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 March 31, 2010




OR




 ̈
            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
 ̈





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





Indicate by check mark 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.





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (do
      not check if a smaller reporting company)
              Smaller
      reporting company x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).     Yes  ̈    No
x





As of May
12, 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 March 31, 2010 (unaudited) and June 30,
      2009
                3Condensed
      Consolidated Statements of Operations (unaudited) for the three and
      nine-months ended March 31, 2010 and 2009
                4Condensed
      Consolidated Statements of Cash Flows (unaudited) for the nine-months
      ended March 31, 2010 and 2009
                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
                32Item
      4.
                Controls
      and Procedures
                33Part
      II
                Other
      Information:Item
      1.
                Legal
      Proceedings
                34Item
      1A.
                Risk
      Factors
                34Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                34Item
      3.
                Defaults
      Upon Senior Securities
                34Item
      4.
                Removed
      and Reserved
                34Item
      5.
                Other
      Information
                34Item
      6.
                Exhibits
                34Signatures
                35Certifications
                37-39


2




SMF ENERGY CORPORATION AND SUBSIDIARIES




CONDENSED
CONSOLIDATED BALANCE SHEETS




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





March31,2010
                  
                  
                  June30,2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  265
                  
                  
                  $
                  123Accounts
      receivable, net of allowances of $808 and $1,038
                  
                  
                  16,966
                  
                  
                  
                  15,878Inventories,
      net of reserves of $96 and $82
                  
                  
                  1,926
                  
                  
                  
                  1,959Prepaid
      expenses and other current assets
                  
                  
                  523
                  
                  
                  
                  772Total
      current assets
                  
                  
                  19,680
                  
                  
                  
                  18,732Property
      and equipment, net of accumulated depreciation of $16,513 and
      $15,280
                  
                  
                  7,541
                  
                  
                  
                  8,569Identifiable
      intangible assets, net of accumulated amortization of $1,701 and
      $1,433
                  
                  
                  1,751
                  
                  
                  
                  2,019Goodwill
                  
                  
                  228
                  
                  
                  
                  228Deferred
      debt costs, net of accumulated amortization of $658 and
    $530
                  
                  
                  396
                  
                  
                  
                  503Other
      assets
                  
                  
                  76
                  
                  
                  
                  67Total
      assets
                  
                  $
                  29,672
                  
                  
                  $
                  30,118LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Line
      of credit payable
                  
                  $
                  7,448
                  
                  
                  $
                  7,845Current
      portion of term loan
                  
                  
                  1,000
                  
                  
                  
                  917Accounts
      payable
                  
                  
                  7,009
                  
                  
                  
                  5,807Accrued
      expenses and other liabilities
                  
                  
                  3,158
                  
                  
                  
                  3,767Total
      current liabilities
                  
                  
                  18,615
                  
                  
                  
                  18,336Long-term
      liabilities:Term
      loan, net of current portion
                  
                  
                  3,333
                  
                  
                  
                  4,083Promissory
      notes
                  
                  
                  800
                  
                  
                  
                  800Other
      long-term liabilities
                  
                  
                  286
                  
                  
                  
                  370Total
      liabilities
                  
                  
                  23,034
                  
                  
                  
                  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
                  
                  
                  36,658
                  
                  
                  
                  36,601Accumulated
      deficit
                  
                  
                  (30,106
                  )
                  
                  
                  (30,152
                  )Total
      shareholders’ equity
                  
                  
                  6,638
                  
                  
                  
                  6,529Total
      liabilities and shareholders’ equity
                  
                  $
                  29,672
                  
                  
                  $
                  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 Nine MonthsEnded March 31,
                
                
                Ended March 31,2010
                
                
                2009
                
                
                2010
                
                
                2009Petroleum
      product sales and service revenues
                
                $
                43,181
                
                
                $
                29,746
                
                
                $
                121,764
                
                
                $
                142,584Petroleum
      product taxes
                
                
                5,971
                
                
                
                5,236
                
                
                
                17,379
                
                
                
                16,781Total
      revenues
                
                
                49,152
                
                
                
                34,982
                
                
                
                139,143
                
                
                
                159,365Cost
      of petroleum product sales and service
                
                
                39,783
                
                
                
                25,956
                
                
                
                110,888
                
                
                
                129,683Petroleum
      product taxes
                
                
                5,971
                
                
                
                5,236
                
                
                
                17,379
                
                
                
                16,781Total
      cost of sales
                
                
                45,754
                
                
                
                31,192
                
                
                
                128,267
                
                
                
                146,464Gross
      profit
                
                
                3,398
                
                
                
                3,790
                
                
                
                10,876
                
                
                
                12,901Selling,
      general and administrative expenses
                
                
                3,555
                
                
                
                3,455
                
                
                
                10,067
                
                
                
                11,354Operating
      income (loss)
                
                
                (157
                )
                
                
                335
                
                
                
                809
                
                
                
                1,547Interest
      expense
                
                
                (260
                )
                
                
                (575
                )
                
                
                (751
                )
                
                
                (1,938
                )Interest
      and other income
                
                
                6
                
                
                
                5
                
                
                
                12
                
                
                
                24Income
      (loss) before income taxes
                
                
                (411
                )
                
                
                (235
                )
                
                
                70
                
                
                
                (367
                )Income
      tax expense
                
                
                (8
                )
                
                
                (8
                )
                
                
                (24
                )
                
                
                (24
                )Net
      income (loss)
                
                $
                (419
                )
                
                $
                (243
                )
                
                $
                46
                
                
                $
                (391
                )Basic
      and diluted net income (loss) per share computation:Net
      income (loss)
                
                $
                (419
                )
                
                $
                (243
                )
                
                $
                46
                
                
                $
                (391
                )Less:  Preferred
      stock dividends
                
                
                -
                
                
                
                (124
                )
                
                
                -
                
                
                
                (452
                )Net
      income (loss) attributable to common shareholders
                
                $
                (419
                )
                
                $
                (367
                )
                
                $
                46
                
                
                $
                (843
                )Net
      income (loss) per share attributable to common
    shareholders:Basic
                
                $
                (0.05
                )
                
                $
                (0.11
                )
                
                $
                0.01
                
                
                $
                (0.25
                )Diluted
                
                $
                (0.05
                )
                
                $
                (0.11
                )
                
                $
                0.01
                
                
                $
                (0.25
                )Weighted
      average common shares outstanding:Basic
                
                
                8,557
                
                
                
                3,364
                
                
                
                8,455
                
                
                
                3,312Diluted
                
                
                8,557
                
                
                
                3,364
                
                
                
                8,693
                
                
                
                3,312




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 Nine Months Ended March 31,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                
                $
                46
                
                
                $
                (391
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization within:Cost
      of sales
                
                
                682
                
                
                
                823Selling,
      general and administrative
                
                
                952
                
                
                
                1,017Amortization
      of deferred debt costs
                
                
                128
                
                
                
                227Amortization
      of debt discount
                
                
                -
                
                
                
                31Amortization
      of stock-based compensation
                
                
                179
                
                
                
                243Write-off
      of unamortized acquisition costs
                
                
                187
                
                
                
                -Gain
      from sale of assets
                
                
                (3
                )
                
                
                (4
                )Inventory
      reserve provision
                
                
                14
                
                
                
                (14
                )Provision
      for doubtful accounts
                
                
                88
                
                
                
                490Non-cash
      interest expense deferral fee
                
                
                -
                
                
                
                48Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                (1,176
                )
                
                
                16,394Decrease
      in inventories, prepaid expenses and other assets
                
                
                71
                
                
                
                717Increase
      (decrease) in accounts payable, accrued expenses, and other
      liabilities
                
                
                514
                
                
                
                (5,832
                )Net
      cash provided by operating activities
                
                
                1,682
                
                
                
                13,749CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment, net of disposals
                
                
                (296
                )
                
                
                (273
                )Proceeds
      from sale of equipment
                
                
                3
                
                
                
                91Decrease
      in restricted cash
                
                
                -
                
                
                
                45Net
      cash used in investing activities
                
                
                (293
                )
                
                
                (137
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from line of credit
                
                
                144,430
                
                
                
                169,687Repayments
      of line of credit
                
                
                (144,827
                )
                
                
                (183,623
                )Principal
      payments on term loan
                
                
                (667
                )
                
                
                -Proceeds
      from issuance of promissory notes
                
                
                -
                
                
                
                725Proceeds
      from issuance of preferred stock
                
                
                -
                
                
                
                149Payment
      of dividends
                
                
                -
                
                
                
                (390
                )Debt
      issuance costs
                
                
                (20
                )
                
                
                (70
                )Common
      stock, preferred stock, and warrants issuance costs
                
                
                (116
                )
                
                
                (39
                )Capital
      lease payments
                
                
                (47
                )
                
                
                (40
                )Net
      cash used in financing activities
                
                
                (1,247
                )
                
                
                (13,601
                )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                142
                
                
                
                11CASH
      AND CASH EQUIVALENTS, beginning of period
                
                
                123
                
                
                
                48CASH
      AND CASH EQUIVALENTS, end of period
                
                $
                265
                
                
                $
                59





(Continued)


5




SMF
ENERGY CORPORATION AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)




(in
000’s)





(Continued)
                      
                      For the Nine Months Ended March 31,2010
                      
                      
                      2009SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                      
                      $
                      590
                      
                      
                      $
                      1,322SUPPLEMENTAL
      DISCLOSURE OF NON-CASH ACTIVITIES:Capital
      leases
                      
                      $
                      43
                      
                      
                      $
                      47Accrued
      dividends related to preferred stock
                      
                      $
                      -
                      
                      
                      $
                      256Conversion
      of preferred shares to common shares
                      
                      $
                      -
                      
                      
                      $
                      260Issuance
      of common stock for the deferral fee related to the August 2007 Notes and
      September 2008 Notes, January 1, 2009 and March 1, 2009 interest payments,
      respectively, which were deferred until April 15, 2009
                      
                      $
                      -
                      
                      
                      $
                      47




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 March
31, 2010, the Company was conducting operations through 34 service locations in
the 11 states of Alabama, California, Florida, Georgia, Louisiana, Mississippi,
Nevada, North Carolina, South Carolina, Tennessee and Texas.




2.
            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 nine months ended March 31, 2010 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 May 17, 2010, as part of its significant accounting
policies.




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





Total
cash and cash availability was approximately $4.0 millionand $2.5 million at
March 31, 2010 and June 30, 2009, respectively, and was approximately $4.4
million on May 12, 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.




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.


8




SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Diluted
net income per share for the nine months ended March 31, 2010, was diluted by
additional common stock equivalents, adjusted per the reverse stock-split, as
follows (in thousands):




For the Nine Monthsended March 31, 2010Incremental
      shares due to stock options awarded to employees and
    directors
                    
                    
                    2Incremental
      shares due to preferred stock conversion rights
                    
                    
                    236Total
      dilutive shares
                    
                    
                    238




Diluted
net loss per share for the three months ended March 31, 2010 and 2009 and
nine-months ended March 31, 2009 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 Nine Monthsended March 31,
                  
                  
                  ended March 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Stock
      options
                  
                  
                  418
                  
                  
                  
                  429
                  
                  
                  
                  416
                  
                  
                  
                  429Common
      stock warrants
                  
                  
                  141
                  
                  
                  
                  158
                  
                  
                  
                  141
                  
                  
                  
                  158Promissory
      note conversion rights
                  
                  
                  89
                  
                  
                  
                  922
                  
                  
                  
                  89
                  
                  
                  
                  922Preferred
      stock conversion rights
                  
                  
                  133
                  
                  
                  
                  1,406
                  
                  
                  
                  -
                  
                  
                  
                  1,406Total
      common stock equivalents outstanding
                  
                  
                  781
                  
                  
                  
                  2,915
                  
                  
                  
                  646
                  
                  
                  
                  2,915





The
promissory note and preferred stock conversion rights in the three and nine
months ended March 31, 2009 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 Ended,March 31, 2010
                                          
                                          
                                          March 31, 2009Weighted
                                          
                                          
                                          
                                          
                                          
                                          
                                          WeightedAverage
                                          
                                          
                                          
                                          
                                          
                                          
                                          AverageCommon
                                          
                                          Per Share
                                          
                                          
                                          
                                          
                                          Common
                                          
                                          Per ShareEarnings
                                          
                                          Shares
                                          
                                          Amount
                                          
                                          
                                          Earnings
                                          
                                          Shares
                                          
                                          AmountNet
      loss
                                          
                                          $
                                          (419
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          (243
                                          )Less:  Preferred
      stock dividends
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (124
                                          )Basic
      and dilutive net loss per share attributable to common
      shareholders
                                          
                                          $
                                          (419
                                          )
                                          8,557
                                          
                                          $
                                          (0.05
                                          )
                                          
                                          $
                                          (367
                                          )
                                          3,364
                                          
                                          $
                                          (0.11
                                          )





For the Nine Months Ended,March 31, 2010
                    
                    
                    March 31, 2009Weighted
                    
                    
                    
                    
                    
                    
                    
                    
                    WeightedAverage
                    
                    
                    
                    
                    
                    
                    
                    
                    AverageCommon
                    
                    
                    Per Share
                    
                    
                    
                    
                    
                    Common
                    
                    
                    Per ShareEarnings
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Earnings
                    
                    
                    Shares
                    
                    
                    AmountNet
      income (loss)
                    
                    $
                    46
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (391
                    )Less:  Preferred
      stock dividends
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (452
                    )Basic
      net income (loss) per share attributable to common
      shareholders
                    
                    $
                    46
                    
                    
                    
                    8,455
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (843
                    )
                    
                    
                    3,312
                    
                    
                    $
                    (0.25
                    )Effect
      of dilutive securities:Stock
      options
                    
                    
                    -
                    
                    
                    
                    2
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -Preferred
      stock conversion rights
                    
                    
                    -
                    
                    
                    
                    236
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
      net income (loss) per share attributable to common
      shareholders
                    
                    $
                    46
                    
                    
                    
                    8,693
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (843
                    )
                    
                    
                    3,312
                    
                    
                    $
                    (0.25
                    )




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.  At March 31, 2010, 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 the applicable
margins ranging from 3.00% to 3.75%.


10


SMF
ENERGY CORPORATION AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


As of
March 31, 2010 and June 30, 2009, the Company had outstanding borrowings of $7.4
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 March 31, 2010 and June 30, 2009, the Company had $3.8 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 March 31, 2010, the financial covenants included
a minimum daily availability of $250,000, a fixed charge coverage ratio of 1.1
to 1.0, and a capital expenditure limitation for fiscal year 2010 of
$750,000.  At March 31, 2010 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 March 31, 2010 and June 30, 2009, $1.5 million
and $1.6 million, respectively, had been issued in letters of
credit.





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 March 31, 2010, 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 ofMarch 31, 2010
                  
                  
                  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 March 31, 2010; secured by substantially
      all Company assets.  For additional details, see
      below.
                  
                  $
                  4,333
                  
                  
                  $
                  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.  For additional details, see below.
                  
                  
                  800
                  
                  
                  
                  800Total
      long-term debt
                  
                  
                  5,133
                  
                  
                  
                  5,800Less:
      current portion
                  
                  
                  (1,000
                  )
                  
                  
                  (917
                  )Long-term
      debt, net
                  
                  $
                  4,133
                  
                  
                  $
                  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 March 31, 2010, the interest
rate was 4.75%.


11




SMF
ENERGY CORPORATION AND SUBSIDIARIES




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)




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.





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 nine months ended March 31, 2010 (in thousands,
except share data):





Preferred Stock
                          
                          
                          
                          
                          
                          AdditionalSeriesD
                          
                          
                          CommonStock
                          
                          
                          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
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          46
                          
                          
                          
                          46Conversion
      of Series D Preferred Stock to common stock
                          
                          
                          (2,630
                          )
                          
                          
                          -
                          
                          
                          
                          594,012
                          
                          
                          
                          6
                          
                          
                          
                          (6
                          )
                          
                          
                          -
                          
                          
                          
                          -Recapitalization
      costs
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (116
                          )
                          
                          
                          -
                          
                          
                          
                          (116
                          )Stock-based
      compensation amortization expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          179
                          
                          
                          
                          -
                          
                          
                          
                          179Balance
      at March 31, 2010
                          
                          
                          598
                          
                          
                          $
                          -
                          
                          
                          
                          8,557,314
                          
                          
                          $
                          86
                          
                          
                          $
                          36,658
                          
                          
                          $
                          (30,106
                          )
                          
                          $
                          6,638





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


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.





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 March 31, 2010.  Therefore no
contingency gains or losses have been recorded as of March 31,
2010.  However, based on management’s knowledge at the time of this
filing, management believes that the final resolution of such matters pending at
the time of this report, individually and in the aggregate, will not have a
material adverse effect upon the Company’s consolidated financial position,
results of operations or cash flows.




On
November 23, 2009, SMF Energy Corporation (the “Company”) entered into a
confidential settlement agreement (the “Agreement”) resolving all claims in the
lawsuit entitled, SMF Energy
Corporation vs. Financial Accounting Solutions Group, Inc., Mitchel Kramer, Alex
Zaldivar and Kramer Professional Staffing, Inc.  Pursuant to
the Agreement, SMF received a payment of $1,050,000 during the quarter ended
December 31, 2009.  The payment was treated as a partial recovery of
the professional fees incurred in connection with the lawsuit, with no gain or
loss recognized for the settlement.  The Company expensed $466,000 of
these expenses during the first nine 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 June 30, 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 nine months ended March 31, 2010.





As a
result of the Company’s implementation of the Codification during the nine
months ended March 31, 2010, previous references to new accounting standards and
literature are no longer applicable.  In the current nine 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)


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 notes to condensed consolidated 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 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 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;




·
            Our
      continuing ability to acquire sufficient trade credit from fuel and
      lubricants suppliers and other
vendors;




·
            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;




·
            Our
      success in responding to competition from other providers of similar
      services; and




·
            Our
      continuing success in minimizing of the negative impact on our operations,
      revenues and profitability from current and future unfavorable 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 March 31, 2010, the Company
was conducting operations through 34 service locations in the 11 states of
Alabama, California, Florida, Georgia, Louisiana, Mississippi, Nevada, North
Carolina, South Carolina, Tennessee and Texas.


16


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





The
quarter ending on March 31, 2010 is historically our most financially
challenging quarter because of the seasonal decline in gallons sold in January
and February as a result of fewer workdays and typically adverse weather
conditions which impact customer demand.  In the third quarter of
fiscal 2010, we increased our sales volume from the previous quarter and from
the same quarter a year ago by sales to new markets and new customers in
existing markets.  Those increases were lower than planned, however,
to overcome a larger than expected reduction in demand from our existing
customer base, some of whom reported sharply lower demand for freight services
during the first two months of the quarter.  However in March, we
experienced a steady recovery in this demand, along with increased demand for
our services from the addition of new customers.  We are cautiously
optimistic that the return to the upside move on the demand curve that we saw in
the third quarter of fiscal 2010 will continue into the fourth quarter and
thereafter.





Our
results for the third quarter of fiscal 2010 also reflect the restraints that we
face as we try to increase the size of our business during a severe economic
recession in order to improve economies of scale and thereby enhance our
profitability.  During the quarter, our gallons sold were 8% higher
than a year ago, and revenues were up 41%, reflecting the higher fuel prices
this year.  We sold 17.4 million gallons of fuel during the quarter,
our highest quarterly volume since the quarter ended September 30, 2008, when we
sold 18.6 million gallons.  The increased volume, however, was almost
exclusively the result of our aggressive solicitation of new customers in our
existing markets and our entry into new markets rather than from any
pre-recession rebound in demand from our existing customer base.  In
fact, demand from that core customer group actually softened further in the
first two months of the quarter before recovering in March.  This
decrease in demand from our existing customers in the freight, construction and
other industries came on top of the 14% decrease in sales volume from before the
onset of the recession in 2008 that we have not yet recovered.  Our
profitability for the quarter was also hurt by higher than anticipated costs,
including increases in maintenance, fuel and other running costs for our own
fleet as well as new costs for implementing Sarbanes Oxley 404(b) compliance
programs and for weather related operating costs associated with our Houston
facility.





Notwithstanding
our loss from operations in the quarter, we continue to believe that we are in
position to achieve steady improvements in profitability in future
quarters.  Moreover, despite the third quarter loss and the lower than
expected sales volume and increased SG&A expense that it reflects, we still
generated positive financial performance for the first nine months of fiscal
year 2010, yielding bottom line net income, positive EBITDA, and cash
contribution after our fixed charges.  Additionally, during the nine
month period, we expanded into three new markets, including Knoxville, TN,
Spartanburg, SC, and North Augusta, GA, where we continue our marketing efforts
in an effort to further penetrate these new markets and improve our net margins
there and in the Company overall.


17


While the
Company’s management continues to pursue reductions in operating and other
expenses, its focus remains on the achievement of sales and revenue growth to
achieve sustained profitability.  Besides the prospects for increased
sales and revenue from new markets and from new customers in existing markets,
as the overall economy improves, we may still see a recovery of the 14%
reduction in demand from existing customers that we experienced last year when
the national economy collapsed.  Accordingly, 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.  We currently have over 4,000 customers in 34 markets over
11 states contributing to our bottom line performance.





During
the third quarter of fiscal 2010, the Company’s management sought to respond to
continuing weakness in trading volume and market awareness of the Company’s
common stock by engaging in a series of campaigns to stimulate awareness and
interest in our common stock via stock promotion, participation in road shows
and other investor communications.  For further reference, please see
our presentation at www.mobilefueling.com
under the section entitled “Investor Relations”.


18


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


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




1 EBITDA
is defined as earnings before interest, taxes, depreciation, and amortization, a
Non-GAAP financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission.  To the extent that gain 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.




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


19


3Non-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.





4Adjusted
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 ongoing performance of its
operations, such as the non-cash accounting charge of $1.7 million in the fourth
quarter of fiscal 2009 and the first quarter of fiscal 2010 write-off
incurred as a new accounting ruling was applied.  We believe that this
is a meaningful Non-GAAP representation of the ongoing performance of the
operations.




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




1See
footnote 4 above.


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):




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




·
            We
      have now reported positive EBITDA for seven consecutive
      quarters.  This improvement is attributable to a number of new
      efficiencies in our operation, as well as to our early recognition of, and
      response to, the national economic crisis by permanently eliminating
      certain personnel costs in the first half of fiscal
  2009.





·
            The
      $419,000 net loss during the three months ended March 31, 2010, included
      $638,000 in non-cash charges, such as depreciation and amortization of
      assets, amortized debt costs, stock-based compensation, provision for
      doubtful accounts, and slow moving inventory reserve.  The net
      loss also included stated interest expense associated with servicing of
      our debt of $260,000, and public company costs of
  $176,000.





·
            The
      net margin in the third quarter of fiscals 2010 and 2009 was $3.6 million
      and $4.0 million, respectively, on 17.4 million and 16.0 million gallons
      sold during those periods.  The net margin per gallon in the
      third quarter of fiscal 2010 and 2009 were 20.8 cents and 25.1 cents,
      respectively.





·
            In
      the third quarter of fiscal 2010, we achieved EBITDA of $398,000 compared
      to $974,000 in the same period a year ago, a decrease of approximately
      $576,000, most of which is attributable to a decrease of $392,000 in gross
      profit and an increase of $100,000 in SG&A.  Our twelve
      month cumulative fixed coverage ratio as of March 31, 2010 (as that term
      is defined by our bank) was of 1.56, well above the 1.1 required by our
      bank covenants.





·
            As
      a result of our June 29, 2009 recapitalization (the “Recapitalization”),
      our interest expense was substantially lower in the third quarter of
      fiscal 2010 compared to the same period the prior year.  We
      incurred interest expense of $260,000 this quarter compared to $575,000 in
      the same quarter in the prior year, a decrease of $315,000, or 55%, of
      which $260,000 is related to lower debt and lower costs to service our
      existing debt.


21





·
            We
      incurred a net loss of $419,000 during the third quarter of fiscal 2010
      compared to net income of $445,000 during the recent second quarter of
      fiscal 2010.  This change of $864,000 was primarily related to a
      $882,000 increase in SG&A, as the second quarter reflected a one-time
      benefit from our settlement of a lawsuit, in which we recovered a
      substantial portion of our expensed legal and professional fees, lowering
      our second quarter SG&A costs during the quarter by approximately
      $748,000.  Additionally, we incurred in the third quarter
      $101,000 of SOX 404 compliance costs and $49,000 higher selling expenses
      associated with higher credit card fees and increased collections
      activities which were partially offset by lower other professional
      fees.





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.





Comparison
of Three Months Ended March 31, 2010 (“third quarter of fiscal 2010”) to Three
Months Ended March 31, 2009 (“third quarter of fiscal 2009”)





Revenues





Revenues
were $49.2 million in the third quarter of fiscal 2010, as compared to $35.0
million in the same period of the prior year, an increase of $14.2 million, or
41%.  The increase in revenues of 41% is primarily due to an increase
in price variances of 58% in market prices of petroleum products, as compared to
the same quarter in the prior year, which resulted in an increase of $10.4
million in revenues.  The increase in revenues is also
attributable  to an 8% increase in gallons sold compared to a year
ago, which was almost exclusively the result of our aggressive solicitation of
new customers in our existing markets and our entry into new markets rather than
from any pre-recession rebound in demand from our existing customer
base.




Gross
Profit





Gross
profit was $3.4 million in the third quarter of fiscal 2010, as compared to $3.8
million in the same period of the prior year, a decrease of approximately
$392,000 or 10%.  The decrease in gross profit is primarily due to a
$194,000 increase in running equipment expense due to higher fuel
prices, and weather related operating costs at our Houston facility, a
$162,000 increase in repair and maintenance expense, a $49,000 increase in
travel expense primarily related to the expansion into the new markets, and an
additional $42,000 in safety and security expense partially offset by $18,000
lower facilities expense and $21,000 lower depreciation expense.  Net
margins per gallon were 20.8 cents and 25.1 cents for the third quarters of
fiscal 2010 and 2009.




Selling,
General and Administrative Expenses




Selling,
general and administrative (“SG&A”) expenses remained flat in the third
quarter of fiscal 2010 when compared to the third quarter of fiscal
2009.  SG&A expenses were $3.6 million and $3.5 million in the
third quarters of fiscal 2010 and 2009.  During the current quarter we
incurred higher costs in office and facilities expense of $65,000; higher credit
card fees of $60,000 related to increases in market prices of petroleum
products; higher employee expense of $29,000; higher travel expense of $22,000
related to the geographical expansion of our business operations in the prior
quarter of the current fiscal year; and higher miscellaneous fees of $52,000
related to certain marketing initiatives.  These increases were offset
by a reduction in the provision for doubtful accounts of
$112,000.


22




Interest
Expense





Interest
expense was $260,000 in the third quarter of fiscal 2010, as compared to
$575,000 in the same period of the prior year, a decrease of $315,000, or
55%.  The decrease was primarily due to lower interest expense as a
result of the reduction in our long term-debt outstanding, and lower interest
rates since the June 2009 Recapitalization, when we eliminated some of our high
interest secured and unsecured debt and replaced the balance with a lower
interest (currently around 4.75%).  At the same time, we also
negotiated favorable interest rates and other terms on our bank line of
credit.





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





For the Three Months Ended March 31,2010
                        
                        
                        2009Stated
      Rate Interest Expense:Line
      of credit
                        
                        $
                        112
                        
                        
                        $
                        96Long-term
      debt
                        
                        
                        64
                        
                        
                        
                        324Other
                        
                        
                        43
                        
                        
                        
                        75Total
      stated rate interest expense
                        
                        
                        219
                        
                        
                        
                        495Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                        
                        
                        41
                        
                        
                        
                        69Amortization
      of debt discount
                        
                        
                        -
                        
                        
                        
                        11Total
      non-cash interest amortization
                        
                        
                        41
                        
                        
                        
                        80Total
      interest expense
                        
                        $
                        260
                        
                        
                        $
                        575




Income
Taxes




State
income tax expense of $8,000 was recorded for each of the third 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.




Net
Loss




Net
loss was $419,000 in the third quarter of fiscal 2010, as compared to a net loss
of $243,000 in the same period in the prior year.  The $176,000
increase in net loss was partially attributable to the decrease of $392,000 in
gross profit and the increase of $100,000 in SG&A, partially offset by a
decrease of $315,000 in interest expense.




23




EBITDA




EBITDA
was $398,000 in the third quarter of fiscal 2010, as compared to $974,000 in the
same period of the prior year, a decrease of $576,000.  The decrease
was partially attributable to the decrease of $392,000 in gross profit and the
increase of $100,000 in SG&A.





The
reconciliation of EBITDA to Net loss for the third quarters of fiscals 2010 and
2009 was as follows (in thousands):




For the Three Months Ended March 31,2010
                        
                        
                        2009Net
      loss
                        
                        $
                        (419
                        )
                        
                        $
                        (243
                        )Add
      back:Interest
      expense
                        
                        
                        260
                        
                        
                        
                        575Income
      tax expense
                        
                        
                        8
                        
                        
                        
                        8Depreciation
      and amortization expense within:Cost
      of sales
                        
                        
                        218
                        
                        
                        
                        239Selling,
      general and administrative expenses
                        
                        
                        316
                        
                        
                        
                        334Stock-based
      compensation amortization expense
                        
                        
                        15
                        
                        
                        
                        61EBITDA
                        
                        $
                        398
                        
                        
                        $
                        974




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.  Recapture of
previously deferred interest expense is considered interest expense and
stock-based compensation amortization is considered an amortization item for
purposes of 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 interest, taxes, depreciation and amortization allows investors to
meaningfully trend and analyze the performance of our core cash
operations.




Comparison
of Nine Months Ended March 31, 2010 to Nine Months Ended March 31,
2009




Revenues





Revenues
were $139.1 million in the nine months ended March 31, 2010, as compared to
$159.4 million in the same period of the prior year, a decrease of $20.3
million, or 13%, primarily as a result of lower market prices of petroleum
products during the first quarter of fiscal 2010, to which a decrease of $20.5
million in revenues is attributable.


24





The
number of gallons sold during the nine months ended March 31, 2010 and 2009 was
51.3 million and 51.2 million, respectively.  In the first part of
fiscal 2009, we provided emergency response services in Louisiana and Texas for
Hurricanes Gustav and Ike which sustained us through the contraction of the
national economy, which downturn impacted us dramatically and adversely in the
second quarter of 2009.  Since that time, we have witnesses a slow but
steady increase in demand from companies seeking to reduce their costs of
operation with mobile fueling, leading to our decision to add three new service
locations in fiscal 2010.  Our concern, expressed in prior filings,
that the steady increase would continue in the future or that our new business
will be sufficient to offset possible future decreases in demand from our
existing customer base, proved to be prescient in the first two months of the
third quarter of fiscal 2010.  During that two month period, we saw a
downturn in demand from our existing customer base that, while it was offset by
new business, led to a smaller increase in volume and revenues than we had
expected.  Nevertheless, after the rebound in demand from our core
customers in the last month of the quarter, we remain cautiously optimistic that
we can maintain or increase present volume levels by continuing to attract new
customers.




Gross
Profit




Gross
profit was $10.9 million in the nine months ended March 31, 2010, as compared to
$12.9 million in the same period of the prior year, a decrease of $2.0 million,
or 16%.  The net margin per gallon for the nine months ended March 31,
2010 and 2009 was 22.5 centsand 26.8 cents,
respectively, a decrease of 4.3 cents.  The decreases were primarily
due to the incremental margin contributions in fiscal 2009 from the emergency
response services provided in Louisiana and Texas for Hurricanes Gustav and Ike
during the first quarter of fiscal 2009.  We incurred additional
direct operating expenses this fiscal year as a result of last fiscal 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, after stalling in the
first part of the most recent quarter, appears to be continuing in fiscal 2010,
and partially due to increases in new customer business and prospective business
as companies in new and existing markets 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 $10.1 million in the nine months ended
March 31, 2010, as compared to $11.4 million in the same period of the prior
year, a decrease of $1.3 million, or 11%.





SG&A
decreased as a result of the cost cutting and business restructuring steps that
we began in late November 2008 and continued through the second half of fiscal
2009 to meet the decrease in customer demand experienced in fiscal
2009.  We experienced decreases in the provision for doubtful accounts
of $402,000, employee expense of $149,000, travel expense of $141,000,
depreciation of fixed assets of $65,000, and credit card fees of $63,000 due to
lower average fuel prices.  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 $584,000.  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 fiscal year
mentioned above, were offset by this year’s higher personnel benefits expense of
$270,000 resulting from last fiscal 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.


25





Interest
Expense





Interest
expense was $751,000 in the nine months ended March 31, 2010, as compared
to $1.9 million in the same period of the prior year, a decrease of
approximately $1.2 million, or 61%.  The decrease was primarily due to
lower interest expense as a result of the reduction in our long-term debt
outstanding, and lower interest rates since the Recapitalization, when we
eliminated some of our high interest secured and unsecured debt and replace the
balance with a lower interest (currently around 4.75%).  At the same
time, we also negotiated favorable interest rates and other terms on our line of
credit.  In addition, the average outstanding balance on the line of
credit was $4.7 million lower this year primarily due to lower average fuel
prices and lower debt requirements.





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





For the Nine Months Ended March 31,2010
                      
                      
                      2009Stated
      Rate Interest Expense:Line
      of credit
                      
                      $
                      336
                      
                      
                      $
                      685Long-term
      debt
                      
                      
                      200
                      
                      
                      
                      874Other
                      
                      
                      87
                      
                      
                      
                      121Total
      stated rate interest expense
                      
                      
                      623
                      
                      
                      
                      1,680Non-Cash
      Interest Amortization:Amortization
      of deferred debt costs
                      
                      
                      128
                      
                      
                      
                      227Amortization
      of debt discount
                      
                      
                      -
                      
                      
                      
                      31Total
      non-cash interest amortization
                      
                      
                      128
                      
                      
                      
                      258Total
      interest expense
                      
                      $
                      751
                      
                      
                      $
                      1,938




Income
Taxes




State
income tax expense of $24,000 was recorded for each of the nine months ended
March 31, 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 nine
months ended March 31, 2010, there is no provision for federal income taxes due
to the availability of net operating loss carryforwards.




Net
Income




Net
income was $46,000 in the nine months ended March 31, 2010, as compared to a net
loss of $391,000 in the same period in the prior year.  The $437,000
increase was partially attributable to lower selling, general and administrative
expenses of $1.3 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 dramatic decrease in customer demand
attributable to the international economic crisis, and also by lower interest
expense of $1.2 million attributable to the Recapitalization and to 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 $584,000.





Net
income in the first nine months of fiscal 2010 was reduced by the lower gross
profit of $2.0 million resulting from higher direct operating expenses this
year, the decrease in margin contribution from the emergency response services
provided in the first quarter of fiscal 2009, and the non recurrence of the
benefit from last year’s elimination of certain personnel benefits
expense.


26




EBITDA




EBITDA
was $2.8 million in the nine months ended March 31, 2010, as compared to $3.7
million in the same period of the prior year, a decrease of
$833,000.  The decrease in EBITDA was partially due to the lower gross
profit of $2.0 million resulting from higher operating expenses this year and
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.  The decrease in EBITDA was partially
offset by the $1.3 million decrease in selling, general and administrative
expenses as a result of the cost cutting and business restructuring steps taken
beginning in late November 2008 to meet the dramatic decrease in customer demand
attributable to the international economic crisis, and the recovery of certain
professional fees related to the settlement of a lawsuit.  The
decreases in selling, general and administrative expenses were partially offset
by the increase in personnel benefits due to last year’s one time elimination of
a benefits reserve.




The
reconciliation of EBITDA to net income (loss) for the nine months ended March
31, 2010 and 2009 was as follows (in thousands):




For the Nine Months Ended March 31,2010
                      
                      
                      2009Net
      income (loss)
                      
                      $
                      46
                      
                      
                      $
                      (391
                      )Add
      back:Interest
      expense
                      
                      
                      751
                      
                      
                      
                      1,938Income
      tax expense
                      
                      
                      24
                      
                      
                      
                      24Depreciation
      and amortization expense within:Cost
      of sales
                      
                      
                      682
                      
                      
                      
                      823Selling,
      general and administrative expenses
                      
                      
                      952
                      
                      
                      
                      1,017Stock-based
      compensation amortization expense
                      
                      
                      179
                      
                      
                      
                      243Write-off
      of unamortized acquisition costs
                      
                      
                      187
                      
                      
                      
                      -EBITDA
                      
                      $
                      2,821
                      
                      
                      $
                      3,654





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.  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.




Capital
Resources and Liquidity





At March
31, 2010, we had total cash and cash availability of approximately $4.0 million,
which consisted of cash and cash equivalents of $265,000 and additional cash
availability of approximately $3.8 million through our line of
credit.  At March 31, 2010, the financial covenants included a minimum
daily availability of $250,000.  As of May 12, 2010, our cash
availability was approximately $4.4 million.  We are able to draw on
our line of credit on a daily basis subject to our borrowing base, as defined in
our line of credit agreement, and other debt covenant
requirements.


27





During
the fourth quarter of fiscal 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our then existing debt and
equity.  After the Recapitalization, our total debt was
immediately decreased by $4.5 million, 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 any other unanticipated market forces or opportunities that may
develop 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 on account of the
elimination of 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.





Our $20.0
million line of credit permits us to borrow up to 85% of the total amount of
eligible accounts receivable and 65% of eligible inventory, both as
defined.  Outstanding letters of credit reduce the maximum amount
available for borrowing.  Outstanding borrowings under the line are
secured by substantially all Company assets, including our transportation fleet
and related field equipment.  Our line of credit finances the timing
difference between petroleum product purchases, payable generally in 10 to 12
days from date of delivery, and the collection of receivables from our
customers, generally in 30 to 45 days from date of delivery.





Interest
is payable monthly based on a pricing matrix.  At March 31, 2010, 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 the applicable
margins ranging from 3.00% to 3.75%.





As of
March 31, 2010, we have outstanding letters of credit for an aggregate amount of
$1.5 million.  These letters of credit were issued so that we could
obtain better purchasing terms and pricing than were otherwise available in
certain markets.  The letters of credit have twelve-month expirations
and renew automatically.  No amounts have been drawn on any of the
letters of credit; however, as described above, outstanding letters of credit
reduce our cash availability under our line of credit facility.


28





As of
March 31, 2010 and June 30, 2009, we had outstanding borrowings of $7.4 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 March 31, 2010, we had approximately $3.8 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 were issued in the
Recapitalization, are payable when, as and if declared by the Board of
Directors, but only out of funds that are legally available, in annual cash or
equity dividends, at the Company’s election, at the rate of 5.5% per annum of
the sum of the Original Issue Price per share.  Per the Certificate of
Designation for the Series D, the first dividend declaration for the outstanding
Series D Preferred Stock 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.  During
the nine months ended March 31, 2010, $1.1 million of the Series D Preferred
stock was converted into 594,012 shares of Common Stock, further lowering our
cost of capital as future dividend payments were reduced.





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.





29




Cash
Flows
 
 During
the nine months ended March 31, 2010 and 2009, cash and cash equivalents
increased $142,000 and $11,000, respectively.


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





For the Nine Months Ended March 31,2010
                  
                  
                  2009Cash
      provided by operating activities
                  
                  $
                  1,682
                  
                  
                  $
                  13,749Proceeds
      from sales of equipment
                  
                  
                  3
                  
                  
                  
                  91Proceeds
      from issuance of promissory notes
                  
                  
                  -
                  
                  
                  
                  725Proceeds
      from issuance of preferred stock
                  
                  
                  -
                  
                  
                  
                  149Decrease
      in restricted cash
                  
                  
                  -
                  
                  
                  
                  45Total
      of generated cash
                  
                  $
                  1,685
                  
                  
                  $
                  14,759





We used cash primarily for (in
thousands):





For the Nine Months Ended March 31,2010
                  
                  
                  2009Net
      payments on line of credit payable
                  
                  $
                  397
                  
                  
                  $
                  13,936Principal
      payments on term loan
                  
                  
                  667
                  
                  
                  
                  -Purchases
      of property and equipment, net of proceeds
                  
                  
                  296
                  
                  
                  
                  273Payments
      of debt and equity issuance costs
                  
                  
                  136
                  
                  
                  
                  109Capital
      lease payments
                  
                  
                  47
                  
                  
                  
                  40Payment
      of dividends
                  
                  
                  -
                  
                  
                  
                  390Total
      of used cash
                  
                  $
                  1,543
                  
                  
                  $
                  14,748Net
      change in cash and cash equivalents
                  
                  $
                  142
                  
                  
                  $
                  11




As of
March 31, 2010, we had $7.4 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 nine months ended March
31, 2010 include the cumulative activity of the daily borrowings and repayments,
$144.4 million and $144.8 million, respectively, under the line of
credit.  The availability under the line of credit at March 31, 2010
and June 30, 2009, amounted to $3.8 million and $2.4 million,
respectively.  The net cash borrowings from, or repayments of, the
line of credit during the nine months ended March 31, 2010 and 2009,
respectively, have been included as sources or uses of cash in the tables
above.




Adequacy
of Capital Resources





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





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.


30





In
November 2008, recognizing the impact of the then nascent global economic crisis
on our business, 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.  We then completed our $40 million Recapitalization
in June of 2009, substantially reducing our cost of capital.  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 continued
through the second quarter of fiscal 2010, with some unexpectedly severe
seasonality decreases in January and February of 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 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 ongoing
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, including
an investment in three new service locations.





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 principal
and interest on our debt.  Our line of credit with our principal
lender matures on July 1, 2012.




Off-Balance
Sheet Arrangements





At March
31, 2010, we do not have any material off-balance sheet
arrangements.




Recent
Accounting Pronouncements




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




Accounting for
Transfers of Financial Assets


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





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


31





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





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




Critical
Accounting Policies





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.


32


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 March 31, 2010.





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 March
31, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Inherent
Limitations on Effectiveness of Controls




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




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


33


PART
II   Other Information





ITEM
1.    LEGAL PROCEEDINGS





Not
applicable.





ITEM
1A. RISK FACTORS





Not
applicable.





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





Not applicable.





ITEM
3.    DEFAULTS UPON SENIOR SECURITIES





Not
applicable.





ITEM
4.    REMOVED AND RESERVED





ITEM
5.    OTHER INFORMATION





Not
applicable.





ITEM
6.    EXHIBITS





Exhibits





ExhibitNo.
                
                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


34


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 CORPORATIONMay
      17, 2010
              By:
              /s/ Richard E. GathrightRichard
      E. GathrightChairman
      of the Board, Chief Executive Officer andPresident
      (Principal Executive Officer)By:
              /s/ Michael S. ShoreMichael
      S. ShoreChief
      Financial Officer, Treasurer and Senior VicePresident
      (Principal Financial
Officer)


35


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


36