UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the quarterly period ended December 31, 2008
  OR
  o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OF 15(D) OR THE SECURITIES EXCHANGE ACT OF
      1934
  Commission
File Number 000-21825
  SMF
      ENERGY CORPORATION(Exact
      name of registrant as specified in its
charter)
 
 Delaware
                    
                    65-0707824(State
      of Incorporation)
                    
                    (IRS
      Employer Identification
Number)
 
 200 West Cypress Creek Road, Suite 400, Fort Lauderdale, Florida
                          
                          33309(Address of principal
      executive offices)
                          
                          (Zip
      Code)
 (954)
308-4200
 (Issuer's
telephone number, including area code)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes x.    No
o.
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer, or a smaller reporting company.  See
definitions of “accelerated filer and large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).     Yes o.    No
x.
 
 As of
February 11, 2009 there were 15,187,623 shares of the registrant’s common stock
outstanding.
  
  SMF
ENERGY CORPORATION
  FORM
10-Q
  INDEX
  Form 10-Q Part and Item
No.
 
 Part
      I
                                            Financial
      Information:Item
      1.
                                            Condensed
      Unaudited Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of December 31, 2008 (unaudited) and June
      30, 2008
                                            3Condensed
      Unaudited Consolidated Statements of Operations for the three and
      six-months ended December 31, 2008 and 2007
                                            4Condensed
      Unaudited Consolidated Statements of Cash Flows for the six-months ended
      December 31, 2008 and 2007
                                            5Notes
      to Condensed Unaudited Consolidated Financial Statements
                                            7Item
      2.
                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                            16Item
      3.
                                            Quantitative
      and Qualitative Disclosures About Market Risk
                                            31Item
      4.
                                            Controls
      and Procedures
                                            32Part
      II
                                            Other
      Information:Item
      1.
                                            Legal
      Proceedings
                                            33Item 1A.
                                            Risk
      Factors
                                            33Item
      2.
                                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                                            33Item
      3.
                                            Defaults
      Upon Senior Securities
                                            33Item
      4.
                                            Submission
      of Matters to a Vote of Security Holders
                                            33Item
      5.
                                            Other
      Information
                                            35Item
      6.
                                            Exhibits
                                            35Signatures
                                            36Certifications
                                            38
  2
 SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED BALANCE SHEETS
  (in
000’s, except share and per share data)
 
 December
      31, 2008
                              
                              
                              June
      30, 2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              158
                              
                              
                              $
                              48Accounts
      receivable, net of allowances of $1,470 and $1,283
                              
                              
                              15,000
                              
                              
                              
                              30,169Inventories,
      net of reserve of $98 and $99
                              
                              
                              1,851
                              
                              
                              
                              2,535Prepaid
      expenses and other current assets
                              
                              
                              690
                              
                              
                              
                              855Total
      current assets
                              
                              
                              17,699
                              
                              
                              
                              33,607Property
      and equipment, net of accumulated depreciation of $14,589 and
      $13,981
                              
                              
                              9,353
                              
                              
                              
                              10,276Identifiable
      intangible assets, net of accumulated amortization of $1,251 and
      $1,060
                              
                              
                              2,201
                              
                              
                              
                              2,392Goodwill
                              
                              
                              228
                              
                              
                              
                              228Deferred
      debt costs, net of accumulated amortization of $713 and
    $556
                              
                              
                              253
                              
                              
                              
                              348Other
      assets
                              
                              
                              80
                              
                              
                              
                              133Total
      assets
                              
                              $
                              29,814
                              
                              
                              $
                              46,984LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Line
      of credit payable
                              
                              $
                              7,884
                              
                              
                              $
                              19,789Current
      portion of long-term debt, net of unamortized debt discount of
      $45
                              
                              
                              8,814
                              
                              
                              
                              -Accounts
      payable
                              
                              
                              4,973
                              
                              
                              
                              9,921Accrued
      expenses and other liabilities
                              
                              
                              4,093
                              
                              
                              
                              4,938Total
      current liabilities
                              
                              
                              25,764
                              
                              
                              
                              34,648Long-term
      liabilities:Promissory
      notes, net of unamortized debt discount of $0 and $65
                              
                              
                              725
                              
                              
                              
                              8,794Other
      long-term liabilities
                              
                              
                              443
                              
                              
                              
                              490Total
      liabilities
                              
                              
                              26,932
                              
                              
                              
                              43,932ContingenciesShareholders’
      equity:Preferred
      stock, $0.01 par value; 10,000 Series A shares authorized, 4,205 and 4,587
      issued and outstanding at December 31, 2008 and June 30, 2008,
      respectively
                              
                              
                              -
                              
                              
                              
                              -Preferred
      stock, $0.01 par value; 2,000 Series B shares authorized, 1,985 issued and
      outstanding at December 31, 2008 and June 30, 2008
                              
                              
                              -
                              
                              
                              
                              -Preferred
      stock, $0.01 par value; 2,000 Series C shares authorized, 229 and 0 issued
      and outstanding at December 31, 2008 and June 30, 2008,
      respectively
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $.01 par value; 50,000,000 shares authorized; 14,938,295 and
      14,556,295 issued and outstanding at December 31, 2008 and June 30, 2008,
      respectively
                              
                              
                              149
                              
                              
                              
                              146Additional
      paid-in capital
                              
                              
                              30,694
                              
                              
                              
                              30,719Accumulated
      deficit
                              
                              
                              (27,961
                              )
                              
                              
                              (27,813
                              )Total
      shareholders’ equity
                              
                              
                              2,882
                              
                              
                              
                              3,052Total
      liabilities and shareholders’ equity
                              
                              $
                              29,814
                              
                              
                              $
                              46,984
  The
accompanying notes to the condensed unaudited financial statements are an
integral part of these consolidated balance sheets.
  3
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
  (in
000’s, except per share data)
 
 Three
      Months Ended December 31,
                        
                        
                        Six
      Months Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Petroleum
      product sales and service revenues
                        
                        $
                        39,876
                        
                        
                        $
                        52,905
                        
                        
                        $
                        112,838
                        
                        
                        $
                        102,094Petroleum
      product taxes
                        
                        
                        5,236
                        
                        
                        
                        6,089
                        
                        
                        
                        11,545
                        
                        
                        
                        12,397Total
      revenues
                        
                        
                        45,112
                        
                        
                        
                        58,994
                        
                        
                        
                        124,383
                        
                        
                        
                        114,491Cost
      of petroleum product sales and service
                        
                        
                        36,584
                        
                        
                        
                        50,340
                        
                        
                        
                        103,727
                        
                        
                        
                        96,347Petroleum
      product taxes
                        
                        
                        5,236
                        
                        
                        
                        6,089
                        
                        
                        
                        11,545
                        
                        
                        
                        12,397Total
      cost of sales
                        
                        
                        41,820
                        
                        
                        
                        56,429
                        
                        
                        
                        115,272
                        
                        
                        
                        108,744Gross
      profit
                        
                        
                        3,292
                        
                        
                        
                        2,565
                        
                        
                        
                        9,111
                        
                        
                        
                        5,747Selling,
      general and administrative expenses
                        
                        
                        3,267
                        
                        
                        
                        3,788
                        
                        
                        
                        7,899
                        
                        
                        
                        7,591Operating
      income (loss)
                        
                        
                        25
                        
                        
                        
                        (1,223
                        )
                        
                        
                        1,212
                        
                        
                        
                        (1,844
                        )Interest
      expense
                        
                        
                        (680
                        )
                        
                        
                        (782
                        )
                        
                        
                        (1,363
                        )
                        
                        
                        (1,560
                        )Interest
      and other income
                        
                        
                        3
                        
                        
                        
                        19
                        
                        
                        
                        19
                        
                        
                        
                        40Loss
      on extinguishment of promissory notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,641
                        )Loss
      before income taxes
                        
                        
                        (652
                        )
                        
                        
                        (1,986
                        )
                        
                        
                        (132
                        )
                        
                        
                        (5,005
                        )Income
      tax expense
                        
                        
                        (8
                        )
                        
                        
                        -
                        
                        
                        
                        (16
                        )
                        
                        
                        -Net
      loss
                        
                        $
                        (660
                        )
                        
                        $
                        (1,986
                        )
                        
                        $
                        (148
                        )
                        
                        $
                        (5,005
                        )Basic
      and diluted net loss per share computation:Net
      loss
                        
                        $
                        (660
                        )
                        
                        $
                        (1,986
                        )
                        
                        $
                        (148
                        )
                        
                        $
                        (5,005
                        )Less:  Preferred
      stock dividends
                        
                        
                        (132
                        )
                        
                        
                        -
                        
                        
                        
                        (328
                        )
                        
                        
                        -Net
      loss attributable to common stockholders
                        
                        $
                        (792
                        )
                        
                        $
                        (1,986
                        )
                        
                        $
                        (476
                        )
                        
                        $
                        (5,005
                        )Basic
      and diluted net loss per share attributable to common
      stockholders
                        
                        $
                        (0.05
                        )
                        
                        $
                        (0.14
                        )
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.35
                        )Basic
      and diluted weighted average common shares outstanding
                        
                        
                        14,938
                        
                        
                        
                        14,556
                        
                        
                        
                        14,792
                        
                        
                        
                        14,379
  The
accompanying notes to the condensed unaudited financial statements are an
integral part of these consolidated statements of operations.
  4
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
  (in
000’s)
 
 Six
      Months Ended December 31,2008
                      
                      
                      2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (148
                      )
                      
                      $
                      (5,005
                      )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization:Cost
      of sales
                      
                      
                      584
                      
                      
                      
                      768Selling,
      general and administrative
                      
                      
                      683
                      
                      
                      
                      586Amortization
      of deferred debt cost
                      
                      
                      158
                      
                      
                      
                      130Amortization
      of debt discount
                      
                      
                      20
                      
                      
                      
                      63Amortization
      of stock-based compensation
                      
                      
                      182
                      
                      
                      
                      259Gain
      from sale of assets
                      
                      
                      (4
                      )
                      
                      
                      (11
                      )Inventory
      reserve
                      
                      
                      -
                      
                      
                      
                      (46
                      )Provision
      for doubtful accounts
                      
                      
                      332
                      
                      
                      
                      237Non-cash
      loss on extinguishment of debt
                      
                      
                      -
                      
                      
                      
                      1,371Changes
      in operating assets and liabilities:Decrease
      in accounts receivable
                      
                      
                      14,836
                      
                      
                      
                      3,815Decrease
      in inventories, prepaid expenses and other assets
                      
                      
                      847
                      
                      
                      
                      311Decrease
      in accounts payable and other liabilities
                      
                      
                      (5,800
                      )
                      
                      
                      (216
                      )Net
      cash provided by operating activities
                      
                      
                      11,690
                      
                      
                      
                      2,262CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                      
                      
                      (193
                      )
                      
                      
                      (1,422
                      )Proceeds
      from sale of equipment
                      
                      
                      56
                      
                      
                      
                      18Decrease
      in restricted cash
                      
                      
                      91
                      
                      
                      
                      625Net
      cash used in investing activities
                      
                      
                      (46
                      )
                      
                      
                      (779
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from line of credit
                      
                      
                      133,375
                      
                      
                      
                      119,444Repayments
      of line of credit
                      
                      
                      (145,280
                      )
                      
                      
                      (123,794
                      )Proceeds
      from issuance of promissory notes
                      
                      
                      725
                      
                      
                      
                      7,690Proceeds
      from issuance of preferred stock
                      
                      
                      149
                      
                      
                      
                      -Proceeds
      from issuance of common stock and warrants
                      
                      
                      -
                      
                      
                      
                      1,170Principal
      payments on promissory notes
                      
                      
                      -
                      
                      
                      
                      (6,359
                      )Debt
      issuance costs
                      
                      
                      (65
                      )
                      
                      
                      (457
                      )Common
      stock, preferred stock, and warrants issuance costs
                      
                      
                      (22
                      )
                      
                      
                      (79
                      )Payment
      of dividends
                      
                      
                      (390
                      )
                      
                      
                      -Capital
      lease payments
                      
                      
                      (26
                      )
                      
                      
                      (22
                      )Net
      cash used in financing activities
                      
                      
                      (11,534
                      )
                      
                      
                      (2,407
                      )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      110
                      
                      
                      
                      (924
                      )CASH
      AND CASH EQUIVALENTS, beginning of period
                      
                      
                      48
                      
                      
                      
                      987CASH
      AND CASH EQUIVALENTS, end of period
                      
                      $
                      158
                      
                      
                      $
                      63
  (Continued)
  5
   SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
  (in
000’s)
 
 (Continued)
                        
                        Six
      Months Ended December 31,2008
                        
                        
                        2007SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                        
                        $
                        1,150
                        
                        
                        $
                        1,310SUPPLEMENTAL
      DISCLOSURE OF NON-CASH ACTIVITIES:Accrued
      dividends related to preferred stock
                        
                        $
                        132
                        
                        
                        $
                        -Capital
      leases
                        
                        $
                        47
                        
                        
                        $
                        -Conversion
      of preferred shares to common shares
                        
                        $
                        210
                        
                        
                        $
                        -Refinancing
      of August 2003, January 2005, and September 2005 notes into August 2007
      notes
                        
                        $
                        -
                        
                        
                        $
                        4,918Non-cash
      costs related to issuance of stock, warrants and August 2007
      notes
                        
                        $
                        -
                        
                        
                        $
                        134Debt
      discount costs related to issuance of stock, warrants and extension of
      warrants and August 2007 notes
                        
                        $
                        -
                        
                        
                        $
                        112
 
 The
accompanying notes to condensed unaudited financial statements are an integral
part of these consolidated statements of cash flows.
  6
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
                NATURE
      OF OPERATIONS
 
 SMF
Energy Corporation (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.
  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.
  At
December 31, 2008, the Company was conducting operations through 31 service
locations in the eleven states of Alabama, California, Florida, Georgia,
Louisiana, Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
  2.     
      BASIS OF PRESENTATION
 
 The
condensed unaudited consolidated financial statements include the accounts of
SMF Energy Corporation and its wholly owned subsidiaries, SMF Services, Inc., H
& W Petroleum Company, Inc., and Streicher Realty, Inc.  All
significant intercompany balances and transactions have been eliminated in
consolidation.
 
 The
condensed unaudited consolidated financial statements included herein have been
prepared in accordance with the instructions of Form 10-Q, and do not include
all the information and footnotes required by generally accepted accounting
principles; however, they do include all adjustments of a normal recurring
nature that, in the opinion of management, are necessary to present fairly the
financial position and results of operations of the Company as of and for the
interim periods presented.
 
 Operating
results for the three and six months ended December 31, 2008 are not necessarily
indicative of the results that may be expected for any subsequent period or the
fiscal year ending June 30, 2009.  These interim financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended June 30, 2008, as filed with the United States
Securities and Exchange Commission (the “2008 Form 10-K”).
 
 7
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 3.           RECENT
ACCOUNTING PRONOUNCEMENTS
 
 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, provides a one-year deferral 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 has not yet determined the impact, if any, that the adoption of FAS No.
157-2 will have on its consolidated financial position, results of operations or
cash flows.
 
 In
February 2007, FAS Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS No. 159”), was issued.  FAS
No. 159 enables companies to report selected financial assets and liabilities at
their fair value.  This statement requires companies to provide additional
information to help investors and other users of financial statements understand
the effects of a company’s election to use fair value on its earnings.  FAS
No. 159 also requires companies to display the fair value of assets and
liabilities on the face of the balance sheet when a company elects to use fair
value.  FAS No. 159 is effective for the Company since the beginning of
fiscal year 2009.  The Company’s adoption of FAS No. 159 had no impact
on the Company’s financial condition or results of operations.
  In
December 2007, the FASB issued FAS Statement No. 141 (revised 2007), “Business Combinations”(“FAS
No. 141R”), which replaces FAS No. 141.  The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting.  It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred.  FAS
No. 141R is effective for the Company beginning July 1, 2009 and will
be applied prospectively to business combinations completed on or after that
date.
  In
December 2007, the FASB issued FAS Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51,” which changes
the accounting and reporting for minority interests (“FAS No.
160”).  Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parent’s equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity
transactions.  In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings.  FAS No. 160 is effective for the Company
beginning July 1, 2009 and will apply prospectively, except for the
presentation and disclosure requirements, which will apply
retrospectively.  The Company is currently assessing the potential
impact that adoption of SFAS No. 160 would have on its financial
statements.
  8
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  In March
2008, the FASB issued FAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FAS Statement No.
133” (“FAS No. 161”).  This Standard requires enhanced
disclosures regarding derivatives and hedging activities, including: (a) the
manner in which an entity uses derivative instruments; (b) the manner in which
derivative instruments and related hedged items are accounted for under FAS No.
133, “Accounting for
Derivative Instruments and Hedging Activities”; and (c) the effect of
derivative instruments and related hedged items on an entity’s financial
position, financial performance, and cash flows.  FAS No. 161 is
effective for the Company beginning July 1, 2009.  As FAS No. 161
relates specifically to disclosures, the standard will have no impact on our
financial condition, results of operations or cash flows.
 
 In May 2008, the FASB issued FAS No.
162, “The Hierarchy of
Generally Accepted Accounting Principles” (“FAS No.
162”).  This Standard identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles.  FAS No. 162
directs the hierarchy to the entity, rather than the independent auditors, as
the entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with generally accepted accounting
principles.  The Standard is effective 60 days following SEC approval
of the Public Company Accounting Oversight Board amendments to remove the
hierarchy of generally accepted accounting principles from the auditing
standards.  FAS No. 162 is not expected to have an impact on our
financial condition, results of operations or cash flows.
  4.           CASH
AND CASH EQUIVALENTS
 
 During
the six months ended December 31, 2008, the Company paid down $11.9 millionon its line of credit
payable.  Total cash and cash availability was $2.0 million and $1.9
millionat December
31, 2008 and June 30, 2008, respectively, and was $2.5 millionat February 11,
2009.  Total cash and cash availability includes cash as presented in
the Company’s balance sheet and cash available to the Company through its line
of credit, described in Note 6 - 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.  Balances up to $250,000 are insured by the
Federal Deposit Insurance Corporation.  The Company has not
experienced any losses in such bank accounts.
  5.       
    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 the period.
  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 unless the effect is dilutive.  In
determining whether outstanding common share equivalents should be considered
for their dilutive effect, the average market price of the Company’s common
stock for the period has to exceed the exercise price of the outstanding common
share equivalent.  The dilutive effect, if any, of outstanding common
share equivalents would be reflected in diluted earnings per share by
application of the if-converted and the treasury stock method, as
applicable.  The Company excluded the impact of its common stock
equivalents in the computation of diluted net loss per share for the three and
six months ended December 31, 2008 and 2007, as their effect is not
dilutive.
   9
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Common
stock equivalents outstanding consisted of (in thousands):
 
 December
      31,2008
                        
                        
                        2007Stock
      options
                        
                        
                        2,008
                        
                        
                        
                        2,040Common
      stock warrants
                        
                        
                        747
                        
                        
                        
                        887Promissory
      note conversion rights
                        
                        
                        4,149
                        
                        
                        
                        3,633Preferred
      stock conversion rights
                        
                        
                        6,419
                        
                        
                        
                        -Total
      common stock equivalents outstanding
                        
                        
                        13,323
                        
                        
                        
                        6,560
 
 The
following table sets forth the computation of basic and diluted loss per share
(in thousands, except per share amounts):
 
 Three
      Months Ended
                    
                    
                    Six
      Months EndedDecember
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Net
      loss
                    
                    $
                    (660
                    )
                    
                    $
                    (1,986
                    )
                    
                    $
                    (148
                    )
                    
                    $
                    (5,005
                    )Less:  Preferred
      stock dividends
                    
                    
                    (132
                    )
                    
                    
                    -
                    
                    
                    
                    (328
                    )
                    
                    
                    -Net
      loss attributable to common stockholders
                    
                    $
                    (792
                    )
                    
                    $
                    (1,986
                    )
                    
                    $
                    (476
                    )
                    
                    $
                    (5,005
                    )Net
      loss per share attributable to common stockholders – basic and
      diluted
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.14
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.35
                    )Weighted
      average shares outstanding:Basic
      and diluted
                    
                    
                    14,938
                    
                    
                    
                    14,556
                    
                    
                    
                    14,792
                    
                    
                    
                    14,379
  6.     
      LINE OF CREDIT
PAYABLE
 
 The Company has a $25.0 million credit
facility with a national financial institution, which 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 letters of credit
reduce the maximum amount available for borrowing.  Interest is
payable monthly based on a pricing matrix agreed with the bank.  At
December 31, 2008 the interest rate was at prime plus 0.75%. At December 31,
2008, the interest rate was 4.00%.  Outstanding borrowings under the
line are secured by substantially all Company assets other than its
transportation fleet and related field equipment.
 
 As of
December 31, 2008 and June 30, 2008, the Company had outstanding borrowings of
$7.9 million and $19.8 million, respectively, under its $25.0 million line of
credit.  The line of credit is classified as a current liability in
accordance with EIFT 95-22, “Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit
Agreements”.  Based on eligible receivables and inventories,
and letters of credit outstanding at December 31, 2008 and June 30, 2008, the
Company had $1.8 million and $1.8 million of cash availability under the line of
credit.
  10
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 The
Company’s line of credit provides for certain affirmative and negative covenants
that may limit the total availability based upon the Company’s ability to meet
these covenants.  At December 31, 2008, the financial covenants
included a minimum availability of $750,000, a fixed charge coverage ratio of
1.3 to 1.0, and a capital expenditure limitation for fiscal year 2009 of
$750,000.At
December 31, 2008 and June 30, 2008, the Company had a maximum amount of $1.750
million and $1.5 million, respectively for which letters of credit could be
issued.    At December 31, 2008 and June 30, 2008, $1.6
million and $1.35 million, respectively, had been issued in letters of
credit.
 
 In
September 2008, the Company and its line of credit lender entered into the
Sixteenth Amendment and also into the Seventeenth Amendment to the loan and
security agreement.  These amendments allowed for the issuance of
unsecured promissory notes, extended the maturity date from December 31, 2008 to
July 1, 2009, and modified the variable interest rate to a range of 0.75% to
2.75% over the prime lending rate based on the Company meeting certain fixed
charge coverage ratios.  Additionally, effective October 31, 2008, the
average monthly availability requirement was eliminated and replaced with a
required fixed charge coverage ratio of 1.0 to 1.0 through November 2008 and 1.3
to 1.0 thereafter.  The termination fee of 0.5% was also eliminated
for the period of September 2008 through December 31, 2008.
 
 The line of credit agreement 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.  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 December
31, 2008, the Company was in compliance with all the requirements of its
covenants under the agreement.
  7.     
      LONG-TERM DEBT
 
 Long-term
debt consists of the following (in thousands):
 
 December
      31,
                    
                    
                    June
      30,2008
                    
                    
                    2008September
      2008 unsecured convertible subordinated promissory notes (the “September
      2008 Notes”) (12% interest due semi-annually, March 1 and September 1
      beginning March 1, 2009); matures September 1, 2010 in its entirety;
      effective interest rate of 12%.  For additional details, see
      below.
                    
                    $
                    725
                    
                    
                    $
                    -August
      2007 senior secured convertible subordinated promissory notes (the “August
      2007 Notes”) (11.5% interest due semi-annually, January 1 and July 1);
      matures December 31, 2009 in its entirety; effective interest rate of
      14.6% including cost of warrants and other debt issue
    costs.
                    
                    
                    8,859
                    
                    
                    
                    8,859Unamortized
      debt discount
                    
                    
                    (45
                    )
                    
                    
                    (65
                    )9,539
                    
                    
                    
                    8,794Less:
      current portion
                    
                    
                    (8,814
                    )
                    
                    
                    -Long-term
      debt, net
                    
                    $
                    725
                    
                    
                    $
                    8,794
  11
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  On
September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
notes (the “September 2008 Notes”) maturing on September 1, 2010 to
accredited investors, including a $250,000 participation by a related
party.  The Company used the proceeds for working capital purposes,
including the enhancement of short-term supplier credit.  The
September 2008 Notes are unsecured and are 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.  These promissory
notes may be redeemed by us, in whole or in part, without prepayment penalty or
premium, except that, if such pre-payment is proposed to be made before
September 2, 2009, a 1% prepayment penalty shall be paid.  The unpaid
principal amount of the September 2008 Notes and the accrued but unpaid interest
thereon may be converted into shares of our common stock at $0.65 per share,
which was above the market price of the Company’s common stock on the date of
the offering.  In addition, these promissory notes will be
automatically converted into common stock, (A) if the closing price of the
common stock is equal to or greater than two times the conversion price then in
effect for a period of twenty (20) consecutive business days, or (B) upon the
election of the holders of two thirds of the principal outstanding notes, or (C)
upon the closing of a firmly underwritten public offering at a price that is two
times the conversion price with cash proceeds to the Company of at least
$10,000,000.
 
 Effective
January 30, 2008, the holders of the August 2007 Notes agreed to the deferral of
the $520,000 interest payment due on the August 2007 Notes from January 1 to
April 15, 2009.  As consideration for the deferral, the Company paid a
deferral fee equal to 1% of the outstanding principal balance, or $88,950, 50%
of which was paid in cash, with the remainder satisfied through issuance of
unregistered shares of the Company’s common stock.
  Other
 
 In
connection with the issuance of certain promissory notes in August 2003, January
2005 and September 2005, which have since been redeemed, the Company had
recorded unamortized debt discounts which were being amortized under the
effective interest method as non-cash interest expense over the respective term
of the debt issued.  These were non-cash discounts related to the
valuation of the common stock warrants issued to the note holders and the
placement agent in the financing transactions that did not reduce the amount of
principal cash repayments required to be made by the Company.  On
August 8, 2007, as a result of the early redemption of these promissory notes,
the Company recorded a loss on extinguishment of $1.6 million, as
follows:
 
 Six
      Months EndedDecember
      31, 2007Write
      offs of costs and gain related to the refinancing of the August 2003,
      January 2005 and September 2005 Notes:Unamortized
      debt costs
                        
                        $
                        443Unamortized
      debt discounts
                        
                        
                        978Cash
      pre-payment penalty
                        
                        
                        270Gain
      on extinguishment
                        
                        
                        (50
                        )Loss
      on extinguishment of promissory notes, net
                        
                        $
                        1,641
 
 To the
extent that loss on extinguishment of promissory notes constitutes
the recognition of previously deferred interest, it is considered interest
expense for the calculation of certain interest expense
amounts.
  12
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  8.           SHAREHOLDERS’
EQUITY
 
 The
following reflects the change in shareholders’ equity for the six months ended
December 31, 2008 (in thousands, except share data):
  Preferred
      Stock
                                                                        
                                                                        
                                                                        Preferred
      Stock
                                                                        
                                                                        
                                                                        Preferred
      Stock
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        AdditionalSeries
      A
                                                                        
                                                                        
                                                                        Series
      B
                                                                        
                                                                        
                                                                        Series
      C
                                                                        
                                                                        
                                                                        Common
      Stock
                                                                        
                                                                        
                                                                        Paid-in
                                                                        
                                                                        
                                                                        AccumulatedShares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        Shares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        Shares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        Shares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        Capital
                                                                        
                                                                        
                                                                        Deficit
                                                                        
                                                                        
                                                                        TotalBalance
      at June 30, 2008
                                                                        
                                                                        
                                                                        4,587
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,985
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        14,556,295
                                                                        
                                                                        
                                                                        $
                                                                        146
                                                                        
                                                                        
                                                                        $
                                                                        30,719
                                                                        
                                                                        
                                                                        $
                                                                        (27,813
                                                                        )
                                                                        
                                                                        $
                                                                        3,052Net
      loss
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (148
                                                                        )
                                                                        
                                                                        
                                                                        (148
                                                                        )Issuance
      of Series C preferred stock, net ofissuance costs of
      $25
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        229
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        124
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        124Conversion
      of Series A preferred stockto common
      stock
                                                                        
                                                                        
                                                                        (382
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        382,000
                                                                        
                                                                        
                                                                        
                                                                        3
                                                                        
                                                                        
                                                                        
                                                                        (3
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Series
      A preferred stock dividend
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (183
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (183
                                                                        )Series
      B preferred stock dividend
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (136
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (136
                                                                        )Series
      C preferred stock dividend
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (9
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (9
                                                                        )Stock-based
      compensation expense
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        182
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        182Balance
      at December 31, 2008
                                                                        
                                                                        
                                                                        4,205
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,985
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        229
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        14,938,295
                                                                        
                                                                        
                                                                        $
                                                                        149
                                                                        
                                                                        
                                                                        $
                                                                        30,694
                                                                        
                                                                        
                                                                        $
                                                                        (27,961
                                                                        )
                                                                        
                                                                        $
                                                                        2,882
 
 13
  Issuance
of Series C Preferred Stock
 
 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”).  Each share of Series C Preferred Stock is
convertible into 1,000 shares of the Company’s common stock at a price per share
of $0.65 per share, which was above the closing market price of the Company’s
common stock on the date of the offering.  The rights and preferences
of the Series C Preferred Stock are substantially similar to those of the Series
A and Series B Preferred Stock.
  The Series C Preferred Stock ranks
senior to the common stock, $0.01 par value (the “Common Stock”) of the Company
and is on parity with the holders of any other series of preferred stock as to
the payment of dividends and distribution of assets, including the currently
outstanding shares of Series A Preferred Stock and Series B Preferred
Stock. Upon liquidation,
dissolution or winding up of the Company, holders of Series C Preferred Stock
are entitled to be paid out of the assets of the Company an amount per share of
Series C Preferred Stock equal to the greater of: (i) the original issue price
of the Series C Preferred Stock, plus all accumulated but unpaid dividends; or
(ii) the fair market value of the Series C Preferred Stock on an as-converted to
Common Stock basis, plus all accumulated but unpaid dividends. Each holder of Series C Preferred Stock
is entitled to one vote per share at each meeting of stockholders of the Company
with respect to any and all matters presented to the stockholders of the
Company.
 
 Dividends
paid on the Series C Preferred Stock when, as and if declared by the Board of
Directors, but only out of funds that are legally available, in quarterly cash
dividends at the rate of eighteen percent (18%) per annum of the sum of the
Original Issue Price of $650 per share.  Since the Company achieved
positive Earnings Before Interest, Taxes, Depreciation and Amortization for two
consecutive fiscal quarters, the quarterly cash dividend was changed from
eighteen percent (18%) of the Original Issue Price per annum to twelve percent
(12%) in December 2008.
 
 Each
share of Series C Preferred Stock is currently convertible, at the option of the
holder, into 1,000 shares of Common Stock based on a conversion price equal to
$0.65 per share of Common Stock (the “Series C Conversion
Price”).  The Series C Conversion Price is subject to adjustment for
stock dividends, stock splits and other similar recapitalization events. In
addition, each share of Series C Preferred Stock shall automatically be
converted into shares of Common Stock, based on the then-effective Series C
Conversion Price, if:
 
 (A)
                  the
      closing price of the Common Stock as reported on the Nasdaq Capital Stock
      Market (or on such other public securities trading market, such as the OTC
      Bulletin Board, as then constitutes the primary trading market for the
      Common Stock) is equal to or greater than two times the Series C
      Conversion Price then in effect (the “Series C Automatic Conversion
      Price”), for a period of twenty (20) consecutive business days,
      or
 (B)
                  at
      any time upon the affirmative election of the holders of at least
      sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
      the Series C Preferred Stock,
or
 (C)
                  upon
      the closing of a firmly underwritten public offering pursuant to an
      effective registration statement under the Securities Act covering the
      offer and sale of Common Stock for the account of the Company in which (i)
      the per share price is at least two times the Series C Automatic
      Conversion Price and (ii) the cash proceeds to the Company (before
      underwriting discounts, commissions and fees) are at least ten million
      dollars ($10,000,000).
 
 Conversion
of Series A Preferred Stock
 
 In
September 2008, the holders of an aggregate of 382 shares of the Company’s
Series A Preferred Stock elected to convert those shares at the 1 to 1000
conversion ratio set by the Certificate of Designation for the Series A into an
aggregate of 382,000 shares of the Company’s Common Stock.
  14
  Preferred
Stock Dividends
  Cumulative
dividends on the Series A, Series B, and Series C Preferred Stock are declared
quarterly.  During the first six months of fiscal 2009, the Company
declared $328,000 in cumulative dividends on the Series A, Series B, and Series
C Preferred Stock, of which $132,000 remains outstanding as of the date of
filing. During the last six months of fiscal 2008, the Company declared
dividends of $249,000 of which $56,000 was paid during fiscal 2008 and the
remainder was paid during fiscal 2009.
  Employee
Stock Options
  During
the six months ended December 31, 2008, the Company granted 28,000 stock options
under the Employee Stock Options Plan.  The weighted average grant
date fair value of the options granted was $0.29.
  9.           CONTINGENCIES
 
 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 that may be covered by
insurance or recoverable from third parties, or the financial impact with
respect to these matters as of December 31, 2008, therefore no contingency gains
or losses have been recorded as of December 31, 2008.   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
October 10, 2006, the Company commenced a civil action in Broward County,
Florida Circuit Court against Financial Accounting Solutions Group, Inc.
(“FAS”), Kramer Professional Staffing, Inc. (“KPS”), and Mitchell Kramer, an
officer, director, shareholder and control person of FAS and KPS (“Kramer”),
alleging that Kramer, FAS and KPS (collectively, the “Defendants”) induced the
Company to engage FAS to provide services with respect to (a) the implementation
of certain Information Technology (“IT”) functions; (b) the modernization and
expansion of the Company’s accounting and business technology capabilities, and
(c) compliance with public company accounting requirements and the
Sarbanes-Oxley Act (the “IT Projects”) by making numerous misrepresentations
concerning the experience, capabilities and background of FAS and FAS’
personnel.  FAS subsequently filed a countersuit in the same court
seeking payment of additional fees allegedly due from the
Company.  The court is jointly administering the countersuit with the
Company’s action.  The Company has amended its complaint to add Alex
Zaldivar, the managing director and a principal of FAS, as an additional
Defendant, and to make new claims for accounting malpractice, negligent training
and supervision, negligent placement and breach of fiduciary duty against the
Defendants.  The case is currently in the discovery
stage.
  15
  ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
 Forward Looking
Statements
 
 This report, including but not limited
to this Item 2 and the footnotes to the financial statements in Item 1, contains
“forward looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).  These
statements concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.  Statements preceded by,
followed by, or that include the words “believes,” “expects,” “anticipates,” or
similar expressions are generally considered to be forward-looking
statements.
 
 The
forward-looking statements include, but are not limited, to the
following:
  ·
                Our
      beliefs regarding our position in the market for commercial mobile fueling
      and bulk fueling; lubricant and chemical packaging, distribution and
      sales; integrated out-sourced fuel management services; and transportation
      logistics;
  ·
                Our
      strategies, plan, objectives and expectations concerning our future
      operations, cash flows, margins, revenues, profitability, liquidity and
      capital resources;
  ·
                Our
      efforts to improve operational, financial and management controls and
      reporting systems and procedures;
and
  ·
                Our
      plans to expand and diversify our business through acquisitions of
      existing companies or their operations and customer
  bases.
  The
forward-looking statements reflect our current view about future events and are
subject to risks, uncertainties and assumptions.  A number of
important factors may affect our actual results and could cause them to differ
significantly from those expressed in any forward-looking
statement.  In addition to the Risk Factors included in Part I, Item
1A, of the Company’s Annual Report on Form 10-K for the year ended June 30,
2008, as filed with the United States Securities and Exchange Commission, the
inaccuracy of any of the following assumptions could prevent us from achieving
our goals, and cause the assumptions underlying the forward-looking statements
and the actual results to differ materially from those expressed in or implied
by those forward-looking statements:
 
 ·
                The
      avoidance of future net losses;
  ·
                The
      avoidance of adverse consequences relating to our outstanding
      debt;
  ·
                Our
      continuing ability to pay interest and principal on our debt instruments,
      and to pay our accounts payable and other liabilities when
      due;
  ·
                Our
      continuing ability to comply with financial covenants contained in our
      credit agreements;
  ·
                Our
      continuing ability to obtain all necessary waivers of covenant violations,
      if any, in our debt agreements;
  ·
                The
      avoidance of significant provisions for bad debt reserves on our accounts
      receivable;
  ·
                The
      continuing demand for our products and services at competitive prices and
      acceptable margins;
  ·
                The
      avoidance of negative customer reactions to new or existing marketing
      strategies;
  ·
                The
      avoidance of significant inventory reserves for slow moving
      products;
   16
  ·
                Our
      continuing ability to acquire sufficient trade credit from fuel and
      lubricants suppliers and other
vendors;
  ·
                The
      successful integration of acquired companies and/or organic geographic
      expansion  into our existing operations, and enhancing the
      profitability of the integrated businesses or new
  markets;
  ·
                The
      successful execution of our acquisition and diversification strategy,
      including the availability of sufficient capital to acquire additional
      businesses and to support the infrastructure requirements of a larger
      combined company;
  ·
                The
      success in responding to competition from other providers of similar
      services;
  ·
                The
      impact of generally positive economic and market conditions;
      and
  ·
                The
      ability to retire or convert debt to
equity.
 
 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 December 31, 2008, the
Company was conducting operations through 31 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 delivers 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 deliveries
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.
  17
  
 OVERVIEW
 
 ·
                We
      continued to focus on the improvement of our business by adding new
      customers, deriving higher net margin per gallon, managing our expenses
      and maintaining our customer base in a difficult economic
      environment.   In the fourth quarter of fiscal 2008, we
      began a trend of financial performance improvement as evidenced by the
      achievement of higher net margins, reduction of our losses, and
      improvements in EBITDA.   While our volumes have decreased
      in the second quarter of fiscal 2009 as a direct result of the rapid
      contraction of the national economy and the current world-wide severe
      economic downturn and recession, impacting the majority of our 4,600
      customers and all industry sectors we service, we are able to operate more
      efficiently, partly due to our new ERP system, which allows us more
      visibility into our business allowing us to react quickly to market
      conditions or business
opportunities.
 
 ·
                The
      trend of improvement continued throughout the first quarter of fiscal 2009
      and while we are able to deliver improved results when compared to the
      prior year, we experienced a dramatic decline in our volumes in November
      and December as a result of our customers delivering less of their goods
      and services in the current economy and world-wide financial
      crisis.  We took swift far reaching cost cutting and business
      restructuring steps beginning late in November, continuing through
      December and into the current quarter to meet the decrease in customer
      demand.  These steps have included eliminating operating and
      administrative personnel, reducing other employee expenses and benefits,
      maximizing the use of running equipment and reducing direct and office
      operating expenses.   This process has included the
      consolidation of delivery routes wherever possible to improve
      efficiencies, while ensuring that we are able to maintain our same high
      level of service to our existing customers.  This undertaking
      has required extremely detailed scheduling and planning as we have
      aggressively sought and have added new customers who are attempting to
      reduce their costs of operations or whose prior service providers were
      ineffective in delivering value to
them.
 
 ·
                During
      this difficult market environment, we have continued our track record of
      collecting our receivables.  At December 31, 2008, our
      receivables were $15.0 million compared to $30.2 million at June 30, 2008,
      partly a reflection of decreased fuel prices, but also of our strong
      credit and underwriting efforts.   Towards the end of
      January, 2009, and into February we are experiencing some stabilization of
      existing customer demand and volumes, together with a marked increase in
      new customer starts.  While there can be no assurances that this
      trend will continue, we remain cautiously optimistic that these
      developments coupled with the cost cuts and efficiency improvements taken
      in response to the current deep economic recession, will positively impact
      our operations and financial
performance.
 
 ·
                We
      achieved a net loss of $660,000 and EBITDA of $690,000 for the quarter
      compared to a net loss of $2.0 million  and a negative EBITDA of
      $387,000  for the same period a year ago, a $1.3 million and
      $1.1 million improvement to our financial performance,
      respectively.  During the six months ended December 31, 2008, we
      had a net loss of $148,000 and EBITDA of $2.7 million compared to a net
      loss of $5.0 million and negative EBITDA of $191,000 for the same period a
      year ago, a $4.9 million and $2.9 million improvement,
      respectively.
 
 ·
                As
      previously noted, we are reporting a net loss for the second quarter of
      fiscal 2009 of $660,000 compared to a loss of $2.0 million a year
      ago.   The $660,000 net loss included $688,000 in non-cash
      charges, such as depreciation and amortization of assets, debt costs, debt
      discounts, stock based compensation, and provision for doubtful
      accounts.  The net loss also included stated interest expense
      associated with servicing of our debt of $584,000, legal expenses of
      $178,000 and public company costs of
$208,000.
  18
 
 ·
                The
      net margin in the second quarter of fiscal 2009 and 2008 was $3.5 million
      and $2.9 million, respectively, on 16.6 million and 18.1 million gallons
      sold during those periods.    The net margins per
      gallon in the second quarter of fiscal 2009 and 2008 were 21.3 cents and
      16.3 cents, respectively.  The increase in net margin in 2009
      was primarily due to the continuation of the higher net margin trend
      previously reported for the fourth quarter of fiscal year
      2008.  The increase in net margins can be attributed, in part,
      to the efficiencies of our new ERP system, which has helped us to identify
      and eliminate non-contributory, lower margin
  business.
 
 ·
                During
      the quarter, we began deliveries under a new two-year agreement to provide
      fleet and emergency fueling services to the United States Postal Service
      (USPS).  Under this expanded agreement, the Company is providing
      scheduled fueling services to approximately 10,000 postal vehicles
      domiciled at over 350 locations across the United States.  Under the
      new contract, we were awarded the servicing rights for new Vehicle
      Maintenance Facilities covering a large number of additional USPS delivery
      points, representing a 40% increase in volumes over the prior contract
      before taking into account the current slow-down in business attributable
      to the economy.  The USPS was already our largest customer,
      representing 8% of our business in fiscal 2008, before these expanded
      services began on November 1, 2008.
 
 The
following table presents certain operating results for the last six sequential
quarters (in thousands, except net margin per gallon):
 
 For
      the three months endedSeptember
      30,
                            
                            
                            December
      31,
                            
                            
                            March
      31,
                            
                            
                            June
      30,
                            
                            
                            September
      30,
                            
                            
                            December
      31,2007
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2008
                            
                            
                            2008
                            
                            
                            2008Revenues
                            
                            $
                            55,497
                            
                            
                            $
                            58,994
                            
                            
                            $
                            64,162
                            
                            
                            $
                            82,036
                            
                            
                            $
                            79,271
                            
                            
                            $
                            45,112Gross
      profit
                            
                            $
                            3,182
                            
                            
                            $
                            2,565
                            
                            
                            $
                            2,875
                            
                            
                            $
                            4,290
                            
                            
                            $
                            5,819
                            
                            
                            $
                            3,292Selling,
      general andadministrative
                            
                            $
                            3,803
                            
                            
                            $
                            3,788
                            
                            
                            $
                            3,445
                            
                            
                            $
                            3,845
                            
                            
                            $
                            4,632
                            
                            
                            $
                            3,267Operating
      income (loss)
                            
                            $
                            (621
                            )
                            
                            $
                            (1,223
                            )
                            
                            $
                            (570
                            )
                            
                            $
                            445
                            
                            
                            $
                            1,187
                            
                            
                            $
                            25Interest
      expense andother income, net
                            
                            $
                            (757
                            )
                            
                            $
                            (763
                            )
                            
                            $
                            (720
                            )
                            
                            $
                            (811
                            )
                            
                            $
                            (667
                            )
                            
                            $
                            (677
                            )Loss
      on extinguishmentof promissory notes
                            
                            $
                            (1,641
                            )
                            
                            $
                            -
                            
                            
                            $
                            (108
                            )
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Net
      income (loss)
                            
                            $
                            (3,019
                            )
                            
                            $
                            (1,986
                            )
                            
                            $
                            (1,398
                            )
                            
                            $
                            (366
                            )
                            
                            $
                            512
                            
                            
                            $
                            (660
                            )EBITDA 1
                            
                            $
                            196
                            
                            
                            $
                            (387
                            )
                            
                            $
                            277
                            
                            
                            $
                            1,154
                            
                            
                            $
                            1,990
                            
                            
                            $
                            690Net margin 2
                            
                            $
                            3,569
                            
                            
                            $
                            2,945
                            
                            
                            $
                            3,228
                            
                            
                            $
                            4,611
                            
                            
                            $
                            6,161
                            
                            
                            $
                            3,534Net
      margin per gallon
                            
                            $
                            0.19
                            
                            
                            $
                            0.16
                            
                            
                            $
                            0.18
                            
                            
                            $
                            0.24
                            
                            
                            $
                            0.33
                            
                            
                            $
                            0.21Gallons
      sold
                            
                            
                            18,695
                            
                            
                            
                            18,050
                            
                            
                            
                            18,102
                            
                            
                            
                            19,024
                            
                            
                            
                            18,550
                            
                            
                            
                            16,602
  1EBITDA 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 loss on
extinguishment of debt constitutes the recognition of previously deferred
interest, it is considered interest expense for the calculation of interest
expense.  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.
  19
  The
following chart reconciles EBITDA to the net income (loss) for each of the six
quarterly periods presented above (in thousands):
  For
      the three months endedSeptember
      30,
                                      
                                      
                                      December
      31,
                                      
                                      
                                      March
      31,
                                      
                                      
                                      June
      30,
                                      
                                      
                                      September
      30,
                                      
                                      
                                      December
      31,2007
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2008
                                      
                                      
                                      2008
                                      
                                      
                                      2008Net
      income (loss)
                                      
                                      $
                                      (3,019
                                      )
                                      
                                      $
                                      (1,986
                                      )
                                      
                                      $
                                      (1,398
                                      )
                                      
                                      $
                                      (366
                                      )
                                      
                                      $
                                      512
                                      
                                      
                                      $
                                      (660
                                      )Add
      back:Interest
      expense
                                      
                                      
                                      778
                                      
                                      
                                      
                                      782
                                      
                                      
                                      
                                      780
                                      
                                      
                                      
                                      720
                                      
                                      
                                      
                                      683
                                      
                                      
                                      
                                      680Income
      tax expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8
                                      
                                      
                                      
                                      8Depreciation
      and amortization expense:Cost
      of sales
                                      
                                      
                                      388
                                      
                                      
                                      
                                      380
                                      
                                      
                                      
                                      353
                                      
                                      
                                      
                                      321
                                      
                                      
                                      
                                      342
                                      
                                      
                                      
                                      242Selling,
      general andadministrative
      expenses
                                      
                                      
                                      282
                                      
                                      
                                      
                                      304
                                      
                                      
                                      
                                      311
                                      
                                      
                                      
                                      357
                                      
                                      
                                      
                                      341
                                      
                                      
                                      
                                      342Stock-based
      compensationamortization
      expense
                                      
                                      
                                      126
                                      
                                      
                                      
                                      133
                                      
                                      
                                      
                                      123
                                      
                                      
                                      
                                      122
                                      
                                      
                                      
                                      104
                                      
                                      
                                      
                                      78Loss
      on extinguishment of promissory notes
                                      
                                      
                                      1,641
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      108
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -EBITDA
                                      
                                      $
                                      196
                                      
                                      
                                      $
                                      (387
                                      )
                                      
                                      $
                                      277
                                      
                                      
                                      $
                                      1,154
                                      
                                      
                                      $
                                      1,990
                                      
                                      
                                      $
                                      690
 
 ·
                Financial
      results from our commercial mobile and bulk fueling services continue to
      be largely dependent on the number of gallons of fuel sold and the net
      margin per gallon achieved.  The second quarter of 2009
      continued to reflect a decrease in the number of gallons sold compared to
      the same period in 2008 due to lower volumes demanded by some of our
      existing customers in response to a weaker economy, and our pursuit of
      business with higher net margin contributions partially offset by the
      volume generated from new customer
additions.
  20




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 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.




Comparison
of Three Months Ended December 31, 2008 (“second quarter of fiscal 2009”) to
Three Months Ended December 31, 2007 (“second quarter of fiscal
2008”)





Revenues





Revenues
were $45.1 million in the second quarter of fiscal 2009, as compared to $59.0
million in the same period of the prior year, a decrease of $13.9 million, or
24%, primarily as a result of price variances due to recent decreases in market
prices of petroleum products.  Market fuel prices have decreased
approximately 29% in the second quarter of fiscal 2009 compared to the same
period in the prior year, which resulted in a decrease of $9.2 million in
revenues.  Additionally, $4.7 million of the $13.9 million decrease
was due to an 8% reduction in gallons sold compared to the same period in the
prior year.  While we continued to add new customers during the second
quarter of fiscal 2009, there was a dramatic and significant overall decrease in
volume demand from our existing customers beginning in November 2008, resulting
in the overall reduction in volume sold during the quarter.  This
lower sales volume is a direct result of the rapid contraction of the national
economy and the current world-wide recession, impacting the majority of our
4,600 customers and all industry sectors we service. While we have seen
stabilization in the demand for our services from existing customers since the
end of the second quarter and a strong increase in new customer business as
companies attempt to reduce their costs of operation, we cannot be certain that
this trend will continue into the future or that the new business will offset
possible future decreases in demand from our base customers.  To date,
we have not seen any connection between the recent easing of fuel prices and
increased fuel usage by our existing customers, as the overall recessionary
condition of the economy and its impact on our customer’s businesses appears to
be outweighing any elasticity of demand based on price.  We remain
cautiously optimistic, however, that customer demand for our services will not
decline further and that we can maintain or increase present volume levels by
attracting new customers.




Gross
Profit





Gross
profit was $3.3 million in the second quarter of fiscal 2009, as compared to
$2.6 million in the same period of the prior year, an increase of $727,000, or
28 %.  The net margin per gallon for the second quarters of fiscals
2009 and 2008 was 21.3 centsand 16.3 cents,
respectively, an increase of 5.0 cents. This improvement was the result of the
continued trend in higher net margin per gallon we established in the fourth
quarter of fiscal 2008.




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses were $3.3 million in the second quarter of
fiscal 2009, as compared to $3.8 million in the same period of the prior year, a
decrease of $521,000, or 14%.   The decreases in selling, general
and administrative expenses were primarily due to decreases of $161,000 in the
provision for doubtful accounts since, as fuel prices have decreased, our total
outstanding receivables have correspondingly decreased.  Additionally,
a decrease of $341,000 in employee expense due to our efforts to reduce employee
benefit costs contributed to the decrease in SG&A.


21




Interest
Expense





Interest
expense was $680,000 in the second quarter of fiscal 2009, as compared to
$782,000 in the same period of the prior year, a decrease of $102,000 or
13%.  The decrease was primarily due to the reduction in our debt as
the noteholders of promissory notes issued in November 2007 were converted into
the Company’s Series A Preferred stock during the third quarter of fiscal
2008.  The decrease is also due to lower interest expense related to
the line of credit as the base interest rate has decreased. At December 31,
2008, the effective rate on our line of credit was 4.00% as compared to 8.0% at
December 31, 2007.





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





Three Months EndedDecember 31,2008
                  
                  
                  2007Stated
      Rate Interest Expense:Line
      of credit
                  
                  $
                  276
                  
                  
                  $
                  318Long
      term debt
                  
                  
                  283
                  
                  
                  
                  354Other
                  
                  
                  25
                  
                  
                  
                  14Total
      stated rate interest expense
                  
                  
                  584
                  
                  
                  
                  686Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                  
                  
                  86
                  
                  
                  
                  83Amortization
      of debt discount
                  
                  
                  10
                  
                  
                  
                  13Total
      amortization of interest expense
                  
                  
                  96
                  
                  
                  
                  96Total
      interest expense
                  
                  $
                  680
                  
                  
                  $
                  782




Income
Taxes




State
income tax expense of $8,000 was recorded for the second quarter of fiscal
2009.  No federal income tax expense was recorded for the second
quarters of fiscals 2009 and 2008.  The net operating loss
carryforward at June 30, 2008 was $29.8 million, which includes a $2.2 million
net operating loss carryforward acquired in connection with the H & W
acquisition.


22




Net
Loss




Net loss
was $660,000 in the second quarter of fiscal 2009, as compared to a loss of $2.0
million in the same period in the prior year.  The $1.3 million
improvement was primarily attributable to the continuing higher net margin per
gallon trend that we established in the fourth quarter of fiscal year
2008.  The decrease in the loss was also due to a reduction of
$521,000 in selling, general and administrative expenses, as discussed above.




EBITDA




As noted
above, EBITDA is a non-GAAP financial measure within the meaning of Regulation G
promulgated by the Securities and Exchange Commission.  EBITDA is
defined as earnings before interest, taxes, depreciation, and
amortization.  To the extent that loss on extinguishment of debt
constitutes the recognition of previously deferred interest, it is
considered interest expense for the calculation of interest
expense.  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.




EBITDA
was $690,000 in the second quarter of fiscal 2009, as compared to a negative
EBITDA of $387,000 in the same period of the prior year, an increase of $1.1
million.  The increase was primarily due to the continued higher net
margin per gallon traction we achieved in the fourth quarter of fiscal year 2008
as described above in our Business Overview.  The increase was also
partially due to a decrease in selling, general, and administrative
expenses.




The
reconciliation of EBITDA to net loss for the second quarters of fiscals 2009 and
2008 was as follows (in thousands):




Three Months EndedDecember 31,2008
                                
                                
                                2007Net
      loss
                                
                                $
                                (660
                                )
                                
                                $
                                (1,986
                                )Add
      back:Interest
      expense
                                
                                
                                680
                                
                                
                                
                                782Income
      tax expense
                                
                                
                                8
                                
                                
                                
                                -Depreciation
      and amortization expense:Cost
      of sales
                                
                                
                                242
                                
                                
                                
                                380Selling,
      general and administrative expenses
                                
                                
                                342
                                
                                
                                
                                304Stock-based
      compensation amortization expense
                                
                                
                                78
                                
                                
                                
                                133EBITDA
                                
                                $
                                690
                                
                                
                                $
                                (387
                                )




23




Comparison
of Six Months Ended December 31, 2008 to Six Months Ended December 31,
2007





Revenues





Revenues
were $124.4 million in the six months ended December 31, 2008, as compared to
$114.5 million in the same period of the prior year, an increase of $9.9
million, or 9%, primarily as a result of price variances due to overall higher
market prices of petroleum products during the first quarter of fiscal
2009.  Overall, for the first half of fiscal 2009, market fuel prices
were approximately 10% higher compared to the same period a year
ago.    Price variances resulted in an increase of $14.9
million in revenues, including a partial contribution from the emergency
response services provided during the first quarter of fiscal 2009, partially
offset by a $5.0 decrease in revenues due to a 4% reduction in gallons sold
compared to the same period in the prior year.  While we continued to
add new customers during the second quarter of fiscal 2009, there was a dramatic
and significant overall decrease in volume demand from our existing customers
beginning in November 2008, resulting in the overall reduction in volume sold
during the quarter.  This lower sales volume is a direct result of the
rapid contraction of the national economy and the current world-wide recession,
impacting the majority of our 4,600 customers and all industry sectors we
service.  While we have seen stabilization in the demand for our
services from existing customers at the end of the second quarter and a strong
increase in new customer business as companies attempt to reduce their costs of
operation, we cannot be certain that this trend will continue into the future or
that the new business will offset possible future decreases in demand from our
base customers.  To date, we have not seen any connection between the
recent easing of fuel prices and increased fuel usage by our existing customers,
as the overall recessionary condition of the economy and its impact on our
customer’s businesses appears to be outweighing any elasticity of demand based
on price.  We remain cautiously optimistic, however, that customer
demand for our services will not decline further and that we can maintain or
increase present volume levels by attracting new customers.




Gross
Profit





Gross
profit was $9.1 million in the six months ended December 31, 2008, as compared
to $5.7 million in the same period of the prior year, an increase of $3.4
million, or 59%.  The net margin per gallon for the six months ended
December 31, 2008 and 2007 was 27.6 centsand 17.7 cents,
respectively, an increase of 9.9 cents. This improvement was the result of the
continued trend in higher net margin per gallon established in the fourth
quarter of fiscal year 2008 plus the incremental margin contribution from the
emergency response services provided in Louisiana and Texas for Hurricanes
Gustav and Ike.




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses were $7.9 million in the six months ended
December 31, 2008, as compared to $7.6 million in the same period of the prior
year, an increase of $308,000, or 4%.  The increases in selling,
general and administrative expenses were due to increases of $137,000 in credit
card fees due to higher fuel prices in the first quarter of fiscal 2009, $97,000
increase in depreciation due to the additions in fixed assets, $96,000 in the
provision for doubtful accounts, and $88,000 increase in travel expense for work
related to the fiscal 2009 hurricanes emergency response work, and a $136,000
increase in professional fees.  Partially offsetting these increases
were decreases in payroll related expenses of $228,000, and $18,000 decrease in
other expenses.


24


Interest
Expense





Interest
expense was $1.4 million in the six months ended December 31, 2008, as
compared to $1.6 million in the same period of the prior year, a decrease of
$197,000, or 13 %.  The decrease was primarily due to lower interest
expense associated with our line of credit as the base interest rate has
decreased to 4% at December 31, 2008 from 8% at the prior
year.   The decrease in interest expense is also due to the
reduction in our long-term debt as the outstanding secured promissory notes
issued on August 2003, January 2005 and September 2005 were refinanced in August
2007 with new senior secured convertible subordinated notes and the November
2007 notes were converted into preferred stock.





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





Six
      Months EndedDecember
      31,2008
                  
                  
                  2007Stated
      Rate Interest Expense:Line
      of credit
                  
                  $
                  589
                  
                  
                  $
                  677Long
      term debt
                  
                  
                  550
                  
                  
                  
                  656Other
                  
                  
                  46
                  
                  
                  
                  34Total
      stated rate interest expense
                  
                  
                  1,185
                  
                  
                  
                  1,367Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                  
                  
                  158
                  
                  
                  
                  130Amortization
      of debt discount
                  
                  
                  20
                  
                  
                  
                  63Total
      amortization of interest expense
                  
                  
                  178
                  
                  
                  
                  193Total
      interest expense
                  
                  $
                  1,363
                  
                  
                  $
                  1,560




Loss
on Extinguishment of Debt





In August
2007, we recorded a loss on extinguishment of debt of $1.6 million related to
our long-term debt, as the outstanding secured promissory notes issued on August
2003, January 2005 and September 2005 were refinanced in August 2007 with new
senior secured convertible subordinated notes.  The loss on
extinguishment of debt was the result of the write-off of unamortized debt
discounts of $978,000,the write-off of debt
costs of $443,000, a pre-payment penalty of $270,000, and a gain of $50,000 due
to the excess of the carrying value of the notes over the extinguishment
price.




Income
Taxes




State
income tax expense of $16,000 was recorded for the six months ended December 31,
2008.  No federal income tax expense was recorded for the six months
ended December 31, 2008 and 2007.


25




Net
Loss




Net loss
was $148,000 in the six months ended December 31, 2008, as compared to a loss of
$5.0 million in the same period in the prior year.  The $4.9 million
improvement was primarily the result of an overall higher net margin per gallon,
including margin contributions from the emergency response services,
efficiencies derived from our new ERP system, and a variety of cost cutting
measures implemented on account of the deteriorating national
economy.  The loss on extinguishment of debt of $1.6 million recorded
in the six months ended December 31, 2007, from the August 2007 refinancing with
new senior secured convertible subordinated notes, also contributed to the
reduced net loss for the period.




EBITDA
was $2.7 million in the six months ended December 31, 2008, as compared to a
negative EBITDA of $191,000 in the same period of the prior year, an increase of
$2.9 million.  The increase in EBITDA was due to the continued higher
net margin per gallon for the period, including the incremental margin
contribution from the emergency response services, partially offset by an
increase in selling, general, and administrative expenses of
$308,000.




The
reconciliation of EBITDA to net loss for the six months ended December 31, 2008
and 2007 was as follows (in thousands):




Six Months EndedDecember 31,2008
                          
                          
                          2007Net
      loss
                          
                          $
                          (148
                          )
                          
                          $
                          (5,005
                          )Add
      back:Interest
      expense
                          
                          
                          1,363
                          
                          
                          
                          1,560Income tax expense
                          
                          
                          16
                          
                          
                          
                          -Depreciation
      and amortization expense:Cost
      of sales
                          
                          
                          584
                          
                          
                          
                          768Selling,
      general and administrative expenses
                          
                          
                          683
                          
                          
                          
                          586Stock-based
      compensation amortization expense
                          
                          
                          182
                          
                          
                          
                          259Loss
      on extinguishment of promissory notes
                          
                          
                          -
                          
                          
                          
                          1,641EBITDA
                          
                          $
                          2,680
                          
                          
                          $
                          (191
                          )




Capital
Resources and Liquidity





At
December 31, 2008, we had total cash and cash availability of $2.0 million,
which consisted of cash and cash equivalents of $158,000 and additional cash
availability of approximately $1.8 million through our line of
credit.  As of February 11, 2009, our cash and cash availability was
approximately $2.5 million.  We are able to draw on our line of credit
on a daily basis subject to debt covenant requirements.


26


The
escalating fuel prices in fiscal 2008, which continued into most of the first
quarter of fiscal 2009, adversely affected our capital
resources.  Historically, while we generally avoided the impact of
higher fuel prices by passing along the higher prices to our customers, the
higher costs for operating our own delivery fleet and the decreased demand for
the services and goods provided by most of our customer base, and in turn, those
customers’ demand for fuel, have had an indirect effect on our profitability
with increased costs and lower volumes.  In addition, the higher fuel
prices substantially increased the amount of credit that we needed to obtain
from our suppliers of fuel.  Our higher demand for credit led to
limitations on the supplier credit available to us and increased our costs of
obtaining that credit.  We initially addressed the limitations on
supplier credit by issuing short-term notes to a limited number of investors in
November 2007, the proceeds from which we used for credit enhancements in those
markets where our credit was most limited.  These notes were
subsequently exchanged for Series A Preferred Stock in February 2008, which
strengthened our balance sheet and helped us achieve compliance with listing
standards of the Nasdaq Stock Market.  The exchange of the November
2007 notes for Series A Preferred Stock and the March 2008 exchange of $1.7
million in senior secured promissory notes for Series B Preferred Stock,
improved our access to supplier credit.  In addition in September
2008, we sold $725,000 in unsecured convertible promissory notes to accredited
investors.





The
challenges of the second quarter of fiscal 2009 were substantially different,
however, from those we faced in the first quarter.  Dramatically lower
fuel prices somewhat eased the availability of credit for fuel purchases but
rapidly diminishing demand for the services we provide led to overall decreases
in volumes of petroleum products and chemicals sold, which reduced our revenues
and our profitability, which is based on a per gallon service
fee.  This lower sales volume is a direct result of the rapid
contraction of the national economy and the current world-wide recession,
impacting the majority of our 4,600 customers and all industry
sectors.  While we have seen stabilization in the demand for our
services from existing customers at the end of the second quarter and a strong
increase in new customer business as companies attempt to reduce their costs of
operation, we cannot be certain that this trend will continue into the future or
that the new business will offset possible future decreases in demand from our
base customers.  While future market risks cannot be reliably
predicted, fuel prices could return to or exceed their recent historic highs in
the future, irrespective of whether there is any higher demand from our
customers for fuel, the result of which could be decreased availability of
adequate credit for fuel purchases.  The Company presently believes,
however, that it has established adequate credit enhancements, such as the
letters of credit described below, to meaningfully respond to future fuel price
increases.





Sources
of Cash





Debt Financing and Equity
Offerings





We
have a $25 million line of credit facility with Wachovia N.A., (which was
purchased by Wells Fargo effective December 31, 2008) which 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.  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 30 to 45 days from date of
delivery.




Interest
is payable monthly at prime plus 0.75% through December 31, 2008, and may
increase up to prime plus 2.75% after such date based on the Company meeting
certain fixed charge coverage ratios.  At December 31, 2008 the
interest rate was 4.00%.  Outstanding borrowings under the line of
credit are secured by substantially all of our assets other than our truck fleet
and related equipment.  The maturity date of the line of credit is
July 1, 2009.





As of
December 31, 2008, we issued letters of credit for an aggregate amount of $1.6
million.  These letters of credit were issued to obtain better
purchasing terms and pricing than was then 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.


27


As of
December 31, 2008 and June 30, 2008, we had outstanding borrowings of $7.9
million and $19.8 million, respectively, under our $25.0 million line of
credit.  The line of credit is classified as a current liability in
accordance with EITF 95-22, “Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreement” due to certain provisions in the
agreement providing for subjective acceleration rights and requiring the Company
to maintain a lockbox arrangement whereby cash deposits are automatically
utilized to reduce amounts outstanding under the line of
credit.  Based on eligible receivables and inventories, and letters of
credit outstanding at December 31, 2008 and June 30, 2008, we had $1.8 million
and $1.8 million, respectively, of cash availability under the line of
credit.





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
is convertible into 1,000 shares of the Company’s common stock at a price per
share of $0.65 per share, which is greater than the $0.49 closing price of the
Company’s common stock on August 14, 2008.





Dividends
were paid on the Series C Preferred Stock when, as and if declared by the Board
of Directors, but only out of funds that are legally available, in quarterly
cash dividends at the rate of eighteen percent (18%) per annum of the sum of the
Original Issue Price of $650 per share.  Since the Company reported in
an SEC filing that it achieved positive Earnings Before Interest, Taxes,
Depreciation and Amortization for two consecutive fiscal quarters, the quarterly
cash dividend was changed from eighteen percent (18%) per annum to twelve
percent (12%) per annum of the sum of the Original Issue Price effective in
December 2008.  Accumulated unpaid dividends on shares of preferred
stock do not bear interest.





Cumulative
dividends on the Series A, Series B, and Series C Preferred Stock are declared
quarterly.  During the first six months of fiscal 2009, the Company
declared $328,000 in cumulative dividends on the Series A, Series B, and Series
C Preferred Stock, of which $132,000 remains outstanding as of the date of
filing. During the last six months of fiscal 2008, the Company declared
dividends of $249,000 of which $56,000 was paid during fiscal 2008 and the
remainder was paid during fiscal 2009.




On
September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
notes maturing on September 1, 2010.  The promissory notes are
unsecured and are 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.  Interest on the notes is payable
semi-annually, on each March 1 and September 1, beginning March 1,
2009.  The notes may be redeemed by us, in whole or in part, without
prepayment penalty or premium, except that, if such pre-payment is proposed to
be made before September 2, 2009, a 1% prepayment penalty shall be
paid.  The unpaid principal amount of the promissory notes and the
accrued but unpaid interest thereon may be converted into shares of our common
stock at $0.65 per share.  In addition, the notes will automatically
be converted into common stock: (A) if the closing price of the common stock is
equal to or greater than two times the conversion price then in effect for a
period of twenty (20) consecutive business days, or (B) upon the election of the
holders of two thirds of the principal outstanding under the Notes, or (C) upon
the closing of a firmly underwritten public offering at a price that is two
times the conversion price with cash proceeds to the Company of at least
$10,000,000.





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
the six months ended December 31, 2008 and 2007, cash and cash equivalents
increased $110,000 and decreased $924,000, respectively.




28


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





Six Months EndedDecember 31,2008
                    
                    
                    2007Cash
      provided by operating activities
                    
                    $
                    11,690
                    
                    
                    $
                    2,262Proceeds
      from issuance of promissory notes
                    
                    
                    725
                    
                    
                    
                    7,690Proceeds
      from issuance of preferred stock
                    
                    
                    149
                    
                    
                    
                    -Proceeds
      from issuance of common stock and warrants
                    
                    
                    -
                    
                    
                    
                    1,170Decrease
      in restricted cash
                    
                    
                    91
                    
                    
                    
                    625Proceeds
      from sale of equipment
                    
                    
                    56
                    
                    
                    
                    18$
                    12,711
                    
                    
                    $
                    11,765




We used cash primarily for (in
thousands):




Six
      Months EndedDecember
      31,2008
                    
                    
                    2007Net
      payments on line of credit payable
                    
                    $
                    11,905
                    
                    
                    $
                    4,350Principal
      payments on promissory notes
                    
                    
                    -
                    
                    
                    
                    6,359Payment
      of dividends
                    
                    
                    390
                    
                    
                    
                    -Purchases
      of property and equipment
                    
                    
                    193
                    
                    
                    
                    1,422Payments
      of debt and equity issuance costs
                    
                    
                    87
                    
                    
                    
                    536Capital
      lease payments
                    
                    
                    26
                    
                    
                    
                    22$
                    12,601
                    
                    
                    $
                    12,689Net
      change in cash and cash equivalents
                    
                    $
                    110
                    
                    
                    $
                    (924
                    )




As of
December 31, 2008, we had $7.9 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 condensed
unaudited consolidated statements of cash flows for the six months ended
December 31, 2008 include the cumulative activity of the daily borrowings and
repayments, $133.4 million and $145.3 million, respectively, under the line of
credit.  The availability under the line of credit at December 31,
2008 amounted to $1.8 million.  The net cash borrowings from, or
repayments of, the line of credit during the six months ended December 31, 2008
and 2007, respectively, have been included as sources or uses of cash in the
tables above.




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.




29


Our
sources of cash during fiscal 2009 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.




As the
current economic crisis worsened significantly impacting our business beginning
in November 2008,  we implemented an extensive program of cost
reductions and business restructuring steps to achieve higher margins on our
business in order to offset reductions in the volumes of fuel, lubricants,
chemicals and other products and services sold to our customers.  Poor
economic conditions have significantly injured the businesses of our customers,
as less freight is being transported and manufacturing demand is down,
correspondingly reducing the consumption of fuel and other petroleum
products.  As a result, we have been concentrating our efforts on
reducing costs and conserving cash availability in order to meet the challenges
of a slowing economy even as we continue to add new customers.  In
fact, notwithstanding the dismal economy, we are adding new customers who are
attempting to reduce their costs of operations and we are experiencing
stabilization of demand for our services from existing customers, and thus, we
expect our volumes to be higher in the third quarter of fiscal 2009 versus the
preceding quarter, though there can certainly be no assurance that it will be
the case.





In order
to conserve cash during the early stages of this deepening economic recession,
on February 3, 2009, we entered into a series of agreements (the “Agreements”)
with each of the holders (“Holders”) of our 111⁄2% Senior Secured Convertible
Promissory Notes dated August 8, 2007 (the “Notes”) to defer the interest
payments on the Notes scheduled for January 1, 2009 (the “Payment”) until April
15, 2009, in exchange for the immediate payment to the Holders of a deferral fee
equal to one percent (1%) of the current outstanding balance of the Note (the
“Deferral Fee”) or to accept the Payment in the form of unregistered shares of
our Common Stock (“Shares”).  Fifty percent (50%) of the Deferral Fee
was paid in cash and fifty percent (50%) was paid in Shares.  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
$0.29 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.  The total cash payment was $45,909, and an aggregate
158,328 Shares were issued to Holders, either as part of the Deferral Fee or for
conversion of the Payment.





Our uses
of cash over the next twelve months are expected to be principally for operating
working capital needs, maintaining our line of credit, servicing any principal
and interest on our debt and dividend requirements on our preferred
stock.  We will continue to pursue additional conversions of debt into
equity or other capital infusions to reduce the amounts owed under our long-term
debt.   Our line of credit with our principal lender matures on
July 1, 2009 and the August 2007 Notes mature on December 31,
2009.  We are currently pursuing various financing alternatives in
order to satisfy our obligations prior to the maturity dates of the Notes and
the line of credit, respectively.  We presently anticipate that, so
long as we continue to meet the terms of all of our bank line of credit
covenants, we will be able to successfully negotiate an extension of time on the
line of credit for most if not all of calendar 2009.  Our ability to
extend or replace our existing bank line of credit facility may depend, however,
on our success in refinancing the August 2007 Notes or repaying them with new
equity capital.    There can, of course, be no assurance
that we will be able to arrange for such new financing or obtain sufficient
equity capital to repay the August 2007 Notes or that we will receive an
extension on our line of credit at acceptable terms for our
Company.    While we are optimistic that, in light of our
steadily improving net margin per gallon and EBITDA, such new financing will be
available to us, we recognize that the unprecedented deterioration of the
national economy and the financial markets over the past several months make
almost any financing subject to question.  If we are not successful in
refinancing or repaying the August 2007 Notes and extending or replacing our
bank line of credit before their respective maturities, our operations would be
materially impacted.




Off-Balance
Sheet Arrangements





At
December 31, 2008, we do not have any material off-balance sheet
arrangements.


30




Recent
Accounting Pronouncements




See Note
3 in the footnotes to financial statements included in this Form
10-Q.




Critical
Accounting Policies




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 as previously disclosed in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2008.




ITEM
3.  QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.


31


ITEM
4.  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 the Exchange Act Rules 13a-15(e) and
15d-15(e), as of the end of the period covered by this Quarterly Report on Form
10-Q.  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 December 31, 2008.





Changes
in Internal Controls 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 quarter ended December
31, 2008 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.


32


PART
II.  Other Information





ITEM
1.  LEGAL PROCEEDINGS





Not
applicable.





ITEM
1A.  RISK FACTORS





Not
applicable.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





Not Applicable.





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





Not
Applicable.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





(a)
              Our
      Annual Meeting of Stockholders was held on November 20,
    2008.




(b)
              The
      Annual Meeting involved the re-election of our board of directors: Wendell
      R. Beard, Richard E. Gathright, Steven R. Goldberg, Larry S. Mulkey, C.
      Rodney O’Connor,
      Robert S. Pico, and Nat
Moore.




(c)
              At
      the Annual Meeting, stockholders voted on the following
      matters:




Proposal
1 – the amendment of the Certificate of Incorporation to effect a reverse stock
split:




Stock
                              
                              Votes in Favor
                              
                              Votes Against
                              
                              Votes AbstainedCommon
      Stock
                              
                              9,850,909
                              
                              959,767
                              
                              71,973Total
      Voting Stock
                              
                              9,855,953
                              
                              960,489
                              
                              71,973





The
proposal has been approved.




Proposal
2 – the amendment to the Company’s 2001 Director Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance:




Votes
      For
                              (Voting
      Stock)
                            
                            Votes
      Against
                              (Voting
      Stock)
                            
                            Votes
      Abstain
                              (Voting
      Stock)3,223,460
                            
                            925,114
                            
                            41,233





The
proposal has been approved.


33


Proposal
3 – the amendment to the Company’s 2000 Stock Option Plan to increase the number
of shares of Common Stock reserved for issuance and to eliminate Section 3(b)
from the 2000 Plan:




Votes
      For
                          (Voting
      Stock)
                        
                        Votes
      Against
                          (Voting
      Stock)
                        
                        Votes
      Abstain
                          (Voting
      Stock)3,213,887
                        
                        911,402
                        
                        64,518




The
proposal has been approved.




Proposal
4 – the election of directors:




Director
                    
                    Votes
      For
                        (Voting
      Stock)
                    
                    Votes
      Withheld
                        (Voting
      Stock)Wendell
      W. Beard
                    
                    9,994,817
                    
                    893,602Richard
      E. Gathright
                    
                    9,991,717
                    
                    896,702Steven
      R. Goldberg
                    
                    9,994,417
                    
                    894,002Nat
      Moore
                    
                    9,973,369
                    
                    915,050Larry
      S. Mulkey
                    
                    9,990,517
                    
                    897,902C.
      Rodney O’Connor
                    
                    9,974,369
                    
                    914,050Robert
      S. Picow
                    
                    9,989,617
                    
                    898,802




All of
the nominees for director have been elected.




Proposal
5 – the ratification of Grant Thornton LLP as the Company’s independent audit
firm:




Votes
      For
                        (Voting
      Stock)
                      
                      Votes
      Against
                        (Voting
      Stock)
                      
                      Votes
      Abstain
                        (Voting
      Stock)10,293,028
                      
                      188,212
                      
                      407,179




The
proposal has been approved.




(d)        
      Not applicable.




34




ITEM
5.  OTHER INFORMATION





Not
Applicable.




ITEM
6.  EXHIBITS





Exhibits





Exhibit No.
              
              Description31.1
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              
              Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002




35


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.




SMF
      ENERGY CORPORATIONFebruary
      17, 2009
              By:
              /s/ Richard E. GathrightRichard
      E. GathrightChairman
      of the Board, Chief Executive Officer and President (Principal Executive
      Officer)By:
              /s/ Michael S. ShoreMichael
      S. ShoreChief
      Financial Officer, Treasurer and Senior Vice President (Principal
      Financial Officer)


36


INDEX
OF EXHIBITS





31.1
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002




37