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Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification.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during the nine months ended March 31, 2010, previous references to new accounting standards and literature are no longer applicable.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.

 

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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.

 

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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.

 

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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.

 

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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”.

 

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

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

 

2 Net 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.

 

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3 Non-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.

4 Adjusted 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				2008
Net income (loss)		$	(419	)		$	445			$	20			$	(1,948	)		$	(243	)		$	(660	)		$	512
Less:  Non-cash write off of unamortized acquisition costs			-				-				187				-				-				-				-
Less:  Non-cash stock options repricing costs			-				-				93				-				-				-				-
Less:  Non-cash ASC 470-20 (formerly FAS No. 84) inducement on extinguishment			-				-				-				1,651				-				-				-
Adjusted net income (loss) before non-cash, non-recurring charges 1		$	(419	)		$	445			$	300			$	(297	)		$	(243	)		$	(660	)		$	512

 

1 See footnote 4 above.

 

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

 

		For the Three Months Ended,
		March 31,				December 31,				September 30,				June 30,				March 31,				December 31,				September 30,
		2010				2009				2009				2009				2009				2008				2008
Net income (loss)		$	(419	)		$	445			$	20			$	(1,948	)		$	(243	)		$	(660	)		$	512
Add back:
Interest expense			260				261				230				545				575				680				683
Income tax expense			8				8				8				8				8				8				8
Depreciation and amortization expense within:
Cost of sales			218				228				236				254				239				242				342
Selling, general and administrative expenses			316				316				320				344				334				342				341
Stock-based compensation expense			15				31				133				49				61				78				104
Write-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.

 

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·

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.

 

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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				2009
Stated Rate Interest Expense:
Line of credit		$	112			$	96
Long-term debt			64				324
Other			43				75
Total stated rate interest expense			219				495
Non-Cash Interest Amortization:
Amortization of deferred debt costs			41				69
Amortization of debt discount			-				11
Total non-cash interest amortization			41				80
Total 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.

 

 

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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				2009
Net loss		$	(419	)		$	(243	)
Add back:
Interest expense			260				575
Income tax expense			8				8
Depreciation and amortization expense within:
Cost of sales			218				239
Selling, general and administrative expenses			316				334
Stock-based compensation amortization expense			15				61
EBITDA		$	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.

 

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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 cents and 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.

 

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

 

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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				2009
Net income (loss)		$	46			$	(391	)
Add back:
Interest expense			751				1,938
Income tax expense			24				24
Depreciation and amortization expense within:
Cost of sales			682				823
Selling, general and administrative expenses			952				1,017
Stock-based compensation amortization expense			179				243
Write-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.

 

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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.

 

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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.

 

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

We used cash primarily for (in thousands):

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

 

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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.

 

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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.

 

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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.

 

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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

Exhibit No.		Description
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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 CORPORATION
May 17, 2010	By:	/s/ Richard E. Gathright
		Richard E. Gathright
		Chairman of the Board, Chief Executive Officer and
		President (Principal Executive Officer)
	By:	/s/ Michael S. Shore
		Michael S. Shore
		Chief Financial Officer, Treasurer and Senior Vice
		President (Principal Financial Officer)

 

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INDEX OF EXHIBITS

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

 

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