2014, we had 36,891,530 shares of common stock outstanding, most of which were restricted under the Securities Act of 1933, as amended, or Securities Act.  All 36,891,530 shares of outstanding common stock, were issued by us more than six months prior to that date and, therefore, can be sold without restriction subject to the limitations imposed by Rule 144 of the Securities Act (of these 36,891,530 shares of our common stock that have been held for more than six months, 10,921,660 shares of our common stock are held by non-affiliates).  As of April 15, 2014, we also had outstanding warrants that were exercisable for approximately 10,295,500 shares of common stock and convertible notes and convertible debentures convertible into an aggregate of 6,814,583 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.

 

The exercise of outstanding options and warrants to purchase our common stock and the conversion into common stock of our outstanding convertible notes and convertible debentures 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 and convertible debentures, 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 convertible notes and/or convertible debentures, 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, convertible notes and convertible debentures. In addition, holders of certain of the warrants and holders of convertible notes and convertible debentures have registration rights with respect to the common stock underlying these warrants, convertible notes and convertible debentures. The registration of these underlying shares of common stock 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, convertible notes or convertible debentures 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 of our warrants and options or conversion of our convertible notes or convertible debentures and then resold into the market.

 

If the exercise prices of our warrants and options and conversion prices of our convertible notes and convertible debentures 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 of our warrants and options and upon conversion of our convertible notes and convertible debentures, 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 of our warrants or options or the conversion of our convertible notes or convertible debentures.

 

Because we are 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 Pink^® marketplace. The last reported sale price per share of our common stock on April 15, 2014, was $0.12. As a result, our common stock constitutes “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.

 

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 Pink^® marketplace under the symbol “BLQN.” Because our stock is quoted on the OTC Pink^® marketplace 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.

 

Furthermore, 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, or GAAP. 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. Further, Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting.

 

For the year ended December 31, 2013, our management identified two material weaknesses in our internal controls over financial reporting and, therefore, determined that our internal controls over financial reporting were not adequate. While we are attempting to remedy the internal control weaknesses, we may not be able to adequate correct the issues, and other future material weaknesses in our internal controls may arise. If we are unable to remedy the internal control weaknesses, 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.

 

Item 1B.           Unresolved Staff Comments.

 

Not applicable.

 

Item 2.              Properties.

 

Our executive offices are located at 1420 240^th Street, Harbor City, California 90710, where we occupy approximately 18,750 square feet of space. During the year ended December 31, 2013, we leased our Harbor City facility for $10,605 a month. We currently lease our Harbor City facility for $10,605 a month. During each of the years ended December 31, 2013 and 2012, we reported $139,986 and $160,995, respectively, in lease expenses.

 

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

 

Item 3.              Legal Proceedings.

 

On September 21, 2012, T&K Logistics, Inc. filed a complaint, or Complaint, against us in the Superior Court of California, County of Los Angeles (Case No.: BC492619).  The Complaint relates to the lease agreement between us and T&K Logistics regarding our yard tractors.  The Complaint purports to state the following three counts against us: (i) breach of contract, (ii) specific performance, and (iii) negligent misrepresentation, and seeks compensatory damages of not less than $453,897.  On October 19, 2012, we filed an answer to the Complaint denying all allegations in the Complaint.  On that same date, we filed a cross-complaint against T&K Logistics for breach of contract and common count—goods and services rendered, which seeks damages in excess of $300,000. On September 10, 2013 a Settlement Agreement was reached between the two parties, where both parties agreed to terminate the Lease Agreement and equipment was returned to us. As of date of this report there are no further disputes between the parties.

 

On December 9, 2013 we reached a Settlement Agreement with Miranda and Associates under which we agreed to pay Miranda and Associates $235,000 is past due payments in monthly payments with total amount due payable by April 2016. The amount agreed upon also includes a 10% interest payment during the period in which balance is owed to Miranda and Associates.

 

Item 4.              Mine Safety Disclosure.

 

Not applicable.

 

PART II

 

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

 

Market Price of Common Stock and Holders

 

Shares of our common stock trade on the OTC Pink^® marketplace under the symbol “BLQN.” Shares of our common stock began trading on the OTC Bulletin Board on November 20, 2008. The table below sets forth for the quarters indicated for the years ended December 31, 2012 and 2013, the reported high and low bid prices of our common stock as reported on the OTC Bulletin Board. The prices shown below reflect inter-dealer quotations without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

 

		High				Low
Year Ended December 31, 2012
First Quarter (January 1 – March 31)		$	0.65			$	0.25
Second Quarter (April 1 – June 30)		$	0.43			$	0.42
Third Quarter (July 1 – September 30)		$	0.48			$	0.30
Fourth Quarter (October 1 – December 31)		$	0.18			$	0.15
Year Ending December 31, 2013
First Quarter		$	0.18			$	0.18
Second Quarter		$	0.20			$	0.20
Third Quarter		$	0.20			$	0.13
Fourth Quarter		$	0.13			$	0.06

 

As of April 15, 2014, we had 36,891,530 shares of common stock outstanding held of record by approximately 69 stockholders. 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. On April 15, 2014, the last reported sale price of our common stock on the OTC Pink^® marketplace was $0.12 per share.

 

Dividend Policy

 

We did not declare any dividends on our common stock during 2013. 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. Further, the terms of our outstanding senior secured convertible debentures include a restriction on our ability to pay dividends on our common stock. 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.

 

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 industry 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;

 

·

our ability to distinguish ourselves from our current and future competitors; and

 

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.

 

Recent Developments

 

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs in the very near-term. We believe that we have sufficient working capital to continue operations only until approximately August 31, 2014 at the latest unless we successfully restructure our debt, experience a significant improvement in sales and obtain other sources of liquidity. See “Risk Factors.”

 

We are in default on $3,361,500 in principal amount of our convertible notes and $770,003 in accrued interest on these notes. Although we are actively pursuing a number of alternatives, including seeking to restructure our debt and seeking to raise additional debt or equity financing, or both, there can be no assurance that we will be successful. If we cannot restructure our debt and obtain sufficient liquidity in the very near term, we may need to seek to protection under the U.S. Bankruptcy Code. See “Risk Factors.”

 

In April 2014, we received orders for two heavy duty electric drive systems from customers in Europe. Our drive and battery systems will be incorporated into electric yard tractors by our OEM partners in Europe and shipped to large retail warehousing customers. We believe these orders are result of our successful completion of a two year demonstration of an electric yard tractor at a large distribution facility in Belgium.

 

In March 2014, we completed development of 14 passenger battery powered airport Shuttle bus built on Ford E450 chassis. This is our first demonstration of a medium duty electric vehicle showcasing our inverter, charger and battery system technologies. During 2014, we anticipate increased sales in the medium duty truck and bus market in both domestic and international markets.

 

In March 2014, we delivered our first electric yard tractor to a large marine port in Turkey. Our model year 2014 electric yard tractor incorporates latest inverter and fast charging technologies developed during the past year. We believe our strategic relationship with OEM (Original Equipment Manufacturer) in Turkey combined with the demonstration of electric yard tractor will yield additional sales in the region during 2014.

 

In February 2014, we installed a 400 kWhr lithium battery storage system at a steel plant in the United States for energy saving application. This installation includes 80 Kw solar panel array that charges the batteries during the day which provides stored energy to the manufacturing plant during peak hours of operation. This project is a largest installation of our high capacity lithium battery system in a commercial application. We believe significant growth in use of solar energy in commercial applications to reduce energy costs combined with our deployment of large energy storage system will result in increased growth in sales of energy storage product line.

 

In January 2014, we signed Agreement with AQMD to deliver three on-road Class 8 lithium battery powered electric tractors for total amount of $925,000. Under this Agreement we are required to develop next generation of our Model MX30 with fast charging capability using DC (Direct Current) charger. We anticipate demonstration of DC charger will reduce charge time of our heavy duty vehicles from eight hours to two hours.

 

In October 2013, we received a purchase order to develop heavy duty plug-in hybrid refuse truck for a OEM in United States. During the first three months of 2014, significant portion of our engineering effort has been on completing the design and development of hybrid heavy duty vehicle that incorporates our proprietary inverter, charging and battery system technologies with a hybrid generator that increases range of our heavy duty vehicles. We believe, in the short term incorporation of hybrid technologies to increase range of our heavy duty vehicles will increase sales of our products.

 

Business Overview

 

We design, develop, manufacture and sell heavy duty electric vehicles, drive systems and lithium battery energy storage systems. We are the first company to introduce battery powered Class 8 off-road and on-highway vehicles in year 2007, since then we have introduced several medium and heavy duty high performance drive systems to global OEM’s in India, China and Europe. Since year 2011, we have also successfully diversified our business model by developing lithium battery storage technologies for renewable energy applications with products ranging in size from 10 kilo watt hour (kWhr) to 1 mega watt hr (mWhr) storage products.

 

The introduction of heavy duty and medium duty electric vehicles requires development of components and products that meets customers range and performance expectations, while maintaining cost competitiveness with existing fossil fuel powered vehicles. Our strategic relationship with lithium battery manufacturer and OEM’s of trucks and buses in China, India and Europe reduces our product costs when compared with other global electric vehicle manufacturers. We believe cost competitiveness with existing technologies in vehicle and energy storage applications is a key differentiator in the markets we serve.

 

Our introduction of world’s first Class 8 battery powered electric tractor, Model XE20 with capacity to tow 30 tons of loaded container resulted in development of proprietary flux vector inverter, battery management and charging technologies, which we use today as core technologies to market drive systems to OEM’s worldwide. In addition adapting these core technologies to energy storage products has provided us ability to address a growing market for renewable energy storage in domestic and international markets.

 

In addition to developing, manufacturing and selling our own line of heavy duty electric trucks and tractors, we have also provided services for the development and integration of our core electric vehicle technologies into products of other global manufacturers of buses, trucks and tractors. Since 2011, we have successfully integrated our core technologies into five vehicle platforms in India, China and Europe and believe successful launch of the products by our OEM customers will result in additional sales in 2014. In 2013 we launched several configurations of energy storage products for commercial and residential markets, applications of which include backup power, peak demand reduction and demand response.

 

We believe energy storage market is a significant growth opportunity for our core technologies and higher capacity lithium batteries. Our access to high capacity lithium batteries from our strategic partner provides us cost and performance advantage over other residential and commercial providers of energy storage products. In order to capitalize on this advantage we plan to invest further into developing new product solutions for energy storage markets

 

Our proprietary inverter technology and lithium battery packs has enabled us to deliver heavy duty electric tractor and electric drive trains at what we believe a lower cost per kilowatt-hour than our competitors. Our battery systems include our proprietary Battery Management System (BMS) and fast chargers that are capable of charging our vehicles in less than two hours. Design and development of reliable electric drive train for heavy duty vehicles has required extensive testing and innovation over the past five years. These innovations combined with over five years of field deployment experience of our technologies has resulted in an extensive know how and intellectual property that our OEM customers rely on for future product developments.

 

Our global strategy focuses on partnership with local vehicle manufacturers of fossil fuel vehicle to jointly design, develop and integrate our low cost drivtrain and battery systems into localized products. We believe our success in partnering with large OEM’s of trucks and buses in India, China and Europe is a result of: (i) Our long term field experience with our technologies (ii) Our ability to provide all systems, including drive train, battery and charger to OEM’s as a integrated electric vehicle solution (iii) Our ability to develop customized technologies and systems for local markets (iv) Our ability to continuously improve, innovate and incorporate new battery and drive train technologies to increase range and performance of resulting product platforms.

 

Our products include the following battery powered electric trucks and tractors: (i) the Nautilus XRE20, a heavy-duty electric yard tractor; (ii) the Nautilus MX30, a heavy-duty, Class 8 electric short-haul tractor; and (iii) the Mule M100, a heavy-duty, Class 8 electric inner city delivery truck. We also market and sell lithium battery cells and storage solutions under the brand name HIQAP™. We sell our trucks and tractors through a direct sales force and dealers, while our battery related products and accessories are marketed through our online store and retailers of energy storage products.

 

Critical Accounting Policies

 

Our financial statements have been prepared in accordance with Generally Accepted Accounting Principles. 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Material estimates relate to the recognition of contract revenues and estimated costs to complete contracts in process, and recoverability of reported amounts of long-lived assets. Actual results may differ from those estimates.

 

Revenues

 

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

 

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

 

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 account for stock option awards issued and vesting to employees in accordance with authorization guidance of the Financial Accounting Standards Board, or FASB, where the value of stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options to purchase shares of our common stock vest and expire according to the terms established at the grant date.

 

We account for stock options and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

 

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

 

We estimate the fair value of shares of common stock issued for services based on the closing price of our common stock on the date shares are granted.

 

Derivative Financial Instruments

 

We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, we used the Monte Carlo option pricing models to value the derivative instruments at inception and on subsequent valuation dates through June 30, 2012. We used the probability weighted average Black-Scholes-Merton models to value the derivative instruments for valuation dates after June 30, 2012. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.  Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

 

 

Impairment of Long-Lived Assets

 

The FASB, has established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured. Guidance of the FASB also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. We periodically review, at least annually, such assets for possible impairment and expected losses. If any losses are determined to exist they are recorded in the period when such impairment is determined. Based upon management’s assessment, there were no indicators of impairment of our long lived assets at December 31, 2012 or December 31, 2013.

 

Income Taxes

 

We recognize income taxes for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.

 

Financial Condition and Results of Operations

 

Our total revenues decreased by $472,790, or 23%, to $1,627,737 for the year ended December 31, 2013 as compared to $2,100,526 for the year ended December 31, 2012. The decrease in revenues was a result of lower sales of electric yard tractors when compared to the prior year. Gross profit during 2013 was $117,883, which represents an increase of $1,484,452, or 109%, as compared to 2012. There was no write-down of non recoverable inventories for 2013 as compared to 2012, which included the markdown of $996,214 of non-recoverable inventories. We reported a net loss of $2,730,467 for 2013 as compared to a net loss of $6,046,611 for 2012, a decrease of $3,416,144. Losses from operations as a percentage of sales during 2013 were 110%, as compared to losses from operations as a percentage of sales of 206% during 2012. The decreases in losses from operation during 2013 are attributable to decreases in general and administrative expenses of $697,635 as well as a decrease in research and development costs of $163,429. A $229,320 loss on the change in the fair value of the derivative liability was realized during 2013 as compared to a $795,091 gain on the change in the fair value of the derivative liability was realized during 2012. The decrease of $1,141,391 in interest expense during 2013 was partly due to the decrease in amortization of the beneficial conversion feature interest cost incurred on our convertible notes and warrants.

 

Our product mix during 2013 changed from our product mix during 2012. We attribute this change to our increased focus on battery and energy storage system sales. Sales of our battery and energy storage systems accounts for 87% of our total sales during 2013 as compared to 32% of total sales during 2012. Sales of our controllers and electric drive systems accounted for 6% of our total sales during 2013 as compared to 21% of total sales 2012. Sales of battery systems and chargers accounted for 6% of our total sales during 2013 as compared to 15% in 2012. During 2013, our sales of vehicles and parts accounted for 1% of our total sales, while during 2012, our sales of vehicles and parts accounted for 31% of total sales.

 

As of December 31, 2013, we had a working capital deficit of $11,187,056, an accumulated deficit of $31,172,183 and reported a net loss for the year ended December 31, 2013 of $2,730,467. Our plans for correcting these deficiencies include the future sales of our products and technologies and the raising of capital, which we expect will help provide us with the liquidity necessary to meet operating expenses. Over the longer-term, we plan to achieve profitability through the sale of our drive systems, electric vehicles, lithium batteries and energy storage systems.

 

As of April 15, 2014, we had a backlog of $2,654,865. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report, 62% of our backlog consists of vehicles, 19% consists of batteries, 10% consists of controllers, 8% consists of a drive system, and the remaining 1% consists of chargers and accessories. As of the date of this report, 88% of our backlog consists of U.S. customers, while 12% of our backlog consists of international customers. Our backlog reflects a $925,000 AQMD agreement awarded to us in January 2014.

 

We anticipate that our future sales will be more diversified than in previous years. We believe future sales will reflect our focus on energy storage systems and drive systems to OEMs. We believe our strategic relationships with OEMs in Europe and Asia will result in additional sales for our electric drive systems.

 

The tables presented below, which compare our results of operations for 2013 and 2012, presents 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” shows 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.

		Year Ended December 31,								Dollar Variance				Percentage Variance				Results as a Percentage of Net Revenues for the Years Ended December 31,
		2013				2012				Favorable (Unfavorable)				Favorable (Unfavorable)				2013				2012
Net revenues		$	1,627,737			$	2,100,526			$	(472,790	)			(23%	)			100%				100%
Cost of revenues			1,509,854				2,470,881				961,027				39%				93%				118%
Write down of inventory			–				996,214				996,214				100%				0%				47%
Gross profit (loss)			117,883				(1,366,569	)			1,484,452				109%				7%				(65%	)
General & administrative expenses			1,799,712				2,497,347				697,635				28%				111%				119%
Research & development			95,363				258,792				163,429				63%				6%				12%
Depreciation & amortization			14,367				29,706				15,339				52%				1%				1%
Financing costs			–				(671,809	)			671,809				100%				0%				(32%	)
Change in derivative liability			(229,320	)			795,091				(1,024,411	)			(129%	)			14%				38%
Impairment Loss			–				166,500				166,500				100%				0%				8%
Interest expense			709,588				1,850,979				1,141,391				61%				44%				88%
Net Loss		$	(2,730,467	)		$	(6,046,611	)		$	3,316,144				55%				(168%	)			(288%	)

 

Net Revenues. Our net revenues in 2013 decreased by $472,790, or 23%, to $1,627,737 as compared to $2,100,526 for 2012. The decrease in net revenues was mainly attributable to slowdown in vehicle sales caused due to lack of federal government incentives and lack of working capital to promote new products related to energy storage systems.

 

Write-down of non-recoverable inventories. There was no write-down of non-recoverable inventories in 2013. The write-down of non-recoverable inventories of $996,214 in 2012 is attributable to the write-down charges of $257,214 attributable to inventory and $739,000 attributable to the equipment inventory held for lease by customer under an agreement with T&K Logistics. During the fourth quarter of 2012, we determined these assets were non-recoverable and recorded the corresponding write-down of non-recoverable inventories.

 

Gross Profit. Gross profit during 2013 was $117,183, up $1,484,452, or 109%, from 2012. Our gross profit was mainly attributable to no write-down of non recoverable inventories being recorded in 2013 as compared to the write-down of $996,214 of non-recoverable inventories recorded in 2012.

 

General & Administrative Expenses. General and administrative expenses decreased by $697,635, or 28%, in 2013 as compared to 2012. In 2013, the slowdown in domestic sales required us to restructure our organization to reduce these expenses. This decrease is attributable to a $93,285 decrease in legal expenses, a $238,782 decrease in unapplied overhead, a decrease of $39,831 in consulting fees and a $325,737 net decrease in other general and administrative expenses.

 

Our general and administrative expenses are expected to be lower as a percentage of net revenues as we increase our net revenues. We expect that our continued restructuring of our general and administrative expenses combined with diversified growth of electric vehicles and energy storage systems, is expected to reduce our general and administrative costs as a percentage of net revenues.

 

Research & Development Expenses. Our research and development expenses for 2013 and 2012 were $95,363 and $258,792, respectively. The decrease in research and development expenses of $163,429 in 2013 is primarily attributable to a decrease of $160,992 in salaries for personnel in our research and development department.

 

Depreciation and Amortization. During 2013 our depreciation and amortization expenses decreased by $15,339, which is largely due to reduced expenditure in the purchase of new equipment, computer and software.

 

Private Placement Costs. During 2013, we did not incur any private placement costs as compared to the $671,809 costs incurred relating to the issuance of certain of our convertible notes and warrants.

 

Change in derivative liability. At December 31, 2013, the fair value of our derivatives increased by $229,320 resulting in a loss on the change in fair value of the derivative liability. This change in derivative liability is a non-cash benefit reported on the statements of operations. At December 31, 2012, the fair value of our derivatives decreased by $795,091 resulting in a gain on the change in fair value of the derivative liability. During 2012, we incurred non-cash costs of $966,279 relating to a derivative liability created upon issuance of certain of our convertible notes and warrants.

 

Impairment Loss. No impairment loss was recorded in 2013. During the year ended December 31, 2012, we incurred an impairment loss of goodwill of $166,500.

 

Interest Expenses. The decrease of $1,141,391 in interest expense during 2013 was partly due to the decrease in amortization of the beneficial conversion feature interest cost incurred on our convertible notes and warrants.

 

Liquidity and Capital Resources

 

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs in the very near-term. We believe that we have sufficient working capital to continue operations until August 31, 2014, at the latest unless we successfully restructure our debt, experience a significant improvement in sales and obtain other sources of liquidity. We are in default on $3,361,500 in principal amount of our convertible notes and in default on $770,003 of accrued interest on these notes. We are also delinquent on $351,191 of payroll taxes. Although we are actively pursuing a number of alternatives, including seeking to restructure our debt and seeking to raise additional debt or equity financing, or both, there can be no assurance that we will be successful. If we cannot restructure our debt and obtain sufficient liquidity in the very near term, we may need to seek to protection under the U.S. Bankruptcy Code. See “Risk Factors.”

 

For the year ended December 31, 2013, we recorded a net loss of $2,730,467. During 2013, we funded our operations from cash provided from operations, and use of proceeds from sale of batteries consigned to us by SOL, a related party, and an increase of $319,611 in customer advances to fund working capital needs. As of December 31, 2013, we had a working capital deficiency of $11,187,056 as compared to a working capital deficiency of $8,813,025 at December 31, 2012. At December 31, 2013 and 2012 we had an accumulated deficit of $31,172,183 and $28,441,716, respectively, and cash and cash equivalents of $21,573 and $33,869, respectively.

 

During 2009, under the terms of the City of Los Angeles Agreement, we requested and were issued an advance payment in the amount of $1,159,601 from the City of Los Angeles. During June 2012, we billed $630,000 to the City of Los Angeles to upgrade six of the electric trucks previously delivered to from lead acid batteries to lithium ion batteries. This billed amount was applied as a reduction of the advance payment leaving an unpaid balance of $529,601 on this advance. Our agreement with City of Los Angeles has been terminated, to the extent that we do not receive additional purchases from City of Los Angeles for the remaining balance due, we may be required to return the unpaid balance to City of Los Angeles. We anticipate selling additional products and services during the next 12 months to reduce the unpaid balance

 

Our available capital resources at December 31, 2013 consisted primarily of approximately $21,573 in cash and cash equivalents. We expect that our future available capital resources will consist primarily of cash on hand, sale of consigned batteries, cash generated from operations, if any, and future debt and/or equity financings, if any.

 

Cash used in operating activities in 2013 was $12,296 compared to $93,778 in 2012. For 2013, cash used in operating activities included a net loss of $2,730,467, amortization of note discount of $280,654 and a reduction in the fair value of derivative liabilities of $229,320. Material changes in asset and liabilities at December 31, 2013 as compared to December 31, 2012 that affected these results include:

 

·

an increase in accounts receivable of $53,586;

·

an increase in inventory of $10,193;

·

a net increase in accounts payable and accrued expenses of $1,610,505 of which $1,060,548 was an increase in related party accounts payable and $228,053 was an increase in accrued salary to our CEO, Mr. Samra;

·

an increase of $319,611 in customer deposits.

 

Cash provided by financing activities totaled none for 2013 as compared to $94,984 for 2012.

 

On May 18, 2012, we entered into agreements with 3 accredited investors for a sale by us of an aggregate of $340,000 10% Secured Subordinated Convertible Promissory Notes (the “May 2012 Notes”) which are convertible into an aggregate of  850,000 shares of our common stock at a conversion price of $0.40 per share of common stock, subject to adjustment. The notes were due on March 31, 2013 and are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes).   The security agreement is subordinate to existing bank financing and the Debentures (as defined below) that currently have a principle balance due of $775,000 and the Amended Notes that currently have a balance due of $891,500.  Additionally, we issued three-year warrants to purchase an aggregate of 340,000 shares of our common stock at an exercise price of $0.40 per share, subject to adjustment.

 

As of December 31, 2011, Mr. Winston Chung, our Chairman of the Board, had advanced $500,000 to Balqon. The advance received were non-interest bearing, and with no other defined terms. As of December 31, 2011, Mr. Chung also held warrants to acquire 7,812,500 shares of our common stock at an exercise price of $0.64 per share. The warrants were vested and have a 5-year term or an expiration date on December 30, 2015. Effective March 31, 2012, we, Mr. Chung and SOL, a company related to the Chairman by common ownership, entered into an agreement whereby the exercise price of certain warrants held by SOL were reduced to $0.40 per share. Due to the modification of the exercise price, during the year ended December 31, 2012 we recognized a cost to induce conversion of $225,000 relating to the additional 468,750 shares that would be issued under the modified exercise price.

 

SOL then elected to exercise the warrants to acquire 1,250,000 shares of common stock at a price of $0.40 for which we issued 1,250,000 shares of our common stock to SOL. In consideration of the exercise of the warrants, Mr. Chung agreed to cancel the $500,000 owed to him. We recognized a cost of $446,809, which represents the incremental fair value of the warrants after modification and was reflected as financing cost.

 

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 8 employees on a full-time basis and expect to hire additional personnel pursuant to meet our current operational plan for 2014.

 

Although, we expect sale of consigned batteries and completion and delivery of the products in our backlog will provide us with additional liquidity and capital resources, we believe that we will need additional liquidity and capital resources through debt and/or equity financing to complete our entire existing and anticipated future product backlog. 

 

These factors, among others, raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm, in its report on our 2013 financial statements, has raised substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. We have been, and currently are, working towards 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 the 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.   In addition, our senior secured convertible debentures issued between July and December 2010 contains covenants that include restrictions on our ability to pay dividends on our common stock.

 

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 April 15, 2014, we had a backlog of $2,654,865. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report, 62% of our backlog consists of vehicles, 19% consists of batteries, 10% consists of controllers, 8% consists of a drive system, and the remaining 1% consists of chargers and accessories. As of the date of this report, 88% of our backlog consists of U.S. customers, while 12% of our backlog consists of international customers. We believe that the majority of our current backlog will be shipped within the next 12 months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog.

 

In 2012 and 2013 we made significant investments in developing new products with our OEM partners and diversifying our market strategy to participate in the lithium battery and energy storage system markets. We believe our strategy reduces our growth risk and provides us with additional flexibility during economic downturns and positions us for a more sustainable growth in the future. We rely on our OEM partners to market completed products in the regions assigned, with three of our four OEM partners completing prototypes during 2012 provides us with a better opportunity to sell additional electric drive systems during 2013. In domestic markets, we believe that increased restrictions on diesel trucks combined with government incentives for heavy-duty tractors may contribute to higher sales for our heavy-duty trucks and tractors. In the lithium battery market segment, we believe we have a significant cost advantage over our competitors. Although our competitors are substantially larger than us, we believe our low cost and technical support capabilities provide us an advantage in this growth market.

 

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.

 

Recent Accounting Pronouncements

 

·

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

 

·

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presented of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances and the amendments in this update are intended to eliminate that diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Early adoption is permitted. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

 

There are recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (“AICPA”), and the SEC, however these are not believed by management to have a material impact on our present or future 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

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our principal accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2013 that our disclosure controls and procedures were not effective at the reasonable assurance level due to material weakness described below.

 

In light of the material weaknesses described below, additional analyses and other procedures were performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with GAAP. These measures included expanded year-end closing procedures, the dedication of significant internal resources and reconciliations and management’s own internal reviews and efforts to remediate the material weaknesses in internal control over financial reporting described below. As a result of these measures, management concluded that our consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented in conformity with GAAP.

 

Management’s Report on Internal Control Over Financial Reporting

 

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

 

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

 

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

 

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

 

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

 

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

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013 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, 2013 our internal control over financial reporting were not effective and identified the following material weakness in our internal control over financial reporting as of December 31, 2013:

 

	(a)	We did not have qualified personnel to design and manage period-end financial reporting processes. Furthermore, we do not have a formalized and consistent finance and accounting policies and procedures and our Chief Financial Officer does not have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP.

The foregoing material weakness contributed to a delay in the filing of our and annual financial statements to the SEC. In addition, these material weaknesses could result in misstatements of our consolidated financial statement accounts and disclosures which would result in a material misstatement of future annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

 

As a result of these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2013, based on the criteria established in the Internal Control — Integrated Framework issued by the COSO.

 

Our annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting and management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.

 

Management's Further Remediation Initiatives and Interim Measures

 

In response to the identified material weaknesses, we have dedicated significant resources to improve our control environment. Management believes that actions taken beginning in December 2012, along with other improvements not yet fully implemented, will address the material weaknesses in the Company’s internal control over financial reporting noted above. Our management plans to continue to review and make changes to the overall design of its control environment, including the roles and responsibilities within the organization and reporting structure, as well as policies and procedures to improve the overall internal control over financial reporting. In particular, we have implemented, or plan to implement, the measures described below to remediate the material weakness described above.

 

 

·

We are implementing and/or enhancing a number of key accounting and finance-related policies and procedures, including with respect to our financial closing process, disbursements, treasury and stockholders’ equity. Furthermore, we are improving our existing internal control policies and implementing procedures to ensure that all required account balances are appropriately reconciled in a timely manner and that journal entries are properly prepared and approved.

 

We expect that these improvements and procedures will be substantially implemented by December 31, 2014 and we intend to continue to monitor the effectiveness of these actions and will make changes that management determines are appropriate.

 

Inherent Limitations on the Effectiveness of Controls

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

Item 9B.           Other Information.

 

Not Applicable

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

The names, ages and positions held by our directors and executive officers as of April 15, 2014 and their business experience are as follows:

 

Name	Age	Positions Held
Winston Chung	55	Chairman of the Board and Director
Balwinder Samra(1)	52	President, Chief Executive Officer, Chief Financial Officer, Vice Chairman of the Board and Director
Erik Rolland	52	Director
Henry Velasquez(1)	37	Vice President Engineering and Director

____________

(1)

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

 

Balwinder Samra was appointed as our President, Chief Executive Officer, and a director in connection with the consummation of the Merger Transaction and has served in such capacities since the Merger Transaction and has serves as Chief Financial Officer since August 2012, Mr. Samra served as Chairman of the Board from the consummation of the Merger Transaction until December 14, 2011 when Mr. Winston Chung was appointed as Chairman of the Board and Mr. Samra was appointed as Vice Chairman of the Board. 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’s experience as our President and Chief Executive Officer combined with over 20 years of previous experience in senior management positions at other companies within the electric vehicle industry gives him unique insights into our challenges, opportunities and operations. Mr. Samra’s extensive experience in the electric vehicle industry qualifies him to serve as a director of Balqon. Mr. Samra holds a B.S. degree in Chemistry from Punjab University, India.

 

Winston Chung was appointed as our Chairman of the Board and a director on December 14, 2011. Mr. Chung is the inventor of the lithium iron phosphate battery and the founder of WGE, a China based company engaged in the manufacturing and sales of energy storage solutions and lithium batteries. Mr. Chung also serves as Director and Chief Scientist for the People’s Republic of China’s National 863 Lithium Battery Research and Development Center.  In 1982, Mr. Chung invented the world’s first maintenance-free lead acid battery. In 1989, Mr. Chung invented the world’s first plastic lithium-ion rechargeable battery.  In 1995, he invented the waterborne adhesive lithium-ion rechargeable battery. In 2001, he applied the principles of human life, imitating bionics theory to successfully develop the world’s first rare-earth element lithium yttrium rechargeable battery.  In 2003, Mr. Chung developed the rare earth lithium sulfur rechargeable battery.  Mr. Chung remains committed to expanding clean energy research and product development.  Mr. Chung’s extensive experience in the clean energy industry and his expertise in developing and manufacturing clean energy products make him uniquely qualified to serve as a director and the Chairman of our Board of Directors.

 

Erik Rolland was appointed as a director on August 16, 2011.  Since July 1991, Dr. Rolland has been a Professor of Accounting and Information Systems at the University of California, Riverside.  Dr. Rolland holds a Ph.D. in Business Administration and a M.A. in Business Administration and a B.Sc. in Computer Science Engineering from the Ohio State University.  Dr. Rolland also holds a M. Sc. in Computer Science Engineering from The Norwegian Institute of Technology and a M.S. in Management and Economics from The Norwegian School of Economics and Business Administration.  Dr. Rolland has conducted over 20 years of research in transportation and logistical systems and brings over 25 years of international consulting and industry experience in this area to our Board of Directors.  Dr. Rolland also has experience and research in the international business and risk management areas.  Dr. Rolland’s extensive academic career together with his years of experience and research in the transportation and logistical systems makes him uniquely qualified to serve as a director.

 

Henry Velasquez was 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’s experience in vehicle design and his contacts with large automotive suppliers provides us with strategic insights into the global supply chain of automotive components. His extensive experience in engineering and manufacturing at various automotive and industrial companies qualifies him to serve as director of Balqon. Mr. Velasquez holds a B.S. degree in Mechanical Engineering from Loyola Marymount University, Los Angeles, California.

 

Term of Office and Family Relationships

 

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.

 

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 Forms 3 and 4 and amendments thereto furnished to us during the year ended December 31, 2013 and Forms 5 and amendments thereto furnished us with respect to the year ended December 31, 2013, and written representations that no Form 5 is required, no person that was a reporting person during the year ended December 31, 2013, failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2013 or prior fiscal years, except that (i) Mr. Balwinder Samra failed to timely file one Form 4 reporting one transaction for 50,000 shares used to pay Balqon Corporation debt to a consulting firm, (ii) Mr. Balwinder Samra failed to file two Form 4s, each reporting a single transaction, for 40,000 shares and 120,000 shares used to pay Balqon Corporation debt to a consulting firm, (iii) Seven One Limited failed to file one Form 4 reporting one transaction and (iv) none of our reporting persons has filed a Form 5 for the fiscal year ended December 31, 2013 and we have not received a written representation from any of our reporting persons 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 four. At each annual meeting of our 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. The term of our Class I director was set to expire at our 2010 annual meeting of stockholders, however, we did not hold an annual meeting of stockholders during 2012. As a result, Mr. Chung, our Class I director, will hold office until our next annual meeting, until his successors is elected or until his earlier death, resignation or removal. The term of our Class II director was set to expire at our 2011 annual meeting of stockholders, however, we did not hold an annual meeting of stockholders during 2012 or 2013. As a result, Mr. Velasquez, our Class II director will hold office until our next annual meeting of stockholders, until his successor is elected or until his earlier death, resignation or removal. Mr. Balwinder Samra and Dr. Erik Rolland are Class III directors whose terms were set to expire at our 2013 annual meeting of stockholders; however we did not hold an annual meeting of stockholders during 2012. As a result, Mr. Samra and Dr. Rolland will hold office until our next annual meeting of stockholders, until their respective successors are elected or until their earlier death, resignation or removal.

 

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.

 

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, or Codes of Ethics. 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. Our Codes of Ethics are available on our Internet website, located at http://www.balqon.com/about-us/corporate-governance /.

 

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

 

Annually, the board of directors, with the assistance of the Nominating and Corporate Governance Committee, makes a 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. None of our directors except for Dr. Erik Rolland is independent under these standards. Mr. Balwinder Samra and Henry Velasquez are our Chief Executive Officer and Vice President Engineering, respectively. SOL, of which Mr. Chung is President and Chief Executive Officer, is party to the Distribution Agreement under which we issued 1,375,000 shares of our common stock and a five-year warrant to purchase up to 1,500,000 shares of our common stock at an exercise price of $1.50 per in consideration of certain distribution rights granted to us by SOL.

 

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 240^th 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 board of directors did not hold any formal meetings during 2013. 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 2013.

 

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. Dr. Erik Rolland serves as an independent member on each of the committees of our board of directors.

 

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, Dr. Erik Rolland and Henry Velasquez. Mr. Velasquez serves as the Chairman of our Audit Committee. Our board of directors has determined that only Dr. Rolland is “independent” under our Corporate Governance Guidelines, and the NASDAQ Marketplace Rules and that only Dr. Rolland satisfies the other requirements under SEC rules regarding audit committee membership. Dr. Rolland qualifies as an “audit committee financial expert” under applicable SEC rules and regulations governing the composition of the Audit Committee, and satisfies the “financial sophistication” requirements of the NASDAQ Marketplace Rules.

 

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, Dr. Erik Rolland and Henry Velasquez. Mr. Balwinder Samra acts as Chairman of our Compensation Committee. Our board of directors has determined that other than for Dr. Erik Rolland, 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.

 

When considering the size and composition of our board during the evaluation of a potential candidate, our Nominating and Corporate Governance Committee examines, among other things, the following qualifications and skills of director candidates—their business or professional experience, their integrity and judgment, their records of public service, their ability to devote sufficient time to the affairs of the Company, the diversity of backgrounds and experience they will bring to our board and our needs. Our Nominating and Corporate Governance Committee also believes that all nominees should be individuals of substantial accomplishment with demonstrated leadership capabilities. Our Nominating and Corporate Governance Committee does not have a formal policy with regard to the consideration of diversity in identifying nominees for director.

 

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, Dr. Erik Rolland and Henry Velasquez. Mr. Balwinder Samra acts as chairman of our Nominating and Corporate Governance Committee. Our board of directors has determined that other than Dr. Erick Rolland 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.

 

Mr. Chung is paid $6,000 per year for serving on the board of directors and Mr. Rolland is paid $3,000 per quarter for serving on our 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 – 2013

 

The following table summarizes for the year ended December 31, 2013, the compensation awarded to or paid to, or earned by, Winston Chung and Dr. Erik Rolland, the members of our board of directors who are not named executive officers.

 

Name		Fees Earned or Paid in Cash ($)				Stock Awards ($)				All Other Compensation ($)				Total ($)
Winston Chung		$	6,000				–				–			$	6,000
Erik Rolland		$	12,000				–				–			$	12,000

 

Compensation of Executive Officers

 

Summary Compensation Table

 

The following table provides information concerning the compensation for the individual who served as our principal executive officer during the year ended December 31, 2013 and our two highest paid executive officers who were serving as an executive officer on December 31, 2013. These three individuals are collectively referred to in this report as the “named executive officers.”

 

Name and Principal Position		Year		Salary   ($)				Total   ($)
Balwinder Samra		2012			300,000	(1)			300,000
President and Chief Executive Officer		2013			300,000	(2)			300,000
Henry Velasquez		2012			175,000				175,000
Vice President Engineering and Director		2013			175,000				175,000

 

(1)

As of December 31, 2012, Mr. Samra was owed the entire $300,000 he earned in 2012 under the terms of his employment agreement. As of December 31, 2012, he was owed an aggregate of $576,414 in accrued salaries.

(2)

As of December 31, 2013, Mr. Samra was owed the entire $300,000 he earned in 2013 under the terms of his employment agreement. As of December 31, 2013, Mr. Samra was owed an aggregate of $804,467 in accrued salaries.

 

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. As discussed above, Mr. Samra is no longer our Chairman of the Board.

 

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 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.

 

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 18 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 18 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 18 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 18-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, or 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

 

(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.

 

Outstanding Equity Awards At Fiscal Year-End – 2013

 

None.

 

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

 

Principal Stockholder Table

 

The following table sets forth information with respect to the beneficial ownership of our voting stock as of April 15, 2014, 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; 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 36,891,530 shares of common stock outstanding as of the date of the table.

 

The address of each of the following stockholders, unless otherwise indicated below, is c/o Balqon Corporation, 1420 240^th Street, Harbor City, California 90710. The address for SOL and Winston Chung is One East Broward Blvd., Suite 1400, Fort Lauderdale, FL 33301. Messrs. Samra, and Velasquez are executive officers of Balqon Corporation. Messrs. Samra, Velasquez, Rolland and Chung are directors of Balqon Corporation. Mr. Gruenwald is a named executive officer for purposes of this report; however, Mr. Gruenwald ceased being a named executive officer on March 11, 2013.

 

 

Name of Beneficial Owner		Title of Class		Amount and Nature of Beneficial Ownership				Percent of Class
Balwinder Samra		Common			15,174,030			41.3%
Henry Velasquez		Common			333,340			*
Robert Gruenwald		Common			228,400			*
Seven One Limited and Winston Chung		Common			18,500,000	(1)		41.2%
Erik Rolland		Common			25,000			*
All directors and executive officers as a group (5 persons)		Common			34,007,370	(2)		75.7%

_______________

*

Less than 1%.

 

(1)

Includes 8,062,500 shares of common stock underlying warrants. These securities are held by SOL. Winston Chung, Chairman of our Board of Directors, has the power to vote and dispose of the securities held by SOL, as its Chairman of Board of Directors.

(2)

Includes 8,062,500 shares of common stock underlying warrants.

 

Equity Compensation Plan Information - 2013

 

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2013.

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)		(b)		(c)
Equity compensation plans approved by security holders		__		__		__
Equity compensation plans not approved by security holders		__		__		7,475,000(1)
Total		__		__		7,475,000

_______________

(1)

Represents shares of common stock available for issuance under our 2008 Plan. The material features of our 2008 Plan are described immediately below.

 

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 and approved by our stockholders on October 23, 2009. As April 14, 2014, no options to purchase 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.

 

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 Pink Marketplace 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.

 

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.

 

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.

 

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 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.

 

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.

 

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.

 

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. 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.

 

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.

 

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.

 

Accounting Treatment

 

Pursuant to GAAP, 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.

 

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

 

Director Independence

 

The Board of directors, with the assistance of the Nominating and Corporate Governance Committee, makes a 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 other than for Dr. Erik Rolland, none of our directors are independent under these standards. Mr. Balwinder Samra and Henry Velasquez are our Chief Executive Officer and Vice President Engineering, respectively. SOL, of which Mr. Chung is President and Chief Executive Officer, is party to the Distribution Agreement under which we issued 1,375,000 shares of our common stock and a five-year warrant to purchase up to 1,500,000 shares of our common stock at an exercise price of $1.50 per share on December 14, 2010 in consideration of certain distribution rights granted to us by SOL.

 

Policy Regarding Related Party Transactions

 

We recognize that related party transactions present a heightened risk of conflicts of interest and 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 reviews 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.

 

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 11, 2013, we mutually agreed with Mr. Gruenwald to terminate his employment agreement and we entered into a one-year independent contractor agreement under which Mr. Gruenwald has agreed to provide services as a consultant to us. As part of the termination of his employment agreement, we agreed to pay him severance in the amount of $400,000 by transferring ownership of 200 used lithium batteries, with an estimated value of $176,000. In addition, we agreed to the payment of unpaid expenses and salary increases due under the employment agreement, totaling $41,060, in monthly installments of $2,000 per month.

 

Indemnification Agreements

 

On October 24, 2008, we entered into an indemnification agreement with each of Mr. Amarpal Samra, our former director, and each of our current executive officers other than Mr. Gruenwald. We entered into an indemnification agreement with Mr. Gruenwald on March 27, 2009. We entered into an indemnification agreement with Mr. Chung on December 14, 2010. We entered into an indemnification agreement with Dr. Rolland on August 16, 2011. The indemnification agreements and our Articles of Incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by Nevada law.

 

Transactions with Seven One Limited and Winston Chung

 

On December 14, 2010, we issued 7,812,500 shares of our common stock and a five-year warrant to purchase up to 7,812,500 shares of our common stock at an exercise price of $0.64 per share to SOL, for an aggregate purchase price of $5,000,000 in a private offering. As a result, SOL became the beneficial owner of more than 5% of our common stock. In connection with this transaction, Winston Chung was appointed as a member of our Board of Directors and Chairman of our Board of Directors. Mr. Chung is the chief executive officer of SOL.

 

On December 14, 2010, we also entered into the Distribution Agreement with SOL. Under the Distribution Agreement, as amended to date, we have been appointed as the exclusive authorized distributor for the promotion, marketing and sale of lithium iron phosphate batteries and high voltage charging systems manufactured by Seven One Battery Company in the United States. In consideration of our appointment as the exclusive distributor under the Distribution Agreement, we issued to SOL 1,375,000 shares of our common stock and a five-year warrant to purchase up to 1,500,000 shares of our common stock at an exercise price of $1.50 per share. In January 2011, based on the terms of the Distribution Agreement, we received 3564 battery units valued at $2,629,800 on a consignment basis. During the year ended December 31, 2013, we sold 973 units of these batteries with a cost of $750,700. As of April 15, 2014, we held the remaining 326 units valued at $326,000 on a consignment basis.

 

During the year ended December 31, 2012, we purchased $1,781,770 of products from Winston Battery and SOL. During the year ended December 31, 2013, we purchased $1,072,600 of products from Winston Battery and SOL. As of December 31, 2013, we had accounts payable of $2,700,250 to these related parties.  

 

On October 2, 2011, Mr. Winston Chung made an advance of $500,000 to us.  The amounts due was unsecured and non-interest bearing.  Effective March 31, 2012, Mr. Chung exercised 1,250,000 of warrants held by SOL. Mr. Chung agreed to apply the $500,000 owed to Mr. Chung in connection with the advance against the exercise price.  In consideration of converting the $500,000 unsecured loan owed by us to Mr. Chung into shares of our common stock, we agreed to reduce the exercise price of the warrants being exercised from $0.64 to $0.40.  In connection with the conversion of the unsecured loan, we also agreed to cancel the remaining 6,562,500 warrants held by SOL at an exercise price of $0.64 and issue 6,562,500 new warrants at an exercise price of $0.40.  The newly issued warrants will expire on the original expiration date of December 14, 2015.

 

Balwinder Samra

 

Mr. Balwinder Samra, our Chief Executive Officer, has made advances of $5,018 to us in prior years.  The amounts due to Mr. Samra are unsecured, non-interest bearing, and do not have defined terms of repayment.

 

As of December 31, 2013, Mr. Samra was owed the entire $300,000 he earned in 2013 under the terms of his employment agreement. As of December 31, 2013, Mr. Samra was owed an aggregate of $804,467 in accrued salaries.

 

In 2013 and 2012, Mr. Samra transferred an aggregate of 235,880 and 210,000 shares, respectively, of our common stock owned by him to certain service providers in consideration for consulting services provided to us.

 

In 2013, Mr. Samra transferred an aggregate of 1,500,000 shares of individually owned stock to extend the foreclosure date by six months between Lego battery and the Company. The Company recorded the fair value of these shares of $300,000 as a cost and as contribution to capital.

 

 

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 years ended December 31, 2013 and 2012, respectively. We appointed Weinberg as our independent registered public accounting firm on October 24, 2008.

 

		2013				2012
Audit Fees		$	78,620			$	96,373
Audit-Related Fees			–				7,230
Tax Fees			–				–
All Other Fees			–				–
Total		$	78,620			$	103,603

 

Audit Fees. Consist of amounts billed for professional services rendered for the audit of our annual consolidated financial statements included in our Annual Reports on Form 10-K, and reviews of our interim consolidated financial statements included in our Quarterly Reports on Form 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 2013, all services performed by Weinberg were pre-approved by our Audit Committee in accordance with these policies and applicable SEC regulations.

 

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		Description
2.1		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 MotorSports, LLC and Balqon California (7)(%)(###)
3.1		Articles of Incorporation of the Registrant (3)
3.2		Bylaws of the Registrant (3)
3.3		Certificate of Change (17)
3.4		Articles of Merger (18)
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)
10.1		Balqon Corporation 2008 Stock Incentive Plan (11)(#)
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)(#)

 

 

Exhibit Number

Description

 

10.7		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 (8)(##)
10.11		Employment Agreement, dated October 24, 2008, by and between Robert Gruenwald and the Registrant (7)(#)
10.23		Form of 10% Unsecured Subordinated Convertible Promissory Notes issued to certain security holders in the aggregate principal amount of $1,000,000 (7)
10.24		Form of Warrants issued by the Registrant to certain security holders to purchase an aggregate of 1,000,000 shares of common stock (7)
10.25		Form of 10% Unsecured Subordinated Convertible Promissory Notes issued to certain security holders in the aggregate principal amount of $1,500,000 (13)
10.28		Form of 10% Senior Secured Subordinated Convertible Debenture issued by the Registrant to certain security holders in the aggregate principal amount of $850,000 (15)
10.29		Form of Warrants to purchase an aggregate of 850,000 shares of common stock (subject to adjustment) issued by the Registrant to certain security holders (15)
10.30		Form of Common Stock Placement Warrants to purchase 68,000 shares of common stock issued by the Registrant (15)
10.31		Security Agreement, dated July 29, 2010, between the Registrant, the holders of the Registrant’s 10% Senior Secured Subordinated Convertible Debenture and CitizensTrust, as collateral agent (15)
10.32		Securities Purchase Agreement, dated December 14, 2010, by and between Balqon Corporation and Seven One Limited (16)(###)
10.33		Distribution Agreement, dated December 14, 2010, by and between Balqon Corporation and Seven One Limited  (16)(###)
10.34		Amendment No. 1 to Distribution Agreement, dated April 13, 2011, by and between Balqon Corporation and Seven One Limited (18)
10.35		Form of Warrant issued by Balqon Corporation on December 14, 2010 to Seven One Limited (16)
10.36		Form of Distribution Warrant issued by Balqon Corporation on December 14, 2010 to Seven One Limited (16)
10.37		Registration Rights Agreement, dated December 14, 2010, by and between Balqon Corporation and Seven One Limited (16)
10.38		Amendment No. 1 to Registration Rights Agreement, dated April 13, 2011, between Balqon Corporation and Seven One Limited (18)
10.39		Form of Warrants issued by the Registrant to certain security holders to purchase an aggregate of 50,000 shares of common stock in consideration of investor relations services (18)

 

 

 

Exhibit Number

Description

 

10.41		First Amendment to Lease 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 February 3, 2011 (18)
10.42		Amendment No. 2 to Registration Rights Agreement, dated effective June 30, 2011, between Balqon Corporation and Seven One Limited (19)
10.43		Form of Amendment and Exchange Agreements dated effective March 31, 2012 (20)
10.44		Form of 10% Secured Subordinated Convertible Promissory Notes issued on April 30, 2012 (20)
10.45		Form of Warrants to Purchase Common Stock issued on April 30, 2012 (20)
10.46		Security Agreement, dated April 30, 2012, by and between the Registrant and Michaels Law Group, as Collateral Agent (20)
10.47		Form of 10% Secured Subordinated Convertible Promissory Notes issued on May 18, 2012 (20)
10.48		Form of Warrants to Purchase Common Stock issued on May 18, 2012 (20)
10.49		Security Agreement, dated May 18, 2012, by and between the Registrant and Matt Goldman, as Collateral Agent (20)
14.1		Code of Ethics (4)
14.2		Code of Ethics for Chief Executive Officer and Senior Financial Officers(4)
23.1		Consent of Independent Registered Public Accounting Firm (*)
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, a 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 (*)
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document

_________________

(*)

Filed herewith.

(%)

The schedules to the agreement have not been filed.

(#)

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 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.

(1)

Filed as an exhibit to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2008.

(2)

Filed as an exhibit to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission 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)

Intentionally omitted.

(6)

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

(7)

Filed as an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009.

(8)

Filed as an exhibit to the Registrant’s Amendment No. 1 to Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 22, 2009.

(9)

Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2009.

(10)

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

(11)

Filed as Annex A to the Registrant’s definitive Proxy Statement filed with the Securities and Exchange Commission on October 9, 2009.

(12)

Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2009.

(13)

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

(15)

Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 16, 2010.

(16)

Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 17, 2010.

(17)

Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2008.

(18)

Filed as an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2011.

	(19)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on July 29, 2011.
	(20)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 20, 2012.

 

 

 

BALQON CORPORATION

INDEX TO FINANCIAL STATEMENTS

 

 

	Page
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets as of December 31, 2013 and 2012	F-3
Statements of Operations for the Years Ended December 31, 2013 and 2012	F-4
Statement of Shareholders’ Deficiency for the Years Ended December 31, 2013 and 2012	F-5
Statements of Cash Flows for the Years Ended December 31, 2013 and 2012	F-6
Notes to Financial Statements for the Years Ended December 31, 2013 and 2012	F-8

 

 

 

 

 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Stockholders of

Balqon Corporation

Harbor City, California

 

We have audited the accompanying balance sheets of Balqon Corporation (the “Company”) as of December 31, 2013 and 2012, and the related statements of operations, shareholders’ deficiency and cash flows for the years then ended. 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 the 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, 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, 2013 and 2012, 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 that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a shareholders’ deficiency and has experienced recurring operating losses and negative operating cash flows since inception. In addition, the Company is in default of its convertible note agreements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that might result from the outcome of this uncertainty.

 

 

/s/ Weinberg & Company, P.A.

 

 

Los Angeles, California

April 15, 2014

 

 

 

BALQON CORPORATION
BALANCE SHEETS

 

		December 31, 2013				December 31, 2012
ASSETS
Current assets
Cash and cash equivalents		$	21,573			$	33,869
Accounts receivable, trade, net of allowance for doubtful accounts of $199,300 and $199,300 respectively			74,825				21,239
Inventories			276,202				266,009
Prepaid expenses			110,763				52,615
Total current assets			483,363				373,732
Property and equipment, net			19,747				29,223
Other assets:
Deposits			14,400				14,400
Total assets		$	517,510			$	417,355
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities
Accounts payable and accrued expenses		$	2,207,731			$	1,885,826
Accounts payable to related parties			2,700,250				1,639,702
Customer deposits			1,163,470				843,860
Payroll taxes payable			351,191				307,619
Accrued expenses to officer			804,467				576,414
Advances from shareholders			5,018				5,018
Derivative liability			1,076,792				847,472
Convertible notes, net of discount – in default			3,361,500				3,080,846
Total current liabilities			11,670,419				9,186,757
SHAREHOLDERS’ DEFICIENCY
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,891,530 shares issued and outstanding as of December 31, 2013 and 2012, respectively			36,891				36,891
Additional paid in capital			19,982,383				19,635,423
Accumulated deficit			(31,172,183	)			(28,441,716	)
Total shareholders’ deficiency			(11,152,909	)			(8,769,402	)
Total liabilities and shareholders’ deficiency		$	517,510			$	417,355

 

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

 

BALQON CORPORATION
STATEMENTS OF OPERATIONS

 

		Years Ended December 31,
		2013				2012
REVENUES			1,627,737				2,100,526
COST OF REVENUES (including $1,193,992 and $1,675,504 paid to a related entity)			1,509,854				2,470,881
WRITE DOWN OF INVENTORY			–				996,214
GROSS PROFIT (LOSS)			117,883				(1,366,569	)
OPERATING EXPENSES
General and administrative			1,799,712				2,497,347
Research and development			95,363				258,792
Depreciation and amortization			14,367				29,706
Impairment loss on goodwill			–				166,500
Total operating expenses			1,909,442				2,952,345
LOSS FROM OPERATIONS			(1,791,559	)			(4,318,914	)
Financing costs to related entity			–				(671,809	)
Change in fair value of derivative liabilities			(229,320	)			795,091
Interest expense			(709,588	)			(1,850,979	)
NET LOSS		$	(2,730,467	)		$	(6,046,611	)
Net loss per share – basic and diluted		$	(0.07	)		$	(0.17	)
Weighted average shares outstanding, basic and diluted			36,891,530				36,580,558

 

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

 

BALQON CORPORATION
STATEMENTS OF SHAREHOLDERS’ DEFICIENCY

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

  

 

		Common Stock, $0.001 Par Value								Additional Paid in				Accumulated
		Number				Amount				Capital				Deficit				Total
Balances, January 1, 2012			35,641,530			$	35,641			$	18,283,624			$	(22,395,105	)		$	(4,075,840	)
Cost to induce exercise of warrants by related party			–				–				671,809				–				671,809
Fair value of warrants issued with convertible notes			–				–				109,140				–				109,140
Common stock issued upon conversion of shareholder loan			1,250,000				1,250				498,750				–				500,000
Fair value of common stock transferred by shareholder to settle company debts			–				–				72,100				–				72,100
Net loss			–				–				–				(6,046,611	)			(6,046,611	)
Balances, December 31, 2012			36,891,530				36,891				19,635,423				(28,441,716	)			(8,769,402	)
Fair value of common stock transferred by shareholder to settle company debts			–				–				346,960				–				346,960
Net loss			–				–				–				(2,730,467	)			(2,730,467	)
Balances, December 31, 2013			36,891,530			$	36,891			$	19,982,383			$	(31,172,183	)		$	(11,152,909	)

 

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

 

BALQON CORPORATION
STATEMENTS OF CASH FLOWS

 

		Years Ended December 31,
		2013				2012
Cash flows from operating activities:
Net loss		$	(2,730,467	)		$	(6,046,611	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			9,476				29,706
Fair value of warrants issued upon conversion of common stock			–				671,809
Fair value of common stock transferred by shareholder to settle company debts			346,960				72,100
Change in fair value of derivative liability			229,320				(795,091	)
Write down of non-recoverable inventory			–				996,214
Loss on goodwill impairment			–				166,500
Amortization of note discount			280,654				1,519,605
Changes in operating assets and liabilities:
Accounts receivable			(53,586	)			788,089
Inventories			(10,193	)			542,372
Prepaid expenses			(58,148	)			2,395
Accounts payable and accrued expenses			1,610,506				2,225,043
Payroll taxes payable			43,572				307,619
Customer advances			319,610				(573,528	)
Net cash used in operating activities			(12,296	)			(93,778	)
Cash flows from investing activities:
Acquisition of furniture, equipment and software			–				–
Net cash used in investing activities			–				–
Cash flows from financing activities:
Bank overdraft			–				(11,785	)
Net repayment of bank loan			–				(233,231	)
Proceeds from issuance of convertible notes, net			–				340,000
Net cash provided by financing activities			–				94,984
Increase (decrease) in cash and cash equivalents			(12,296	)			1,206
Cash and cash equivalents, beginning of year			33,869				32,663
Cash and cash equivalents, end of year		$	21,573			$	33,869
Supplemental cash flow information:
Interest Paid		$	–			$	–
Income taxes Paid		$	–			$	–

 

		2013				2012
Supplemental non cash financing and investing activities:
Fair value of derivative liability related to beneficial conversion feature and warrants issued in connection with exchange of unsecured convertible notes	$		–			$	829,429
Fair value of derivative liability related to beneficial conversion feature in connection with secured convertible notes	$		–			$	136,850
Conversion of shareholder loan to common stock	$		–			$	500,000
Fair value of warrants issued with convertible notes	$		–			$	109,140

 

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

BALQON CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

 

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

The Company

 

Balqon Corporation, a California corporation (“Balqon California”), was incorporated on April 21, 2005 and commenced business operations in 2006. On October 24, 2008, Balqon California completed a merger with BMR Solutions, Inc., a Nevada corporation (“BMR”), with BMR being the survivor of the merger. Upon the closing, BMR changed its name to Balqon Corporation (the “Company”). The Company develops and manufactures complete drive systems and battery systems for electric vehicles, industrial equipment and renewable energy storage devices. The Company also designs and assembles electric powered yard tractors, short haul drayage tractors and inner city Class 7 and 8 delivery trucks utilizing its proprietary drive system technologies.

 

Going Concern

 

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2013, the Company recorded a net loss of $2,730,467 and utilized cash in operations of $12,296. As of December 31, 2013, the Company had a working capital deficit of $11,187,056 and a shareholders’ deficiency of $11,152,909. In addition, the Company has not paid $351,191 in payroll taxes and is delinquent in payment of $3,361,500 in principal of its convertible notes and $770,003 of interest due on convertible notes payable. Pursuant to the terms of the notes, the non-payment of principal and interest by the Company constitutes an event of default and, as a result, the holders of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice to the Company and thereby requiring that the Company immediately pay all principal and accrued and unpaid interest. If the holders of the notes were to declare the notes due and payable, the Company presently does not have the ability to pay these notes. In addition, as of December 31, 2013, $2,006,500 of the notes are secured under the terms of a security agreement granting the holders of the notes a security interest in all of the Company’s assets (including all intellectual property assets of the Company) subject to the interests of the holders of senior indebtedness (as that term is defined in the notes).

 

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and to ultimately achieve sustainable revenues and profitable operations. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

The Company does not currently have sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs in the very near-term. The Company believes that it has sufficient working capital to continue operations only until approximately August 15, 2014 at the latest unless it successfully restructures its debt, experiences a significant improvement in sales and obtains other sources of liquidity. In addition, although various secured creditors holding approximately $2,006,500 in secured convertible notes and secured debentures have not exercised their rights to foreclose on all of the Company’s assets (including its intellectual property assets), no assurance can be given that these holders of secured debt will not exercise their remedies under the Company’s outstanding secured notes and secured debentures.

 

 

 

The Company has been, and currently is, working towards identifying and obtaining new sources of financing. No assurances can be given that the Company will be successful in obtaining additional financing in the future. Any future financing that the Company may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company’s flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and cash flows. In addition, the Company’s senior secured convertible debentures issued between July and December 2010 contain covenants that include restrictions on the Company’s ability to pay dividends on its common stock.

 

If adequate funds are not available, the Company may be required to delay, scale back or eliminate portions of its operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its 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 the Company’s proprietary technology and other important assets and could also adversely affect its ability to fund the Company’s continued operations and its product and service development efforts. Although the Company is actively pursuing a number of alternatives, including seeking to restructure its debt and seeking to raise additional debt or equity financing, or both, there can be no assurance that the Company will be successful. If the Company cannot restructure its debt and obtain sufficient liquidity in the very near term, the Company may need to seek to protection under the U.S. Bankruptcy Code.

 

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Material estimates relate to estimates of reserves for accounts receivable, inventory reserves, recoverability of reported amounts of long-lived assets and estimates for valuing equity instruments issued for financing or services. Actual results may differ from those estimates.

 

Revenues

 

Sales of Production Units, Parts and Batteries

 

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

 

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

 

Product Warranties

 

The Company provides limited warranties for parts and labor at no cost to its customers within a specified time period after the sale. The Company estimates the actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. As of December 31, 2013 and 2012, the Company had no warranty reserve nor did the Company incur warranty expenses during the years ended December 31, 2013 or 2012.

 

 

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

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

 

The Company uses the allowance method to account for uncollectible trade receivable balances. Under the allowance method, if needed, an estimate of uncollectible customer balances is made based upon specific account balances that are considered uncollectible. Factors used to establish an allowance include the credit quality and payment history of the customer. As of December 31, 2013 and December 31, 2012, management provided an allowance for doubtful accounts of $199,300 and $199,300 respectively.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories at December 31, 2013 and 2012 consist principally of raw materials. During the year ended December 31, 2012, the Company performed an assessment of its inventory and determined an impairment charge of $257,214 was necessary to reduce such inventories to their net realizable value. No such inventory impairment charge was required at December 31, 2013. Recorded inventories at December 31, 2013 and 2012 do not include approximately $326,000 and $1,076,700 of batteries and other items held on consignment from Seven One Battery Company, an affiliate of the Company’s Chairman of the Board. (See Note 10)

 

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized on the straight-line method over the following estimated useful lives:

 

Computer equipment and software	3 years
Furniture	3 years
Machinery	3-5 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

 

Management performs impairment tests of goodwill and indefinite-lived intangible assets whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. Also, management performs impairment testing of goodwill and indefinite-lived intangible assets at least annually.

 

 

 

Management tests goodwill for impairment at the reporting unit level. The Company has only one reporting unit. At the time of goodwill impairment testing, management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved with its reporting unit. If the calculated fair value is less than the current carrying value, impairment of the Company may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing in the absence of available domestic and international transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and Company-specific historical and projected data, develops growth rates and cash flow projections for the Company. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate fair value of all reporting units is reconciled to the total market capitalization of the Company. The discounted cash flow valuation methodology and calculations was used in the 2012 impairment testing.

 

During the year ended December 31, 2012, the Company determined that the value of its intangible asset recorded in connection with the acquisition of substantially all of the assets of EMS was impaired. Accordingly, the Company recorded an impairment loss of $166,500 that represented the recorded value of the goodwill from the EMS acquisition.

 

The Company reviews intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets. The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset using a discounted cash flow income approach as described above. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

 

Impairment of Long-Lived Assets

 

The Financial Accounting Standards Board (“FASB”) has established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured. The guidelines also provide a single accounting model for long-lived assets to be disposed of and significantly change 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 were no indicators of impairment of the Company’s long lived assets during the years ended December 31, 2013 and 2012.

 

 

 

Income Taxes

 

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.

 

Loss Per Share

 

Basic loss per share has been computed using the weighted average number of common shares outstanding and issuable during the period. Diluted loss per share is computed based on the weighted average number of common shares and all common equivalent shares outstanding during the period in which they are dilutive. Common stock equivalent shares consist of shares issuable upon the exercise of stock options, warrants or other convertible securities such as convertible notes.  For the years ended December 31, 2013 and 2012, common stock equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive.

 

The following table summarizes the weighted average shares and common stock equivalents outstanding as of December 31, 2013 and 2012:

 

		December 31, 2013				December 31, 2012
Weighted average shares outstanding			36,891,530				36,580,558
Common stock equivalents:
Options exercisable into common shares			–				–
Warrants exercisable into common shares			10,295,500				10,295,500
Notes payable convertible into common shares			6,814,583				6,814,583
Total, common stock equivalents			17,110,083				17,110,083

 

Stock-Based Compensation

 

The Company periodically issues stock instruments, including shares of its common stock, stock options, and warrants to purchase shares of its common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option awards issued and vesting to employees in accordance with authorization guidance of the FASB whereas the value of stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options to purchase shares of the Company’s common stock vest and expire according to the terms established at the grant date.

 

The Company accounts for stock options and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

 

Financial Assets and Liabilities Measured at Fair Value

 

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

 

 

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

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

Level 3

Unobservable inputs based on the Company’s assumptions.

 

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2013 and 2012.

 

December 31, 2013		Level 1				Level 2				Level 3				Total
Fair value of Derivative Liability		$	–			$	–			$	1,076,792			$	1,076,792

 

 

December 31, 2012		Level 1				Level 2				Level 3				Total
Fair value of Derivative Liability		$	–			$	–			$	847,472			$	847,472

 

 

Derivative Financial Instruments

 

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company used the Monte Carlo option pricing models to value the derivative instruments at inception and on subsequent valuation dates through June 30, 2012. The Company used the probability weighted average Black-Scholes-Merton models to value the derivative instruments for valuation dates after June 30, 2012. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Concentrations

 

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

 

The Company maintains cash balances at one bank. At times, the amount on deposit exceeds the federally insured limits. Management believes that the financial institution that holds the Company’s cash is financially sound and, accordingly, minimal credit risk exists. As of December 31, 2013 and December 31, 2012 the Company did not have any amount in excess of insured limits maintained at the bank.

 

For the year ended December 31, 2013, 21%, 15% and 14% of revenues were from three customers. For the year ended December 31, 2012, 30% of total revenues were from one customer. At December 31, 2013, a single customer represented 69% of total accounts receivable balances. Accounts receivable from a single customer represented 60% of total accounts receivable as of December 31, 2012.

 

For the year ended December 31, 2013, 79% of costs of revenue were to one vendor. At December 31, 2013, accounts payable to the vendor represented 61% of total accounts payable balances. The vendor is a related party. (See Note 10)

 

For the year ended December 31, 2012, 68% of costs of revenue were to one vendor. At December 31, 2012, accounts payable to the vendor represented 53% of total accounts payable balances. The vendor is a related party. (See Note 10)

 

 

 

Research and Development Costs

 

The Company accounts for research and development costs by expensing costs as they are incurred.

 

Recent Accounting Pronouncements

 

The Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carrforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

 

 

NOTE 2 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		December 31, 2013				December 31, 2012
Computer equipment and software		$	121,680			$	121,680
Office furniture			35,300				35,300
Equipment			35,941				35,941
Leasehold improvements			21,711				21,711
Total property and equipment, cost			214,632				214,632
Less: accumulated depreciation and amortization			(194,885	)			(185,409	)
Property and equipment, net		$	19,747			$	29,223

 

Depreciation expense for the years ended December 31, 2013 and 2012 was $9,476 and $29,706, respectively.

 

NOTE 3 – ADVANCES FROM SHAREHOLDERS

 

As of December 31, 2013 and December 31, 2012, $5,018 of advances from shareholders was advanced to the Company by its President, Mr. Balwinder Samra, and is payable to Mr. Samra. This amount due to Mr. Samra, a related party, is unsecured, non-interest bearing, and does not have defined terms of repayment.

 

As of December 31, 2011, Mr. Winston Chung, the Company’s Chairman of the Board, had advanced $500,000 to the Company. The advance was non-interest bearing, and with no other defined terms. As of December 31, 2011, Mr. Chung also held warrants to acquire 7,812,500 shares of the Company’s common stock at an exercise price of $0.64 per share. The Warrants were vested and have a 5-year term or an expiration date on December 30, 2015. Effective March 31, 2012, the Company, Mr. Chung and SOL, a company related to the Chairman by common ownership, entered into an agreement whereby the exercise price of certain warrants held by SOL were reduced to $0.40 per share. Due to the modification of the exercise price, during the year ended December 31, 2012 the Company recognized a cost to induce conversion of $225,000 relating to the additional 468,750 shares that would be issued under the modified exercise price.

 

SOL then elected to exercise the warrants to acquire 1,250,000 shares of common stock at a price of $0.40 for which the Company issued 1,250,000 shares of its common stock to SOL. In consideration of the exercise of the warrants Mr. Chung agreed to cancel the $500,000 owed to him. The Company recognized a cost of $446,809, which represents the incremental fair value of the warrants after modification and was reflected as financing cost.

 

 

NOTE 4– CONVERTIBLE NOTES PAYABLE – IN DEFAULT

 

Convertible notes payable, which are all in default, consist of the following as of December 31, 2013 and December 31, 2012:

 

		December 31, 2013				December 31, 2012
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (1)		$	891,500			$	891,500
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012 (2)			25,000				25,000
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012 (3)			1,330,000				1,330,000
Senior secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (4)			775,000				775,000
Secured Convertible Note Payable, Interest at 10% per annum payable quarterly, due March 31, 2013 (5)			340,000				340,000
Convertible notes payable			3,361,500				3,361,500
Less: note discount			–				(280,654	)
Convertible notes payable, net of note discount		$	3,361,500			$	3,080,846

 

(1) Between March 25, 2009 and June 19, 2009, the Company entered into agreements with 34 accredited investors for the sale by the Company of an aggregate of $1,000,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,000,000 shares of the Company’s common stock at a conversion price of $1.00 per share of common stock, subject to adjustment. The notes are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). Additionally, the Company issued three-year warrants to purchase an aggregate of 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The conversion price of the notes and the exercise price of the warrants are only subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. As of December 31, 2011, $916,500 in principal was outstanding under these notes.

 

During the three months ended March 31, 2012, the Company negotiated Amendment and Exchange Agreements with holders of $891,500 of its $916,500 of 10% unsecured notes payable that matured on March 31, 2012. The terms of the Amendment and Exchange Agreements provide that the maturity date of these notes (the “Amended Notes”) was extended until March 31, 2013, and are now currently in default. The Amended Notes continue to accrue interest at the rate of 10% and are subject to a security agreement. The Amendment and Exchange Agreements also provide that the Amended Notes are convertible into common stock of the Company at a price of $0.40 per share, subject to adjustment for a weighted average anti-dilution provision. In connection with the issuance of the Amended Notes, the Company issued three-year warrants to purchase up to 975,000 shares of common stock at an exercise price per share of $0.40.

 

 

 

As of December 31, 2013 and 2012, $891,500 was outstanding under these notes. The Amended Notes were due on March 31, 2013 (the “Maturity Date”) and are currently in default due to non-payment of the note by the Company. The Amended Notes are secured under the terms of a security agreement granting the holders of the Amended Notes a security interest in all of the Company’s personal property subject to the interests of the holders of Senior Indebtedness (as defined in the Amended Notes). The security interest granted is subordinate to the 10% Senior Secured Convertible Debentures that currently have a principal balance due of $775,000. (See item 4 below)

 

Each of the agreements governing the Amended Notes and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the Amended Notes or exercise price of the warrants issued with the Amended Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Amended Notes and the exercise price of the warrants are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the initial fair value of these warrants as derivative liabilities upon issuance. The Company determined the aggregate initial fair value of the warrants issued to investors to be $316,876 and the initial fair value of the embedded beneficial conversion feature of the Amended Notes to be $512,613 (an aggregate amount of $829,489). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. As such, the Company recorded an $829,489 valuation discount upon issuance of the notes and warrants. The Company is amortizing this valuation discount to interest expense over the life of the notes. During the year ended December 31, 2013 and 2012 the Company included in interest expense $207,357 and $622,132, respectively relating to the amortization of this discount. As of December 31, 2013 and 2012, the unamortized balance of the note discount was $0 and $207,357, respectively.

 

(2) A holder of $25,000 in principal of the Company’s 10% Unsecured Convertible Promissory Notes issued between March 25, 2009 and June 19, 2009 did not accept the Company’s offer under the Amendment and Exchange Agreements (see note 1 above) to exchange this note for an Amended Note that matures on March 31, 2013. As such, this 10% Unsecured Convertible Promissory Note matured on March 31, 2012 and is in default due to non-payment of the note by the Company.

 

(3) Between February 5, 2010 and April 12, 2010, the Company entered into agreements with seven accredited investors for the sale by the Company of an aggregate of $1,500,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,999,993 shares of the Company’s common stock at a conversion price of $0.50 per share of common stock, subject to adjustment. Additionally, the Company issued three-year warrants to purchase an aggregate of 1,999,993 shares of the Company’s common stock at an exercise price of $0.50 per share. In connection with the offering, the Company issued three year warrants to purchase 15,999 shares of its common stock at an exercise price of $0.50 per share to two accredited investors in consideration of finder services rendered. The conversion price of the notes and the exercise price of the warrants are only subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. As of December 31, 2013 and 2012, $1,330,000 in principal was outstanding under these notes. The notes matured on September 1, 2012 and are presently in default due to non-payment.

 

 

The Company determined that the relative fair value of the warrants upon issuance was $731,710. The relative fair value was determined using the methodology prescribed by current accounting guidance. The Company determined the fair value of the beneficial conversion feature was approximately $768,290. These amounts were calculated under a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of between 95% and 116%, a risk free interest rate of 1.47%, and no expected dividend yield. The relative value of the warrants of $731,710 and the beneficial conversion feature of $768,290 was recorded by the Company as a loan discount of $1,500,000, which the Company is amortizing to interest expense over the life of the notes. As of December 31, 2011, the unamortized balance of the note discount was $362,645. During the year ended December 31, 2012 the remaining unamortized discount of $362,645 was recorded as interest expense.

 

(4) Between July 2010 and December 2010, the Company entered into agreements with 26 accredited investors for the sale by the Company of an aggregate of $850,000 of 10% Senior Secured Convertible Debentures (the “Debentures”) which are convertible into an aggregate of 1,133,333 shares of the Company’s common stock at a conversion price of $0.75 per share, subject to adjustment.  In connection with this offering, the Company also issued to the investors warrants to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $0.75 per share, subject to adjustment.  The Company also issued to its placement agent warrants to purchase 68,000 shares of the Company’s common stock at exercise price of $0.75 per share, subject to the same adjustments and terms as those warrants issued to investors. Under the adjustment provisions of the Debentures and warrants, the conversion price of the Debentures and the exercise price of the warrants were reduced to $0.56 in connection with various dilutive issuances made in 2011 and 2010.

 

As of December 31, 2013 and 2012, $775,000 in principal was outstanding under these Debentures. The Debentures were due on September 30, 2012, and subsequently extended to, March 31, 2013 (the “Maturity Date”) and are now in default due to non-payment  The Debentures are secured under the terms of a security agreement granting the holders of the Debentures a security interest in all of the Company’s personal property.

 

Each of the agreements governing the Debentures and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Debentures and the exercise price of the warrants are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the fair value of these conversion features and warrants as derivative liabilities upon issuance.

 

The Company determined that upon issuance in 2010, the aggregate fair value of the warrants issued and the initial fair value of the embedded beneficial conversion feature of the Debentures to be an aggregate amount of $1,015,839. As such, the Company recorded an $850,000 valuation discount upon issuance, and in 2010, recognized private placement costs of $358,339 for financial reporting purposes. As of December 31, 2011, the remaining unamortized valuation discount was $281,946. As of December 31, 2012, the Company amortized $269,560 of the valuation discount, and the remaining unamortized valuation discount of $12,386 was amortized as interest expense during the year ended December 31, 2013.

 

 

 

(5) On May 18, 2012, the Company entered into Agreements with 3 accredited investors for a sale by the Company of an aggregate of $340,000 10% Secured Subordinated Convertible Promissory Notes (the “May 2012 Notes”) which are convertible into an aggregate of 850,000 shares of the Company’s common stock at a conversion price of $0.40 per share of common stock, subject to adjustment. The notes were due on March 31, 2013 and are now in default due to non-payment. The May Notes are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes).  The notes pay quarterly interest at the rate of 10% and are subject to a security agreement that secures the Notes by the Company’s assets. The security agreement is subordinate to existing bank financing and the Debentures (as defined below) that currently have a principle balance due of $775,000 and the Amended Notes that currently have a balance due of $891,500.  Additionally, the Company issued three-year warrants to purchase an aggregate of 340,000 shares of the Company’s common stock at an exercise price of $0.40 per share, subject to standard anti-dilution adjustments. As of December 31, 2013 and 2012, $340,000 was outstanding under these notes.

 

The conversion price of the May 2012 Notes are subject to full ratchet anti-dilution provisions and also subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend.  Each of the agreements governing the May 2012 Notes include an anti-dilution provision that allows for the automatic reset of the conversion price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the May 2012 Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the May 2012 Notes are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events.  As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion feature of the notes as derivative liabilities upon issuance.

 

The Company determined the aggregate fair value of the warrants issued to investors to be $109,140 and the initial fair value of the embedded beneficial conversion feature of the May 2012 Notes to be $136,850 (an aggregate amount of $245,990).  These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model.  As such, the Company recorded a $245,990 valuation discount upon issuance of the notes and warrants. The Company is amortizing this valuation discount to interest expense over the life of the notes.  As of December 31, 2012, the Company amortized $185,079 of the discount, and the remaining unamortized valuation discount of $60,911 as of December 31, 2012 was amortized as interest expense during the year ended December 31, 2013.

 

NOTE 5 – DERIVATIVE LIABILITY

 

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.  The conversion feature of the Company’s Debentures (described in Note 4), and the related warrants, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future.  The Company was required to include the reset provisions in order to protect the holders of the Debentures from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the Debentures was separated from the host contract (i.e., the Debentures) and recognized as a derivative instrument.  Both the conversion feature of the Debentures and the related warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

 

At the date of issuance, the derivative liabilities were valued using a Monte Carlo simulation model, and with a probability weighted average Black-Scholes pricing model in periods subsequent to issuance with the following assumptions:

 

		December 31, 2013				December 31, 2012
Conversion feature
Risk-free interest rate			0.13%				0.18%
Expected volatility			229%				186.99%
Expected life (in years)			.75 years				.25 years
Expected dividend yield			0				0
Warrants:
Risk-free interest rate			0.13%				0.25%
Expected volatility			229%				186.99%
Expected life (in years)			1.75 years				2.5 years
Expected dividend yield			0				0
Fair Value:
Conversion feature			982,792				579,821
Warrants			94,000				267,651
		$	1,076,792			$	847,472

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility was based on the historical statistical volatility of the Company over the past 12 months. The expected life of the conversion feature of the Debentures was based on the term of the Debentures and the expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

 

As of December 31, 2012, the aggregate derivative liability of the conversion feature and the warrants was $847,472. For the year ended December 31, 2012, the Company recorded a gain on the change in fair value of the derivative liabilities of $795,091.

 

As of December 31, 2013, the aggregate derivative liability of the conversion feature and the warrants was $1,076,792. For the year ended December 31, 2013, the Company recorded a loss on the change in fair value of the derivative liabilities of $229,320.

 

 

NOTE 6 – LOSS ON EQUIPMENT HELD BY CUSTOMER PENDING A LEASE

 

In November 2010, T&K Logistics, the provider of logistics services to Ford Motor Company and the manager of on-site transportation of trailers and containers at Ford Motor Company’s assembly plant in Wayne, Michigan, agreed to lease 10 of the Company’s Nautilus yard tractors for use at the assembly plant for a period of 36 months. Although the Company shipped five of its Nautilus XR E20s with a cost basis of $739,000 to T&K Logistics during the first six months of 2011, T&K Logistics has failed to accept delivery of these units and, as a result, has failed to make any payments owed to the Company under the lease. The Nautilus XR E20s that the Company shipped to T&K Logistics featured battery systems with double the battery energy and, therefore, double the range of the Company’s Nautilus XE20s. Although the Company experienced certain delays during the installation of charging systems into the tractors at T&K Logistics’ facility, the Company believes that five units operated satisfactorily and incurred significant hours of use. The Company has delayed shipment of the remaining units to T&K Logistics until the previously delivered five units are accepted by T&K Logistics.

 

On September 21, 2012, T&K Logistics, Inc. filed a complaint, or Complaint, against us in the Superior Court of California, County of Los Angeles (Case No.: BC492619).  The Complaint relates to the lease agreement between us and T&K Logistics regarding our yard tractors.  The Complaint purports to state the following three counts against us: (i) breach of contract, (ii) specific performance, and (iii) negligent misrepresentation, and seeks compensatory damages of not less than $453,897.  On October 19, 2012, we filed an answer to the Complaint denying all allegations in the Complaint.  On that same date, we filed a cross-complaint against T&K Logistics for breach of contract and common count—goods and services rendered, which seeks damages in excess of $300,000. On September 10, 2013 a Settlement Agreement was reached between the two parties, where both parties agreed to terminate the Lease Agreement and equipment was returned to Balqon Corporation. As of date of this report there are no further disputes between both parties.

 

During 2012, the Company conducted an assessment and determined that $739,000 of the value of the electric vehicles inventory held for lease by customer were non-recoverable and should be impaired. This amount is included in the write-down of $996,214 of inventories on the accompanying statement of operations for the year ending December 31, 2012.

 

NOTE 7 – INCOME TAXES

 

At December 31, 2013 and 2012, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $25,400,000 and $20,400,000, respectively, for federal and for state purposes. The Federal carryforward expires in 2028 and the state carryforward expires in 2018. Given the Company’s history of net operating losses, management has determined that it is more likely than not the Company will be able to realize the tax benefit of the carryforwards.

 

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

 

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

 

 

 

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

 

		December 31, 2013				December 31, 2012
Deferred income tax asset:
Net operating loss carryforward		$	10,100,000			$	10,100,000
Valuation allowance			10,100,000				10,100,000
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,
		2013				2012
Tax expense at the U.S. statutory income tax			(34.0%	)			(34.0%	)
State tax net of federal tax benefit			(5.8%	)			(5.8%	)
Increase in the valuation allowance			39.8%				39.8%
Effective tax rate		—%				—%

 

The Company adopted authoritative guidance issued by the GAAP which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the current accounting guidelines, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Current accounting guidelines also provide guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and require increased disclosures. At the date of adoption, and as of December 31, 2013 and December 31, 2012, the Company does not have a liability for unrecognized tax benefits.

 

NOTE 8 – SHAREHOLDERS’ DEFICIENCY

 

Shares Issued Upon Exercise of Warrants

 

On March 31, 2012, the Company issued 1,250,000 shares of its common stock to SOL, an affiliate of the Company's Chairman, in consideration of the exercise of warrants at an exercise price of $0.40 upon the conversion of $500,000 of an unsecured loan made by the Chairman to the Company during October 2011. (See Note 3).

 

Shares issued by the Chief Executive Officer for services

 

During the years ended December 31, 2013 and 2012, the Company’s Chief Executive officer issued to vendors and others 1,735,880 and 210,000 shares of common stock owned by him for payment of services performed for the Company. The Company recorded the fair value of these shares of $346,960 and $72,100 as a cost and as a contribution to capital, respectively. (See Note 10)

 

 

 

NOTE 9 – STOCK OPTIONS AND WARRANTS

 

Stock Options

 

Under our 2008 Stock Incentive plan, we have authorized 7,500,000 shares of common stock for employee incentive. As April 14, 2014, no options to purchase shares of common stock were issued and outstanding under the 2008 Plan.

 

		Shares		Weighted Average Exercise Price
Balance at December 31, 2011		1,416,695		$2.50
Granted		–		–
Exercised		–		–
Expired		(1,416,695)		$2.50
Balance at December 31, 2012		–		–

 

There were no options outstanding and exercisable as of December 31, 2013.

 

Warrants

 

At December 31, 2013, warrants shares outstanding were as follows:

 

		Shares		Weighted Average Exercise Price
Balance at December 31, 2011		13,256,220		$0.82
Granted		1,315,000		$0.40
Exercised		(1,250,000)		$0.40
Expired		(3,025,720)		$0.74
Balance at December 31, 2012		10,295,500		$0.44
Granted		–
Exercised		–
Expired		–
Balance at December 31, 2013		10,295,500		$0.44

 

During the year ended December 31, 2012, the Company negotiated Amendment and Exchange Agreements with holders of $891,500 of the Company’s 10% Unsecured Convertible Notes that matured on March 31, 2012. In connection with these Amendment and Exchange Agreements, the Company issued new warrants that will enable the warrant holders to purchase up to 975,000 shares of the Company’s common stock at an exercise price per share of $0.40. These warrants have a contractual life of three years and expire on March 31, 2015.

 

Effective March 31, 2012, the Company’s Chairman exercised 1,250,000 warrants to purchase 7,812,500 shares held by Seven One Limited (“SOL”), a company related to the Chairman by common ownership. These warrants were previously exercisable at $0.64 per share, however, in consideration of the Chairman converting $500,000 of an outstanding unsecured loan into common stock, the Company agreed to re-price these warrants at an exercise price of $0.40. The total value of the adjustment of the exercise price of these warrants was $446,809 and was reflected as a cost to induce conversion during the year ended December 31, 2012.

 

 

On May 18, 2012, the Company entered into agreements with 3 accredited investors for a sale by the Company of an aggregate of $340,000 of the May 2012 Notes. In connection with these Notes, the Company issued warrants that will enable the warrant holders to purchase up to 340,000 shares of the Company’s common stock at an exercise price per share of $0.40. These warrants have a contractual life of three years and expire on March 31, 2015.

 

The following table summarizes information about stock warrants outstanding and exercisable as of December 31, 2013:

 

		Warrants Outstanding						Warrants Exercisable
Range of Exercise Prices		Number of Shares Underlying Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares		Weighted Average Exercise Price
$0.40		8,745,500	(i)	$0.40		2.5		8,745,500		$0.40
$0.64		1,500,000		$0.64		2.9		1,500,000		$0.64
$1.00		50,000		$1.00		1.8		50,000		$1.00
		10,295,500						10,295,500

 

 

As of December 31, 2013, there was no intrinsic value of the warrants outstanding and exercisable

 

(i) As of December 31, 2013, agreements governing 1,843,000 of the warrants exercisable at $0.40 per share includes an anti-dilution provision that allows for the automatic reset of the exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the exercise price of these warrants.

 

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

Shares issued by the Chief Executive Officer

 

On January 9, 2013, Company signed an Amendment Agreement (described in note 13) extending foreclosure date on Lego Agreement from Jan 9, 2013 to July 9, 2013, in return for 1,500,000 shares of the Company’s common stock owned individually by the Company’s President, Balwinder Samra. The Company recorded the fair value of these shares of $300,000 as a cost and as a contribution to capital.

 

On January 28, 2013 the Company’s Chief Executive Officer transferred to two consultants an aggregate of 235,880 shares of the Company’s common stock owned by him for payment of services performed for the Company. The Company recorded the fair value of these shares of $46,960 as a cost and as a contribution to capital.

 

During the years ended December 31, 2013 and 2012, the Company had no sales to related parties. As of December 31, 2013 and 2012, the Company had accounts receivable of $198,067 from sales to related parties in prior years which are fully reserved. During the years ended December 31, 2013 and 2012, the Company made purchases of $1,193,992 and $1,675,504, respectively from related parties. As of December 31, 2013 and 2012, the Company had trade accounts payable to related parties of $2,700,250 and $1,639,702, respectively. The related parties are suppliers of the Company related by common ownership to the Company’s Chairman.

 

On December 14, 2010, the Company entered into a Distribution Agreement with SOL (the “Distribution Agreement”). Under the Distribution Agreement, SOL has granted the Company the right to distribute lithium iron phosphate batteries and high voltage charging systems manufactured by Seven One Battery Company on an exclusive basis in the United States. The Company’s Chairman of the Board, Winston Chung, is the chief executive officer of SOL. In January 2011, based on the terms of the Distribution Agreement, the Company received battery units valued at $2,629,800 on a consignment basis. As of December 31, 2013 and 2012, the Company held battery units valued at $326,000 and $1,076,700, respectively on a consignment basis, which amounts are not included in recorded inventories. During the year ended December 31, 2013 and 2012, battery costs were $750,700 and $1,502,500, respectively, under the Distribution Agreement.

 

As of December 31, 2013 and December 31, 2012, our CEO, Mr. Balwinder Samra was owed an aggregate amount of $804,467 and $576,414, respectively in accrued salaries earned in prior periods under the terms of his employment agreement, which amounts are included in the balance of accounts payable and accrued expenses on the accompanying balance sheet.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

California Air Quality Management District

 

In January 2014, we signed an agreement with the California Air Quality Management District (“AQMD”) to deliver three on-road Class 8 lithium battery powered electric tractors for an aggregate amount of $925,000.  Under this agreement we are required to develop the next generation of our Model MX30 with fast charging capabilities using direct current (“DC”) charger. 

 

City of Los Angeles Agreement

 

During 2009, under the terms of the Company’s agreement with the City of Los Angeles, the Company requested and was issued an advance payment in the amount of $1,159,601. This advance payment was recorded as a customer deposit. During June 2012, we billed $630,000 to the City of Los Angeles to upgrade six of the electric trucks previously delivered from lead acid batteries to lithium ion batteries. This billed amount was applied as a reduction of the advance payment leaving an unpaid balance of $529,601 on this advance as of December 31, 2013. Our agreement with the City of Los Angeles has been terminated, to the extent that we do not receive additional purchases from the City of Los Angeles for the remaining balance due, we may be required to return the unpaid balance to the City of Los Angeles. We anticipate selling additional products and services during the next 12 months to reduce the unpaid balance; however we presently do not have the funds to repay this advance if payment is requested by the City of Los Angeles.

 

Employment Agreements

 

Employment Agreement between the Company and Balwinder Samra

 

On October 24, 2008, the Company signed an at will employment agreement with Balwinder Samra as 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.

 

Employment Agreement between the Company and Robert Gruenwald

 

On March 27, 2009, the Company signed an at will employment agreement with Mr. Gruenwald as 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.

 

 

 

On March 11, 2013, the Company mutually agreed with Mr. Gruenwald to terminate his employment agreement and the Company entered into a one-year independent contractor agreement under which Mr. Gruenwald has agreed to provide services as a consultant to the Company. As part of the termination of his employment agreement, the Company agreed to pay him severance in the amount of $400,000 by transferring ownership of 200 used lithium batteries, with an estimated value of $176,000. In addition, the Company agreed to the payment of unpaid expenses and salary increases due under the employment agreement, totaling $41,060, in monthly installments of $2,000 per month, of which $22,250 remains unpaid at December 31, 2013 and is included in accounts payable and accrued expenses.

 

Lego Agreement

 

On July 9, 2012, the Company entered into a Purchase and Representation Agreement (the “Lego Agreement”) with Lego Battery Sales, LLC (“Lego”). The terms of the Lego Agreement call for the sale by the Company to Lego of 1,000 batteries for an aggregate sales price of $350,000.

 

The Lego Agreement further requires that the Company serve as Lego’s exclusive sales agent and representative to market and resell the batteries on behalf of Lego. The sales prices of the batteries must be at a minimum sales price of $490 per battery. In consideration for its services as sales agent and representative, the Company shall earn a sales commission equal to the excess of the sales price of each battery above the minimum sale price. The Lego Agreement is secured by a pledge of 2,450,000 shares of common stock owned individually by the Company’s president; Mr. Balwinder Samra. If Lego does not receive the minimum consideration of $490,000 for the sale of the 1,000 batteries by January 9, 2013, Lego may foreclose on these pledged shares. The term of the Lego Agreement is for six months and may be extended by mutual consent of the parties. On January 9, 2013 the parties signed an Amendment Agreement extending the foreclosure date from January 9, 2013 to July 9, 2013 in return for 1,500,000 shares of the Company’s common stock owned individually by the Company’s President, Balwinder Samra. The Company recorded the fair value of these shares of $300,000 as a cost and as contribution to capital. The Company has received a purchase order for 500 batteries from an electric vehicle manufacturer and currently is awaiting payment from the customer prior to shipment of the batteries. In addition, the Company plans to use the remainder of the batteries for production of on-road electric vehicles. The Company has informed Lego Battery Sales of its sales plan and expects to negotiate a reasonable extension of the deadline within the next sixty days.

 

Although the Company has not fully performed on its sales obligations under the Agreement, the other parties have not expressed a desire to foreclose on the stock pledged individually by Mr. Balwinder Samra, President of the Company, to secure the obligations of the Company under the Agreement. 

 

Leases

 

The Company leases a manufacturing facility located in Harbor City, California that expires on August 1, 2014. The base monthly rent under the lease is $10,605. Rent expense for the years ended December 31, 2013 and 2012 for this lease was $139,986 and $160,995, respectively.

 

The future minimum rental payments required under the non-cancelable operating leases through expiration of the lease in 2014 is $74,235.

 

 

 

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 15^th day of April, 2014.

 

 

	BALQON CORPORATION
	By:	/s/ Balwinder Samra
		Balwinder Samra, President and Chief Executive Officer (principal executive officer)

 

	By:	/s/ Balwinder Samra
		Balwinder Samra, Interim 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 Balwinder Samra	President, Chief Executive Officer and Director (principal executive officer)	April 15, 2014
/s/ HENRY VELASQUEZ Henry Velasquez	Director	April 15, 2014
WINSTON CHUNG Winston Chung	Chairman of the Board of Directors, Director	April 15, 2014
ERIK ROLLAND Erik Rolland	Director	April 15, 2014

 

 

 

 

BALQON CORPORATION

EXHIBITS ATTACHED TO THIS REPORT

 

Exhibit Number	Description
23.1	Consent of Independent Registered Public Accounting Firm
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 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document