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,
2009
  OR
  o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF 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
 (Registrant’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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).                                                                                                                                             
    Yes  o No o
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
 
 Smaller
reporting company x       Large
accelerated filer o        Non-accelerated
filer  ̈ (do not
check if a smaller reporting
company)       Accelerated filer o
 
 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 10, 2010 there were 8,557,314 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, 2009 (unaudited) and June
      30, 2009
                    3Condensed
      Consolidated Statements of Operations (unaudited) for the three and
      six-months ended December 31, 2009 and 2008
                    4Condensed
      Consolidated Statements of Cash Flows (unaudited) for the six-months ended
      December 31, 2009 and 2008
                    5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                    7Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    16Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    33Item
      4.
                    Controls
      and Procedures
                    34Part II
                    Other
      Information:Item
      1.
                    Legal
      Proceedings
                    35Item
      1A.
                    Risk
      Factors
                    35Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    35Item
      3.
                    Defaults
      Upon Senior Securities
                    35Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    35Item
      5.
                    Other
      Information
                    35Item
      6.
                    Exhibits
                    35Signatures
                    36Certifications
                    38-40
  2
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED BALANCE SHEETS
  (in
000’s, except share and per share data)
 
 AsofDecember31,2009
                            
                            
                            June30,2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            49
                            
                            
                            $
                            123Accounts
      receivable, net of allowances of $766 and $1,038
                            
                            
                            15,125
                            
                            
                            
                            15,878Inventories,
      net of reserves of $93 and $82
                            
                            
                            1,933
                            
                            
                            
                            1,959Prepaid
      expenses and other current assets
                            
                            
                            460
                            
                            
                            
                            772Total
      current assets
                            
                            
                            17,567
                            
                            
                            
                            18,732Property
      and equipment, net of accumulated depreciation of $16,070 and
      $15,280
                            
                            
                            7,880
                            
                            
                            
                            8,569Identifiable
      intangible assets, net of accumulated amortization of $1,612 and
      $1,433
                            
                            
                            1,841
                            
                            
                            
                            2,019Goodwill
                            
                            
                            228
                            
                            
                            
                            228Deferred
      debt costs, net of accumulated amortization of $617 and
    $530
                            
                            
                            437
                            
                            
                            
                            503Other
      assets
                            
                            
                            69
                            
                            
                            
                            67Total
      assets
                            
                            $
                            28,022
                            
                            
                            $
                            30,118LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Line
      of credit payable
                            
                            $
                            6,570
                            
                            
                            $
                            7,845Current
      portion of term loan
                            
                            
                            1,000
                            
                            
                            
                            917Accounts
      payable
                            
                            
                            5,327
                            
                            
                            
                            5,807Accrued
      expenses and other liabilities
                            
                            
                            3,318
                            
                            
                            
                            3,767Total
      current liabilities
                            
                            
                            16,215
                            
                            
                            
                            18,336Long-term
      liabilities:Term
      loan, net of current portion
                            
                            
                            3,583
                            
                            
                            
                            4,083Promissory
      note
                            
                            
                            800
                            
                            
                            
                            800Other
      long-term liabilities
                            
                            
                            318
                            
                            
                            
                            370Total
      liabilities
                            
                            
                            20,916
                            
                            
                            
                            23,589ContingenciesShareholders’
      equity:Preferred
      stock, $0.01 par value; 5,000 Series D shares authorized,
      598 and 3,228 issued and outstanding,
    respectively
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $0.01 par value; 50,000,000 shares
      authorized; 8,557,314 and 7,963,302 issued and outstanding,
      respectively
                            
                            
                            86
                            
                            
                            
                            80Additional
      paid-in capital
                            
                            
                            36,707
                            
                            
                            
                            36,601Accumulated
      deficit
                            
                            
                            (29,687
                            )
                            
                            
                            (30,152
                            )Total
      shareholders’ equity
                            
                            
                            7,106
                            
                            
                            
                            6,529Total
      liabilities and shareholders’ equity
                            
                            $
                            28,022
                            
                            
                            $
                            30,118
 
  The accompanying notes to the condensed
consolidated financial statements (unaudited) are an integral part of these
condensed consolidated balance sheets.
  3
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
  (in
000’s, except per share data)
  For the Three Months
                    
                    
                    For the Six MonthsEnded December 31,
                    
                    
                    Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Petroleum
      product sales and service revenues
                    
                    $
                    40,458
                    
                    
                    $
                    39,876
                    
                    
                    $
                    78,583
                    
                    
                    $
                    112,838Petroleum
      product taxes
                    
                    
                    5,847
                    
                    
                    
                    5,236
                    
                    
                    
                    11,408
                    
                    
                    
                    11,545Total
      revenues
                    
                    
                    46,305
                    
                    
                    
                    45,112
                    
                    
                    
                    89,991
                    
                    
                    
                    124,383Cost
      of petroleum product sales and service
                    
                    
                    37,077
                    
                    
                    
                    36,584
                    
                    
                    
                    71,105
                    
                    
                    
                    103,727Petroleum
      product taxes
                    
                    
                    5,847
                    
                    
                    
                    5,236
                    
                    
                    
                    11,408
                    
                    
                    
                    11,545Total
      cost of sales
                    
                    
                    42,924
                    
                    
                    
                    41,820
                    
                    
                    
                    82,513
                    
                    
                    
                    115,272Gross
      profit
                    
                    
                    3,381
                    
                    
                    
                    3,292
                    
                    
                    
                    7,478
                    
                    
                    
                    9,111Selling,
      general and administrative expenses
                    
                    
                    2,673
                    
                    
                    
                    3,267
                    
                    
                    
                    6,512
                    
                    
                    
                    7,899Operating
      income
                    
                    
                    708
                    
                    
                    
                    25
                    
                    
                    
                    966
                    
                    
                    
                    1,212Interest
      expense
                    
                    
                    (261
                    )
                    
                    
                    (680
                    )
                    
                    
                    (491
                    )
                    
                    
                    (1,363
                    )Interest
      and other income
                    
                    
                    6
                    
                    
                    
                    3
                    
                    
                    
                    6
                    
                    
                    
                    19Net
      income (loss) before income taxes
                    
                    
                    453
                    
                    
                    
                    (652
                    )
                    
                    
                    481
                    
                    
                    
                    (132
                    )Income
      tax expense
                    
                    
                    (8
                    )
                    
                    
                    (8
                    )
                    
                    
                    (16
                    )
                    
                    
                    (16
                    )Net
      income (loss)
                    
                    $
                    445
                    
                    
                    $
                    (660
                    )
                    
                    $
                    465
                    
                    
                    $
                    (148
                    )Basic
      and diluted net income (loss) per share computation:Net
      income (loss)
                    
                    $
                    445
                    
                    
                    $
                    (660
                    )
                    
                    $
                    465
                    
                    
                    $
                    (148
                    )Less:  Preferred
      stock dividends
                    
                    
                    -
                    
                    
                    
                    (132
                    )
                    
                    
                    -
                    
                    
                    
                    (328
                    )Net
      income (loss) attributable to common shareholders
                    
                    $
                    445
                    
                    
                    $
                    (792
                    )
                    
                    $
                    465
                    
                    
                    $
                    (476
                    )Net
      income (loss) per share attributable to common
    shareholders:Basic
                    
                    $
                    0.05
                    
                    
                    $
                    (0.24
                    )
                    
                    $
                    0.06
                    
                    
                    $
                    (0.14
                    )Diluted
                    
                    $
                    0.05
                    
                    
                    $
                    (0.24
                    )
                    
                    $
                    0.05
                    
                    
                    $
                    (0.14
                    )Weighted
      average common shares outstanding:Basic
                    
                    
                    8,557
                    
                    
                    
                    3,320
                    
                    
                    
                    8,404
                    
                    
                    
                    3,287Diluted
                    
                    
                    8,781
                    
                    
                    
                    3,320
                    
                    
                    
                    8,692
                    
                    
                    
                    3,287
 
  The
accompanying notes to the condensed consolidated financial statements
(unaudited) are an integral part of these condensed
 consolidated
statements of operations (unaudited).
   4
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
  (in
000’s)
  For the Six Months Ended December 31,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                    
                    $
                    465
                    
                    
                    $
                    (148
                    )Adjustments
      to reconcile net income (loss) to net cash provided byoperating
      activities:Depreciation
      and amortization within:Cost
      of sales
                    
                    
                    464
                    
                    
                    
                    584Selling,
      general and administrative
                    
                    
                    636
                    
                    
                    
                    683Amortization
      of deferred debt costs
                    
                    
                    87
                    
                    
                    
                    158Amortization
      of debt discount
                    
                    
                    -
                    
                    
                    
                    20Amortization
      of stock-based compensation
                    
                    
                    164
                    
                    
                    
                    182Write-off
      of unamortized acquisition costs
                    
                    
                    187
                    
                    
                    
                    -Gain
      from sale of assets
                    
                    
                    -
                    
                    
                    
                    (4
                    )Inventory
      reserve provision
                    
                    
                    11
                    
                    
                    
                    -Provision
      for doubtful accounts
                    
                    
                    43
                    
                    
                    
                    332Changes
      in operating assets and liabilities:Decrease
      in accounts receivable
                    
                    
                    710
                    
                    
                    
                    14,836Decrease
      in inventories, prepaid expenses and other assets
                    
                    
                    137
                    
                    
                    
                    847Decrease
      in accounts payable, accrued expenses, and other
    liabilities
                    
                    
                    (980
                    )
                    
                    
                    (5,800
                    )Net
      cash provided by operating activities
                    
                    
                    1,924
                    
                    
                    
                    11,690CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment, net of disposals
                    
                    
                    (201
                    )
                    
                    
                    (193
                    )Proceeds
      from sale of equipment
                    
                    
                    -
                    
                    
                    
                    56Decrease
      in restricted cash
                    
                    
                    -
                    
                    
                    
                    91Net
      cash used in investing activities
                    
                    
                    (201
                    )
                    
                    
                    (46
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from line of credit
                    
                    
                    94,364
                    
                    
                    
                    133,375Repayments
      of line of credit
                    
                    
                    (95,639
                    )
                    
                    
                    (145,280
                    )Principal
      payments on term loan
                    
                    
                    (417
                    )
                    
                    
                    -Proceeds
      from issuance of promissory notes
                    
                    
                    -
                    
                    
                    
                    725Proceeds
      from issuance of preferred stock
                    
                    
                    -
                    
                    
                    
                    149Payment
      of dividends
                    
                    
                    -
                    
                    
                    
                    (390
                    )Debt
      issuance costs
                    
                    
                    (21
                    )
                    
                    
                    (65
                    )Common
      stock, preferred stock, and warrants issuance costs
                    
                    
                    (52
                    )
                    
                    
                    (22
                    )Capital
      lease payments
                    
                    
                    (32
                    )
                    
                    
                    (26
                    )Net
      cash used in financing activities
                    
                    
                    (1,797
                    )
                    
                    
                    (11,534
                    )NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    (74
                    )
                    
                    
                    110CASH
      AND CASH EQUIVALENTS, beginning of period
                    
                    
                    123
                    
                    
                    
                    48CASH
      AND CASH EQUIVALENTS, end of period
                    
                    $
                    49
                    
                    
                    $
                    158
 
 (Continued)
  5
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
  (in
000’s)
 
 (Continued)
                  
                  For the Six Months Ended December 31,2009
                  
                  
                  2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                  
                  $
                  382
                  
                  
                  $
                  1,150SUPPLEMENTAL
      DISCLOSURE OF NON-CASH ACTIVITIES:Capital
      leases
                  
                  $
                  32
                  
                  
                  $
                  47Accrued
      dividends related to preferred stock
                  
                  $
                  -
                  
                  
                  $
                  132Conversion
      of promissory notes to common shares
                  
                  $
                  -
                  
                  
                  $
                  210
  The
accompanying notes to the condensed consolidated financial statements
(unaudited) are an integral part of these condensed
 consolidated
statements of cash flows (unaudited).
  6
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 1.
              NATURE
      OF OPERATIONS
 
 SMF
Energy Corporation, a Delaware corporation (the “Company”) provides petroleum
product distribution services, transportation logistics and emergency response
services to the trucking, manufacturing, construction, shipping, utility,
energy, chemical, telecommunications, and government services
industries.  The Company generates its revenues from commercial mobile
and bulk fueling; the packaging, distribution and sale of lubricants; integrated
out-sourced fuel management; transportation logistics, and emergency response
services.  The Company’s fleet of custom specialized tank wagons,
tractor-trailer transports, box trucks and customized flatbed vehicles delivers
diesel fuel and gasoline to customers’ locations on a regularly scheduled or as
needed basis, refueling vehicles and equipment, re-supplying fixed-site and
temporary bulk storage tanks, and emergency power generation systems; and
distributes a wide variety of specialized petroleum products, lubricants and
chemicals to its customers.
  At
December 31, 2009, the Company was conducting operations through 34 service
locations in the 11 states of Alabama, California, Florida, Georgia, Louisiana,
Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
  2.           CONDENSED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 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 to 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, 2009 are not necessarily
indicative of the results that may be expected for any subsequent period or the
fiscal year ending June 30, 2010.  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, 2009, as filed with the United States
Securities and Exchange Commission (the “2009 Form 10-K”).
 
 Reverse Stock
Split - On September 10, 2009, the Company amended its Certificate of
Incorporation to effect a 1-for-4.5 reverse stock split of the Company’s common
stock, which became effective on the Nasdaq Capital Market on October 1,
2009.  As a result of the reverse stock split, every 4.5 shares of the
Company’s issued and outstanding common stock was combined into 1 share of
common stock with a par value of $0.01 per share.  The reverse stock
split did not change the number of authorized shares of the Company’s common
stock, which remains at 50,000,000 authorized shares.  No fractional
shares were issued in connection with the reverse stock split. If, as a result
of the reverse stock split, a stockholder would otherwise hold a fractional
share, the number of shares to be received by such stockholder were rounded up
to the next highest number of shares.  The reverse stock split
affected all shares of the Company’s common stock, including common stock
underlying stock options, warrants, convertible promissory notes and convertible
preferred stock that were outstanding on the effective date.  All
share and per share information in the accompanying condensed unaudited
consolidated financial statements and the notes thereto has been retroactively
adjusted to give effect to the reverse stock split for all periods
presented.
  7
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 Subsequent
Events- The
Company addressed the disclosure of subsequent events through the date of filing
of this Form 10-Q on February 16, 2010.
  Fair Value of
Financial Instruments -The Company’s financial instruments, primarily
consisting of cash and cash equivalents, accounts receivable and accounts
payable, approximate fair value due to the short term maturity of these
instruments.  The promissory notes and long-term debt approximate fair
value as the borrowing rates currently available to the Company for bank loans
and average maturities are similar to those of June 29, 2009, the date in which
the promissory notes and long-term debt were recorded.
  3.           CASH
AND CASH EQUIVALENTS
 
 During
the six months ended December 31, 2009, the Company paid down $1.3 million on
its line of credit payable.  Total cash and cash availability was
approximately $3.0 millionand $2.5 million at
December 31, 2009 and June 30, 2009, respectively, and was approximately $3.6
million on February 10, 2010.  Total cash and cash availability
includes cash and cash equivalents as presented in the Company’s balance sheet
and cash available to the Company through its line of credit, described in Note
5 – Line of Credit Payable.
 
 The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.  The Company
maintains its cash balances at financial institutions, which at times may exceed
federally insured limits.  The Federal Deposit Insurance Corporation
currently insures balances up to $250,000.  The Company has not
experienced any losses in such bank accounts.
  4.           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.
  8
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  Diluted
net income (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted-average number of common
shares outstanding, increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued.  Conversion or exercise of the potential common shares is
not reflected in diluted earnings per share unless the effect is
dilutive.  The dilutive effect, if any, of outstanding common share
equivalents is reflected in diluted earnings per share by application of the
if-converted and the treasury stock method, as applicable.  In
determining whether outstanding stock options and common stock warrants should
be considered for their dilutive effect, the average market price of the common
stock for the period has to exceed the exercise price of the outstanding common
share equivalent.  Diluted net income per share for the three and
six-months ended December 31, 2009, was diluted by additional common stock
equivalents, adjusted per the reverse stock-split, as follows (in
thousands):
  For
      the Three Months
                      
                      
                      For
      the Six Monthsended December 31, 2009
                      
                      
                      ended December 31, 2009Incremental
      shares due to stock options awarded to employees and
    directors
                      
                      
                      2
                      
                      
                      
                      2Incremental
      shares due to preferred stock conversion rights
                      
                      
                      133
                      
                      
                      
                      286Incremental
      shares due to debt conversion rights
                      
                      
                      89
                      
                      
                      
                      -Total
      dilutive shares
                      
                      
                      224
                      
                      
                      
                      288
  Diluted
net loss per share for the three and six-months ended December 31, 2008 did not
include any common stock equivalents in the computation since the Company
incurred net losses in those periods.
  Anti-dilutive
common stock equivalents outstanding and not included in the computation of
diluted earnings per common share consisted of (in
thousands):
  For
      the Three Months
                    
                    
                    For
      the Six Monthsended December 31,
                    
                    
                    ended December 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Stock
      options
                    
                    
                    418
                    
                    
                    
                    446
                    
                    
                    
                    418
                    
                    
                    
                    446Common
      stock warrants
                    
                    
                    141
                    
                    
                    
                    166
                    
                    
                    
                    141
                    
                    
                    
                    166Promissory
      note conversion rights
                    
                    
                    -
                    
                    
                    
                    922
                    
                    
                    
                    89
                    
                    
                    
                    922Preferred
      stock conversion rights
                    
                    
                    -
                    
                    
                    
                    1,426
                    
                    
                    
                    -
                    
                    
                    
                    1,426Total
      common stock equivalents outstanding
                    
                    
                    559
                    
                    
                    
                    2,960
                    
                    
                    
                    648
                    
                    
                    
                    2,960
 
 The
promissory note and preferred stock conversion rights in the three and six
months ended December 31, 2008 were associated with financial instruments that
were extinguished or converted as of result of a series of transactions
involving all of the holders of the Company’s debt and preferred equity
securities that occurred on June 29, 2009 (“the Recapitalization”).
  9
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 The
following table sets forth the computation of basic and diluted income per share
(in thousands, except per share amounts):
 
 For
      the Three Months
                  
                  
                  For
      the Six MonthsEnded December 31, 2009
                  
                  
                  Ended December 31, 2009Weighted
                  
                  
                  
                  
                  
                  
                  
                  
                  WeightedAverage
                  
                  
                  
                  
                  
                  
                  
                  
                  AverageCommon
                  
                  
                  Per
      Share
                  
                  
                  
                  
                  
                  Common
                  
                  
                  Per
      ShareEarnings
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Earnings
                  
                  
                  Shares
                  
                  
                  AmountNet
      Income
                  
                  $
                  445
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  465Less:  Preferred
      stock dividends
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Basic
      net income per share attributable to common shareholders
                  
                  $
                  445
                  
                  
                  
                  8,557
                  
                  
                  $
                  0.05
                  
                  
                  $
                  465
                  
                  
                  
                  8,404
                  
                  
                  $
                  0.06Effect
      of dilutive securities:Stock
      options
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  2Preferred
      stock conversion rights
                  
                  
                  -
                  
                  
                  
                  133
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  286Debt
      conversion rights
                  
                  
                  3
                  
                  
                  
                  89
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      net income per share attributable to common shareholders
                  
                  $
                  448
                  
                  
                  
                  8,781
                  
                  
                  $
                  0.05
                  
                  
                  $
                  465
                  
                  
                  
                  8,692
                  
                  
                  $
                  0.05
  5.           LINE OF CREDIT
PAYABLE
 
 The Company has a $25.0 million loan
facility, comprised of a three year $20.0 million asset based lending revolving
line of credit coupled with a $5.0 million, 60 month, fully amortized term
loan.  The Company’s $20.0 million line of credit has a maturity date
of July 1, 2012 and permits the Company to borrow up to 85% of the total amount
of eligible accounts receivable and 65% of eligible inventory, both as
defined.  Outstanding stand by letters of credit reduce the maximum
amount available for borrowing.  Outstanding borrowings under the line
are secured by substantially all Company assets.
 
 Interest is payable monthly based on a
LIBOR rate and a pricing matrix and at December 31, 2009, the interest rate for
the line of credit was 4.00%.  This rate was priced using a minimum
LIBOR floor of 0.75%, plus the applicable margin of 3.25%.  The
applicable margin is determined quarterly based on a predetermined fixed charge
coverage ratio pricing matrix with these margins ranging from 3.00% to
3.75%.
 
 As of
December 31, 2009 and June 30, 2009, the Company had outstanding borrowings of
$6.6 million and $7.8 million, respectively, under its line of
credit.  The line of credit is classified as a current liability in
accordance with ASC 470, Debt.  Based on eligible receivables and
inventories, and letters of credit outstanding at December 31, 2009 and June 30,
2009, the Company had $2.9 million and $2.4 million of cash availability under
the line of credit, respectively.
 
 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, 2009, the financial covenants
included a minimum daily availability of $250,000, a fixed charge coverage ratio
of 1.1 to 1.0, and a capital expenditure limitation for fiscal year 2010 of
$750,000.  At December 31, 2009 and June 30, 2009, the Company had a
maximum amount of $1.75 million, on both dates, for which letters of credit
could be issued.  At December 31, 2009 and June 30, 2009, $1.5 million
and $1.6 million, respectively, had been issued in letters of
credit.
  10
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 The Company’s $25.0 million loan
facility agreement requires the Company to obtain the consent of the lender
prior to incurring additional debt, paying any cash dividends or distributions,
or entering into mergers, consolidations or sales of assets outside the ordinary
course of business.  Failure to comply with one or more of the
covenants in the future could affect the amount the Company can borrow and
thereby adversely affect the Company’s liquidity and financial
condition.  At December 31, 2009, the Company was in compliance with
all the requirements of its covenants under the loan facility
agreement.
 
 6.           LONG-TERM
DEBT (INCLUDES TERM LOAN AND PROMISSORY NOTES)
 
 Long-term
debt consists of the following (in thousands):
 
 As
      ofDecember 31, 2009
                        
                        
                        June 30, 2009June
      2009 Term loan (the “Term Loan”), fully amortized, 60 monthly principal
      payments of approximately $83,000 commencing on August 1, 2009; variable
      interest due monthly, 4.75% at December 31, 2009; secured by substantially
      all Company assets; effective interest rate of 6.6%.  For
      additional details, see below.
                        
                        $
                        4,583
                        
                        
                        $
                        5,000June
      2009 unsecured convertible subordinated promissory note (the “New
      Unsecured Note”) (5.5% interest due semi-annually, January 15 and July 15,
      beginning January 15, 2011; interest accrued for first 13 months deferred
      and due on or about August 15, 2010); matures July 1, 2014 in its
      entirety; effective interest rate of 6.3%.  For additional
      details, see below.
                        
                        
                        800
                        
                        
                        
                        800Total
      long-term debt
                        
                        
                        5,383
                        
                        
                        
                        5,800Less:
      current portion
                        
                        
                        (1,000
                        )
                        
                        
                        (917
                        )Long-term
      debt, net
                        
                        $
                        4,383
                        
                        
                        $
                        4,883
 
 
 On June 29, 2009, as part of the
Recapitalization, the Company restructured all of its debt and
equity.  In connection therewith, the Company and its principal
lender, Wachovia Bank, N.A. (the “Bank”), amended the Company’s existing $25.0
million revolving line of credit agreement to provide for a new $25.0 million
loan facility, which included a new $5.0 million, fully amortized, 60 month term
loan (the “Term Loan”).  The proceeds of the Term Loan were used to
pay down $4.867 million of the August 2007 Notes and $125,000 of the September
2008 Notes.  The interest on the Term Loan is payable monthly and the
interest rate is based on a pricing matrix with margins of 3.75% to 4.50% over
the LIBOR lending rate determined by the Company meeting certain EBITDA to fixed
charge coverage ratios, as defined.  At December 31, 2009, the
interest rate was 4.75%.
 
 Also in connection with the
Recapitalization, the Company extinguished $800,000 of the August 2007 Notes
through the issuance of a new, 5.5% interest only, unsecured convertible
subordinated promissory note in the principal amount of $800,000 (the “New
Unsecured Note”).  The New Unsecured Note is subordinated to all other
existing debt of the Company, including any amounts owed now or in the future to
the Bank.  The holder of the New Unsecured Note entered into a debt
subordination agreement (the “Subordination Agreement”) with the Company and the
Bank, whereby it expressly subordinated its rights under the New Unsecured Note
to the Bank.
  11
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 The
principal balance of the New Unsecured Note is due at maturity on July 1,
2014.  Subject to the limitations in the Subordination
Agreement, interest will be paid semi-annually, except that accrued interest
payments for the first thirteen months will be deferred until on or about August
15, 2010.  Thereafter, starting January 15, 2011, semi-annual interest
payments will be scheduled on or about each January 15th and July
15th.  The amounts due under the New Unsecured Note will become due
and payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default.  If permitted under
the Subordination Agreement, the Company may pre-pay the New Unsecured Note, in
whole or in part, without prepayment penalty or premium.
 
 Twenty-five percent (25%) of the
original principal amount of the New Unsecured Note, or $200,000, may be
converted into shares of the Company’s Common Stock at $2.25 per share (the
“Conversion Price”) at the option of the noteholder.  The Conversion
Price was adjusted as a result of the October 1, 2009, reverse stock
split.  The number and kind of securities purchasable upon conversion
and the Conversion Price remain subject to additional adjustments for stock
dividends, stock splits and other similar events.
  7.           SHAREHOLDERS’
EQUITY
  The following reflects the change in
shareholders’ equity for the six months ended December 31, 2009 (in thousands,
except share data):
  Preferred
      Stock
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    AdditionalSeries
      D
                                                    
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    Paid-in
                                                    
                                                    
                                                    AccumulatedShares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Capital
                                                    
                                                    
                                                    Deficit
                                                    
                                                    
                                                    TotalBalance
      at June 30, 2009
                                                    
                                                    
                                                    3,228
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    
                                                    7,963,302
                                                    
                                                    
                                                    $
                                                    80
                                                    
                                                    
                                                    $
                                                    36,601
                                                    
                                                    
                                                    $
                                                    (30,152
                                                    )
                                                    
                                                    $
                                                    6,529Net
      income
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    465
                                                    
                                                    
                                                    
                                                    465Conversion
      of Series D Preferred Stock to common stock
                                                    
                                                    
                                                    (2,630
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    594,012
                                                    
                                                    
                                                    
                                                    6
                                                    
                                                    
                                                    
                                                    (6
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Recapitalization
      costs
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (52
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (52
                                                    )Stock-based
      compensation amortization expense
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    164
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    164Balance
      at December 31, 2009
                                                    
                                                    
                                                    598
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    
                                                    8,557,314
                                                    
                                                    
                                                    $
                                                    86
                                                    
                                                    
                                                    $
                                                    36,707
                                                    
                                                    
                                                    $
                                                    (29,687
                                                    )
                                                    
                                                    $
                                                    7,106
 
 In July
2009, the Company was informed by two previous noteholders (the “Holders”) of
the August 2007 Notes that, notwithstanding the terms of their original exchange
agreements related to the Recapitalization completed in June 2009, they had
intended to exchange more of their August 2007 Notes for shares of common stock
than was reflected in their original exchange
agreements.  Accordingly, in response to a request from the Holders to
remedy their mistake, on July 6, 2009, the Company entered into two additional
exchange agreements (the “New Exchange Agreements”) with the Holders by which
the Holders exchanged 824 shares of Series D Preferred Stock for an aggregate of
192,680 shares of the Company’s Common Stock based on an aggregate value of
$329,000.  The New Exchange Agreements provided the Holders with the
terms originally offered in the Recapitalization, including the $1.71 price per
share of Common Stock, rather than the $1.80 conversion price that would have
been available upon a conversion of the Series D Preferred Stock received in the
Recapitalization.  The $1.71 price used in the New Exchange Agreements
was not less than the closing bid price for the Common Stock on the Nasdaq
Capital Market on the last trading day preceding the July 6, 2009 New Exchange
Agreements.  The issuance of the additional 36,997 shares resulted in
a non-cash inducement on extinguishment of convertible notes of $166,000 which
was recorded in the financial statements for the year ended June 30,
2009.  All share and price per share amounts discussed above have been
adjusted to reflect the reverse stock split of October 1, 2009.
 
 In
September 2009, some of the holders of the Series D Preferred Stock converted an
aggregate of 1,806 shares into 401,332 shares of Common Stock for an aggregate
value of $722,000.  Since this is an exchange of an equity instrument
into another equity instrument, the net impact to shareholders’ equity is zero,
with a decrease of $6,000 in Additional Paid-in Capital and an equal increase to
Common Stock reflecting the par value of the issued common
shares.  The share amounts discussed above have been adjusted to
reflect the reverse stock split of October 1, 2009.
  12
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  Employee
Stock Options
  In
December 2009, the Company’s shareholders approved the Board of Directors’
adoption of a new equity incentive plan (the “2009 Plan”) with a total of
1,300,000 shares of common stock reserved for issuance under the Plan in the
form of stock options, stock appreciation rights, performance stock units or
restricted stock.  After the 2009 Plan was approved by the
shareholders and became effective on December 10, 2009, the Company’s Board of
Directors resolved that it would make no further grants of stock options under
the Company’s existing stock option plans, the 2001 Director Stock Option Plan
and the 2000 Stock Option Plan (the “Existing Plans”).
 
 In
September 2009, the exercise prices of all outstanding employee stock options
previously granted under the 2000 Stock Option Plan were amended by the
Compensation Committee of the Company’s Board of Directors to have an exercise
price of $2.48 per share after the reverse stock split, or $0.55 per share
before the reverse stock split (the “Amendments”).  The new exercise
price of $2.48 set by the Amendments was, as adjusted for the reverse stock
split, $0.77 above the $1.71 official closing price on the Nasdaq Capital Market
on the trading day immediately preceding the date of the
Amendment.  The Amendments did not change the vesting schedules or any
of the other terms of the respective stock options.  As a result of
the repricing of the options effected by the Amendments, the Company incurred a
non-cash charge of $93,000 to stock-based compensation amortization expense
during the first quarter of fiscal year 2010 and an additional $5,000 which is
being amortized over the remaining vesting period of the related
options.  This modification affected 31 employees who held 327,614
stock options on June 30, 2009, adjusted to reflect the reverse stock split of
October 1, 2009.
  8.           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 which may be covered by
insurance or recoverable from third parties, or the financial impact with
respect to these matters as of December 31, 2009.  Therefore no
contingency gains or losses have been recorded as of December 31,
2009.  However, based on management’s knowledge at the time of this
filing, management believes that the final resolution of such matters pending at
the time of this report, individually and in the aggregate, will not have a
material adverse effect upon the Company’s consolidated financial position,
results of operations or cash flows.
  On
November 23, 2009, SMF Energy Corporation (the “Company”) entered into a
confidential settlement agreement (the “Agreement”) resolving all claims in the
lawsuit entitled, SMF Energy
Corporation vs. Financial Accounting Solutions Group, Inc., Mitchel Kramer, Alex
Zaldivar and Kramer Professional Staffing, Inc.  Pursuant to
the Agreement, SMF received a payment of $1,050,000 during the quarter ended
December 31, 2009.  The payment was treated as a partial recovery of
the professional fees incurred in connection with the lawsuit, with no gain or
loss recognized for the settlement.  The Company expensed $463,000 of
these expenses during the first six months of the current fiscal
year.  The recovery of these professional fees and the year to date
litigation costs have been recorded as part of the selling, general and
administrative expenses in the statement of operations.  There was no
admission of liability by any of the parties to the Lawsuit on account of any of
the various claims, counterclaims or third party claims made in the
Lawsuit.  All claims made by or against the Company in the Lawsuit
were released as part of the Agreement.
  13
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 On May
26, 2009, the Company filed a Demand for Arbitration with the American
Arbitration Association in Broward County, Florida, under which the Company
brought claims against various members of the Harkrider family arising out of
the Company’s October 1, 2005 purchase of H & W Petroleum Company, Inc. (“H
& W”) from the Harkrider family and H & W’s purchase of certain assets
of Harkrider Distributing Company, Inc. (“HDC”) immediately prior to the
Company’s purchase of H & W.  In that action, Case No. 32 198 Y
00415 09 (the “Arbitration”), the Company and H & W, which is now the
Company’s wholly owned subsidiary, sought damages for breaches of, and
indemnification under, the October 1, 2005, Stock Purchase Agreement between
various Harkrider family members and the Company and under the September 29,
2005, Asset Purchase Agreement between HDC and various members of the Harkrider
family, on the one hand, and H & W on the other, along with various other
claims arising from the transaction.  Also on May 26, 2009, H & W
filed a second action against various members of the Harkrider family in the
District Court in Harris County, Texas, Civil Action No. 2009-32909 (the “Harris
County Action”), seeking damages and declaratory relief for various breaches of
H & W’s lease of its Houston, Texas, facility by H & W’s landlord, the
Harkrider Family Partnership, and other related claims.  On June 24,
2009, the parties to the Arbitration and the Harris County Action agreed that
all of the claims brought in the Arbitration would be dismissed and all of those
claims would be added to the Harris County Action.  On June 29, 2009,
in accordance with the stipulation of the parties to consolidate the Arbitration
with the Harris County Action, the American Arbitration Association closed the
Arbitration.  The Harris County Action is currently in the discovery
phase and settlement discussions are ongoing with all parties having entered
into a standstill agreement until March 15, 2010.
  9.           RECENT
ACCOUNTING PRONOUNCEMENTS
 
 FASB Accounting
Standards Codification
 (Accounting Standards Update (“ASU”)
2009-01)
 
 In
June 2009, the FASB issued the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental
GAAP.  All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the
Codification.  All other non-grandfathered, non-SEC accounting
literature not included in the Codification has become
nonauthoritative.  The Codification did not change GAAP, but instead
introduced a new structure that combines all authoritative standards into a
comprehensive, topically organized online database.  The Codification
is effective for interim or annual periods ending after September 15, 2009,
and impacts the Company’s financial statements as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification.  There have been no changes to the content of the
Company’s financial statements or disclosures as a result of implementing the
Codification during the three and six months ended December 31,
2009.
 
 As a
result of the Company’s implementation of the Codification during the six months
ended December 31, 2009, previous references to new accounting standards and
literature are no longer applicable.  In the current six months
financial statements, the Company provides reference to both new and old
guidance to assist in understanding the impacts of recently adopted accounting
literature, particularly for guidance adopted since the beginning of the current
fiscal year.
 
 Fair Value
Measurements
 (Included in ASC 825 “Financial
Instruments”, previously FAS No. 157 “Fair Value
Measurements”)
 
 In
September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”).  This standard provides guidance for using fair value to
measure assets and liabilities.  Under FAS No. 157, fair value refers to
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in
which the reporting entity transacts.  In this standard, the FASB clarifies
the principle that fair value should be based on the assumptions that market
participants would use when pricing the asset or liability.  In support of
this principle, FAS No. 157 establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions.  The fair value
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data, for example, the reporting entity’s own
data.  Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy.  Certain aspects of
this standard were effective for the financial statements issued for the Company
since the beginning of fiscal year 2009.  The adoption of FAS No. 157 had
no impact on the Company’s consolidated financial position, results of
operations or cash flows.  FASB Staff Position (“FSP”) FAS 157-2,
“Effective Date of FASB Statement No. 157,” issued in February 2008, provided a
one-year deferral to fiscal years beginning after November 15, 2008 of the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed in financial
statements at least annually at fair value on a recurring basis.  The
Company’s adoption of the remaining provisions as of July 1, 2009 of FAS No. 157
did not have an impact on the Company’s consolidated financial position, results
of operations or cash flows.
  14
  SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 Business
Combinations
 (Included in ASC 805 “Business
Combinations”, previously FAS No. 141R “Business
Combinations”)
 
 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.  In April, 2009, the FASB issued
FSP FAS 141(R)-1, “Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (“FSP No. 131(R)-1”).  This FSP amends and
clarifies FAS No. 141R to address application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination.  FAS
No. 141R was effective for the Company beginning July 1, 2009 and was
applied prospectively to business combinations completed on or after that
date.  The adoption of FAS No. 141R resulted in the write-off of $187,000,
in the first quarter of fiscal year 2010, of unamortized acquisition costs as of
June 30, 2009, which are no longer capitalized under FAS No.
141R.
  Accounting for
Convertible Debt Instruments
 (Included
in ASC 470-20 “Debt – Debt with Conversion and Other Options”, previously FSP
APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement)”)
  In May
2008, the FASB issued FSP APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP No. 14-1”).  This
standard clarifies that convertible debt instruments that may be settled in cash
upon conversion (including partial cash settlement) are not addressed by
paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.  Additionally, this FSP specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods.  FSP No. 14-1 was effective for the Company beginning July 1,
2009.  The standard had no impact on our financial condition, results of
operations or cash flows.
  Equity
Topic 505 – Accounting for Distributions to Shareholders with Components of
Stock and Cash a Consensus of the FASB Emerging Issues Task Force
 
 In
January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-01,
“Equity Topic 505 – Accounting
for Distributions to Shareholders with Components of Stock and Cash a Consensus
of the FASB Emerging Issues Task Force” (“ASU No.
2010-01”).The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share).  ASU No. 2010-01 was effective for interim and annual periods
ending on or after December 15, 2009, and should be applied on a retrospective
basis.  The adoption of this update in the second quarter of fiscal
2010 did not have a material impact on the Company’s consolidated financial
position, results of operations or cash flows.
  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,
2009, 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 unanticipated 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
      debt agreements and to replace, extend or refinance the debts evidenced by
      those agreements as they mature;
  ·
              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; and
  ·
              The
      avoidance of a substantial adverse impact from recent generally negative
      economic and market conditions.
  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, 2009, the
Company was conducting operations through 34 service locations in the 11 states
of Alabama, California, Florida, Georgia, Louisiana, Mississippi, Nevada, North
Carolina, South Carolina, Tennessee and Texas.
 
 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.
  OVERVIEW
 
 During
the first half of fiscal year 2010, as we expected, we generated positive
financial performance in both our first and second fiscal quarters yielding
operating profit, bottom line net income, positive EBITDA and cash contribution
after our fixed charges1.
  17
  During
the second quarter of fiscal 2010, we continued to grow our business organically
by completing an expansion into three new markets including Knoxville, TN,
Spartanburg, SC, and North Augusta, GA, and of our business in existing North
Carolina markets projecting to add 4 million gallons annually from this
expansion.  During this fiscal year, we have yet to see any recovery
of the lost 14% in existing customer demand that we experienced last year when
the national economy collapsed.  Nevertheless, if and when the
anticipated economic recovery reaches the businesses of these customers, we
believe that we will be at the forefront of the economic benefits provided, due
to the nature of the industries we serve as well as our diversification within
those industries, with over 4,000 customers in 34 markets over 11 states
contributing to our bottom line performance.
 
 We are
currently focused on reinvigorating our long term growth strategy, which
includes not only organic growth but also growth via acquisition of other
businesses.  We have taken steps to position ourselves for such growth
through acquisitions, including the stabilization of our existing business, the
consistent generation of positive cash contribution and improved financial
performance, completion of our enterprise resource management system software
and other infrastructure to facilitate rapid and efficient integration of
acquired companies, and maintenance of our NASDAQ Capital Markets listing
notwithstanding the stock market meltdown of the past 18 months via our October
2009 reverse stock split.  We have recently engaged in a series of
campaigns to actively stimulate awareness and interest in our Company’s common
stock via stock promotion, participation in road shows and other investor
communications.  We believe that the current market capitalization of
the Company is far less than the Company’s real enterprise value, and are
constrained from using our common stock as an accretive component of our
acquisition plans at current stock price levels, which could be significantly
dilutive.  Finally, in December 2009, we also brought closure to the
costly FAS litigation whereby we agreed to settle the case and recovered part of
the overall professional fees that we incurred.
 
 As
discussed in our last quarter overview and described in detail in our June 30,
2009 Form 10-K, we concluded fiscal 2009 with a complex recapitalization of all
of our debt and equity securities which strengthened our balance sheet and
financial position by lowering our total debt by $4.5 million, increasing
shareholders’ equity by $4.1 million and reducing our debt to equity ratio from
approximately 9:1 to 2:1 over the prior year.  This June 2009
confluence of transactions (the “Recapitalization”) extinguished all of our
maturing debt while providing us with a new 5 year term loan and a minimum 3
year bank line of credit, both of which carry significantly lower interest rates
than our previous debt instruments.  The Recapitalization was expected
to reduce our annual cash interest expense by over $1.0 million, which
expectation is being confirmed, based on our results for the first half of
fiscal 2010.
  18
  The
following table presents certain operating results for the last seven sequential
quarters (in thousands, except net margin per gallon):
 For
      the Three Months ended,December 31,
                    
                    
                    September 30,
                    
                    
                    June
      30,
                    
                    
                    March
      31,
                    
                    
                    December
      31,
                    
                    
                    September
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2009
                    
                    
                    2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2008
                    
                    
                    2008Revenues
                    
                    $
                    46,305
                    
                    
                    $
                    43,686
                    
                    
                    $
                    39,884
                    
                    
                    $
                    34,982
                    
                    
                    $
                    45,112
                    
                    
                    $
                    79,271
                    
                    
                    $
                    82,036Gross
      profit
                    
                    $
                    3,381
                    
                    
                    $
                    4,097
                    
                    
                    $
                    3,539
                    
                    
                    $
                    3,790
                    
                    
                    $
                    3,292
                    
                    
                    $
                    5,819
                    
                    
                    $
                    4,290Selling,
      general and administrative
                    
                    $
                    2,673
                    
                    
                    $
                    3,839
                    
                    
                    $
                    3,401
                    
                    
                    $
                    3,455
                    
                    
                    $
                    3,267
                    
                    
                    $
                    4,632
                    
                    
                    $
                    3,845Operating
      income
                    
                    $
                    708
                    
                    
                    $
                    258
                    
                    
                    $
                    138
                    
                    
                    $
                    335
                    
                    
                    $
                    25
                    
                    
                    $
                    1,187
                    
                    
                    $
                    445Interest
      expense and other income, net
                    
                    $
                    (255
                    )
                    
                    $
                    (230
                    )
                    
                    $
                    (454
                    )
                    
                    $
                    (570
                    )
                    
                    $
                    (677
                    )
                    
                    $
                    (667
                    )
                    
                    $
                    (811
                    )Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on extinguishment 4
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (1,651
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Gain
      on extinguishment of promissory notes
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    27
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Net
      income (loss)
                    
                    $
                    445
                    
                    
                    $
                    20
                    
                    
                    $
                    (1,948
                    )
                    
                    $
                    (243
                    )
                    
                    $
                    (660
                    )
                    
                    $
                    512
                    
                    
                    $
                    (366
                    )Less:  Non-cash
      write-off of unamortized acquisition costs
                    
                    $
                    -
                    
                    
                    $
                    187
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Less:  Non-cash
      stock options repricing costs
                    
                    $
                    -
                    
                    
                    $
                    93
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Less:  Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on extinguishment 4
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,651
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Adjusted
      net income (loss) before non-cash, non-recurring charges 5
                    
                    $
                    445
                    
                    
                    $
                    300
                    
                    
                    $
                    (297
                    )
                    
                    $
                    (243
                    )
                    
                    $
                    (660
                    )
                    
                    $
                    512
                    
                    
                    $
                    (366
                    )EBITDA
      2
                    
                    $
                    1,289
                    
                    
                    $
                    1,134
                    
                    
                    $
                    876
                    
                    
                    $
                    974
                    
                    
                    $
                    690
                    
                    
                    $
                    1,990
                    
                    
                    $
                    1,154Net
      margin
                    
                    $
                    3,609
                    
                    
                    $
                    4,333
                    
                    
                    $
                    3,795
                    
                    
                    $
                    4,027
                    
                    
                    $
                    3,534
                    
                    
                    $
                    6,161
                    
                    
                    $
                    4,611Net
      margin per gallon 3
                    
                    $
                    0.21
                    
                    
                    $
                    0.26
                    
                    
                    $
                    0.23
                    
                    
                    $
                    0.25
                    
                    
                    $
                    0.21
                    
                    
                    $
                    0.33
                    
                    
                    $
                    0.24Gallons
      sold
                    
                    
                    16,956
                    
                    
                    
                    16,945
                    
                    
                    
                    16,709
                    
                    
                    
                    16,041
                    
                    
                    
                    16,602
                    
                    
                    
                    18,550
                    
                    
                    
                    19,024
  1Cash contribution after fixed charges
reflects the cash that is generated by the business after deducting cash
payments incurred to service debt obligations and capital expenditures.
  2 EBITDA
is defined as earnings before interest, taxes, depreciation, and amortization, a
Non-GAAP financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission.  To the extent that gain or loss
and the non-cash ASC 470-20 (formerly FAS No. 84) inducement on extinguishment
of promissory notes constitute the recognition of previously deferred interest
or finance cost, it is considered interest expense for the calculation of
certain interest expense amounts.  Both stock-based compensation
amortization expense and the write-off of unamortized acquisition costs are
considered amortization items to be excluded in the EBITDA
calculation.  We believe that EBITDA provides useful information to
investors because it excludes transactions not related to the core cash
operating business activities.  We believe that excluding these
transactions allows investors to meaningfully trend and analyze the performance
of our core cash operations.
  3Net
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
 
 4Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on extinguishment is a charge we
incurred strictly as a result of the June 29, 2009
Recapitalization.  The Company extinguished a portion of the August
2007 and the September 2008 Notes (“the Notes”) through the issuance of
approximate 1.2 million shares and approximate 278,000 shares, respectively, at
the negotiated price of $1.71 per share, which was greater than the $1.67 per
share closing bid price the day prior to the Recapitalization, but lower than
the conversion price applicable to the convertible debt instruments, which
resulted in the issuance of more shares in the exchange than would have been
issued upon a conversion.  The practice of accounting in the
interpretation of FAS No. 84 is that an inducement occurs any time when
additional shares are issued in the extinguishment of convertible debt
regardless of the absence of an economic loss or economic intent of the parties
to the transaction.  Irrespective of the economic reality of the
transaction, FAS No. 84 required the recording of a non-cash “conversion
inducement” charge of $1.7 million, based on the difference between the
approximate aggregate 471,000 common shares issuable to the applicable note
holder under the original conversion rights that existed upon a conversion and
the approximate 1.5 million common shares exchanged at $1.71 cents in the
transaction that extinguished all of the Notes.  This non-cash charge
is deemed a financing expense to extinguish the Notes.  To the extent
that the non-cash FAS No. 84 inducement on extinguishment of promissory notes
constitutes the recognition of a finance cost, it is considered interest
expense for the calculation of certain interest expense amounts.
 
 5Adjusted
net income (loss) before non-cash, non-recurring charges is shown to provide the
reader with information regarding the true economic performance of the Company
before the impact of charges that do not reflect the on-going performance of the
operations such as of the technical non-economic substantive accounting charge
of $1.7 million in the fourth quarter of fiscal 2009 and the first quarter of
fiscal 2010 write-off incurred as a new accounting ruling was applied and stock
compensation expense that resulted from repricing stock options.  We
believe that this is a meaningful Non-GAAP representation of the ongoing
performance of the operations.
 
 The
following table reconciles Adjusted net income (loss) before non-cash,
non-recurring charges (Non-GAAP measure) to the Net income (loss) for each of
the seven quarterly periods presented above (in thousands):
 
 For
      theThreeMonths
      ended,December 31,
                        
                        
                        September 30,
                        
                        
                        June 30,
                        
                        
                        March 31,
                        
                        
                        December 31,
                        
                        
                        September 30,
                        
                        
                        June 30,2009
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2008
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        445
                        
                        
                        $
                        20
                        
                        
                        $
                        (1,948
                        )
                        
                        $
                        (243
                        )
                        
                        $
                        (660
                        )
                        
                        $
                        512
                        
                        
                        $
                        (366
                        )Less:  Non-cash
      write off of unamortized acquisition costs
                        
                        
                        -
                        
                        
                        
                        187
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Less:  Non-cash
      stock options repricing costs
                        
                        
                        -
                        
                        
                        
                        93
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Less:  Non-cash
      ASC 470-20 (formerly FAS No. 84) inducement on
    extinguishment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,651
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Adjusted net income
      (loss) before  non-cash, non-recurring charges 1
                        
                        $
                        445
                        
                        
                        $
                        300
                        
                        
                        $
                        (297
                        )
                        
                        $
                        (243
                        )
                        
                        $
                        (660
                        )
                        
                        $
                        512
                        
                        
                        $
                        (366
                        )
 
 1Adjusted
net income (loss) before non-cash, non-recurring charges is shown to provide the
reader with information regarding the economic performance of the Company before
the impact of charges that do not reflect the on-going performance of the
operations such as the technical non-economic substantive accounting treatment
charge of $1.7 million in the fourth quarter of fiscal 2009, and the first
quarter of fiscal 2010 write-off incurred as new accounting ruling was applied
and stock compensation expense that resulted from the repricing of stock
options.  We believe that this is a meaningful Non-GAAP representation
of the ongoing performance of the operations.
  20


The
following table reconciles EBITDA (Non-GAAP measure) to the reported Net income
(loss) for each of the seven quarterly periods presented above (in
thousands):
  For the Three Months ended,December 31,
                                                    
                                                    
                                                    September 30,
                                                    
                                                    
                                                    June 30,
                                                    
                                                    
                                                    March 31,
                                                    
                                                    
                                                    December 31,
                                                    
                                                    
                                                    September 30,
                                                    
                                                    
                                                    June 30,2009
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2008Net
      income (loss)
                                                    
                                                    $
                                                    445
                                                    
                                                    
                                                    $
                                                    20
                                                    
                                                    
                                                    $
                                                    (1,948
                                                    )
                                                    
                                                    $
                                                    (243
                                                    )
                                                    
                                                    $
                                                    (660
                                                    )
                                                    
                                                    $
                                                    512
                                                    
                                                    
                                                    $
                                                    (366
                                                    )Add
      back:Interest
      expense
                                                    
                                                    
                                                    261
                                                    
                                                    
                                                    
                                                    230
                                                    
                                                    
                                                    
                                                    545
                                                    
                                                    
                                                    
                                                    575
                                                    
                                                    
                                                    
                                                    680
                                                    
                                                    
                                                    
                                                    683
                                                    
                                                    
                                                    
                                                    720Income
      tax expense
                                                    
                                                    
                                                    8
                                                    
                                                    
                                                    
                                                    8
                                                    
                                                    
                                                    
                                                    8
                                                    
                                                    
                                                    
                                                    8
                                                    
                                                    
                                                    
                                                    8
                                                    
                                                    
                                                    
                                                    8
                                                    
                                                    
                                                    
                                                    -Depreciation
      and amortizationexpense
      within:Cost
      of sales
                                                    
                                                    
                                                    228
                                                    
                                                    
                                                    
                                                    236
                                                    
                                                    
                                                    
                                                    254
                                                    
                                                    
                                                    
                                                    239
                                                    
                                                    
                                                    
                                                    242
                                                    
                                                    
                                                    
                                                    342
                                                    
                                                    
                                                    
                                                    321Selling,
      general andadministrative
      expenses
                                                    
                                                    
                                                    316
                                                    
                                                    
                                                    
                                                    320
                                                    
                                                    
                                                    
                                                    344
                                                    
                                                    
                                                    
                                                    334
                                                    
                                                    
                                                    
                                                    342
                                                    
                                                    
                                                    
                                                    341
                                                    
                                                    
                                                    
                                                    357Stock-based
      compensation expense
                                                    
                                                    
                                                    31
                                                    
                                                    
                                                    
                                                    133
                                                    
                                                    
                                                    
                                                    49
                                                    
                                                    
                                                    
                                                    61
                                                    
                                                    
                                                    
                                                    78
                                                    
                                                    
                                                    
                                                    104
                                                    
                                                    
                                                    
                                                    122Write-off
      of  unamortizedacquisition
      costs
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    187
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Non-cash
      ASC 470-20(formerly
      FAS No. 84)inducement
      on extinguishment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,651
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Gain
      on extinguishmentof
      promissory notes
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (27
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -EBITDA
                                                    
                                                    $
                                                    1,289
                                                    
                                                    
                                                    $
                                                    1,134
                                                    
                                                    
                                                    $
                                                    876
                                                    
                                                    
                                                    $
                                                    974
                                                    
                                                    
                                                    $
                                                    690
                                                    
                                                    
                                                    $
                                                    1,990
                                                    
                                                    
                                                    $
                                                    1,154
 
 ·
              We
      are reporting a continuation of positive operating income and net income
      of $708,000 and $445,000, respectively, for the three months ended
      December 31, 2009, compared to operating income of $25,000 and a net loss
      of $660,000 for the same period in the prior year, improvements of
      $683,000, or 2,732%, and $1.1 million.  In the prior fiscal
      year, based on our recognition of the impending economic crisis, we
      permanently eliminated certain personnel costs in order to better respond
      to the anticipated deterioration of business conditions.  This
      action resulted in a one time reversal of previously expensed charges in
      the second quarter of last year that favorably impacted operating income
      and reduced our net loss by approximately $490,000.  While there
      was no corresponding elimination of personnel costs this year, we did
      achieve another one time financial benefit from our settlement of a
      lawsuit, in which we recovered a substantial portion of our expended legal
      and professional fees, lowering our SG&A costs during the current
      quarter by approximately $748,000 and favorably impacted operating income
      and net income by the same amount.
 
 ·
              The
      net margin in the second quarter of fiscals 2010 and 2009 was $3.6 million
      and $3.5 million, respectively, on 17.0 million and 16.6 million gallons
      sold during those periods.  The increase in the net margin is
      the result of the increase in gallons sold of 2%.  The net
      margins per gallon in the second quarter of fiscals 2010 and 2009 were
      21.3 cents for both periods.
  21
 
 ·
              In
      the second quarter of fiscal 2010, we achieved EBITDA of $1.3 million
      compared to $690,000 in the same period a year ago, an improvement of
      approximately $599,000, and an improvement of approximately $155,000 when
      compared to the $1.1 million EBITDA of the first quarter of fiscal
      2010.  Additionally, during the quarter we generated $660,000 in
      cash contribution after fixed charges, which reflects the cash that is
      generated by the business after deducting cash payments incurred to
      service debt obligations and pay for capital expenditures.  Our
      fixed coverage ratio as of December 31, 2009 was a twelve month cumulative
      of 2.04 compared to the required 1.1 that we need to maintain per
      covenants with the bank.
 
 ·
              The
      $445,000 net income during the three months ended December 31, 2009,
      included $641,000 in non-cash charges, such as depreciation and
      amortization of assets, debt costs, stock-based compensation, and the
      provision for doubtful accounts.  The net income also included
      stated interest expense associated with servicing of our debt of $216,000,
      public company costs of $282,000, and the recovery through our settlement
      of a lawsuit of some of our expended legal and professional fees, thereby
      lowering our SG&A costs during the current quarter by approximately
      $748,000.
 
 ·
              Financial
      results from 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.  During the second quarter of fiscal 2010,
      the gallons delivered remained basically the same as the prior quarter,
      reflecting a continuation of the stabilized volumes that the Company began
      to establish in the third quarter of fiscal 2008.  While there
      can be no assurance that the stabilization of recessionary demand will
      continue or will begin to turn upward in the foreseeable future, we remain
      cautiously optimistic that our operations and financial performance will
      continue to steadily improve as they have over the past few
      quarters.
 
 ·
              As
      a result of the Recapitalization, our interest expense was substantially
      lower in the second quarter of fiscal 2010 compared to the same period the
      prior year.  We incurred interest expense of $261,000 this
      quarter compared to $680,000 in the same quarter in the prior year, a
      decrease of $419,000, or 62%, of which $216,000 is related to lower debt
      and lower costs to service our existing
debt.
  RESULTS
OF OPERATIONS:
 
 To
monitor our results of operations, we review key financial information,
including net revenues, gross profit, selling, general and administrative
expenses, net income or losses, and non-GAAP measures, such as
EBITDA.  We continue to seek ways to more efficiently manage and
monitor our business performance.  We also review other key operating
metrics, such as the number of gallons sold and net margins per gallon
sold.  As our business is dependent on the supply of fuel and
lubricants, we closely monitor pricing, repayment terms, and fuel availability
from our suppliers in order to purchase the most cost effective
products.  We calculate our net margin per gallon by adding gross
profit and the depreciation and amortization components of cost of sales, and
dividing that sum by the number of gallons sold.
  22
 
 Comparison
of Three Months ended December 31, 2009 (“second quarter of fiscal 2010”) to
Three Months ended December 31, 2008 (“second quarter of fiscal
2009”)
 
 Revenues
 
 Revenues
were $46.3 million in the second quarter of fiscal 2010, as compared to $45.1
million in the same period of the prior year, an increase of $1.2 million, or
3%.  The increase in revenues of 3% is primarily due to a 2% increase
in gallons sold compared to a year ago as a result of the stabilization of
customer demand that we saw emerging in the third quarter of fiscal 2009 which
has continued in fiscal 2010.  We also continue to see increases in
new customer business and prospective business as companies seek to reduce their
costs of operation with mobile fueling and our other services which has resulted
in an increase of three service locations from which we conduct our
operations.  Naturally, we cannot be certain that this will continue
in the future or that any new business will be sufficient to offset possible
future decreases in demand from our existing customer base.  We are
cautiously optimistic that the stabilization of customer demand that we saw
emerging in the third quarter of fiscal 2009, which was subsequent to the
economic recessionary volume demand free fall from November 2008 through
February 2009, will continue through the remainder of fiscal 2010 and that we
can maintain or increase present volume levels by continuing to attract new
customers. The
increase in revenues was also due to price variances in market prices of
petroleum products, as compared to the same quarter in the prior year, which
resulted in an increase of $227,000 in revenues.
  Gross
Profit
 
 Gross
profit was $3.4 million in the second quarter of fiscal 2010, as compared to
$3.3 million in the same period of the prior year, an increase of approximately
$89,000 or 3%.  The increase in gross profit is partially due to the
stabilization of customer demand that we saw emerging in the third quarter of
fiscal 2009 which has continued in fiscal 2010, and partially due to increases
in new customer business and prospective business as companies seek to reduce
their costs of operation with mobile fueling and our other
services.  A variety of other countervailing factors contributed to
the increase in gross profit.  For example, increases in gross profit
this year were partially offset by last year’s reduction in direct operating
expense due to a one time reversal of $221,000 of a personnel benefits reserve
in anticipation of the economic crisis and by various other new or higher
expenses this year, such as surveillance expense of $34,000 higher travel
expense of $20,000 related to the expansion into the new markets this quarter,
an additional $110,000 this year for water removal expense related to storms in
Houston this year.  Net margin per gallon was 21.3 cents for both
periods.
  Selling,
General and Administrative Expenses
  Selling,
general and administrative (“SG&A”) expenses were $2.7 million in the second
quarter of fiscal 2010 and $3.3 million in the second quarter of fiscal 2009, a
decrease of $594,000 or 18%.  During the quarter we settled a lawsuit
by which we recovered some of our expended legal and professional fees, thereby
lowering our SG&A costs during the current quarter by approximately
$748,000.  On a comparative basis, some of this one time benefit from
the settlement, as well as the benefit of other cost cuts implemented over the
past year, such as decreases in payroll expense of $173,000, in stock option
expense of $47,000, and in travel expense of $43,000, were offset by higher
personnel benefits expense of $270,000, as there was no corresponding decrease
in this expense during fiscal 2010 as there was from last year’s reversal of
employee benefit reserves.  Also offsetting the benefit, on a
year-to-year quarterly comparison, that we achieved from the lawsuit and our
other cost reductions this year, were increases during the second quarter of
this year of $102,000 in the provision for doubtful accounts, $57,000 related to
a new investor public relations program and $21,000 in facilities and office
expense related to the geographical expansion of our business
operations.
  23
  Interest
Expense
 
 Interest
expense was $261,000 in the second quarter of fiscal 2010, as compared to
$680,000 in the same period of the prior year, a decrease of $419,000, or
62%.  The decrease was primarily due to lower interest expense as a
result of the reduction in our long term-debt outstanding, and improved interest
rate terms due to the June 2009 Recapitalization.  Our interest rate
terms have improved, as we replaced the high 11.5% former Secured and Unsecured
debt with the term loan which is at interest rates currently around
4.75%.  We also negotiated for more favorable rates on the line of
credit.  In addition, the average outstanding balance on the line of
credit was $5.0 million lower period over period primarily due to higher fuel
prices at the beginning of the quarter last fiscal year which resulted in higher
debt requirements last fiscal year.
 
 The
components of interest expense were as follows (in thousands):
 
 For the Three Monthsended December 31,2009
                      
                      
                      2008Stated
      Rate Interest Expense:Line
      of credit
                      
                      $
                      114
                      
                      
                      $
                      276Long-term
      debt
                      
                      
                      67
                      
                      
                      
                      283Other
                      
                      
                      35
                      
                      
                      
                      25Total
      stated rate interest expense
                      
                      
                      216
                      
                      
                      
                      584Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                      
                      
                      45
                      
                      
                      
                      86Amortization
      of debt discount
                      
                      
                      -
                      
                      
                      
                      10Total
      non-cash interest amortization
                      
                      
                      45
                      
                      
                      
                      96Total
      interest expense
                      
                      $
                      261
                      
                      
                      $
                      680
  Income
Taxes
  State
income tax expense of $8,000 was recorded for the second quarters of fiscal 2010
and 2009.  No federal income tax expense was recorded for these
periods.  The federal net operating loss carryforward at June 30, 2009
was $28.1 million, which includes a $2.2 million net operating loss carryforward
acquired in connection with the H & W acquisition. Although
the Company generated net income for the three months ended December 31, 2009,
there is no provision for federal income taxes due to the availability of net
operating loss carryforwards.
  Net
Income (Loss)
  Net
income was $445,000 in the second quarter of fiscal 2010, as compared to a net
loss of $660,000 in the same period in the prior year.  The $1.1
million or 167% increase was partially attributable to the decrease of $594,000
in SG&A costs due to cost containments implemented last year and the
$748,000 net impact of the lawsuit settlement, both of which were partially
offset by prior year’s total reduction of $490,000 attributable to a one time
benefit from the elimination of certain personnel benefits
expense.  The balance of the increase in net income was largely the
result of lower interest expense of $419,000 derived from the reduction in our
debt after the June 2009 Recapitalization.
  24
  EBITDA
  EBITDA
was $1.3 million in the second quarter of fiscal 2010, as compared to $690,000
in the same period of the prior year, an increase of $599,000, or
87%.  The increase was primarily attributed to the improved net income
from overall higher net margins over last year, the recovery of certain
professional fees from the settlement of a lawsuit and the stabilization of
demand starting in the third quarter of fiscal 2009 and continuing through
2010.
 
 The
reconciliation of EBITDA to Net income (loss) for the second quarters of fiscals
2010 and 2009 was as follows (in thousands):
  For the Three Monthsended December 31,2009
                      
                      
                      2008Net
      income (loss)
                      
                      $
                      445
                      
                      
                      $
                      (660
                      )Add
      back:Interest
      expense
                      
                      
                      261
                      
                      
                      
                      680Income
      tax expense
                      
                      
                      8
                      
                      
                      
                      8Depreciation
      and amortization expense within:Cost
      of sales
                      
                      
                      228
                      
                      
                      
                      242Selling,
      general and administrative expenses
                      
                      
                      316
                      
                      
                      
                      342Stock-based
      compensation amortization expense
                      
                      
                      31
                      
                      
                      
                      78EBITDA
                      
                      $
                      1,289
                      
                      
                      $
                      690
  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, a Non-GAAP financial
measure within the meaning of Regulation G promulgated by the Securities and
Exchange Commission.  The stock-based compensation amortization is
considered an amortization item to be excluded in the EBITDA
calculation.  We believe that EBITDA provides useful information to
investors because it excludes transactions not related to the core cash
operating business activities.  We believe that excluding these
transactions allows investors to meaningfully trend and analyze the performance
of our core cash operations.
  Comparison
of Six Months ended December 31, 2009 to Six Months ended December 31,
2008
 
 Revenues
 
 Revenues
were $90.0 million in the six months ended December 31, 2009, as compared to
$124.4 million in the same period of the prior year, a decrease of $34.4
million, or 28%, primarily as a result of price variances due to lower market
prices of petroleum products during the first quarter of fiscal
2010.  Accordingly, the Company estimates that price variances
resulted in a decrease of $31.1 million in revenues.  These variances
were also impacted by the partial contribution from the emergency response
services provided during the first quarter of fiscal 2009.
  25
 
 The
decreases in revenues were also partially due to a decrease of 1.3 million in
gallons sold, which resulted in a decrease of approximately $3.3 million in
revenues compared to the same period in the prior year.  The decreases
were partially due to the emergency response services provided in Louisiana and
Texas for Hurricanes Gustav and Ike during the first quarter of fiscal 2009, and
the contraction of the national economy which started in the second quarter of
2009.  These decreases were offset by increases in new customer
business and prospective business which resulted in a net decrease of gallons
sold of only 4%, as compared to the same period in the prior year.  We
have experienced an increase in demand from companies seeking to reduce their
costs of operation with mobile fueling and our other services which has resulted
in an increase of three service locations from which we conduct our
operations.  Naturally, we cannot be certain that this will continue
in the future or that any new business will be sufficient to offset possible
future decreases in demand from our existing customer base.  We are
cautiously optimistic that the stabilization of customer demand that we saw
emerging in the third quarter of fiscal 2009 will continue through the remainder
of fiscal 2010 and that we can maintain or increase present volume levels by
continuing to attract new customers.
  Gross
Profit
 
 Gross
profit was $7.5 million in the six months ended December 31, 2009, as compared
to $9.1 million in the same period of the prior year, a decrease of $1.6
million, or 18%.  The net margin per gallon for the six months ended
December 31, 2009 and 2008 was 23.4 centsand 27.6 cents,
respectively, a decrease of 4.2 cents.  The decreases were primarily
due to the incremental margin contribution from the emergency response services
provided in Louisiana and Texas for Hurricanes Gustav and Ike during the first
quarter of fiscal 2009 and the decrease in volume resulting from the contraction
of the national economy which impacted us starting in the second quarter of
fiscal 2009.  We incurred additional direct operating expenses this
year as a result of last year’s $221,000 reversal of a personal benefits reserve
as benefits were eliminated as a response to the economic collapse.
 
 These
decreases were partially offset by the stabilization of customer demand that we
saw emerging in the third quarter of fiscal 2009 which has continued in fiscal
2010, and partially due to increases in new customer business and prospective
business as companies seek to reduce their costs of operation with mobile
fueling and our other services.
  Selling,
General and Administrative Expenses
  Selling,
general and administrative expenses were $6.5 million in the six months ended
December 31, 2009, as compared to $7.9 million in the same period of the prior
year, a decrease of $1.4 million, or 18%.
 
 SG&A
has decreased as a result of the cost cutting and business restructuring steps
taken beginning in late November 2008 and through the second half of fiscal 2009
to meet the decrease in customer demand experienced in fiscal
2009.  We experienced decreases in payroll expense of $415,000, the
provision for doubtful accounts of $290,000, travel expense of $163,000 for
services provided in the first quarter of fiscal 2009 related to hurricane
emergency response work, credit card fees of $122,000 due to lower fuel prices,
and facilities and office expense of $32,000.  Also, we settled a
lawsuit whereby we recovered part of our expended legal and professional costs,
lowering our SG&A costs during the current year by approximately
$587,000.  On a comparative basis, some of the benefit from the
settlement, as well as the continuing benefit of other cost cuts implemented
over the past year mentioned above, were offset by this year’s higher personnel
benefits expense of $270,000 resulting from last year’s one time reversal of
employee benefits reserves.
 
 Also
offsetting the benefit, on a year-to-year comparison, that we achieved from the
lawsuit and our other cost reductions this year, was the write-off of $187,000
of unamortized acquisition costs in the first quarter of fiscal year 2010
required by the adoption of ASC 805, which no longer allows the capitalization
of such costs.
  26
 
 Interest
Expense
 
 Interest
expense was $491,000 in the six months ended December 31, 2009, as compared
to $1.4 million in the same period of the prior year, a decrease of
approximately $872,000, or 64%.  The decrease was primarily due to
lower interest expense as a result of the reduction in our long-term debt
outstanding, and improved interest rate terms due to the June 2009
Recapitalization.  Our interest rate terms have improved, as we
replaced the high 11.5% former Secured and Unsecured debt with the term loan
which is at interest rates currently around 4.75%.  We also negotiated
for more favorable rates on the line of credit.  In addition, the
average outstanding balance on the line of credit was $7.6 million lower period
over period primarily due to lower fuel prices and lower debt
requirements.
 
 The
components of interest expense were as follows (in thousands):
 
 For the Six Monthsended December 31,2009
                        
                        
                        2008Stated
      Rate Interest Expense:Line
      of credit
                        
                        $
                        224
                        
                        
                        $
                        589Long-term
      debt
                        
                        
                        136
                        
                        
                        
                        550Other
                        
                        
                        44
                        
                        
                        
                        46Total
      stated rate interest expense
                        
                        
                        404
                        
                        
                        
                        1,185Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                        
                        
                        87
                        
                        
                        
                        158Amortization
      of debt discount
                        
                        
                        -
                        
                        
                        
                        20Total
      non-cash interest amortization
                        
                        
                        87
                        
                        
                        
                        178Total
      interest expense
                        
                        $
                        491
                        
                        
                        $
                        1,363
  Income
Taxes
  State
income tax expense of $16,000 was recorded for the six months ended December 31,
2009 and 2008.  No federal income tax expense was recorded for these
periods.  The federal net operating loss carryforward at June 30, 2009
was $28.1 million, which includes a $2.2 million net operating loss carryforward
acquired in connection with the H & W acquisition.  Although the
Company generated net income for the six months ended December 31, 2009, there
is no provision for federal income taxes due to the availability of net
operating loss carryforwards.
  Net
Income (Loss)
  Net
income was $465,000 in the six months ended December 31, 2009, as compared to a
net loss of $148,000 in the same period in the prior year.  The
approximate $613,000 or 414% increase was partially attributable to lower
selling, general and administrative expenses of $1.4 million.  The net
income results were favorably impacted by cost cutting and business
restructuring steps that were taken beginning in late November 2008 to meet the
decrease in customer demand due to the national economy, and also by lower
interest expense of $872,000 as a result of the reduction in our long term-debt
outstanding and lower balances in the line of credit primarily the result of the
June 2009 Recapitalization and lower fuel prices.  Additionally, the
net income results were positively impacted by the settlement of a lawsuit
whereby we recovered part of our expended legal and professional lowering our
SG&A costs during the current year by approximately
$587,000.
  27
  The
increase in net income was offset by the lower gross profit of $1.6 million
resulting from the decrease in margin contribution from the emergency response
services provided in the first quarter of fiscal 2009 in Louisiana and Texas for
Hurricanes Gustav and Ike, from the decrease of 4% in volumes resulting from the
contraction of the economy which impacted us starting in the second quarter of
fiscal 2009, and the one time benefit last year from the elimination of certain
personnel benefits expense.
  EBITDA
  EBITDA
was $2.4 million in the six months ended December 31, 2009, as compared to $2.7
million in the same period of the prior year, a decrease of
$257,000.  The decrease in EBITDA was partially due to the lower gross
profit of $1.6 million resulting from the decrease in margin contribution from
the emergency response services provided in the first quarter of fiscal 2009 in
Louisiana and Texas for Hurricanes Gustav and Ike and from the decrease in
volumes resulting from the contraction of the economy which impacted us starting
in November of 2008.  The decreases were partially offset by the lower
selling, general and administrative expenses of $1.4 million as a result of the
cost cutting and business restructuring steps taken beginning in late November
2008 to meet the decrease in customer demand, the recovery of certain
professional fees related to the settlement of a lawsuit which decreases were
partially offset by the increase in personnel benefits expense due to the one
time benefit last year when a benefits reserve was eliminated.
  The
reconciliation of EBITDA to Net income (loss) for the six months ended December
31, 2009 and 2008 was as follows (in thousands):
  For the Six Monthsended December 31,2009
                      
                      
                      2008Net
      income (loss)
                      
                      $
                      465
                      
                      
                      $
                      (148
                      )Add
      back:Interest
      expense
                      
                      
                      491
                      
                      
                      
                      1,363Income
      tax expense
                      
                      
                      16
                      
                      
                      
                      16Depreciation
      and amortization expense within:Cost
      of sales
                      
                      
                      464
                      
                      
                      
                      584Selling,
      general and administrative expenses
                      
                      
                      636
                      
                      
                      
                      683Stock-based
      compensation amortization expense
                      
                      
                      164
                      
                      
                      
                      182Write-off
      of unamortized acquisition costs
                      
                      
                      187
                      
                      
                      
                      -EBITDA
                      
                      $
                      2,423
                      
                      
                      $
                      2,680
 
 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, a
Non-GAAP financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission.  Both stock-based compensation
amortization expense and the write-off of unamortized acquisition costs are
considered amortization items to be excluded in the EBITDA
calculation.  We believe that EBITDA provides useful information to
investors because it excludes transactions not related to the core cash
operating business activities.  We believe that excluding these
transactions allows investors to meaningfully trend and analyze the performance
of our core cash operations.
  28
  Capital
Resources and Liquidity
 
 At
December 31, 2009, we had total cash and cash availability of approximately $3.0
million, which consisted of cash and cash equivalents of $49,000 and additional
cash availability of approximately $2.9 million through our line of
credit.  At December 31, 2009, the financial covenants included a
minimum daily availability of $250,000.  As of February 10, 2010, our
cash and cash availability was approximately $3.6 million.  We are
able to draw on our line of credit on a daily basis subject to debt covenant
requirements.
 
 During
the fourth quarter of fiscal 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our debt and
equity.  After the Recapitalization, our total debt was
immediately decreased by $4.5 million, our cash requirements for interest and
dividends are expected to be reduced by over $1 million per year and our
shareholders’ equity increased by approximately $4.1 million at June 30,
2009.  A critical component of the Recapitalization was the conversion
of our existing $25.0 million revolving line of credit into a new, significantly
more favorable, $25.0 million loan facility, comprised of a three year $20.0
million revolver coupled with a new $5.0 million, 60 month, fully amortized term
loan and the extension of the final maturity date of our revolving line of
credit to July 1, 2012.
 
 We
believe that, as a result of the Recapitalization, we have established adequate
credit enhancements to meaningfully respond to potential increases in volumes,
irrespective of whether they are accompanied by fuel price
increases.  However, in light of current economic market uncertainties
and price volatility, we cannot be certain that we will be successful in
responding to unanticipated market forces in the future.
 
 Sources
and Uses of Cash
 
 On
November 23, 2009, the Company entered into a confidential settlement agreement
(the “Agreement”) finally resolving all claims in the lawsuit entitled, SMF Energy Corporation vs. Financial
Accounting Solutions Group, Inc., Mitchel Kramer, Alex Zaldivar and Kramer
Professional Staffing, Inc.  Pursuant to the Agreement, SMF
received a payment of $1,050,000 during the quarter ended December 31,
2009.  The payment was a partial recovery of the professional fees
incurred in connection with the lawsuit.  The proceeds from the
settlement were used to pay down the line of credit and then in turn used to pay
for the professional fees incurred with the settlement, and for working capital
purposes.  The settlement of this lawsuit will have a positive impact
on both our performance and working capital requirements as we have eliminated
the costly litigation expenses.
 
 Debt Financing and Equity
Offerings
 
 As noted
above, on June 29, 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our debt and equity, providing
us with substantial short term and long term financial benefits, including the
conversion of our then existing $25.0 million revolving line of credit into a
new, significantly more favorable, $25.0 million loan facility, comprised of a
three year $20.0 million revolver coupled with a $5.0 million, 60 month, fully
amortized term loan.  The Eighteenth Amendment to our Loan and
Security Agreement with our principal lender also extended the renewal date of
the revolving line of credit from July 1, 2009 to July 1, 2012, added our
vehicles and field operating equipment as additional collateral for the bank,
and modified several covenants in the loan agreement in a manner we believe to
be favorable to the Company.
  29
 
 Our $20.0
million line of credit permits us to borrow up to 85% of the total amount of
eligible accounts receivable and 65% of eligible inventory, both as
defined.  Outstanding letters of credit reduce the maximum amount
available for borrowing.  Outstanding borrowings under the line are
secured by substantially all Company assets including its transportation fleet
and related field equipment.  Our line of credit finances the timing
difference between petroleum product purchases payable generally in 10 to 12
days from date of delivery and the collection of receivables from our customers,
generally in 30 to 45 days from date of delivery.
 
 Interest
is payable monthly based on a pricing matrix and at December 31, 2009, the
interest rate for the line of credit was 4.00%.  This rate was priced
using a minimum LIBOR floor of 0.75%, plus the applicable margin of
3.25%.  The applicable margin is determined quarterly based on a
predetermined fixed charge coverage ratio pricing matrix with these margins
ranging from 3.00% to 3.75% plus the greater of the current LIBOR rate or the
minimum 0.75% LIBOR floor.
 
 As of
December 31, 2009, we have outstanding letters of credit for an aggregate amount
of $1.5 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.
 
 As of
December 31, 2009 and June 30, 2009, we had outstanding borrowings of $6.6
million and $7.8 million, respectively, under our line of credit.  The
line of credit is classified as a current liability in accordance with ASC 470,
Debt.  Based on eligible receivables and inventories, and letters of
credit outstanding at December 31, 2009, we had approximately $2.9 million, of
cash availability under the line of credit.
 
 In
addition to obtaining funds through the line of credit, in the past, we have
obtained funds through the issuance of promissory notes, common stock, preferred
stock and warrants to purchase our common stock.  We have also
concurrently or subsequently restructured our debt and equity to secure better
terms and to reduce our cash requirements for interest and
dividends.  As a result of the Recapitalization effected in the fourth
quarter of fiscal 2009, we believe that we have established adequate credit
enhancements for fiscal 2010 to meaningfully respond to potential increases in
volumes and fuel prices.
 
 Dividends
on the outstanding shares of Series D Preferred Stock, which shares were issued
in the June 2009 Recapitalization, are payable when, as and if declared by the
Board of Directors, but only out of funds that are legally available, in annual
cash or equity dividends, at the Company’s election, at the rate of 5.5% per
annum of the sum of the Original Issue Price per share.  Per the
Certificate of Designation for the Series D, the first dividend declaration for
the outstanding Series D Preferred Stock is expected to be approximately in
August 2010 and may, at the Company’s election, be paid in shares of the
Company’s common stock.  Subsequent dividends on the Series D are
payable in cash except that, under specified circumstances, dividends may be
paid in the form of shares of a new series of nonvoting Preferred Stock, the
terms, rights and privileges of which are, other than the voting rights,
substantially identical to those of the Series D.  Dividends on any of
the Company’s Series of Preferred Stock are cumulative from the date of the
original issuance of the Preferred Stock.  Accumulated unpaid
dividends on Preferred Stock do not bear interest.
 
 During
fiscal 2009, we declared $577,000 in cumulative dividends on the Series A,
Series B, and Series C Preferred Stock, which have been paid or satisfied as of
June 30, 2009.  The Series A, Series B, and Series C Preferred Stock
are no longer outstanding as a result of the Recapitalization effected on June
29, 2009.  During the six months ended December 31, 2009, $1.1 million
of the Series D Preferred stock was converted into 594,012 shares of Common
Stock further reducing our future financing costs as future dividend payments
were reduced.
  30
 
 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, 2009 and 2008, cash and cash equivalents
decreased $74,000 and increased $110,000, respectively.
 
 We
generated cash from the following sources (in thousands):
 
 For the Six Months ended December 31,2009
                        
                        
                        2008Cash
      provided by operating activities
                        
                        $
                        1,924
                        
                        
                        $
                        11,690Proceeds
      from issuance of promissory notes
                        
                        
                        -
                        
                        
                        
                        725Proceeds
      from issuance of preferred stock
                        
                        
                        -
                        
                        
                        
                        149Decrease
      in restricted cash
                        
                        
                        -
                        
                        
                        
                        91Proceeds
      from sale of equipment
                        
                        
                        -
                        
                        
                        
                        56$
                        1,924
                        
                        
                        $
                        12,711
 
 We used
cash primarily for (in thousands):
 
 For the Six Months ended December 31,2009
                      
                      
                      2008Net
      payments on line of credit payable
                      
                      $
                      1,275
                      
                      
                      $
                      11,905Principal
      payments on term loan
                      
                      
                      417
                      
                      
                      
                      -Purchases
      of property and equipment
                      
                      
                      201
                      
                      
                      
                      193Payments
      of debt and equity issuance costs
                      
                      
                      73
                      
                      
                      
                      87Capital
      lease payments
                      
                      
                      32
                      
                      
                      
                      26Payment
      of dividends
                      
                      
                      -
                      
                      
                      
                      390$
                      1,998
                      
                      
                      $
                      12,601Net
      change in cash and cash equivalents
                      
                      $
                      (74
                      )
                      
                      $
                      110
  As of
December 31, 2009, we had $6.6 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, 2009 include the cumulative activity of the daily borrowings and
repayments, $94.4 million and $95.6 million, respectively, under the line of
credit.  The availability under the line of credit at December 31,
2009 and June 30, 2009, amounted to $2.9 million and $2.4 million,
respectively.  The net cash borrowings from, or repayments of, the
line of credit during the six months ended December 31, 2009 and 2008,
respectively, have been included as sources or uses of cash in the tables
above.
  31
  Adequacy
of Capital Resources
 
 Our
liquidity and ability to meet financial obligations is dependent on, among other
things, the generation of cash flow from operating activities, obtaining or
maintaining sufficient trade credit from vendors, complying with our debt
covenants, continuing renewal of our line of credit facility, and/or raising any
required additional capital through the issuance of debt or equity securities or
additional borrowings.
 
 Our
sources of cash during the remainder of fiscal 2010 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.
  In
November 2008, we recognized the significant impact the current economic crisis
was having on our business; so we implemented an extensive program of cost
reductions and business restructuring steps to improve margins in order to
offset reductions in the volumes of fuel, lubricants, chemicals and other
products and services sold to our customers and, further, completed our $40
million June 2009 Recapitalization.  Poor economic conditions have
significantly impacted 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.  Although our
volumes of petroleum products and chemicals sold began to stabilize in the third
quarter of fiscal 2009 and that has continued through the second quarter of
fiscal 2010, we cannot be certain that it will continue in the future or that
any new business will be sufficient to offset possible future decreases in
demand from our existing customer base.
 
 We
concluded fiscal 2009 with the $40 million Recapitalization of all of our debt
and equity securities.  We strengthened our balance sheet and
financial position immediately lowering our total debt by $4.5 million,
increasing shareholder’s equity by approximately $4.1 million and reducing our
debt to equity ratio from approximately 9:1 to 2:1 over the prior
year.  We extinguished all of our maturing debt and obtained a new 5
year term loan and a minimum 3 year bank line of credit, both of which carry
highly competitive lower interest rates than our previous debt
instruments.  We have reduced our cash interest expense and dividends
cash usage.  We also continue to concentrate our efforts on reducing
costs and conserving cash availability in order to meet the challenges of the
recession.  We believe the improvements in our balance sheet as a
result of the Recapitalization resulted in establishing adequate credit
enhancements for fiscal 2010 to meaningfully respond to potential increases in
volumes and fuel prices.  We have also sought to offset the reduced
demand from existing customers by aggressively seeking new customers, which has
resulted in an increase of three service locations from which we conduct our
operations.
 
 Our uses
of cash over the next twelve months are expected to be principally for operating
working capital needs, maintaining our line of credit, and servicing any
principal and interest on our debt.  Our line of credit with our
principal lender matures on July 1, 2012.
  Off-Balance
Sheet Arrangements
 
 At
December 31, 2009, we do not have any material off-balance sheet
arrangements.
  Recent
Accounting Pronouncements
  See Note
9 in the footnotes to financial statements included in this Form 10-Q for
pronouncements that have already been effective.
  32
 
 Fair
Value Measurement and Disclosures Topic 820 – Improving Disclosures about Fair
Value Measurements
 
 In
January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06
“Fair Value Measurement and
Disclosures Topic 820 – Improving Disclosures about Fair Value Measurements”
(“ASU No. 2010-06”), which provides amendments to subtopic 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities.  This update provides amendments to Topic 820 that will
provide more robust disclosures about (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3.  The new disclosures and clarification of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlement in the rollforward of activity in Level 3 fair
value measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.  The Company’s adoption of the remaining provisions of ASU No.
2010-06 are not expected to have an impact on the Company’s consolidated
financial position, results of operations or cash flows.
  Accounting for
Transfers of Financial Assets
 (Included in ASC 860 “Transfers and
Servicing”, previously FAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment to FAS No. 140”)
 
 In
June 2009, the FASB issued FAS Statement No. 166, “Accounting for Transfers of
Financial Assets, an amendment to FAS No. 140” (“FAS No.
166”).  FAS No. 166 eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial
assets including limiting the circumstances in which a company can derecognize a
portion of a financial asset, and requires additional
disclosures.  FAS No. 166 was effective for financial statements
issued for fiscal years beginning after November 15, 2009, and interim periods
within those fiscal years.  The Company’s adoption of this standard is not
expected to have an impact on our financial condition, results of operations or
cash flows.
  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, 2009.
  ITEM
3.  QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Not
applicable.
  33
  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, 2009.
 
 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, 2009 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.
  34
  PART
II   Other Information
 
 ITEM
1.    LEGAL PROCEEDINGS
 
 Please
see Item 8.01 of the Company’s report on Form 8-K, as filed November 30, 2009,
which is incorporated by reference herein.
 
 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
 
 Please
see Item 8.01 of the Company’s report on Form 8-K, as filed December 10, 2009,
which is incorporated by reference herein.
 
 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
      16, 2010
                  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