UNITED
STATES SECURITIES AND EXCHANGE COMMISSION




WASHINGTON,
D.C. 20549




FORM
10-Q







x Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended September 30, 2008




o Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period from ____________ to ____________







Energy
King, Inc.


(Exact
name of registrant as specified in its charter)





Nevada
            
            0-27454
            
            20-3161375(State
      or other jurisdiction of incorporation)
            
            (Commission
      File No.)
            
            (IRS
      Employer Identification No.)




1929
Main St., Suite 106,, Irvine, CA 92614
 (Address
of principal executive offices)
  (858)
272-6600
 (Issuer’s
telephone number, including area code)
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yesx
Noo
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large accelerated filero
                Accelerated
      filer oNon-accelerated
      filer o
      (Do not check if a smaller reporting company)
                Smaller
      reporting company x
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yeso Nox
  On
November 10, 2008 there were 113,612,018 shares of Registrant’s common stock,
$.001 par value, issued and outstanding.










TABLE OF
CONTENTS






PagePart I
              Financial
      Information
              3Item 1.
              Financial Statements
              3Consolidated
      Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007
      (Audited)
              3Consolidated
      Statements of Operations for the Three and Nine Months Ended September 30,
      2008 and 2007 (Unaudited)
              4Consolidated
      Statements of Changes in Stockholders’ Equity for the Nine Months
      Ended September 30, 2008 (Unaudited)
              5Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
      2007 (Unaudited)
              6Notes
      to Consolidated Financial Statements as of September 30, 2008
      (Unaudited)
              7Item 2.
              Management's Discussion and Analysis or Plan of
      Operation
              21Item 3.
              Quantitative and Qualitative Disclosures About
      Market Risks
              27Item 4T.
              Controls and Procedures.
              27Part II.
              Other
      Information
              28Item 1.
              Legal Proceedings
              28Item 1A.
              Risk Factors
              28Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              29Item 3.
              Defaults Upon Senior
    Securities
              29Item 4.
              Submission of Matters to a Vote of Security
      Holders
              29Item 5.
              Other Information
              29Item 6.
              Exhibits
              2930SIGNATURES
              31EX-31.1 (CERTIFICATION)EX-32.1 (CERTIFICATION)EX-32.2(CERTIFICATION)






2




PART
I—FINANCIAL INFORMATION
 
 Item
1. Financial Statements


ENERGY
KING, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE
SHEETS




September
      30,
              2008
              (Unaudited)
            
            
            December 31,
              2007
              (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            136,142
            
            
            $
            1,510,874Accounts
      receivable, less allowance for doubtful accounts of $10,760 and $12,000,
      respectively
            
            
            387,918
            
            
            
            168,231Other
      receivables
            
            
            243,025
            
            
            
            215,976Inventories
            
            
            898,566
            
            
            
            623,607Prepaid
      expenses
            
            
            296,605
            
            
            
            277,386Total
      current assets
            
            
            1,962,256
            
            
            
            2,796,074Property
      and equipment, net
            
            
            657,838
            
            
            
            645,628Goodwill
            
            
            6,805,885
            
            
            
            2,835,263Intangible
      assets, net
            
            
            76,463
            
            
            
            76,411Other
      assets, primarily deposits
            
            
            145,043
            
            
            
            108,738Total
      assets
            
            $
            9,647,485
            
            
            $
            6,462,114LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            2,392,739
            
            
            $
            1,115,513Accrued
      expenses
            
            
            1,606,441
            
            
            
            1,075,300Current
      portion of notes payable and long-term debt
            
            
            1,805,155
            
            
            
            922,096Customer
      deposits and deferred revenue
            
            
            307,069
            
            
            
            374,926Total
      current liabilities
            
            
            6,111,404
            
            
            
            3,487,835Notes
      payable and long-term debt, net of current portion
            
            
            5,492,418
            
            
            
            2,510,798Total
      liabilities
            
            
            11,603,822
            
            
            
            5,998,633Commitments
      and contingencies
            
            
            —
            
            
            
            —STOCKHOLDERS’
      EQUITY:Preferred
      stock, authorized 5,000,000 shares:
              $.01
      par value, 975,086 and 975,086 shares issued and outstanding,
      respectively
            
            
            9,751
            
            
            
            9,751$10.00
      par value, 23,000 and 23,000 shares issued and outstanding,
      respectively
            
            
            230,000
            
            
            
            230,000Common
      stock, authorized 500,000,000 shares, $.001 par value; 113,612,018 and
      105,412,850 shares issued and outstanding, respectively
            
            
            113,612
            
            
            
            105,413Additional
      paid-in capital
            
            
            3,015,517
            
            
            
            2,413,239Accumulated
      deficit
            
            
            (5,325,517
            )
            
            
            (2,294,922
            )Total
      stockholders’ equity
            
            
            (1,956,337
            )
            
            
            463,481Total
      liabilities and stockholders’ equity
            
            $
            9,647,485
            
            
            $
            6,462,114




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


3




ENERGY KING, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)







Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues,
      net
            
            $
            5,111,773
            
            
            $
            3,404,267
            
            
            $
            13,105,747
            
            
            $
            10,455,843Cost
      of services
            
            
            3,409,933
            
            
            
            1,967,221
            
            
            
            8,548,855
            
            
            
            5,887,911Gross
      profit
            
            
            1,701,840
            
            
            
            1,437,046
            
            
            
            4,556,892
            
            
            
            4,567,932Selling,
      general and administrative expenses
            
            
            2,580,746
            
            
            
            1,786,645
            
            
            
            6,709,726
            
            
            
            4,774,650Operating
      loss
            
            
            (878,906
            )
            
            
            (349,599
            )
            
            
            (2,152,834
            )
            
            
            (206,718
            )Other
      income (expense)Interest
      income
            
            
            101
            
            
            
            350
            
            
            
            4,843
            
            
            
            1,340Other
      income
            
            
            1,429
            
            
            
            (22,799
            )
            
            
            22,800
            
            
            
            87Interest
      expense
            
            
            (109,112
            )
            
            
            (83,307
            )
            
            
            (896,986
            )
            
            
            (238,978
            )Total
      other income (expense)
            
            
            (107,582
            )
            
            
            (105,756
            )
            
            
            (869,343
            )
            
            
            (237,551
            )Loss
      before income taxes
            
            
            (986,488
            )
            
            
            (455,355
            )
            
            
            (3,022,177
            )
            
            
            (444,269
            )Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            (2,400
            )
            
            
            (3,039
            )Loss
      from discontinued operations
            
            
            (5,718
            )
            
            
            —
            
            
            
            (5,718
            )
            
            
            —Net
      loss
            
            $
            (992,206
            )
            
            $
            (455,355
            )
            
            $
            (3,030,295
            )
            
            $
            (447,308
            )(Loss)
      Income per share: Basic and diluted
            
            $
            (.01
            )
            
            $
            (.00
            )
            
            $
            (.03
            )
            
            $
            (.00
            )Shares
      used in computing income (loss) per share:Basic
            
            
            111,476,138
            
            
            
            104,682,241
            
            
            
            108,912,744
            
            
            
            101,832,309Diluted
            
            
            111,476,138
            
            
            
            104,682,241
            
            
            
            108,912,744
            
            
            
            101,832,309




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




4




ENERGY
KING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’EQUITY


For
The Nine Months Ended September 30, 2008 and The Year Ended December 31,
2007


(Unaudited)





AdditionalPreferred Stock
            
            
            Common Stock
            
            
            Paid-In
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalance
      at December 31, 2006
            
            
            998,086
            
            
            $
            239,751
            
            
            
            98,548,618
            
            
            $
            98,549
            
            
            $
            856,207
            
            
            $
            (1,216,732
            )
            
            $
            (22,225
            )Common
      stock issued in debt reduction
            
            
            —
            
            
            
            —
            
            
            
            5,440,000
            
            
            
            5,440
            
            
            
            1,149,495
            
            
            
            —
            
            
            
            1,154,935Common
      stock issued pursuant to acquisition of Barnett assets
            
            
            —
            
            
            
            —
            
            
            
            600,000
            
            
            
            600
            
            
            
            149,400
            
            
            
            —
            
            
            
            150,000Common
      stock issued for services
            
            
            —
            
            
            
            —
            
            
            
            580,091
            
            
            
            580
            
            
            
            64,431
            
            
            
            —
            
            
            
            65,011Value
      of warrants relating to first closing of convertible
      debentures
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            156,450
            
            
            
            —
            
            
            
            156,450Common
      stock issued pursuant to Trafalgar financing
            
            
            —
            
            
            
            —
            
            
            
            244,141
            
            
            
            244
            
            
            
            37,256
            
            
            
            —
            
            
            
            37,500Net
      loss (restated)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,078,190
            )
            
            
            (1,098,190
            )Balance
      at December 31, 2007 (restated)
            
            
            998,086
            
            
            
            239,751
            
            
            
            105,412,850
            
            
            
            105,413
            
            
            
            2,413,239
            
            
            
            (2,294,922
            )
            
            
            463,481Common
      stock issued for services and in satisfaction of
    liabilities
            
            
            —
            
            
            
            —
            
            
            
            8,199,168
            
            
            
            8,199
            
            
            
            602,278
            
            
            
            —
            
            
            
            610,477Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,030,295
            )
            
            
            (3,030,295
            )Balance
      at September 30, 2008
            
            
            998,086
            
            
            $
            239,751
            
            
            
            113,612,018
            
            
            $
            113,612
            
            
            $
            3,015,517
            
            
            $
            (5,325,217
            )
            
            $
            (1,956,377
            )




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




5





ENERGY
KING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)








Nine
      Months Ended
              September
      30,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (3,030,295
            )
            
            $
            (447,308
            )Adjustments
      to reconcile net loss to net cash used
      in operating activities—Stock
      compensation expense
            
            
            181,200
            
            
            
            65,011Depreciation
      and amortization expense
            
            
            156,189
            
            
            
            130,840Interest
      expense accreted on debt discounts
            
            
            373,164
            
            
            
            —Changes
      in operating assets and liabilities, net of effects of
      acquisitions:Receivables,
      net
            
            
            (246,736
            )
            
            
            (258,707
            )Inventories
            
            
            (274,959
            )
            
            
            (92,137
            )Prepaid
      expenses
            
            
            (19,219
            )
            
            
            (61,375
            )Accounts
      payable
            
            
            1,245,174
            
            
            
            63,377Accrued
      expenses
            
            
            531,141
            
            
            
            110,753Customer
      deposits and deferred revenue
            
            
            (67,857
            )
            
            
            332,856Net
      cash used in operating activities
            
            
            (1,152,198
            )
            
            
            (156,690
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (360,954
            )
            
            
            (317,163
            )Cash
      used in connection with acquisition
            
            
            (328,947
            )
            
            
            (300,000
            )Changes
      in other assets
            
            
            (36,305
            )
            
            
            (5,014
            )Net
      cash used in investing activities
            
            
            (726,206
            )
            
            
            (622,177
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase in
      notes payable and long-term debt
            
            
            503,672
            
            
            
            2,017,264Net
      cash provided by financing activities
            
            
            503,672
            
            
            
            2,017,264NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            (1,374,732
            )
            
            
            1,238,397CASH
      AND CASH EQUIVALENTS, beginning of period
            
            
            1,510,874
            
            
            
            273,976CASH
      AND CASH EQUIVALENTS, end of period
            
            $
            136,142
            
            
            $
            1,512,373




Supplemental
      disclosures of cash flow information:Interest
      paid
            
            $
            264,689
            
            
            $
            30,317Income
      taxes paid
            
            
            —
            
            
            
            800Non-cash
      investing and financing activities:Acquisition
      of Gallagher’s Heating and Air Conditioning, Inc. partially for notes
      payable
            
            $
            3,586,667
            
            
            $
            —Acquisition
      of Energy King, Inc. Barnett assets partially for common
    stock
            
            $
            —
            
            
            $
            150,000Stock
      issued for debt reduction
            
            
            252,189
            
            
            
            1,131,025




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


6




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)




1
- BUSINESS AND ORGANIZATION




Energy
King, Inc. (“ENKG”), formerly Buckeye Ventures, Inc., collectively with its
subsidiaries (the “Company”, “we,” “us,” or “our”) is a national provider of
comprehensive heating, ventilation and air conditioning (“HVAC”) installation,
maintenance, repair and replacement services within the mechanical services
industry. The Company operates primarily in the residential HVAC
markets.




Effective
February 15, 2008, Buckeye Ventures, Inc. changed its name to Energy King, Inc.
to better reflect the scope of services provided by the company. The
Company was originally incorporated in Nevada in June 2005.




2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF
PRESENTATION




Principles
of consolidation




The
accompanying consolidated financial statements are unaudited and have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rules 5-02 and 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. The consolidated financial statements
include the accounts of ENKG and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments consisting
only of normal, recurring entries necessary for a fair presentation have been
included. The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements as
well as the reported revenues and expenses during the reporting period. Actual
results could differ from these estimates. The results of operations for the
nine months ended September 30, 2008 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31,
2008.  For further information, refer to the consolidated financial
statements and notes thereto included in our annual report on Form 10-KSB/A for
the fiscal year ended December 31, 2007.





The
financial statements have been prepared on a “going concern” basis, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. However, as of September 30, 2008, the Company had
negative working capital of $4,149,148. Further, the Company incurred net losses
of $3,030,295and
$1,078,190 for the nine months ended September 30, 2008 and the year ended
December 31, 2007, respectively. These factors create uncertainty as to the
Company’s ability to continue as a going concern. The Company plans to improve
its financial condition by obtaining new financing. Also, the Company plans to
pursue certain acquisition prospects to attain profitable operations. However,
there is no assurance that the Company will be successful in accomplishing these
objectives. The financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going
concern.




Cash
and cash equivalents




For
purposes of the consolidated financial statements, the Company considers all
liquid instruments purchased with original maturities of three months or less to
be cash equivalents.




Accounts
receivable




The
Company provides an allowance for uncollectible trade receivable balances for
all specific account balances that are considered uncollectible. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. An appropriate allowance for doubtful accounts is included
in accounts receivable. Concentrations of credit risk with respect to accounts
receivable are limited due to the nature of the Company's
receivables.




Accounting
for Allowance for Doubtful Accounts




We are
required to estimate the collectibility of accounts receivable and provide an
allowance for doubtful accounts for receivable amounts we believe we will not
ultimately collect. This requires us to make certain judgments and estimates
involving, among others, the creditworthiness of the customer, our prior
collection history with the customer, ongoing relationships with the customer,
the aging of past due balances, our lien rights, if any, in the property where
we performed the work, and the availability, if any, of payment bonds
applicable to our contract. These estimates are re-evaluated and adjusted as
additional information is received.




7




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





Inventories




Inventories
consist of equipment, parts and supplies that the Company purchases and holds
for use in the ordinary course of business and are stated at the lower of cost
or market using the first-in, first-out method.





Property
and Equipment




Property
and equipment are stated at cost, and depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the expected life
of the lease or the estimated useful life of the asset. Assets are depreciated
over the following estimated useful lives:




Computers
      and equipment
            3
      to   7 yearsFurniture
      and fixtures
            3
      to   7 yearsVehicles
            3
      to   5 yearsLeasehold
      Improvements
            7
      to 10 years




Expenditures
for repairs and maintenance are charged to expense when incurred. Expenditures
for major renewals and betterments which extend the useful lives of existing
equipment are capitalized and depreciated over the remaining useful life of
the equipment. Upon retirement or disposition of property and equipment, the
cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of
operations.





Goodwill




Goodwill
represents the excess of the aggregate purchase price paid by the Company in
acquisitions over the fair value of the net tangible and intangible assets
acquired.




Long-Lived
Assets




Long-lived
assets are comprised principally of goodwill, property and equipment, and
intangible assets. The Company periodically evaluates whether events and
circumstances have occurred that indicate that the remaining balances of these
assets may not be recoverable.





The
Company uses estimates of future income from operations and cash flows, as well
as other economic and business factors, to assess the recoverability of these
assets. If the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is
recognized for the difference between the fair value and carrying value of the
asset or group of assets. Such analyses necessarily involve significant
judgment.




Revenue
recognition and deferred revenue




The
Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at installation. Shipping and handling
fees are included in sales. Payments received for uninstalled products are
deferred until installation and are included in customer deposits
and deferred revenues.





Shipping
and handling fees




Shipping
and handling costs billed to customers are included in sales and the related
costs are included in cost of goods sold.  Shipping and handling costs are
charged to expense as incurred.




Concentration
of suppliers




The
Company has a wide array of vendors to purchase products from. Interruption in
any of the Company's current supply sources would not impact the Company's
ability to meet customer demand or adversely affect future operating
results.




Warranty
Costs




The
Company typically warrants labor for the first year after installation on new
HVAC systems. The Company generally warrants labor for 30 days after servicing
of existing HVAC systems. A reserve for warranty costs is estimated and recorded
based upon the historical level of warranty claims and management’s estimate of
future costs.




8




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





Earnings
(loss) per share




Basic
earnings (loss) per common share (EPS) are based on the weighted average number
of common shares outstanding during each period. Diluted earnings per common
share are based on shares outstanding (computed as under basic EPS) and
potentially dilutive common shares. For the nine months ended September 30,
2008, the Company had convertible notes payable, convertible preferred stock,
and warrants outstanding. They are potentially dilutive common shares but are
not included in the computation of diluted loss per share because their
inclusion would have been anti-dilutive.




Comprehensive
income (loss)




The
Company has no items of other comprehensive income (loss) for the nine months
ended September 30, 2008 and 2007.





Income
Taxes




The
Company accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized and measured
using enacted tax rates at the balance sheet date. Deferred tax expense or
benefit is the result of changes in deferred tax assets and liabilities.
Valuation allowances are established when necessary to reduce net deferred taxes
to amounts that are more likely than not to be realized.




The
Company files a consolidated return for federal income tax purposes. Income
taxes are provided for under the liability method in accordance with SFAS
No. 109, “Accounting for Income Taxes,” which takes into account
differences between financial statement treatment and tax treatment of certain
transactions. Deferred tax assets represent the tax effect of activity that has
been reflected in the financial statements but which will not be deductible
for tax purposes until future periods. Deferred tax liabilities represent the
tax effect of activity that has been reflected in the financial statements but
which will not be taxable until future periods.




The
Company regularly evaluates valuation allowances established for deferred tax
assets for which future realization is uncertain. The Company performs this
evaluation each quarter. Estimations of required valuation allowances include
estimates of future taxable income. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which the activity underlying these assets becomes deductible. The
Company considers projected future taxable income and tax planning strategies in
making this assessment. If actual future taxable income differs from the
estimates, the Company may not realize deferred tax assets to the extent it has
estimated.




Advertising




Advertising
costs are charged to expense as incurred. Advertising costs are included in
selling, general, and administrative expenses on the accompanying consolidated
statements of operations and totaled $1,416,079 and $930,824 for the nine months
ended September 30, 2008 and 2007, respectively.




Fair
value of financial instruments




The
carrying value of the Company's cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, and notes payable approximate fair values
due to the short-term maturity of the instruments. The carrying value of
long-term obligations approximates the fair value based on the effective
interest rates compared to current market rates.




Segment
Disclosure




ENKG’s
activities are within one operating and reportable segment, which includes
the residential market of the mechanical services industry.





Use
of Estimates




The
preparation of financial statements in conformity with GAAP requires the use of
estimates and assumptions by management in determining the reported amounts of
assets and liabilities, revenues and expenses, and disclosures regarding
contingent assets and liabilities. Actual results could differ from those
estimates. The most significant estimates used in the Company’s financial
statements affect revenue and cost recognition, the allowance for doubtful
accounts, self-insurance accruals, deferred tax assets, warranty accruals, and
the quantification of fair value for reporting units in connection with the
Company’s goodwill and other long-lived asset impairment testing.




9




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)




Concentrations
of Credit Risk




The
Company provides services in a broad range of geographic regions. The Company’s
credit risk primarily consists of receivables from a variety of customers
including general contractors, property owners and developers, and commercial
and industrial companies. The Company regularly reviews its accounts receivable
and estimates an allowance for uncollectible amounts. The Company has a diverse
customer base, with no single customer accounting for more than 10% of
consolidated accounts receivable.




Reclassifications




Certain
reclassifications have been made in prior period financial statements to conform
to current period presentation.




3
- INVENTORIES




Inventories
consist of the following:




September
      30,2008
            
            
            December
      31, 2007Raw
      materials
            
            $
            6,470
            
            
            $
            6,451Work
      in progress
            
            
            -
            
            
            
            -Finished
      goods
            
            
            892,096
            
            
            
            617,156$
            898,566
            
            
            $
            623,607





4 - ACQUISITIONS




BARNETT
HEATING AND AIR CONDITIONING SERVICES, INC.




Effective
January 2, 2007, Energy King, Inc. (“EKI”) acquired certain assets of Barnett
Heating and Air Conditioning Services, Inc. (“Barnett”) for $300,000 cash and
600,000 shares of ENKG common stock (valued at $150,000). Barnett was a heating
and air conditioning service company specializing in the Modesto, California
residential market.


The
identifiable net assets of Barnett at January 2, 2007 (effective date of the
acquisition) acquired by EKI consisted of:





Inventory
            
            $
            40,533Property
      and equipment
            
            
            82,650Customer
      deposits
            
            
            (47,381
            )Identifiable
      net assets
            
            $
            75,802





Goodwill
of $374,198 (excess of the $450,000 purchase price over the $75,802 identifiable
net assets of Barnett acquired) was recorded in January 2007.





The asset
purchase agreement provided that in the event the fair market value on December
31, 2007 of the 600,000 shares of ENKG common stock was less than $150,000, then
EKI shall pay or cause ENKG to pay the deficit. The agreement further provided
that the deficit may be paid in cash, shares of ENKG common stock, or any
combination thereof. The Company determined the deficit to be approximately
$102,000 and accordingly increased goodwill and accrued expenses payable by
$102,000 at December 31, 2007.




GALLAGHER’S
HEATING AND AIR CONDITIONING SERVICES, INC.




On
February 29, 2008, ENKG entered into a merger agreement with Gallagher's Heating
& Air Conditioning, Inc., a California corporation ("Gallagher’s"), and
certain other parties pursuant to which a wholly owned Delaware subsidiary of
ENKG was merged on February 29, 2008 with and into Gallagher’s and ENKG became
the owner of 100% of the issued and outstanding shares of
Gallagher’s.  Pursuant to the merger agreement, the shares of the
former sole stockholder of Gallagher’s were converted upon the effectiveness of
the merger into a combination of cash and promissory notes as follows: 1) a cash
payment of $500,000; 2) a promissory note for $1,586,667; and 3) a
convertible promissory note for $2,000,000; for a total consideration of
$4,086,667. Gallagher’s was the surviving corporation in the merger and upon the
effectiveness of the merger Gallagher’s became a wholly-owned subsidiary of
ENKG.




10




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)






Gallagher’s
was founded in 1989 as a residential and light commercial heating and
air-conditioning service company located in Los Molinos, CA. Gallagher’s serves
the Tehama County, CA market as well as the surrounding counties of Butte,
Glenn, Mendocino, Plumas Shasta and Trinity in North Central California.
Gallagher’s currently has 38 employees.




The
identifiable net assets of Gallagher’s at February 29, 2008 (effective date of
the acquisition) acquired by EKI consisted of:





Cash
            
            $
            171,053Accounts
      receivable, net
            
            
            229,575Inventory
            
            
            221,786Prepaid
      and deposits
            
            
            24,767Property
      and equipment, net
            
            
            85,566Intangibles,
      net
            
            
            8,777Other
      assets
            
            
            109,965Accounts
      payable
            
            
            (416,320
            )Warranty
            
            
            (30,903
            )Notes
      payable
            
            
            (173,039
            )Other
      liabilities
            
            
            (115,182
            )Identifiable
      net assets
            
            $
            116,045





Goodwill
of $3,970,622 (excess of the $4,086,667 purchase price over the $116,045
identifiable net assets of Gallagher’s acquired) was recorded in March
2008.







5 -PROPERTY AND
EQUIPMENT




Property
and equipment consists of the following:


September
      30,
              2008
            
            
            December
      31,
              2007Computers
      and equipment
            
            $
            760,110
            
            
            $
            333,735Vehicles
            
            
            951,167
            
            
            
            455,656Leasehold
      improvements
            
            
            181,540
            
            
            
            156,356Motion
      picture and television properties
            
            
            —
            
            
            
            100,000Total
            
            
            1,892,817
            
            
            
            1,045,747Accumulated
      depreciation and amortization
            
            
            (1,234,979
            )
            
            
            (400,119
            )Property
      and equipment, net
            
            $
            657,838
            
            
            $
            645,628




Depreciation
expense of $156,189 and $130,840 was recorded for the nine months ended
September 30, 2008 and 2007, respectively.








6
-GOODWILL




In most
businesses the Company has acquired, the consideration paid to buy the business
was greater than the value of specifically identifiable net assets in the
business. Under GAAP, this excess is termed goodwill and is recognized as an
asset at the time the business is acquired. It is generally expected that future
net earnings from an acquired business will exceed the goodwill asset recognized
at the time the business is bought.




11




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





SFAS
No. 142, “Goodwill and Other Intangible Assets” requires companies to
assess goodwill asset amounts for impairment each year, and more frequently if
circumstances suggest an impairment may have occurred. Impairment must be
reflected when the value of a given business unit in excess of its tangible net
assets falls below the goodwill asset balance carried for that unit on the
Company’s books. If other business units have had increases in the value of
their respective goodwill balances, such increases may not be recorded under
SFAS No. 142. Accordingly, such increases may not be netted against
impairments at other business units.




The
Company currently performs its annual impairment testing as of December 31
and any impairment charges resulting from this process are reported in the
fourth quarter. The Company segregated its operations into reporting units based
on the degree of operating and financial independence of each unit and the
Company’s related management of them. These reporting units are tested for
impairment by comparing the unit’s fair value to its carrying
value.





The fair
value of each reporting unit was estimated using a discounted cash flow model
combined with market valuation approaches. Significant estimates and assumptions
are used in assessing the fair value of reporting units. These estimates and
assumptions involved future cash flows, growth rates, discount rates, weighted
average cost of capital and estimates of market valuations for each of the
reporting units.




The
Company has not recorded goodwill impairment charges for the nine months ended
September 30, 2008 and 2007.




The
changes in the carrying amount of goodwill as of September 30, 2008 are as
follows:




Goodwill balance as of December 31, 2005
            
            $
            —Goodwill
      related to share exchange with WWMP
            
            
            —Goodwill
      related to acquisition of Energy King Sacramento
            
            
            2,359,065Impairment
      adjustment
            
            
            —Goodwill
      balance as of December 31, 2006
            
            
            2,359,065Goodwill
      related to acquisition of Barnett assets (see note 4)
            
            
            476,198Impairment
      adjustment
            
            
            —Goodwill
      balance as of December 31, 2007
            
            
            2,835,263Goodwill
      related to acquisition of Gallagher’s (see note 4)
            
            
            3,970,622Impairment
      adjustment
            
            
            —Goodwill
      balance as of September 30, 2008
            
            $
            6,805,885










7 - NOTES PAYABLE AND LONG-TERM
DEBT




Notes
payable and long-term debt consist of the following:




September
      30,
              2008
            
            
            December
      31,
              2007Convertible
      debenture due Trafalgar Capital Specialized Investment Fund (net of
      unamortized discounts of $78,225 and $125,159, respectively), due December
      29, 2009
            
            $
            1,489,518
            
            
            $
            1,344,841Notes
      payable to sellers of EKI (net of unamortized discount of $1,468,610 and
      $1,841,774, respectively) interest of 5%, due January 31,
      2011.
            
            
            1,831,390
            
            
            
            1,458,226Note
      payable to seller of Gallagher’s, interest at 7%, due February 28,
      2010.
            
            
            2,000,000
            
            
            
            -Note
      payable to seller of Gallagher’s, interest at 4.375%, due in monthly
      installments from January 29, 2009 to April 29, 2010.
            
            
            1,586,667
            
            
            
            -Note
      payable to investor, interest at 10%, due October 31,
2008.
            
            
            -
            
            
            
            200,000


12




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





Note
      payable to investor, interest at 12%, due October 31,
2008.
            
            
            100,000
            
            
            
            100,000Note
      payable to related party, interest at 24%, due December 31,
      2008.
            
            
            10,000
            
            
            
            25,000Note
      payable to investor, due February 29, 2008.
            
            
            -
            
            
            
            14,478Total
      ENKG
            
            
            7,017,575
            
            
            
            3,142,545Heating
      and Air-conditioning Services, Inc. vehicle loans payable.
            
            
            97,133
            
            
            
            118,733EKI
      notes payable (primarily vehicle loans).
            
            
            61,788
            
            
            
            148,665Gallagher’s
      vehicle loans payable
            
            
            121,077
            
            
            
            -World
      Wide Motion Picture Corporation (“WWMPC”) notes payable
            
            
            -
            
            
            
            22,951Total
            
            
            7,297,573
            
            
            
            3,432,894Less
      current portion
            
            
            (1,805,155
            )
            
            
            (922,096
            )Long-term
      debt
            
            $
            5,492,418
            
            
            $
            2,510,798







At
September 30, 2008, the Convertible Debenture balance consists of:





Principal
      outstanding
            
            $
            1,567,743Debt
      discounts attributable to the value of warrants issued to lender,less
      accumulated amortization of $78,225
            
            
            (78,225
            )Balance,
      net of unamortized discounts
            
            $
            1,489,518








In
connection with the private Securities Purchase Agreement with Trafalgar Capital
Specialized Investment Fund, a Luxembourg corporation (“Trafalgar”) dated June
29, 2007 (the “Agreement”) (see Note 8), the Company agreed to grant Trafalgar
warrants to purchase 1,250,000 shares at $0.001 per share and 50,000 warrants to
purchase shares of common stock at each of the first, second and third closing
for each $100,000 in Debentures, exercisable at the lower of $0.07 per share or
the closing bid price of the Registrant’s common stock on the date prior to the
issuance of each warrant. All of the warrants are exercisable for a period of 5
years from the date of issuance. At the first closing of $1,500,000 in September
2007, the Company issued Trafalgar 1,250,000 warrants exercisable at a price of
$.001 per share (valued at $106,125) and 750,000 warrants exercisable at a price
of $.07 per share (valued at $50,325).





In
accordance with Emerging Issues Task Force Issue 00-27, Application of Issue No.
98-5 to Certain Convertible Instruments ("EITF - 00-27"), and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” the Company recognized the $156,450 total
value attributable to the warrants as an increase in additional paid-in capital
and a discount against the Debenture.





The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
five years, an average risk free interest rate of 4.5%, a dividend yield of 0%
and volatility of 100%.


13




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





At
September 30, 2008, the notes payable to sellers of EKI consists
of:





Principal
      outstanding
            
            $
            3,300,000Debt
      discounts attributable to the contingent consideration due the sellers of
      EKI, less accumulated amortization of $431,390
            
            
            (1,468,610
            )Balance,
      net of unamortized discounts
            
            $
            1,831,390








On
November 15, 2007, the Company executed amendments to the agreement with the two
sellers of EKI. Pursuant to the amendments, the parties agreed to deem the
Purchase Price Adjustment Amount to be $0 and agreed to extend the maturity date
of the $3,300,000 outstanding notes payable (including the $1,900,000 considered
to be “contingent consideration”) to January 31, 2011. Pursuant to SFAS No. 15,
“Accounting by Debtors and Creditors for Troubled Debt Restructurings,” the
Company is accreting the $1,900,000 increase in notes payable to interest
expense using the interest method over the remaining 38.5 month term of the
notes.








8 -
CONVERTIBLE DEBENTURE





The
Company entered into a private Securities Purchase Agreement with Trafalgar
Capital Specialized Investment Fund, a Luxembourg corporation (“Trafalgar”)
dated June 29, 2007 (the “Agreement”). Pursuant to the Agreement, the Company
agreed to issue to Trafalgar a 10% Secured Convertible Debenture (the
“Debenture”) in the aggregate amount of $5,000,000, to be funded as follows (i)
$1,500,000 on the first closing; $1,750,000 on the second closing; and
$1,750,000 on the third closing.




In
September 2007, the first closing for $1,500,000 occurred. In addition to
interest at 10%, the Agreement (as amended) also provides commencing December
2007, for the Company’s monthly payment of principal (totals of $30,000 in 2007,
$480,000 in 2008 and $990,000 in 2009) and redemption premiums (totals of $1,800
in 2007, $63,600 in 2008, and $251,400 in 2009) equal to 6% of principal
payments in December 2007 and 1% increases each month thereafter until the
Debenture is satisfied in full.





The
Company, at its option, has the right to redeem a portion or all of the
Debenture (provided that the last trading day’s closing bid price of ENKG common
stock is below $0.20 per share) at 120% of the amount redeemed.





The
Debenture is secured by the Company’s assets. In addition, the two principal
co-founding shareholders of the Company, each pledged 17,857,143 million shares
of common stock which represents more than 50% of their common stock holdings.
The Debenture is convertible into shares of the Company’s common stock at the
lower of $0.20 per share or an amount equal to eighty-five percent (85%) of the
lowest volume weighted average price (“VWAP”) during the ten trading days
immediately preceding the conversion only if the closing bid price or the
VWAP for the Common Stock is at or above $0.20 per share. In the event the
Company defaults on any of its obligations under the Agreement, Trafalgar is
entitled, at its option, to convert the Debenture, plus accrued interest, into
shares of the Registrant’s common stock, even if the closing price or VWAP is
less than $0.20 per share.




In
connection with the Agreement, the Company agreed to grant Trafalgar warrants to
purchase 1,250,000 shares at $0.001 per share and 50,000 warrants to purchase
shares of common stock at each of the first, second and third closing for each
$100,000 in Debentures, exercisable at the lower of $0.07 per share or the
closing bid price of the Company’s common stock on the date prior to the
issuance of each warrant. All of the warrants are exercisable for a period
of 5 years from the date of issuance.




The
Company has agreed to register the shares of Common Stock underlying the
conversion of the Debentures and the exercise of the warrants, subject to the
provisions of Rule 415 under the Securities Act of 1933. The Investor
Registration Rights Agreement provides that in the event that the Registration
Statement is not declared effective by the Securities and Exchange Commission
(the “SEC”) on or before the Scheduled Effective Date (December 20, 2007, as
amended), the Company is to pay Trafalgar as liquidated damages an amount equal
to 2% of the outstanding balance for each 30 day period (or any part thereof)
after December 20, 2007 that the Registration Statement is not declared
effective by the SEC. On December 6, 2007, the Company filed a Registration
Statement with the SEC. On February 14, 2008, the Company filed Amendment No. 1
to the Registration Statement in response to a SEC comment letter. On April 29,
2008, the Company filed Amendment No. 2 to the Registration Statement. As of
September 30, 2008, failure to cause the Registration Statement to be declared
effective has resulted in total liquidated damages of $264,000, of which the
Company has paid $180,000 in liquidated damages. At September 30, 2008, the
Company has included $84,000 in accrued expenses in the consolidated balance
sheet to reflect the liability at that date. For the nine months ended September
30, 2008, selling, general and administrative expenses include liquidated
damages of $234,000.


14




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)




9
- ACCRUED EXPENSES PAYABLE




Accrued
expenses payable consists of the following:




September
      30,
              2008
            
            
            December
      31,
              2007Compensation
      of officers
            
            $
            440,934
            
            
            $
            287,117Other
      compensation, payroll taxes and withholdings
            
            
            224,325
            
            
            
            188,581Interest
            
            
            476,765
            
            
            
            222,314Warranty
      reserve
            
            
            118,520
            
            
            
            81,583Liability
      related to acquisition
            
            
            -
            
            
            
            102,000Other
            
            
            345,897
            
            
            
            193,705Total
            
            $
            1,606,441
            
            
            $
            1,075,300





10
- EMPLOYEE BENEFIT PLANS




The
Company provides a qualified deferred arrangement 401(k) plan whereby employees
may contribute up to 25% of gross compensation to the plan. The Company has the
option to match employee contributions up to 4% of the employees’ wages. There
were no Company matching contributions during the nine months ended September
30, 2008 and 2007.




11 - PREFERRED STOCK




The
Company’s preferred stock ranks senior to the common stock in respect of
dividends and liquidation rights. Shares of preferred stock are nonvoting and
are not entitled to mandatory dividends. Some series of preferred stock are
convertible into common stock; other series are not.







At
September 30, 2008, preferred stock consisted of:


Series
            
            Number
      of Shares of
              Preferred
      Stock
            
            
            Number
      of Shares of
              Common
      Stock
              Convertible
      Into$.01
      par value total
            
            
            975,086
            
            
            
            255,268$10.00
      par value total
            
            
            23,000
            
            
            
            4,000Total
      Preferred Stock
            
            
            998,086
            
            
            
            259,268





12 - COMMON STOCK





On
September 25, 2008, the Company issued 2,000,000 restricted shares of its
common stock to an investor in satisfaction of $200,000 in notes payable to such
investor.





On August
7, 2008 the Company issued a total of 750,000 restricted shares of its common
stock to three consulting firms for services rendered and has included the
$58,560 estimated fair value of these shares in selling, general and
administrative expenses in the nine month ended September 30, 2008.





On August
6, 2008, the Company issued 500,000 restricted shares of its common stock to a
consultant for services rendered and has included the $25,000 estimated fair
value of these shares at August 6, 2008 in selling, general and administrative
expenses in the nine months ended September 30, 2008.





On July
2, 2008, the Company issued 2,000,475 restricted shares of its common stock to a
consultant for services rendered and has included the $140,333 estimated fair
value of these shares at July 2, 2008 in selling, general and administrative
expenses in the nine months ended September 30, 2008.


15




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





On April
21, 2008, the Company issued 200,000 restricted shares of its common stock to a
consultant for services rendered and has included the $18,000 estimated fair
value of these shares at April 21, 2008 in selling, general and administrative
expenses in the nine months ended September 30, 2008.





On April
21, 2008, the Company issued 796,875 restricted shares of its common stock in
partial settlement of a December 31, 2007 accrued obligation of $102,000. The
shares were issued to the former owner of the Barnett location assets, and the
Company has reduced the liability by the $68,544 estimated fair value of these
shares as of September 30, 2008.





On April
21, 2008, the Company issued 181,818 restricted shares of its common stock,
pursuant to an agreement on April 1, 2008, to a consultant for services rendered
and has included the $20,000 estimated fair value of these shares as a reduction
in accounts payable in the nine months ended September 30, 2008.




On
January 28, 2008, the Company issued 1,000,000 restricted shares of its common
stock to a consultant for services rendered and has included the $40,000
estimated fair value of these shares at January 28, 2008 in selling, general and
administrative expenses in the nine months ended September 30,
2008.





16




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





13 - INCOME TAXES




ENKG
files a consolidated income tax return with its subsidiaries for federal
reporting purposes with subsidiaries filing separate income tax returns for
state reporting purposes.





The
provision for income taxes consists of the following:




Nine
      Months EndedSeptember
      30,
                2008
              
              
              September
      30,
                2007Current—Federal
              
              $
              —
              
              
              $
              —State
              
              
              2,400
              
              
              
              3,039Total
      current
              
              
              2,400
              
              
              
              3,039


Deferred—Federal
            
            
            (929,924
            )
            
            
            (136,702
            )State
            
            
            (287,106
            )
            
            
            (42,206
            )Valuation
      allowance
            
            
            1,217,030
            
            
            
            178,908Total
      deferred
            
            
            —
            
            
            
            —Total
      income taxes
            
            $
            2,400
            
            
            $
            3,039


17




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)




A
reconciliation of the expected income tax expense (benefit) to reported income
taxes follows:




Nine
      Months EndedSeptember
      30,
              2008
            
            
            September
      30,
              2007Federal
      income tax at 34%
            
            
            (1,027,540
            )
            
            
            (151,051
            )State
      income tax, net
            
            
            (187,090
            )
            
            
            (24,818
            )Change
      in valuation allowance
            
            
            1,217,030
            
            
            
            178,908Total
            
            $
            2,400
            
            
            $
            3,039








Management
has not determined it to be more likely than not that any portion of the
deferred tax asset attributable to the future utilization of the net operating
loss carryforwards as of September 30, 2008 will be realized. Accordingly, the
Company has provided a 100% allowance against the deferred tax asset in the
financial statements at September 30, 2008. The Company will continue to review
this valuation allowance and make adjustments as appropriate. The
net operating loss carryforwards are available in varying amounts through
year 2028 to offset future taxable income. Current tax laws limit the amount of
loss available to be offset against future taxable income when a substantial
change in ownership occurs. Therefore, the amount available to offset future
taxable income may be limited.








14 - COMMITMENTS AND
CONTINGENCIES




Operating
leases:




ENKG
leases its corporate office space (approximately 400 square feet) as a
month-to-month lease agreement executed on January 3, 2008. The lease provides
for monthly rental payments of $2,038.




Heating
and Air Conditioning Services, Inc. (“HACS”) leases its office space
(approximately 12,000 square feet) under a non-cancelable lease agreement
executed January 26, 2005 with a lessor partially owned by the General Manager
of HACS. The lease provides for monthly rental payments of $7,500 through
January 2010. EKI leases its office space (approximately 4,000 square feet)
under a month-to-month lease with a rental of $2,700 per month at Sacramento and
$1,800 per month for its Riverbank operations, and negotiations are underway to
extend the leases. HACS leases truck vehicles under month to month lease
agreements.




Gallagher’s
Heating and Air Conditioning Services, Inc. (“GHAC”) rents its Los Molinos, CA
facility (approximately 4,000 square feet) from Tim Gallagher at $2,500 per
month. The lease is through December 31, 2009. GHAC rents a facility in Yuba
City, CA (approximately 2,000 square feet) at $1,900 per month on a
month-to-month lease.





For the
nine months ended September 30, 2008 and 2007, rent expense under operating
leases consisted of:




September
      30,
              2008
            
            
            September
      30,
              2007ENKG
      Corporate office space
            
            $
            20,682
            
            
            $
            23,616HVAC
      office space
            
            
            144,110
            
            
            
            87,750HVAC
      truck vehicles
            
            
            77,526
            
            
            
            26,919WWMPC
      office space
            
            
            8,085
            
            
            
            10,888Total
            
            $
            250,403
            
            
            $
            149,173





18




ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)





At
December 31, 2007, the aggregate future minimum lease payments under
non-cancelable lease agreements were as follows:




Year EndedDecember31,
            
            Operating
            
            
            Capital2008
            
            $
            152,075
            
            
            $
            13,0562009
            
            
            137,326
            
            
            
            12,1602010
            
            
            27,014
            
            
            
            13,2852011
            
            
            4,798
            
            
            
            14,5132012
            
            
            —
            
            
            
            14,254Total
      Future Minimum Payments
            
            $
            321,213
            
            
            
            67,268Less:
      Executory and Interest Costs
            
            
            
            
            
            
            20,287Net
      Present Value of Future Minimum Lease Payments
            
            
            
            
            
            $
            46,981







Employment
Agreements:




On
February 29, 2008, ENKG entered into an employment agreement with Tim Gallagher
as its General Manger of Gallagher’s operations. The term of the agreement is
from February 29, 2008 through December 31, 2009 at an annual salary of
$150,000.





On May
23, 2008, Mr. Jeffrey R. Hultman, was appointed by the Board as CEO, pursuant to
meetings of Board members and executives, interviews by Board members and a
Board vote held May 17, 2008 for a term of two years. Mr. Hultman will
receive cash compensation for his services as CEO in the amount of $175,000
annually.  Cash compensation shall be accrued until a financing of at
least $2,000,000 (“Financing”) is completed. In addition, Mr. Hultman will
receive (1) employee stock options to purchase shares of the Company’s common
stock pursuant to a to be approved Company Stock Option Plan ("Plan"), with
an exercise price equal to the closing price of the Company’s common stock on
the grant date of the option, as reported by the OTC Bulletin Board, and (2)
options to purchase shares of the Company’s common stock equal to 5.0% of the
outstanding Common Shares after the Financing is completed. These options shall
vest over a three-year period with 1/12 of the total vesting on the last day of
each quarter starting from the Effective Date of the employment
agreement.  Vested shares subject to the options will be subject to
the terms and conditions of the Plan and any associated stock option
agreement.




Contingency:




Claims
and Lawsuits




The
Company is subject to certain claims and lawsuits arising in the normal course
of business. The Company maintains various insurance coverages to minimize
financial risk associated with these claims.




The
Company estimates and provides accruals for probable losses and related legal
fees associated with litigation. While the Company cannot predict the outcome of
proceedings, in management’s opinion and based on reports of counsel, any
liability arising from these matters individually and in the aggregate will not
have a material effect on the Company’s operating results or financial
condition, after giving effect to provisions already recorded.




19


ENERGY
KING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008
(Unaudited)








15– SALE OF
SUBSIDIARY





Effective
July 1, 2008, ENKG sold WWMPC for $1. The loss on sale of WWMPC was included in
discontinued operations in the three and nine months ended September 30, 2008
and, excluding disputed items, was as follows:








Sale
      price
            
            $
            1Net
      assets of WWMPC at June 30, 2008:Cash
      and cash equivalents
            
            
            112,511Property
      and equipment, net
            
            
            80,504Accounts
      payable
            
            
            (3,025
            )Accrued
      expenses
            
            
            (21,880
            )Current
      portion of notes payable and long-term debt
            
            
            (18,641
            )Customer
      deposits and deferred revenue
            
            
            (140,000
            )Notes
      payable and long-term debt, net of current portion
            
            
            (3,750
            )Net
      assets
            
            
            5,719Fair
      value of 770,000 shares of ENKG common stock at July 1, 2008 (to be
      retained by WWMPC)
            
            
            40,040Loss
      on sale of WWMPC
            
            $
            (45,758
            )








WWMPC and
Paul Hancock, the chief executive officer of WWMPC, have advised ENKG that ENKG
is and has been obligated to pay Paul Hancock a monthly salary (ranging from
$9,166 to $15,833 per month through February 28, 2012) pursuant to an amended
Employment Contract dated March 1, 2006. WWMPC also has advised ENKG that ENKG
is and has been obligated to pay WWMPC a monthly expense allowance ($6,500 per
month through February 28, 2012) pursuant to an Operating Agreement dated March
1, 2006. ENKG advised WWMPC and Paul Hancock that, commencing January 1, 2008,
ENKG was no longer responsible for such payments. The total disputed amount at
September 30, 2008, which has not been accrued, is approximately $150,000.
Further, WWMPC has advised ENKG that ENKG is obligated to issue and deliver an
additional 2,000,000 shares of ENKG common stock to WWMPC pursuant to the
Operating Agreement dated March 1, 2006 (which ENKG disputes).





16– SUBSEQUENT EVENTS





On
October 20, 2008, Trafalgar sent a Notice of Default to the Company in
connection with the Convertible Debenture (see Note 8).  The notice
seeks acceleration of all debentures outstanding and accrued interest thereon in
a claimed amount of $1,745,887 and, in the event of failure to pay such amount,
foreclosure of assets as governed by the Security Agreement dated June 29,
2007.  The company has been discussing with Trafalgar alternative ways
to resolve the situation.


20
  Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations




Management's
discussion and analysis of financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes. This discussion may contain forward-looking statements that could involve
risks and uncertainties.





DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS


The
statements which are not historical facts contained in this Form 10-Q are
"forward looking statements" that involve risks and uncertainties. The words
"anticipate", "believes", "expect", "intend", "may" or similar expressions used
in this Form 10-Q as they relate to the Company or its management are generally
intended to identify such forward looking statements. These risks and
uncertainties contained in this Form 10-Q include but are not limited to:
product demand and market acceptance risks, the effect of economic conditions
generally and retail/wholesale in the heating, ventilation, air conditioning,
plumbing, , the impact of competition, labor shortages, increase in wage rates,
unexpected increases in general operating costs, technological difficulties,
capacity and supply constraints or difficulties, the results of financing
efforts, changes in consumer preferences and trends, the effect of the
Company's accounting policies, weather conditions, acts of God, and other risks
detailed in the Company's Securities and Exchange Commission
filings.




Forward-looking
statements are based on current information and expectations and are made in
good faith but we assume no obligation to update them at
any stage. Therefore, our actual experience and results achieved
during the period covered by any particular forward-looking statement may
differ substantially from those anticipated. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by us
or any other person that these estimates will be realized, and actual
results may vary materially. We cannot offer any assurance that any of
these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.





RESULTS
OF OPERATIONS




CONSOLIDATED
OVERVIEW




The
Company reported consolidated revenues of $13,105,747 for the first nine months
of 2008 which is an increase of 25.3% or $2,649,905 over the $10,455,842
reported in the first nine months of 2007.   On February 29, 2008,
Galalgher’s Heating and Air Conditioning, Inc. (GHAC) was acquired. It is
located in Los Molinos, CA which is about 2 hours north east of Sacramento, CA.
GHAC is expected to bring approximately $4.5 million in revenues to the company
in 2008. The Company expects revenue growth to continue in proportion to future
acquisitions’ revenue streams. The heating ventilation and air conditioning
(HVAC) industry has cyclical components. Sales traditionally decline in the
middle of the fourth quarter through the first quarter of the new year. The
Company believes that it is positively impacted by factors such as greater
consumer awareness of energy conservation through better HVAC equipment
utilization.  The Company believes that there are current offsetting
negative factors such as the overall slowdown in national economic activity,
declining consumer confidence and increased costs, such as fuel costs. The
Company continues to remain focused on acquisitions, top-line sales growth, and
increased customer retention. The Company’s goal is to combine locally acquired
HVAC businesses in specific regions across the United States with the logo and
name Energy King, creating a nationally recognized brand name.




OPERATIONS
REVIEW




Currently
there are five operational HVAC locations providing direct HVAC installation and
repair services: Heating & Air Conditioning Services, Inc. ("HACS") and
Energy King, Inc.-Sacramento, California ("EKIS"), Energy King, Inc.’s Barnett
Heating and Air near Modesto, California (“EKIB”), Energy King, Inc.-Fresno,
California ("EKIS"), and Gallagher’s Heating and Air Conditioning, Inc. in Los
Molinos, CA (“GHAC-LM”).








21




The HVAC
operations reflect the seasonal nature of heating and cooling. Overall, the
integration plan used with HACS is providing positive operational results there
as well as with the California locations. The same plan will be tailored to
future acquisitions to improve marketing, administration and sales efforts. The
integration plan is comprised of a team of professionals with experience in the
HVAC industry who work with the acquired company's management and field staff to
develop and train their people in techniques to improve sales. Key components of
the integration include: standardized reporting of operations, customer
awareness and support, lead generation and follow through, focused marketing,
employee training and pricing strategies. The following table illustrates the
performance of each HVAC location through the first nine months of 2008.





Nine
      months Ended September 30, 2008HVAC
            
            101
              HACS
            
            
            102
              EKIS
            
            
            103
              EKIB
            
            
            104
              EKIF
            
            
            105
              GHAC-LM
            
            
            TOTAL
      HVACRevenues
            
            $
            3,425,829
            
            
            $
            3,613,767
            
            
            $
            2,126,301
            
            
            $
            328,635
            
            
            $
            3,611,215
            
            
            $
            13,105,747Gross
      Profit
            
            
            869,476
            
            
            
            1,303,471
            
            
            
            569,603
            
            
            
            92,875
            
            
            
            1,721,466
            
            
            
            4,556,891Gross
      Profit Percentage
            
            
            25.4
            %
            
            
            36.1
            %
            
            
            26.8
            %
            
            
            28.3
            %
            
            
            47.7
            %
            
            
            34.8
            %Income
      (Loss) from Operations
            
            $
            168,092
            
            
            $
            (17,794
            )
            
            $
            (293,514
            )
            
            $
            (34,317
            )
            
            $
            349,902
            
            
            $
            172,369Income
      (Loss) from Operations Percentage of Revenues
            
            
            4.9
            %
            
            
            -.5
            %
            
            
            -13.8
            %
            
            
            -10.4
            %
            
            
            9.7
            %
            
            
            1.3
            %








Sales of
the HVAC operations continued to increase. All locations are expected to improve
their revenues and net income from operations starting with Spring through the
Summer. The introduction of windows as a product available through HVAC in
California have shown customer acceptance and sales. The windows that are
offered help insulate the home thereby saving on heating and cooling bills. We
are looking to improve the“green” image of
our HVAC operations through windows and other similar energy conservation
measures. Offering more energy saving air conditioning units along with similar
green heating units will improve the image of the Company and the industry.
While helping increase sales through the“green” approach
for our customers, we are looking to make a positive impact on the environment
as well.




The
following table presents selected HVAC, Corporate and Consolidated financial
data for the period indicated.




Nine
      months Ended September 30, 2008HVAC
            
            Corporate
            
            ConsolidatedRevenues
            
            $
            13,105,747
            
            $
            ---
            
            $
            13,105,747COS
      and expenses
            
            
            12,933,378
            
            
            2,325,203
            
            
            15,258,581Income
      (Loss) from Operations
            
            
            172,369
            
            
            (2,325,203
            )
            
            (2,152,834
            )Cash
      and cash equivalents
            
            
            (37,033
            )
            
            99,109
            
            
            136,142Current
      assets
            
            
            1,854,959
            
            
            107,297
            
            
            1,962,256Total
      assets
            
            
            4,891,427
            
            
            4,756,058
            
            
            9,647,485Current
      liabilities
            
            
            3,145,256
            
            
            2,966,148
            
            
            6,111,404Total
      liabilities
            
            $
            3,418,573
            
            $
            8,185,249
            
            $
            11,603,822




Consolidated
loss from operations for the first nine months of 2008 was 16.5% of net
sales. HVAC operations over came its first quarter loss of $245,418 to show a
nine month net income of $172,369. Consolidated loss from operations for the
third quarter of 2008 was 19.4% of net sales compared with 13.4% for the third
quarter of 2007.




Sales
increased $2,649,905 in the first nine months of 2008 compared to the same
period of 2007. This 25.3% increase was driven by the acquisition of Gallagher’s
Heating and Air. Sales increased $1,707,506 in the third quarter of 2008
compared to the same period of 2007. This 50.2% increase was driven by the
acquisition of Gallagher’s Heating and Air.




Cost of
services increased 28.3% during the first nine months of 2008 over the same
period in 2007. Although sales have increased, the cost of producing those sales
has as well. The HVAC operations absorbed most increases in costs to secure new
sales. A focused effort on cost controls and strategic vendor alliances has
helped reduce the effect of the apparent economic downturn. With more
acquisitions and greater economies of scales, management expects to continue to
reduce costs as a percentage of sales. Cost of services increased 73.3% during
the third quarter of 2008 over the same period in 2007.




22


Marketing
and selling expenses increased to 10.8% of net revenues in the first nine months
of 2008 as compared to 9.0% for the same period in 2007. Management believes the
impact of this increased marketing effort per dollar of sales is generating
returns. Of the variety of marketing efforts used, approximately 92% of all
marketing funds went to a combination of television, yellow pages, direct
mailing, radio and newspaper efforts. Marketing and selling expenses
remained constant at 9.6% of net revenues in the third quarter of 2008 as
compared to the same period in 2007.





General
and administrative (“G&A”) expenses increased approximately 44.7% in the
first nine months of 2008 over the same period of 2007, and
represented 29.5% of net revenues in the third quarter of 2008 as
compared with the first nine months of the year in 2007 where G&A expenses
represented 29.3% of revenues. General and administrative (“G&A”) expenses
increased approximately 24.4% in the third quarter of 2008 over the same period
of 2007. Non-cost-of-service salaries and related costs were 40.0% of
revenues in the first nine months of 2008 and 39.0% for the same period in 2007.
Accounting, legal and other professional costs decreased from 3.7% to 1.5% of
revenues in the third quarter of 2008 compared to the same period in 2007. As a
percent of total G&A expenses, rent remained steady at approximately 1% of
revenues in each of the first nine months of both 2008 and 2007. Insurance also
remained steady at approximately 2% of revenues in each of the first nine months
of both 2008 & 2007.




Interest
expense increased $658,008 to $896,986 in the first nine months of 2008 or just
under 7% of revenues as compared to 2.3% for the same period in 2007. The
increase in interest expense was primarily impacted by interest on additional
debt in 2008 and interest expense recorded in relation to amended acquisition
agreements on November 15, 2007.







In the
midst of declining sales in the first quarter of 2008, Energy King increased its
marketing efforts, maintained its level of salesmen, technicians and installers
and has emerged in the second quarter of 2008 with increased HVAC sales and
profits. With management’s philosophy of controlling costs of services as well
as selling, general and administrative expenses, the efficacy of Energy King’s
business philosophy is strong. It is a philosophy designed to bring proven
techniques for increasing leads which result in sales, cost controls and cost
consciousness at all levels of the company. Energy King practices a philosophy
of training the salesmen, installers and technicians in better techniques. The
soundness of the Energy King mission is clear.




At
Energy King, our mission is to become the leading national brand of residential
comfort services contractors by acquiring the industry's most outstanding
operators, sharing best practices, offering the most ethical and professional
services and providing solutions that meet our customers' needs and exceed
their expectations.




23




General




Energy
King, Inc. was formed in July 2005 for the purpose of becoming a consolidator of
independent local and regional providers of residential heating, ventilating,
air conditioning and plumbing ("HVAC/Plumbing") services and replacement
equipment through the United States.




The
Company's goal is to become a leading HVAC/Plumbing service provider in each of
the markets in which it operates or will operate. The Company's management is
comprised of executives and operators with extensive experience in the
HVAC/Plumbing industry generally as well as experience in HVAC/Plumbing service
consolidation, management and operations, including large multi-location,
national, regional and local HVAC/Plumbing companies.




The
Company believes that by pursuing its plan of combining local and regional
HVAC/Plumbing service providers into a well-managed national organization, the
Company should be able to create a national HVAC/Plumbing service provider with
brand name recognition throughout the HVAC/Plumbing service industry. We believe
that with national recognition the Company will be able to strengthen and
consolidate its customer bases and improve overall operating efficiency,
utilizing centralized management expertise and strong local presences in each
market.




We
provide comprehensive heating, ventilation and air conditioning (“HVAC”)
installation, maintenance, repair and replacement services within the mechanical
services industry in 5 locations in the United States. We operate primarily in
the residential HVAC markets, and perform most of our services within
residential homes. In addition to standard HVAC services, certain locations also
provide specialized applications such as improved home insulation through window
installations. Approximately 80% of our consolidated revenues were derived from
residential installation customers with approximately 15% of the revenues
attributable to maintenance, repair and replacement services and 5% attributable
to windows installation.




Effective
February 15, 2008, the Company officially changed its name to Energy King, Inc.
and accordingly the trading symbol was changed from BEYV to ENKG to better
reflect the new name.





Our
present and future focus is on the HVAC service and replacement markets for
residential and small commercial customers because it is management's belief,
based upon years of industry experience, that the service and replacement market
offers higher margins and exposes us to a reduced level of credit risk
compared to the levels of risk usually associated with larger scale new
construction projects. In addition, we believe that the HVAC/Plumbing service
and replacement market offers more attractive pricing due to demands by both
residential and small commercial customers in local markets for prompt,
convenient and reliable service that can be offered by local HVAC/Plumbing
service providers.




Our
Internet address ishttp://www.enkg.com. We make available free of charge on or through our
website our annual report on Form 10-KSB, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission, or
the Commission.


24





GENERAL
DESCRIPTION OF THE HEATING, VENTILATION AND AIR CONDITIONG SERVICES
INDUSTRY




The
HVAC/Plumbing service industry is highly fragmented and the Company estimates,
based upon industry data, that there are at least 80,000 HVAC/Plumbing companies
in the US, mostly privately held companies that operate from a single location.
We believe based upon published industry data estimates that the market for the
service and replacement of HVAC/Plumbing systems in existing homes is in excess
of $50 billion annually.




Generally,
local HVAC/Plumbing companies are small, owner-operated, independent contractors
who serve customers in local markets, with limited access to capital for
investment in infrastructure, technology and expansion. We believe that
HVAC/Plumbing businesses are typically closely-held, single-center operators
that serve a limited geographic area and are heavily dependent upon referrals
to generate business. We also believe that, in many cases, these
small-sized service providers are operated by former service technicians who
lack the management experience and marketing expertise necessary to expand their
businesses, generate profitable operations and compete effectively with larger
operators in their local market as well as regional operators competing in their
market.




Our
management believes that larger HVAC/Plumbing contractors are generally better
able to operate efficiently and cost-effectively, offer customers a broader
array of HVAC/Plumbing related products and services and provide a higher level
of customer service than smaller operators. We believe that these competitive
advantages are the result of greater managerial and financial resources as well
as economies of scale in purchasing and marketing expenses, which factors should
enable us to promote a trend toward consolidation in the HVAC/Plumbing industry
and present an opportunity for well-capitalized operators, including
public companies such as us, to acquire additional operators on
favorable terms.





At
present, we serve the greater Sacramento, Los Molinos, Modesto, and Fresno, CA
and Boston, MA metropolitan area markets, principally providing renovation and
replacement service to residential and small business customers rather than new
construction HVAC/Plumbing installations. It is the view of management, based
upon their experience and continuing HVAC/Plumbing industry analysis, that many
metropolitan and suburban areas in the U.S. have experienced significant growth
in residential HVAC/Plumbing renovation and replacement activity over the last
several years as a result of the past several years of strong residential
housing market nationally. We believe, even with the recent slowing in new
residential construction and the sale price decreases in residential homes, that
the demographic trends indicate continued growth in the areas of HVAC/Plumbing
renovation and replacement as homeowners seek ways to add value to their
homes.




The
HVAC/Plumbing service industry is influenced by seasonal factors, which
generally result in lower activity during winter months than in other periods.
This factor is especially apparent in northern and mid-western regions of the
U.S. As a result, we expect that revenues and profits from our Sacramento, Los
Molinos, Modesto, and Fresno, CA and Boston, MA area operations and other such
markets in which we make acquisitions will generally be lower in the first and
fourth quarters of each fiscal year, and higher in the second and third
quarters. As we make acquisitions in the south and southwest areas of the U.S.,
seasonal factors will become less apparent in our consolidated
operations.




HVAC
systems provide the primary method of circulating fresh air in residences during
peak periods of heat and cold climate conditions. In many instances, replacing
an aging system with a modern, energy-efficient HVAC system significantly
reduces a home's heating and cooling costs and improves air quality and HVAC
system effectiveness. Older residential HVAC systems often have poor air quality
as well as inadequate air conditioning, and older HVAC systems result in
significantly higher energy costs than do modern systems. These factors cause
many residential owners to consider replacing older systems before the end of
their functioning lives. More than fifty percent of the HVAC systems replaced
are operational at the time of replacement.




Many
factors positively affect HVAC industry growth, particularly (i) population
growth, which has increased the need for residential space, (ii) an aging
installed base of HVAC equipment, (iii) increasing sophistication,
complexity, and efficiency of HVAC systems, (iv) growing emphasis on indoor
air quality, (v) reduction or elimination of the refrigerants commonly used
in older HVAC systems, and (vi) increasingly stringent regulations on minimum
HVAC and house ducting systems efficiency standards. We believe these factors
should increase demand for the reconfiguration or replacement of existing
HVAC systems and may also mitigate, to some extent, the effect on the HVAC
industry of the cyclicality inherent in the traditional construction
industry.




HVAC/PLUMBING
SERVICES




HVAC. At present, we offer HVAC
replacement and renovation services with operations and facilities in the
Sacramento, Los Molinos, Modesto, and Fresno, CA and Boston, MA metropolitan
areas, respectively. To date these operations have generated nearly all of our
revenues. HVAC systems typically involve air duct systems and air-handling and
condenser equipment. Other equipment components of an HVAC system include:
heaters, furnaces, condensers, air handlers and blowers. A typical HVAC
replacement project for residential or small commercial projects begins with a
thorough inspection of the current equipment. Engineering calculations are
performed to determine the appropriate replacement equipment. In most cases, the
air-handling equipment and condensing equipment are replaced as well as the
refrigeration lines. When necessary, duct repairs and modifications are also
made.


25




Maintenance,
Repair and Replacement. Maintenance and repair
contracting services are generally provided on a fee per visit basis. In
addition, we provide our customers with service contracts which generally have
an annual fee with additional sums due for certain products and services.
Revenues generated from repair and maintenance contracting services historically
represent a small portion of the overall revenue of the Company.




Windows. As we acquire new
HVAC/Plumbing service providers, our window replacement services will involve
the replacement of residential windows with more energy efficient models to
provide a better seal for the residential structure. Having a better seal makes
the residence more energy efficient by cutting down on heat loss in winter
operation and heat gains in summer operation thus providing cost savings to the
homeowner. The offering of energy efficient windows in tandem with HVAC systems
enhances the Company's presentation to the homeowner as a provider of a
more complete energy solution





Plumbing. We anticipate a strong
synergy between HVAC operations and plumbing. As we acquire new HVAC/Plumbing
service providers, our plumbing services will involve the repair of residential
plumbing systems that convey domestic water throughout a home or supply natural
gas to various equipment or appliances, as well as the repair and replacement of
heaters, boilers, ovens and stoves, and kitchen and bathroom equipment. A
domestic water system typically includes separate piping for hot and cold water
as well as a number of fixtures including sinks, bathtubs, showers and hot tubs.
Substantially all of the equipment and component parts we will install are
purchased from third-party wholesale suppliers or directly from the
manufacturers or "OEMs", which equipment and components will be resold to our
customers as part of the contracted installation and repairs.





Governmental
Regulation and Environmental Matters




Our
operations are subject to various federal, state and local laws and regulations,
including: (i) licensing requirements applicable to engineering,
construction and service technicians, (ii) building and HVAC codes and
zoning ordinances, (iii) regulations relating to consumer protection,
including those governing residential service agreements, and
(iv) regulations relating to worker safety and protection of the
environment. We believe we have all required licenses to conduct our operations
and are in substantial compliance with applicable regulatory requirements. If we
fail to comply with applicable regulations we could be subject to substantial
fines or revocation of our operating licenses, which could have a material
negative impact on our operating business.




Many
state and local regulations governing the HVAC services trades require
individuals to hold permits and licenses. In some cases, a required permit or
license held by a single individual may be sufficient to authorize specified
activities for all of our service technicians who work in the state or county
that issued the permit or license. We seek to ensure that, where possible, we
have two employees who hold any such permits or licenses that may be material to
our operations in a particular geographic region.




Our
operations are subject to the federal Clean Air Act, as amended, which governs
air emissions and imposes specific requirements on the use and handling of
chlorofluorocarbons, or CFCs, and certain other refrigerants. Clean Air Act
regulations require the certification of service technicians involved in the
service or repair of equipment containing these refrigerants and also regulate
the containment and recycling of these refrigerants. These requirements have
increased our training expenses and expenditures for containment and
recycling equipment. The Clean Air Act is intended ultimately to eliminate
the use of CFCs in the United States and to require alternative refrigerants to
be used in replacement HVAC systems. We do not believe these regulations
involving CFCs will materially affect our business on the whole because,
although they require us to incur modest ongoing training costs, our competitors
also incur such costs, and the regulations may encourage our customers to update
their HVAC systems.




INTERNAL
AND EXTERNAL SOURCES OF LIQUIDITY AND CAPITAL RESOURCES




For the
nine months ended September 30, 2008, the Company experienced a net loss of
$3,030,295 after net loss from operations of $2,158,552. At September 30, 2008,
the Company had $136,142 in cash and cash equivalents.





As the
Company enters into a seasonally-lower sales period, cash flows will likely be
negatively impacted in a material manner. The Northeastern part of the country
will likely experience an increase in sales for the winter months starting in
mid-October into December, however, this seasonal increase is not as prevalent
for existing operations in California. In January 2009, the Company will have
increased cash needs of $100,000 per month related to the acquisition of
Gallagher’s and debt repayments. Consequently, management is seeking alternative
funding sources and analyzing operational levels to plan for the anticipated
decrease in sales and related cash flows after September 2008.




The
Company’s existing capital resources may not be adequate to satisfy its capital
requirements for the foreseeable future. Therefore, we will need to acquire
additional funds through public or private financings in the form of debt or
equity. If the Company fails in its efforts to acquire additional funds, the
Company will be forced to dramatically cut operating expenses, which will likely
negatively impact sales, net income and related cash flows.. These drastic
measures would likely result in a loss of key sales people, technicians and
installers. Recovery of lost sales and cash flows from such drastic reductions
in expenses may take all of the year 2009, if it all. In the worst case, if the
Company is unable to meet its debt obligations and the related creditors
exercise their default provisions, the Company could potentially lose all of its
existing HVAC locations.





In
accordance with Section 4(2) of the Securities Act of 1933 and subject to Rule
144 restrictions, the Company issued 8,199,168 shares of its common stock and no
shares of its preferred stock for services in the first nine months ended
September 30, 2008.




The
Company's principal liquidity at September 30, 2008 included cash of $136,142
and $387,918 net accounts receivable. It is anticipated that the Company's
liquidity position may not be sufficient to support ongoing general and
administrative expense, strategic positioning, and the addition of new, as well
as maintenance of existing contracts and relationships.




26





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Market risk generally represents
the risk that losses may occur in the values of financial instruments as a
result of movements in interest rates, foreign currency exchange rates and
commodity prices. Since we operate exclusively in the United States we do not
have foreign currency exchange rate or commodity price market
risk.
 Item 4(T). Controls and
Procedures.




The
Company's Chief Executive Officer and Principle Accounting Officer, Jeffrey R.
Hultman, the Audit Committee, and the Company's Secretary Larry Weinstein, have
evaluated the Company's disclosure controls and procedures as of the end of the
period covered by this report.
  The
Company's disclosure controls and procedures include a roll-up of financial and
non-financial reporting that is consolidated in the offices of the Chief
Executive Officer, Chief Financial Officer and the Audit Committee.
 
 The
reporting process is designed to ensure that information required to be
disclosed by the Company in the reports that it files with or submits to the
Securities and Exchange Commission is recorded, processed, summarized and
reported under the direction of its Internal Auditor and Compliance Officer
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Based on their review of the effectiveness of the design and
operation of our disclosure controls and procedures, Messrs. Hultman, Weinstein
and the Audit Committee have concluded that (i) our disclosure controls and
procedures are effective at the reasonable assurance level to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported in accordance with and within the time periods specified in Securities
and Exchange Commission rules and forms; and (ii) our disclosure controls and
procedures are effective also to ensure that information required to be
disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is accumulated and communicated to our management, including our
Chief Executive Officer and Principal Accounting Officer, to allow timely
decisions about required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures .
  There
were no changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
 27




Part
II. Other Information




Item
1. Legal Proceedings




INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS




There are
no material pending legal proceedings to which the Company is a party or to
which any of its assets are subject.




Various
legal actions, governmental investigations and proceedings and claims may be
instituted or asserted in the future by the Company or against the Company
and/or its subsidiaries including those arising out of alleged deficiencies in
the company's products; governmental or industry regulations relating to safety,
financial services; employment-related matters; distributor, exhibitor,
co-producer, vendor, supplier, or other contractual relationships; intellectual
property rights; product warranties and environmental matters. Some of the
foregoing matters involve or may involve compensatory, punitive or anti-trust or
other treble damage claims in varying amounts, environmental remediation
programs, sanctions or other relief which, if granted, would require varying
expenditures. Litigation is subject to many uncertainties, and the outcome of
individual litigated matters is not predictable with assurance. The Company does
not reasonably expect, based on its analysis, that any adverse outcome from such
matters would have a material effect on future consolidated financial statements
for a particular year, although such an outcome is possible.





Item
1A. Risk Factors.





For a
detailed discussion of the risk factors that should be understood by any
investor contemplating investment in our stock, please refer to Part II, Item
1A, Risk Factors, in our Form 10-K for the year ended December 31, 2007 filed
with the Securities and Exchange Commission.


28




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds




In
accordance with Section 4(2) of the Securities Act of 1933 and subject to SEC
Rule 144 restrictions, the Company issued a convertible promissory note,
8,079,168 shares of its common stock and no shares of its preferred stock to
employees, consultants and in connection with an acquisition in the first nine
months ended September 30, 2008 as follows:





Date
      of Sale
            Title
      of Security
            Number
      Sold
            Consideration
      Received and Description of Underwriting or Other Discounts to Market
      Price or Convertible Security Afforded to Purchasers
            Exemption
      from Registration Claimed
            If
      Option, Warrant or Convertible Security, Terms of Exercise or
      ConversionJanuary
      18, 2008
            Common
      Stock, $.001 par value
            1,000,000
            Services
      rendered; no commissions paid;
            Section
      4(2)
            Not
      applicableFebruary
      29, 2008
            Convertible
      Note
            1
            Acquisition;
      no commissions paid
            Section
      4(2)
            $2,000,000
      promissory note convertible to (1:1) common stock at $.20 and $.25 per
      share through February 28, 2010.March
      31, 2008
            Common
      Stock, $.001 par value
            1,400,000
            Services
      rendered; no commissions paid
            Section
      4(2)
            Not
      applicableApril
      21, 2008
            Common
      Stock, $.001 par value
            1,178,693
            Services
      rendered; no commissions paid
            Section
      4(2)
            Not
      applicableJuly
      2, 2008
            Common
      Stock, $.001 par value
            2,000,475
            Services
      rendered; no commissions paid
            Section
      4(2)
            Not
      applicableAugust
      6, 2008
            Common
      Stock, $.001 par value
            500,000
            Services
      rendered; no commissions paid
            Section
      4(2)
            Not
      applicableSeptember
      25, 2008
            Common
      Stock, $.001 par value
            2,000,000
            Conversion
      of note
            Section
      4(2)
            Not
      applicable




Item
3. Defaults Upon Senior Securities




There
were no defaults on senior securities for the nine months ended September 30,
2008.




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




There
were no submissions of matters to a vote of shareholders in the nine months
ended September 30, 2008.





Item
5. Other Information




None.





29




Item
6. Exhibits
  The
following exhibits are filed herewith.




INDEX
OF EXHIBITS












Incorporated by Reference to the
      Exhibit Indicated Below and to the
      Filing with the Commission Indicated
    BelowExhibit
                Number
              
              
              
              Description
      of Exhibits
              
              
              Exhibit
                Number
              
              
              Filing or
      File Number31.1
              
              
              
              Rule
      13a-14(a) Certification of Jeffrey R. Hultman pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002
              
              
              31.1
              
              
              Filed
      Herewith32.1
              
              
              
              Section
      1350 Certification of Jeffrey R. Hultman pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
              
              
              32.1
              
              
              Filed
      Herewith32.2
              
              
              
              Section
      1350 Certification of Jeffrey R. Hultman pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
              
              
              32.2
              
              
              Filed
      Herewith






30




SIGNATURES




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




ENERGY
      KING, INC.November
      13, 2008
            
            By:
            /s/
      JEFFREY R. HULTMANJeffrey
      R. HultmanChief
      Executive Officer & Principal Accounting
  Officer


















31