Group Assignment 3 (Financial Plan)

IMAN 670 Spring 2011 March 22, 2011

Consolidated Inc: Aaron Harms Malenereynee B. Ginete Troy Fox

Financial ObjectivesBalqons financial strategy will involve the funding of our y1 entrance to Denmark with 100% cash on hand, and if needed, limited convertible debt agreements. With our present contract with China to produce 300 drive trains, we plan to use a portion of the $15.9 million to fund our Q1 2012 entrance. To withstand our future outlays, we have developed a sales / costs figures analysis that is illustrated by our Goal, Target, and Margin, located in figure 9. Showing a Margin case scenario of 16% profit margin on 60 vehicles sold we expect Y1 to show a net income of $292,812 to a Goal net income figure of $1.16 million. Overall, the goal will be to decrease spending, borrowing, and increase profits to both the company and shareholders. Our number one goal at Balqon is to keep our stakeholders profitable and informed and to keep with our goals; the information will include: Target Sale objective for M150 introduction (100 units per year/5 years) Provide updates on capital structure changes Detailed pro formas on a quarterly bases for Denmark

All information will be consolidated into one company wide 10k and with breaks of both US and Denmark operations. Progress measurements will be developed to meet the objectives of supporting Balqons Denmark growth. These objectives are seen in figure 1. After capturing the information and validating it against financial objectives, Balqon will take steps necessary to increase revenue through expansion first into the Danish market and the greater European market thereafter. . Historical Analysis-

According to Balqon third quarter 2010 report, the company is facing some financial challenges. For the nine months ending on September 30, 2010, the Company recorded a net loss of $4,786,000, utilized cash in operations of $2,081,965, and had a working capital deficit of $4,003,574 and a shareholders deficiency of $4,396,851 as of September 30, 2010. (Morningstar Research, 2010) This has generated growing stakeholder and shareholder concern. The LA Port Deal with Los Angeles Port Authority has been slow to develop. In the last two years, Balqon has slipped into being the least effective company within the electric truck industry. When compared to its rivals, it fails to meet the same level of revenue and meet the demand of its customers in a timely manner. As seen in the following Revenue growth and EBITDA margin and Revenue growth and earning yield chart, Balqon (BLQN) is ranked last The growing concern for Balqon is it has shortfalls in generating revenue. This problem will affect Balqon expansion into Denmark if not rectified or a capital sourcing solution is created. The company can do three major steps: 1. acquire debt capital through loans at Danish banking institutions or Convertible Debt; 2. Release more common stocks in the market; or three. Our payment method will be per unit sales, 50% of the bill is paid up front with 50% due at end of sale. Through recent years, Balqon had difficulty finding a financing solution. Balqon really needs a successful entrance into Denmark to save the company. Capital Structure Planning Our target structure at Balqon is to provide all capital investments through cash on hand. Cash on hand ending in September 2010 is at $33,373, but with the recently

contract with China, our planned reserves expect to increase by $15.9 million by end of 2012 with payments beginning Q1 2011. A recent payment of $490,000 was recorded March 2011.If needed, convertible debt will be executed as needs for capital at $1.10 exercise price with the projection that by 2013/2014 our value of Balqons stock will be near $1.45. Then negotiate warranted at the price of $1.20 within two years maturity. With our forecasted amount, meeting our margin, of 500 Mule 150s being sold in the capacity of 60 vehicles per year in the next 5 years of implementation starting in 2012 will allow us to attain this $1.45 share value. From our 3rd Qtr, We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if any, and future debt and/or equity financings, if any. This forecast has us using minimal debt and more equity based on cash on hand from our potential sales. Our capital structure will be based on a goal of 100% reserve cash on hand and if needed, minimum debt financing. Financial Controls Balqon will be modeling our financial controls based on B Corporations financial controls. (http://www.bcorporation.net/resources/bcorp/documents/B%20Resources%20%20Implementing%20Financial%20Controls.pdf) Management Policies / Staffing Knowledgeable accounting and finance staff are in place to ensure that relevant accounting standards are reviewed and implemented throughout the organization to accurately report financial data. Senior management ensures that the control processes surrounding accounting and financial data are effective through proactive involvement in financial and accounting matters. Accounting staff has direct reporting line to the COO/CFO, who in turn is part of senior management. Comprehensive global General Ledger (G/L) frameworks and a detailed Chart of Accounts exist. Corporate policies are in place for G/L and Chart of Accounts management, financial statement closing process, reconciliations, aging and charge-offs, inactive accounts, and suspended accounts. Management team reviews and evaluates financial performance and ensures that finance and accounting staff has appropriate knowledge and skills.

 A clear segregation of duties exists between the following functions: sales, order placement, receiving, invoicing, accounts payable, and account reconciliation. Accounts Receivable, Credit, and Collections Strive to ensure that all funds intended for the organization are received, promptly deposited, properly recorded, reconciled, and kept under adequate security. Require credit reporting on all customers prior to credit issuance. Require periodic review of key customers to ensure ongoing credit worthiness. Establish limits of authority for credit issuance and terms (system or otherwise). Limit system access to alter credit limits and/or terms only to appropriate personnel. Require manager approval for adjustments to and/or write-offs of A/R balances. Sequentially number credit memo adjustments to A/R balances. Require monthly reconciliation of the General Ledger to the Cash and A/R subsidiary. Reconcile bank statements to the General Ledger on a monthly basis. A central point of contact is designated for all incoming mail (Denmark / US). Access to alter or create records in the customer master file is limited to appropriate parties. Account statements are mailed and/or emailed to customers. Support files are maintained in a secured area and restricted to appropriate personnel. Accounts Payable / Purchasing Strive to ensure that funds are disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded. Policies and procedures governing accounts payable and purchasing processes exist. System access to create, edit, or delete purchase orders is restricted to appropriate personnel. The ability to add, modify, or delete vendor records in the vendor master file is restricted to appropriate individuals. Manager approval is required for all new vendors or major modifications to vendor information. Vendor master file is periodically purged of old and obsolete vendors. A three-way match between the invoice, PO, and receiver must be present before payment is released to the vendor. Management approval is required for adjustments to A/P balances (credit notes) and restricted to appropriate personnel. Check stock is appropriately secured and access is restricted to appropriate personnel. Owner or COO signature is required on all manual check disbursements. Check sequences and gaps are investigated. Bank statements are reconciled to the general ledger monthly and reviewed by management. Major supplier statements are reconciled to the A/P subsidiary ledger. Support files are maintained in a secured area and restricted to appropriate personnel. Wire transfers are owner executed through a password-protected internet process. Clear expense reimbursement guidelines are maintained. Accountant reviews expense reports in detail and reimburses only with valid receipt and approval of manager.

 Credit cards are only issued to employees with clearly defined needs (e.g. extensive travel). One general company credit card exists for non-management personnel, and access is only allowed through permission from the accountant and manager and through a formal purchase order. Payroll Strive to ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursement is properly recorded and that related legal requirements (such as payroll tax deposits) are complied with. Policies and procedures governing payroll processes detailing timelines, responsibilities, actions, responsibilities, etc exist. Access to add, modify, and delete records from the employee master file are restricted to appropriate personnel (COO, and, if needed, company owners). Managerial approval is required for modification to significant data (i.e. salaries, etc). Support files are maintained in a secured area and restricted to appropriate personnel. Fixed Assets Strive to ensure that fixed assets are acquired and disposed of only upon proper authorization, and that they are adequately safeguarded, and properly recorded. Policies and procedures governing fixed asset-related processes detailing timelines, responsibilities, actions, responsibilities, etc exist. Assets are secured appropriately. Book to physical reconciliation is conducted annually to validate condition and existence. Access to the fixed assets register is restricted to appropriate personnel. Managerial approval is required for asset disposals and write-offs. Asset acquisitions are approved in advance of purchase. Asset valuations are periodically reviewed by management for continued relevance. All supporting paperwork is obtained prior to entry into the fixed asset register. Support files are maintained in a secured area and restricted to appropriate personnel. Inventory Strive to ensure that inventories are received and/or shipped only with proper authorization and documentation, properly recorded, and appropriately safeguarded. Policies and procedures governing inventory-related processes detailing timelines, responsibilities, actions, responsibilities, etc exist. Inventories are appropriately secured. Book-to-physical or cycle counts are periodically conducted to validate condition and existence. Inventory is only received with valid support paperwork (i.e. PO). All inventory receipts are verified for quantity and condition against the bill of lading and the packing slip and record on pre-number receiver forms or a log. Management reviews and reconciles the receipts log to system receipts on a daily basis. Support files are maintained in a secured area and restricted to appropriate personnel. Management review and approval of inventory write-offs is required. System access to process inventory adjustments is restricted to appropriate personnel. All inventory shipments are required to be accompanied by a valid order. Management periodically reviews open work orders, inventory aging reports, etc.

 All shipments are recorded in a shipping log, and management reviews and reconciles to the system on a daily basis. Financial Closing or Reporting Strive to ensure that financial data is recorded, consolidated, and reported accurately, timely, and in compliance with US GAAP and Denmarks IASB IAS. Policies and procedures governing financial closing processes detailing timelines, responsibilities, actions, responsibilities, etc exist. Segregation of duties within the account reconciliation, journal posting, and management review/approval processes exist. Management approval is required for all non-standard, adjusting, and/or manual journal entries. A budgeting and forecasting process is established. Trend analysis is used (horizontal and vertical) in order to sanity check results and research and resolve any unusual variations. The ability and/or access to post journal entries is limited to appropriate personnel. Pro Forma Financial Statements Reviewing our companys most current financial data, we will adapt an expecting to utilize cash for most of its capital needs. Our cash is generated mostly from the sale of convertible debt, but this will not be the structure in Denmark. March 2012 we have received an advance on our contract with china of $490,000 and will continue receiving periodic payments throughout the term of the agreement. We have generated well over $2 million in the trade of convertible debt and the majority of this $15.9 will go into paying off our current debt, but with only $800,000 needed for our Y1 entrance to Denmark, Balqon will be able to finance 100% of the project. This keeps us from having to borrow money from institutions. With the large amount of cash coming in from our recent contract with China, it would more than fund our first 1 to 2 years of operation in Denmark. Based on sales revenue alone, our projections show during Y1 our net income will be between $250,000 - $1.16 million, which will allow for future growth in both the US and Denmark. Figure 8 & 9 is an illustration of our released 3rd qtr 2010 data. Sources of Funds Statement:

Over 80% Balqons stateside operations are funded by private investors. Our goal with Denmark is to make our Y1 costs minimal by implanting only a sales office and hiring local talent for marketing and advertising. Our costs are $800,000 for Y1 entrance. Y1 costs includes general, administrative, and selling costs and will be funded by 100% cash reserves ending in 2011. Restructuring of capital may change based on year end differences in projections and convertible debt financing may be needed but not to exceed 25% of overall Y1 forecasted costs. Sources of Funds: Cash Reserves: 100% cash reserve funding of $800,000 Equity Financing: 0% - There will be no equity financing

Debt Financing: Not to exceed 25% if needed. Sale of convertible debt if needed at 2012 to pay for possible upgrades to our infrastructure in Denmark. 2015 / 2016 plan to develop full scale operations in Denmark that will be a hub for European countries. Costs to exceed $2 million. Budgeting and forecasting to take place in E.O.Y 2012. Uses of Funds: Capital Expenditures: Property Rental 1 year Purchase of office furnishings (desks, chairs, computers, etc.) Working Capital: Initial shipment of show room models and relocation of American Manager Hiring and interviewing of Danish staff Salaries Advertising materials Additional marketing materials

Sources of funding are similar for years 2 through 5. The initial launch by the company will be predominantly expenditures on advertising and marketing, as well as the

initial shipments of show room models. All proceeding shipment costs will be incurred by the customer and built into the unit retail price. Assumption Sheet (Based on Abrams) Balqon assumes the following information about its potential in the Danish Market: Sales (Figure 4) Sales goal is 100 units per year with margin at 60 units. Our unit prices will be split into 3 units; Unit A: $140,000, Unit B: $145,000, Unit C: $153,000. Our margin net income target for 2012 is $292.812 with goal target of $1.16 million. The projected sales curve over the five years is flat. We assume sales will start slowly in year 1, but as more units enter the Danish market, more and more transportation companies will switch their fleets over to electric alternatives. Key Expenses: Our largest capital expense will be salaries and the rental of an office building in Copenhagen. Advertising materials will be our second largest expense for the initial launch, and customer support as our overseas branch grows. Shipping costs are calculated into our base pricing. Personnel/Management: (Figure 5) The Danish office will employ a lean team of five personnel in Copenhagen. One American Manager will head the office of four local hires. Salaries have been calculated in regards to local Danish income norms in similar companies. Projected payroll for these individuals is as follows: No further key management positions are to be added, however, there is room in the structure for supporting sales associates, customer support, and advertising associates to be added on at a later date should sales take off. Outsourced Services: (Figure 6)

To support our IT, Marketing, and Advertising, we have decided to outsource and contract with local firms form these needs. We have allocated $410,000 USD in order to fund these. Other expenses: (Figure 7) Other expenses are desks for our employees, chairs, and computers. Our total funds estimated are $7,500. TOTAL YEAR 1 COSTS: $800,000 Possible changes to cost of goods: Our original business plan imports fully assembled pieces from the Balqon facilities in Harbor City, California. An assessment after the 5th year of operations overseas will be done to deduce if units can be assembled in Denmark and materials locally procured.

FIGURE 1 Target Sales

Updated Information Current sales are zero. Sales Force will enter Denmark no later than 1st

Objective Progress Objective not met

Debt / Equity Financing Denmark Expenses Denmark Market Forecast

QTR 2012 For Denmark expansion, no Debt financing generated Denmark operation budget established ($800,000/y1) Denmark shifts to become fossil fuel free; electric vehicles are desired to fill change in market

Not to exceed 25% of total need capital if needed.

Sales team needed to start selling M150; unit price is high but competitive; first mover advantage

Figure 2: (Street Market Research 2011)

Figure 3: Sales

Year Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL

Units Sold 100 100 100 100 100 500

Price Each $110,000 $110,000 $110,000 $110,000 $110,000

TOTAL $11,000,000 $11,000,000 $11,000,000 $11,000,000 $11,000,000 $55,000,000

Figure 4: Employee Costs

Position Manager (AmCit) Administrative Assistant Sales Associate Sales Associate OFFICE SPACE RENTAL Total Annual Salary Costs

Annual Salary $85,000 USD $38,000 USD $50,000 USD $50,000 USD $20,000 USD $243,000 USD

Figure 5: Outsourcing Costs (Contracting)

IT support (Outsource) Marketing (Outsource) Advertising (Outsource) Total Annual Services Costs
Figure 6: Other Expenses (Office)

$10,000 $200,000 $200,000 $410,000 USD

Office Equipment Desks Chairs Computers Total Annual Equipment Costs

Cost $5,000 USD $1,000 USD $1,500 USD $7,500 USD

FIGURE 7 BALQON CORPORATION CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Unaudited) Nine Months Ended September 30, 2010 Cash flow from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Fair value of common stock granted for services Fair value of warrants granted for services Cost of private placement Change in fair value of derivative Amortization of note discount Amortization of financing costs Changes in operating assets and liabilities: (165,481.0 Accounts receivable Customer advance Costs and estimated earnings in excess of billings on uncompleted contracts Inventories Prepaid expenses Accounts payable and accrued expenses Billings in excess of costs and estimated earnings on uncompleted contracts Net cash used in operating activities Cash flows from investing activities: (6,360.0 Acquisition of furniture, equipment and software Refund of Deposit Net cash used in investing activities Cash flows from financing activities: 0) 0) (6,360.0 0) 15,368.0 0 (3,570.0 0) (18,938.0 0) (34,224.0 0) (81,731.0 0) 5,389.0 0 (53,968.0 0) (650.0 0) (2,081,965.0 0) 0) 0 (1,329,083.0 0) 650.0 0) (17,359.0 0 (492.0 0) 1,159,601.0 0 111,913.0 (797,546.0 0 208,000.0 0 26,562.0 0 2,009,240.0 0 10,306.0 0 657,490.0 0 17,791.0 0 0 120,907.0 ($4,786,000) 105,311.0 0 ($1,977,271) 70,514.0 2009

91,313.0 Proceeds from loan payable, Bridge Bank Payment of notes payable, related parties Proceeds from issuance of convertible notes Financing costs Advances from shareholder Net cash provided by financing activities 0 (85,262.0 Decrease in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental cash flow information Interest Paid Income taxes Paid Supplemental schedule of non cash financing and investing activities Fair value of beneficial conversion feature and warrants issued with convertible notes Derivative Liability arising from issuance of convertible notes and warrants Conversion of convertible notes into shares of the Companys common stock $223,722.00 $ 0) 118,635.0 0 33,373.0 0 0 0 0) 0 (163,250.0 0) 2,003,063.0 0 2,075,000.0 0 0)

256,300.0 (75,875.0 1,000,000.0 0 (27,081.0 0) 1,153,344.0 0 (179,309.0 355,615.0 176,306.0

$53,645.00 $ -

$1,500,000.00 $2,584,240.00 $15,000.00

$100,000.00 $ $ -

FIGURE 8 BALQON CORPORATION CONDENSED BALANCE SHEETS September 30, 2010 (Unaudited) ASSET S Current assets Cash and cash equivalents Accounts receivable Costs and estimated earnings in excess of billings on uncompleted contracts Inventories Prepaid expenses Total current assets Property and equipment, net Other assets: 14,400 Deposits Financing costs, net of amortization Trade secrets, net Goodwill Total assets LIABILITIES AND SHAREHOLDERS DEFICIENCY Current liabilities Accounts payable and accrued expenses Customer deposit Loan payable, Bridge Bank Notes payable to related parties Advances from shareholder Derivative Liability Billings in excess of costs and estimated earnings on uncompleted contracts Total current liabilities .00 145,459 .00 62,324 .00 166,500 .00 $1,992,196.00 .00 $1,745,904.00 .00 166,500 109,063 .00 14,400 $33,373.00 333,404 .00 34,224 .00 1,084,479 .00 47,993 .00 1,533,473 .00 70,040 .00 $18,635.00 167,925 .00 1,002,748 .00 53,382 .00 1,342,690 .00 122,251 .00 December 31, 2009

$1,533,419.00 1,159,601 .00 219,463 .00 25,000 .00 5,018 .00 2,594,546 .00 5,537,047 .00

$1,587,388.00 1,159,601 .00 128,150 .00 25,000 .00 5,018 .00 650 .00 2,905,807 .00

Convertible notes payable, net of discount

852,000 .00 6,389,047 .00

209,510

3,115,317 .00

Total Liabilities SHAREHOLDERS DEFICIENCY Common stock, $0.001 par value, 100,000,000 shares authorized, 25,733,348 and 25,518,348 shares issued and outstanding on September 30, 2010 and December 31, 2009, respectively

.00

25,733 .00 .00

25,518

11,399,676 Additional paid in capital Accumulated deficit Total shareholders deficiency Total liabilities and shareholders deficiency .00 (15,822,260 .00) (4,396,851 .00) $1,992,196.00 .00) .00) .00

9,650,329 (11,036,260 (1,360,413 $1,754,904.00

Reference Morningstar Document Research (2010) Form 10-Q BALQON CORP. BLQN. Retrieved March 16, 2011 from http://www.ir-site.com/balqon/index.asp. The Street Rating (2011). Balqon Corp (BLQN). March 13, 2011. Retrieved 14 March, 2011 from www.ameritrade.com.