**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-QSB**

 

| **(Mark One)**                                          |
|---------------------------------------------------------|
| **ý**                                              | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                    |   |   |
| **For the period from January 1, 2003 to June 30,2003** |
|                                                    |   |   |
| **o**                                                   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |

 

**Commission File No. 0-31267**

 

**IWT TESORO CORPORATION**

(Exact Name of Small Business Issuer in Its Charter)

 

| **Nevada**                                                                          |   | **91-2048019**                           |
|-------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)                     |   | (I.R.S. Employer  Identification Number) |
|                                                                                |   |                                     |
| **101 Post Road West, Westport, CT 06880**                                          |
| (Address of principal executive offices)                                            |
|                                                                                |   |                                     |
| **(203) 221-2770**                                                                  |
| (Issuer’s Telephone Number, including area code)                               |
|                                                                                |   |                                     |
| (Former Name, Former Address and Former Fiscal Year, if Changed Since  Last Report) |

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:  **NONE**

Securities registeredpursuant to Section 12(g) of the Exchange Act: **Common Stock, $.001 Per Share**

 

Check whether the issuer:(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days:

ýYes                   oNo

 

State the number of sharesoutstanding of each of the issuer’s class of common equity:  As of August 6, 2003, 11,214,630 shares ofcommon stock were outstanding.

 

Transitional Small BusinessDisclosure Format:   oYes         ýNo

 

 

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Part 1. Financial Information

 

Item 1. Financial Statements

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

**SIX MONTHS ENDED JUNE30, 2003**

 

**TABLE OF CONTENTS**

 
|                                                                         | **Page No.** |
|------------------------------------------------------------------------------|--------------|
|                                                                         |         |
| Consolidated Balance Sheets (Unaudited)                                      | 2            |
|                                                                         |         |
| Consolidated Statements of Operations  (Unaudited)                           | 4            |
|                                                                         |         |
| Consolidated Statements of Changes in  Stockholders’ Equity (Unaudited) | 5            |
|                                                                         |         |
| Consolidated Statements of Cash Flows  (Unaudited)                           | 6            |
|                                                                         |         |
| Notes to Consolidated Financial Statements                                   | 7            |

 

1

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 

**Assets**

 
|                                |   | **June 30,  2003** |       | **December 31,  2002** |   |
|-------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                |   | **(Unaudited)**    |       | **(Audited)**          |   |
| Current assets                      |   |               |       |                   |   |
| Cash                                |   | $                  | 318,732    |                   | $      | 574,046 |   |
| Accounts receivable, net            |   | 4,583,646          |       | 2,875,532              |   |
| Inventory                           |   | 10,922,077         |       | 6,047,876              |   |
| Deferred tax asset                  |   | —             |       | 34,348                 |   |
| Prepaid expenses                    |   | 331,261            |       | 286,820                |   |
| Total current assets                |   | 16,155,716         |       | 9,818,622              |   |
|                                |   |               |       |                   |   |
| Property and equipment, net         |   | 3,811,678          |       | 2,712,422              |   |
|                                |   |               |       |                   |   |
| Other assets                        |   |               |       |                   |   |
| Organization cost, net              |   | 7,480              |       | —                 |   |
| Other receivables                   |   | 66,933             |       | 64,205                 |   |
| Other receivables - related parties |   | —             |       | 5,500                  |   |
| Other assets                        |   | 144,020            |       | 122,008                |   |
|                                |   | 218,433            |       | 191,713                |   |
|                                |   |               |       |                   |   |
|                                |   | $                  | 20,185,827 |                   | $      | 12,722,757 |   |

 

See notes to financial statements.

 

2

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

**Liabilities and Stockholders’ Equity**

 
|                                                                                                             |   | **June 30,  2003** |       | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                                                                                             |   | **(Unaudited)**    |       | **(Audited)**          |   |
|                                                                                                             |   |               |       |                   |   |
| Current liabilities                                                                                              |   |               |       |                   |   |
| Accounts payable                                                                                                 |   | $                  | 9,273,711  |                   | $      | 5,403,816 |   |
| Accrued expenses                                                                                                 |   | 60,000             |       | 126,340                |   |
| Other current liabilities                                                                                        |   | 29,097             |       | 24,723                 |   |
| Deferred tax liability                                                                                           |   | 29,652             |       | —                 |   |
| Current portion of lease payable                                                                                 |   | 57,196             |       | 47,222                 |   |
| Current portion of notes payable - unrelated parties                                                             |   | 57,832             |       | 48,780                 |   |
| Total current liabilities                                                                                        |   | 9,507,488          |       | 5,650,881              |   |
|                                                                                                             |   |               |       |                   |   |
| Long term lease payable                                                                                          |   | 149,164            |       | 108,438                |   |
| Long term notes payable - related parties                                                                        |   | 338,662            |       | 448,712                |   |
| Long term notes payable - unrelated parties                                                                      |   | 68,448             |       | 64,872                 |   |
| Long term loan payable                                                                                           |   | 7,335,904          |       | 4,864,778              |   |
|                                                                                                             |   | 7,892,178          |       | 5,486,800              |   |
|                                                                                                             |   |               |       |                   |   |
| Redeemable common stock (450,000 shares issued and outstanding)                                                  |   | —             |       | 1,073,160              |   |
|                                                                                                             |   |               |       |                   |   |
| Stockholders’ equity                                                                                        |   |               |       |                   |   |
| Preferred stock, $0.001 par value, 25,000,000 authorized; none issued                                            |   | —             |       | —                 |   |
| Common stock, $0.001 par value, 100 million shares authorized,  11,209,252 and 10,587,834 issued and outstanding |   | 11,209             |       | 10,588                 |   |
| Additional paid in capital                                                                                       |   | 2,290,092          |       | 686,068                |   |
| Retained earnings (deficit)                                                                                      |   | 484,860            |       | (184,740               | )      |
|                                                                                                             |   | 2,786,161          |       | 511,916                |   |
|                                                                                                             |   |               |       |                   |   |
|                                                                                                             |   | $                  | 20,185,827 |                   | $      | 12,722,757 |   |

 

See notes to financial statements.

 

3

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
|                                       |   | **For the period ended June 30,** |      |
|--------------------------------------------|--------|-----------------------------------|-----------|
|                                       |   | **Three months ended**            |      | **Six months ended** |   |
|                                       |   | **2003**                          |      | **2002** |   | **2003** |   | **2002** |   |
| Revenue                                    |   |                              |      |   |   |   |   |   |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Sales, net of discounts and returns        |   | $                                 | 8,505,066 |   | $ | 6,803,466 |   | $ | 15,239,624 |   | $ | 12,817,486 |   |
| Cost of goods sold                         |   | 5,012,000                         |      | 4,193,483 |   | 9,091,607 |   | 7,805,798 |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Gross profit                               |   | 3,493,066                         |      | 2,609,983 |   | 6,148,017 |   | 5,011,688 |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Expenses                                   |   |                              |      |   |   |   |   |   |   |
| Payroll                                    |   | 1,149,349                         |      | 1,004,736 |   | 2,282,180 |   | 1,775,936 |   |
| Delivery                                   |   | 413,075                           |      | 316,114 |   | 749,120 |   | 587,632 |   |
| Lease expenses                             |   | 198,254                           |      | 112,490 |   | 332,634 |   | 227,206 |   |
| Depreciation and amortization              |   | 158,603                           |      | 86,039 |   | 295,127 |   | 200,617 |   |
| General and administrative                 |   | 305,373                           |      | 111,194 |   | 516,285 |   | 190,239 |   |
| Insurance                                  |   | 85,138                            |      | 84,803 |   | 159,966 |   | 167,154 |   |
| Sales expenses                             |   | 129,763                           |      | 58,513 |   | 198,370 |   | 98,105 |   |
| Bad debts                                  |   | 50,570                            |      | — |   | 53,817 |   | — |   |
| Repairs and maintenance                    |   | 87,629                            |      | 69,120 |   | 169,999 |   | 104,108 |   |
| Advertising                                |   | 18,474                            |      | 91,041 |   | 40,350 |   | 106,104 |   |
| Travel and entertainment                   |   | 75,653                            |      | 14,367 |   | 130,112 |   | 47,993 |   |
| Professional fees                          |   | 113,794                           |      | 23,864 |   | 237,742 |   | 43,901 |   |
|                                       |   | 2,785,675                         |      | 1,972,281 |   | 5,165,702 |   | 3,548,995 |   |
| Income from operations                     |   | 707,391                           |      | 637,702 |   | 982,315 |   | 1,462,693 |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Other income/(expenses)                    |   |                              |      |   |   |   |   |   |   |
| Interest expense                           |   | (98,632                           | )         | (89,679 | ) | (174,581 | ) | (164,310 | ) |
| Other income                               |   | 900                               |      | 876 |   | 1,941 |   | 1,584 |   |
| Other expense                              |   | (5,723                            | )         | (11 | ) | (5,723 | ) | — |   |
| Gain (loss)on disposal                     |   | —                            |      | — |   | (5,352 | ) | 5,979 |   |
|                                       |   | (103,455                          | )         | (88,814 | ) | (183,715 | ) | (156,747 | ) |
|                                       |   |                              |      |   |   |   |   |   |   |
| Net income before taxes                    |   | 603,936                           |      | 548,888 |   | 798,600 |   | 1,305,946 |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Income tax - deferred                      |   | (32,000                           | )         | — |   | (64,000 | ) | — |   |
| Income tax - current                       |   | (65,000                           | )         | — |   | (65,000 | ) | — |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Net income                                 |   | $                                 | 506,936   |   | $ | 548,888 |   | $ | 669,600 |   | $ | 1,305,946 |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Earnings per common share - basic          |   | $                                 | 0.05      |   | $ | 0.06 |   | $ | 0.06 |   | $ | 0.15 |   |
|                                       |   |                              |      |   |   |   |   |   |   |
| Earnings per common share -   diluted |   | $                                 | 0.04      |   | $ | 0.06 |   | $ | 0.06 |   | $ | 0.15 |   |

 

See notes to financial statements.

 

4

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**SIX MONTHS ENDED JUNE 30, 2003**

 
|                                                         |   | **Common Stock** |   | **Additional  Paid in  Capital** |   | **Subscription  Receivable** |   | **Retained  Earnings  (Deficit)** |   | **TOTAL**  |    |
|--------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------------|--------|-----------------------------------|--------|------------|---------|
| **Shares**                                                   |   | **Amount**       |
| Balance, December 31, 2001                                   |   | 9,000,000        |   | $                                | 9,000  |                         | $      | 116,400                           |   | $          | (84,000 | ) | $ | 830,582 |   | $ | 871,982 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Distributions, September 30, 2002                            |   | —           |   | —                           |   | —                       |   | —                            |   | (1,864,020 | )       | (1,864,020 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Payment of subscription receivable                           |   | —           |   | —                           |   | —                       |   | 84,000                            |   | —     |    | 84,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Net income, nine months ended September 30, 2002             |   | —           |   | —                           |   | —                       |   | —                            |   | 2,118,767  |    | 2,118,767 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Balance September 30, 2002 - before recapitalization         |   | 9,000,000        |   | 9,000                            |   | 116,400                      |   | —                            |   | 1,085,329  |    | 1,210,729 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Recapitalization on October 1, 2002                          |   | 1,800,000        |   | 1,800                            |   | 972,471                      |   | —                            |   | (1,085,329 | )       | (111,058 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Balance after recapitalization on October 1, 2002            |   | 10,800,000       |   | 10,800                           |   | 1,088,871                    |   | —                            |   | —     |    | 1,099,671 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Reclassification of redeemable stock                         |   | (450,000         | )      | (450                             | )      | (60,086                      | )      |                              |   |       |    | (60,536 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares in exchange for legal services            |   | 15,000           |   | 15                               |   | 40,635                       |   | —                            |   | —     |    | 40,650 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares to employees for services rendered (SIP)  |   | 75,900           |   | 76                               |   | 205,613                      |   | —                            |   | —     |    | 205,689 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares to directors (SIP)                        |   | 40,000           |   | 40                               |   | 108,360                      |   | —                            |   | —     |    | 108,400 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares to consultants (SIP)                      |   | 8,600            |   | 9                                |   | 23,297                       |   | —                            |   | —     |    | 23,306 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Sub-total                                                    |   | 10,489,500       |   | $                                | 10,490 |                         | $      | 1,406,690                         |   | $          | —  |   | $ | — |   | $ | 1,417,180 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares in exchange for consulting services       |   | 10,000           |   | 10                               |   | 27,090                       |   | —                            |   | —     |    | 27,100 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares - private offering                        |   | 83,334           |   | 83                               |   | 249,917                      |   | —                            |   | —     |    | 250,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Exercise of warrants                                         |   | 5,000            |   | 5                                |   | 14,995                       |   | —                            |   | —     |    | 15,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Accretion of redeemable stock                                |   |             |   |                             |   | (1,012,624                   | )      |                              |   |       |    | (1,012,624 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Net loss, three months ended December 31, 2002               |   | —           |   | —                           |   | —                       |   | —                            |   | (184,740   | )       | (184,740 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Balance, December 31, 2002                                   |   | 10,587,834       |   | 10,588                           |   | 686,068                      |   | —                            |   | (184,740   | )       | 511,916 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares - private offering                        |   | 93,334           |   | 93                               |   | 279,907                      |   | —                            |   | —     |    | 280,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Exercise of warrants                                         |   | 10,000           |   | 10                               |   | 29,990                       |   | —                            |   | —     |    | 30,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares to employees for services rendered (SIP)  |   | 1,000            |   | 1                                |   | 2,709                        |   | —                            |   | —     |    | 2,710 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares to directors (SIP)                        |   | 15,000           |   | 15                               |   | 40,635                       |   | —                            |   | —     |    | 40,650 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares - private offering                        |   | 43,334           |   | 43                               |   | 129,957                      |   | —                            |   | —     |    | 130,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares in exchange for consulting services (SIP) |   | 5,000            |   | 5                                |   | 27,495                       |   | —                            |   | —     |    | 27,500 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Sub-total                                                    |   | 10,755,502       |   | $                                | 10,755 |                         | $      | 1,196,761                         |   | $          | —  |   | $ | (184,740 | ) | $ | 1,022,776 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance of shares - public offering                         |   | 3,750            |   | 4                                |   | 20,621                       |   | —                            |   | —     |    | 20,625 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Cancellation of stock repurchase agreement                   |   | 450,000          |   | 450                              |   | 1,072,710                    |   | —                            |   | —     |    | 1,073,160 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Net income, six months ended June 30, 2003                   |   |             |   |                             |   |                         |   |                              |   | 669,600    |    | 669,600 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Balance, June 30, 2003 (Unaudited)                           |   | 11,209,252       |   | $                                | 11,209 |                         | $      | 2,290,092                         |   | $          | —  |   | $ | 484,860 |   | $ | 2,786,161 |   |

 

See notes to financial statements.

 

5

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
|                                                                               |   | **Six months ended June 30,** |       |
|------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                               |   | **2003**                      |       | **2002** |   |
|                                                                               |   |                          | ** ** |   | ** ** |
| Cash flows from operating activities:                                              |   |                          |       |   |   |
| Net Income                                                                         |   | $                             | 669,600    |   | $ | 1,305,946 |   |
|                                                                               |   |                          |       |   |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                          |       |   |   |
| Depreciation and amortization                                                      |   | 295,127                       |       | 200,617 |   |
| (Gain) loss on disposal of assets                                                  |   | 5,352                         |       | (5,979 | ) |
| Bad debts                                                                          |   | 53,817                        |       | — |   |
| (Increase) decrease in accounts receivable                                         |   | (1,707,843                    | )          | (1,100,740 | ) |
| (Increase) decrease in inventory                                                   |   | (4,874,201                    | )          | 448,739 |   |
| (Increase) decrease in prepaid expenses                                            |   | (44,440                       | )          | 3,840 |   |
| (Increase) decrease in other assets                                                |   | 33,339                        |       | (19,876 | ) |
| Increase (decrease) in accounts payable and accrued expenses                       |   | 3,797,846                     |       | 147,043 |   |
| Increase (decrease) in other liabilities                                           |   | 39,735                        |       | 5,482 |   |
| Total adjustments                                                                  |   | (2,401,268                    | )          | (320,874 | ) |
| Net cash provided by  (used  in) operating activities                         |   | (1,731,668                    | )          | 985,072 |   |
|                                                                               |   |                          |       |   |   |
| Cash flows from investing activities:                                              |   |                          |       |   |   |
| Proceeds from sale of property                                                     |   | —                        |       | 11,000 |   |
| Cash payments for the purchase of property                                         |   | (1,303,172                    | )          | (214,552 | ) |
| Net cash used in investing activities                                              |   | (1,303,172                    | )          | (203,552 | ) |
|                                                                               |   |                          |       |   |   |
| Cash flows from financing activities:                                              |   |                          |       |   |   |
| Proceeds from issuance of stocks                                                   |   | 460,625                       |       | — |   |
| Proceeds from loans                                                                |   | 16,228,000                    |       | 11,800,000 |   |
| Proceeds from loans from related party                                             |   | 10,640                        |       | 14,360 |   |
| Distributions to stockholders                                                      |   | —                        |       | (650,000 | ) |
| Payments for stockholder loans                                                     |   | (110,050                      | )          | — |   |
| Principal payments on notes payable                                                |   | (13,782,136                   | )          | (11,856,737 | ) |
| Principal payment on capital leases                                                |   | (27,553                       | )          | (20,771 | ) |
| Net cash provided by (used in) financing activities                                |   | 2,779,526                     |       | (713,148 | ) |
|                                                                               |   |                          |       |   |   |
| Net increase in cash and cash equivalents                                          |   | (255,314                      | )          | 68,372 |   |
|                                                                               |   |                          |       |   |   |
| Cash and cash equivalents, beginning of period                                     |   | 574,046                       |       | 402,500 |   |
|                                                                               |   |                          |       |   |   |
| Cash and cash equivalents, end of period                                           |   | $                             | 318,732    |   | $ | 470,872 |   |
|                                                                               |   |                          |       |   |   |
| Supplemental disclosures of cash flow information:                                 |   |                          |       |   |   |
|                                                                               |   |                          |       |   |   |
| Cash paid during the period for:                                                   |   |                          |       |   |   |
|                                                                               |   |                          |       |   |   |
| Interest expense                                                                   |   | $                             | 174,581    |   | $ | 164,310 |   |

 

See notes to financial statements.

 

6

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

**SIX MONTHS ENDED JUNE30, 2003**

 

**NOTE 1 ****                      BASISOF PRESENTATION AND PRINCIPLES OF CONSOLIDATION**

 

The accompanying consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, International Wholesale Tile, Inc. (IWT), IWT TesoroInternational, Inc. (International) and IWT Tesoro Transport, Inc. (Transport).  All significant inter-company balances andtransactions have been eliminated.

 

The accompanying consolidatedfinancial statements of the Company have been prepared in accordance with theinstructions to Form 10-QSB and, therefore, omit or condense certain footnotesand other information normally included in financial statements prepared inaccordance with generally accepted accounting principles.  It is suggested that these condensedfinancial statements should be read in conjunction with the Company’s financialstatements and notes thereto included in the Company’s audited financialstatements on Form 10-KSB for the fiscal year ended December 31, 2002.

 

The accounting policiesfollowed for interim financial reporting are the same as those disclosed inNote 1 of the Notes to Financial Statements included in the Company’s auditedfinancial statements for the fiscal year ended December 31, 2002, which areincluded in Form 10-KSB.

 

In the opinion of management,the unaudited financial statements include all necessary adjustments(consisting of normal, recurring accruals) for a fair presentation of thefinancial position, results of operations and cash flow for the interim periodspresented.  Preparing financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses.  Actual results may differ from theseestimates.  Interim results are notnecessarily indicative of results for a full year.  The results of operations for the six-month period ended June 30,2003 are not necessarily indicative of operating results to be expected for afull year.

 

**NOTE 2****                            NATUREOF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Stock Options

The Company elected to accountfor stock options issued to employees in accordance with Accounting PrinciplesBoard Opinion No. 25**(APB OpinionNo. 25) *Accounting For Stock Issued toEmployees* and related interpretations, which established financialaccounting and reporting for compensation cost of stock issued to employeesthrough non-variable plans, variable plans, and non-compensatory plans, andaccounts for stock options and warrants issued to non-employees in accordancewith SFAS 123, *Accounting for Stock-BasedCompensation*, which established a fair value method of accountingfor stock compensation plans with employees and others.

 

No options were granted duringthe six months ended June 30, 2003 and 2002.

 

7

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Hadcompensation costs for the Company’s stock option granted during the year endedDecember 31, 2002, been determined on the fair market value at the grant datesfor the options, consistent with Statement of Accounting Standards No. 123, *Accounting for Stock Based Compensation*(Statement No. 123), the Company’s results of operations for the year endedDecember 31, 2002 would have changed to the pro-forma amounts indicated.

 
|                                                                                                                                |   | **2002** |      |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|
| Net income as reported                                                                                                              |   | $        | 1,934,027 |   |
| Add: Stock based employee  compensation cost, net of related tax effects, included in the determination  of net income as reported  |   | 234,355  |      |
|                                                                                                                                |   |     |      |
| Less: Stock based employee  compensation cost, net of related tax effects, determined under fair value  based method for all awards |   | (295,656 | )         |
|                                                                                                                                |   |     |      |
| Pro-forma net income                                                                                                                |   | $        | 1,872,726 |   |
|                                                                                                                                |   |     |      |
| Net income per share basic – diluted                                                                                           |   |     |      |
| As reported                                                                                                                         |   | $        | 0.18      |   |
| Pro-forma                                                                                                                           |   | $        | 0.17      |   |

 

Accounting Pronouncements

In December 2002, the FASBissued SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure,* which amendedSFAS No. 123, *Accounting for Stock-BasedCompensation.*  The newstandard provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  Additionally, thestatement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in the annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used in reported results. This statement is effective for financial statements for fiscal yearsending after December 15, 2002.  Incompliance with SFAS No. 148, the Company has elected to continue to follow theintrinsic value method in accounting for its stock-based employee compensationarrangement as defined by APB No. 25.

 

Earnings perShare

Basic earnings per share foreach year is computed by dividing income for the year by the weighted averagenumber of common shares outstanding during the year.  Diluted earnings per share include the effects of common stockequivalents to the extent they are dilutive.

 

8

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Basic and diluted weightedaverage number of shares outstanding at June 30th is as follows:

 
|                                                   |   | **2003**   |   | **2002**  |   |
|--------------------------------------------------------|--------|------------|--------|-----------|--------|
|                                                   |   |       |   |      |   |
| Basic weighted average number of shares  outstanding   |   | 11,142,691 |   | 9,000,000 |   |
|                                                   |   |       |   |      |   |
| Diluted weighted average number of shares  outstanding |   | 11,485,873 |   | 9,000,000 |   |

 

At June 30, 2003, the totalnumber of additional shares that could further dilute basic EPS in the future,but were not included in the computation of diluted EPS because of theirantidilutive effect, was 3,750 shares. At June 30, 2002, there were no common stock equivalents that couldpotentially dilute basic EPS in the future.

 

**NOTE 3****                            CONCENTRATIONOF CREDIT RISK**

 

Financial instruments that potentially subject the Company to creditrisk include cash on deposit with two financial institutions amounting to$315,232 at June 30, 2003, which was insured for up to $100,000 per financialinstitution by the U.S. Federal Deposit Insurance Corporation.

 

The Company obtains detailedcredit evaluations of customers and establishes credit limits as required androutinely assesses the financial strength of its customers.  The Company competes primarily in the saleof ceramic tile and marble markets and sells its products to a multitude ofcustomers.  There is no disproportionateconcentration of credit risk.

 

**NOTE 4****                            ACCOUNTSRECEIVABLE**

 

Accounts receivable consistedof the following:

 
|                                 |   | **June 30,  2003** |      | **December  31,  2002** |   |
|--------------------------------------|--------|--------------------|-----------|-------------------------|--------|
|                                 |   |               |      |                    |   |
| Accounts receivable                  |   | $                  | 4,643,646 |                    | $      | 2,958,777 |   |
| Less allowance for doubtful accounts |   | (60,000            | )         | (83,245                 | )      |
|                                 |   |               |      |                    |   |
|                                 |   | $                  | 4,583,646 |                    | $      | 2,875,532 |   |

 

Bad debt expense for the sixmonths ended June 30, 2003 was $53,817. There was no bad debt expense for thesix months ended June 30, 2002.

 

9

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**NOTE5****                            INVENTORY**

 

Inventory consisted of thefollowing:

 
|                 |   | **June 30,  2003** |       | **December  31,  2002** |   |
|----------------------|--------|--------------------|------------|-------------------------|--------|
|                 |   |               |       |                    |   |
| Tiles                |   | $                  | 9,327,589  |                    | $      | 4,692,974 |   |
| Inventory in transit |   | 1,594,488          |       | 1,354,902               |   |
|                 |   |               |       |                    |   |
|                 |   | $                  | 10,922,077 |                    | $      | 6,047,876 |   |

 

Inventory in transit consistsof merchandise purchased overseas, which is not yet received in thewarehouse.  The Company obtains legaltitle at the shipping point.  Inventory costincludes the purchase price and in-bound freight.

 

**NOTE6****                            PROPERTYAND EQUIPMENT**

 

Property andequipment consisted of the following:

 
|                          |   | **June 30,  2003** |      | **December  31,  2002** |   | **Depreciation  Period  in Years** |   |
|-------------------------------|--------|--------------------|-----------|-------------------------|--------|------------------------------------|--------|
|                          |   |               |      |                    |   |                               |   |
| Furniture and fixtures        |   | $                  | 337,901   |                    | $      | 89,227                             |   | 5-10 |   |
| Machinery and equipment       |   | 433,290            |      | 326,165                 |   | 7-10                               |   |
| Vehicles                      |   | 223,458            |      | 207,071                 |   | 5                                  |   |
| Display boards                |   | 820,441            |      | 607,978                 |   | 5                                  |   |
| Sample boards                 |   | 2,703,845          |      | 2,379,533               |   | 10                                 |   |
| Computer equipment            |   | 317,929            |      | 131,407                 |   | 3-5                                |   |
| Leasehold improvements        |   | 355,846            |      | 108,220                 |   | 7                                  |   |
|                          |   |               |      |                    |   |                               |   |
|                          |   | 5,192,710          |      | 3,849,601               |   |                               |   |
| Less accumulated depreciation |   | (1,381,032         | )         | (1,137,179              | )      |                               |   |
|                          |   |               |      |                    |   |                               |   |
|                          |   | $                  | 3,811,678 |                    | $      | 2,712,422                          |   |   |   |

 

Depreciation expense for thesix months ended June 30, 2003 and 2002 was $294,296 and $200,617, respectively.(See Note 9)

 

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Sample Boards

The samples in the field withcustomers and salespersons have two characteristics that distinguish them asfixed assets:

 

•                  They areproduced for use in operations and entered into the revenue-generating streamindirectly as marketing tools.  They areheld primarily for use and not for sale.

•                  They haverelatively long lives.

 

The carrying values of thesesamples are adjusted through systematic depreciation to reflect wear and tear.

 

Capitalized samples in thefield were as follows:

 
|                           |   | **June 30,  2003** |      | **December  31,  2002** |   |
|--------------------------------|--------|--------------------|-----------|-------------------------|--------|
|                           |   |               |      |                    |   |
| Sample boards                  |   | $                  | 2,703,845 |                    | $      | 2,379,533 |   |
| Less: accumulated depreciation |   | (715,763           | )         | (586,507                | )      |
|                           |   |               |      |                    |   |
|                           |   | $                  | 1,988,082 |                    | $      | 1,793,026 |   |

 

Depreciation expense related tothe sample boards for the six months ended June 30, 2003 and 2002 was $129,256and $94,979, respectively.

 

**NOTE7****                            NOTESPAYABLE**

 

The Company has outstandingnotes payable as follows:

 
|                                   |   | **June 30,  2003** |    | **December  31,  2002** |   |
|----------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                   |   |               |    |                    |   |
| Notes Payable – Related Parties   |   | $                  | 338,662 |                    | $      | 448,712 |   |
| Notes Payable – Unrelated Parties |   | 126,280            |    | 113,652                 |   |
|                                   |   |               |    |                    |   |
|                                   |   | 464,942            |    | 562,364                 |   |
| Less current portion                   |   | (57,832            | )       | (48,780                 | )      |
|                                   |   |               |    |                    |   |
|                                   |   | $                  | 407,110 |                    | $      | 513,584 |   |

 

Interest expense for the sixmonths ended June 30, 2003 and 2002 was $25,489 and $32,682, respectively.

 

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Long-term debt maturities forall notes payable for the next five years and thereafter are as follows:

 
| 2003                  |   | $       | 32,285  |   |
|-----------------------|--------|---------|---------|--------|
| 2004                  |   | 50,578  |    |
| 2005                  |   | 25,880  |    |
| 2006                  |   | 7,622   |    |
| 2007                  |   | 7,622   |    |
| 2008 & thereafter |   | 340,955 |    |
|                  |   |    |    |
|                  |   | $       | 464,942 |   |

 

**NOTE8****                            LOANPAYABLE**

 

OnNovember 13, 2002, the subsidiary (IWT) renegotiated its existing line ofcredit to increase the amount of the maximum credit to $7,500,000.  The average interest rate was approximately5% for the six months ended June 30, 2003. IWT owed $7,335,904 at June 30, 2003, and $4,864,778 atDecember 31, 2002 against these revolving loans.

 

IWTis subject to a number of restricted covenants under the debt agreement.  IWT is in compliance with all covenantsduring the six months ended June 30, 2003.

 

Interest expense related tothese loans for the six months ended June 30, 2003 and 2002 was $143,534 and$126,928, respectively.

 

**NOTE9****                            LEASES**

 

Capital Leases

The Company’s property undercapital leases is included in property and equipment (See Note 6) and issummarized as follows:

 
|                                  |   | **June 30,  2003** |    | **December  31,  2002** |   |
|---------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                  |   |               |    |                    |   |
| Equipment                             |   | $                  | 355,448 |                    | $      | 266,672 |   |
| Less:   Accumulated depreciation |   | (75,155            | )       | (58,724                 | )      |
|                                  |   |               |    |                    |   |
| Net assets under capital leases       |   | $                  | 280,293 |                    | $      | 207,948 |   |

 

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OperatingLeases

The Company leases office andwarehouse space under a non-cancelable operating lease, which has an initialterm in excess of one year.  In May2003, the Company took occupancy of a new warehouse and office facility in PalmCity, Florida.   Additionally, the Companyentered into a new lease agreement for over 48,000 square feet of warehouse spaceat the old location. The Company also leases office space in Westport,Connecticut for its corporate headquarters.

 

At June 30, 2003, futureminimum annual lease payments under operating and capital leases are asfollows:

 
|                |   | **Operating  Leases** |      | **Capital  Leases** |   |
|---------------------|--------|-----------------------|-----------|---------------------|--------|
|                |   |                  |      |                |   |
| 2003                |   | $                     | 409,631   |                | $      | 30,426 |   |
| 2004                |   | 832,312               |      | 57,587              |   |
| 2005                |   | 851,887               |      | 53,328              |   |
| 2006                |   | 872,437               |      | 41,216              |   |
| 2007                |   | 893,800               |      | 21,310              |   |
| 2008 and thereafter |   | 5,232,645             |      | 2,493               |   |
|                |   |                  |      |                |   |
|                |   | $                     | 9,092,712 |                | $      | 206,360 |   |

 

Total lease expense underoperating leases was $332,634 and $227,206 for the six months ended June 30,2003 and 2002, respectively.

 

Total interest expense undercapital leases was $5,558 and $4,700 for the six months ended June 30, 2003 and2002, respectively.

 

**NOTE 10****                  INCOME TAXES**

 

At June 30, 2003 the Companyhad utilized its loss carryforward of approximately $400,000 that would haveexpired on December 31, 2022.

 

The provision for income taxesat June 30, 2003 consisted of the following:

 
| Currently payable:  |   |   |   |
|---------------------|--------|--------|--------|
| Federal             |   | $      | 51,000 |   |
| State               |   | 14,000 |   |
|                |   |   |   |
|                |   | $      | 65,000 |   |
| Deferred provision: |   |   |   |
| Federal             |   | $      | 48,000 |   |
| State               |   | 16,000 |   |
|                |   |   |   |
|                |   | $      | 64,000 |   |

 

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At June 30, 2002, the Companywas an S Corporation; consequently no income tax provision was required.

 

**NOTE11****                     STOCKHOLDERS’EQUITY**

 

The Articles of Incorporationprovide for the authorization of 25,000,000 shares of convertible preferredstock at $0.001, and 100,000,000 shares of common stock at $0.001 parvalue.  Each share of preferred stock isconvertible into 1 share of common stock. At June 30, 2003 11,209,252 shares of common stock were issued andoutstanding.

 

Common Stock

During the six months endedJune 30, 2003, the Company issued 136,668 shares of common stock and 205,002warrants for $3.00 per unit, for a total of $410,000, to accredited investorspursuant to the private offering. (See Note 14)

 

On March 3, 2003, the Companyissued 1,000 shares of common stock valued at $2.71 per share, based on thecontemporaneous offering price, for a total of $2,710, to employees under theStock Incentive Plan for services rendered resulting in an immediate charge tooperations.

 

On February 18th andFebruary 25th, 2003, the Company issued 15,000 shares of commonstock valued at $2.71 per share, based on the contemporaneous offering price,for a total of $40,650, to directors under the Stock Incentive Plan forservices rendered resulting in an immediate charge to operations.

 

On February 26, 2003, 10,000warrants were exercised for 10,000 shares of common stock at $3.00 per share,or a total of $30,000.

 

On May 12, 2003, the Companyissued 5,000 shares of common stock valued at $5.50 per share, based on thecontemporaneous public offering price, for a total of $27,500, to a consultantunder the Stock Incentive Plan for services rendered resulting in an immediatecharge to operations.

 

During the month ended June 30,2003, the Company issued 3,750 shares of common stock and 3,750 warrants for$5.50 per unit, for a total of $20,625, to various investors pursuant to thepublic offering. (See Note 17)

 

14

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**NOTE 12****                     STOCK OPTIONSAND COMPENSATION PLAN**

 

StockCompensation Plan

On December 27, 2001, IWTTesoro Corporation adopted the “Stock Incentive Plan.”  The Company’s Stock Incentive Plan providesthat eligible employees, consultants, and affiliates may be granted shares ofcommon stock.  Under the plan, the optionsgranted are non-qualified stock options, incentive stock options, and restrictedstock.  The aggregate total common stockthat may be issued is 4,000,000 shares. For the six months ended June 30, 2003, 21,000 restricted shares wereissued to employees directors and consultants for services rendered.  For the six months ended June 30, 2002, norestricted shares were issued to employees, directors and consultants forservices rendered under the “Stock Incentive Plan.”    The aggregate total of restricted shares issued under the StockIncentive Plan is 145,500 through June 30, 2003.  These shares are currently not registered and are subject to Rule144 without any additional restrictions imposed by the Compensation Committeeat the present time.

 

In accordance with SFAS No.123, for options issued to employees, the Company has elected to account forthese stock options under APB No. 25 and related interpretations in accountingfor its plan.  Accordingly, nocompensation costs have been recognized for options issued under the plan as ofDecember 31, 2002.  Had compensationcosts for the Company’s stock option been determined on the fair market valueat the grant dates for the options, consistent with Statement of AccountingStandards No. 123, *Accounting for StockBased Compensation* (Statement No. 123), the Company’s results ofoperations for the year ended December 31, 2002 would have changed to thepro-forma amounts indicated.  No optionswere issued during the six months ended June 30, 2003.

 

**NOTE 13****                     ACQUISITION**

 

On October 1, 2002, the Companyacquired International Wholesale Tile, Inc. In connection with the legal formof this transaction, International Wholesale Tile, Inc. became a wholly ownedsubsidiary of IWT Tesoro Corporation.  Atotal of 9,000,000 shares of common stock were issued for the acquisition.  For accounting purposes, the acquisition hasbeen treated as a capital transaction and as a recapitalization ofInternational Wholesale Tile, Inc.

 

As part of the transaction, theCompany and each of the three shareholders of International Wholesale Tile,Inc. entered into a repurchase agreement, to commence on January 1, 2003 forthree years, by which the three shareholders may sell a certain amount of theCompany’s common stock back to the Company for a price based on an amount equalto 88% of the average trading price of the Company’s common stock so long asthe stock is trading.  The amount ofstock is generally up to 25,000 shares for the first year, up to 50,000 sharesfor the second year, and up to 75,000 shares for the third year.  The repurchase agreement is contingent upontrading of the Company’s stock on the NYSE, the ASE, the NASDAQ, the Over theCounter Bulletin Board, or the “Pink Sheets”.

 

On June 26, 2003 the Companyvoted to cancel the repurchase agreement; consequently the financial statementswere adjusted to reflect the change.

 

15

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**NOTE14****                     PRIVATEOFFERING**

 

TheCompany adopted a subscription agreement on October 1, 2002 to commence aprivate offering of its common stock to accredited investors only, for up to 1.0million units at $3.00 per unit; each consisting of one (1) share of commonstock and warrants to purchase 11⁄2 shares initially at $3.00 per share.  The price of the warrants will increase by$.25 per share at the beginning of each calendar quarter following the firstpublic sale of the common stock of IWT Tesoro Corporation, pursuant to theCompany’s form 211 to be filed with the National Association of SecuritiesDealers (NASD).

 

Underthis private offering, the Company sold 220,000 units for a total of$660,000.  In addition, 15,000 warrantswere exercised for a total of $45,000.

 

**NOTE15****                     SEGMENTINFORMATION**

 

TheCompany manages its operations as one segment and all revenue is derived fromcustomers in the United States.

 

**NOTE16****                     NEWSUBSIDIARIES**

 

On January8, 2003, the Company incorporated a subsidiary, IWT Tesoro International, Ltd.(ITIL).  This subsidiary was set up as aforeign subsidiary, to be based in Bermuda to handle future operations offoreign subsidiaries.  Organizationalcosts related to the incorporation totaling $8,311 were capitalized and arebeing amortized over 5 years. Amortization expense for the six months ended June 30, 2003 was $831.

 

OnJanuary 24, 2003, the Company set up IWT Tesoro Transport, Inc. (ITTI).  Initially, this corporation will be atransport broker, but future plans include overland transport of tile fromFlorida to destinations within the United States and return shipments of otherfreight back to Florida.

 

**NOTE17****                     PUBLICOFFERING**

 

OnApril 11, 2003, the Company filed a registration statement with the Securitiesand Exchange Commission that was declared effective on June 17, 2003. Twoofferings were included in the registration statement. The firstwas the offer and sale of 250,000 units at $5.50 per unit.  Each unit consists of one share of Tesorocommon stock and a warrant to purchase one share at $7.00 per share throughJune 17, 2006. This offering will end the earlier of September 15, 2003 oruntil all 250,000 shares are sold.  TheCompany may extend this offering for an additional ninety days through December14, 2003. Through July 7, 2003, the Company will offer these units to itscurrent stockholders exclusively.  Thesecond offering was by certain Tesoro stockholders to sell an aggregate of1,243,502 registered shares; of this total 443,500 have no lock-up period,699,002 are subject to a six-month lock-up period, and 101,000 are subject to a12-month lock-up period.

 

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ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Thefollowing discussion should be read along with our financial statements, whichare included in another section of this prospectus. This discussion containsforward-looking statements about our expectations for our business andfinancial needs. These expectations are subject to a variety of uncertaintiesand risks that may cause actual results to vary significantly from ourexpectations. The cautionary statements made in this prospectus should be readas applying to all forward-looking statements in any part of this prospectus.

 

Wewere incorporated on May 5, 2000 as a Nevada corporation. Our principaloffice is located at 191 Post Road West, Suite 10, Westport, CT 06880. Anyreference in this “Management’s Discussion and Analysis or Plan of Operations”discussion to “the company,” “our,” “we” or “us” refers to Tesoro.

 

EffectiveOctober 1, 2002, we acquired International Wholesale Tile, Inc. (IWT)through a share exchange and IWT became our wholly owned subsidiary. We issueda total of 9 million shares of our common stock in exchange for all of theIWT shares. As part of the transaction, Tesoro and each of the three IWTstockholders entered into a repurchase agreement by which the threestockholders may each sell a total of 150,000 shares of Tesoro’s common stockover a three-year period back to us for a price based on an amount equal to 88%of its then weighted average trading price. Effective June 28, 2003, Tesoro and three former IWT shareholdersterminated the repurchase agreement.

 

ThroughIWT, we provide hard floor and wall covering materials primarily ceramic,porcelain and granite tiles to the new construction and remodeling industriesfor the commercial and residential marketplaces. We distribute our productsthrough a network of independently owned dealers and distributors, buyinggroups and home center retailers. We currently purchase our productspredominately from foreign manufacturers.

 

Ourprimary source of revenue is the sale of hard flooring and wall covering materialsand our primary costs relate to the acquisition, warehousing, selling anddelivery of those products. While sales are made throughout the United States,the majority of our sales are in the southeastern quadrant of the country. Theprimary sources of working capital are a $7.5 million (US) revolving lineof credit from a division of a large US commercial bank, stockholders’ equityand our suppliers who have extended us terms. During 2003, we expect to begintrading our stock on the OTC-BB and to raise equity through the public market.Any new equity raised will be used to strengthen our balance sheet and toprovide capital for continued growth.

 

*Results of Operations for the Quarter ending June 30, 2003.*

 

Thefollowing discussion and analysis should be read in conjunction with thefinancial statements and notes thereto that appear elsewhere in this document.The table below sets forth certain operating data as a percentage of totalrevenue for the periods indicated.

 
|                    |   | **Quarter  Ending June 30,** |   |
|-------------------------|--------|------------------------------|--------|
|                    |   | **2001**                     |   | **2002** |   | **2003** |   |
|                    |   |                         |   |   |   |   |   |
| Revenues                |   | 4,913,633                    |   | 6,803,466 |   | 8,505,066 |   |
| Cost of Goods Sold      |   | 3,271,102                    |   | 4,193,483 |   | 5,012,000 |   |
| Gross Margin            |   | 1,642,531                    |   | 2,609,983 |   | 3,493,066 |   |
| Gross Margin Percentage |   | 33.43                        | %      | 38.36 | % | 41.07 | % |
| Operating Expenses      |   | 1,288,018                    |   | 1,972,281 |   | 2,785,675 |   |

 

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*Quarter ended June 30, 2003 Compared to Quarter Ended June30, 2002*

 

Salesfor the quarter ended June 30, 2003 were $8,505,066 a 25% increase over salesfor the quarter ended June 30, 2002. This growth follows a 38% growth from 2001to 2002. We are a relatively small player in a growing market. We are enteringnew markets and adding new products; therefore, we expect to be able to growfaster than the market as a whole for the next several years. Our share of thismarket is approximately 1%. The tile market in the United States isapproximately $2.1 billion and is growing at a five to seven percent rate.

 

Aswe grow, we have been able to purchase product at lower prices and haveconsequently lowered our cost of goods to 60% in 2002 from 64% in 2001 and 68%in 2000. While there are certainly finite limits to improving our gross marginpercentage, it is imperative that we maintain these ratios as we grow.  The gross margin for the quarter ended June30, 2003 was $3,493,066, a 33% increase over gross margin for the quarter endedJune 30, 2002.  This increase in grossmargin resulted from the increase in sales and a slight improvement in our costof goods to 58.9% for the quarter ending June 30, 2003.

 

In early April 2003, wemoved into a new warehouse facility of nearly 147,000 square feet, an increaseof nearly 50% over the previous facility. 5,000 square feet of the new facilityis for office space.  On June 4thand July 9th, 2003, lease addendums were signed that addedapproximately 75,000 square feet to the warehouse capacity.  These new additions bring the totalwarehouse capacity to approximately 220,000 square feet.  These new facilities will allow us toincrease our inventory and better serve our customers who rely upon us to meetthe short lead times and limited inventory capacity that exist in theirmarkets. We hope to improve the efficiency of our warehouse operations bysimplifying the receiving and shipping functions. We currently maintain betweenfour and five million square feet of product in our facility and expect thatthis will increase to between six and seven million square feet. Our inventoryturns, in 2002, were approximately 3.8 times. We expect to lower those turns toabout 3.2 during 2003 and to 3.0 in 2004; however we cannot assure anyone thatwe will be successful in attaining these expectations. Availability of productis a key success factor for us and is a good use of our capital.

 

In May 2003, we commencedbulk sales of products, made exclusively for IWT, to wholesale distributorsthroughout the United States.  The salesof these products are made in full truckload or container load volumes, withsome product being delivered directly to the customer from the factory(drop-shipped).  The gross margin onthese sales could be lower than our traditional business; however, we believethat the lower handling costs may offset the lost gross margin.

 

Makingit easy for our customers to sell product is also a key success factor for us.We have an extensive sampling and display program that augments the trainingand marketing support we provide our customers. Our inventory of samples in thefield with our customers represents a significant investment that is capitalizedas property and equipment. The net value on June 30, 2003 and December 31,2002 was $1,988,082 and $1,793,026, respectively on our balance sheet.

 

Anothersuccess factor for us is maintaining our position as a dependable supplier notonly to meet customer demand but also to ensure leading edge design andtechnical superiority of the product. We established IWT Tesoro International Ltd., as our subsidiaryresponsible for dealing with the global array of manufacturers that supply uswith product.  During the secondquarter, we continued to develop key relationships in Europe and South Americaand began to sell some of these new items through the IWT network of dealersand distributors.  The impact of theseactivities on our second quarter results was minimal, but we believe it willgrow during the remainder of this fiscal year.

 

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Operatingexpenses for the quarters ended June 30, 2003 and June 30, 2002 were $2,785,675and $1,972,281, respectively. This increase of 41.3% was a result of increasesin sales related expenses, such as commissions and delivery charges, driven byour revenue growth, and investments being made in people, infrastructure andcorporate organization for future growth. With the acquisition of IWT inOctober 2002, we began to incur certain professional and operatingexpenses that are not reflected in the comparable period for 2002. In addition,we began to issue common stock to non-executive employees, outside directorsand suppliers under the stock incentive plan. Generally Accepted AccountingPrinciples require that these shares be expensed in the period they are issuedat the fair market value of these shares. We expect these expenses to continue.

 

Thesecond quarter of fiscal year 2003 also saw the increase in our occupancy costsincluding rent and moving expenses at IWT in anticipation of its expansion ofthe bulk sales and home center store channels. We expect these increasedexpenses to generate proportionate sales growth in the future.

 

*Liquidity and Capital Resources*

 

Wehad cash balances of $318,732 and $574,046 at the end of June 30, 2003 andDecember 31, 2002, respectively. We have generated positive cash flow fromoperations at year end for the last three years.

 

InOctober 2002, we commenced a private offering of our common stock toaccredited investors for up to one million units at $3.00 per unit. Eachunit consists of one share of common stock and warrants to purchase 1 1/2shares initially at $3.00 per share for five years from the date the warrantwas issued. The price of the warrants will increase by $.25 per share at thebeginning of each calendar quarter following the first public sale of Tesoro’scommon stock and continuing until the warrant expires.

 

Throughit’s closing as of June 30, 2003, we raised $530,000 from units sales. We alsoraised an additional $45,000 from 15,000 warrants that were exercised. All ofthe investors were provided with, or otherwise had access to, information aboutus and our subsidiaries, including financial information. The proceeds from theoffering and the warrant exercises were used for general corporate purposes,including paying fees to outside professionals and working capital.

 

OnNovember 21, 2000, our subsidiary, IWT, entered into a new loan andsecurity agreement with a financial institution totaling $5 million as arevolving loan, for a period of three years, with an option to renew for oneadditional year. This was amended and restated effective November 13, 2002and the amount of the maximum credit was increased from $5 million to$7.5 million. The interest rate on this loan is the Wachovia announcedprime rate plus .75% per year. Additionally, at the lender’s option, we alsopay prime plus 2.75% with respect to any non-contingent obligations

 

•                                          on all outstanding obligations followingtermination or non-renewal of the credit facility;

 

•                                          form and after the date of an event ofdefault occurs and for so long as such event is continuing, as determined bylender;

 

•                                          during any time the amounts available to usare made or arise without our lender’s knowledge or consent.

 

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OnJune 17, 2003, the Securities and Exchange Commission declared IWT TesoroCorporation’s registration statement on Form SB-2 effective.  Inconnection with the Registration Statement, two offerings are occurring. The first is the offer and sale of 250,000 units at $5.50 per unit.  Eachunit consists of one share of Tesoro common stock and a warrant to purchase oneshare at $7.00 per share through June 17, 2006.  The second is an offer bycertain Tesoro’s stockholders to sell an aggregate of 1,243,502 registeredshares.

 

Theunit offering is being sold on an exclusive basis through July 7, 2003 toTesoro’s current stockholders.  Thereafter, the units will be offered andsold by Tesoro’s officers and directors, or by certain registeredbroker-dealers who have entered into a Selected Dealer Agreement with Tesoroand who have been approved by the National Association of Securities Dealers(NASD).  Through June 30, 2003, weraised $20,625 from unit sales under the current registration statement.

 

ITEM 3:  CONTROLS AND PROCEDURES

 

(a)                                  Withinthe 90 days prior to the date of this report, we carried out an evaluation,under the supervision and with the participation of management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation,our principal executive officer and principal financial officer concluded thatour disclosure controls and procedures are effective in timely alerting them tomaterial information relating to us (including our consolidated subsidiaries)that is required to be included in our periodic SEC reports. There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect those controls subsequent to the date we carried out thisevaluation.

 

(b)                                 Therehave been no significant changes in our internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theevaluation described in the preceding paragraph.

 

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PART II — OTHER INFORMATION

 

ITEM 1.                             LEGALPROCEEDINGS

 

There are no legal proceedingsagainst us and we are unaware of such proceedings contemplated against it.

 

ITEM 2.                             CHANGESIN SECURITIES

 

(a) — (c)                         Notapplicable

 

(d)                                 OnJune 17, 2003, the Securities and Exchange Commission declared IWT TesoroCorporation’s registration statement on Form SB-2 effective.

 

In connection with theRegistration Statement, two offerings are occurring.  The first is the offer and sale of 250,000 units at $5.50 perunit.  Each unit consists of one shareof Tesoro common stock and a warrant to purchase one share at $7.00 per sharethrough June 17, 2006.  The second is anoffer by certain Tesoro’s stockholders to sell an aggregate of 1,243,502registered shares.

 

The unit offering is being soldon an exclusive basis through July 7, 2003 to Tesoro’s currentstockholders.  Thereafter, the unitswill be offered and sold by Tesoro’s officers and directors, or by certainregistered broker-dealers who have entered into a Selected Dealer Agreementwith Tesoro and who have been approved by the National Association ofSecurities Dealers (NASD).

 

As required by Rule 463, as ofAugust 4, 2003, 9,328 units were sold by us, for which Tesoro received proceedsof $51,304.  These proceeds have beenused for offering costs and expense for its Registration Statement.

 

ITEM 3.                             DEFAULTSUPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.                             SUBMISSIONOF MATTER TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

ITEM 5.                             OTHERINFORMATION

 

Not applicable.

 

ITEM 6.                             EXHIBITSAND REPORTS ON FORM 8-K

 

(a)                                  Exhibits

 

31.1                           Certificationof CEO

31.2                           Certificationof CFO

32.1                           CERTIFICATIONPURSUANT TO 18 U.S.C. sec. 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

32.2                           CERTIFICATIONPURSUANT TO 18 U.S.C. sec. 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

(b)                                 Reports on Form 8-K.

 

i.             On June 24, 2003, the Company filed a report on Form 8-K stating that its registration statement filed with the Securities and Exchange Commission became effective.

 

ii.          On June 26, 2002, the Company filed a report on Form 8-K stating that three repurchase agreements that had been entered into with three principal stockholders who also serve as executive officers and directors of Tesoro, were terminated.

 

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SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|            | IWT  TESORO CORPORATION                  |
|-----------------|------------------------------------------|
|            |                                     |
|            |                                     |
| August  8, 2003 | /s/  Henry J. Boucher, Jr.               |   |
|            | Henry  J. Boucher, Jr., President        |
|            |                                     |
| August 8, 2003  | /s/Forrest  Jordan                       |   |
|            | Forrest  Jordan, Chief Financial Officer |
|                 |                                          |  |  |

 

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