UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K




(Mark
One)


x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
fiscal year ended:  June 30, 2010


OR


 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from ____________________ to ____________________





Commission
file number:  0-21825





SMF
ENERGY CORPORATION


(Exact
name of registrant as specified in its charter)




Delaware
              65-0707824(State
      or other jurisdiction
              (I.R.S.
      Employerof
      incorporation or organization)
              Identification
      No.)





200
West Cypress Creek Road, Suite 400, Fort Lauderdale, Florida 33309


(Address
of principal executive offices) (Zip Code)




(954)
308-4200


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:




Title
      of Class
                  
                  Name
      of exchange on which registeredCommon
      Stock, $.01 Par Value
                  
                  Nasdaq
      Capital Market





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈    No
x




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). 
                                                                                                                                                
Yes  ̈    No
 ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  ̈





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 definition of “accelerated filer”, “large accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





 ̈ Large accelerated
filer         ̈ Accelerated
filer         ̈ Non-accelerated
filer        Smaller reporting company
x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


Yes  ̈    No
x





The
aggregate market value of the voting stock held by non-affiliates was
$11,790,346.  The aggregate market value was computed by reference to the
last sale price of the registrant’s Common Stock on the Nasdaq Capital Market on
December 31, 2009.





As of
September 21, 2010 there were 8,557,314 shares of the Registrant’s Common Stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE:


Certain
Portions of Registrant’s Proxy Statement relating to the 2010 Annual Meeting of
Shareholders are incorporated by reference into Part III.











CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS




From time
to time, we make statements concerning our expectations, beliefs, plans,
objectives, goals, strategies, future events or performance and underlying
assumptions and other statements that are not historical facts.  These
statements are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995.  Forward-looking statements include statements concerning our
expectations, plans, objectives, goals, strategies, future events, future
revenue or performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, business trends and other information that
is not historical information and, in particular, appear under the headings
“Management's
Discussion and Analysis of Financial Condition and Results of Operations.” The
words “could,”
“estimate,”
“expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “goal,” “forecast” and
variations of such words or similar expressions are intended to identify
forward-looking statements.  All forward-looking statements, including,
without limitation, management's examination of historical operating trends, are
based upon our current expectations and various assumptions.  Our
expectations, beliefs and projections are expressed in good faith and we believe
there is a reasonable basis for them.  However, there can be no assurance
that our expectations, beliefs and projections will result or be
achieved.




There may
also be factors that are not presently known to us or that we currently consider
to be immaterial that may cause our actual results to differ materially from the
forward-looking statements.  Some of the risks and uncertainties that could
cause our actual results to differ materially from the forward-looking
statements are described in the section entitled “Risk Factors” in Item 1A, and
elsewhere in this Annual Report on Form 10-K.  All forward-looking
statements and projections attributable to us or persons acting on our behalf
apply only as of the date of the particular statement, and are expressly
qualified in their entirety by the cautionary statements included in this report
and our other filings with the SEC.  We undertake no obligation to publicly
update or revise forward-looking statements, including any of the projections
presented herein, to reflect events or circumstances after the date made or to
reflect the occurrence of unanticipated events.





TABLE
OF CONTENTS





PAGEPART
      I.Item
      1.
                  Business
                  1Item
      1A.
                  Risk
      Factors
                  7Item
      1B.
                  Unresolved
      Staff Comments
                  10Item
      2.
                  Properties
                  11Item
      3.
                  Legal
      Proceedings
                  12Item
      4.
                  Removed
      and Reserved
                  12PART
      II.Item
      5.
                  Market
      for Common Equity, Related Shareholder Matters and Issuer Purchases of
      Equity Securities
                  13Item
      6.
                  Selected
      Financial Data
                  15Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  19Item
      8.
                  Financial
      Statements and Supplementary Data
                  38Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  38Item
      9A.
                  Controls
      and Procedures
                  38Item
      9B.
                  Other
      Information
                  39PART
      III.Item
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  40Item
      11.
                  Executive
      Compensation
                  40Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  40Item
      13.
                  Certain
      Relationships, Related Transactions, and Director
    Independence
                  40Item
      14.
                  Principal
      Accounting Fees and Services
                  40PART
      IV.Item
      15.
                  Exhibits
      and Financial Statement Schedules
                  41Signatures
                  50





PART
I


Item
1.  Business


Overview


We
are a leading provider of petroleum product distribution services,
transportation logistics and emergency response services to the trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunication and
government services industries.We provide our services and
products through 34servicelocations in the eleven states of Alabama, California, Florida,
Georgia, Louisiana, Mississippi, Nevada, North Carolina, South Carolina,
Tennessee and Texas.




The broad range of services we
offer our customers includes commercial mobile and bulk fueling; the packaging,
distribution and sale of lubricants; integrated out-sourced fuel management;
transportation logistics and emergency response services.  Our fleet of
custom specializedtank wagons, tractor-trailer
transports, box trucks, and customized flatbed vehicles delivers diesel
fuel and gasoline to customers’ locations on a regularly scheduled or as needed
basis, refueling vehicles and equipment, re-supplying fixed-site and temporary bulk storage
tanks, and emergency power generation systems; and distributes a wide
variety of specialized petroleum products, lubricants and chemicals to our
customers.  In addition, our fleet ofspecial duty
tractor-trailer units provides heavy haul transportation services over short and
long distances to customers requiring the movement of over-sized or over-weightequipment
and manufactured products.




We were originally
incorporated in Florida in 1996, under the name Streicher Mobile Fueling, Inc.
(“Streicher”).  SMF Energy Corporation (the “Company”), a Delaware
corporation, was formed in 2006 as a wholly-owned subsidiary of Streicher. 
In December 2006, the shareholders of Streicher approved changing the name of
Streicher to SMF Energy Corporation and the reincorporation of Streicher in
Delaware by merger into the Company.  These actions were effectuated on
February 14, 2007 by the merger of Streicher into the Company.  Unless
indicated otherwise,“the Company”,“SMF”,“we”,“us”, and“our” refer to SMF Energy
Corporation and its subsidiaries.





Strategy




An
objective of our business model is to become the leading “single source”
provider of petroleum products and services to our target customers in the
eleven states in which we presently have operating locations, as well as
expanding into additional markets in other states.  We seek to offer our
customers a diversified package of quality and reliable petroleum products and
service with 24 hour around the-clock-availability at competitive prices. 
To achieve these objectives, we plan to grow organically and through selective
acquisitions.  As we achieve such growth, we expect to achieve economies of
scale and related efficiencies that improve our profitability and enhance
shareholder value.




Our
organic growth strategy is focused on increasing market share in our existing
operating locations and contiguous geographic areas.  We seek market share
expansion through a concentrated market penetration and sales program offering a
broader line of products and services to both existing and prospective
customers.  We believe that our corporate infrastructure, including our
Enterprise Resource Planning (“ERP”) operating system, has enabled us to operate
more efficiently and to reduce operating costs and administrative
expenses.  This system has facilitated the consolidation of financial
management reporting and analysis functions, improved management controls, and
helped us comply with the requirements of the Sarbanes-Oxley Act of 2002. 
Over the past few years, it has also permitted us to offset the negative impact
of recent economic conditions on our customer base by steadily improving our
efficiency, and supporting our expansion into new markets and within existing
markets.




Our
acquisition strategy is focused on acquiring companies, assets and business
operations that complement or offer diversified opportunities for growth in the
markets where we already have an established presence or that permit us to
expand into new markets.  We believe that carefully selected future
acquisitions can provide us with increased market share, volume and
margins.  In addition, such acquisitions would enhance our operational and
administrative efficiencies by helping us achieve greater economies of
scale.  Our corporate infrastructure and our ERP system are the foundations
on which we can build our business and expand; we are now able to more
effectively integrate acquisitions.


1




We
evaluate potential acquisitions based on a variety of factors,
including:




·
            market
      presence;




·
            growth
      potential of product and service
lines;




·
            margin
      contribution;




·
            impact
      on our competition;




·
            customer
      loyalty and retention;




·
            commitment
      of management and other personnel;




·
            integration
      efficiencies and controls; and




·
            transaction
      financing alternatives, among
others.




We have
historically funded acquisitions primarily by raising additional capital. 
While recent economic conditions have considerably tightened the capital
markets, we still believe that new capital, in the form of equity, debt or a
combination of both, will be available to us for making acquisitions of
complementary or diversifying businesses.  As one of the few companies to
have strengthened its balance sheet and improved its operating results over the
past few years, we expect that we can obtain the capital required to make such
acquisitions.  Nevertheless, there is no assurance that we will be able to
identify and engage suitable acquisition candidates or that, if we do so, we
will successfully raise the necessary capital to complete the acquisition and
implement our growth strategy.




Products,
Services and Operations




Commercial
Mobile and Bulk
Fuelingand Fuel
Management Services




We provide commercialmobile and bulk fueling distribution services on a regularly scheduled or
as needed basis, refueling vehicles and equipment, and re-supplying bulk storage tanks and
emergency power generation systems.




Traditionally,
businesses and other entities that operate fleets of vehicles and equipment have
met their fueling requirements by fueling vehicles at retail stations or at
other third party facilities or by maintaining their own supply of fuel in
on-site storage tanks.  We believe that the commercial mobile fueling and
out-sourced fuel management services we offer provide numerous benefits to our
customers, including lower labor and administrative costs associated with
fueling vehicles, centralized control and management over fuel inventories, data
useful for management and tax reporting, elimination of environmental risks and
related costs associated with on-site fuel storage and dispensing facilities,
and elimination of security risks associated with off-site fueling by
employees.  Our
commercial mobile fueling solutions include the use of our patented proprietary
electronic fuel tracking control systemto measure, record and track fuel
sold to each vehicle and tank fueled at a customer location.  This system
allows verification of the amount and type of fuel sold and provides customers
with customized fleet fuel data.  Depending on the customer application,
the benefits of our commercial mobile fueling and out-sourced fuel management
services over traditional fueling methods may include:




·
            Reduced Operating Costs and
      Increased Labor Productivity.  Fleet operators are able to
      reduce operating costs and lower payroll hours by eliminating the need for
      their employees to fuel vehicles either on-site or at local retail
      stations and other third party facilities.  Overnight fueling
      prepares fleet vehicles for operation at the beginning of each workday and
      increases labor productivity by allowing employees to use their vehicles
      during time that would otherwise be spent fueling.  Vehicle use is
      maximized since fueling is conducted during non-operating hours.  The
      fuel necessary to operate vehicles is reduced since fueling takes place at
      customer locations.  The administrative burden required to manage
      fuel programs and monitor vehicle utilization is also
    reduced.


2




·
            Centralized Inventory Control
      and Management.  Our fuel management system provides fleet
      operators with a central management data source.  Web-based
      comprehensive reports detail, among other things, the location,
      description, fuel type and daily and weekly fuel sold to each vehicle or
      piece of equipment that we provide the fueling services to.  This
      eliminates customers’ need to invest working capital to carry fuel
      supplies and allows customers to centralize fuel inventory controls as
      well as track and analyze vehicle movements and fuel consumption for
      management and fuel tax reporting purposes.  We are also able to
      service and manage fuel distribution to a customer’s on-site storage tank,
      and using our technology we can provide reports detailing fuel dispensed
      from the tank into each of the customer’s vehicles.  Our system is
      specifically designed for use in commercial fueling and is certified for
      accuracy by The National Conference on Weights and
    Measures.




·
            Tax Reporting
      Benefits.  Our fuel management system can track fuel
      consumption to specific vehicles and fuel tanks, providing tax reporting
      benefits to customers consuming fuel in uses that are tax-exempt, such as
      for off-road vehicles, government-owned vehicles and fuel used to operate
      refrigerator units on vehicles.  For these uses, the customers
      receive reports that provide them with the information required to
      substantiate tax exemptions.




·
            Elimination of Expenses and
      Liabilities of On-site Storage.  Fleet operators who
      previously satisfied their fuel requirements using on-site storage tanks
      can eliminate the capital and costs relating to installing, equipping and
      maintaining fuel storage and dispensing facilities, including the cost and
      price volatility associated with fuel inventories; complying with
      escalating environmental government regulations; and carrying increasingly
      expensive insurance.  By removing on-site storage tanks and relying
      on commercial mobile fueling, customers are able to avoid potential
      liabilities related to both employees and equipment in connection with
      fuel storage and handling.  Customers’ expensive and inefficient use
      of business space and the diminution of property values associated with
      environmental concerns are also
eliminated.




·
            Lower Risk of Fuel
      Theft.  Fleet operators relying on employees to fuel vehicles,
      whether at on-site facilities or at retail stations, often experience
      shrinkage of fuel inventories or excess fuel purchases due to employee
      fraud.  Our fuel management system prevents the risk of employee
      theft by selling fuel only to authorized vehicles.  Utilizing our
      fueling services, rather than allowing employees to purchase fuel at local
      retail stations, also eliminates employee fraud due to credit card
      abuse.




·
            Access to Emergency Fuel
      Supplies and Security.  Emergency preparedness, including fuel
      availability, is critical to the operation of governmental agencies,
      utilities, communication companies, delivery services and numerous other
      fleet operators.  We provide access to emergency fuel supplies at
      times and locations chosen by our customers, allowing them to react more
      quickly and effectively to emergency situations, such as severe weather
      conditions and related disasters.  Fueling by fleet operators at
      their own on-site storage facilities, and/or at retail and other third
      party locations may be limited due to power interruptions, supply outages
      or access and other natural limitations.  In addition, since security
      concerns of fleet operators to terrorism, hijacking and sabotage are
      increasing, fueling vehicles at customers’ facilities eliminates security
      risks to the fleet operators’ employees and equipment rather than fueling
      at retail service stations and other third party
    facilities.




Packaging,
Distribution and Sale of Lubricants, Other Petroleum Products and
Chemicals




We
distribute and sell a wide array of branded and private label petroleum-based
lubricants, including products such as gear oil, engine oil, heavy-duty motor
oil, hydraulic oil, transmission oil, specialty high temperature grease and
synthetic lubricants, from our Texas facilities.  Our operations include
the distribution of lubricants in bulk and the repackaging of lubricants
purchased in bulk quantities.  In addition, we are a blender and
distributor of specialty lubricants.  These products are formulated from
bulk feedstocks to meet specific industrial customer requirements and
applications.  We are also a distributor of solvents and other chemicals,
including those used in the dry cleaning industry.


3




Transportation Logistics
Services




Some of
our customers, particularly those engaged in the construction industry within
Texas, require the movement of heavy equipment, such as bulldozers, cranes and
road grading equipment.  To meet this demand, we provide specialized
transportation and logistics services utilizing a fleet of re-configurable
tractor-trailer units to provide the delivery of specialized commodities,
including heavy haul, over-size and/or over-weight machinery and
equipment.  These services are primarily supplied in Texas as well as in
the Southeast and Southwest regions of the U.S.




Emergency Response
      Services




We
provide fuel supply services to governmental agencies, utilities, communication
companies, delivery services and other fleet and equipment operators when
emergency situations, such as severe weather conditions and related disasters,
create power interruptions, supply outages or access restrictions on our
customers.  We provide access to emergency fuel supplies at times and
locations chosen by our customers, allowing them to react more quickly and
effectively to emergency situations.  In addition, our emergency generator
services program provides customers with ongoing fuel testing, treatment,
filtration and top-off services to ensure that generators and other emergency
power supply systems are fully fueled and that the fuel is in optimal condition
for use at the onset of power outages.  We then provide emergency fuel
supplies in a series of scheduled fuel distribution services for the duration of
power outages based on the utilization requirements of these generator
systems.




Operating
Equipment




We operate a fleet of over
200 specialized
commercial vehicles, including fueling and lubricant tank wagons, tractor
trailer fuel and lubricant transports, lubricant delivery box trucks, flatbed
vehicles andspecial heavy haul tractor-trailer units.  Our custom
commercial mobile fueling trucks have fuel carrying capacities ranging from
2,800 to 4,500 gallons and are equipped with multi-compartmented tanks. 
The fuel we sell or deliver is acquired daily at local third-party petroleum
terminal storage facilities.  Each truck typically services between five
and fifteen customer locations per night or day, on specified delivery
routes.  The driver of each truck also fuels the customer
vehicles.


We also own over 800 fuel and
lubricant storage tanks with total capacity in excess of1.7million gallons.  These
tanks include bulk storage tanks located at our facilities and portable tanks
used for the temporary storage and dispensing of fuels and lubricants at
customer job sites.We also sell portable storage tanks to our
customer’s job-site or other locations; and we reposition, re-supply and
maintain these tanks as required, whether on a scheduled or an as needed
basis.


Marketing
and Customers




We
identify and market to potential customers requiring petroleum related services
and products within our established service areas.  We also pursue the
development of new markets by first evaluating the profitability of volume and
margin commitments of any potential customers in those new areas.  Our
primary methods for developing new business are through direct marketing and
referrals from existing customers as well as from our own personnel.  We
evaluate new customers based on factors such as type and size of service
required, proximity to existing markets, volume commitments, profitability
margins and credit worthiness.




Our
commercial mobile and bulk fueling and lubricant distribution customers are
principally companies operating fleets of vehicles and equipment in a variety of
industries, including thetrucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunication and
government services industries.  We are usually the exclusive
service provider for the fueling of a customer’s entire fleet or a particular
location of vehicles and equipment.  Our lubricant customers are primarily
companies requiring large volumes of specialty industrial oils, motor and gear
lubricants and greases that must adhere to rigid technical and performance
specifications.  In addition, we market and distribute solvents and
specialty petroleum products to dry cleaners and industrial customers in Texas
and certain other products, such as fire training chemicals, throughout the
U.S.


4




During
the year ended June 30, 2010 approximately 22.9%, of our total revenues, were
derived from fleet fueling services provided to our two largest customers. 
Although we do have certain length of service written contracts with a few of
our larger customers, including our two largest customers, one of whom the
Company has been servicing for over 16 years, these types of agreements are not
customary in the fuel and lubricant distribution industry, and therefore, we do
not have written contracts with the majority of our approximately 4,600
customers.  Most of our customers can terminate our services at any time
and for any reason and, correspondingly, we can discontinue service to those
customers at any time.  We may also discontinue service to a customer if
changes in service conditions or other factors cause us not to reach our minimum
targeted levels of volumes and margins, and we are unable to charge an effective
margin that is satisfactory to meet our customer logistics service yield
requirements.




The
Company bills customers for its petroleum and other products and services when
sold.  We generally collect from our customers within 10 to 45 days after
our products and services are sold.




Fuel
and Lubricant Supply




We
purchase the fuel sold to our customers from multiple suppliers at daily market
prices. In certain cases, we qualify for discounts.  We monitor fuel prices
and trends in each of our service markets daily in order to purchase our supply
at the lowest prices and the most favorable terms available to us.  We
mitigate commodity price risk by purchasing and selling fuel supplies daily and
by generally utilizing cost of sales and service-plus pricing when billing
customers.




We
purchase the majority of our lubricants primarily pursuant to a long-term supply
agreement with Chevron who also offers marketing and financing assistance to our
customers.  Lubricants are distributed and sold in bulk, prepackaged or
repackaged by us to meet customer needs.  We price lubricant products on a
cost of sales and service-plus basis.  Traditionally, lubricants inventory
was not subject to market price volatility as significant as that for fuel
products.  Recently, however, due to increasingly volatile petroleum
prices, the prices of lubricants have experienced more frequent price changes
than in the past.  However, these lubricant pricing changes do not
generally create pricing risks to us.




We
purchase chemicals from several key suppliers.  Products are delivered to
our location to be redistributed to our customers via company owned
equipment.  Chemical sales are done in truckload quantities, or in
containers ranging from 5 gallons to 55 gallons.




Competition




We
compete with other distributors of fuels, lubricants, chemicals and other
petroleum products, including several large regional distributors and numerous
small independent operators.  Our mobile fueling operations also compete
with retail marketing outlets such as retail stations and other third-party
service locations.  We believe that the primary competitive factors
affecting our market include price, ability to meet complex and technical
services needs, dependability, extended credit terms, service locations, and the
ability to provide fuel-management tools.




We
believe that our principal competitive advantages include:




·
            our
      patented
      proprietary electronic fuel tracking control
  system;




·
            our
      reputation for timely, efficient and reliable distribution of products and
      services;




·
            our
      well trained drivers and support
staff;




·
            our
      technical knowledge of our products and our customers’ needs;
      and




·
            our
      competitive pricing for products and services as a result of strong
      business relationships with our principal
  suppliers.




5




Intellectual
Property




Ourpatented
proprietary fuel tracking and management reporting system is widely used in our
commercial mobile fueling operations.  We own all patents covering the
system, the rights to which are registered with the United States Patent and
Trademark Office and expire in the year 2015, unless otherwise extended. We also
rely upon a combination of trademark laws and non-disclosure and other
contractual arrangements to protect our proprietary rights.




Employees




At June
30, 2010 we employed 239 employees, of which 230 were full-time
employees.




Governmental
Regulation




Our
operations are affected by numerous federal, state and local laws, regulations
and ordinances, including those relating to protection of the environment and
worker safety.  Various federal, state and local agencies have broad powers
under these laws, regulations and ordinances.  In particular, the operation
of our commercial fleet of vehicles is subject to extensive regulation by the
U.S.  Department of Transportation (“DOT”) under the Federal Motor Carrier
Safety Act (“FMCSA”), and our transportation of diesel fuel and gasoline is
further subject to the Hazardous Materials Transportation Act (“HMTA”).  We
are subject to regulatory and legislative changes that can affect the economics
of the industry by requiring changes in operating practices or influencing the
demand for, and the cost of providing, mobile fueling services.  In
addition, we depend on the supply of diesel fuel and gasoline from the oil and
gas industry and are thereby affected by changing taxes, price controls and
other laws and regulations generally relating to the oil and gas industry. 
Our future operations and earnings may be affected by new legislation, new
regulations or changes in existing regulations.




The
technical requirements of laws and regulations are becoming increasingly
expensive, complex and stringent.  These laws may impose penalties or
sanctions for damages to natural resources or threats to public health and
safety.  Changing laws and regulations may also expose us to liability for
the conduct of, or conditions caused by, others, or even for our own actions
that were in compliance with applicable laws when taken.  Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties and criminal prosecution.  Certain
environmental laws provide for joint and several liabilities for remediation of
spills and releases of hazardous substances.  In addition, we may be
subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances, as well as damage to natural
resources.




There is
no assurance that we will be able to comply with existing and future regulatory
requirements without incurring substantial costs or otherwise adversely
affecting our operations.




Available
Information




More
information about the Company can be found at our website, www.mobilefueling.com. 
This annual report on Form 10-K as well as our quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements and other information are filed
with the Securities Exchange Commission (“SEC”).  We post these reports on
the “Investor Relations” section of our website promptly after we file them with
the SEC.  Our Code of Business Conduct is also posted on our website. 
All of these documents are available in print without charge to our shareholders
upon request.  Information on our website is not incorporated by reference
in, and is not a part of, this report on Form 10-K.




All of
our filings with the SEC may be reviewed at the SEC’s website, www.sec.gov. 
They may also be read and copied at the SEC’s Public Reference Room at 100 F
Street, N.E., Room 1580, Washington, DC 20549, on official business days during
the hours of 10 a.m. to 3 p.m.  The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.


6




Item
1A. Risk Factors




We are
affected by a wide range of risk factors that could materially affect our
business, results of operations and financial condition, and could therefore
cause operating results to differ materially from those expressed in any
forward-looking statements made by or on behalf of us elsewhere in this report.
In addition, investors in our common stock and other securities also bear
certain risks relating to those securities and the trading market for our common
stock.  Below are some of the material factors and risks that could affect
our results of operations or the value of our securities:





No Assurance of
Future Profitability; Losses from Operations; Need for Capital.We
incurred net income in fiscal year ended June 30, 2010 and a net loss in fiscal
year 2009.  In order to generate profits in the future, we need to continue
to maintain operating profit by continuing to increase the volume of products
and services sold at profitable margins, control costs and generate sufficient
cash flow to support our working capital and debt service requirements. 
There is no assurance that we will be able to maintain net income or avoid net
losses in the future or that we will be able to raise additional capital on
acceptable terms if our capital needs cannot be satisfied by cash flow from
operations.  We enhanced our profitability over the past fifteen months,
generating net income during fiscal 2010, in contrast to fiscal 2009, when we
faced a number of challenges presented by the rapidly weakening economy. 
We responded to the need to raise new capital by completing a $40 million
recapitalization in June 2009 (the “Recapitalization”) that reduced our total
debt by $4.5 million, lowered our annual servicing expense for interest and
dividends by over $1 million, increased our shareholders’ equity by $4.1
million and reduced our debt to equity ratio from approximately 9 to 1 at
June 30, 2008 to 2 to 1 at June 30, 2009.  In the future, we may need to
raise additional capital to fund new acquisitions, to expand or diversify
existing operations or to make additional debt repayments.  We believe
that, in light of the financial stability  flowing from our June 2009
Recapitalization and the resulting positive financial performance in fiscal
2010, we will be able to obtain needed capital, but there can be no assurance
that we will be able to do so or that the capital available will be offered on
terms acceptable to us.





Nasdaq Listing of
Our Common Stock.Our common stock currently trades on the Nasdaq
Capital Market under the symbol FUEL. While we consider the listing on Nasdaq to
be a valuable attribute of our common stock and other securities, maintaining
that listing has been costly over the past few years and there is still no
assurance that such listing will continue.  During Fiscal 2008, our listing
on Nasdaq came into question on two different grounds, leading us to issue
shares of Series A Convertible Preferred Stock for approximately $2.52 million
in cash and debt and then issue 1,985 shares of Series B Convertible Preferred
Stock in exchange for approximately $1.8 million in debt.  These
transactions increased our stockholders’ equity by approximately $4.1 million,
permitting us to regain compliance with Nasdaq’s minimum stockholders’ equity
requirements.  During fiscal 2009, we completed a recapitalization of our
debt and equity that increased stockholders’ equity to $6.5 million at June 30,
2009.  While we were profitable in fiscal 2010 and further buttressed our
compliance with this requirement, there is no assurance that such compliance
will continue indefinitely since substantial net operating losses in the future
could reduce our stockholders’ equity below Nasdaq minimums again.




In
addition, because the bid price of our common stock closed below the minimum
$1.00 per share requirement of Nasdaq Marketplace Rules for more than 30
consecutive business days in 2007, we sought and obtained a series of extensions
of time to reestablish compliance with this requirement.  When our final
deadline for reestablishing compliance with the minimum bid price requirement
was set at October 15, 2009, we were required to implement a 1 for 4.5 reverse
stock split that took effect on October 1, 2009.  While this reverse stock
split succeeded in increasing the post-reverse split trading price of our common
stock above the $1.00 minimum bid price, the market price for our stock steadily
decreased after the split, notwithstanding what we believed to be our steadily
improving operating results at the time.  Based on this apparent disconnect
between the market prices for our stock and our reported financial performance
after the reverse stock split, we determined that the market price of our common
stock did not reflect its value and, in August 2010, commenced an open market
purchase program for shares of our own stock.  While we have expressed our
own views as to the value of our stock by launching the open market purchase
program, it is possible that the inconsistency between the market price of our
post-split stock and our financial performance will continue in the
future.  In such an event, there is a risk that the market price will again
fall below the $1.00 minimum price for a prolonged period of time in violation
of Nasdaq rules.  In such an event, our listing on Nasdaq could again be
threatened and we may not be in a position to cure the non-compliance with
Nasdaq listing requirements.


7





Effect of Price
Depreciation After Reverse Stock Split.As noted above, the long
term efficacy of the Company’s 1 for 4.5 reverse stock split in maintaining
compliance with Nasdaq’s minimum bid price requirement remains uncertain. 
Moreover, since the reverse stock split, the market price of our common stock
has steadily declined notwithstanding what we believe to be consistent
improvements in our results of operations, cash flow and financial stability
during the same time period.   Accordingly, even though the reverse
stock split successfully re-established compliance with Nasdaq’s minimum bid
price requirement the aggregate market value of our common stock after the
reverse stock split has been lower than it was before the reverse stock
split.  There is no assurance that this price depreciation will be reversed
or even slowed by our continuing improvements in financial performance.  We
acknowledge the risk that, as some anecdotal evidence suggests, stock prices can
be adversely affected for a considerable period of time by reverse stock splits
(and positively impacted by forward stock splits) irrespective of the financial
condition or operating performance of the issuer.  Investors should
therefore appreciate the potential for a lingering negative impact on the
trading prices of the common stock from the reverse stock split.





Volatility of
Trading Market for Our Stock.During the past few years, our stock
has sometimes traded in large daily volumes and other times at much lower
volumes, in many cases at wide price variances. This volatility, which could
make it difficult for shareholders to sell shares at a predictable price or at
specific times, is generally due to factors beyond our control. Quarterly and
annual operating results, changes in general conditions in the economy, the
financial markets or other developments affecting us could also cause the market
price of our common stock to fluctuate. The market price of our common stock may
be affected by various other factors unrelated to the number of shares
outstanding after the reverse stock split, including our future performance and
general market conditions.





Acquisition
Availability; Integrating Acquisitions.Our future growth strategy
involves the acquisition of complementary businesses, such as wholesale fuel or
petroleum lubricants marketers and distributors, wholesale fuel and other
commercial mobile fueling companies, and transportation logistics services
businesses. It is not certain that we will be able to identify or make suitable
acquisitions on acceptable terms or that any future acquisitions will be
effectively and profitably integrated into our operations. Acquisitions involve
numerous risks that could adversely affect our operating results, including
timely and cost effective integration of the operations and personnel of the
acquired business, potential write downs of acquired assets, retention of key
personnel of the acquired business, potential disruption of existing business,
maintenance of uniform standards, controls, procedures and policies, the
availability of necessary  capital on acceptable terms, the effect of
changes in management on existing business relationships, and profitability and
cash flows generally.





Our
credit facility with our principal lender also requires the Company to obtain
the consent of the financial institution prior to incurring additional debt, or
entering into mergers, consolidations or sales of assets.





Growth
Dependent Upon Future Expansion; Risks Associated With Expansion into New
Markets. While our
long term plan is to expand more quickly through acquisitions, our growth will
also depend upon the ability to achieve greater penetration in existing markets
and to successfully enter new markets in both additional major and secondary
metropolitan areas. Such organic expansion will largely be dependent on our
ability to demonstrate the benefits of our services and products to potential
new customers, successfully establish and operate new locations, hire, train and
retain qualified management, operating, marketing and sales personnel, finance
acquisitions, capital expenditures and working capital requirements, secure
reliable sources of product supply on a timely basis and on commercially
acceptable credit terms, and successfully manage growth by effectively
supervising operations, controlling costs and maintaining appropriate quality
controls.  During the fiscal year 2010, we grew our business organically by
completing an expansion into three new markets including Knoxville, TN,
Spartanburg, SC, and North Augusta, GA, and of our business in existing North
Carolina markets.  Although in the fiscal year 2010 we were able to
continue to grow our business, there can be no assurance that in the future we
will be able to successfully expand our operations into new
markets.


8





Dependence on Key
Personnel.Our future
success will be largely dependent on the continued services and efforts of
Richard E. Gathright, our Chief Executive Officer and President, and on those of
other key executive personnel.  The loss of the services of Mr. Gathright
or other executive personnel could have a material adverse effect on our
business and prospects.  Our success and plans for future growth will also
depend on our ability to attract and retain additional qualified management,
operating, marketing, sales and financial personnel.  There can be no
assurance that we will be able to hire or retain such personnel on terms
satisfactory to us.  We have entered into written employment agreements
with Mr. Gathright and certain other key executive personnel.  While Mr.
Gathright’s employment agreement provides for automatic one-year extensions
unless either party gives notice of intent not to renew prior to such extension,
there is no assurance that Mr. Gathright’s services or those of our other
executive personnel will continue to be available to us.





Fuel Pricing and
Supply Availability; Effect on Profitability.Diesel fuel and gasoline
are commodities that are refined and distributed by numerous sources.  We
purchase the fuel from multiple suppliers at daily market prices and in some
cases qualify for certain discounts.  We monitor fuel prices and trends in
each of our service markets on a daily basis and seek to purchase our supply at
the lowest prices and under the most favorable terms.  Commodity price risk
is generally mitigated since we purchase and distribute our fuel supply daily
and generally utilize cost-plus pricing when billing our customers.  If we
cannot continue to utilize cost-plus pricing as a component of billing our
customers, margins would likely decrease and losses could return to the bottom
line performance.  We have not engaged in derivatives or futures trading to
hedge fuel price movements.  In addition, diesel fuel and gasoline may be
subject to supply interruption due to a number of factors, including natural
disasters, refinery and/or pipeline outages and labor disruptions.  While
limitations on the credit available from suppliers became a more significant
issue for us during the onset of the national economic recession in fiscal 2008
and 2009, the 2009 Recapitalization and our improved operating performance in
fiscal 2010 has alleviated most of these credit availability issues.  There
is no assurance that a tightened credit market will not recur. 
Irrespective of the reason, any reduction of the availability of fuel supplies
could impact our ability to provide mobile fueling, commercial bulk fueling, and
emergency response services and would therefore impact our
profitability.





Risks Associated
with Customer Concentration; Absence of Written Agreements.Although we
provide services to many customers, a significant portion of our revenue is
generated from a few of our larger customers.  Sales to our two largest
customers, represents 22% of our total revenue in fiscal year 2010.  While
we have formal, length of service written contracts with certain of these larger
customers, including our two largest customers, one of whom we have been
servicing for over 16 years, such agreements are not customary and we do not
have them with the majority of our customers.  As a result, most of our
customers can terminate our services at any time and for any reason, and we can
similarly discontinue service to those customers. We may also discontinue
service to a customer if changes in the service conditions or other factors
cause us not to meet our minimum level of margins and rates, and the pricing or
delivery arrangements cannot be passed along to our customers to achieve our
required yield.  As a result of this customer concentration and the absence
of written agreements, our business, results of operations and financial
condition could be materially adversely affected if one or more of our larger
customers were lost or if we were to experience a high rate of service
terminations of our other customers.





Effect of Reduced
Fuel Usage.The global economic
downturn that followed the September 2008 stock market crash resulted in many
businesses, including most of our customers, experiencing reduced demand for
their services and, thus the amount of fuel that they consume in their
operations.   For those of our existing customers who experienced
reduced fuel usage, the reductions lowered the volumes sold by us to those
customers.  We have not seen any recovery of the approximately 14%
reduction in sales volumes to existing customers that we experienced at the
beginning of this long, deep and continuing economic recession and
downturn.  We have replaced those lost sales with sales to new customers
and the expansion of service to existing customers in new markets. 
However, should the current weak economic conditions persist or worsen, it is
possible that customers’ fuel usage will not recover to pre-recession levels or
could decline further.    If we cannot replace any further
diminished customer volumes, then our revenues and our results of operation
could be negatively affected.  In addition, while we have not historically
experienced a material reduction in fuel sales during periods of extremely high
fuel prices due to the nature of our business, such an event in the future could
also negatively affect our customer’s volumes of fuel used and our financial
performance.


9





Competition.We compete with other service providers, including several large regional
providers and numerous small, local independent operators, who provide some or
all of the same services that we offer to our customers. In the mobile fueling
area, we also compete with retail fuel marketing, since fleet operators have the
option of fueling their own equipment at retail stations and at other
third-party service locations such as card lock facilities.  Our ability to
compete is affected by numerous factors, including price, the complexity and
technical nature of the services required, delivery dependability, credit terms,
the costs incurred for non-mobile fueling alternatives, service locations as
well as the type of reporting and invoicing services provided.  In
addition, because our principal competitors are privately held, we are adversely
affected by the availability of the information concerning our business
contained in our SEC filings and elsewhere, since they can utilize that
information to compete with us and we have no corresponding information
concerning them.  There can be no assurance that we will be able to
continue to compete successfully as a result of these or other
factors.





Operating Risks
May Not Be Covered by Insurance.Our operations are subject to the
operating hazard and
risks normally incidental to handling, storing and transporting diesel fuel and
gasoline, which are classified as hazardous materials.  We maintain
insurance policies in amounts and with coverages and deductibles that we believe
are reasonable and prudent.  There can be no assurance, however, that our
insurance will be adequate to protect us from liabilities and expenses that may
arise from claims for personal and property damage arising in the ordinary
course of business, including business interruption; that we will be able to
maintain acceptable levels of insurance; or that insurance will be available at
economical prices.




Governmental
Regulation.Numerous federal, state and local laws, regulations and
ordinances, including those relating to protection of the environment and worker
safety, affect our operations.  There can be no assurance that we will be
able to continue to comply with existing and future regulatory requirements
without incurring substantial costs or otherwise adversely affecting our
operations.




Terrorism and
Warfare May Adversely Affect the Economy and the Price and Availability of
Petroleum Products.Terrorist attacks, as well as the continuing
political unrest and warfare in various oil producing countries, may adversely
impact the price and availability of fuel, our results of operations, our
ability to raise capital and our future growth.  The impact of terrorism on
the oil industry in general, and on us in particular, is not known at this
time.  An act of terror could result in disruptions of crude oil or natural
gas supplies and markets, the sources of our products, and our infrastructure
facilities or our suppliers could be direct or indirect targets.  Terrorist
activity or warfare may also hinder our ability to transport fuel if the means
of supply transportation, such as rail or pipelines, become damaged as a result
of an attack.  A lower level of economic activity following a terrorist
attack or war could result in a decline in energy consumption, which could
adversely affect our revenues or restrict our future growth. Instability in the
financial markets as a result of terrorism or war could also impair our ability
to raise capital. Terrorist activity or further instability in the Middle East
could also lead to increased volatility in fuel prices, which could adversely
affect our business generally.





Item
1B.  Unresolved Staff Comments





Not
applicable.


10


Item
2.  Properties





Our
corporate headquarters are located in 20,400 square feet of leased office space
in Fort Lauderdale, Florida.  Our lease for this facility expires on July
31, 2013.





In
addition, we own truck yard and office space in Tampa, Florida.  We also
lease truck yard and office space for 21 locations specified below as of June
30, 2010, primarily under 1 to 5 year leases which include lease renewal
options.  We believe that our facilities are adequate for our current
needs.





Location
                
                Lease ExpirationBloomington,
      CA
                
                7/15/2013Gardena,
      CA
                
                7/15/2011Jacksonville,
      FL
                
                8/31/2015Melbourne,
      FL
                
                2/28/2011Orlando,
      FL
                
                11/30/2012Port
      Everglades, FL
                
                5/31/2011Doraville,
      GA
                
                8/31/2011Jackson,
      MS
                
                12/31/2012Charlotte,
      NC
                
                12/31/2011Greensboro,
      NC
                
                5/31/2011Selma,
      NC
                
                10/31/2011North
      Augusta, SC
                
                10/31/2010Spartanburg,
      SC
                
                11/11/2010Knoxville,
      TN
                
                11/16/2010Buda,
      TX
                
                7/31/2011Freeport,
      TX
                
                9/30/2010Ft.
      Worth, TX
                
                12/31/2010Houston,
      TX
                
                9/30/2015Lufkin,
      TX
                
                9/30/2015Selma,
      TX
                
                12/31/2013Waxahachie,
      TX
                
                9/30/2015


11




We also
lease the following facilities on a month to month basis:




Fort
      Myers, FLEllabell,
      GAGonzales,
      LANorth
      Las Vegas, NVChattanooga,
      TNElm
      Mott, TXLongview,
      TX




Item
3.  Legal Proceedings




The
Company and its subsidiaries are from time to time parties to legal proceedings,
lawsuits and other claims incident to their business activities.  Such
matters may include, among other things, assertions of contract breach, claims
for indemnity arising in the course of the business and claims by persons whose
employment with us has been terminated.  Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. 
Consequently, management is unable to ascertain the ultimate aggregate amount of
monetary liability, amounts which may be covered by insurance or recoverable
from third parties, or the financial impact with respect to these matters as of
June 30, 2010.  Therefore no contingency gains or losses have been recorded
as of June 30, 2010.  However, based on management’s knowledge at the time
of this filing, management believes that the final resolution of such matters
pending at the time of this report, individually and in the aggregate, will not
have a material adverse effect upon the Company’s consolidated financial
position, results of operations or cash flows.




On
November 23, 2009, the Company entered into a confidential settlement agreement
(the “Agreement”) resolving all claims in the lawsuit entitled, SMF Energy Corporation vs. Financial
Accounting Solutions Group, Inc., Mitchel Kramer, Alex Zaldivar and Kramer
Professional Staffing, Inc.  Pursuant to the Agreement, the Company
received a payment of $1,050,000 during the quarter ended December 31,
2009.  The payment was treated as a partial recovery of the professional
fees incurred in connection with the lawsuit, with no gain or loss recognized
for the settlement.  The Company expensed $466,000 of these expenses during
the current fiscal year.  The recovery of these professional fees and the
year to date litigation costs have been recorded as part of the selling, general
and administrative expenses in the statement of operations.  There was no
admission of liability by any of the parties to the lawsuit on account of any of
the various claims, counterclaims or third party claims made in the
lawsuit.  All claims made by or against the Company in the lawsuit were
released as part of the Agreement.





On May
26, 2009, the Company filed a Demand for Arbitration with the American
Arbitration Association in Broward County, Florida, under which the Company
brought claims against various members of the Harkrider family arising out of
the Company’s October 1, 2005 purchase of H & W Petroleum Company, Inc. (“H
& W”) from the Harkrider family and H & W’s purchase of certain assets
of Harkrider Distributing Company, Inc. (“HDC”) immediately prior to the
Company’s purchase of H & W.  In that action, Case No. 32 198 Y 00415
09 (the “Arbitration”), the Company and H & W, which is now the Company’s
wholly owned subsidiary, sought damages for breaches of, and indemnification
under, the October 1, 2005, Stock Purchase Agreement between various Harkrider
family members and the Company and under the September 29, 2005, Asset Purchase
Agreement between HDC and various members of the Harkrider family, on the one
hand, and H & W on the other, along with various other claims arising from
the transaction.  Also on May 26, 2009, H & W filed a second action
against various members of the Harkrider family in the District Court in Harris
County, Texas, Civil Action No. 2009-32909 (the “Harris County Action”), seeking
damages and declaratory relief for various breaches of H & W’s lease of its
Houston, Texas facility by H & W’s landlord, the Harkrider Family
Partnership, and other related claims.  On June 24, 2009, the parties to
the Arbitration and the Harris County Action agreed that all of the claims
brought in the Arbitration would be dismissed and all of those claims would be
added to the Harris County Action.  On June 29, 2009, in accordance with
the stipulation of the parties to consolidate the Arbitration with the Harris
County Action, the American Arbitration Association closed the
Arbitration.  The Harris County Action is currently in the discovery phase
but the case is inactive, since the parties have entered into a standstill
agreement while they engage in settlement discussions.




Item
4.  Removed and Reserved


12




PART
II




Item
5.  Market for Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities




The
Company’s common stock, par value $.01 (“common stock”) has traded in the
National Association of Securities Dealers Automated Quotation System (“NASDAQ”)
Market under the symbol “FUEL”, since December 11, 1996, the date of the
Company’s initial public offering.  The following table sets forth, for the
periods indicated, the high and low prices for the common stock, as reported by
NASDAQ.




Common StockHigh
                      
                      
                      LowYear Ended June 30, 20101st
      quarter
                      
                      $
                      2.48
                      
                      
                      $
                      1.172nd
      quarter
                      
                      $
                      1.79
                      
                      
                      $
                      1.213rd
      quarter
                      
                      $
                      1.57
                      
                      
                      $
                      1.224th
      quarter
                      
                      $
                      1.91
                      
                      
                      $
                      1.11Year Ended June 30, 20091st
      quarter
                      
                      $
                      3.20
                      
                      
                      $
                      1.132nd
      quarter
                      
                      $
                      1.89
                      
                      
                      $
                      0.953rd
      quarter
                      
                      $
                      1.31
                      
                      
                      $
                      0.454th
      quarter
                      
                      $
                      3.15
                      
                      
                      $
                      0.63





On June
30, 2010, the closing price of the common stock was $1.22 per share.  As of
September 21, 2010, there were 2,000 holders of record of our common stock and
over 75 beneficial owners of our common stock.




Dividends




We have
never declared or paid any dividends on our common stock.  The payment of
dividends on our common stock, if any, is within the discretion of the Board of
Directors and will depend upon our earnings, our capital requirements and
financial condition and other relevant factors.  While our Board of
Directors has recently considered the advisability of declaring dividends on our
common stock in response to the gradual deterioration of the market price of
that stock, the Board has indicated that, at the present time, it does not
intend to declare dividends and intends to retain any future earnings for use in
our business operations and for purchases of our stock pursuant to the open
market stock purchase program we announced in August 2010.




Dividends
on the 598 outstanding shares of Series D Preferred Stock, which shares were
issued in the June 2009 Recapitalization, are payable when, as and if declared
by the Board of Directors, but only out of funds that are legally available, in
annual cash or equity dividends, at the Company’s election, at the rate of 5.5%
per annum of the sum of the Original Issue Price per share.  Per the
Certificate of Designation for the Series D, the first dividend declaration for
the outstanding Series D Preferred Stock was in August 2010 and was paid in
cash.  Subsequent dividends on the Series D are payable in cash except
that, under specified circumstances, dividends may be paid in the form of shares
of a new series of nonvoting Preferred Stock, the terms, rights and privileges
of which are, other than the voting rights, substantially identical to those of
the Series D.  Any payment of dividends is subject to approval by our
principal lender.





Dividends
on any of the Company’s Series of Preferred Stock are cumulative from the date
of the original issuance of the Preferred Stock.  Accumulated unpaid
dividends on Preferred Stock do not bear interest.





In August
2010, the Company declared cumulative dividends of $13,000 on the Series D
Preferred Stock, which were accrued as of June 30, 2010 and paid in full during
the first quarter of fiscal 201l.


13


While the
Company no longer has any shares of its Series A, Series B, or Series C
Preferred Stock issued or outstanding as a result of the June 2009
Recapitalization, additional issuances of those securities, while unlikely at
this time, could be made.  In accordance with the respective Certificates
of Designation for each Series, dividends would be payable thereon when, as and
if declared by the Board of Directors, but only out of funds that are legally
available, in quarterly cash dividends.  Also per the Certificates of
Designation, the initial dividend rate of eighteen percent (18%) per annum of
the sum of the Original Issue Price per share was reduced to twelve percent
(12%) in December 2008 because the Company achieved positive Earnings Before
Interest, Taxes, Depreciation and Amortization for two consecutive fiscal
quarters.  During fiscal 2009, the Company declared $577,000 in cumulative
dividends on the Series A, Series B, and Series C Preferred Stock, which were
paid or satisfied by June 30, 2009.  On May 5, 2009, the Company entered
into an agreement with the holders of the Series A, Series B, and Series C
Preferred Stock to satisfy the dividends due for the quarters ended December 31,
2008, and March 31, 2009 through the issuance of unregistered shares of common
stock of the Company.  For purposes of determining the number of shares to
be issued for the unpaid dividends, shares were valued at $1.04 per share, the
official closing price on the Nasdaq Stock Market on April 24, 2009, the trading
day immediately preceding the April 27, 2009 effective date of the conversion
agreements.  As a result, the Company issued 246,910 shares of common stock
to the holders of Preferred Stock in lieu of paying the $256,000 in cash
dividends for the quarters ended December 31, 2008, and March 31,
2009.





On June
29, 2009, as part of the Recapitalization, the Company entered into another
agreement with the holders of the Series A, Series B, and Series C Preferred
Stock to satisfy the dividends due for the quarter ended June 30, 2009 through
the issuance of shares of common stock of the Company.  For purposes of
determining the number of shares to be issued for the unpaid dividends, shares
were valued at the negotiated price of $1.71 per share (the official closing
price on the Nasdaq Stock Market on the trading day immediately preceding the
June 29, 2009 effective date of the conversion agreements was $1.67).  As a
result, the Company issued 73,449 shares of common stock to the holders of
Preferred Stock in lieu of paying the $126,000 in cash dividends for the quarter
ended June 30, 2009.




In the
June 2009 Recapitalization, the Company redeemed all the outstanding Series A,
Series B, and Series C preferred shares through the issuance of an aggregate of
2,455,001 common shares at the negotiated price of $1.71 per share, which was a
per share amount lower than the original terms of the securities.  As per
ASC 260, “Earnings per Share” (formerly
EITF No. D-42), the Company reported the additional securities issued to the
preferred shareholders as a non-cash deemed dividend of $1,746,216, which was a
calculation of the difference between the 1,406,223 common shares that would
have been issuable under the original conversion rights that existed in the
convertible preferred shares and the 2,455,001 common shares issued at $1.71 per
share upon the redemption exchange times the market price on the conversion
date.




Convertible
Promissory Notes




Also in
the June 2009 Recapitalization, the Company extinguished a portion of the August
2007 and the September 2008 Notes (“the Notes”) through the issuance of
1,184,591 shares and 277,778 shares of Common Stock, respectively, at the
negotiated price of $1.71 per share, which was higher than the $1.67 per share
closing bid price on the trading day immediately preceding the June 29, 2009
Recapitalization.  The original terms of the Notes allowed for a conversion
of 50% of the August 2007 Notes and 100% of the September 2008 Notes into common
stock.  The negotiated issuance price of $1.71 per share in the
Recapitalization was based on then current market prices, and it was lower than
the original conversion prices of $6.57 per share and $2.93 per share of the
August 2007 Notes and the September 2008 Notes, respectively.  Since the
extinguishment of the Notes through issuance of Common Stock was done at close
to current market prices of the Common Stock, the Company issued an aggregate of
991,657 more shares than it would have issued for the convertible equivalent
under the original terms of the Notes.




ASC
470-20, “Debt - Debt with
Conversion and Other Options” (“ASC 470-20”), specifies the method of
accounting for conversions of convertible debt to equity securities when the
debtor induces conversion of the debt by offering additional securities or other
consideration to convertible debt holders.  In accordance with ASC 470-20,
an expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).”  While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in convertible debt
for an equal aggregate value of cash, common stock and preferred stock is
required by ASC 470-20 to be accounted for as an induced conversion of
outstanding debt securities.  While we believe that the application of ASC
470-20 did not reflect the economic substance of the value exchanged in this
portion of the Recapitalization transaction, we reported, in fiscal year 2009,
the required non-cash charge of approximately $1.65 million for the difference
between the number of common shares issued compared to the number of common
shares that would have been issued under the original terms of the convertible
debt instrument, times the market price on the conversion date.


14





The
Company understands that the accounting interpretation of ASC 470-20 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or economic
intent of the parties to the transaction.  As a result, the application of
ASC 470-20 to the exchange of existing convertible debt securities for common
stock resulted in the recording of a non-cash “inducement” accounting charge of
$1.65 million, which was a calculation of the difference between the 470,712
common shares that would have been issuable to the applicable note holder under
the original conversion rights that existed in the convertible Notes and the
1,462,369 common shares exchanged at $1.71 per share upon the
extinguishment.  This non-cash charge was deemed a financing expense to
extinguish the Notes and it is included in the Consolidated Statements of
Operations with a corresponding increase in Additional paid-in capital and
therefore the net impact has no effect to total Shareholders’
Equity.




Equity
Compensation Plan Information




The
information required by this item is incorporated by reference from our
Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be
filed no later than 120 days after the end of the fiscal year covered by
this report.




Issuer
Purchases of Equity Securities




There were no issuer purchases of
equity securities during fiscal 2010.




Item
6.  Selected Financial Data




The
following table summarizes our selected historical financial information for
each of the last five fiscal years.  The information presented below has
been derived from our audited consolidated financial statements.  This
table should be read in conjunction with such Consolidated Financial Statements
and related notes and with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in Item 7 of this Form
10-K.


15


(in
thousands, except net margin per gallon and per share data)





Year
      Ended June 30,2010
                                
                                
                                
                                2009
      4
                                
                                
                                
                                2008
      4
                                
                                
                                2007
                                
                                
                                2006Selected
      Income Statement Data:Total
      revenue
                                
                                $
                                192,847
                                
                                
                                $
                                199,249
                                
                                
                                $
                                260,689
                                
                                
                                $
                                229,769
                                
                                
                                $
                                248,699Gross
      profit
                                
                                $
                                15,196
                                
                                
                                $
                                16,440
                                
                                
                                $
                                12,912
                                
                                
                                $
                                12,631
                                
                                
                                $
                                12,409Selling,
      general and administrative expense
                                
                                $
                                13,745
                                
                                
                                $
                                14,755
                                
                                
                                $
                                14,881
                                
                                
                                $
                                15,836
                                
                                
                                $
                                13,262Operating
      income (loss)
                                
                                $
                                1,451
                                
                                
                                $
                                1,685
                                
                                
                                $
                                (1,969
                                )
                                
                                $
                                (3,205
                                )
                                
                                $
                                (853
                                )Interest
      expense
                                
                                $
                                978
                                
                                
                                $
                                2,483
                                
                                
                                $
                                3,060
                                
                                
                                $
                                3,384
                                
                                
                                $
                                4,025Non-cash
      ASC 470-20 (formerly FAS No.84)inducement on
      extinguishment 8
                                
                                $
                                -
                                
                                
                                $
                                1,651
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -(Gain) loss on
      extinguishment of promissory notes 6
                                
                                $
                                -
                                
                                
                                $
                                (27
                                )
                                
                                $
                                1,749
                                
                                
                                $
                                -
                                
                                
                                $
                                -Net
      income (loss)
                                
                                $
                                465
                                
                                
                                $
                                (2,339
                                )
                                
                                $
                                (6,769
                                )
                                
                                $
                                (6,589
                                )
                                
                                $
                                (4,878
                                )Less:  Non-cash
      ASC 470-20 (formerly FAS No.84) inducement on
      extinguishment 8
                                
                                $
                                -
                                
                                
                                $
                                1,651
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Less:  Non-cash
      write-off of unamortized acquisition costs
                                
                                $
                                187
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Less:  Non-cash
      stock options repricing costs
                                
                                $
                                93
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Adjusted net income
      (loss) before non-cash, non-recurring costs9
                                
                                $
                                745
                                
                                
                                $
                                (688
                                )
                                
                                $
                                (6,769
                                )
                                
                                $
                                (6,589
                                )
                                
                                $
                                (4,878
                                )Share
      Data:Net
      income (loss)
                                
                                $
                                465
                                
                                
                                $
                                (2,339
                                )
                                
                                $
                                (6,769
                                )
                                
                                $
                                (6,589
                                )
                                
                                $
                                (4,878
                                )Less:  Preferred
      stock dividends
                                
                                
                                (13
                                )
                                
                                
                                (577
                                )
                                
                                
                                (249
                                )
                                
                                
                                -
                                
                                
                                
                                -Less:  Non-cash
      EITF No. D-42 deemed dividends 7
                                
                                
                                -
                                
                                
                                
                                (1,746
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Net
      income (loss) attributable to common shareholders
                                
                                $
                                452
                                
                                
                                $
                                (4,662
                                )
                                
                                $
                                (7,018
                                )
                                
                                $
                                (6,589
                                )
                                
                                $
                                (4,878
                                )Basic
      net income (loss) per share attributable to common
      shareholders
                                
                                $
                                0.05
                                
                                
                                $
                                (1.39
                                )
                                
                                $
                                (2.18
                                )
                                
                                $
                                (2.58
                                )
                                
                                $
                                (2.24
                                )Diluted
      net income (loss) per share attributable to common
      shareholders
                                
                                $
                                0.05
                                
                                
                                $
                                (1.39
                                )
                                
                                $
                                (2.18
                                )
                                
                                $
                                (2.58
                                )
                                
                                $
                                (2.24
                                )Adjusted net income
      (loss) per share attributable to common shareholders excluding
      non-recurring costs 10Basic
                                
                                $
                                0.09
                                
                                
                                $
                                (0.38
                                )
                                
                                $
                                (2.18
                                )
                                
                                $
                                (2.58
                                )
                                
                                $
                                (2.24
                                )Diluted
                                
                                $
                                0.08
                                
                                
                                $
                                (0.38
                                )
                                
                                $
                                (2.18
                                )
                                
                                $
                                (2.58
                                )
                                
                                $
                                (2.24
                                )Basic
      weighted average common shares outstanding
                                
                                
                                8,480
                                
                                
                                
                                3,355
                                
                                
                                
                                3,215
                                
                                
                                
                                2,558
                                
                                
                                
                                2,182Diluted
      weighted average common shares outstanding
                                
                                
                                8,692
                                
                                
                                
                                3,355
                                
                                
                                
                                3,215
                                
                                
                                
                                2,558
                                
                                
                                
                                2,182As
      of June 30,2010
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006Selected
      Balance Sheet Data:Cash
      and cash equivalents
                                
                                $
                                115
                                
                                
                                $
                                123
                                
                                
                                $
                                48
                                
                                
                                $
                                987
                                
                                
                                $
                                4,103Accounts
      receivable, net
                                
                                $
                                17,530
                                
                                
                                $
                                15,878
                                
                                
                                $
                                30,169
                                
                                
                                $
                                25,442
                                
                                
                                $
                                24,345Restricted
      cash
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                69
                                
                                
                                $
                                1,145
                                
                                
                                $
                                -Line
      of credit payable
                                
                                $
                                6,896
                                
                                
                                $
                                7,845
                                
                                
                                $
                                19,789
                                
                                
                                $
                                17,297
                                
                                
                                $
                                15,612Long-term
      debt (including current portion)
                                
                                $
                                4,883
                                
                                
                                $
                                5,800
                                
                                
                                $
                                8,794
                                
                                
                                $
                                10,276
                                
                                
                                $
                                13,136Shareholders’
      equity
                                
                                $
                                7,056
                                
                                
                                $
                                6,529
                                
                                
                                $
                                3,052
                                
                                
                                $
                                4,114
                                
                                
                                $
                                5,540Total
      assets
                                
                                $
                                29,958
                                
                                
                                $
                                30,118
                                
                                
                                $
                                46,984
                                
                                
                                $
                                43,925
                                
                                
                                $
                                48,114Financial
      and Statistical Information:EBITDA 1
                                
                                $
                                4,010
                                
                                
                                $
                                4,530
                                
                                
                                $
                                1,240
                                
                                
                                $
                                252
                                
                                
                                $
                                1,781Net Margin 2
                                
                                $
                                16,087
                                
                                
                                $
                                17,517
                                
                                
                                $
                                14,354
                                
                                
                                $
                                14,333
                                
                                
                                $
                                14,076Net Margin per gallon
      (in dollars) 3
                                
                                $
                                0.231
                                
                                
                                $
                                0.258
                                
                                
                                $
                                0.194
                                
                                
                                $
                                0.169
                                
                                
                                $
                                0.149Total
      Gallons
                                
                                
                                69,668
                                
                                
                                
                                67,902
                                
                                
                                
                                73,871
                                
                                
                                
                                84,899
                                
                                
                                
                                94,261


16





Non-GAAP
      Measure Reconciliation, EBITDA
                              
                              Year
      Ended June 30,2010
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006Calculation:Net
      income (loss)
                              
                              $
                              465
                              
                              
                              $
                              (2,339
                              )
                              
                              $
                              (6,769
                              )
                              
                              $
                              (6,589
                              )
                              
                              $
                              (4,878
                              )Add
      back:Interest expense
      5
                              
                              
                              978
                              
                              
                              
                              2,483
                              
                              
                              
                              3,060
                              
                              
                              
                              3,727
                              
                              
                              
                              4,025Income
      tax expense
                              
                              
                              32
                              
                              
                              
                              32
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Depreciation
      and amortization expense within:Cost
      of sales and SG&A
                              
                              
                              2,158
                              
                              
                              
                              2,438
                              
                              
                              
                              2,696
                              
                              
                              
                              2,623
                              
                              
                              
                              2,123Stock-based
      compensation expense
                              
                              
                              190
                              
                              
                              
                              292
                              
                              
                              
                              504
                              
                              
                              
                              491
                              
                              
                              
                              511Write-off
      of unamortized acquisition costs
                              
                              
                              187
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Non-cash ASC 470-20
      (formerly FAS No. 84) inducement on extinguishment 8
                              
                              
                              -
                              
                              
                              
                              1,651
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -(Gain) loss on
      extinguishment of promissory notes 6
                              
                              
                              -
                              
                              
                              
                              (27
                              )
                              
                              
                              1,749
                              
                              
                              
                              -
                              
                              
                              
                              -Subtotal
                              
                              
                              3,545
                              
                              
                              
                              6,869
                              
                              
                              
                              8,009
                              
                              
                              
                              6,841
                              
                              
                              
                              6,659EBITDA
                              
                              $
                              4,010
                              
                              
                              $
                              4,530
                              
                              
                              $
                              1,240
                              
                              
                              $
                              252
                              
                              
                              $
                              1,781





Non-GAAP
Measure Reconciliation, Adjusted basic and diluted net income (loss) per share
attributable to common shareholders excluding non-recurring costs:





Fiscal
      Year Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Net
      income (loss)
                    
                    $
                    465
                    
                    
                    $
                    (2,339
                    )
                    
                    $
                    (6,769
                    )
                    
                    $
                    (6,589
                    )
                    
                    $
                    (4,878
                    )Preferred
      stock dividends
                    
                    
                    (13
                    )
                    
                    
                    (577
                    )
                    
                    
                    (249
                    )
                    
                    
                    -
                    
                    
                    
                    -Non-cash
      deemed dividends for preferred stockSeries
      A, B and C redemption to common stock
                    
                    
                    -
                    
                    
                    
                    (1,746
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income (loss) attributable to common shareholders
                    
                    $
                    452
                    
                    
                    $
                    (4,662
                    )
                    
                    $
                    (7,018
                    )
                    
                    $
                    (6,589
                    )
                    
                    $
                    (4,878
                    )Less:  Non-cash
      deemed dividends for preferred stockSeries
      A, B and C redemption to common stock
                    
                    
                    -
                    
                    
                    
                    1,746
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Less:  Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    extinguishment
                    
                    
                    -
                    
                    
                    
                    1,651
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Less:  Non-cash
      write-off of unamortized acquisition costs
                    
                    
                    187
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Less:  Non-cash
      stock options repricing costs
                    
                    
                    93
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Adjusted
      net income (loss) attributable to common shareholders
                    
                    $
                    732
                    
                    
                    $
                    (1,265
                    )
                    
                    $
                    (7,018
                    )
                    
                    $
                    (6,589
                    )
                    
                    $
                    (4,878
                    )Adjusted net income
      (loss) per share attributable to common shareholders excluding
      non-recurring costs 10Basic
                    
                    $
                    0.09
                    
                    
                    $
                    (0.38
                    )
                    
                    $
                    (2.18
                    )
                    
                    $
                    (2.58
                    )
                    
                    $
                    (2.24
                    )Diluted
                    
                    $
                    0.08
                    
                    
                    $
                    (0.38
                    )
                    
                    $
                    (2.18
                    )
                    
                    $
                    (2.58
                    )
                    
                    $
                    (2.24
                    )Net
      income (loss) per share attributable to common:Basic
                    
                    $
                    0.05
                    
                    
                    $
                    (1.39
                    )
                    
                    $
                    (2.18
                    )
                    
                    $
                    (2.58
                    )
                    
                    $
                    (2.24
                    )Diluted
                    
                    $
                    0.05
                    
                    
                    $
                    (1.39
                    )
                    
                    $
                    (2.18
                    )
                    
                    $
                    (2.58
                    )
                    
                    $
                    (2.24
                    )Weighted
      average common shares outstanding:Basic
                    
                    
                    8,480
                    
                    
                    
                    3,355
                    
                    
                    
                    3,215
                    
                    
                    
                    2,558
                    
                    
                    
                    2,182Diluted
                    
                    
                    8,692
                    
                    
                    
                    3,355
                    
                    
                    
                    3,215
                    
                    
                    
                    2,558
                    
                    
                    
                    2,182





1EBITDA
is defined as earnings before interest, taxes, depreciation and, amortization
expense, a non-GAAP financial measure within the meaning of Regulation G
promulgated by the Securities and Exchange Commission. To the extent that gain
or loss and the non-cash ASC 470-20 inducement on extinguishment of convertible
notes constitutes the recognition of previously deferred interest or finance
cost, it is considered interest expense for the calculation of certain interest
expense amounts. We believe that EBITDA provides useful information to investors
because it excludes transactions not related to the core cash operating business
activities. We believe that excluding these transactions allows investors to
meaningfully trend and analyze the performance of our core cash
operations.





2Net
margin = Gross profit plus cost of sales depreciation.





3Net
margin per gallon = Net margin divided by total gallons sold.





4Net loss
and EBITDA for the years ended June 30, 2009 and 2008, included a $27,000 gain
on extinguishment of convertible notes and $1.7 million loss on extinguishment
of convertible notes, respectively.


17





5The
year ended June 30, 2006 included $472,000 in interest expense to write-off debt
discounts and deferred debt costs and a prepayment penalty related to the
warrants issued on June 30, 2006, to convert a portion of the August 2003,
January 2005, and September 2005 Notes.





6The
year ended June 30, 2009 included a $27,000 net gain on extinguishment of
convertible notes which consisted of gains on extinguishment partially offset by
write offs of unamortized debt costs and debt discounts.   The gains
on extinguishment were $145,000, and $23,000 to record at fair value of the
common stock and the Series D Preferred Stock issued to extinguish a portion of
the August 2007 notes and the September 2008 notes, respectively.  The
write offs of the unamortized debt costs were $118,000 and the unamortized debt
discounts were $23,000 both related to the exchanged notes.  The year ended
June 30, 2008 included $1.7 million as loss on extinguishment of promissory
notes to write-off debt discounts and deferred debt costs, a prepayment penalty
and a gain on extinguishment related to the August 2007 refinancing of debt and
the exchange of the November 2007 note and a portion of the August 2007 note
into Series A and Series B Preferred Stock. To the extent that gain or loss and
the non-cash ASC 470-20 inducement on extinguishment of convertible notes
constitutes the recognition of previously deferred interest or finance
cost, it is considered interest expense for the calculation of EBITDA and
certain interest expense amounts.





7As
a result of the June 2009 Recapitalization, the Company redeemed all the
outstanding preferred shares through the issuance of an aggregate of 2,455,002
common shares at the negotiated price of $1.71 per share, which was an amount
lower than the original conversion terms of the convertible debt
securities.  As per 260-Earnings per Share (formerly EITF No. D-42), “The
Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock,” the Company reported the additional securities
issued to the preferred shareholders as an inducement which resulted in a
non-cash deemed dividend of $1,746,216.  See Note 4 – June 2009
Recapitalization.





8Additionally,
as a result of the Recapitalization, the Company extinguished a portion
of  the August 2007 and the September 2008 Notes (“the Notes”) through
the issuance of 1,184,591 shares and 277,778 shares, respectively, at the
negotiated price of $1.71 per share, which was greater than the $1.67 per share
closing bid  price the day prior to the Recapitalization, but lower
than the conversion price applicable to  the convertible debt
instruments, which resulted in the issuance of more shares in the exchange than
would have been issued upon a conversion.  The practice of accounting in
the interpretation of ASC 470-20 is that an inducement occurs any time when
additional shares are issued in the extinguishment of convertible debt
regardless of the absence of an economic loss or economic intent of the parties
to the transaction.  Irrespective of the economic reality of the
transaction, ASC 470-20 requires the recording of a non-cash “conversion
inducement” charge of $1,651,109, based on the difference between the aggregate
470,711 common shares issuable to the applicable note holder under the original
conversion rights that existed upon a conversion and the 1,462,368 common shares
exchanged at $1.71 cents in the transaction that extinguished all of the
Notes.  This non-cash charge is deemed a financing expense to extinguish
the Notes and it is included in the Consolidated Statements of Operations with a
corresponding increase in Additional paid-in capital and therefore the net
impact has no effect to total Shareholders’ Equity.  See Note 4 – June 2009
Recapitalization. To the extent that the non-cash ASC 470-20 inducement on
extinguishment of promissory notes constitutes the recognition of a finance
cost, it is considered interest expense for the calculation of certain interest
expense amounts.





9Adjusted
net income (loss) before non-cash, non-recurring costs is a non-GAAP measure
that excludes the non-cash ASC 470-20 inducement on extinguishment of
convertible notes, the non-cash ASC 805 write-off of unamortized acquisition
costs, and the non-cash stock options repricing costs.  We believe that
this is a meaningful Non-GAAP representation of the ongoing performance of the
operations as it excludes the effect of charges that were strictly related to the
Recapitalization and/or charges that are non-recurring.





10Adjusted
Basic and diluted net income (loss) per share attributable to common
shareholders excluding non-recurring costs is a Non-GAAP measure that excludes
the effect of a cash ASC 470-20 inducement and deemed dividends on
extinguishment of convertible notes and preferred shares, the non-cash ASC 805
write-off of unamortized acquisition costs, and the non-cash stock options
repricing costs. We believe that this is a meaningful Non-GAAP representation of
the ongoing performance of the operations as it excludes the effect of charges
that were strictly related to the Recapitalization and/or charges that are
non-recurring.


18




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




The
following discussion of our financial condition, results of operations,
liquidity and capital resources should be read in conjunction with our audited
consolidated financial statements and related notes included in Part III of this
Form 10-K, commencing on page F-1.




OUR
BUSINESS




We are a
supplier of specialized transportation and distribution services for petroleum
products and chemicals.  We provide commercial mobile and bulk fueling,
lubricant and chemical distribution, emergency response services and
transportation logistics to the trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunications and
government services industries.At June 30, 2010, the Company was
conducting operations through 34 service locations in the eleven states of
Alabama, California, Florida, Georgia, Louisiana, Mississippi, Nevada, North
Carolina, South Carolina, Tennessee and Texas.





We
provide commercial mobile and bulk fueling, integrated out-sourced fuel
management, packaging, distribution and sale of lubricants and chemicals,
transportation logistics, and emergency response services.  Our specialized
equipment fleet distributes diesel fuel and gasoline to customer locations on a
regularly scheduled or as needed basis, refueling vehicles and equipment,
re-supplying bulk storage tanks, and providing fuel for emergency power
generation systems.  Our fleet also handles the movement of customer
equipment and storage tanks we provide for use by our customers.  We also
distribute a wide variety of specialized petroleum products, lubricants and
chemicals to our customers in Texas and in certain other markets.





We
compete with several large and numerous small distributors, jobbers and other
companies offering services and products in the same markets in which we
operate.  We believe that the industry and these markets offer us
opportunities for consolidation, as customers increasingly demand one-stop
shopping for their petroleum based needs and seek reliable supply distribution
services particularly to prevent business interruptions during
emergencies.  We believe that certain factors, such as our ability to
provide a range of services and petroleum based products and services, create
advantages for us when compared to our competitors.





An
objective of our business strategy is to become the leading “single source”
provider of petroleum products and services in the markets we currently operate
in, as well as expanding into additional contiguous markets.  To achieve
this objective we plan to focus on increasing revenues in our core operations
and in expanding through selective acquisitions.


19




OVERVIEW




Summary:




Our
fiscal year 2010 was a substantial improvement over the prior year as the bottom
line turned positive from a net loss of $2.3 million to net income of
$465,000.  This $2.8 million improvement in our bottom line in our fiscal
2010, coming on the heels of a $4.4 million improvement in fiscal 2009 over
fiscal 2008, confirms that, in the face of an unprecedented global economic
recession and financial meltdown over the past two years, we have outperformed
all reasonable expectations.  Despite facing the worst domestic and global
economy since the Great Depression, we actually increased our volumes by 2.6% or
1.8 million gallons in fiscal 2010 over the prior year by offsetting the
reduction of demand from our customer base with the addition of net new
business, including entering three new markets.  We consider this
achievement to be particularly noteworthy in light of the fact that the 14% drop
in demand from our existing customer base at the onset of the economic downturn
in the fall of 2008 has not yet been recovered.  Moreover, we have achieved
profitability in fiscal 2010 notwithstanding not having any significant amount
of emergency response work in the year compared to a year ago, as reflected by
our net margin per gallon of 23.1 cents versus 25.8 cents per gallon in the
prior year.




We
achieved this 23.1 cent net margin per gallon in fiscal 2010 notwithstanding
higher repairs, maintenance and operating costs of our fleet and facilities and
new market start up costs.  In prior years, these kinds of unanticipated
expense increases could have lowered our net margin to the point of
unprofitability but, with a stronger balance sheet after our June 2009
recapitalization transactions, increasing volumes and more efficient operations,
we were not so adversely affected in fiscal 2010.




In fiscal
2010, our selling, general and administrative expenses were $1.0 million lower
than last year due to a significant reduction in personnel costs and
professional fees.  That $1.0 million reduction was achieved
notwithstanding $531,000 in SG&A costs that are not expected to recur in
fiscal 2011, including:  1) a $187,000 write off of deferred
acquisition costs; 2) a $93,000 stock option repricing charge; and 3) $251,000
in Sarbanes-Oxley Section 404(b) cost preparing for auditor attestation of our
internal controls assessment from which we were exempted by law after these
costs were incurred; offset by a $584,000 SG&A reduction from the settlement
of our litigation against the FAS Group.  Part of our bottom line
improvement included the resulting recurring impact from our June 2009
Recapitalization replacing high yield notes for mostly common stock and low
yield notes resulting in a $1.5 million interest expense savings and paying $1.0
million of scheduled principal payments on our bank term loan this
year.




For
fiscal 2010, our EBITDA was $4.0 million, our cash contribution which is EBITDA
less fixed charges was $1.9 million and our fixed charge coverage ratio was
1.86.  These numbers are comparable to the $4.5 million, $1.8 million and
1.65, respectively, reported a year ago, when we suggested our EBITDA and other
reported numbers were harbingers of further improvements in our operating
results.5While
we are now generating taxable income, we have a $10 million deferred tax asset
that remains fully reserved even though we have used approximately $1.0 million
to set off taxable income due in the last two tax years.




We have
ordered new trucks to modernize and increase the size of our fleet which will
create expanded capacity to our system, improve fuel economy and satisfy new
emission standards, give us further opportunity to expand in new markets and
reduce our repairs and maintenance.  Our principal lender has given us
approval to incur up to $2.0 million in new debt to finance this fleet
expansion, conditioned upon our continuing satisfaction of specified financial
thresholds.




We
continue to seek ways to attract interest in our common stock in the
marketplace, conducting several investor road shows last year.  Even though
that investor relations activity has not appeared to improve the liquidity,
trading volume or the trading price of our stock, we plan to continue reaching
out to the investment community in an effort to enhance their understanding of
the value of our company and its securities.  Our market capitalization is
approximately $10.75 million (based on a $1.25 share price and 8.6 million
shares outstanding), or 2.69 times EBITDA, which we consider an inexplicable
undervaluation of our common stock.  Notwithstanding the recent disconnect
between our reported results of operations and the market price of our stock;
however, we remain optimistic that the continuing improvements in our financial
results and the prospects for further betterments described in this annual
report will have a positive impact on the trading volume and market price of our
common stock.




In light
of the weak market conditions for our stock, we recently announced a stock
repurchase program pursuant to which we may purchase up to $840,000 of capital
stock.  While that program has only recently begun, we believe that, in
light of the current prices for our common stock, the expenditure of corporate
funds to acquire shares at these prices is a reasonable and prudent allocation
of our financial resources.


20




We
believe that, in this economy, there are many opportunities available for us to
acquire complementary businesses and achieve accelerated growth from those
acquisitions.  A significant improvement in the trading price of our common
stock would facilitate those acquisitions, since we could use shares of our
stock to fund all or a portion of any such acquisition.  We are currently
reluctant to use shares of our stock as consideration for acquisitions, however,
because we believe acquisitions made with our stock at or near current prices
would be unduly dilutive.  While we will consider using stock for
acquisitions that are accretive on an earnings per share basis, we will do so
only if we believe that the trading market for our stock is sufficiently related
to the actual value and prospects of our company to reflect the enhanced value
from the acquisition.




TRENDS IN
FISCAL YEAR 2010 TO DATE





·
            We
      began fiscal year 2010 profitable, reporting net income of $20,000 and
      EBITDA of $1.1 million in the first quarter.  The results included
      non-cash, non-recurring charges of $187,000 for the write-off of
      unamortized acquisition costs per application of ASC 805, and $93,000
      related to stock option expense incurred as a result of the stock option
      repricing.  Gallons sold increased slightly from 16.7 million in the
      fourth quarter of fiscal year 2009 to 16.9 million in the first quarter of
      fiscal year 2010.





·
            During
      the second quarter of fiscal year 2010, we reported net income of $445,000
      and EBITDA of $1.3 million on 17.0 million gallons sold.  We expanded
      into three new markets during this
quarter.





·
            For
      the third quarter of fiscal year 2010, typically our most challenging
      quarter because of seasonal declines in January and February, we reported
      a net loss of $419,000 and EBITDA of $398,000.  Our gallons sold
      increased to 17.4 million compared to the second quarter of fiscal 2010,
      primarily due to customer additions, however, we incurred higher costs
      related to the startup of these new markets and experienced ongoing higher
      costs of repairs and maintenance, storm water removal costs and further
      reduction of existing customer demand in January and February.





·
            During
      the fourth quarter of fiscal year 2010, we achieved net income of $419,000
      and EBITDA of $1.2 million while our gallons sold increased to 18.4
      million compared to the third quarter of fiscal 2010.  A rebound in
      demand from existing customers that began at the end of the third quarter
      continued during the fourth quarter, resulting in another strong and
      profitable quarter.





·
            As
      in prior years, our operating results for this year reflect substantial
      non-cash charges.  In fiscal 2010, we had $2.9 million in such
      charges, including depreciation and amortization of assets, amortized debt
      costs, stock-based compensation, provision for doubtful accounts, and slow
      moving inventory reserve.





·
            The
      Company improved its bottom line profitability by $2.8 million in fiscal
      2010 even though EBITDA, a non-GAAP measure, decreased by $520,000 in
      fiscal 2010 from the prior year.  The fiscal 2010 net income
      reflects stated interest expense of $809,000, which was substantially
      lower than the $2.1 million reported in fiscal 2009, a $1.3 million
      difference, as much of the benefit of the June 2009 Recapitalization was
      realized in fiscal 2010.


21




The following table presents certain
operating results for the last eight sequential quarters (in thousands, except
net margin per gallon):




For the Three Months Ended,June 30,
                                            
                                            
                                            March 31,
                                            
                                            
                                            December 31,
                                            
                                            
                                            September 30,
                                            
                                            
                                            June 30,
                                            
                                            
                                            March 31,
                                            
                                            
                                            December 31,
                                            
                                            
                                            September30,2010
                                            
                                            
                                            2010
                                            
                                            
                                            2009
                                            
                                            
                                            2009
                                            
                                            
                                            2009
                                            
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2008Revenues
                                            
                                            $
                                            53,704
                                            
                                            
                                            $
                                            49,152
                                            
                                            
                                            $
                                            46,305
                                            
                                            
                                            $
                                            43,686
                                            
                                            
                                            $
                                            39,884
                                            
                                            
                                            $
                                            34,982
                                            
                                            
                                            $
                                            45,112
                                            
                                            
                                            $
                                            79,271Gross
      profit
                                            
                                            $
                                            4,320
                                            
                                            
                                            $
                                            3,398
                                            
                                            
                                            $
                                            3,381
                                            
                                            
                                            $
                                            4,097
                                            
                                            
                                            $
                                            3,539
                                            
                                            
                                            $
                                            3,790
                                            
                                            
                                            $
                                            3,292
                                            
                                            
                                            $
                                            5,819Selling,
      general and administrative
                                            
                                            $
                                            3,678
                                            
                                            
                                            $
                                            3,555
                                            
                                            
                                            $
                                            2,673
                                            
                                            
                                            $
                                            3,839
                                            
                                            
                                            $
                                            3,401
                                            
                                            
                                            $
                                            3,455
                                            
                                            
                                            $
                                            3,267
                                            
                                            
                                            $
                                            4,632Operating
      income (loss)
                                            
                                            $
                                            642
                                            
                                            
                                            $
                                            (157
                                            )
                                            
                                            $
                                            708
                                            
                                            
                                            $
                                            258
                                            
                                            
                                            $
                                            138
                                            
                                            
                                            $
                                            335
                                            
                                            
                                            $
                                            25
                                            
                                            
                                            $
                                            1,187Interest
      expense and other income, net
                                            
                                            $
                                            (215
                                            )
                                            
                                            $
                                            (254
                                            )
                                            
                                            $
                                            (255
                                            )
                                            
                                            $
                                            (230
                                            )
                                            
                                            $
                                            (454
                                            )
                                            
                                            $
                                            (570
                                            )
                                            
                                            $
                                            (677
                                            )
                                            
                                            $
                                            (667
                                            )Non-cash ASC 470-20
      (formerly FAS No. 84) inducement on extinguishment 3
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (1,651
                                            )
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Gain
      on extinguishment of promissory notes
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            27
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Net
      income (loss)
                                            
                                            $
                                            419
                                            
                                            
                                            $
                                            (419
                                            )
                                            
                                            $
                                            445
                                            
                                            
                                            $
                                            20
                                            
                                            
                                            $
                                            (1,948
                                            )
                                            
                                            $
                                            (243
                                            )
                                            
                                            $
                                            (660
                                            )
                                            
                                            $
                                            512Less:  Non-cash
      write-off of unamortized acquisition costs
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            187
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Less:  Non-cash
      stock options repricing costs
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            93
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Less:  Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on extinguishment 3
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            1,651
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Adjusted
      net income (loss) before non-cash, non-recurringcharges 4
                                            
                                            $
                                            419
                                            
                                            
                                            $
                                            (419
                                            )
                                            
                                            $
                                            445
                                            
                                            
                                            $
                                            300
                                            
                                            
                                            $
                                            (297
                                            )
                                            
                                            $
                                            (243
                                            )
                                            
                                            $
                                            (660
                                            )
                                            
                                            $
                                            512EBITDA 1
                                            
                                            $
                                            1,189
                                            
                                            
                                            $
                                            398
                                            
                                            
                                            $
                                            1,289
                                            
                                            
                                            $
                                            1,134
                                            
                                            
                                            $
                                            876
                                            
                                            
                                            $
                                            974
                                            
                                            
                                            $
                                            690
                                            
                                            
                                            $
                                            1,990Net
      margin
                                            
                                            $
                                            4,529
                                            
                                            
                                            $
                                            3,616
                                            
                                            
                                            $
                                            3,609
                                            
                                            
                                            $
                                            4,333
                                            
                                            
                                            $
                                            3,795
                                            
                                            
                                            $
                                            4,027
                                            
                                            
                                            $
                                            3,534
                                            
                                            
                                            $
                                            6,161Net margin per
      gallon 2
                                            
                                            $
                                            0.25
                                            
                                            
                                            $
                                            0.21
                                            
                                            
                                            $
                                            0.21
                                            
                                            
                                            $
                                            0.26
                                            
                                            
                                            $
                                            0.23
                                            
                                            
                                            $
                                            0.25
                                            
                                            
                                            $
                                            0.21
                                            
                                            
                                            $
                                            0.33Gallons
      sold
                                            
                                            
                                            18,385
                                            
                                            
                                            
                                            17,382
                                            
                                            
                                            
                                            16,956
                                            
                                            
                                            
                                            16,945
                                            
                                            
                                            
                                            16,709
                                            
                                            
                                            
                                            16,041
                                            
                                            
                                            
                                            16,602
                                            
                                            
                                            
                                            18,550




1 EBITDA
is defined as earnings before interest, taxes, depreciation, and amortization, a
Non-GAAP financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission. To the extent that gain and the non-cash ASC
470-20 (formerly FAS No. 84) inducement on extinguishment of promissory notes
constitutes the recognition of previously deferred interest or finance cost, it
is considered interest expense for the calculation of certain interest expense
amounts. Both stock-based compensation amortization expense and the write-off of
unamortized acquisition costs are considered amortization items to be excluded
in the EBITDA calculation. We believe that EBITDA provides useful information to
investors because it excludes transactions not related to the core cash
operating business activities. We believe that excluding these transactions
allows investors to meaningfully trend and analyze the performance of our core
cash operations.





2Net
margin per gallon is calculated by adding gross profit to the cost of sales
depreciation and amortization and dividing that sum by the number of gallons
sold.


22





3Non-cash
ASC 470-20 inducement on extinguishment is a charge we incurred strictly as a
result of the June 29, 2009 Recapitalization.  The Company extinguished a
portion of the August 2007 and the September 2008 Notes (“the Notes”) through
the issuance of approximate 1.2 million shares and approximate 278,000 shares,
respectively, at the negotiated price of $1.71 per share, which was greater than
the $1.67 per share closing bid price the day prior to the Recapitalization, but
lower than the conversion price applicable to the convertible debt instruments,
which resulted in the issuance of more shares in the exchange than would have
been issued upon a conversion.  The practice of accounting in the
interpretation of ASC 470-20 is that an inducement occurs any time when
additional shares are issued in the extinguishment of convertible debt
regardless of the absence of an economic loss or economic intent of the parties
to the transaction.  Irrespective of the economic reality of the
transaction, ASC 470-20 required the recording of a non-cash “conversion
inducement” charge of $1.7 million, based on the difference between the
approximate aggregate 471,000 common shares issuable to the applicable note
holder under the original conversion rights that existed upon a conversion and
the approximate 1.5 million common shares exchanged at $1.71 cents in the
transaction that extinguished all of the Notes.  This non-cash charge is
deemed a financing expense to extinguish the Notes.  To the extent that the
non-cash ASC 470-20 inducement on extinguishment of promissory notes constitutes
the recognition of a finance cost, it is considered interest expense for
the calculation of certain interest expense amounts.





4 Adjusted
net income (loss) before non-cash, non-recurring charges is Non-GAAP measure
that is shown to provide the reader with information regarding the true economic
performance of the Company before the impact of charges that do not reflect the
ongoing performance of its operations, such as the non-cash accounting charge of
$1.7 million in the fourth quarter of fiscal 2009 and the first quarter of
fiscal 2010 write-off incurred as a new accounting ruling was applied.  We
believe that this is a meaningful Non-GAAP representation of the ongoing
performance of the operations.





The following table reconciles EBITDA
(Non-GAAP measure) to the reported Net income (loss) for each of the eight
quarterly periods presented above (in thousands):




For the Three Months Ended,June 30,
                                          
                                          
                                          March 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          September 30,
                                          
                                          
                                          June 30,
                                          
                                          
                                          March 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          September30,2010
                                          
                                          
                                          2010
                                          
                                          
                                          2009
                                          
                                          
                                          2009
                                          
                                          
                                          2009
                                          
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2008Net
      income (loss)
                                          
                                          $
                                          419
                                          
                                          
                                          $
                                          (419
                                          )
                                          
                                          $
                                          445
                                          
                                          
                                          $
                                          20
                                          
                                          
                                          $
                                          (1,948
                                          )
                                          
                                          $
                                          (243
                                          )
                                          
                                          $
                                          (660
                                          )
                                          
                                          $
                                          512Add
      back:Interest
      expense
                                          
                                          
                                          227
                                          
                                          
                                          
                                          260
                                          
                                          
                                          
                                          261
                                          
                                          
                                          
                                          230
                                          
                                          
                                          
                                          545
                                          
                                          
                                          
                                          575
                                          
                                          
                                          
                                          680
                                          
                                          
                                          
                                          683Income
      tax expense
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8
                                          
                                          
                                          
                                          8Depreciation and
      amortization expense within:Cost
      of sales
                                          
                                          
                                          208
                                          
                                          
                                          
                                          218
                                          
                                          
                                          
                                          228
                                          
                                          
                                          
                                          236
                                          
                                          
                                          
                                          254
                                          
                                          
                                          
                                          239
                                          
                                          
                                          
                                          242
                                          
                                          
                                          
                                          342Selling,
      general and administrative expenses
                                          
                                          
                                          316
                                          
                                          
                                          
                                          316
                                          
                                          
                                          
                                          316
                                          
                                          
                                          
                                          320
                                          
                                          
                                          
                                          344
                                          
                                          
                                          
                                          334
                                          
                                          
                                          
                                          342
                                          
                                          
                                          
                                          341Stock-based
      compensation expense
                                          
                                          
                                          11
                                          
                                          
                                          
                                          15
                                          
                                          
                                          
                                          31
                                          
                                          
                                          
                                          133
                                          
                                          
                                          
                                          49
                                          
                                          
                                          
                                          61
                                          
                                          
                                          
                                          78
                                          
                                          
                                          
                                          104Write-off
      of unamortized acquisition costs
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          187
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
      extinguishment
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,651
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Gain
      on extinguishment of promissory notes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (27
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -EBITDA
                                          
                                          $
                                          1,189
                                          
                                          
                                          $
                                          398
                                          
                                          
                                          $
                                          1,289
                                          
                                          
                                          $
                                          1,134
                                          
                                          
                                          $
                                          876
                                          
                                          
                                          $
                                          974
                                          
                                          
                                          $
                                          690
                                          
                                          
                                          $
                                          1,990


23




The
following table reconciles Adjusted net income (loss) before non-cash,
non-recurring charges(Non-GAAP measure) to the
reported Net income (loss) for each of the eight quarterly periods presented
above (in thousands):




For the Three Months Ended,June 30,
                                    
                                    
                                    March 31,
                                    
                                    
                                    December 31,
                                    
                                    
                                    September 30,
                                    
                                    
                                    June 30,
                                    
                                    
                                    March 31,
                                    
                                    
                                    December 31,
                                    
                                    
                                    September30,2010
                                    
                                    
                                    2010
                                    
                                    
                                    2009
                                    
                                    
                                    2009
                                    
                                    
                                    2009
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2008Net
      income (loss)
                                    
                                    $
                                    419
                                    
                                    
                                    $
                                    (419
                                    )
                                    
                                    $
                                    445
                                    
                                    
                                    $
                                    20
                                    
                                    
                                    $
                                    (1,948
                                    )
                                    
                                    $
                                    (243
                                    )
                                    
                                    $
                                    (660
                                    )
                                    
                                    $
                                    512Less:  Non-cash
      write-off of unamortized acquisition costs
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    187
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Less:  Non-cash
      stock optionsrepricing costs
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    93
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Less:  Non-cash
      ASC 470-20 (formerly FAS No. 84)inducement on
      extinguishment
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    1,651
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Adjusted
      net income (loss) before non-cash, non-recurringcharges
                                    
                                    $
                                    419
                                    
                                    
                                    $
                                    (419
                                    )
                                    
                                    $
                                    445
                                    
                                    
                                    $
                                    300
                                    
                                    
                                    $
                                    (297
                                    )
                                    
                                    $
                                    (243
                                    )
                                    
                                    $
                                    (660
                                    )
                                    
                                    $
                                    512


24




5Cash
contribution, fixed charges and fixed coverage ratio are Non-GAAP measures that
provide useful information regarding the Company’s ability to satisfy cash
payments other than those made for operating activities.




The
following table reconciles cash contribution, fixed charges and fixed coverage
ratio (Non-GAAP measures) to the reported Net income (loss) for each of the
fiscal years presented above (in thousands):




Years Ended June 30,2010
                      
                      
                      2009Net
      income (loss)
                      
                      $
                      465
                      
                      
                      $
                      (2,339
                      )Add
      back:Interest
      expense
                      
                      
                      978
                      
                      
                      
                      2,483Income
      tax expense
                      
                      
                      32
                      
                      
                      
                      32Depreciation
      and amortization expense within:Cost
      of sales
                      
                      
                      890
                      
                      
                      
                      1,077Selling,
      general and administrative expenses
                      
                      
                      1,268
                      
                      
                      
                      1,361Stock-based
      compensation amortization expense
                      
                      
                      190
                      
                      
                      
                      292Write-off
      of unamortized acquisition costs
                      
                      
                      187
                      
                      
                      
                      -Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    Extinguishment
                      
                      
                      -
                      
                      
                      
                      1,651Gain
      on extinguishment of promissory notes
                      
                      
                      -
                      
                      
                      
                      (27
                      )EBITDA
                      
                      $
                      4,010
                      
                      
                      $
                      4,530Less
      fixed charges:Principal
      payments on term and promissory notes
                      
                      
                      917
                      
                      
                      
                      4,993Purchases
      of property and equipment other than restricted cash
                      
                      
                      415
                      
                      
                      
                      298Capital
      lease payments
                      
                      
                      62
                      
                      
                      
                      58Cash
      paid for interest
                      
                      
                      765
                      
                      
                      
                      2,125Payment
      of dividends
                      
                      
                      -
                      
                      
                      
                      390Principal
      and interest payments made as a result of the
    Recapitalization
                      
                      
                      -
                      
                      
                      
                      (5,045
                      )Property
      and equipment payments made from restricted cash
                      
                      
                      -
                      
                      
                      
                      (76
                      )Total
      fixed charges
                      
                      $
                      2,159
                      
                      
                      $
                      2,743Cash
      contribution
                      
                      $
                      1,851
                      
                      
                      $
                      1,787Fixed
      charge coverage ratio (EBITDA divided by fixed charges)
                      
                      
                      1.86
                      
                      
                      
                      1.65




RESULTS
OF OPERATIONS:





To
monitor our results of operations, we review key financial information,
including net revenues, gross profit, selling, general and administrative
expenses, net income or losses, and non-GAAP measures, such as EBITDA.  We
continue to seek ways to more efficiently manage and monitor our business
performance.  We also review other key operating metrics, such as the
number of gallons sold and net margins per gallon sold.  As our business is
dependent on the supply of fuel and lubricants, we closely monitor pricing,
repayment terms, and fuel availability from our suppliers in order to purchase
the most cost effective products.  We calculate our net margin per gallon
by adding gross profit and the depreciation and amortization components of cost
of sales, and dividing that sum by the number of gallons sold.


25




Comparison
of Year Ended June 30, 2010 (“fiscal 2010”) to Year Ended June 30, 2009 (“fiscal
2009”)





Revenues





Revenues
were $192.8 million in fiscal 2010 as compared to $199.2 million in fiscal 2009,
a decrease of $6.4 million, or 3.2%, primarily as a result of lower market
prices of petroleum products during fiscal 2010, as compared to fiscal 2009, to
which a decrease of $11.3 million in revenues is attributable.





The
number of gallons sold during fiscal 2010 and 2009 was 69.7 million and 67.9
million, respectively, an increase of 1.8 million gallons, or 2.7%.  In the
first part of fiscal 2009, we provided emergency response services in Louisiana
and Texas for Hurricanes Gustav and Ike.  This brief injection of higher
margin emergency response business helped to sustain us through the dramatic
contraction of the national economy at the time, which severely affected us in
the second quarter of that year.  Since that time, we have witnessed a slow
but steady increase in demand for our services from companies seeking to reduce
their costs of operation with mobile fueling, leading to our decision to add
three new service locations in fiscal 2010.  The 14% decrease in same
customer sales demand that occurred during the economic downturn at that time,
however, has still not been recovered by the Company.  Much like the
reports of uneven and unsteady growth for the economy generally, our sales
volume fluctuated during much of fiscal 2010.  We saw a much stronger
demand from net new business from March 2010 through the end of the fiscal year
and are optimistic about its continuation throughout this next fiscal
year.




Gross
Profit





Gross
profit was $15.2 million on 69.7 million gallons in fiscal 2010 as compared to
$16.4 million on 67.9 million gallons in fiscal 2009, a decrease of $1.2
million, or 7.6%.  While we saw an overall net increase in our business,
resulting in a 2.7% increase in our gallons sold, the gross profit was lower
than last year due to a net margin per gallon decrease of $2.7 cents from $25.8
cents, in fiscal 2009 to $23.1 cents in fiscal 2010.  The decreases were
primarily due to the incremental margin contributions in fiscal 2009 from the
emergency response services provided in Louisiana and Texas for Hurricanes
Gustav and Ike during the first quarter of fiscal 2009, as well as higher
repairs and maintenance costs of our fleet in fiscal 2010, $244,000 in storm
water removal costs in our mid-continent division in 2010 (which cost was almost
entirely eliminated by May 2010), and new market start up costs of approximately
$104,000 in fiscal 2010.  We also recorded higher direct operating expenses
this fiscal year as a result of last fiscal year’s $221,000 benefit from the
reversal of a personal benefits reserve as employee benefits programs were
modified as a response to the economic collapse.




Selling,
General and Administrative Expenses




Selling,
general and administrative (“SG&A”) expenses were $13.7 million in fiscal
2010 compared to $14.8 million in fiscal 2009, a decrease of approximately $1.0
million, or 6.8%.





While
there were a number of  significant variables in SG&A in fiscal
2010, management believes that the ultimate cause of the decrease in SG&A
was the cost cutting, business restructuring measures and reductions in
professional services programs that were initiated during fiscal 2009, which
were continued and maintained throughout fiscal 2010.  This cost
elimination program was initiated in response to the economic downturn that
began in November 2008 and continues today.  We accomplished a $1.0 million
improvement in SG&A by cutting or otherwise lowering  expense in
various categories, including  professional fees, employee expense,
travel expense, depreciation and amortization expense, credit card fees and
provision for doubtful accounts.





During
fiscal 2010, we also had various other significant SG&A components that are
not expected to recur in fiscal 2011, namely:  1) the recovery of
$584,000 in legal fees, offset by 2) a $187,000 write off of unamortized
acquisition costs, $93,000 for an employee stock option repricing
and  $251,000 of preparation costs for Sarbanes-Oxley 404(b)
auditor attestation compliance (not ultimately needed due to new federal
legislation and SEC rulemaking which took place after the expenditure was
required to be made).  The overall impact of these fiscal 2010 components
on fiscal 2010 SG&A was neutral, so we believe that the reductions stemming
from our cost reduction program represent the best explanation of the $1.0
million reduction in SG&A for fiscal 2010 and the most meaningful indicator
of historical trends in this area.


26




Interest
Expense




Interest
expense was $978,000 in fiscal 2010, as compared to $2.5 million in the
same period of the prior year, a decrease of $1.5 million, or 60.6%.  The
decrease was primarily due to lower interest expense attributable to lower
long-term debt balances and lower interest rates after the June 2009
Recapitalization, when we eliminated our 12% and 11.5% secured and unsecured
debt and replaced the balance with 4.5% to 5% debt.  At the same time, we
also negotiated favorable interest rates and other terms on our line of credit
and we are paying down the line of credit with cash generated from
operations.  In addition, the average outstanding balance on the line of
credit was $3.5 million lower this year primarily due to lower average fuel
prices, which resulted in lower borrowing requirements.





The
components of interest expense were as follows (in thousands):





Year
      Ended June 30,2010
                      
                      
                      2009Stated
      Rate Interest Expense:Line
      of credit
                      
                      $
                      455
                      
                      
                      $
                      787Long-term
      debt
                      
                      
                      261
                      
                      
                      
                      1,093Other
                      
                      
                      93
                      
                      
                      
                      208Total
      stated rate interest expense
                      
                      
                      809
                      
                      
                      
                      2,088Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                      
                      
                      169
                      
                      
                      
                      305Amortization
      of debt discount
                      
                      
                      -
                      
                      
                      
                      42Other
                      
                      
                      -
                      
                      
                      
                      48Total
      non-cash interest amortization
                      
                      
                      169
                      
                      
                      
                      395Total
      interest expense
                      
                      $
                      978
                      
                      
                      $
                      2,483




Gain
on Extinguishment of Promissory Notes





In fiscal
year 2009, as a result of the June 2009 Recapitalization, we recorded a net gain
of extinguishment of $27,000.  This net gain on extinguishment is the
result of the recording at fair value of the common stock and the Series D
Preferred Stock issued to extinguish a portion of the August 2007 notes and the
September 2008 notes, offset by the write offs of unamortized debt costs of
$118,000 and unamortized debt discounts of $23,000 related to the exchanged
notes.





Non-Cash
ASC 470-20 (formerly FAS No. 84) Inducement on Extinguishment





Also in
the June 2009 Recapitalization, the Company extinguished a portion of the August
2007 and the September 2008 Notes (“the Notes”) through the issuance of
1,184,591 shares and 277,778 shares of Common Stock, respectively, at the
negotiated price of $1.71 per share (as adjusted for the subsequent 1 for 4.5
reverse stock split), which was higher than the $1.67 per share closing bid
price on the trading day immediately preceding the June 29, 2009
Recapitalization.  The original terms of the Notes allowed for a conversion
of 50% of the August 2007 Notes and 100% of the September 2008 Notes into common
stock.  The negotiated issuance price of $1.71 per share in the
Recapitalization was based on then current market prices, and  was
lower than the original conversion prices of $6.57 per share and $2.93 per share
of the August 2007 Notes and the September 2008 Notes, respectively.  Since
the extinguishment of the Notes through issuance of Common Stock was done at
close to current market prices of the Common Stock, the Company issued an
aggregate of 991,657 more shares than it would have issued for the convertible
equivalent under the original terms of the Notes.


27




ASC
470-20 “Debt - Debt with
Conversion and Other Options” (“ASC 470-20”) (Formerly FAS No. 84),
specifies the method of accounting for conversions of convertible debt to equity
securities when the debtor induces conversion of the debt by offering additional
securities or other consideration to convertible debt holders.  In
accordance with ASC 470- 20, an expense is recognized if and to the extent that
“additional consideration is paid to debt holders for the purpose of inducing
prompt conversion of the debt to equity securities (sometimes referred to as a
convertible debt ‘sweetener’).”  While the Company’s purpose in
effecting the June 2009 Recapitalization was to effect a complete restructuring
of its debt and equity structure via a series of transactions that would have
the effect of reducing its outstanding debt and future obligations and there was
no intent to induce any conversion of the outstanding debt to common stock, a
portion of the exchange of the outstanding carrying value of $9.6 million in
convertible debt for an equal aggregate value of cash, common stock and
preferred stock is required by ASC 470-20 to be accounted for as an induced
conversion of outstanding debt securities.  While we believe that the
application of ASC 470-20 does not reflect the economic substance of the value
exchanged in this portion of the Recapitalization transaction, we have reported
the required non-cash charge of approximately $1.65 million for the difference
between the number of common shares issued compared to the number of common
shares that would have been issued under the original terms of the convertible
debt instrument, times the market price on the conversion date.




The
Company understands that the accounting interpretation of ASC 470-20 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or economic
intent of the parties to the transaction.  As a result, the application of
ASC 470-20 to the exchange of existing convertible debt securities for common
stock resulted in the recording of a non-cash “inducement” accounting charge of
$1.65 million, which was a calculation of the difference between the 470,712
common shares that would have been issuable to the applicable note holder under
the original conversion rights that existed in the convertible Notes and the
1,462,369 common shares exchanged at $1.71 cents upon the extinguishment. 
This non-cash charge is deemed a financing expense to extinguish the Notes and
it is included in the Consolidated Statements of Operations with a corresponding
increase in Additional paid-in capital and therefore the net impact has no
effect to total Shareholders’ Equity.




The
Company did not record any charge for inducement of conversion of convertible
securities in fiscal 2010.




Income
Taxes




State
income tax expense of $32,000 was recorded for each of the fiscal years 2010 and
2009.  No federal income tax expense was recorded for these periods. 
The federal net operating loss carryforward at June 30, 2010 was $26.3 million,
which includes a $2.2 million net operating loss carryforward acquired in
connection with the H & W acquisition.  Although the Company generated
net income in fiscal 2010, there is no provision for federal income taxes due to
the availability of net operating loss carryforwards and the $10.0 million net
deferred tax asset remains fully reserved at June 30, 2010.




Net
Income (Loss)




Net
income was $465,000 in fiscal 2010, compared to a net loss of $2.3 million in
fiscal 2009, an improvement of $2.8 million.  The improvement was partially
attributable to lower selling, general and administrative expenses of $1.0
million as the results were favorably impacted by cost cutting and business
restructuring steps that were taken beginning in late November 2008 to meet the
dramatic decrease in customer demand attributable to the international economic
crisis.  Additionally, we incurred lower interest expense of $1.5 million
attributable to the Recapitalization and to lower fuel prices, which resulted in
lower debt balances and lower borrowing requirements,
respectively.


28





Net
income in fiscal 2010 was reduced by the lower gross profit of $1.2 million
partially resulting from the decrease in margin contribution from the emergency
response services provided in the first quarter of fiscal 2009, higher repairs
and maintenance costs of our fleet, $244,000 of cost for storm water removal in
our mid-continent division which cost was almost eliminated by May 2010, new
market start up costs of approximately $104,000, and the non recurrence of the
benefit from last year’s modification of certain personnel benefits
programs.  The net loss in fiscal 2009 includes a $1.7 million non-cash ASC
470-20 (formerly FAS No. 84) inducement on extinguishment charge as discussed
above.




EBITDA




EBITDA
was $4.0 million in fiscal 2010, as compared to $4.5 million in fiscal 2009, a
decrease of $520,000.  The decrease in EBITDA was partially due to the same
factors cited for the lower gross profit of $1.2 million; namely the decrease in
margin contribution from the emergency response services provided in the first
quarter of fiscal 2009 in Louisiana and Texas for Hurricanes Gustav and Ike,
higher repairs and maintenance costs of our fleet, $244,000 of cost for storm
water removal in our mid-continent division which cost was almost eliminated by
May 2010, and the new market start up costs of approximately $104,000.  The
decrease in EBITDA was partially offset by the $1.0 million decrease in selling,
general and administrative expenses in fiscal 2010.  The net effect of the
FAS Group litigation settlement, write-off of acquisition costs, employee stock
option repricing, and SOX 404b audit attestation compliance cost combined to
have a neutral impact on selling, general and administrative costs and EBITDA
for fiscal year 2010.




The
reconciliation of EBITDA to net income (loss) for fiscal years 2010 and 2009 was
as follows (in thousands):




Years Ended June 30,2010
                  
                  
                  2009Net
      income (loss)
                  
                  $
                  465
                  
                  
                  $
                  (2,339
                  )Add
      back:Interest
      expense
                  
                  
                  978
                  
                  
                  
                  2,483Income
      tax expense
                  
                  
                  32
                  
                  
                  
                  32Depreciation
      and amortization expense within:Cost
      of sales
                  
                  
                  890
                  
                  
                  
                  1,077Selling,
      general and administrative expenses
                  
                  
                  1,268
                  
                  
                  
                  1,361Stock-based
      compensation amortization expense
                  
                  
                  190
                  
                  
                  
                  292Write-off
      of unamortized acquisition costs
                  
                  
                  187
                  
                  
                  
                  -Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    extinguishment
                  
                  
                  -
                  
                  
                  
                  1,651Gain
      on extinguishment of promissory notes
                  
                  
                  -
                  
                  
                  
                  (27
                  )EBITDA
                  
                  $
                  4,010
                  
                  
                  $
                  4,530


29




Capital
Resources and Liquidity





At June
30, 2010 and 2009, we had total cash and cash availability of approximately $4.7
million and $2.5 million.  At June 30, 2010, cash and cash availability
consisted of cash and cash equivalents of $115,000 and additional cash
availability of approximately $4.6 million through our line of credit.  The
Company pays down its line of credit daily minimizing its cash on hand to reduce
the financing costs on the line of credit.  At June 30, 2010, the financial
covenants included a minimum daily availability of $250,000.  As of
September 21, 2010, our cash availability was approximately $3.4 million. 
We are able to draw on our line of credit on a daily basis subject to our
borrowing base, as defined in our line of credit agreement, and other debt
covenant requirements.




During
fiscal 2010, our EBITDA was $4.0 million, our cash contribution (EBITDA less
fixed charges) was $1.9 million after fixed charges and our fixed charge
coverage ratio was 1.86.  These numbers are comparable to the $4.5 million,
$1.8 million and 1.65, respectively, reported a year ago.  We have a $10
million deferred tax asset that remains fully reserved but we have used
approximately $1.0 million to set off taxable income due in the last two
years.




We
currently have new trucks on order to modernize and increase the size of our
fleet.  This additional equipment will generate expanded capacity to our
system, help us improve fuel economy and satisfy new emission standards, give us
further opportunity to expand in new markets and reduce our repairs and
maintenance.  Our principal lender has given us approval to incur up to
$2.0 million in new debt to finance this fleet expansion, conditioned upon our
continuing satisfaction of specified financial thresholds.




During
the fourth quarter of fiscal 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our then existing debt and
equity.  After the Recapitalization, our total debt was immediately
decreased by $4.5 million, significantly reducing our cash requirements for
interest and dividends.  A critical component of the Recapitalization was
the conversion of our existing $25.0 million revolving line of credit into a
new, significantly more favorable, $25.0 million loan facility, comprised of a
three year $20.0 million revolver coupled with a new $5.0 million, 60 month,
fully amortized term loan and the extension of the final maturity date of our
revolving line of credit to July 1, 2012.





On July 28, 2010, our Board of
Directors  approved a share repurchase program (the “Program”) under
which we may elect to purchase up to five percent of our outstanding capital
stock, or approximately 435,000 shares of common stock or common stock
equivalents.  Repurchases of capital stock, including shares of common
stock and Series D convertible preferred stock, may be made on the open market
at prevailing market prices or in block trades, subject to the restrictions
relating to volume, price, and timing set forth in Securities Exchange Act of
1934 Rule 10b-18, or in privately negotiated transactions.  We will fund
the repurchases from its available cash under its revolving line of credit with
our principal lender.





Our principal lender has approved a
total of $840,000 in capital stock repurchases under the Program, including up
to $200,000 in any one fiscal quarter, conditioned upon
our  maintenance of (i) a ratio of EBITDA to Fixed Charges of 1.3 to
1.0, based on the most recent twelve (12) month period for which financial
statements have been provided to the lender, after giving pro forma effect to
any repurchases; and (ii) Excess Availability of at least $2.25 million (A)
immediately after making any repurchase and (B) for the ninety (90) days
preceding any repurchase.





We do not
believe that our purchases of capital stock under the Program will meaningfully
impair our capital resources or our ability to support the cash needs of our
business.  Moreover, while there can be no certainty in today’s volatile
and uncertain economy, we believe that, as a result of the current year net
income and cash contribution as well as the June 2009 Recapitalization, we have
established adequate credit enhancements to meaningfully respond to potential
increases in volumes, irrespective of whether they are accompanied by fuel price
increases.


30




Sources
and Uses of Cash





We
currently have a loan facility with our principal lender, comprised of a $20.0
million revolver coupled with a $5.0 million, 60 month, fully amortized term
loan.





Our $20.0
million line of credit permits us to borrow up to 85% of the total amount of
eligible accounts receivable and 65% of eligible inventory, both as
defined.  Outstanding letters of credit reduce the maximum amount available
for borrowing.  Outstanding borrowings under the line are secured by
substantially all Company assets including our transportation fleet and related
field equipment.  Our line of credit finances the timing difference between
petroleum product purchases, payable generally in 10 to 12 days from date of
delivery, and the collection of receivables from our customers, generally in 10
to 45 days from date of delivery.  The line of credit has a renewal date of
July 1, 2012.





Interest
is payable monthly based on a pricing matrix.  At June 30, 2010, the
interest rate for the line of credit was 4.0%.  This rate was priced using
a minimum LIBOR floor of 0.75%, plus the applicable margin of 3.25%.  The
applicable margin is determined quarterly based on a predetermined fixed charge
coverage ratio pricing matrix with the applicable margins ranging from 3.00% to
3.75%.





As
of June 30, 2010, we have outstanding letters of credit for an aggregate amount
of $1.5 million.  These letters of credit were issued so that we could
obtain better purchasing terms and pricing than were otherwise available in
certain markets.  The letters of credit have twelve-month expirations and
renew automatically.  No amounts have been drawn on any of the letters of
credit; however, as described above, outstanding letters of credit reduce our
cash availability under our line of credit facility.





As of
June 30, 2010 and June 30, 2009, we had outstanding borrowings of $6.9 million
and $7.8 million, respectively, under our line of credit. Outstanding
borrowings under the line of credit are classified as a current liability in
accordance with ASC 470, Debt.  Based on eligible receivables and
inventories, and letters of credit outstanding at June 30, 2010 and 2009, we had
$4.6 million and $2.4 million, respectively, of cash availability under the line
of credit.





The term
loan, with an original amount of $5.0 million is fully amortized, 60 monthly
principal payments of approximately $83,000 commencing on August 1, 2009 with
variable interest due monthly (4.75% at June 30, 2010) is secured by
substantially all Company assets.  During fiscal 2010 we have paid down
$917,000 of the principal balance, and at June 30, 2010, the outstanding balance
was $4.083 million.





In addition to the loan facility
described above, we havean $800,000 unsecured 5.5% interest only,
subordinated promissory note (the “June 2009 Note”) issued to an existing
institutional investor in exchange for $800,000 of one of the Secured Notes
during the June 2009 Recapitalization.  The June 2009 Note is subordinated
to all other existing debt of the Company, including any amounts owed now or in
the future to the Bank.  The holder of the June 2009 Note entered into a
debt subordination agreement (the “Subordination Agreement”) with the Company
and the Bank, whereby it expressly subordinated its rights under the June 2009
Note to the Bank.  The principal balance of the June 2009 Note is due at
maturity on July 1, 2014.  Subject to the limitations in the
Subordination Agreement, interest is payable semi-annually, except that accrued
interest payments for the first thirteen months was deferred until, and paid on,
August 12, 2010.  Thereafter, starting in 2011, semi-annual interest
payments will be made on or about each January 15th and
July 15th until
maturity.  The amounts due under the June 2009 Note will become due and
payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default.  If permitted under the
Subordination Agreement, the Company may pre-pay the June 2009 Note, in whole or
in part, without prepayment penalty or premium. Twenty-five percent (25%) of the
original principal amount of the June 2009 Note, or $200,000, may be converted
into shares of the Common Stock at $2.25 per share (the “Conversion Price”) at
the option of the noteholder.  The number and kind of securities
purchasable upon conversion and the Conversion Price are subject to customary
adjustments for stock dividends, stock splits and other similar
events.




The June
2009 Recapitalization of all of our debt and equity securities strengthened our
balance sheet and financial position, immediately lowering our total debt by
$4.5 million, increasing shareholders’ equity by approximately $4.1 million and
reducing our debt to equity ratio from approximately 9:1 to 2:1 over the prior
year.  As a result of the June 2009 Recapitalization we reduced our cash
interest expense and dividends cash usage as reflected in fiscal 2010
results.


31





We
continue to concentrate our efforts on reducing costs and conserving cash
availability in order to meet the challenges of the ongoing recession and
economic downturn.  We believe the improvements in our balance sheet as a
result of the Recapitalization resulted in establishing adequate credit
enhancements for fiscal 2010 to meaningfully respond to potential increases in
volumes and fuel prices.  We have also sought to offset the reduced demand
from existing customers by aggressively seeking new customers, including an
investment in three new service locations during fiscal 2010.





Our debt
agreements have covenants that define certain financial requirements and
operating restrictions.  Our failure to comply with any covenant or
material obligation contained in these debt agreements, absent a waiver or
forbearance from the lenders, would result in an event of default which could
accelerate debt repayment terms under the debt agreements.  Due to
cross-default provisions contained in our debt agreements, an event of default
under one agreement could accelerate repayment terms under the other agreements,
which would have a material adverse effect on our liquidity and capital
resources.  At the date of this filing, we are in compliance with the
requirements of the applicable covenants required by our debt
agreements.




Cash
Flows




During
fiscal years 2010 and 2009, cash and cash equivalents decreased $8,000 and
increased $75,000, respectively.





We
generated cash from the following sources (in thousands):





Years
      EndedJune 30,2010
                  
                  
                  2009Cash
      provided by operating activities
                  
                  $
                  2,467
                  
                  
                  $
                  12,067Proceeds
      from sale of equipment
                  
                  
                  3
                  
                  
                  
                  102Proceeds
      from term loan and issuance of promissory notes
                  
                  
                  -
                  
                  
                  
                  5,725Proceeds
      from issuance of preferred stock
                  
                  
                  -
                  
                  
                  
                  149Decrease
      in restricted cash
                  
                  
                  -
                  
                  
                  
                  68$
                  2,470
                  
                  
                  $
                  18,111





We used
cash primarily for (in thousands):





Years
      EndedJune 30,2010
                  
                  
                  2009Net
      payments on line of credit payable
                  
                  $
                  949
                  
                  
                  $
                  11,944Principal
      payments on term and promissory notes
                  
                  
                  917
                  
                  
                  
                  4,993Purchases
      of property and equipment
                  
                  
                  415
                  
                  
                  
                  298Payments
      of debt and equity issuance costs
                  
                  
                  135
                  
                  
                  
                  353Capital
      lease payments
                  
                  
                  62
                  
                  
                  
                  58Payment
      of dividends
                  
                  
                  -
                  
                  
                  
                  390$
                  2,478
                  
                  
                  $
                  18,036Net
      change in cash and cash equivalents
                  
                  $
                  (8
                  )
                  
                  $
                  75


32





As of
June 30, 2010, we had $6.9 million outstanding under our line of credit. 
The amounts disclosed in the captions titled “Proceeds from line of credit” and
“Repayments of line of credit” in the accompanying consolidated statements of
cash flows for the year ended June 30, 2010 include the cumulative activity of
the daily borrowings and repayments, $199.2 million and $200.1 million,
respectively, under the line of credit.  The availability under the line of
credit at June 30, 2010 and 2009, amounted to $4.6 million and 2.4 million,
respectively.  The net cash borrowings from, or repayments of, the line of
credit during the fiscal years ended June 30, 2010 and 2009, respectively, have
been included as sources or uses of cash in the tables above.





Fiscal
2010





During
fiscal 2010, we generated cash of $2.5 million from operating activities, while
the primary uses of our cash were for $1.0 million in net reductions of our line
of credit, $1.1 million pay down of our term debt and capital leases and
$415,000 in purchases of property and equipment.  During 2010, we received
a settlement payment of $1,050,000 as a partial recovery of the professional
fees incurred in connection with a lawsuit.  The proceeds from the
settlement were used to pay down the line of credit and then in turn used to pay
for the professional fees incurred with the settlement, and for working capital
purposes.  The settlement of this lawsuit had a positive impact on
offsetting other one-time type of costs in fiscal year 2010 and helped improve
working capital requirements on account of the elimination of the costly
litigation expenses.





Fiscal
2009





During
fiscal 2009, as noted above, on June 29, 2009, we completed a comprehensive $40
million recapitalization program that restructured all of our debt and equity,
providing us with substantial short term and long term financial benefits,
including the conversion of our then existing $25.0 million revolving line of
credit into a new, significantly more favorable, $25.0 million loan facility,
comprised of a three year $20.0 million revolver coupled with a $5.0 million, 60
month, fully amortized term loan.  The Eighteenth Amendment to our Loan and
Security Agreement with our principal lender also extended the renewal date of
the revolving line of credit from July 1, 2009 to July 1, 2012, added our
vehicles and field operating equipment as additional collateral for the bank,
and modified several covenants in the loan agreement in a manner we believe to
be favorable to the Company.





During
fiscal 2009, prior to the June 2009 Recapitalization, as we had done in the
past, in addition to obtaining funds through the line of credit, we obtained
funds through the issuance of promissory notes, common stock, and preferred
stock.





On August
15, 2008, we issued 229 shares of our Series C Convertible Preferred Stock,
$0.01 par value, at a price of $650 per share, or an aggregate of $148,850 (the
“Series C Preferred Stock”).  Each share of Series C Preferred Stock was
convertible into 223 shares of our common stock at a price per share of $2.93
per share, which was greater than the $2.21 closing price of our common stock on
August 14, 2008.





On
September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
notes maturing on September 1, 2010.  The promissory notes were
unsecured and were expressly subordinated to any amounts owed now or in the
future to our primary lender pursuant to a subordination agreement between the
note holders and the lender.  The unpaid principal amount of the promissory
notes and the accrued but unpaid interest thereon could be converted into shares
of our common stock at $2.93 per share.


33





In the
third quarter of fiscal 2009, the holders of the August 2007 and September 2008
Notes agreed to defer to April 15, 2009, the $563,000 in interest payments
originally due in January and March 2009.  As consideration for the
deferral of these interest payments until April 15, 2009, we paid a deferral fee
equal to 1% of the outstanding principal balance, or $95,000 of which 50% of the
deferral fee was paid in cash, with the remainder satisfied through the issuance
of 37,962 unregistered shares of our common stock.  For purposes of
determining the number of shares to be issued for the stock portion of the
deferral fee or upon conversion of the Payment, shares were valued at $1.31 per
share, the official closing price on the Nasdaq Stock Market on January 22,
2009, the trading day immediately preceding the effective date of the
Agreements.





As part
of the Recapitalization mentioned above, we entered into various agreements with
our existing debt and equity investors that extinguished all of its existing
non-bank debt and outstanding preferred stock.





We
extinguished the $8.9 million of the August 2007 Notes with the following (in
thousands):





Cash
                        
                        $
                        4,867Issuance
      of Preferred Stock D
                        
                        
                        1,166Issuance
      of Common Stock
                        
                        
                        2,026Issuance
      of June 2009 Note
                        
                        
                        800Total
                        
                        $
                        8,859





We used
the majority of the proceeds from the $5.0 million term loan to extinguish $4.9
million of the August 2007 Notes. We extinguished $1.2 million of the August
2007 Notes through the issuance of 2,916 shares of Series D Convertible
Preferred Stock (“Preferred Stock D”) at $400 per share.  We extinguished
$2.0 million of the August 2007 Notes through the issuance of 1,184,591 shares
of common stock negotiated at $1.71 per share.  We extinguished $800,000 of
the August 2007 Notes through the issuance of the $800,000 June 2009 Note which
is subordinated to all debts owed to the Bank pursuant to a debt subordination
agreement, paying 5.5% annual interest paid semi-annually with a five year
maturity from the date of issuance.  If permitted under the Subordination
Agreement, we may pre-pay the June 2009 Note, in whole or in part, without
prepayment penalty or premium.  Twenty-five percent (25%) of the original
principal amount of the June 2009 Note, or $200,000, may be converted into
shares of our Common Stock at $2.25 per share. Since the conversion price of
$2.25 per share is higher than the $1.67 closing market bid price of the day
prior to the transaction date, the June 2009 Note does not contain a beneficial
conversion feature.





Additionally,
we extinguished the $725,000 of the September 2008 Notes with the following (in
thousands):





Cash
                        
                        $
                        125Issuance
      of Preferred Stock D
                        
                        
                        125Issuance
      of Common Stock
                        
                        
                        475Total
                        
                        $
                        725





We used
part of the proceeds from the new $5.0 million term loan to extinguish $125,000
of the September 2008 Notes.  We extinguished $125,000 of the September
2008 Notes through the issuance of 312 shares of Series D Convertible Preferred
Stock at $400 per share.  Each preferred share is convertible into 223
shares of common stock at $1.80 per share.  We extinguished $475,000 of the
September 2008 Notes through the issuance of 277,778 shares of common stock at
$1.71 per share.





In June
2009, we issued 287,210 unregistered shares of Common Stock to the Holders of
the August 2007 and September 2008 Notes as part of the Recapitalization in
payment of $490,000 in outstanding interest.





We
incurred $906,000 in fees related to the Recapitalization, of which $382,000
were recorded to equity and $524,000 to debt, allocated on a percentage
basis.  The placement agent received $380,000 in fees.  These fees
were paid in the form of $100,000 in securities and $280,000 in cash.  For
the $100,000 in securities, a total of 58,480 shares of common stock were issued
on June 29, 2009, priced at $1.71, the same price used for the common stock
issued pursuant to the exchange agreements.


34





Dividends





Dividends
on the outstanding shares of our Series D Preferred Stock, which were issued in
the Recapitalization, are payable when, as and if declared by the Board of
Directors, but only out of funds that are legally available, in annual cash or
equity dividends, at the Company’s election, at the rate of 5.5% per annum of
the sum of the Original Issue Price per share.  Per the Certificate of
Designation for the Series D, the first dividend declaration for the outstanding
Series D Preferred Stock was in August 2010.  Subsequent dividends on the
Series D are payable in cash except that, under specified circumstances,
dividends may be paid in the form of shares of a new series of nonvoting
Preferred Stock, the terms, rights and privileges of which are, other than the
voting rights, substantially identical to those of the Series D.  Dividends
on any of our Series of Preferred Stock are cumulative from the date of the
original issuance of the Preferred Stock.  Accumulated unpaid dividends on
Preferred Stock do not bear interest.





During
fiscal 2011, the Company declared cumulative dividends of $13,000 on the Series
D Preferred Stock, which were accrued as of June 30, 2010.




During
fiscal 2009, we declared $577,000 in cumulative dividends on the Series A,
Series B, and Series C Preferred Stock, which have been paid or satisfied as of
June 30, 2009.  The Series A, Series B, and Series C Preferred Stock are no
longer outstanding as a result of the Recapitalization.  During fiscal
2010, $1.1 million of the Series D Preferred Stock was converted into 132,003
shares of Common Stock, further lowering our cost of capital as future dividend
payments were reduced.




We have
never declared or paid any dividends on our common stock.  While our Board
of Directors has recently considered the advisability of declaring dividends on
our common stock in response to the gradual deterioration of the market price of
that stock, the Board has indicated that, at the present time, it does not
intend to declare dividends and intends to retain any future earnings for use in
our business operations and for purchases of our stock pursuant to the open
market stock purchase program we announced in August 2010.





Adequacy
of Capital Resources





Our
liquidity and ability to meet financial obligations is dependent on, among other
things, the generation of cash flow from operating activities, obtaining or
maintaining sufficient trade credit from vendors, complying with our debt
covenants, continuing renewal of our line of credit facility, and/or raising any
required additional capital through the issuance of debt or equity securities or
additional borrowings.





Our
sources of cash during fiscal 2011 are expected to be cash on hand, cash
generated from operations, borrowings under our credit facility, and any other
capital sources that may be deemed necessary.  There is no assurance,
however, that if additional capital is required, it will be available to us or
available on acceptable terms.




Our
uses of cash over the next twelve months are expected to be principally for
operating working capital needs, maintaining our line of credit, and servicing
any principal and interest on our debt, and our ongoing stock repurchase
program, preferred stock dividends, and costs incurred in connection with
any market expansions.  Our line of credit with our principal lender
matures on July 1, 2012.




Off-Balance
Sheet Arrangements




At June
30, 2010, we do not have any material off-balance sheet
arrangements.


35




NEW ACCOUNTING STANDARDS AND
CRITICAL ACCOUNTING POLICIES AND ESTIMATES




See Note
2 in the notes to condensed consolidated financial statements included in this
Form 10-K for pronouncements that have already been effective.




Recent
Accounting Pronouncement




Accounting for
Transfers of Financial Assets


(Included in ASC 860 “Transfers and
Servicing”, previously FAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment to FAS No. 140”)





In
June 2009, the FASB issued FAS Statement No. 166, “Accounting for Transfers of
Financial Assets, an amendment to FAS No. 140” (“FAS No.
166”).  FAS No. 166 eliminates the concept of a qualifying special-purpose
entity, changes the requirements for derecognizing financial assets including
limiting the circumstances in which a company can derecognize a portion of a
financial asset, and requires additional disclosures.  FAS No. 166 is
effective for financial statements issued for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal years.  The
Company’s adoption of this standard is not expected to have an impact on our
financial condition, results of operations or cash flows.





Fair
Value Measurement and Disclosures Topic 820 – Improving Disclosures about Fair
Value Measurements





In
January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06
“Fair Value Measurement and
Disclosures Topic 820 – Improving Disclosures about Fair Value Measurements”
(“ASU No. 2010-06”), which provides amendments to subtopic 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities.  This update provides amendments to Topic 820 that will
provide more robust disclosures about (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3.  The new disclosures and clarification of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlement in the rollforward of activity in Level 3 fair
value measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.  The Company’s adoption of the ASU No. 2010-06 is not expected to
have an impact on the Company’s consolidated financial position, results of
operations or cash flows.





Critical
Accounting Policies and Estimates





We
believe there are several accounting policies that are critical to understanding
our historical and future performance as these policies affect the reported
amount of revenues and expenses and other significant areas involving
management’s judgments and estimates.  On an ongoing basis, management
evaluates and adjusts its estimates and judgments, if necessary.  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingencies. 
Due to the inherent uncertainty involved in making estimates, actual results
reported in future periods may be materially different from those
estimates.  There were no changes to our critical accounting policies for
the fiscal year ended June 30, 2010.




Accounts Receivable and Allowance for
Doubtful Accounts





We
perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customers’ current credit worthiness. 
Management continuously monitors collections and payments from customers and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that are
identified.  While such credit losses have historically been within
expectations and the provisions established, we cannot assure that we will
continue to experience the same credit loss rates that have occurred in the
past.


36





Inventory
Valuation Reserves





We make
estimates relating to the net realizable value of inventories, based upon our
assumptions about future demand, historical trends and market conditions. 
If we estimate that the net realizable value of inventory is less than the cost
of the inventory recorded on our books, we record a reserve for the difference
between the cost of the inventory and the estimated net realizable value. 
This reserve is recorded as a charge to cost of sales.





Property
and Equipment




We record
property and equipment at cost and depreciate that cost over the estimated
useful life of the asset on a straight-line basis.  Ordinary maintenance
and repairs are expensed as incurred and improvements that significantly
increase the useful life of property and equipment are capitalized.




We test
property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable.  The conditions that would trigger an impairment assessment of
property, plant and equipment would include, but not be limited to, a
significant, sustained negative trend in operating results or cash flows; a
decrease in demand for our services; a change in the competitive environment;
and other industry and economic factors.  Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the asset to
future net cash flows expected to be generated by the asset.  If such
assets are deemed to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets based on the projected net cash flows discounted at a rate
commensurate with the risk of the assets.




Goodwill
and Other Intangible Assets




In
accordance with ASC 350, “Intangibles – Goodwill and
Other” (“ASC 350”), goodwill and intangible assets with indefinite lives
are not amortized but instead are measured for impairment at least annually, or
when events indicate that an impairment exists.  As required by ASC 350, in
our impairment test for goodwill, we compare the estimated fair value of
goodwill to the carrying value.  If the carrying value exceeds our estimate
of fair value, we calculate impairment as the excess of the carrying value over
our estimate of fair value.   Our estimates of fair value utilized in
goodwill tests may be based upon a number of factors, including our assumptions
about the expected future operating performance of our reporting unit.  Our
estimates may change in future periods due to, among other things, political and
economic conditions and changes to our business operations or inability to meet
business plans.  Such changes may result in impairment charges recorded in
future periods.




Intangible
assets that are determined to have finite lives are amortized over their useful
lives and are measured for impairment only when events or circumstances indicate
the carrying value may be impaired.  In these cases, we estimate the future
undiscounted cash flows to be derived from the asset to determine whether or not
a potential impairment exists.  If the carrying value exceeds our estimate
of future undiscounted cash flows, we then calculate the impairment as the
excess of the carrying value of the asset over our estimate of its fair
value.




Income
Taxes




The
provision for income taxes and corresponding balance sheet accounts are
determined in accordance with ASC 740, “Income Taxes” (“ASC 740”).  Under ASC
740, deferred tax assets and liabilities are determined based on the temporary
differences between the bases of certain assets and liabilities for income tax
and financial reporting purposes.  The deferred tax assets and liabilities
are classified according to the financial statement classification of the net
assets and liabilities generating the differences.  The Company provides a
valuation allowance for that portion of deferred tax assets which it cannot
determine is more likely than not to be recognized.


37





As
required by the provisions of ASC 740, the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an
audit.  For tax positions meeting the more likely than not threshold, the
amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement
with the relevant tax authority.





At June
30, 2010 and 2009, the amount of unrecognized tax benefits was approximately
$695,000 and $759,000 respectively, of which approximately $268,000 and
$326,000 would, if recognized, affect the Company’s effective tax rate for each
respective tax year.





To the
extent a valuation allowance is established or an increase in the allowance is
recorded in a period, a tax expense is provided in the statement of
operations.  Management judgment is required in determining the provision
for income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets.  A valuation allowance
of $10.0 million was recorded as of June 30, 2010, due to uncertainties related
to utilizing some of the deferred tax assets, primarily consisting of certain
net operating losses carried forward, before they expire.  The valuation
allowance is based on estimates of taxable income and the period over which
deferred tax assets will be recoverable.  In the event that actual results
differ from these estimates, or these estimates are adjusted in future periods,
it may be necessary to establish an additional valuation allowance that could
materially impact the Company’s financial position and results of
operations.





Item
8.  Financial Statements and Supplementary Data





Our
financial statements required by Form 10-K are attached following Part IV of
this report, commencing on page F-1.





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





None.





Item
9A.  Controls and Procedures





Evaluation
of disclosure controls and procedures.





We
carried out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and the Chief Financial
Officer of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Exchange Act Rules 13a-15(e) and
15d-15(e), as of the end of the period covered by this Annual Report on Form
10-K.  Based upon this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of June 30, 2010.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as that term is defined In Exchange Act Rule
13a-15(f).  Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. 
Our control environment is the foundation for our system of internal control
over financial reporting.  Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect our
transactions and dispositions of our assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of our
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.


38





Management assessed the effectiveness
of the Company’s internal control over financial reporting as of June 30,
2010.  In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated framework.  Based on our assessment, management
has concluded that our internal control over financial reporting was effective
as of June 30, 2010 to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.





This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting.  Management’s
report is not subject to attestation by the Company’s independent registered
public accounting firm.





Changes
in Internal Control Over Financial Reporting





No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
June 30, 2010, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




Inherent
Limitations on Effectiveness of Controls




Due to
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate.




A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. 
The design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.  Furthermore, due to the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected. 
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake.  Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override
of the controls.  The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there can be no
assurance that any system’s design will succeed in achieving its stated goals
under all potential future conditions.





Item
9B.  Other Information





On
September 23, 2010 the Compensation Committee of the Board of Directors approved
amendments to the employment agreement of Richard E. Gathright, our President
and Chief Executive Officer (a) to reflect changes to the regulations of the
Internal Revenue Service relating to Internal Revenue Code §409A that clarified
the circumstances under which severance payments could be paid to Mr. Gathright
upon his termination and (b) to increase his base salary from $323,000 to
$373,000 per annum. In determining to increase Mr. Gathright’s base salary, the
Committee noted that Mr. Gathright’s salary had not been increased since 2005,
and that increase was the only increase in his salary since he joined the
Company in 2000.  The Committee based its decision to increase his salary
at this time on Mr. Gathright’s completion of the June 2009 recapitalization of
the Company, his assumption of additional duties after the Company lost the
services of its former Senior Vice President-Corporate Planning and Fleet
Operations, his initiation of cost cutting measures in 2008 in response to the
recessionary downturn in existing customer sales, and his leadership of new
sales initiatives since that time to offset the downturn, all of which led to
the Company’s return to profitability in fiscal 2010.  In light of that
success, the Committee concluded that it would be in the best interests of the
Company’s stockholders to increase Mr. Gathright’s compensation level to a level
more comparable to that being paid to chief executive officers at other
companies.


39


PART
III




Item
10.  Directors, Executive Officers, and Corporate
Governance





The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.





Item
11.  Executive Compensation





The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.





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





The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.





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





The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.





Item
14.  Principal Accounting Fees and Services





The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.


40




PART
IV




Item
15.  Exhibits and Financial Statement Schedules




(a)          Financial
Statements and Schedule




Our
financial statements are attached following Part III of this report, commencing
on page F-1.  Financial statement schedules have been omitted since they
are not required, not applicable, or the information is otherwise
included.




(b)
            Exhibits




Exhibits
              
              Description2.1
              
              Asset
      Purchase Agreement by and among SMF Energy Corporation., SMF Services,
      Inc., Shank C&E Investments, L.L.C., Jerry C. Shanklin and Claudette
      Shanklin dated January 25, 2005 filed as Exhibit 2.1 to the Company’s Form
      8-K filed January 31, 2005 and incorporated by reference
      herein.2.2
              
              Supplemental
      Agreement dated February 18, 2005 to the Asset Purchase Agreement by and
      among SMF Energy Corporation., SMF Services, Inc., Shank C&E
      Investments, L.L.C., Jerry C. Shanklin and Claudette Shanklin dated
      January 25, 2005 filed as Exhibit 2.1 to the Company’s Form 8-K filed
      February 25, 2005 and incorporated by reference herein.2.3
              
              Stock
      Purchase Agreement by and among SMF Energy Corporation, H & W
      Petroleum Co., Inc., Eugene Wayne Wetzel, Mary Kay Wetzel, Sharon
      Harkrider, William M. Harkrider II, W. M. Harkrider Testamentary Trust,
      Harkrider Distributing Company, Inc. and W & H Interests dated
      September 7, 2005 filed as Exhibit 2.1 to the Company’s Form 8-K filed
      September 8, 2005 and incorporated by reference herein.2.4
              
              Agreement
      of Merger and Plan of Merger and Reorganization between Streicher Mobile
      Fueling, Inc. and SMF Energy Corporation dated February 13, 2007. 
      Filed as Exhibit 2.1 to the Company’s Form 8-K filed February 14, 2007 and
      incorporated by reference herein.3.1
              
              Restated
      Articles of Incorporation filed as Exhibit 3.1 to the Company’s Form 10-K
      for the fiscal year ended June 30, 2003 and incorporated by reference
      herein.3.2
              
              Amended
      and Restated Bylaws filed as Exhibit 3.2 to the Company’s  Form
      10-Q for the quarter ended December 31, 2003 and incorporated by reference
      herein.3.3
              
              Certificate
      of Incorporation of SMF Energy Corporation and Certificate of Amendment of
      Certificate of Incorporation of SMF Energy Corporation (incorporated by
      reference to Appendix B to the Company’s Definitive Proxy Statement on
      Schedule 14A, filed on October 30, 2006).3.4
              
              Bylaws
      of SMF Energy Corporation (incorporated by reference to Appendix D to the
      Company’s Definitive Proxy Statement on Schedule 14A, filed on October 30,
      2006).


41





3.5
                
                Certificate
      of Designation of Series A Convertible Preferred Stock.  Filed as
      Exhibit 3.1 to the Company’s Form 8-K filed March 6, 2008 and incorporated
      by reference herein.3.6
                
                Certificate
      of Designation of Series B Convertible Preferred Stock.  Filed as
      Exhibit 3.1 to the Company’s Form 8-K filed March 14, 2008 and
      incorporated by reference herein.3.7
                
                Certificate
      of Designation of Series C Convertible Preferred Stock.  Filed as
      Exhibit 3.1 to the Company’s Form 8-K filed August 21, 2008 and
      incorporated by reference herein.3.8
                
                Certificate
      of Designation of Series D Convertible Preferred Stock.  Filed as
      Exhibit 3.1 to the Company’s Form 8-K filed July 6, 2009 and incorporated
      by reference herein.3.9
                
                Certificate
      of Amendment of Certificate of Incorporation of SMF Energy
      Corporation.  Filed as Exhibit 3.1 to the Company’s Form 8-K filed
      September 15, 2009 and incorporated by reference
herein.4.1
                
                Form
      of Common Stock Certificate filed as Exhibit 4.1 to the Company’s
      Registration Statement on Form SB-2 (No. 333-11541) and incorporated by
      reference herein.4.2
                
                Form
      of Redeemable Common Stock Purchase Warrant filed as Exhibit 4.2 to the
      Company’s Registration Statement on Form SB-2 (No. 333-11541) and
      incorporated by reference herein.4.3
                
                Underwriters’
      Purchase Option Agreement between the Company and Argent Securities, Inc.
      filed as Exhibit 4.3 to the Company’s Registration Statement on Form SB-2
      (No. 333-11541) and incorporated by reference herein.4.4
                
                Warrant
      Agreement between the Company and American Stock Transfer & Trust
      Company filed as Exhibit 4.4 to the Company’s Registration Statement on
      Form SB-2 (No. 333-11541) and incorporated by reference
      herein.4.5
                
                Indenture
      with The Bank of Cherry Creek dated August 29, 2003 filed as Exhibit 10.14
      to the Company’s Form 10-K for the fiscal year ended June 30, 2003 and
      incorporated by reference herein.4.6
                
                Form
      of 10% Promissory Note dated January 25, 2005 filed as Exhibit 10.2 to the
      Company’s Form 8-K filed January 31, 2005 and incorporated by reference
      herein.4.7
                
                Form
      of Investor Warrant dated January 25, 2005 filed as Exhibit 10.3 to the
      Company’s Form 8-K filed January 31, 2005 and incorporated by reference
      herein.4.8
                
                Indenture
      Agreement with American National Bank dated January 25, 2005 filed as
      Exhibit 10.4 to the Company’s Form 8-K filed January 31, 2005 and
      incorporated by reference herein.4.9
                
                Form
      of Placement Agent Warrants dated January 25, 2005 filed as Exhibit 10.5
      to the Company’s Form 8-K filed January 31, 2005 and incorporated by
      reference
herein.


42




4.10
              
              Form
      of Note for Stock Purchase Agreement in Exhibit 2.3 herein filed as
      Exhibit 10.1 to the Company’s Form 8-K filed September 8, 2005 and
      incorporated by reference herein.4.11
              
              Form
      of 10% Promissory Note filed as Exhibit 10.3 to the Company’s Form 8-K
      filed September 8, 2005 and incorporated by reference
    herein.4.12
              
              Form
      of Investor Warrant filed as Exhibit 10.4 to the Company’s Form 8-K filed
      September 8, 2005 and incorporated by reference herein.4.13
              
              Form
      of Indenture Agreement filed as Exhibit 10.5 to the Company’s Form 8-K
      filed September 8, 2005 and incorporated by reference
    herein.4.14
              
              Form
      of Warrant.  Filed as Exhibit 10.1 to the Company’s Form 8-K filed
      February 22, 2007 and incorporated by reference herein.4.15
              
              Form
      of 11% Senior Secured Convertible Promissory Note dated August 8,
      2007.  Filed as Exhibit 10.2 to the Company’s Form 8-K filed August
      14, 2007 and incorporated by reference herein.4.16
              
              Form
      of Indenture dated August 8, 2007.  Filed as Exhibit 10.3 to the
      Company’s Form 8-K filed August 14, 2007 and incorporated by reference
      herein.4.17
              
              Form
      of Warrant dated August 8, 2007.  Filed as Exhibit 10.5 to the
      Company’s Form 8-K filed August 14, 2007 and incorporated by reference
      herein.4.18
              
              Final
      form of 11% Senior Secured Convertible Promissory Note dated August 8,
      2007.  Filed as Exhibit 4.18 to the Company’s Form 10-K for the
      fiscal year ended June 30, 2007 and incorporated by reference
      herein.4.19
              
              Form
      of Promissory Note dated November 19, 2007.  Filed as Exhibit 4.1 to
      the Company’s Form 8-K filed November 23, 2007 and incorporated by
      reference herein.4.20
              
              Form
      of Allonge – Amendment to Promissory Note dated November 19, 2007. 
      Filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended
      December 31, 2007 filed February 14, 2008 and incorporated by reference
      herein.4.21
              
              Form
      of 12% Unsecured Convertible Promissory Note dated September 2,
      2008.  Filed as Exhibit 4.1 to the Company’s Form 8-K filed September
      8, 2008 and incorporated by reference herein.4.22
              
              Form
      of Convertible Promissory Notes.  Filed as Exhibit 4.1 to the
      Company’s Form 8-K filed on July 6, 2009 and incorporated by reference
      herein.10.1
              
              Registrant’s
      1996 Stock Option Plan filed as Exhibit 10.2 to the Company’s Registration
      Statement on Form SB-2 (No. 333-1154) and incorporated by reference
      herein.10.2
              
              2000
      Stock Option Plan filed as Exhibit 10.6 to the Company’s Form 10-K for the
      fiscal year ended January 31, 2001 and incorporated by reference
      herein.


43





10.5
              
              2001
      Directors Stock Option Plan filed as Appendix A to the Company’s Proxy
      Statement for the Annual Meeting of Stockholders on December 9, 2004 and
      incorporated by reference herein.10.6
              
              Loan
      and Security Agreement with Congress Financial Corporation dated September
      26, 2002 filed as Exhibit 99.1 to the Company’s Form 8-K filed September
      30, 2002 and incorporated by reference herein.10.7
              
              First
      Amendment to Loan and Security Agreement with Congress Financial
      Corporation dated March 31, 2003 filed as Exhibit 10.13 to the Company’s
      Form 10-K for the fiscal year ended June 30, 2003 and incorporated by
      reference herein.10.8
              
              Security
      Agreement with The Bank of Cherry Creek dated August 29, 2003 filed as
      Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended June
      30, 2003 and incorporated by reference herein.10.9
              
              Second
      Amendment to Loan and Security Agreement with Congress Financial
      Corporation dated August 29, 2003 filed as Exhibit 10.1 to the Company’s
      Form 10-Q for the quarter ended September 30, 2003 and incorporated by
      reference herein.10.10
              
              Third
      Amendment to Loan and Security Agreement with Congress Financial
      Corporation dated August 3, 2003 filed as Exhibit 10.1 to the Company’s
      Form 10-Q for the quarter ended December 31, 2004 and incorporated by
      reference herein.10.11
              
              Form
      of Securities Purchase Agreement dated January 25, 2005 filed as Exhibit
      10.1 to the Company’s Form 8-K filed January 31, 2005 and incorporated by
      reference herein.10.12
              
              Fourth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, SMF Services, Inc. and Wachovia Bank, National Association,
      successor by merger to Congress Financial Corporation (Florida) dated
      February 18, 2005 filed as Exhibit 10.1 to the Company’s Form 8-K filed
      February 25, 2005 and incorporated by reference herein.10.13
              
              Subordination
      Agreement by, between and among Shank C&E Investments, L.L.C.,
      Wachovia Bank, National Association, successor by merger to Congress
      Financial Corporation (Florida), SMF Services, Inc. and SMF Energy
      Corporation dated February 18, 2005 filed as Exhibit 10.2 to the Company’s
      Form 8-K filed February 25, 2005 and incorporated by reference
      herein.10.14
              
              Amended
      and Restated Employment Agreement by and between SMF Energy Corporation
      and Richard E. Gathright executed May 14, 2005, effective as of March 1,
      2005 filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter
      ended March 31, 2005, and incorporated by reference
  herein.10.15
              
              Form
      of Note Purchase Agreement filed as Exhibit 10.2 to the Company’s Form 8-K
      filed September 8, 2005 and incorporated by reference
    herein.10.16
              
              Form
      of Security Agreement filed as Exhibit 10.6 to the Company’s Form 8-K
      filed September 8, 2005 and incorporated by reference
    herein.


44




10.17
                
                Fifth
      Amendment to Loan and Security Agreement by among SMF Energy Corporation,
      SMF Services, Inc. and Wachovia Bank, National Association, successor by
      merger to Congress Financial Corporation (Florida) dated October 1,
      2005.  Filed as Exhibit 10.1 to the Company’s Form 8-K filed October
      6, 2005 and incorporated by reference herein.10.18
                
                Subordination
      Agreement executed effective as of the 1st day of October, 2005, by,
      between and among Eugene Wayne Wetzel, Mary Kay Wetzel, Sharon Harkrider,
      William M. Harkrider II, W. M. Harkrider Testamentary Trust, Harkrider
      Distributing Company, Inc. and W & H Interests, Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (FLORIDA), and SMF Energy Corporation  Filed as
      Exhibit 10.2 to the Company’s Form 8-K filed October 6, 2005 and
      incorporated by reference herein.10.19
                
                Warrant
      Purchase Agreement dated June 30, 2006.  Filed as Exhibit 10.1 to the
      Company’s Form 8-K filed July 7, 2006 and incorporated by reference
      herein.10.20
                
                Form
      of Stock Purchase Warrant.  Filed as Exhibit 10.2 to the Company’s
      Form 8-K filed July 7, 2006 and incorporated by reference
      herein.10.21
                
                Sixth
      Amendment to Loan and Security Agreement by among SMF Energy Corporation,
      SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated September 22, 2006 and effective March 31,
      2006.  Filed as Exhibit 10.1 to the Company’s Form 8-K filed October
      2, 2006 and incorporated by reference herein.10.22
                
                Seventh
      Amendment to Loan and Security Agreement by among SMF Energy Corporation,
      SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) effective September 22, 2006.  Filed as Exhibit
      10.2 to the Company’s Form 8-K filed October 2, 2006 and incorporated by
      reference herein.10.23
                
                Amendment
      to Warrant Purchase Agreement and Stock Purchase Warrant between Streicher
      Mobile Fueling, Inc. and the Purchasers dated September 28, 2006. 
      Filed as Exhibit 10.1 to the Company’s Form 8-K filed October 3, 2006 and
      incorporated by reference herein.10.24
                
                Second
      Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
      Streicher Mobile Fueling, Inc. and the Purchasers dated November 29,
      2006.  Filed as Exhibit 10.1 to the Company’s Form 8-K filed December
      4, 2006 and incorporated by reference herein.10.25
                
                Third
      Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
      Streicher Mobile Fueling, Inc. and the Purchasers dated January 14,
      2007.  Filed as Exhibit 10.1 to the Company’s Form 8-K filed January
      19, 2007 and incorporated by reference herein.10.26
                
                Assumption
      Agreement and Eighth Amendment to Loan and Security Agreement by and among
      SMF Energy Corporation, successor by merger to Streicher Mobile Fueling,
      Inc., SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia
      Bank, National Association, successor by merger to Congress Financial
      Corporation (Florida) dated February 14, 2007.  Filed as Exhibit 10.1
      to the Company’s Form 8-K filed February 21, 2007 and incorporated by
      reference herein.


45





10.27
              
              Ninth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated February 15, 2007.  Filed as Exhibit 10.2
      to the Company’s Form 8-K filed February 21, 2007 and incorporated by
      reference herein.10.28
              
              Fourth
      Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
      SMF Energy Corporation, Triage Capital Management, L.P. and Triage Capital
      Management B L.P. dated February 14, 2007.  Filed as Exhibit 10.3 to
      the Company’s Form 8-K filed February 21, 2007 and incorporated by
      reference herein.10.29
              
              Form
      of Securities Purchase Agreement.  Filed as Exhibit 10.2 to the
      Company’s Form 8-K filed February 22, 2007 and incorporated by reference
      herein.10.30
              
              Fifth
      Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
      SMF Energy Corporation, Triage Capital Management, L.P. and Triage Capital
      Management B L.P. dated March 29, 2007.  Filed as Exhibit 10.1 to the
      Company’s Form 8-K filed April 3, 2007 and incorporated by reference
      herein.10.31
              
              Tenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated August 8, 2007.  Filed as Exhibit 10.1 to
      the Company’s Form 8-K filed August 14, 2007 and incorporated by reference
      herein.10.32
              
              Form
      of Security Agreement, dated August 8, 2007.  Filed as Exhibit 10.4
      to the Company’s Form 8-K filed August 14, 2007 and incorporated by
      reference herein.10.33
              
              Form
      of Note Purchase Agreement dated August 8, 2007.  Filed as Exhibit
      10.33 to the Company’s Form 10-K for the fiscal year ended June 30, 2007
      and incorporated by reference herein.10.34
              
              Form
      of Securities Purchase Agreement dated August 8, 2007.  Filed as
      Exhibit 10.34 to the Company’s Form 10-K for the fiscal year ended June
      30, 2007 and incorporated by reference herein.10.35
              
              Subordination
      Agreement dated July 13, 2007.  Filed as Exhibit 10.33 to the
      Company’s Form 10-K for the fiscal year ended June 30, 2007 and
      incorporated by reference herein.10.36
              
              Eleventh
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated October 31, 2007.  Filed as Exhibit 10.1
      to the Company’s Form 8-K filed November 2, 2007 and incorporated by
      reference herein.


46





10.37
              
              Form
      of Subordination Agreement dated November 19, 2007.  Filed as Exhibit
      10.1 to the Company’s Form 8-K filed November 23, 2007 and incorporated by
      reference herein.10.38
              
              Form
      of Subordination Agreement dated November 19, 2007.  Filed as Exhibit
      10.2 to the Company’s Form 8-K filed November 23, 2007 and incorporated by
      reference herein.10.39
              
              Twelfth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated November 21, 2007.  Filed as Exhibit 10.3
      to the Company’s Form 8-K filed November 23, 2007 and incorporated by
      reference herein.10.40
              
              Thirteenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated February 8, 2008.  Filed as Exhibit 10.1
      to the Company’s Form 8-K filed February 14, 2008 and incorporated by
      reference herein.10.41
              
              Fourteenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated March 6, 2008.  Filed as Exhibit 10.1 to
      the Company’s Form 8-K filed March 6, 2008 and incorporated by reference
      herein.10.42
              
              Form
      of Exchange Agreement.  Filed as Exhibit 10.2 to the Company’s Form
      8-K filed March 6, 2008 and incorporated by reference
    herein.10.43
              
              Form
      of Securities Purchase Agreement.  Filed as Exhibit 10.3 to the
      Company’s Form 8-K filed March 6, 2008 and incorporated by reference
      herein.10.44
              
              Fifteenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated March 10, 2008.  Filed as Exhibit 10.1 to
      the Company’s Form 8-K filed March 14, 2008 and incorporated by reference
      herein.10.45
              
              Form
      of Exchange Agreement.  Filed as Exhibit 10.2 to the Company’s Form
      8-K filed March 14, 2008 and incorporated by reference
    herein.10.46
              
              Form
      of Securities Purchase Agreement.  Filed as Exhibit 10.1 to the
      Company’s Form 8-K filed August 21, 2008 and incorporated by reference
      herein.10.47
              
              Sixteenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida) dated September 2, 2008.  Filed as Exhibit 10.1
      to the Company’s Form 8-K filed September 8, 2008 and incorporated by
      reference herein.


47





10.48
              
              Seventeenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor by merger to Streicher Mobile Fueling, Inc. SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor by merger to Congress Financial
      Corporation (Florida), dated September 17, 2008.10.49
              
              Form
      of Subordination Agreement.  Filed as Exhibit 10.2 to the Company’s
      Form 8-K filed September 8, 2008 and incorporated by reference
      herein.10.50
              
              Form
      of Securities Purchase Agreement.  Filed as Exhibit 10.3 to the
      Company’s Form 8-K filed September 8, 2008 and incorporated by reference
      herein.10.51
              
              SMF
      Energy Corporation 2001 Director Stock Option Plan (incorporated by
      reference to Appendix B to the Company’s Definitive Proxy Statement on
      Schedule 14A, filed on September 24, 2008).10.52
              
              SMF
      Energy Corporation 2000 Stock Option Plan (incorporated by reference to
      Appendix C to the Company’s Definitive Proxy Statement on Schedule 14A,
      filed on September 24, 2008).10.53
              
              Form
      of Interest Deferral Agreement.  Filed as Exhibit 10.1 to the
      Company’s Form 8-K filed on February 9, 2009 and incorporated by reference
      herein.10.54
              
              Form
      of Payment in Kind Agreement.  Filed as Exhibit 10.1 to the Company’s
      Form 8-K filed on May 8, 2009 and incorporated by reference
      herein.10.55
              
              Eighteenth
      Amendment to Loan and Security Agreement by and among SMF Energy
      Corporation, successor-by-merger to Streicher Mobile Fueling, Inc., SMF
      Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
      National Association, successor-by-merger to Congress Financial
      Corporation (Florida) dated June 29, 2009.  Filed as Exhibit 10.1 to
      the Company’s Form 8-K filed on July 6, 2009 and incorporated by reference
      herein.10.56
              
              Form
      of Debt Subordination Agreement.  Filed as Exhibit 10.2 to the
      Company’s Form 8-K filed on July 6, 2009 and incorporated by reference
      herein.10.57
              
              Form
      of Exchange Agreement (Series A for Common Stock).  Filed as Exhibit
      10.3 to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
      reference herein.10.58
              
              Form
      of Exchange Agreement (Series B for Common Stock).  Filed as Exhibit
      10.4 to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
      reference herein.10.59
              
              Form
      of Exchange Agreement (Series C for Common Stock).  Filed as Exhibit
      10.5 to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
      reference herein.10.60
              
              Form
      of Exchange Agreement (Unsecured Note for Common Stock).  Filed as
      Exhibit 10.6 to the Company’s Form 8-K filed on July 6, 2009 and
      incorporated by reference
herein.


48





10.61
              
              Form
      of Payment and Exchange Agreement (Unsecured Note for Cash and Series D
      Preferred).  Filed as Exhibit 10.7 to the Company’s Form 8-K filed on
      July 6, 2009 and incorporated by reference herein.10.62
              
              Form
      of Payment and Exchange Agreement (Secured Note for Cash and Common
      Stock).  Filed as Exhibit 10.8 to the Company’s Form 8-K filed on
      July 6, 2009 and incorporated by reference herein.10.63
              
              Form
      of Payment and Exchange Agreement (Secured Note for Cash and Common
      Stock).  Filed as Exhibit 10.9 to the Company’s Form 8-K filed on
      July 6, 2009 and incorporated by reference herein.10.64
              
              Form
      of Payment and Exchange Agreement (Secured Note for Cash, Series
      D
                Preferred
      and Common Stock).  Filed as Exhibit 10.10 to the Company’s Form 8-K
      filed on July 6, 2009 and incorporated by reference
  herein.10.65
              
              Form
      of Payment and Exchange Agreement (Secured Note for Cash and
      New
                Unsecured
      Note).  Filed as Exhibit 10.11 to the Company’s Form 8-K filed on
      July 6, 2009 and incorporated by reference herein.*10.66
              
              Amended
      and Restated Employment Agreement by and between SMF Energy Corporation
      and Richard E. Gathright executed effective September 23,
      2010.10.67
              
              SMF
      Energy Corporation 2009 Equity Incentive Plan (incorporated by reference
      to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A,
      filed on October 28, 2009).10.68
              
              Amendment
      1 to SMF Energy Corporation 2009 Equity Incentive Plan (incorporated by
      reference to Appendix A to the Company’s Definitive Proxy Statement on
      Schedule 14A, filed on November 24, 2009).*21.1
              
              Subsidiaries
      of the Company*23.1
              
              Consent
      of Grant Thornton LLP





*31.1
              
              Certificate
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*31.2
              
              Certificate
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*32.1
              
              Certificate
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of The Sarbanes-Oxley Act of 200299.1
              
              Statement
      of Financial Accounting Standards No. 84 “Induced Conversions of
      Convertible Debt (as amended)”99.2
              
              Emerging
      Issues Task Force D-42 “The Effect on the Calculation of Earnings per
      Share for the Redemption or Induced Conversion of Preferred
      Stock”





*Filed herewith


49




SIGNATURES




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




Dated:  September
      28, 2010
              SMF
      ENERGY CORPORATIONBy:
              /s/ Richard E. GathrightRichard
      E. Gathright, Chief Executive Officer and President


Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.




Name
                    
                    Title
                    
                    DateBy:
                    /s/ Richard E. Gathright
                    
                    Chairman
      of the Board, Chief Executive
                    
                    September
      28, 2010Richard
      E. Gathright
                    
                    Officer
      and President (PrincipalExecutive
      Officer)By:
                    /s/ Michael S. Shore
                    
                    Chief
      Financial Officer, Treasurer and
                    
                    September
      28, 2010Michael
      S. Shore
                    
                    Senior
      Vice President (PrincipalFinancial
      Officer)By:
                    /s/ Laura Patricia
    Messenbaugh
                    
                    Chief
      Accounting Officer and Vice
                    
                    September
      28, 2010Laura
      Patricia Messenbaugh
                    
                    President
      (Principal Accounting Officer)By:
                    /s/ Wendell R. Beard
                    
                    Director
                    
                    September
      28, 2010Wendell
      R. BeardBy:
                    /s/ Steven R. Goldberg
                    
                    Director
                    
                    September
      28, 2010Steven
      R. GoldbergBy:
                    /s/ Nat Moore
                    
                    Director
                    
                    September
      28, 2010Nat
      MooreBy:
                    /s/ Larry S. Mulkey
                    
                    Director
                    
                    September
      28, 2010Larry
      S. MulkeyBy:
                    /s/ C. Rodney O’Connor
                    
                    Director
                    
                    September
      28, 2010C.
      Rodney O’ConnorBy:
                    /s/ Robert S. Picow
                    
                    Director
                    
                    September
      28, 2010Robert
      S. Picow


50




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets as of June 30, 2010 and 2009
                F-3Consolidated
      Statements of Operations for the Years Ended June 30, 2010 and
      2009
                F-4Consolidated
      Statements of Shareholders’ Equity for the Years Ended June 30, 2010 and
      2009
                F-5Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2010 and
      2009
                F-7Notes
      to Consolidated Financial Statements
                F-9


F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Shareholders


SMF
Energy Corporation




We have
audited the accompanying consolidated balance sheets of SMF Energy Corporation
(Delaware Corporation) and subsidiaries as of June 30, 2010 and 2009, and the
related consolidated statements of operations, shareholders’ equity, and cash
flows for each of the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SMF Energy Corporation and
subsidiaries as of June 30, 2010 and 2009, and the results of its operations and
its cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.





/s/ Grant
Thornton LLP





Fort
Lauderdale, Florida


September
28, 2010


F-2


SMF
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(in
000’s, except share and per share data)





June 30, 2010
                
                
                June 30, 2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                115
                
                
                $
                123Accounts
      receivable, net of allowances for doubtful accounts
                
                
                17,530
                
                
                
                15,878Inventories
                
                
                1,744
                
                
                
                1,959Prepaid
      expenses and other current assets
                
                
                644
                
                
                
                772Total
      current assets
                
                
                20,033
                
                
                
                18,732Property
      and equipment, net of accumulated depreciation
                
                
                7,226
                
                
                
                8,569Identifiable
      intangible assets, net of accumulated amortization
                
                
                1,662
                
                
                
                2,019Goodwill
                
                
                228
                
                
                
                228Deferred
      debt costs, net of accumulated amortization
                
                
                355
                
                
                
                503Other
      assets
                
                
                74
                
                
                
                67Total
      assets
                
                $
                29,578
                
                
                $
                30,118LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Line
      of credit payable
                
                $
                6,896
                
                
                $
                7,845Current
      portion of term loan
                
                
                1,000
                
                
                
                917Accounts
      payable
                
                
                7,301
                
                
                
                5,807Accrued
      expenses and other liabilities
                
                
                3,191
                
                
                
                3,767Total
      current liabilities
                
                
                18,388
                
                
                
                18,336Long-term
      liabilities:Term
      loan, net of current portion
                
                
                3,083
                
                
                
                4,083Promissory
      notes
                
                
                800
                
                
                
                800Other
      long-term liabilities
                
                
                251
                
                
                
                370Total
      liabilities
                
                
                22,522
                
                
                
                23,589Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock, $0.01 par value; 10,000 Series A shares authorized,
      0 issued and outstanding
                
                
                -
                
                
                
                -Preferred
      stock, $0.01 par value; 2,000 Series B shares authorized,
      0 issued and outstanding
                
                
                -
                
                
                
                -Preferred
      stock, $0.01 par value; 2,000 Series C shares authorized, 0 issued
      and outstanding
                
                
                -
                
                
                
                -Preferred
      stock, $0.01 par value; 5,000 Series D shares authorized, 598
      and 3,228 issued and  outstanding, respectively
                
                
                -
                
                
                
                -Common
      stock, $.01 par value; 50,000,000 shares authorized; 8,557,314 and
      7,963,302 issued and outstanding, respectively
                
                
                86
                
                
                
                80Additional
      paid-in capital
                
                
                36,657
                
                
                
                36,601Accumulated
      deficit
                
                
                (29,687
                )
                
                
                (30,152
                )Total
      shareholders’ equity
                
                
                7,056
                
                
                
                6,529Total
      liabilities and shareholders’ equity
                
                $
                29,578
                
                
                $
                30,118





The accompanying notes to the
consolidated financial statements are an integral part of these consolidated
balance sheets.




F-3





SMF
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
000’s, except per share data)





Years Ended June 30,2010
                    
                    
                    2009Petroleum
      product sales and service revenues
                    
                    $
                    169,313
                    
                    
                    $
                    177,054Petroleum
      product taxes
                    
                    
                    23,534
                    
                    
                    
                    22,195Total
      revenues
                    
                    
                    192,847
                    
                    
                    
                    199,249Cost
      of petroleum product sales and service
                    
                    
                    154,117
                    
                    
                    
                    160,614Petroleum
      product taxes
                    
                    
                    23,534
                    
                    
                    
                    22,195Total
      cost of sales
                    
                    
                    177,651
                    
                    
                    
                    182,809Gross
      profit
                    
                    
                    15,196
                    
                    
                    
                    16,440Selling,
      general and administrative expenses
                    
                    
                    13,745
                    
                    
                    
                    14,755Operating
      income
                    
                    
                    1,451
                    
                    
                    
                    1,685Interest
      expense
                    
                    
                    (978
                    )
                    
                    
                    (2,483
                    )Interest
      and other income
                    
                    
                    24
                    
                    
                    
                    115Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    extinguishment
                    
                    
                    -
                    
                    
                    
                    (1,651
                    )Gain
      on extinguishment of promissory notes
                    
                    
                    -
                    
                    
                    
                    27Income
      (loss) before income taxes
                    
                    
                    497
                    
                    
                    
                    (2,307
                    )Income
      tax expense
                    
                    
                    (32
                    )
                    
                    
                    (32
                    )Net
      income (loss)
                    
                    $
                    465
                    
                    
                    $
                    (2,339
                    )Basic
      and diluted net income (loss) per share computation:Net
      income (loss)
                    
                    $
                    465
                    
                    
                    $
                    (2,339
                    )Less:  Preferred
      stock dividends
                    
                    
                    (13
                    )
                    
                    
                    (577
                    )Less:  Non-cash
      deemed dividends for preferred stockSeries
      A, B and C conversion to common stock
                    
                    
                    -
                    
                    
                    
                    (1,746
                    )Net
      income (loss) attributable to common shareholders
                    
                    $
                    452
                    
                    
                    $
                    (4,662
                    )Net
      income (loss) per share attributable to common
    shareholders:Basic
                    
                    $
                    0.05
                    
                    
                    $
                    (1.39
                    )Diluted
                    
                    $
                    0.05
                    
                    
                    $
                    (1.39
                    )Weighted
      average common shares outstanding:Basic
                    
                    
                    8,480
                    
                    
                    
                    3,355Diluted
                    
                    
                    8,692
                    
                    
                    
                    3,355





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


F-4


SMF
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


(in
000’s except share data)





Preferred
      Stock
                                                              
                                                              Preferred
      Stock
                                                              
                                                              Preferred
      Stock
                                                              
                                                              Preferred
      Stock
                                                              
                                                              
                                                              
                                                              AdditionalSeries
      A
                                                              
                                                              Series
      B
                                                              
                                                              Series
      C
                                                              
                                                              Series
      D
                                                              
                                                              Common
      Stock
                                                              
                                                              Paid-in
                                                              
                                                              AccumulatedShares
                                                              
                                                              Amount
                                                              
                                                              Shares
                                                              
                                                              Amount
                                                              
                                                              Shares
                                                              
                                                              Amount
                                                              
                                                              Shares
                                                              
                                                              Amount
                                                              
                                                              Shares
                                                              
                                                              Amount
                                                              
                                                              Capital
                                                              
                                                              Deficit
                                                              
                                                              TotalBalance
      at June 30, 2008
                                                              
                                                              
                                                              4,587
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              1,985
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              3,236,808
                                                              
                                                              $
                                                              33
                                                              
                                                              $
                                                              30,832
                                                              
                                                              $
                                                              (27,813
                                                              )
                                                              $
                                                              3,052Net
      loss
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (2,339
                                                              )
                                                              
                                                              (2,339
                                                              )Issuance
      of Series C preferred stock, net of issuance costs of $39
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              229
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              110
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              110Conversion
      of Series A preferred stock to common stock
                                                              
                                                              
                                                              (473
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              105,112
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              (1
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              -Issuance
      of Series D Preferred Stock for partial extinguishment of August 2007
      Notes and September 2008 Notes, net of issuance costs of
    $43
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              3,228
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              1,146
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              1,146Issuance
      of common stock for partial extinguishment of August 2007 Notes, September
      2008 Notes, Preferred Stock A, Preferred Stock B, and Preferred Stock C,
      net of issuance costs of $224
                                                              
                                                              
                                                              (4,114
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              (1,985
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              (229
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              3,917,371
                                                              
                                                              
                                                              39
                                                              
                                                              
                                                              2,172
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              2,211Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    extinguishment
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              1,651
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              1,651Issuance
      of common stock for agent fees
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              58,480
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              96
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              97Issuance
      of common stock for payment of accrued dividend on preferred stock, net of
      issuance costs of $21
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              320,359
                                                              
                                                              
                                                              3
                                                              
                                                              
                                                              356
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              359Series
      A preferred stock dividend
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (318
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              (318
                                                              )Series
      B preferred stock dividend
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (242
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              (242
                                                              )Series
      C preferred stock dividend
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (17
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              (17
                                                              )Issuance
      of common stock for payment of interest deferral fee and accrued interest
      on August 2007 Notes and September 2008 Notes
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              325,172
                                                              
                                                              
                                                              3
                                                              
                                                              
                                                              524
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              527Stock-based
      compensation expense
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              292
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              292Balance
      at June 30, 2009
                                                              
                                                              
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              3,228
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              7,963,302
                                                              
                                                              $
                                                              80
                                                              
                                                              $
                                                              36,601
                                                              
                                                              $
                                                              (30,152
                                                              )
                                                              $
                                                              6,529


(Continued)


The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated statements of shareholders’ equity.


F-5


SMF
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


(in
000’s except share data)





(Continued)
                                                        
                                                        Preferred
      Stock
                                                        
                                                        Preferred
      Stock
                                                        
                                                        Preferred
      Stock
                                                        
                                                        Preferred
      Stock
                                                        
                                                        
                                                        
                                                        AdditionalSeries
      A
                                                        
                                                        Series
      B
                                                        
                                                        Series
      C
                                                        
                                                        Series
      D
                                                        
                                                        Common
      Stock
                                                        
                                                        Paid-in
                                                        
                                                        AccumulatedShares
                                                        
                                                        Amount
                                                        
                                                        Shares
                                                        
                                                        Amount
                                                        
                                                        Shares
                                                        
                                                        Amount
                                                        
                                                        Shares
                                                        
                                                        Amount
                                                        
                                                        Shares
                                                        
                                                        Amount
                                                        
                                                        Capital
                                                        
                                                        Deficit
                                                        
                                                        TotalBalance
      at June 30, 2009
                                                        
                                                        
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        3,228
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        7,963,302
                                                        
                                                        $
                                                        80
                                                        
                                                        $
                                                        36,601
                                                        
                                                        $
                                                        (30,152
                                                        )
                                                        $
                                                        6,529Net
      income
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        465
                                                        
                                                        
                                                        465Conversion
      of Series D Preferred stock to common stock
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        (2,630
                                                        )
                                                        
                                                        -
                                                        
                                                        
                                                        594,012
                                                        
                                                        
                                                        6
                                                        
                                                        
                                                        (6
                                                        )
                                                        
                                                        -
                                                        
                                                        
                                                        -Recapitalization
      costs
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        (115
                                                        )
                                                        
                                                        -
                                                        
                                                        
                                                        (115
                                                        )Series
      D preferred stock dividends
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        (13
                                                        )
                                                        
                                                        -
                                                        
                                                        
                                                        (13
                                                        )Stock-based
      compensation amortization expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        190
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        190Balance
      at June 30, 2010
                                                        
                                                        
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        598
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        8,557,314
                                                        
                                                        $
                                                        86
                                                        
                                                        $
                                                        36,657
                                                        
                                                        $
                                                        (29,687
                                                        )
                                                        $
                                                        7,056





The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated statements of shareholders’ equity.


F-6


SMF
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
000’s)





Years Ended June 30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                
                $
                465
                
                
                $
                (2,339
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization within:Cost
      of sales
                
                
                890
                
                
                
                1,077Selling,
      general and administrative
                
                
                1,268
                
                
                
                1,361Amortization
      of deferred debt costs
                
                
                168
                
                
                
                305Amortization
      of debt discount
                
                
                -
                
                
                
                42Amortization
      of stock-based compensation
                
                
                190
                
                
                
                292Write-off
      of unamortized acquisition costs
                
                
                187
                
                
                
                -Gain
      from sale of assets
                
                
                (3
                )
                
                
                (93
                )Inventory
      reserve provision
                
                
                17
                
                
                
                (17
                )Provision
      for doubtful accounts
                
                
                335
                
                
                
                366Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    extinguishment
                
                
                -
                
                
                
                1,651Non-cash
      interest expense deferral fee
                
                
                -
                
                
                
                48Non-cash
      gain on extinguishment of promissory notes
                
                
                -
                
                
                
                (27
                )Other
                
                
                -
                
                
                
                (13
                )Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                (1,987
                )
                
                
                13,935(Increase)
      decrease in inventories, prepaid expenses and other assets
                
                
                132
                
                
                
                675Increase
      (decrease) in accounts payable and other liabilities
                
                
                805
                
                
                
                (5,196
                )Net
      cash provided by operating activities
                
                
                2,467
                
                
                
                12,067CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property, software and equipment
                
                
                (415
                )
                
                
                (298
                )Proceeds
      from sale of equipment
                
                
                3
                
                
                
                102Decrease
      in restricted cash
                
                
                -
                
                
                
                68Net
      cash used in investing activities
                
                
                (412
                )
                
                
                (128
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from line of credit
                
                
                199,195
                
                
                
                210,313Repayments
      of line of credit
                
                
                (200,144
                )
                
                
                (222,257
                )Principal
      payments on term loan and promissory notes
                
                
                (917
                )
                
                
                (4,993
                )Proceeds
      from issuance of term loan and promissory notes
                
                
                -
                
                
                
                5,725Proceeds
      from issuance of preferred stock
                
                
                -
                
                
                
                149Payment
      of dividends
                
                
                -
                
                
                
                (390
                )Common
      stock, preferred stock, and warrants issuance costs
                
                
                (115
                )
                
                
                (167
                )Debt
      issuance costs
                
                
                (20
                )
                
                
                (186
                )Capital
      lease payments
                
                
                (62
                )
                
                
                (58
                )Net
      cash used in financing activities
                
                
                (2,063
                )
                
                
                (11,864
                )NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (8
                )
                
                
                75CASH
      AND CASH EQUIVALENTS, beginning of period
                
                
                123
                
                
                
                48CASH
      AND CASH EQUIVALENTS, end of period
                
                $
                115
                
                
                $
                123





The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated statements of cash flows.


F-7


SMF
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
000’s)





(Continued)
                
                Years Ended June 30,2010
                
                
                2009SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                765
                
                
                $
                2,125Cash
      paid for income tax
                
                $
                37
                
                
                $
                -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH ACTIVITIES:Issuance
      of common stock in exchange for Preferred Stock D
                
                $
                1,051
                
                
                $
                -Capital
      leases
                
                $
                43
                
                
                $
                54Accrued
      dividend related to Preferred Stock D
                
                $
                13
                
                
                $
                -Recapitalization
      - Issuance of common stock in exchange for Preferred Stock A, Preferred
      Stock B, and Preferred Stock C
                
                $
                -
                
                
                $
                4,198Recapitalization
      - Issuance of common stock as part of the extinguishment of August 2007
      Notes and September 2008 Notes
                
                $
                -
                
                
                $
                2,435Recapitalization
      - Issuance of preferred stock as part of the extinguishment of August 2007
      Notes and September 2008 Notes
                
                $
                -
                
                
                $
                1,189Recapitalization
      - Issuance of June 2009 Note as part of the extinguishment of August 2007
      Notes
                
                $
                -
                
                
                $
                800Issuance
      of common stock for payment of accrued dividends on Preferred Stock A,
      Preferred Stock B, and Preferred Stock C
                
                $
                -
                
                
                $
                380Recapitalization
      - Issuance of common stock for agent fees
                
                $
                -
                
                
                $
                97Recapitalization
      - Issuance of common stock for accrued interest on August 2007 Notes and
      September 2008 Notes
                
                $
                -
                
                
                $
                478Issuance
      of common stock for the deferral fee related to the August 2007 Notes and
      September 2008 Notes, January 1, 2009 and March 1, 2009 accrued interest,
      respectively, which were deferred until April 15, 2009
                
                $
                -
                
                
                $
                49Conversion
      of Preferred Stock A to common shares
                
                $
                -
                
                
                $
                260Accrued
      debt costs related to the term loan and line of credit
                
                $
                -
                
                
                $
                352Accrued
      costs related to issuance of stock, warrants and promissory
      notes
                
                $
                -
                
                
                $
                104





The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated statements of cash flows.


F-8


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.          NATURE
OF OPERATIONS




SMF
Energy Corporation (the “Company”) provides petroleum product distribution
services, transportation logistics and emergency response services to the
trucking, manufacturing, construction, shipping, utility, energy, chemical,
telecommunications, and government services industries.  The Company
generates its revenues from commercial mobile and bulk fueling; the packaging,
distribution and sale of lubricants; integrated out-sourced fuel management;
transportation logistics, and emergency response services.  The
Company’s fleet of custom specialized tank wagons, tractor-trailer transports,
box trucks and customized flatbed vehicles delivers diesel fuel and gasoline to
customers’ locations on a regularly scheduled or as needed basis, refueling
vehicles and equipment, re-supplying fixed-site and temporary bulk storage
tanks, and emergency power generation systems; and distributes a wide variety of
specialized petroleum products, lubricants and chemicals to its
customers.




The Company is a Delaware corporation
formed in 2006.  In December 2006, the shareholders of Streicher
Mobile Fueling, Inc. (“Streicher”), a Florida corporation formed in 1996,
approved changing Streicher’s name to SMF Energy Corporation and the
reincorporation of Streicher in Delaware by merger into the
Company.  The merger was effective February 14, 2007.





At June
30, 2010, the Company was conducting operations through 34 service locations in
the 11 states of Alabama, California, Florida, Georgia, Louisiana, Mississippi,
Nevada, North Carolina, South Carolina, Tennessee and Texas.





2.           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





The
consolidated financial statements include the accounts of SMF Energy Corporation
and its wholly owned subsidiaries, SMF Services, Inc., H & W Petroleum
Company, Inc. (“H & W”), and Streicher Realty, Inc.  All
significant intercompany balances and transactions have been eliminated in
consolidation.





Reverse
Stock Split





On
September 10, 2009, the Company amended its Certificate of Incorporation to
effect a 1-for-4.5 reverse stock split of the Company’s common stock, which
became effective on the Nasdaq Capital Market on October 1, 2009.  As
a result of the reverse stock split, every 4.5 shares of the Company’s issued
and outstanding common stock was combined into 1 share of common stock with a
par value of $0.01 per share.  The reverse stock split did not change
the number of authorized shares of the Company’s common stock, which remains at
50,000,000 authorized shares.  No fractional shares were issued in
connection with the reverse stock split.  If, as a result of the
reverse stock split, a stockholder would otherwise hold a fractional share, the
number of shares to be received by such stockholder were rounded up to the next
highest number of shares.  The reverse stock split affected all shares
of the Company’s common stock, including common stock underlying stock options,
warrants, convertible promissory notes and convertible preferred stock that were
outstanding on the effective date.  All share and per share
information in the accompanying consolidated financial statements and the notes
thereto have been retroactively adjusted to give effect to the reverse stock
split for all periods presented.





Segment
Information





The
Company follows ASC 280, “Segment Reporting”, to report
financial and descriptive information about its reportable operating
segments.  Operating segments are components of an enterprise for
which separate financial information is available and is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.  The Company’s chief operating decision maker
currently evaluates the Company’s operations from a number of different
operational perspectives including but not limited to geographic
location.  Although the Company records revenue by type of service,
management does not assign and/or allocate specific resources and assets to
these services.  The Company’s assets are used interchangeably for the
different types of services; as a result, earnings information related to each
type of service is limited.


F-9


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Reports
reviewed by management based on geographic location are prepared for ease of
review.  However, these geographic areas have similar economic
characteristics in regards to the nature of the products and services, nature of
processes, type of customers, methods used to distribute the products, and the
nature of the regulatory environment.  As a result, many business
decisions are based on consolidated metrics such as total gallons sold, net
margin per total gallons sold, gross margin per total gallons sold, and other
consolidated results.  Due to the nature of the business, at June 30,
2010 and 2009, the Company had only one reportable segment of business:
distribution of petroleum products from integrated out-sourced management
services.  Nevertheless, management evaluates, at least quarterly,
whether the Company continues to have one single reportable
segment.


Cash
and Cash Equivalents




During
fiscal year 2010, the Company paid down $949,000 on its line of credit
payable.  Total cash and cash availability was $4.7 million and $2.5
million at June 30, 2010 and 2009, respectively, and was approximately $3.4
million on September 21, 2010.  Total cash and cash availability
includes cash and cash equivalents as presented in the Company’s balance sheet
and cash available to the Company through its line of credit, described in Note
5 – Line of Credit Payable.




The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.  The Company
maintains its cash balances at financial institutions, which at times may exceed
federally insured limits.  The Federal Deposit Insurance Corporation
currently insures balances up to $250,000.  The Company has not
experienced any losses in such bank accounts.




Accounts
Receivable




Accounts
receivable mainly consist of amounts due from customers within a diverse range
of industries and are generally unsecured.  The carrying amount of
accounts receivable is reduced by an allowance for doubtful accounts that
reflects management’s best estimate of the amounts that will not be
collected.  The Company periodically reviews the accounts receivable
aging for delinquent accounts and provides for credit losses based on
management’s evaluation of collectability including current and historical
performance, credit worthiness and experience of each
customer.  Uncollectible accounts receivables are written off against
the allowance for doubtful accounts when a settlement is reached for an amount
less than the outstanding balance or when the Company determines that the
balance will not be collected.




Activity
in the allowance for doubtful accounts for the indicated periods is as follows
(in thousands):





June 30,2010
                  
                  
                  2009Balance
      - beginning of period
                  
                  $
                  1,038
                  
                  
                  $
                  1,283Provision
      for doubtful accounts
                  
                  
                  335
                  
                  
                  
                  366Write-offs,
      net of recoveries
                  
                  
                  (348
                  )
                  
                  
                  (611
                  )Balance
      - end of period
                  
                  $
                  1,025
                  
                  
                  $
                  1,038





Inventories




Inventories,
consisting primarily of lubricants, chemicals, diesel fuel and gasoline, are
stated at the lower of cost or market and include federal and state petroleum
product taxes payable to vendors.  Cost is determined using the
first-in, first-out method.


F-10


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued


Property
and Equipment




Property
and equipment are stated at cost less accumulated
depreciation.  Ordinary maintenance, repairs and replacement parts are
expensed as incurred.  Improvements that significantly increase the
value or useful life of property and equipment are
capitalized.  Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the
assets.  Leasehold improvements are depreciated over the lesser of the
useful life of the assets or the lease term using the straight-line
method.  Depreciation expense for property and equipment and leasehold
improvements was $1.8 million and $2.1 million, for the years ended June 30,
2010 and 2009, respectively.




Property
and equipment balances and the estimated useful lives were as follows at the
indicated dates (in thousands):




June 30,2010
                    
                    
                    2009
                    
                    
                    Estimated Useful LifeFuel
      trucks, tanks and vehicles
                    
                    $
                    17,380
                    
                    
                    $
                    17,430
                    
                    
                    5 –
      25 yearsSoftware
      development / ERP
                    
                    
                    3,863
                    
                    
                    
                    3,690
                    
                    
                    5
      yearsMachinery,
      equipment and software
                    
                    
                    1,687
                    
                    
                    
                    1,589
                    
                    
                    3 –
      5 yearsFurniture
      and fixtures
                    
                    
                    602
                    
                    
                    
                    596
                    
                    
                    5 –
      10 yearsLeasehold
      improvements
                    
                    
                    574
                    
                    
                    
                    477
                    
                    
                    Lesser
      of lease term or useful lifeLand
                    
                    
                    67
                    
                    
                    
                    67
                    
                    
                    —24,173
                    
                    
                    
                    23,849Less:  Accumulated
      depreciation
                    
                    
                    (16,947
                    )
                    
                    
                    (15,280
                    )Property
      and equipment, net
                    
                    $
                    7,226
                    
                    
                    $
                    8,569





In
accordance with ASC 350-40, “Intangibles – Goodwill and Other –
Internal-Use Software”, the Company capitalized certain costs used in the
development of internal use software.  These costs include external
software and consulting costs that were incurred as a result of the costs
associated with the implementation, coding and software
configuration.  At June 30, 2010 and 2009, the capitalized costs
related to internal use software were $3.9 million and $3.7 million,
respectively.  During fiscal years 2010 and 2009, the Company
capitalized $173,000 and $170,000 of software related costs,
respectively.  The Company did not capitalize any interest associated
with the software development as the amounts were immaterial.





Income
Taxes




The
provision for income taxes and corresponding balance sheet accounts are
determined in accordance with ASC 740, “Income Taxes” (“ASC
740”).  Under ASC 740, deferred tax assets and liabilities are
determined based on the temporary differences between the bases of certain
assets and liabilities for income tax and financial reporting
purposes.  The deferred tax assets and liabilities are classified
according to the financial statement classification of the net assets and
liabilities generating the differences.  The Company provides a
valuation allowance for the portion of deferred tax assets, which it cannot
determine is more likely than not to be recognized.


F-11


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





As
required by the provisions of ASC 740, the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an
audit.  For tax positions meeting the more likely than not threshold,
the amount recognized in the financial statements is the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority.





At
June 30, 2010 and 2009, the amount of unrecognized tax benefits was
approximately $695,000 and $759,000, respectively, of which approximately
$268,000 and $326,000 represent permanent items.





Although
the Company generated net income in fiscal year 2010, no provision for federal
income taxes nor interest and penalties have been accrued due to the
availability of net operating loss carryforwards.





The
Company and its subsidiaries file a consolidated federal income tax return in
the U.S. federal jurisdiction and it is subject to certain income taxes in
various states and other local jurisdictions.


Revenue
Recognition




The
Company recognizes revenues on the date that its petroleum and other products
are distributed and services are rendered, and the customer takes ownership and
assumes risk of loss, provided that collections are reasonably
assured.




If the
Company bears the risk of loss, the Company accounts for petroleum product taxes
collected from its customers that are assessed from government authorities, on a
gross basis, in accordance with ASC 605-45 “Revenue Recognition – Principal
Agent Considerations”.




Use
of Estimates




The
preparation of the Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes.  These
assumptions, if not realized, could affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Actual results could differ from management’s
estimates.




Fair
Value of Financial Instruments




The
Company carries certain of its assets and liabilities at fair value, measured on
a recurring basis, in the accompanying consolidated balance
sheets.  In fiscal 2010, the Company adopted ASC 825 Financial Instrumentswhich
establish a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels which distinguish
between assumptions based on market data (observable inputs) and the Company’s
assumptions (unobservable inputs).  The level in the fair value
hierarchy within which the respective fair value measurement falls is determined
based on the lowest level input that is significant to the measurement in its
entirety.  Level 1 inputs are quoted market prices in active markets
for identical assets or liabilities, Level 2 inputs are other than quotable
market prices included in Level 1 that are observable for the asset or liability
either directly or indirectly through corroboration with observable market
data.  Level 3 inputs are unobservable inputs for the assets or
liabilities that reflect management’s own assumptions about the assumptions
market participants would use in pricing the asset or liability.




The
Company’s financial instruments, primarily consisting of cash and cash
equivalents, accounts receivable and accounts payable, approximate fair value
due to the short term maturity of these instruments.  The line of
credit, promissory notes and long-term debt approximate fair value as the
borrowing rates current in the market that would be available to the Company for
bank loans and average maturities are similar to those currently in place for
the Company and recorded in our financial statements.


F-12


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Deferred
Debt Costs and Debt Discount




The
Company amortizes any outstanding deferred debt costs and debt discount as
interest expense under the effective interest method over the respective term of
the debt issued.  Activity related to the deferred debt costs were as
follows (in thousands):





June 30,2010
                    
                    
                    2009Deferred Debt CostsBalance,
      net - beginning of period
                    
                    $
                    503
                    
                    
                    $
                    348Amortization
                    
                    
                    (168
                    )
                    
                    
                    (305
                    )Write
      off of debt costs related to the conversion of debt
                    
                    
                    -
                    
                    
                    
                    (118
                    )Additional
      debt costs incurred during the year
                    
                    
                    20
                    
                    
                    
                    578Balance,
      net - end of period
                    
                    $
                    355
                    
                    
                    $
                    503





Accumulated amortization of deferred
debt costs was $168,000 at June 30, 2010 and zero at June 30, 2009 as a result
of the June 2009 Recapitalization the debt costs were realized.





Prior to fiscal 2009, the Company had
recorded a debt discount related to the issuance of debt.  There were
no outstanding debt discount balances or activity during fiscal
2010.  The activity during fiscal 2009 was as follows:





June 30, 2009Debt DiscountBalance,
      net - beginning of period
                        
                        $
                        65Amortization
                        
                        
                        (42
                        )Write
      off of debt discount related to the conversion of debt
                        
                        
                        (23
                        )Balance,
      net - end of period
                        
                        $
                        -





On June
29, 2009, the Company engaged in a series of transactions that restructured all
of the Company’s debt and equity as described in Note 4 – June 2009
Recapitalization, including the satisfaction of all of the outstanding senior
secured convertible subordinated promissory notes and unsecured promissory
notes.  As a result, in June 2009, the Company wrote off $118,000 of
unamortized debt costs and $23,000 of unamortized debt discount as losses on
extinguishment of promissory notes.  See Note 4 – June 2009
Recapitalization and Note 6 – Long Term Debt – Gain on Extinguishment of Promissory
Notes, net.





Net
Income (Loss) Per Share





Basic net
income (loss) per share is computed by dividing the net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during each year.


F-13


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Diluted
earnings per share is computed by dividing net earnings attributable to common
shareholders by the weighted-average number of common shares outstanding,
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued.  Conversion or exercise of the potential common shares is not
reflected in diluted earnings per share unless the effect is
dilutive.  The dilutive effect, if any, of outstanding common share
equivalents is reflected in diluted earnings per share by application of the
if-converted and the treasury stock method, as applicable.  In
determining whether outstanding stock options and common stock warrants should
be considered for their dilutive effect, the average market price of the common
stock for the period has to exceed the exercise price of the outstanding common
share equivalent.




Diluted
net income per share in fiscal year 2010 was diluted by additional common stock
equivalents as follows (in thousands):




June 30, 2010Incremental
      shares due to stock options awarded to employees and
    directors
                    
                    
                    2Incremental
      shares due to preferred stock conversion rights
                    
                    
                    210Total
      dilutive shares
                    
                    
                    212





Diluted
net loss per share in fiscal year 2009 did not include any common stock
equivalents in the computation since the Company incurred a net loss in that
period.




Anti-dilutive
common stock equivalents outstanding and not included in the computation of
diluted net income per common share consisted of (in thousands):




June 30,2010
                  
                  
                  2009Stock
      options
                  
                  
                  416
                  
                  
                  
                  421Common
      stock warrants
                  
                  
                  141
                  
                  
                  
                  158Promissory
      note conversion rights
                  
                  
                  89
                  
                  
                  
                  89Preferred
      stock conversion rights
                  
                  
                  -
                  
                  
                  
                  717Total
      common stock equivalents outstanding
                  
                  
                  646
                  
                  
                  
                  1,385


F-14


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The
following table sets forth the computation of basic and diluted income (loss)
per share (in thousands, except per share amounts):




For
      the Fiscal Year Ended,June
      30, 2010
                        
                        
                        June
      30, 2009Weighted
                        
                        
                        
                        
                        
                        
                        
                        
                        WeightedAverage
                        
                        
                        
                        
                        
                        
                        
                        
                        AverageCommon
                        
                        
                        Per
      Share
                        
                        
                        
                        
                        
                        Common
                        
                        
                        Per
      ShareEarnings
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Earnings
                        
                        
                        Shares
                        
                        
                        AmountNet
      income (loss)
                        
                        $
                        465
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (2,339
                        )Less:  Preferred
      stock dividends
                        
                        
                        (13
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        (577
                        )Less:  Non-cash
      deemed dividends for theconversion
      of preferred stock Series A,Series
      B and Series C to common stock
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,746
                        )Basic
      net income (loss) per share attributable to common
      shareholders
                        
                        $
                        452
                        
                        
                        
                        8,480
                        
                        
                        $
                        0.05
                        
                        
                        $
                        (4,662
                        )
                        
                        
                        3,355
                        
                        
                        $
                        (1.39
                        )Effect
      of dilutive securities:Stock
      options
                        
                        
                        -
                        
                        
                        
                        2
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -Preferred
      stock conversion rights
                        
                        
                        -
                        
                        
                        
                        210
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -Diluted
      net income (loss) per share attributable to common
      shareholders
                        
                        $
                        452
                        
                        
                        
                        8,692
                        
                        
                        $
                        0.05
                        
                        
                        $
                        (4,662
                        )
                        
                        
                        3,355
                        
                        
                        $
                        (1.39
                        )





In fiscal
year 2009, as a result of the Recapitalization described in Note 4, the Company
reported a non-cash deemed dividend of $1.75 million, which was the result of
redeeming all the outstanding Series A, Series B and Series C preferred shares
through the issuance of common shares at a negotiated price lower than the
original terms of the securities issuable.  See Note 4 – June 2009
Recapitalization.




In fiscal
year 2009, also in the Recapitalization described in Note 4, as a result of the
exchange of existing convertible promissory notes for common stock, the Company
recorded a non-cash “inducement” accounting charge of $1.65
million.  Since the extinguishment of these notes through issuance of
Common Stock was done at close to current market prices of the Common Stock, the
Company issued more shares than it would have issued for the convertible
equivalent under the original terms of these notes.  The inducement
charge is the value of the additional shares that were issued. This non-cash
charge is deemed a financing expense to extinguish the convertible promissory
notes and it is included in the Consolidated Statements of Operations with a
corresponding increase in Additional paid-in capital and therefore the net
impact has no effect on total Shareholders’ Equity.  See Note 4 – June
2009 Recapitalization.


F-15


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Impairment
or Disposal of Long-Lived Assets




In
accordance with the provisions of ASC 360, “Property, Plant, and
Equipment” (“ASC 360”), the Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to forecasted future undiscounted cash flows expected to be generated
by the asset.  If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge would be recognized by the
amount that the carrying amount of the asset exceeds the fair value of the asset
based on the projected net cash flows discounted at a rate commensurate with the
risk of the asset.  Assets to be disposed of are reported at the lower
of their carrying amount or fair value less costs to sell.  During the
fiscal years ended June 30, 2010 and 2009, no impairment was recorded with
respect to long-lived assets.




Identifiable
Intangible Assets and Goodwill




In
accordance with ASC 350, “Intangibles – Goodwill and
Other” (“ASC 350”), the Company does not amortize goodwill and intangible
assets with indefinite lives, but instead measures for impairment at least
annually or when events indicate that an impairment exists.  As
required by ASC 350, the Company compares the fair value of the applicable
reporting unit to its carrying value.




Intangible
assets that are determined to have finite lives are amortized over their useful
lives and are measured for impairment only when events or circumstances indicate
the carrying value may be impaired in accordance with ASC 350, discussed
above.  During the fiscal years ended June 30, 2010 and 2009, no
impairment was recorded.




Asset
Retirement Obligation




The
Company accounts for asset retirement obligations in accordance with the
provisions of ASC 410, “Asset
Retirement and Environmental Obligations”.  This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement
costs.  Retirement is defined as the other-than-temporary removal of a
long-lived asset from service.  The term encompasses a sale,
abandonment, recycling or disposal in some other manner.





In fiscal
year 2005, as a result of the H & W acquisition, the Company recorded an
estimated liability for the removal and clean-up of three underground fuel
storage tanks and had estimated the remaining useful life of those tanks to be
ten years.  At June 30, 2010 and 2009, the Company had a liability for
asset retirement obligations of $158,000 and $147,000, respectively, which is
classified as other long-term liabilities in the accompanying Consolidated
Balance Sheets.  In fiscal years 2010 and 2009, the Company recorded
accretion expense of $11,000, for both periods.




Stock-Based
Compensation




As per
ASC 718,Compensation - Stock
Compensation("ASC 718"), the Company expenses the grant-date fair value
of stock options and other equity-based compensation granted to
employees.  Amortization of stock compensation expense for the years
ended June 30, 2010 and 2009 was $190,000 and $292,000, respectively, and is
included in selling, general and administrative expenses in the Consolidated
Statements of Operations.


F-16


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The fair
value of each option is estimated on the date of grant using the Black-Scholes
option valuation model with the following weighted average
assumptions:





Years Ended June 30,2010
                  
                  
                  2009Risk
      free interest rate
                  
                  
                  3.34
                  %
                  
                  
                  3.22
                  %Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      volatility
                  
                  
                  108.3
                  %
                  
                  
                  105.4
                  %Expected
      life
                  
                  7.1
      years
                  
                  
                  8.0
      years





Use of
the Black-Scholes model requires management to make certain assumptions with
respect to selected model input.  The risk-free rate is based on a
U.S. Treasury zero-coupon bond issue with a remaining term equal to the expected
term of the option.  The dividend yield is zero per share because the
Company has not paid dividends on Common Stock in the past and does not expect
to pay dividends in the foreseeable future.  Expected volatilities are
based on the historical volatility of the Company’s stock.  Since the
Company has limited historical exercise data for the expected life of the
options granted, it is estimating the expected life to be equivalent to the
remaining contractual life and represents the period of time that options
granted are expected to be outstanding.  The fair value of the stock
options is expensed on a uniform straight-line basis over the vesting
period.





Recent
Accounting Pronouncements




FASB Accounting
Standards Codification


(Accounting Standards Update (“ASU”)
2009-01)





In
June 2009, the FASB issued the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental
GAAP.  All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the
Codification.  All other non-grandfathered, non-SEC accounting
literature not included in the Codification has become
nonauthoritative.  The Codification did not change GAAP, but instead
introduced a new structure that combines all authoritative standards into a
comprehensive, topically organized online database.  The Codification
is effective for interim or annual periods ending after September 15, 2009,
and impacts the Company’s financial statements as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification.





As a
result of the Company’s implementation of the Codification during fiscal year
2010, previous references to new accounting standards and literature are no
longer applicable.





Fair Value
Measurements


(Included in ASC 825 “Financial
Instruments”, previously FAS No. 157 “Fair Value
Measurements”)





In
September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”).  This standard provides guidance for using fair value to
measure assets and liabilities.  Under FAS No. 157, fair value refers to
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in
which the reporting entity transacts.  In this standard, the FASB clarifies
the principle that fair value should be based on the assumptions that market
participants would use when pricing the asset or liability.  In support of
this principle, FAS No. 157 establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions.  The fair value
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data, for example, the reporting entity’s own
data.  Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy.  Certain aspects of
this standard were effective for the financial statements issued for the Company
since the beginning of fiscal year 2009.  The adoption of FAS No. 157 had
no impact on the Company’s consolidated financial position, results of
operations or cash flows.  FASB Staff Position (“FSP”) FAS 157-2,
“Effective Date of FASB Statement No. 157,” issued in February 2008, provided a
one-year deferral to fiscal years beginning after November 15, 2008 of the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed in financial
statements at least annually at fair value on a recurring basis.  The
Company’s adoption of the remaining provisions as of July 1, 2009 of FAS No. 157
did not have an impact on the Company’s consolidated financial position, results
of operations or cash flows.


F-17


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Accounting for
Convertible Debt Instruments


(Included
in ASC 470-20 “Debt – Debt with Conversion and Other Options”, previously FSP
APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement)”)




In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP No. 14-1”). This standard clarifies that convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP No. 14-1 was effective for the Company
beginning July 1, 2009. The standard had no impact on our financial condition,
results of operations or cash flows.





Equity
Topic 505 – Accounting for Distributions to Shareholders with Components of
Stock and Cash a Consensus of the FASB Emerging Issues Task Force





In
January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-01,
“Equity Topic 505 – Accounting
for Distributions to Shareholders with Components of Stock and Cash a Consensus
of the FASB Emerging Issues Task Force” (“ASU No. 2010-01”).The
amendments in this update clarify that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS
prospectively and is not a stock dividend for purposes of applying Topics 505
and 260 (Equity and Earnings Per Share). ASU No. 2010-01 was effective for
interim and annual periods ending on or after December 15, 2009, and should be
applied on a retrospective basis. The adoption of this update in the second
quarter of fiscal 2010 had no impact on the Company’s consolidated financial
position, results of operations or cash flows.


F-18


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





3.           IDENTIFIABLE
INTANGIBLE ASSETS AND GOODWILL





The
following table summarizes the Company’s identifiable intangible assets and
goodwill balances as of June 30, 2010 and 2009 (in thousands):





June
      30,2010
                        
                        
                        2009Gross
                        
                        
                        
                        
                        
                        Net
                        
                        
                        Gross
                        
                        
                        
                        
                        
                        Net
                        
                        AmortizationCarrying
                        
                        
                        Accumulated
                        
                        
                        Carrying
                        
                        
                        Carrying
                        
                        
                        Accumulated
                        
                        
                        Carrying
                        
                        PeriodAmount
                        
                        
                        Amortization
                        
                        
                        Amount
                        
                        
                        Amount
                        
                        
                        Amortization
                        
                        
                        Amount
                        
                        (Years)Amortized
      intangible assets:Customer
      relationships
                        
                        $
                        1,768
                        
                        
                        $
                        625
                        
                        
                        $
                        1,143
                        
                        
                        $
                        1,768
                        
                        
                        $
                        513
                        
                        
                        $
                        1,255
                        
                        15Favorable
      leases
                        
                        
                        196
                        
                        
                        
                        186
                        
                        
                        
                        10
                        
                        
                        
                        196
                        
                        
                        
                        147
                        
                        
                        
                        49
                        
                        5Trademarks
                        
                        
                        687
                        
                        
                        
                        218
                        
                        
                        
                        469
                        
                        
                        
                        687
                        
                        
                        
                        172
                        
                        
                        
                        515
                        
                        15Supplier
      contracts
                        
                        
                        801
                        
                        
                        
                        761
                        
                        
                        
                        40
                        
                        
                        
                        801
                        
                        
                        
                        601
                        
                        
                        
                        200
                        
                        5Total
                        
                        $
                        3,452
                        
                        
                        $
                        1,790
                        
                        
                        $
                        1,662
                        
                        
                        $
                        3,452
                        
                        
                        $
                        1,433
                        
                        
                        $
                        2,019Goodwill
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        228
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        228





Amortization
expense is computed using the straight-line method over the useful lives of the
assets.  Amortization expense for the years ended June 30, 2010 and
2009 was $357,000 and $373,000, respectively.  Amortization expense
for the five succeeding fiscal years and thereafter is as follows (in
thousands):





Year
      endingJune 30,
                  
                  Amortization2011
                  
                  $
                  2072012
                  
                  
                  1572013
                  
                  
                  1572014
                  
                  
                  1572015
                  
                  
                  157Thereafter
                  
                  
                  827Total
                  
                  $
                  1,662





4.
            JUNE
      2009 RECAPITALIZATION





Summary





On June
29, 2009 (the “Effective Date”), the Company completed a comprehensive $40
million recapitalization program (the “Recapitalization”) that restructured
all of its debt and equity.  After the Recapitalization, the Company’s
total debt was lowered by $4.5 million.  The Recapitalization
also resulted in a net increase in shareholders’ equity of $4.1 million and a
reduction of interest expense in fiscal year 2010.


F-19


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





On the
Effective Date, by virtue of various agreements with the Company’s existing debt
and equity investors, the Company extinguished all of its existing non-bank debt
and outstanding preferred stock, including: (a) $8.859 million in outstanding
August 2007 11.5% Senior Secured Convertible Promissory Notes (the “Secured
Notes”); (b) $725,000 in outstanding September 2008 12% Unsecured Convertible
Promissory Notes (“Existing Unsecured Notes”); (c) $2.263 million in 12%
Cumulative Dividend Convertible Series A Preferred Stock (“Series A Preferred”);
(d) the $1.787 million in 12% Cumulative Dividend Convertible Series B Preferred
Stock (“Series B Preferred”); (e) $149,000 in 12% Cumulative Dividend
Convertible Series C Preferred Stock (“Series C Preferred”) and (f) $617,000 in
accrued but unpaid interest and dividends on the Secured Notes, the Existing
Unsecured Notes and the Series A, Series B and Series C Preferred
Stock.





As part
of the Recapitalization, the Company converted its existing $25
million asset based lending facility into a new, more favorable, three year
$20 million asset based lending facility (the “Revolver”) and a $5 million 60
month amortized term loan (the “Term Loan”), the proceeds of which were used to
pay down $4.867 million of the Secured Notes and $125,000 of the Unsecured
Notes.





The
balance of the consideration paid by the Company for the cancellation and
extinguishment of  the existing investors’ debt and equity securities
was provided by the Company’s issuance of (i) 3,228 shares of a new 5.5%
Cumulative Dividend Series D Preferred Stock (“Series D Preferred”) at $400 per
share, or $1.80 per common share equivalent, for $1.291 million, (ii) 4,278,030
shares of Common Stock for $1.71 per share, or $7.315 million, (iii) a 5
year $800,000 5.5% Unsecured Note (the “June 2009 Note”); and (iv) $43,934 in
cash.  The agreed upon value of the Common Stock issued in the
Recapitalization was priced at $1.71 per share, which was greater than the
closing bid price of the Common Stock on the Nasdaq Capital Market on the
trading day immediately preceding the Effective Date.





New Bank
Financing





OnJune 29, 2009, the Company entered into the
Eighteenth Amendment to the Loan and Security Agreement (the “Eighteenth Amendment”), which amendedthe Loan and Security Agreement (the
“Loan
Agreement”) between the
Company, SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia
Bank, National Association (the “Bank”), to, among other things, extend the
renewal dateof the
Revolverfor three years
from July 1, 2009 to July 1, 2012, decrease theRevolverloan limit from $25millionto $20million,provide forthenew$5.0 million60 month amortizedTermLoan, add the Company’s vehicles
and field operating equipment,previously used as collateral for the
Secured Notes,as further collateral for
the Term Loan,and modify
certain covenants.





June 2009
Note





The only
non-Bank debt incurred by the Company in the Recapitalization was an $800,000
unsecured 5.5% interest only, subordinated promissory note (the “June 2009
Note”) issued to an existing institutional investor in exchange for $800,000 of
one of the Secured Notes.  The institutional investor also exchanged
$200,000 of the same Secured Note for shares of Common Stock at $1.71 per
share.





The June
2009 Note is subordinated to all other existing debt of the Company, including
any amounts owed now or in the future to the Bank.  The holder of the
June 2009 Note entered into a debt subordination agreement (the “Subordination
Agreement”) with the Company and the Bank, whereby it expressly subordinated its
rights under the June 2009 Note to the Bank.





The
principal balance of the June 2009 Note is due at maturity on July 1,
2014.  Subject to the limitations in the Subordination
Agreement, interest is payable semi-annually, except that accrued interest
payments for the first thirteen months was deferred until, and paid on, August
12, 2010.  Thereafter, starting in 2011, semi-annual interest payments
will be scheduled on or about each January 15th and
July 15th until
maturity.  The amounts due under the June 2009 Note will become due
and payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default.  If permitted under
the Subordination Agreement, the Company may pre-pay the June 2009 Note, in
whole or in part, without prepayment penalty or premium.


F-20


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Twenty-five
percent (25%) of the original principal amount of the June 2009 Note, or
$200,000, may be converted into shares of the Common Stock at $2.25 per share
(the “Conversion Price”) at the option of the noteholder.  The number
and kind of securities purchasable upon conversion and the Conversion Price are
subject to customary adjustments for stock dividends, stock splits and other
similar events.




Exchange
Agreements





As part
of the Recapitalization, the Company entered into a series of agreements on the
Effective Date (the “Exchange Agreements”) pursuant to which it  (1)
exchanged all of the outstanding shares of its Series A,  Series
B and Series C  Preferred (collectively, the “Preferred Stock”)
for shares of Common Stock, including the accrued but unpaid dividends thereon;
(2) exchanged the outstanding principal of all but one of the Existing
Unsecured Notes  for shares of  Common Stock; and (3) paid
down 50% of the principal balance of all but two of the Secured Notes and the
remaining Existing Unsecured Note with proceeds from the Term Loan, and then
exchanged the remaining principal balance of such notes for shares of either
Common Stock or a new, 5.5% dividend bearing, $0.01 par value Convertible
Preferred Stock (“Series D Preferred”) and exchanged any accrued but unpaid
interest on such notes for shares of Common Stock.  The Company also
used proceeds from the Term Loan to redeem, in full, the two Secured Notes that
were not the subject of Exchange Agreements (the “Redeemed Notes”), including
all accrued but unpaid interest thereon.  The collateral for the
Secured Notes was used for the new Bank Financing.





In
particular, pursuant to the Exchange Agreements, the Company exchanged all of
the 4,114 outstanding shares of Series A Preferred, all of the 1,985 outstanding
shares of Series B Preferred, and all of the 229 outstanding shares of Series C
Preferred, including all accrued but unpaid dividends thereon, for 2,528,451
shares of Common Stock.  The Company also exchanged $475,000 of the
aggregate principal amount outstanding on the Existing Unsecured Notes and the
related accrued but unpaid interest for 295,020 shares of Common
Stock.





In the
Recapitalization, the Company paid a total of $4.87 million of the $8.86
million principal amount outstanding on the Secured Notes and paid $125,000 of
the $250,000 principal amount outstanding on one Existing Unsecured Note in
cash.  The Company exchanged the remaining balance on these notes,
including the related accrued but unpaid interest, except for the Redeemed
Notes, for 1,454,559 shares of Common Stock, 3,228 shares of its Series D
Preferred and $800,000 in the June 2009 Note.  The Common Stock was
priced at $1.71 per share, which was greater than the closing bid price of the
Common Stock on the Nasdaq Capital Market on the trading day immediately
preceding the Effective Date.  The shares of Series D Preferred, which are
convertible into 223 shares of Common Stock, were exchanged for $400 per share,
or $1.80 per common share equivalent.  The $4.87 million principal
repayment of the Secured Notes included the redemption, in full, of the Redeemed
Notes, which had an aggregate principal amount of $875,000.  The Company
also paid the $51,000 of accrued but unpaid interest on the Redeemed Notes in
cash on the Effective Date.





Pursuant
to the Exchange Agreements, the Company issued a total of 4,278,030 shares of
Common Stock with a total aggregate value of $7.32 million and 3,228 shares of
Series D Preferred with a total aggregate value of $1.29 million. Each share of
Series D Preferred is convertible into 223 shares of the Common Stock at a price
per share of $1.80 per share, $0.14 above the closing bid price of the Common
Stock on June 29, 2009.





Philadelphia
Brokerage Company (“PBC”), received fees of $380,000 in connection with the
Recapitalization pursuant to a February 1, 2009, financial advisory agreement
between PBC and the Company.  PBC’s fees were paid with a combination
of cash and securities, consisting of $280,000 in cash and shares of Common
Stock.  For the securities, a total of 58,480 shares of Common Stock
were issued to PBC on the Effective Date, priced at $1.71, the same price
used for the Common Stock issued pursuant to the Exchange
Agreements.


F-21


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The
Company’s officers and directors who had participated in the Company’s private
offerings of the Series A Preferred Stock and Existing Unsecured Notes also
participated in the Recapitalization.  The officers, including one
member of the Board of Directors, participated in the exchange of Series A
Preferred for shares of Common Stock on the same terms as all of the other
holders of Series A Preferred.  In addition, a non-employee director
holding an Existing Unsecured Note entered into an Exchange Agreement for his
Existing Unsecured Note that was similar to those entered into by some holders
of the Secured Notes, whereby he received a combination of cash, Series D
Preferred Stock and Common Stock for his Existing Unsecured Note.





The
officer exchanges of Series A Preferred for Common Stock were as follows:
Richard E. Gathright, Chief Executive Officer, President and Chairman of the
Board, exchanged 36 shares of Series A Preferred for 11,579 shares of Common
Stock, and $592 in accrued but unpaid dividends for an additional 347 shares of
Common Stock.  Michael S. Shore, Chief Financial Officer, Senior Vice
President and Treasurer, exchanged 36 shares of Series A Preferred for 11,579
shares of Common Stock and $592 in accrued but unpaid dividends for 347 shares
of Common Stock.  Paul C. Vinger, Senior Vice President - Corporate
Planning and Fleet Operations, exchanged 36 shares of Series A Preferred for
11,579 shares of Common Stock and $592 in accrued but unpaid dividends for 347
shares of Common Stock.  Gary G. Williams III, Senior Vice President -
Commercial Operations, exchanged 18 shares of Series A Preferred for 5,790
shares of Common Stock and $296 in accrued but unpaid dividends for 174 shares
of Common Stock.  Robert W. Beard, Senior Vice President - Marketing
& Sales and Investor Relations Officer exchanged 10 shares of Series A
Preferred for 3,217 shares of Common Stock and $165 in accrued but unpaid
dividends for another 97 shares of Common Stock. Timothy E. Shaw, Senior Vice
President - Information Services & Administration and Chief Information
Officer, exchanged 10 shares of Series A Preferred for 3,217 shares of Common
Stock and $165 in accrued but unpaid dividends for 97 shares of Common
Stock.  L. Patricia Messenbaugh, Vice President - Finance &
Accounting, Chief Accounting Officer and Principal Accounting Officer, exchanged
9 shares of Series A Preferred for 2,895 shares of Common Stock and $148 in
accrued but unpaid dividends for 87 shares of Common Stock.




C. Rodney
O’Connor, a non-employee director of the Company and the beneficial owner of
342,086 shares of Common Stock before the Recapitalization, was repaid 50% of
the $250,000 principal amount outstanding on his Existing Unsecured Note in cash
and exchanged the remaining 50% of the principal amount outstanding for 312
shares of the Company’s Series D Preferred.  In addition, Mr. O’Connor
exchanged the $10,167 in accrued but unpaid interest for 5,946 shares of Common
Stock.  After the Recapitalization, Mr. O’Connor was the beneficial
owner of 325,949 shares of Common Stock, including 69,334 shares attributable to
the conversion rights underlying his 312 shares of Series D Preferred
Stock.





Deemed
Dividend and Non-cash Inducement charge





As
a result of the Recapitalization, the Company redeemed all the outstanding
Series A, Series B, and Series C preferred shares through the issuance of an
aggregate of 2,455,002 common shares at the negotiated price of $1.71 per share,
which was an amount lower than the original terms of the securities
issuable.  As per ASC 260-“Earnings per Share”, (“ASC
260 (formerly EITF No. D-42)”), the Company reported the fair value of
additional securities issued to the preferred shareholders as a non-cash deemed
dividend of $1.75 million, which was a calculation of the difference between the
1,406,223 common shares that would have been issuable under the original
conversion rights that existed in the convertible preferred shares and the
2,455,002 common shares issued at $1.71 upon the redemption
exchange.  See Note 8 – Shareholders’ Equity.


F-22


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 1,184,591 shares
and 277,778 shares of Common Stock, respectively, at the negotiated price of
$1.71 per share, which was higher than the $1.67 per share closing bid price on
the trading day immediately preceding the June 29, 2009
Recapitalization.  The original terms of the Notes allowed for a
conversion of 50% of the August 2007 Notes and 100% of the September 2008 Notes
into common stock.  The negotiated issuance price of $1.71 per share
in the Recapitalization was based on then current market prices, and it was
lower than the original conversion prices of $6.57 per share and $2.93 per share
of the August 2007 Notes and the September 2008 Notes,
respectively.  Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 991,657 more shares than it would have issued
for the convertible equivalent under the original terms of the
Notes.




ASC
470-20 “Debt - Debt with
Conversion and Other Options” (“(ASC 470-20) (Formerly FAS No. 84)”),
specifies the method of accounting for conversions of convertible debt to equity
securities when the debtor induces conversion of the debt by offering additional
securities or other consideration to convertible debt holders.  In
accordance with ASC 470-20 (formerly FAS No. 84), an expense is recognized if
and to the extent that “additional consideration is paid to debt holders for the
purpose of inducing prompt conversion of the debt to equity securities
(sometimes referred to as a convertible debt ‘sweetener’).”  As a
result, notwithstanding the lack of intent to induce a conversion of the
outstanding debt to common stock, a portion of the exchange of the outstanding
carrying value of $9.6 million in convertible debt for an equal aggregate value
of cash, common stock and preferred stock is required by ASC 470-20 (formerly
FAS No. 84) to be accounted for as an induced conversion of outstanding debt
securities.  We have therefore reported the required non-cash charge
for the difference between the number of common shares issued compared to the
common shares that would have been issued under the original terms of the
convertible debt instrument times the market price.




The
application of ASC 470-20 (formerly FAS No. 84) to the exchange of existing
convertible debt securities for common stock resulted in the recording of a
non-cash “inducement” accounting charge of $1.65 million, which was a
calculation of the difference between the 470,712 common shares that would have
been issuable to the applicable note holder under the original conversion rights
that existed in the convertible Notes and the 1,462,369 common shares exchanged
at $1.71 cents upon the extinguishment.  This non-cash charge is
deemed a financing expense to extinguish the Notes and it is included in the
Consolidated Statements of Operations with a corresponding increase in
Additional paid-in capital and therefore the net impact has no effect to total
Shareholders’ Equity.





5.
            LINE
      OF CREDIT PAYABLE





In fiscal
2009, as part of the Recapitalization the Company converted its $25.0 million
asset based lending facility into a new, more favorable, three year $20.0
million revolving asset based lending facility (the “Revolver”) and a $5.0
million, 60 month amortized term loan (the “Term Loan”).  The Revolver
has a maturity date of July 1, 2012 and permits the Company to borrow up to 85%
of the total amount of eligible accounts receivable and 65% of eligible
inventory, both as defined.  Outstanding standby letters of credit
reduce the maximum amount available for borrowing under the
Revolver.  Outstanding borrowings under the Revolver are secured by
substantially all Company assets.





Interest is payable monthly based on a
LIBOR rate and a pricing matrix.  At June 30, 2010, the interest rate
for the Revolver was 4.00%.  This rate was priced using a minimum
LIBOR floor of 0.75%, plus the applicable margin of 3.25%.  The
applicable margin is determined quarterly based on a predetermined fixed charge
coverage ratio pricing matrix with the applicable margins ranging from 3.00% to
3.75%.


F-23


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





As of
June 30, 2010 and June 30, 2009, the Company had outstanding borrowings of $6.9
million and $7.8 million, respectively, under the Revolver which does not
include stand-by letters of credit which reduces the
availability.  The line of credit is classified as a current liability
in accordance with ASC 470, Debt. Based on eligible receivables and
inventories, and reduction from letters of credit outstanding at June 30, 2010
and June 30, 2009, the Company had $4.6 million and $2.4 million of cash
availability under the line of credit, respectively.





The
Revolver provides for certain affirmative and negative covenants that may limit
the total availability based upon the Company’s ability to meet these
covenants.  At June 30, 2010, the financial covenants included a
minimum daily availability of $250,000, a fixed charge coverage ratio of 1.1 to
1.0, and a capital expenditure limitation for fiscal year 2010 of
$750,000.  At June 30, 2010 and June 30, 2009, the Company had a
sublimit of $1.75 million, on both dates, for which letters of credit could be
issued.  At June 30, 2010 and June 30, 2009, $1.5 million and $1.6
million, respectively, had been issued in letters of credit.





The Company’s loan agreement for the
Revolver and the Term Loan requires the Company to obtain the consent of the
lender prior to incurring additional debt, paying any cash dividends or
distributions, or entering into mergers, consolidations or sales of assets
outside the ordinary course of business.  Failure to comply with one
or more of the covenants in the future could affect the amount the Company can
borrow and thereby adversely affect the Company’s liquidity and financial
condition.  At June 30, 2010, the Company was in compliance with all
the requirements of its covenants under the loan facility
agreement.





On July 1, 2010, the lender approved up
to $2.0 million of additional indebtedness for the purchase of additional
equipment, subject to certain financial thresholds at the time the indebtedness
is incurred, as well as the expenditure of $840,000 for the repurchase of
capital stock by the Company, subject to additional financial thresholds being
met.  The Company has obtained a commitment for a vendor financing
credit line of $2.0 million to support the acquisition of ten new bobtails,
which would support anticipated new demand and organic growth.  See
Note 8 – Shareholders’ Equity – Stock Repurchase





6.
            LONG-TERM
      DEBT (INCLUDES TERM LOAN AND PROMISSORY
NOTES)





Long-term
debt consisted of the following on June 30 (in thousands):





As of June 30,2010
                  
                  
                  2009June
      2009 term loan (the “Term Loan”), fully
      amortized, 60 monthly principal payments of approximately $83,333
      commencing on August 1, 2009; variable interest due monthly, 4.75% at June
      30, 2010; secured by substantially all Company assets.  For
      additional details, see below.
                  
                  $
                  4,083
                  
                  
                  $
                  5,000June
      2009 unsecured convertible subordinated promissory note (the “June 2009
      Note”) (5.5% interest due semi-annually, January 15 and July 15, beginning
      January 15, 2011; interest accrued for first 13 months deferred to
      August 12, 2010); matures July 1, 2014 in its entirety.  For
      additional details, see below.
                  
                  
                  800
                  
                  
                  
                  800Total
      long-term debt
                  
                  
                  4,883
                  
                  
                  
                  5,800Less:
      current portion
                  
                  
                  (1,000
                  )
                  
                  
                  (917
                  )Long-term
      debt, net
                  
                  $
                  3,883
                  
                  
                  $
                  4,883


F-24


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





On June 29, 2009, as a result of the
Recapitalization described in Note 4 – June 2009 Recapitalization, the Company
restructured all of its debt and equity.  In connection therewith, the
Company and its principal lender amended the Company’s existing $25.0 million
loan agreement to provide for a new $25.0 million loan facility, which included
a new $5.0 million fully amortized 60 month term loan (the “Term
Loan”).  The proceeds of the Term Loan were used to pay down $4.867
million of the August 2007 Notes and $125,000 of the September 2008
Notes.  The interest on the Term Loan is payable monthly and the
interest rate is based on a pricing matrix with margins of 3.75% to
4.50% over the LIBOR lending rate determined by the Company meeting certain
EBITDA to fixed charge coverage ratios, as defined.





Also as
part of the June 29, 2009 Recapitalization, the Company entered into various
agreements with the Company’s existing debt and equity investors that
extinguished all of its existing non-bank debt and outstanding preferred
stock.





In
particular, the Company extinguished the $8.9 million outstanding principal
balance of the August 2007 Notes using the following (in
thousands):





Cash
                  
                  $
                  4,867Issuance
      of Preferred Stock D
                  
                  
                  1,166Issuance
      of Common Stock
                  
                  
                  2,026Issuance
      of June 2009 Note
                  
                  
                  800Total
                  
                  $
                  8,859





The
Company used the majority of the proceeds from the Term Loan to extinguish
approximately $4.9 million of the August 2007 Notes.  The Company
extinguished $1.2 million of the August 2007 Notes through the issuance of 2,916
shares of Series D Convertible Preferred Stock (“Preferred Stock D”) at $400 per
share.  Each preferred share is convertible into 223 shares of Common
Stock at $1.80 per share.  The Company extinguished $2.0 million of
the August 2007 Notes through the issuance of 1,184,591 shares of Common Stock
at $1.71 per share.  The Company extinguished $800,000 of the August
2007 Notes through the issuance of a new, 5.5% interest only, unsecured
convertible subordinated promissory note in the principal amount of $800,000
(the “June 2009 Note”).





The principal balance of the June 2009
Note is due at maturity on July 1, 2014.  Subject to the
limitations in the Subordination Agreement, interest will be paid
semi-annually, except that accrued interest payments for the first thirteen
months will be deferred until on or about August 15,
2010.  Thereafter, starting January 15, 2011, semi-annual interest
payments will be scheduled on or about each January 15th and July
15th.  The amounts due under the June 2009 Note will become due and
payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default.  If permitted under
the Subordination Agreement, the Company may pre-pay the June 2009 Note, in
whole or in part, without prepayment penalty or premium.





Twenty-five
percent (25%) of the original principal amount of the June 2009 Note, or
$200,000, may be converted into shares of the Company’s Common Stock at $2.25
per share (the “Conversion Price”) at the option of the
noteholder.  The number and kind of securities purchasable upon
conversion and the Conversion Price remain subject to additional adjustments for
stock dividends, stock splits and other similar events.  See Note 4 –
June 2009 Recapitalization.





The
Company incurred $906,000 in fees related to the Recapitalization, of which
$382,000 were recorded to equity and $524,000 as debt issuance
costs.  The placement agent received $380,000 in fees, which were paid
in common shares and $280,000 in cash.  For the common shares, a total
of 58,480 shares of Common Stock were issued on June 29, 2009, priced at
$1.71, the same price used for the Common Stock issued pursuant to the exchange
agreements.


F-25


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Gain
on Extinguishment of Promissory Notes, net





In fiscal
2009, as a result of the extinguishment of the August 2007 Notes in the
Recapitalization, the remaining unamortized debt costs of $118,000 and
unamortized debt discounts of $23,000 related to the exchanged notes were
written off as losses on extinguishment of debt.





As a
result of recording at fair value the Common Stock and the Series D Preferred
Stock issued to extinguish a portion of the August 2007 Notes and the September
2008 Notes, the Company recorded gains on extinguishment of $145,000, and
$23,000, respectively.  The fair value of the Common Stock was
estimated using the closing market bid price of the day prior to the June 29,
2009 transaction, which was $1.67 per share.  Since the shares were
exchanged at $1.71, the $0.04 premium per share resulted in a
gain.  The fair value of the preferred stock was estimated taking into
consideration the fair value of the convertible common shares, the premium
derived from a $1.80 conversion price and the fair value of the dividend
component, all of which resulted in a fair value of $1.67 per
share.  The gains recorded were the result of an excess of the
carrying value of the notes over the fair value of the Common Stock and
Preferred Stock issued.





The following summarizes the components of the net gain on extinguishment of
promissory notes as recorded in the fiscal 2009 consolidated statements of
operations (in thousands):





Year EndedJune 30, 2009Write
      offs of costs and gain related to exchanged August 2007 Notes under
      theRecapitalization:Unamortized
      debt costs
                  
                  $
                  118Unamortized
      debt discounts
                  
                  
                  23Gain
      on extinguishment of August 2007 Notes
                  
                  
                  (145
                  )Gain
      on extinguishment of September 2008 Notes
                  
                  
                  (23
                  )Gain
      on extinguishment of promissory notes, net
                  
                  $
                  (27
                  )





Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on extinguishment of promissory
notes





In fiscal
year 2009, also in the Recapitalization described in Note 4, as a result of the
exchange of a portion of the August 2007 Notes and the September 2008 Notes for
common stock, the Company recorded a non-cash “inducement” accounting charge of
$1.65 million. Since the extinguishment of these notes through issuance of
Common Stock was done at close to current market prices of the Common Stock, the
Company issued more shares than it would have issued for the convertible
equivalent under the original terms of these notes.  The inducement
charge is the value of the additional shares that were issued.  This
non-cash charge is deemed a financing expense to extinguish the convertible
promissory notes and it is included in the Consolidated Statements of Operations
with a corresponding increase in Additional paid-in capital.  As a
result, there is no net impact on total Shareholders’ Equity.  See
Note 4 – June 2009 Recapitalization.


F-26


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Future
debt payments





Future
debt payments as of June 30, 2010 are (in thousands):




Year
      Ending
                    
                    DebtJune 30,
                    
                    Payments2011
                    
                    $
                    1,0002012
                    
                    
                    1,0002013
                    
                    
                    2,0832014
                    
                    
                    -2015
                    
                    
                    800Total
                    
                    $
                    4,883





While the Term Loan has a maturity date
of July 1, 2014 and 60 consecutive payments, the facility agreement, of which
the Term Loan is a component, matures on July 1, 2012.   If the
Revolver portion of the loan facility is not renewed at July 1, 2012, the
remaining payments of the Term Loan would be due at such time, which is
reflected in the table above.





7.           WARRANTS





September
2005 Warrants





On
September 1, 2005, the Company raised $3.0 million and issued 80,000 four-year
detachable warrants to purchase the Company’s Common Stock at an exercise price
of $10.26 per share.  During the year ended June 30, 2006, 63,147
warrants were exercised for gross proceeds of $647,885.  At June 30,
2010, there were no warrants outstanding as the remaining unexercised warrants
expired on August 31, 2009.





February
2007 Warrants





On
February 15, 2007, the Company raised $3.3 million through a private placement
offering of its Common Stock and issued warrants to purchase 94,188 shares of
the Company’s Common Stock at an exercise price of $8.55 per
share.  In addition, the placement agent received additional warrants
to purchase 29,109 shares of the Company’s Common Stock at an exercise price of
$8.55 per share.  The warrants will terminate on the earliest of the
fourth anniversary of the offering closing date or the week after the Common
Stock trades at 200% of the exercise price for twenty consecutive
days.  As of June 30, 2010, these warrants remain
outstanding.


F-27


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





August
2007 Warrants





In
conjunction with the August 8, 2007 promissory notes and equity offering,
further described in Note 6 – Long-Term Debt and Note 8 – Shareholders’ Equity,
the Company issued four-year detachable warrants to the noteholders to purchase
8,788 shares of the Company’s Common Stock at an exercise price of $7.88 per
share.  In addition, the placement agent received additional warrants
to purchase 8,787 shares of the Company’s Common Stock at an exercise price of
$7.88 per share.  As of June 30, 2010, these warrants remain
outstanding.





8.           SHAREHOLDERS’
EQUITY





Fiscal
Year 2009





On August
15, 2008, the Company issued, in a private offering to accredited investors,
$148,850 in equity securities, consisting of 229 shares of Series C Convertible
Preferred Stock, $0.01 par value, at a price of $650 per share (the “Series C
Preferred Stock”).





In
September 2008 and January 2009, the holders of an aggregate of 382 and 91
shares of the Company’s Series A Preferred Stock, respectively, elected to
convert those shares at the 1 to 223 conversion ratio set by the Certificate of
Designation for the Series A into an aggregate of 84,889 and 20,223 shares of
the Common Stock, respectively.





On June
29, 2009, as part of the Company’s recapitalization described in Note 4 – June
2009 Recapitalization, the August 2007 Notes and the September 2008 Notes were
extinguished with a portion of preferred stock as follows:





Amount
                    
                    
                    Preferred
      Stock(in thousands)
                    
                    
                    Series D Issued (Shares)To
      extinguish a portion of the August 2007 Notes
                    
                    $
                    1,166
                    
                    
                    
                    2,916To
      extinguish a portion of the September 2008 Notes
                    
                    
                    125
                    
                    
                    
                    312Total
                    
                    $
                    1,291
                    
                    
                    
                    3,228





The
Preferred Stock Series D were issued at $400 per share.  Each
preferred share is convertible into 223 shares of Common Stock at $1.80 per
share.




Also on
June 29, 2009, to complete the extinguishment of the Company’s existing debt,
and the exchange of the Preferred Stock Series A, B, and C, as described in Note
4 – June 2009 Recapitalization, the Company issued the following number of
shares of Common Stock:





Amount
                    
                    
                    Common(in thousands)
                    
                    
                    Stock Issued (Shares)To
      extinguish a portion of the August 2007 Notes
                    
                    $
                    2,026
                    
                    
                    
                    1,184,591To
      extinguish a portion of the September 2008 Notes
                    
                    
                    475
                    
                    
                    
                    277,778To
      extinguish 4,114 shares outstanding of Preferred Stock Series
      A
                    
                    
                    2,262
                    
                    
                    
                    1,323,217To
      extinguish 1,985 shares outstanding of Preferred Stock Series
      B
                    
                    
                    1,787
                    
                    
                    
                    1,044,738To
      extinguish 229 shares outstanding of Preferred Stock Series
    C
                    
                    
                    149
                    
                    
                    
                    87,047Total
                    
                    $
                    6,699
                    
                    
                    
                    3,917,371





The
common shares were issued at $1.71 per share, which was $0.04 higher than the
adjusted reverse stock split closing market bid price of the day prior to the
transaction date.


F-28


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Prior to
the Recapitalization, the holders of the Preferred Stock had the right to
convert each share of the preferred stock into 223 common shares at $2.48,
$4.05, and $2.93 for the Series A, Series B and Series C,
respectively.  As a result of the Recapitalization, the Company
redeemed all the outstanding preferred shares Series A, Series B, and Series C
through the issuance of an aggregate of 2,455,002 common shares at the
negotiated price of $1.71 per share, which was an amount lower than the original
terms of the securities.  As per ASC 260 (formerly EITF No. D-42), the
Company reported the fair value of the additional securities issued to the
preferred shareholders as a non-cash deemed dividend of $1.75 million which was
a calculation of the difference between the 1,406,223 common shares that would
have been issuable under the conversion rights that existed in the convertible
preferred shares at a weighted average price of $2.97 and the 2,455,002 common
shares issued at $1.71 cents upon the redemption exchange times the market price
on the conversion date. This non-cash charge is deemed a financing expense to
extinguish the convertible promissory notes and it is included in the
Consolidated Statements of Operations with a corresponding increase in
Additional paid-in capital and therefore the net impact has no effect on total
Shareholders’ Equity.




Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 1,184,591 shares
and 277,778 shares of Common Stock, respectively, at the negotiated price of
$1.71 per share, which was higher than the $1.67 per share closing adjusted
reversed stock split bid price on the trading day immediately preceding the June
29, 2009 Recapitalization.  The original terms of the Notes allowed
for a conversion of 50% of the August 2007 Notes and 100% of the September 2008
Notes into common stock.  The negotiated issuance price of $1.71 per
share in the Recapitalization was based on then current market prices, and it
was lower than the original conversion prices of $6.57 per share and $2.93 per
share of the August 2007 Notes and the September 2008 Notes,
respectively.  Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 991,657 more shares than it would have issued
for the convertible equivalent under the original terms of the
Notes.




ASC
470-20 (formerly FAS No. 84), specifies the method of accounting for conversions
of convertible debt to equity securities when the debtor induces conversion of
the debt by offering additional securities or other consideration to convertible
debt holders.  In accordance with ASC 470-20 (formerly FAS No. 84), an
expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).”  While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in convertible debt
for an equal aggregate value of cash, common stock and preferred stock is
required by ASC 470-20 (formerly FAS No. 84) to be accounted for as an induced
conversion of outstanding debt securities.  While the Company believes
that the application of ASC 470-20 (formerly FAS No. 84) does not reflect the
economic substance of the value exchanged in this portion of the
Recapitalization transaction, the Company has reported the required non-cash
charge of approximately $1.65 million for the difference between the number of
common shares issued compared to the number of common shares that would have
been issued under the original terms of the convertible debt instrument, times
the market price on the conversion date.


F-29


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The
Company understands that the accounting interpretation of ASC 470-20 (formerly
FAS No. 84) is that an inducement occurs any time additional shares are issued
in the extinguishment of convertible debt regardless of the absence of an
economic loss or intent of the parties to the transaction.  As a
result, the application of ASC 470-20 (formerly FAS No. 84) to the exchange of
existing convertible debt securities for common stock resulted in the recording
of a non-cash “inducement” accounting charge of $1.65 million, which was a
calculation of the difference between the 470,712 common shares that would have
been issuable to the applicable note holder under the original conversion rights
that existed in the convertible Notes and the 1,462,369 common shares exchanged
at $1.71 cents upon the extinguishment.  This non-cash charge is
deemed a financing expense to extinguish the Notes and it is included in the
Consolidated Statements of Operations with a corresponding increase in
Additional paid-in capital and therefore the net impact has no effect to total
Shareholders’ Equity.




The
Company incurred $906,000 in fees related to the Recapitalization, of which
$382,000 were recorded to equity and $524,000 as debt issuance
costs.  The placement agent received $380,000 in fees, with an
estimated fair value of $377,000, which were paid in cash and securities,
consisting of $280,000 in cash and shares of Common Stock.  For the
securities, a total of 58,480 shares of Common Stock were issued on June 29,
2009, priced at $1.71, the same price used for the Common Stock issued
pursuant to the exchange agreements of June 29, 2009.  These
securities had a fair value of $97,000 since the closing bid market price was
$1.67, lower than the issuance price of $1.71.




During
fiscal 2009, the Company declared $577,000 in cumulative dividends on the Series
A, Series B, and Series C Preferred Stock, all of which were paid or satisfied
as of June 30, 2009.  Prior to the final satisfaction of all dividend
obligations on the Series A, B and C Preferred Stock on June 29, 2009, the
Company entered into an agreement with the holders of the Series A, Series B,
and Series C Preferred Stock on May 5, 2009, to satisfy the dividends due for
the quarters ended December 31, 2008 and March 31, 2009, through the issuance of
unregistered shares of the Common Stock valued at $1.04 per
share.  The Company issued a total of 246,910 shares of Common Stock
to the holders of Series A, B and C Preferred Stock in lieu of paying the
$256,000 in cash dividends accumulated during the quarters ended December 31,
2008, and March 31, 2009.




On
June 29, 2009, the Company and the holders of the Series A, Series B, and Series
C Preferred agreed to satisfy the dividends due for the quarter ended June 30,
2009 through the issuance of shares of Common Stock of the
Company.  For purposes of determining the number of shares to be
issued for the unpaid dividends, shares were valued at $1.71 per share, which
was higher than the $1.67 closing bid price on the Nasdaq Stock Market on the
preceding trading day.  The Company issued 73,449 shares of Common
Stock to the holders of Series A, B and C Preferred in lieu of paying the
$126,000 in cash dividends accumulated during the quarter ended June 30,
2009.




In
January 2009, the holders of the August 2007 Notes agreed to defer the $519,000
interest payment originally due on the August 2007 Notes from January 1, 2009,
to April 15, 2009.  As consideration for this deferral, the Company
paid a deferral fee equal to 1% of the outstanding principal balance, or
$88,000, of which 50% was paid in cash, with the remainder satisfied through
issuance of unregistered shares of Common Stock.  For purposes of
determining the number of shares to be issued for the stock portion of the
deferral fee or upon conversion of the Payment, shares were valued at $1.31 per
share, the official closing price on the Nasdaq Stock Market on January 22,
2009, the trading day immediately preceding the effective date of the
Agreements.  An aggregate of 35,184 unregistered shares of Common
Stock were issued to Holders, either as part of the deferral fee or for
conversion of the Payment of any interest.





In March
2009, the holders of the September 2008 Notes agreed to defer the $44,000
interest payment originally due March 1, 2009, until April 15,
2009.  As consideration for the deferral, the Company paid a deferral
fee equal to 1% of the outstanding principal balance, or $7,000, of which 50%
was paid in cash, with the remainder satisfied through issuance of 2,778
unregistered shares of Common Stock.  The Common Stock was valued at
$1.31 per share, which was the same price used for the Deferral Fee on the
August 2007 Notes.


F-30


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





In June
2009, the Company issued 287,210 unregistered shares of the Company’s Common
Stock to the Holders of the August 2007 and September 2008 Notes as part of the
Recapitalization in lieu of the payment of $490,000 in outstanding
interest.  See Note 4 – June 2009 Recapitalization.





For the
fiscal year 2009, the Company recorded amortization of stock compensation
expense with a correlating increase to shareholders’ equity of
$292,000.





Fiscal
Year 2010




On July
6, 2009, the Company entered into two additional exchange agreements (the “New
Exchange Agreements”) with certain holders of the Series D Preferred Stock by
which the Holders exchanged 824 shares of Series D Preferred Stock for an
aggregate of 192,680 shares of the Company’s Common Stock based on an aggregate
value of $329,000.  Because the $1.71 price used in the New Exchange
Agreements was not less than the closing bid price for the Common Stock on the
Nasdaq Capital Market on the last trading day preceding the July 6, 2009 New
Exchange Agreements, the issuance of the additional 36,997 shares resulted in a
non-cash inducement on extinguishment of convertible notes of $166,000 which was
recorded in the financial statements for the year ended June 30,
2009.





In
September 2009, some of the holders of the Series D Preferred Stock converted an
aggregate of 1,806 shares into 401,332 shares of Common Stock for an aggregate
value of $722,000.  Since this is an exchange of an equity instrument
into another equity instrument, the net impact to shareholders’ equity is zero,
with a decrease of $6,000 in Additional Paid-in Capital and an equal increase to
Common Stock reflecting the par value of the issued common shares.





During
fiscal 2010, the Company declared cumulative dividends of $13,000 on the Series
D Preferred Stock, which were accrued as of June 30, 2010 and paid during the
first quarter of fiscal year 2011.




For the
fiscal year 2010, the Company recorded amortization of stock compensation
expense with a correlating increase to shareholders’ equity of
$190,000.  Included in this charge, are the charges related to the
repricing of options during the first quarter of fiscal year
2010.   In September 2009, the exercise prices of all outstanding
employee stock options previously granted under the 2000 Stock Option Plan were
amended by the Compensation Committee of the Company’s Board of Directors to
have an exercise price of $2.48 per share after the reverse stock split, or
$0.55 per share before the reverse stock split (the
“Amendments”).  The new exercise price of $2.48 set by the Amendments
was $0.77 above the $1.71 official closing price on the Nasdaq Capital Market on
the trading day immediately preceding the date of the Amendment.  The
Amendments did not change the vesting schedules or any of the other terms of the
respective stock options.  As a result of the repricing of the options
effected by the Amendments, the Company incurred a non-cash charge of $93,000 to
stock-based compensation amortization expense during the first quarter of fiscal
year 2010 and an additional $5,000 which is being amortized over the remaining
vesting period of the related options.  This modification affected 31
employees who held 327,614 stock options on June 30, 2009.


F-31


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Certificates
of Designation of Preferred Stock





The
Company filed with the Secretary of State of Delaware the Certificates of
Designation of the Series A, Series B, Series C, and Series D Convertible
Preferred Stock (the “Certificates”).  The Certificates authorize the
issuance of up to 10,000, 2,000, 2,000 and 5,000 shares of Series A, Series B,
Series C, and Series D Preferred Stock (the “Preferred Stock”), respectively,
which have such rights, qualifications, limitations and restrictions as are set
forth in the Certificates. Because of the June 29, 2009, Recapitalization, there
are no longer any outstanding shares of  Series A, B or C Preferred,
but the Company’s Board of Directors retains the right to issue any of the
authorized but unissued shares of such Series, including the reissuance of
shares that were previously issued, cancelled or redeemed.





The
Preferred Stock ranks senior to the Common Stock as to both the payment of
dividends and the distribution of assets.  The Preferred Stock is on
parity and will be on parity with the holders of any other series of preferred
stock that may be issued in the future.  Upon liquidation, dissolution
or winding up of the Company, holders of the Preferred Stock are entitled to be
paid out of the assets of the Company an amount per share of the Preferred Stock
equal to the greater of: (i) the original issue price of the Preferred Stock,
plus all accumulated but unpaid dividends; or (ii) the fair market value of the
Preferred Stock on an as-converted to Common Stock basis, plus all accumulated
but unpaid dividends.  If upon liquidation, the assets of the Company
are insufficient to make payment in full, then such assets will be distributed
ratably in proportion to the full amounts to which each Preferred Stockholder
would have been entitled.  Each holder of the Preferred Stock is
entitled to one vote per share of Preferred Stock at each meeting of
shareholders of the Company with respect to any and all matters presented to the
shareholders of the Company.





Each
share of Series D Preferred Stock is currently convertible, at the option of the
holder, into 223 shares of Common Stock based on a conversion price equal to
$1.80 per share of Common Stock.  If and when issued, each share of
Series A, B and C Preferred would be convertible into 223 shares of Common Stock
at a conversion price equal to $2.48, $4.05 and $2.93,
respectively.  All of the conversion prices of the Preferred Stock are
subject to adjustment for stock dividends, stock splits and other similar
recapitalization events.





In
addition, if and when issued, shares of Series A, Series B, and Series C,
respectively, would automatically be converted into shares of Common Stock,
based on the then-effective conversion price, if:





(A)
            the
      closing price of the Common Stock on the primary trading market for the
      Common Stock were equal to or greater than two times the conversion price
      then in effect for such Series (the “Automatic Conversion Price”),
      for  twenty (20) consecutive business days,
  or


(B)
            upon
      the election of sixty-six and two-thirds percent (66 2/3%) of the
      outstanding shares of the applicable Series,
or


(C)
            upon
      a firmly underwritten, SEC registered, public offering of Common Stock by
      the Company  at a price per share price is at least two times
      the Automatic Conversion Price of the applicable Series with gross
      proceeds of at least ten million dollars
  ($10,000,000).





For the
Series A Preferred Stock, the automatic conversion would also occur upon the
closing of an Acquisition or an Asset Transfer (as these terms are defined in
the Series A Certificates) that results in the holders of the Series A Preferred
Stock receiving cash consideration per share not less than the Series A
Automatic Conversion Price.  The Company has no automatic conversion
rights on the Series D Preferred Stock.  There are no corresponding
automatic conversion provisions for the Series D Preferred.





The
Company may redeem any of the Preferred Stock at any time, upon ten (10) days
notice, by payment of the original issue price plus any accumulated but unpaid
dividends.  In the event of a partial redemption, the Company is not
required to redeem the shares held by various shareholders on a pro rata or
similar basis but may select, in its sole discretion, which shares to
redeem.


F-32


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Dividends
are payable on the Series A, B, and C Preferred Stock in cash when, as and if
declared by the Board of Directors, but only out of funds that are legally
available.  The dividend rate for the cumulative dividends on the
Series A, B and C Preferred was eighteen percent (18%) per annum of the Original
Issue Price until the Company achieved positive Earnings Before Interest, Taxes,
Depreciation and Amortization for two consecutive fiscal quarters, when the rate
was permanently changed to twelve percent (12%) in December 2008.





Dividends
on the Series D Preferred Stock are payable when, as and if declared by the
Board of Directors, but only out of funds that are legally available, at the
rate of 5.5% per annum of the sum of the Original Issue Price per share, in cash
or, under specified circumstances, in the form of shares of a new class of
Preferred Stock that is substantially identical to the Series D Preferred except
that it shall be nonvoting (“New Preferred Stock”), if the Company so
elects.  In particular, during the first year following the original
issuance of the Series D Preferred on June 29, 2009, the Company may elect to
pay dividends of the Series D Preferred in New Preferred Stock and in subsequent
years, the Company may so elect only if its principal lender at the time has
directed or advised the Company not to pay a dividend in cash.  The
first dividend for the Series D Preferred Stock was paid, in cash in August
2010, and is payable on or about July 15th in
subsequent years.  Dividends on Preferred Stock are cumulative from
the date of the original issuance of the Preferred Stock.  Accumulated
unpaid dividends on Preferred Stock do not bear interest.





As
discussed above, the Company has declared dividends on the Preferred Stock
during both, fiscal year 2009 and fiscal year 2010.  All dividends
declared during those years have been paid or satisfied as of the date of this
filing.





Stock
Repurchase





On July 28, 2010, the Board of
Directors of the Company approved a share repurchase program (the “Program”)
under which the Company may elect to purchase up to five percent of its
outstanding capital stock, or approximately 435,000 shares of common stock or
common stock equivalents.  The Company will fund the repurchases from
its available cash under its revolving line of credit with its principal
lender.





On July
1, 2010, the lender had approved such repurchases, conditioned upon the
Company’s maintenance of (i) a ratio of EBITDA to Fixed Charges of 1.3 to 1.0,
based on the most recent twelve month period for which financial statements
have been provided to the Lender, after giving pro forma effect to any
repurchases; and (ii) Excess Availability of at least $2.25 million (A)
immediately after making any repurchase and (B) for the ninety (90) days
preceding any repurchase.  Subject to these conditions, the Lender
approved a total of $840,000 in capital stock repurchases by the Company under
the Program, including up to $200,000 in any one fiscal quarter.





9.           STOCK
OPTIONS AND OTHER BENEFITS PLANS





In
December 2009, the Company’s shareholders approved the Board of Directors’
adoption of the 2009 Equity Incentive Plan (the “2009 Plan”) with a total of
900,000 shares of Common Stock reserved for issuance thereunder.  The
2009 Plan is a broad type of equity incentive plan that permits equity incentive
grants to be made in the form of stock options, stock appreciation rights,
performance stock units or restricted stock.  The purpose of the 2009
Plan is to further the growth in earning and market appreciation of the Company
by providing long-term incentives to those officers, employees and other natural
persons providing services to the Company and its affiliates who make
substantial contributions to the Company, and to members of the Board of
Directors of the Company who are not also employees of the
Company.  After the 2009 Plan was approved by the shareholders and
became effective on December 10, 2009, the Company’s Board of Directors resolved
that it would make no further grants of stock options under any of the Company’s
prior stock option plans, namely the Company’s Board of Directors (the
“Directors’ Plan”) and the 2000 Employee Stock Option Plan (the “2000
Plan”).


F-33


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Employee
Stock Options





At June
30, 2010 the Company could grant stock options to employees, under the 2009
Plan.  While the Company no longer grants stock options under the 2000
Plan, the outstanding stock options are not affected and remain in place. Under
the 2000 Plan, 555,556 shares of Common Stock were initially reserved for
issuance as stock options to employees, including officers and directors,
consultants and non-employee directors upon the exercise of options. Options
granted under the 2000 Plan generally vest over three years of continuous
service and expire no later than ten years from the date of grant.




While the
Company historically granted options under the 2000 Plan only to employees of
the Company and its subsidiaries, when the shares reserved for the Directors
Plan (discussed below) were exhausted in July 2008, the Compensation Committee
resolved to make the automatic grants of fully vested options to non-employee
members of the Board of Directors from the 2000 Plan until such time as there
were additional shares available to resume such automatic grants under the
Directors Plan.  On November 20, 2008, the stockholders approved an
increase in the amount of shares of Common Stock reserved for issuance under the
Directors Plan to 111,112 so the automatic grants of stock options to
non-employee directors were again made from the Director Plan.




In
September 2009, the exercise prices of all outstanding employee stock options
previously granted under the 2000 Plan were amended by the Compensation
Committee of the Company’s Board of Directors to have an exercise price of $2.48
per share after the reverse stock split, or $0.55 per share before the reverse
stock split (the “Amendments”).  The new exercise price of $2.48 set
by the Amendments was $0.77 above the $1.71 official closing price on the Nasdaq
Capital Market on the trading day immediately preceding the date of the
Amendments.  The Amendments did not change the vesting schedules or
any of the other terms of the respective stock options.  As a result
of the repricing of the options effected by the Amendments, the Company incurred
a non-cash charge of $93,000 to stock-based compensation amortization expense
during the first quarter of fiscal year 2010 and an additional $5,000 which is
being amortized over the remaining vesting period of the related
options.  This modification affected 31 employees who held 327,614
stock options on June 30, 2009.




The
following table summarizes the stock option transactions under all employee
plans discussed above:




WeightedWeighted
                      
                      
                      Average
                      
                      
                      AggregateAverage
                      
                      
                      Remaining
                      
                      
                      IntrinsicExercise
                      
                      
                      Contractual
                      
                      
                      ValueAll Employee Plans
                      
                      
                      Price
                      
                      
                      Term
                      
                      
                      (In Thousands)Outstanding
      at June 30, 2009
                      
                      
                      337,569
                      
                      
                      $
                      7.30
                      
                      
                      
                      4.24
                      
                      
                      $
                      -Granted
                      
                      
                      2,004
                      
                      
                      $
                      1.40Cancelled
                      
                      
                      (6,817
                      )
                      
                      $
                      23.07Exercised
                      
                      
                      -
                      
                      
                      $
                      -Outstanding
      at June 30, 2010
                      
                      
                      332,756
                      
                      
                      $
                      2.46
                      
                      
                      
                      3.01
                      
                      
                      $
                      -Exercisable
                      
                      
                      318,577
                      
                      
                      $
                      2.46
                      
                      
                      
                      2.82
                      
                      
                      $
                      -Available
      for future grant (2009 Plan only)
                      
                      
                      897,996


F-34


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The
weighted average grant date fair value of stock options granted during the years
ended June 30, 2010 and 2009 was $1.26 and $1.44, respectively.  For
the years ended June 30, 2010 and 2009, there were no stock options
exercised.





As of
June 30, 2010, there was $13,000 of total unrecognized compensation cost related
to unvested share options granted under the plans.  That cost is
expected to be recognized over a weighted-average period of 0.4
year.





The
following table summarizes information about stock options outstanding under
both plans as of June 30, 2010:





Options Outstanding
                                                                  
                                                                  Options ExercisableWeightedAverage
                                                                  
                                                                  Weighted
                                                                  
                                                                  
                                                                  
                                                                  WeightedRemaining
                                                                  
                                                                  Average
                                                                  
                                                                  Number
                                                                  
                                                                  AverageExercise
                                                                  
                                                                  Number
                                                                  
                                                                  Contractual
                                                                  
                                                                  Exercise
                                                                  
                                                                  of
      Shares
                                                                  
                                                                  ExercisePrice
                                                                  
                                                                  Outstanding
                                                                  
                                                                  Life (years)
                                                                  
                                                                  Price
                                                                  
                                                                  Exercisable
                                                                  
                                                                  Price$
      1.35 - $ 2.00
                                                                  
                                                                  6,231
                                                                  
                                                                  8.70
                                                                  
                                                                  $
                                                                  1.46
                                                                  
                                                                  4,897
                                                                  
                                                                  $
                                                                  1.42$ 2.01
      - $ 2.70
                                                                  
                                                                  326,525
                                                                  
                                                                  2.90
                                                                  
                                                                  $
                                                                  2.48
                                                                  
                                                                  313,680
                                                                  
                                                                  $
                                                                  2.48





The fair
value of the stock options that vested was $506,000 and $404,000 in fiscal year
2010 and 2009, respectively.





Director
Stock Options





In May
2001, the Company adopted a separate stock option plan for non-employee members
of the Company’s Board of Directors (the “Directors’ Plan”).  The
purpose of the Directors’ Plan was to provide an additional incentive to attract
and retain qualified competent directors whose efforts and judgment are
important to the Company’s success through the encouragement of the ownership of
stock by such persons.




In
December 2009, the Company’s Board of Directors resolved that it would make no
further grants of stock options under the Directors’ Plan and that grants to
non-employee directors after December 2009 would only be made from the 2009
Plan.  Outstanding awards under the Directors’ Plan were not affected
and remain in place. Under the Directors’ Plan, 111,112 shares of Common Stock
were initially reserved for issuance upon the exercise of options
granted.  Each non-employee director received a one time grant of a
fully vested option to purchase 4,445 shares of stock.  On the last
day of each fiscal quarter while the Directors’ Plan was in effect, each
non-employee director received an additional grant of an option to purchase 334
shares of stock.  Options to purchase 85,777 shares of Common Stock
remain outstanding at June 30, 2010 under the Directors’ Plan.




Options
previously granted under the Directors’ Plan expire no later than ten years from
the date of grant and are, with limited exceptions, exercisable as of the grant
date.  All outstanding options under the Directors’ Plan as of June
30, 2010 are fully vested.


F-35


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The
following table summarizes the stock option activity under the Directors’ Plan
for the periods indicated:




WeightedWeighted
                      
                      
                      Average
                      
                      
                      AggregateAverage
                      
                      
                      Remaining
                      
                      
                      IntrinsicExercise
                      
                      
                      Contractual
                      
                      
                      Value2001 Plan
                      
                      
                      Price
                      
                      
                      Term
                      
                      
                      (In Thousands)Outstanding
      at June 30, 2009
                      
                      
                      83,773
                      
                      
                      $
                      7.03
                      
                      
                      
                      4.70
                      
                      
                      $
                      -Granted
                      
                      
                      2,004
                      
                      
                      $
                      1.67Cancelled
                      
                      
                      -
                      
                      
                      $
                      -Exercised
                      
                      
                      -
                      
                      
                      $
                      -Outstanding
      at June 30, 2010
                      
                      
                      85,777
                      
                      
                      $
                      6.90
                      
                      
                      
                      3.83
                      
                      
                      $
                      -Exercisable
                      
                      
                      85,777
                      
                      
                      $
                      6.90
                      
                      
                      
                      3.83
                      
                      
                      $
                      -





The
weighted average grant date fair value of Directors’ stock options granted
during the years ended June 30, 2010 and 2009 was $1.53  and $1.00,
respectively.  For the years ended June 30, 2010 and 2009, there were
no stock options exercised.





The
following table summarizes information about the Directors’ stock options
outstanding under the Plan as of June 30, 2010:





Options Outstanding and
      ExercisableWeightedAverage
                  
                  
                  WeightedRemaining
                  
                  
                  AverageExercise
                  
                  Number
                  
                  
                  Contractual
                  
                  
                  ExercisePrice
                  
                  of Shares
                  
                  
                  Life (years)
                  
                  
                  Price$0.68
      to $4.27
                  
                  
                  14,055
                  
                  
                  
                  8.14
                  
                  
                  $
                  2.21$4.28
      to $8.54
                  
                  
                  56,719
                  
                  
                  
                  2.33
                  
                  
                  $
                  6.76$8.55
      to $12.81
                  
                  
                  13,335
                  
                  
                  
                  5.51
                  
                  
                  $
                  11.46$12.82
      to $17.09
                  
                  
                  1,668
                  
                  
                  
                  5.38
                  
                  
                  $
                  14.83Total
                  
                  
                  85,777





The fair
value of the stock options that vested was $3,000 and $6,000 in fiscal year 2010
and 2009, respectively.





For the
year ended June 30, 2010 and 2009, the Company recorded amortization of stock
compensation expense, with a correlating increase to shareholders’ equity, in
the amount of $190,000, and $292,000, respectively.





The Company offers a 401(k) benefit
plan which provides for voluntary contributions by employees subject to a
maximum annual contribution.  During fiscal year 2010 and 2009, the
Company did not make any matching employer contributions.


F-36


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





10.         SIGNIFICANT
CUSTOMERS AND VENDORS





In fiscal
years 2010 and 2009, revenue from two and one customers, accounted for 22.9% and
10.5%, respectively, of the Company’s consolidated revenues.





During
fiscal years 2010 and 2009, the Company had one and two vendors, respectively,
that each year represented more than 10% of cost of sales.  The
vendors accounted for an aggregate 47%, and 43%, of total cost of sales during
fiscal years 2010 and 2009, respectively.





11.         INCOME
TAXES





The
components of the provision for federal and state income taxes are summarized as
follows (in thousands):




Year Ended June 30,2010
                    
                    
                    2009Current:State
                    
                    $
                    (32
                    )
                    
                    $
                    (32
                    )Federal
                    
                    
                    -
                    
                    
                    
                    -Income
      tax provision
                    
                    
                    (32
                    )
                    
                    
                    (32
                    )





The
actual tax expense of the Company for the years ended June 30, 2010 and 2009
differs from the statutory Federal tax rate of 34%, due to the following (in
thousands):




Year Ended June 30,2010
                    
                    
                    2009Expected
      (expense) benefit for income taxes at the statutory Federal income tax
      rate of 34%
                    
                    $
                    (169
                    )
                    
                    $
                    784Deferred
      tax valuation allowance
                    
                    
                    351
                    
                    
                    
                    494State
      income taxes, net of federal benefit
                    
                    
                    (15
                    )
                    
                    
                    21Effect
      of uncertain tax positions
                    
                    
                    34
                    
                    
                    
                    34Net
      operating loss carryforward adjustment
                    
                    
                    (120
                    )
                    
                    
                    (345
                    )Change
      in tax rate
                    
                    
                    (61
                    )
                    
                    
                    38Nondeductible
      expenses
                    
                    
                    (52
                    )
                    
                    
                    (1,058
                    )Provision
      for income taxes
                    
                    $
                    (32
                    )
                    
                    $
                    (32
                    )




Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
their income tax bases, and operating loss carryforwards.


F-37


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





The tax
effects of temporary differences and net operating loss carryforwards that give
rise to significant portions of the deferred tax assets and liabilities at June
30, 2010 and 2009 are presented below (in thousands):




June 30,2010
                  
                  
                  2009Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  9,979
                  
                  
                  $
                  10,693Reserves
      and allowances
                  
                  
                  360
                  
                  
                  
                  365Intangible
      assets
                  
                  
                  344
                  
                  
                  
                  211Stock-based
      compensation expense
                  
                  
                  752
                  
                  
                  
                  679Accrued
      expenses and deferred income
                  
                  
                  229
                  
                  
                  
                  175AMT
      Credit
                  
                  
                  11
                  
                  
                  
                  -Other
                  
                  
                  74
                  
                  
                  
                  69Total
      gross deferred tax assets
                  
                  
                  11,749
                  
                  
                  
                  12,192Less:  valuation
      allowance
                  
                  
                  (9,982
                  )
                  
                  
                  (10,333
                  )Total
      deferred tax assets
                  
                  
                  1,767
                  
                  
                  
                  1,859Deferred
      tax liabilities:Property
      and equipment
                  
                  
                  (1,767
                  )
                  
                  
                  (1,859
                  )Total
      deferred tax liabilities
                  
                  
                  (1,767
                  )
                  
                  
                  (1,859
                  )Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





Realization of deferred tax assets is
dependent upon generating sufficient taxable income in future periods. GAAP
requires a valuation allowance to reduce the deferred tax assets reported, if,
based on management’s analysis, it is more likely than not, that some portion or
all of the deferred tax assets, will not be realized. After consideration of all
the information available, management has determined that a $9.9 million and
$10.3 million valuation allowance at June 30, 2010 and 2009, respectively, is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized.





As
required by GAAP, the Company recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit.  For tax
positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority.


F-38


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
is as follows (in thousands):





June 30,2010
                  
                  
                  2009Balance
      - beginning of period
                  
                  $
                  759
                  
                  
                  $
                  777Additions
      based on tax positions related to the current year
                  
                  
                  -
                  
                  
                  
                  16Reductions
      for tax positions of prior years
                  
                  
                  (30
                  )
                  
                  
                  -Reductions
      as a result of lapse of applicable statute
    of limitations
                  
                  
                  (34
                  )
                  
                  
                  (34
                  )Balance
      - end of period
                  
                  $
                  695
                  
                  
                  $
                  759





At
June 30, 2010 and 2009, the amount of unrecognized tax benefits was
approximately $695,000 and $759,000 respectively, of which approximately
$268,000 and $326,000 would, if recognized, be permanent in nature for each
respective tax year. The Company has not recognized this liability on the
balance sheet due to the Company’s net operating loss
carryforward.





The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income taxes.  The Company did not accrue any interest and
penalties for fiscal years 2010 and 2009 due to the existence of net operating
loss carryforwards.




The Company and/or its subsidiaries
file income tax returns in the U.S. federal jurisdiction and various states and
other local jurisdictions.  The Company’s federal income tax returns
for years prior to June 30, 2006 are no longer subject to
examination.  Returns for some state and local jurisdictions prior to
that date remain subject to examination but are not individually considered
material.





As of
June 30, 2010, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $26.3 million, which will begin to expire
in the year 2012.  The utilization of the net operating loss carry
forwards may be subject to the Internal Revenue Code Section 382 limitation
related to ownership changes.  Additionally, the Company has state net
operating loss carryforwards which expire in varying years.





12.         COMMITMENTS
AND CONTINGENCIES





Operating
Leases





The
Company leases real property and equipment under operating leases that expire at
various times through fiscal year 2016.  Rent expense amounted to $1.6
million for each of the years ended June 30, 2010 and 2009,
respectively.  Certain leases contain escalation clauses and renewal
options.


F-39


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Future
minimum lease payments under non-cancelable operating leases as of June 30, 2010
are (in thousands):




Year
      Ending
                  
                  Operating
      LeaseJune 30,
                  
                  Payments2011
                  
                  $
                  1,3392012
                  
                  
                  9092013
                  
                  
                  8272014
                  
                  
                  4132015
                  
                  
                  366Thereafter
                  
                  
                  90Total
                  
                  $
                  3,944





As a
result of the H & W acquisition in October 2005, the Company is obligated to
the former owners of H & W, one of whom was a former officer of, or
consultant to the Company until November 10, 2008, under four operating leases
covering property utilized for certain operating facilities.  Rent
expense paid to the former owners was $261,000 for each of the fiscal years
ended June 30, 2010 and 2009.  The Company has agreed to extend three
of these leases for another five year term beginning October 1,
2010.  Pursuant to the terms of the extensions, the annual rent
payable under the leases will increase to $351,000.  Future minimum
lease payments under these extended leases are $328,000 for the fiscal year
ended June 30, 2011 and $351,000 thereafter.  Actual rent payable
under the leases may be affected by the results of the ongoing settlement
discussion between the parties referenced in Note 12 – Commitments and
Contingencies.




Governmental
Regulation




Numerous
federal, state and local laws, regulations and ordinances, including those
relating to protection of the environment affect the Company’s
operations.  The operation of the Company’s mobile fueling fleet and
its transportation of diesel fuel and gasoline are subject to extensive
regulation by the U.S. Department of Transportation (“DOT”) under the Federal
Motor Carrier Safety Act (“FMCSA”) and the Hazardous Materials Transportation
Act (“HMTA”).




These
laws may impose penalties or sanctions for damages to natural resources or
threats to public health and safety.  Such laws and regulations may
also expose the Company to liability for the conduct of, or conditions caused by
others, or for acts of the Company that were in compliance with all applicable
laws at the time such acts were performed.  Certain environmental laws
provide for joint and several liabilities for remediation of spills and releases
of hazardous substances.  In addition, the Company may be subject to
claims alleging personal injury or property damage as a result of alleged
exposure to hazardous substances, as well as damage to natural
resources.  These future costs are not fully determinable due to such
factors as the unknown magnitude of possible contamination, the unknown timing
and extent of the corrective actions that may be required, the determination of
the Company’s liability in proportion to other responsible parties, and the
extent to which such costs are recoverable from third parties.




Employment
Agreements




The
Company has entered into written employment agreements with certain officers and
employees.  The agreements vary in length of term and may provide for
severance payments upon termination without cause or for automatic renewal for
successive periods unless notice of termination is given prior to a renewal
period.


F-40


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





Litigation




The
Company and its subsidiaries are from time to time parties to legal proceedings,
lawsuits and other claims incident to their business activities.  Such
matters may include, among other things, assertions of contract breach, claims
for indemnity arising in the course of the business and claims by persons whose
employment with us has been terminated.  Such matters are subject to
many uncertainties, and outcomes are not predictable with
assurance.  Consequently, management is unable to ascertain the
ultimate aggregate amount of monetary liability, amounts which may be covered by
insurance or recoverable from third parties, or the financial impact with
respect to these matters as of June 30, 2010.  Therefore no
contingency gains or losses have been recorded as of June 30,
2010.  However, based on management’s knowledge at the time of this
filing, management believes that the final resolution of such matters pending at
the time of this report, individually and in the aggregate, will not have a
material adverse effect upon the Company’s consolidated financial position,
results of operations or cash flows.




On
November 23, 2009, SMF Energy Corporation (the “Company”) entered into a
confidential settlement agreement (the “Agreement”) resolving all claims in the
lawsuit entitled, SMF Energy
Corporation vs. Financial Accounting Solutions Group, Inc., Mitchel Kramer, Alex
Zaldivar and Kramer Professional Staffing, Inc.  Pursuant to
the Agreement, SMF received a payment of $1,050,000 during the quarter ended
December 31, 2009.  The payment was treated as a partial recovery of
the professional fees incurred in connection with the lawsuit, with no gain or
loss recognized for the settlement.  The Company expensed $466,000 of
these professional fees during the fiscal year ended June 30,
2010.  The recovery of these professional fees and the year to date
litigation costs have been recorded as part of the selling, general and
administrative expenses in the statement of operations.  There was no
admission of liability by any of the parties to the lawsuit on account of any of
the various claims, counterclaims or third party claims made in the
lawsuit.  All claims made by or against the Company in the lawsuit
were released as part of the Agreement.





On May
26, 2009, the Company filed a Demand for Arbitration with the American
Arbitration Association in Broward County, Florida, under which the Company
brought claims against various members of the Harkrider family arising out of
the Company’s October 1, 2005 purchase of H & W Petroleum Company, Inc. (“H
& W”) from the Harkrider family and H & W’s purchase of certain assets
of Harkrider Distributing Company, Inc. (“HDC”) immediately prior to the
Company’s purchase of H & W.  In that action, Case No. 32 198 Y
00415 09 (the “Arbitration”), the Company and H & W, which is now the
Company’s wholly owned subsidiary, sought damages for breaches of, and
indemnification under, the October 1, 2005, Stock Purchase Agreement between
various Harkrider family members and the Company and under the September 29,
2005, Asset Purchase Agreement between HDC and various members of the Harkrider
family, on the one hand, and H & W on the other, along with various other
claims arising from the transaction.  Also on May 26, 2009, H & W
filed a second action against various members of the Harkrider family in the
District Court in Harris County, Texas, Civil Action No. 2009-32909 (the “Harris
County Action”), seeking damages and declaratory relief for various breaches of
H & W’s lease of its Houston, Texas facility by H & W’s landlord, the
Harkrider Family Partnership, and other related claims.  On June 24,
2009, the parties to the Arbitration and the Harris County Action agreed that
all of the claims brought in the Arbitration would be dismissed and all of those
claims would be added to the Harris County Action.  On June 29, 2009,
in accordance with the stipulation of the parties to consolidate the Arbitration
with the Harris County Action, the American Arbitration Association closed the
Arbitration.  The Harris County Action is currently in the discovery
phase but the case is inactive, since the parties have entered into a standstill
agreement while they engage in settlement discussions.


F-41


SMF
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





13.         RELATED
PARTY TRANSACTIONS





The
Company paid $78,000 and $80,000 pursuant to ordinary commercial terms, for each
of the years ended June 30, 2010 and 2009, to a provider of investor relations
and public relations services whose chief executive officer is a member of the
Company’s Board of Directors.





The
Company is obligated to the former owners of H & W under four operating
leases, three of which, as extended, expire on September 30, 2015 covering
property utilized for certain of the Company’s operating
facilities.  See Operating Leases in Note 12 – Commitments and
Contingencies.  While these leases were negotiated at arms’ length
prior to the acquisition of H & W, after the acquisition, one of the former
owners of H & W who leased the facilities to the Company was employed as an
officer of, and then a consultant to the Company, until November 10,
2008.





The
Company’s officers and directors that participated in the Company’s private
offerings of the Series A Preferred Stock and Existing Unsecured Notes also
participated in the Recapitalization.  See Note 4 – June 2009
Recapitalization.


F-42