** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                       |
| **o**      | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                             |

 

**CommissionFile No. 0-31267**

 

**IWT TESORO CORPORATION**

(Exactname of registrant as specified in its charter)

 
| **Nevada**                                                       | ** ** | **91-2048019**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |

 

**101 PostRoad West, Suite 10, Westport, CT 06880**

(Address of principal executive offices)

 

**(203) 221-2770**

(Registrant’s telephone number, includingarea code)

 

Indicate by check, mark whether theregistrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days:

ýYes                                                                                                                                                                oNo

 

Indicate by check mark whether the registrantis an accelerated files (as defined in Rule 12b-2 of the ExchangeAct)   oYes                        ýNo

 

Statethe number of shares outstanding of each of the issuer’s class of commonequity, as of April 28, 2005: 11,697,102 shares

 

 

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**IWT TESORO CORPORATION ANDSUBSIDIARIES**

**FORM 10-Q**

**For the Three Months Ended March 31,2005**

**INDEX**

 
| **PART I**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                |   |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------|--------|
| ** **       | ** ** | ** **                                                                                                                |   |
| Item I.          |       | Financial Statements                                                                                                      |   |
|             |       |                                                                                                                      |   |
|             |       | Consolidated Balance Sheets  as of March 31, 2005 (unaudited) and December 31, 2004                             |   |
|             |       | Consolidated  Statements of Operations for the Three Months Ended March 31, 2005 and  2004(as restated) (unaudited)  |   |
|             |       | Consolidated  Statement of Stockholders’ Equity Statement for the Three Months Ended March 31,  2005(unaudited) |   |
|             |       | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2005 and  2004 (as restated) (unaudited) |   |
|             |       | Notes to the  Consolidated Interim Financial Statements                                                                   |   |
|             |       |                                                                                                                      |   |
| Item  2.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |   |
| Item  3.         |       | Quantitative  and Qualitative Disclosures About Market Risk                                                               |   |
| Item 4.          |       | Controls and  Procedures                                                                                                  |   |
|             |       |                                                                                                                      |   |
| **PART II** |       | OTHER INFORMATION                                                                                                         |   |
| Item 1.          |       | Legal Proceedings                                                                                                         |   |
| Item 6.          |       | Exhibits                                                                                                                  |   |

 

2

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PART 1 – FINANCIAL INFORMATION

 

ITEM 1:     FINANCIAL STATEMENTS

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                                                         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                             |       |               |       |                  |       |
| Current  Assets:                                                                                   |       |               |       |                  |       |
| Cash                                                                                               |       | $                  | 484,840    |                  | $          | 507,677 |   |
| Accounts  receivable, net of allowance for doubtful accounts and returns of $257,072  and $270,013 |       | 8,626,833          |       | 7,883,756             |       |
| Inventories                                                                                        |       | 23,103,624         |       | 21,578,829            |       |
| Deposit on  purchase of inventories                                                                |       | 398,821            |       | 366,667               |       |
| Prepaid  expenses                                                                                  |       | 351,586            |       | 271,104               |       |
| Total  current assets                                                                              |       | 32,965,704         |       | 30,608,033            |       |
|                                                                                               |       |               |       |                  |       |
| Property and  equipment, net                                                                       |       | 1,718,018          |       | 1,762,065             |       |
|                                                                                               |       |               |       |                  |       |
| Other assets                                                                                       |       | 666,479            |       | 758,997               |       |
|                                                                                               |       | $                  | 35,350,201 |                  | $          | 33,129,095 |   |
|                                                                                               |       |               |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                         |       |               |       |                  |       |
|                                                                                               |       |               |       |                  |       |
| Current  Liabilities:                                                                              |       |               |       |                  |       |
| Accounts  payable                                                                                  |       | $                  | 14,353,413 |                  | $          | 15,282,653 |   |
| Accrued  expenses and other liabilities                                                            |       | 1,135,843          |       | 997,432               |       |
| Current  portion of capital lease obligations                                                      |       | 76,839             |       | 80,943                |       |
| Current  portion of notes payable, other                                                           |       | 16,415             |       | 18,218                |       |
| Total  current liabilities                                                                         |       | 15,582,510         |       | 16,379,246            |       |
|                                                                                               |       |               |       |                  |       |
| Long-Term  Debt:                                                                                   |       |               |       |                  |       |
| Note  payable, revolving line of credit                                                            |       | 19,034,952         |       | 16,047,220            |       |
| Capital  lease obligations                                                                         |       | 153,204            |       | 170,425               |       |
| Subordinated  notes payable, stockholders                                                          |       | 338,662            |       | 338,662               |       |
| Notes  payable, other                                                                              |       | 33,337             |       | 37,487                |       |
| Total  long-term debt                                                                              |       | 19,560,155         |       | 16,593,794            |       |
| Total  liabilities                                                                                 |       | 35,142,665         |       | 32,973,040            |       |
|                                                                                               |       |               |       |                  |       |
| Commitments  and Contingencies                                                                     |       | —             |       | —                |       |
|                                                                                               |       |               |       |                  |       |
| Stockholders’  Equity:                                                                        |       |               |       |                  |       |
| Preferred  stock, $0.001 par value, 25,000,000 authorized; none issued                             |       | —             |       | —                |       |
| Common  stock, $0.001 par value, 100 million shares authorized; 11,697,102 issued and  outstanding |       | 11,697             |       | 11,697                |       |
| Additional  paid in capital                                                                        |       | 4,178,800          |       | 4,178,800             |       |
| Accumulated  deficit                                                                               |       | (3,982,961         | )          | (4,034,442            | )          |
|                                                                                               |       | 207,536            |       | 156,055               |       |
|                                                                                               |       | $                  | 35,350,201 |                  | $          | 33,129,095 |   |

 

See notes to the consolidatedinterim financial statements.

 

3

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

 
| ** **                                   | ** ** | **The three months ended** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **March 31,**         | ** ** |
| ** **                                   | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|                                         |       |                       |       | **(restated)** |   |
|                                         |       |                       |       |   |   |
| Net Sales                                    |       | $                          | 13,692,978 |   | $ | 9,534,632 |   |
| Cost of  Goods Sold                          |       | 8,562,993                  |       | 5,810,414 |   |
| Gross Profit                                 |       | 5,129,985                  |       | 3,724,218 |   |
| Operating  Expenses:                         |       |                       |       |   |   |
| Warehouse  and distribution                  |       | 1,685,391                  |       | 1,261,056 |   |
| Sales and  marketing                         |       | 1,689,678                  |       | 1,599,915 |   |
| General and  administrative                  |       | 1,520,756                  |       | 1,387,938 |   |
|                                         |       | 4,895,825                  |       | 4,248,909 |   |
| Income  (Loss) from Operations               |       | 234,160                    |       | (524,691 | ) |
| Other  Expenses:                             |       |                       |       |   |   |
| Interest  expense                            |       | (269,590                   | )          | (122,266 | ) |
| Other                                        |       | 86,911                     |       | 6,453 |   |
|                                         |       | (182,679                   | )          | (115,813 | ) |
| Income  (Loss) Before Income Taxes           |       | 51,481                     |       | (640,504 | ) |
|                                         |       |                       |       |   |   |
| Income Tax  Benefit (Expense)                |       | —                     |       | — |   |
| Net Income  (Loss)                           |       | $                          | 51,481     |   | $ | (640,504 | ) |
| Earnings  (Loss) Per Share:                  |       |                       |       |   |   |
| Basic                                        |       | $                          | 0.00       |   | $ | (0.06 | ) |
| Diluted                                      |       | $                          | 0.00       |   | $ | (0.06 | ) |
| Weighted  Average Common Shares Outstanding: |       |                       |       |   |   |
| Basic                                        |       | 11,697,102                 |       | 11,634,724 |   |
| Diluted                                      |       | 11,697,102                 |       | 11,634,724 |   |

 

See notes to the consolidatedinterim financial statements.

 

4

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF  STOCKHOLDERS’ EQUITY

 
| ** **                                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                          | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Earnings**   | ** ** | ** **      | ** ** |
| ** **                                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
|                                                |       |             |       |        |       |           |       |            |       |       |       |
| Balance, December 31,  2004                    |       | 11,697,102       |       | $           | 11,697     |           | $          | 4,178,800       |       | $          | (4,034,442 | ) | $ | 156,055 |   |
|                                                |       |             |       |        |       |           |       |            |       |       |       |
| Net income,  three months ended March 31, 2005 |       | —           |       | —      |       | —         |       | 51,481          |       | 51,481     |       |
|                                                |       |             |       |        |       |           |       |            |       |       |       |
| Balance, March 31,  2005 (unaudited)           |       | 11,697,102       |       | $           | 11,697     |           | $          | 4,178,800       |       | $          | (3,982,961 | ) | $ | 207,536 |   |

 

See notes to the consolidatedinterim financial statements.

 

5

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                                            | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | ** **             | ** ** | **(Restated)** | ** ** |
| Cash flows  from operating activities:                                                |       |                   |       |   |   |
| Net income  (loss)                                                                    |       | $                      | 51,481     |   | $ | (640,504 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                        |       | 82,179                 |       | 65,658 |   |
| Common stock  issued for services and compensation                                    |       | —                 |       | 89,850 |   |
| Provision  for doubtful accounts and reserve for returns                              |       | —                 |       | 44,127 |   |
| Changes in  operating assets and liabilities:                                         |       |                   |       |   |   |
| (Increase)  Decrease in:                                                              |       |                   |       |   |   |
| Accounts  receivable                                                                  |       | (743,077               | )          | (870,843 | ) |
| Inventories                                                                           |       | (1,466,934             | )          | (1,220,701 | ) |
| Deposit on  purchase of inventories                                                   |       | —                 |       | (550,000 | ) |
| Prepaid  expenses and other assets                                                    |       | (46,452                | )          | 17,416 |   |
| Increase  (Decrease) in:                                                              |       |                   |       |   |   |
| Accounts  payable                                                                     |       | (929,240               | )          | 1,594,335 |   |
| Accrued  expenses                                                                     |       | 138,411                |       | 38,799 |   |
| Net cash  used in operating activities                                                |       | (2,913,632             | )          | (1,431,863 | ) |
|                                                                                  |       |                   |       |   |   |
| Cash flows  from investing activities:                                                |       |                   |       |   |   |
| Acquisitions  of property and equipment                                               |       | (34,005                | )          | (34,130 | ) |
| Net cash  used in investing activities                                                |       | (34,005                | )          | (34,130 | ) |
|                                                                                  |       |                   |       |   |   |
| Cash flows  from financing activities:                                                |       |                   |       |   |   |
| Proceeds  from revolving line of credit                                               |       | 16,062,508             |       | 9,230,000 |   |
| Payments on  revolving line of credit                                                 |       | (13,074,776            | )          | (8,659,056 | ) |
| Collection  on notes receivable arising from sale of stock                            |       | —                 |       | 550,000 |   |
| Proceeds  from issuance of stock                                                      |       | —                 |       | 123,500 |   |
| Payments on  long-term debt                                                           |       | (27,278                | )          | (26,130 | ) |
| Loan  financing costs                                                                 |       | (35,654                | )          | (10,000 | ) |
| Net cash  provided by financing activities                                            |       | 2,924,800              |       | 1,208,314 |   |
|                                                                                  |       |                   |       |   |   |
| Net Decrease  in Cash                                                                 |       | (22,837                | )          | (257,679 | ) |
|                                                                                  |       |                   |       |   |   |
| Cash,  Beginning                                                                      |       | 507,677                |       | 867,361 |   |
| Cash, Ending                                                                          |       | $                      | 484,840    |   | $ | 609,682 |   |
|                                                                                  |       |                   |       |   |   |
| Cash Paid  During the Period for:                                                     |       |                   |       |   |   |
| Interest  expense                                                                     |       | $                      | 269,590    |   | $ | 122,266 |   |
| Income tax                                                                            |       | $                      | 8,000      |   | $ | — |   |
| Non-Cash  Operating Activities:                                                       |       |                   |       |   |   |
| Inventory  acquired through deposit with vendor                                       |       | $                      | 57,861     |   | $ | — |   |
| Non-Cash  Investing and Financing Activities:                                         |       |                   |       |   |   |
| Acquisition  of property and equipment financed through long-term debt                |       | $                      | —     |   | $ | 6,095 |   |

 

See notes to the consolidatedinterim financial statements.

 

6

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IWT TESORO CORPORATION ANDSUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

THREE MONTHS ENDED MARCH 31,2005

 

###### **NOTE 1.**                                                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

######  

#### ***Principles of Consolidation***

####  

The consolidated financialstatements include IWT Tesoro Corporation and its wholly owned subsidiariesInternational Wholesale Tile, Inc., IWT Tesoro International, Ltd, IWTTesoro Transport, Inc. and The Tile Club, Inc. All significantinter-company balances and transactions have been eliminated in consolidation.

 

#### **B*asis of Presentation***

####  

The interim financial information includedherein is unaudited; however, such information reflects all adjustments, whichare, in the opinion of management, necessary for a fair presentation of theCompany’s financial position, results of operations, changes in stockholders’equity and cash flows for the interim periods. All such adjustments are of anormal, recurring nature. The results of operations for the first three monthsof the year are not necessarily indicative of the results of operations whichmight be expected for the entire year.

 

Theaccompanying consolidated financial statements of the Company have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and with the instructions to Form 10-Q and Rule 10-10of Regulation S-X of the Securities and Exchange Commission. Accordinglycertain information and footnote disclosure required by accounting principlesgenerally accepted in the United States of America for complete financialstatements have been omitted. These condensed financial statements should beread in conjunction with the Company’s financial statements and notes theretoincluded in the Company’s audited financial statements on Form 10-K,for the fiscal year ended December 31, 2004.

 

TheConsolidated Balance Sheet at December 31, 2004 has been derived from theaudited financial statements of IWT Tesoro Corporation at that date, but doesnot include all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements.

 

#### ***Stock-Based Compensation***

####  

The Company has elected to follow AccountingPrinciples Board Opinion No. 25, “*Accounting for StockIssued to Employees*” (APB No. 25), and related interpretations,in accounting for its employee and board of director stock options rather thanthe alternative fair value accounting allowed by SFAS No. 123, “*Accounting for Stock-Based Compensation*”.   As amended by SFAS 148 “Accounting forStock-Based Compensation Transition and Disclosure” APB No. 25 providesthat the compensation expense relative to the Company’s employee stock optionsis measured based on the intrinsic value of the stock option.

 

SFAS No. 123 requires companies that continueto follow APB No. 25 to provide pro forma disclosure of the impact ofapplying the fair value method of SFAS No. 123.  The Company follows SFAS No. 123 inaccounting for stock options issued to non-employees.

 

Pro forma informationregarding net income and earnings per share is required by SFAS No. 123, “*Accounting forStock-Based Compensation*,” and has beendetermined as if the Company had accounted for its stock options under the fairvalue method of that Statement. The fair value for these options wasestimated at the grant date using the Black-Scholes option-pricing model usingthe following weighted average assumptions for 2005 and 2004, respectively:risk-free interest rates of4.50%, and 2.20%, dividend yields of 0% and 0%, volatility factors ofthe expected market price of the Company’s common stock of 60.79% and 21.51%and expected lives of ten years. Using these assumptions, the weighted averagegrant-date fair value per share of options granted in 2005 was $1.57 and in2004 it was $1.21.

 

7

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The Black-Scholes option valuation model wasdeveloped for use in estimating the fair value of traded options, which have novesting restrictions and are fully transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions including the expected stockprice volatility. Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.  For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period.

 

A total of 50,000 options were granted todirectors of the Company during the three months ended March 31, 2005.During the three months ended March 31, 2004 a total of 45,000 optionswere granted to directors of the Company and 5,000 options were granted toemployees. The effect on net income (loss) and earnings (loss) per share if theCompany had applied the fair value recognition provision of the SFAS No. 123are presented below:

 
| ** **                                                                                                                                   | ** ** | **For the three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **                                    | ** ** | **(Restated)** | ** ** |
| Net income  (loss) as reported                                                                                                               |       | $                                             | 51,481     |   | $ | (640,504 | ) |
| Deduct:  Stock-based employee compensation expense determined under the fair value  based method for all options, net of related tax effects |       | (19,740                                       | )          | (54,563 | ) |
|                                                                                                                                         |       |                                          |       |   |   |
| Pro forma  net income (loss)                                                                                                                 |       | $                                             | 31,741     |   | $ | (695,067 | ) |
|                                                                                                                                         |       |                                          |       |   |   |
| Earnings  (loss) per share - Basic                                                                                                           |       |                                          |       |   |   |
| As reported                                                                                                                                  |       | $                                             | 0.00       |   | $ | (0.06 | ) |
| Pro forma                                                                                                                                    |       | $                                             | 0.00       |   | $ | (0.06 | ) |
| Earnings  (loss) per share - Diluted                                                                                                         |       |                                          |       |   |   |
| As reported                                                                                                                                  |       | $                                             | 0.00       |   | $ | (0.05 | ) |
| Pro forma                                                                                                                                    |       | $                                             | 0.00       |   | $ | (0.06 | ) |

 

***Earnings per Share***

 

Basic and diluted loss per share for thethree month period ended March 31, 2004 are equal as the effect of thecommon stock options and warrants were antidilutive.

 

8

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***Income Taxes***

 

The Company recognizesincome taxes under the asset and liability method. Under this method, deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases, and losscarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion or all of the deferred tax assets will not berealized.

 

***Reclassifications***

 

Certain amounts in the 2004 financial statementshave been reclassified for comparative purposes to conform to the 2005presentation. These reclassifications had no effect on net income (loss).

 

###### **NOTE 2.**                                                 RESTATEMENT OF FINANCIAL STATEMENTS

######  

The Company has restated the consolidated balancesheet as of March 31, 2004 and the consolidated statements of operations,stockholders’ equity and cash flows for the three months then ended asdescribed below:

 

***Accounts Receivable***

 

Management determined that the Company had beenincorrectly calculating the allowances for product returns.  Management revised this calculation anddetermined that accounts receivable was overstated by $76,516 at March 31,2004 and net sales were overstated by $21,516 for the three months ended March 31,2004.

 

***Accrued Expenses***

 

Management determined that the Company had beenincorrectly calculating the accruals for sales commissions.  Management revised this calculation anddetermined that accrued expenses were understated by approximately $473,400 asof March 31, 2004.

 

***Sample and Display Boards***

 

Management reassessed its methodology for accountingfor sample and display boards and determined that this promotional merchandiseshould have been expensed when distributed rather than capitalized anddepreciated.  The adjustments resultingfrom the restatement increased the net loss for the three months ended March 31,2004 by approximately $412,000. This change also reduced property and equipmentas of March 31, 2004 by approximately $3,392,000.

 

***Deferred Taxes***

 

In connection with the restatements for accountsreceivable, accrued expenses and sample and display boards described above, therelated tax effect was recorded resulting in gross deferred tax assets and thecompany recorded a valuation allowance, as needed, to reduce net deferred taxassets to an amount considered by management more likely than not to berealized.

 

9

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***Additional Paid in Capital***

 

As part of the recapitalization transaction of IWTeffective October 1, 2002, the Company and each of the three stockholdersof International Wholesale Tile, Inc. entered into a repurchase agreementto commence on January 1, 2003. The maximum number of redeemable sharesunder the repurchase agreement was 450,000. On June 26, 2003, the Companyvoted to cancel the repurchase agreement. The transaction was accounted for byreducing additional paid in capital to the extent a balance existed with theremaining portion of the transaction applied to accumulated deficit as of December 31,2002. As the result of the restatements described above, the recording of thecancellation of the repurchase agreement was also restated based on therestated balance in accumulated deficit and additional paid in capital.

 

The effects of these changesare summarized as follows:

 
| ** **                   | ** ** | **March 31, 2004** | ** ** |
|------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **(unaudited)**         | ** ** |
| ** **                   | ** ** | **As Previously**       | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                   | ** ** | **Reported**            | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated  Balance Sheet: |       |                    |       |   |   |   |   |
| Accounts  receivable         |       | $                       | 5,755,937  |   | $ | (76,516 | ) | $ | 5,679,421 |   |
| Property and  equipment, net |       | 4,610,798               |       | (3,392,168 | ) | 1,218,630 |   |
| Deferred tax  assets         |       | 127,876                 |       | (127,876 | ) | — |   |
| Accrued  expenses            |       | 102,362                 |       | 473,400 |   | 575,762 |   |
| Deferred tax  liability      |       | 149,072                 |       | (149,072 | ) | — |   |
| Additional  paid in capital  |       | 5,186,117               |       | (1,088,871 | ) | 4,097,246 |   |
| Accumulated  deficit         |       | (633,532                | )          | (2,625,631 | ) | (3,259,163 | ) |
|                              |            |                         |            |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **For the Three months Ended March 31,  2004** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **As Previously**                                   | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                             | ** ** | **Reported**                                        | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated  Statement of Operations: |       |                                                |       |   |   |   |   |
| Net Sales                              |       | $                                                   | 9,556,147  |   | $ | (21,515 | ) | $ | 9,534,632 |   |
| Gross profit                           |       | 3,745,733                                           |       | (21,515 | ) | 3,724,218 |   |
| Operating  expenses                    |       | 3,763,306                                           |       | 485,603 |   | 4,248,909 |   |
| Loss before  income taxes              |       | (133,386                                            | )          | (507,118 | ) | (640,504 | ) |
| Income tax  benefit (expense)          |       | (120,000                                            | )          | 120,000 |   | — |   |
| Net Loss                               |       | (253,386                                            | )          | (387,118 | ) | (640,504 | ) |
|                                   |       |                                                |       |   |   |   |   |
| Loss per  share:                       |       |                                                |       |   |   |   |   |
| Basic                                  |       | $                                                   | (0.02      | ) | $ | (0.04 | ) | $ | (0.06 | ) |
| Diluted                                |       | $                                                   | (0.02      | ) | $ | (0.04 | ) | $ | (0.06 | ) |

 

10

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**NOTE 3**                                                    INVENTORIES

 

Inventories consisted of the following:

 
| ** **            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **            | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
|                  |       |               |       |                  |       |
| Tiles                 |       | $                  | 20,590,464 |                  | $          | 17,034,540 |   |
| Inventory in  transit |       | 2,513,160          |       | 4,544,289             |       |
| Total  Inventories    |       | $                  | 23,103,624 |                  | $          | 21,578,829 |   |

 

Inventory in transit consists of merchandisepurchased overseas, which is not yet received in the warehouse. The Companyobtains legal title at the shipping point.

 

#### **NOTE 4**                                                    PROPERTYAND EQUIPMENT

 

Property and equipment consisted of thefollowing:

 
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                     | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
|                           |       |               |       |                  |       |
| Furniture  and fixtures        |       | $                  | 413,541    |                  | $          | 412,316 |   |
| Machinery  and equipment       |       | 644,780            |       | 634,531               |       |
| Vehicles                       |       | 233,501            |       | 233,501               |       |
| Computer  equipment            |       | 470,397            |       | 447,866               |       |
| Leasehold  improvements        |       | 730,534            |       | 730,534               |       |
|                           |       | 2,492,753          |       | 2,458,748             |       |
| Less  accumulated depreciation |       | 774,735            |       | 696,683               |       |
|                           |       | $                  | 1,718,018  |                  | $          | 1,762,065 |   |

 

Depreciation expense for the three months ended March 31,2005 and 2004 was approximately $78,100 and $58,600, respectively.

 

#### **NOTE 5**                                                    NOTESPAYABLE, REVOLVING LINE OF CREDIT

####  

On December 31, 2004, the Company amended andrestated the existing revolving line of credit agreement providing up to$25,000,000 with interest rates of either (1) LIBOR plus 3.00% or (2) thebase rate plus 0.50% (interest rates ranging from 5.22% to 7.09% at March 31,2005) payable monthly.  The line ofcredit is limited by a borrowing base which is comprised of a percentage ofeligible accounts receivable and eligible inventories, as defined, and iscollateralized by substantially all the assets of the Company. The balance due atMarch 31, 2005 and December 31, 2004 was $19,034,952 and $16,047,220,respectively. The line matures September 10, 2006 and contains certaincovenants requiring the Company to maintain a certain leverage ratio, arequired minimum fixed charge coverage ratio, and certain inventory turnoverratio. At March 31, 2005 the Company was not in compliance with theleverage and fixed charge coverage ratio requirement. The Company was granted awaiver of these covenants by our commercial lender.

 

For the three months ended March 31,2005 and 2004, interest expense related to the credit line amounted to $255,625and $101,829 respectively.

 

11

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#### **NOTE 6**                                                    SEGMENTINFORMATION

####  

The Company manages its operations as onesegment and all revenue is derived from customers in the United States.

 

#### **NOTE 7**                                                    INCOMETAXES

####  

Income tax expense for the three month period ended March 31,2005 was $-0-as the provision for income taxes, computed byapplying the Federal statutory rate to income before income taxes, was reducedby the decrease in the deferred tax valuation allowance during the period,resulting from the utilization of a portion of the Company’s net operating losscarryforward.

 

Income tax expense for the three month period ended March 31,2004 was $-0- as the benefit for income taxes, computed by applyingthe Federal statutory rate to loss before income taxes, was reduced by theincrease in the deferred tax valuation allowance during the period, to adjustdeferred taxes to the amount considered by management more likely than not tobe realized.

 

12

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ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read along with our financialstatements, which are included in another section of this filing.

 

Some statements made in this Quarterly Report are “forward-lookingstatements” and are not historical facts. For example, statements regarding our financial position, businessstrategy and other plans and objectives for future operations, and assumptionsand predictions about future demand for our services and products, supply,costs, marketing and pricing factors are all forward-looking statements. Whenwe use words like “intend,” “would”, “anticipate,” “believe,” “estimate,” “plan”or “expect” or the negative of these terms and similar expressions we aremaking forward- looking statements.  Youshould be aware that these forward-looking statements are subject to risks anduncertainties.  Additionally, ourforward-looking statements speak only as of the date of this report.  Other than as required by law, we undertakeno obligation to update or revise these statements, whether as a result of newinformation, future events or otherwise.  New factors emerge from time to time that may cause our business not todevelop as we expect, and it is not possible for us to predict all ofthem.  Factors that may cause our actualresults, performance or achievements to be materially different from theresults, performance or achievements expressed or implied by theforward-looking statements include, among other things:

 

•                  Ourability to successfully implement our business plan, including expanding ourmarkets, increasing our product lines, and maintaining high quality customerservice;

•                  Continuingand cultivating our relationships with current and new vendors;

•                  Fundingour growth in a manner that is beneficial to our stockholders;

•                  Trendsaffecting our financial condition or results of operations, the impact ofcompetition, the start-up of certain operations, roll out of products andservices and acquisition opportunities;

•                  Restraintson pricing flexibility due to competitive conditions in the flooring industry,while taking into consideration factors beyond our control such as increases infreight and tariff charges, currency risks, and political conditions;

•                  Dependingon third party suppliers outside the United States;

•                  Theimpact of adverse weather conditions, both in our targeted markets, as well aswith respect to our foreign suppliers; and

•                  Otherrisks referenced from time to time in our SEC filings.

 

Apart of preparing its Form 10-K, filed on April 15, 2005,management concluded it should restate its previously issued financialstatement since the fiscal year ended December 31, 2002 and through September 31,2004.  The restatements are a result ofmanagement’s reassessing its methodology for accounting for certaintransactions.  The Consolidated FinancialStatements for the year ended December 31, 2004 have been preparedaccording to the new methodology and may be relied upon.  Tesoro is working diligently to complete therestated financial statements, but as of the date filing this Form 10-Qfor the first quarter ended March 31, 2005 the restated FinancialStatements have not be filed. Accordingly, Tesoro’s Consolidated Financial Statements previously filedfor the years ended 2003 and 2002 and for the interim periods within thoseyears should no longer be relied upon.

 

13

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# **General**

# ** **

IWTTesoro Corporation (the Company) was organized in Nevada on May 3rd, 2000,originally under the name “Ponca Acquisition Corporation”.   Effective October 1, 2002, Tesoroacquired all of International Wholesale Tile, Inc.’s (IWT) common stockfrom IWT’s three shareholders. IWT was organized in Florida and has been incontinuous operations since 1994. In exchange for the IWT stock, the IWTshareholders each received 3.0 million Tesoro shares, representing 87% ofTesoro’s then outstanding common stock.

 

In addition to IWT, Tesoro’s primary operatingsubsidiary, Tesoro has three additional wholly owned subsidiaries.  These include:

 

•                  IWTTesoro Transport, a USDOT licensed common carrier, organized to act as ourfreight carrier outside of Florida and to back haul non-household goods intoFlorida to help generate outside revenue, which has been insignificant through March 31,2005;

 

•                  IWTTesoro International, Ltd., a Bermuda corporation to act as a holdingcompany for activities and assets such as agency agreements and investments inforeign operations; and

 

•                  TheTile Club, Inc., formed in 2004, was organized to acquire licensing,manufacturing and distribution rights for high-end designer and artistic baseddecorative tiles and to also act as an agent for foreign manufacturers fromwhom IWT has acquired exclusive distribution rights.

 

Ourprincipal executive office is located at 191 Post Road West, Suite 10,Westport, CT 06880.  Our telephone numberis (203) 221-2770.  Our web sitecan be found at*http://www.iwttesoro.com*.   Information contained on our web site is notpart of this report.

 

*Resultsof Operations for the Quarters ended March 31, 2004 and 2005.*

 

The following discussion andanalysis should be read in conjunction with the financial statements and notesthereto that appear elsewhere in this document. The table below sets forthcertain operating data for the periods indicated. Percentages are relative to total revenue for the periods indicated.

 
| ** **               | ** ** | **March 31,  2003** | ** ** | **March 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **(as restated)**        | ** ** | **(as restated)**        | ** ** | ** **               | ** ** |
| Revenues                 |       | $                        | 6,713,810  |                     | $          | 9,534,632                |       | $ | 13,692,978 |   |
| Cost of  Goods Sold      |       | 4,079,608                |       | 5,810,414                |       | 8,562,993                |       |
| Gross Profit             |       | 2,634,202                |       | 3,724,218                |       | 5,129,985                |       |
| Gross Profit  Percentage |       | 39.2                     | %          | 39.1                     | %          | 37.5                     | %          |
| Operating  Expenses      |       | $                        | 2,618,817  |                     | $          | 4,248,909                |       | $ | 4,895,825 |   |

 

*Quarterended March 31, 2005 Compared to Quarter March 31, 2004*

 

Net sales for the three monthsended March 31, 2005 increased $4,158,346 or approximately43.6% over the reported net sales for the three months ended March 31,2004. This growth follows a 42.0% increase in net sales for the three monthsended March 31, 2004 over the three months ended March 31, 2003. TheCompany expects to maintain its strong growth rate as a result of continuedexpansion into national markets.

 

Gross profit for the three months ended March 31, 2005 was$5,129,985 (37.5% of net sales) compared to $3,724,218 (39.1% of net sales) forthe three months ended March 31, 2004. We anticipated a somewhat lowergross profit percentage as a result of the expansion of our wholesale and homecenter store customer base business. We expect the gross profit percentage tostabilize at approximately 38% in the future.

 

Our operating expenses for the three months ended March 31, 2005were $4,895,825 (35.7% of net sales) compared to $4,248,909 (44.5% of netsales) for the three months ended March 31, 2004. The decrease in thecurrent percentage of operating expenses was a result of the Company beginningto realize economies of scale.

 

14

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**Changes in Financial Position for the threemonths ended March 31, 2005 from the year ended December 31, 2004**

 

Accounts receivable andinventory have increased by $743,077 and $1,524,795 respectively at the threemonth period ended March 31, 2005 from the year ended December 31,2004.  The increases in these accountbalances relate primarily to our growth in sales during the three months ended March 31,2005.  Our accounts receivable balance atMarch 31, 2005 represented approximately 1.81 months of sales. Theinventory turns for the same period was 1.48 times.

 

We also increased our investment in property and equipment by $34,005net of depreciation ($78,100) for the three months ended March 31, 2005from the year ended December 31, 2004.

 

Our liabilities for accounts payable decreased $929,240 and long termdebt increased $2,966,361 for the three months ended March 31, 2005 fromthe year ended December 31, 2004. The net increase in our liabilities relates directly to the financing ofour sales growth.

 

# **Liquidity and CapitalResources**

# ** **

We had cash balances of approximately $484,800 at March 31,2005 and $507,700 at December 31, 2004.  We have financed our growth with new equity capital and increasedborrowings from our commercial lender.

 

Our line of credit is $25 million; an amount theCompany expects to be sufficient to support its growth in accounts receivableand inventory through 2005. Our rapid growth is expected to continue to requirethe Company to seek outside capital to supplement earnings and maintain andstrengthen our balance sheet. We believe that the working capital required tofinance the necessary growth in inventory will be provided by our existing lineof credit. We expect to raise additional equity through both the public andprivate markets during 2005.  However, wecannot assure anyone that we will be able to obtain outside capital, or if wedo, that it will be on terms beneficial to us.

 

The balance due at March 31, 2005 to ourcommercial lender for the use of the revolving line of credit was approximately$19.0 million. The loan and security agreement contains certain covenants,which include financial covenants that require us to maintain a certainleverage ratio, limit our unfunded capital expenditures, a required minimumfixed charge coverage ratio, and a certain inventory turnover ratio. At March 31,2005 the Company was not in compliance with the leverage and fixed chargecoverage ratio requirement. The Company was granted a waiver of these covenantsby our commercial lender. We believe that our relationship with our commerciallender is good and that they will continue to support the Company.

 

# **Critical AccountingPolicies**

# ** **

In preparing the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America, theCompany must make decisions which impact the reported amounts of assets,liabilities, revenues and expenses, and related disclosures. Such decisionsinclude the selection of appropriate accounting principles to be applied andthe assumptions on which to base accounting estimates. In reaching suchdecisions, the Company applies judgment based on its understanding and analysisof the relevant circumstances and historical experience. Actual amounts coulddiffer from those estimated at the time the consolidated financial statementsare prepared.

 

The Company’s significant accounting policies are described in Note 1to the consolidated financial statements included in the Company’s AnnualReport on Form 10-K, for the year ended December 31, 2004. Someof those significant accounting policies require the Company to make subjectiveor complex judgments or estimates. Critical accounting policies are defined asthose that are both most important to the portrayal of a company’s financialcondition and results and require management’s most difficult, subjective, orcomplex judgment, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain and may change in subsequentperiods.

 

The Company believes the following accounting policies require it touse judgments and estimates in preparing its consolidated financial statementsand could represent critical accounting policies.

 

•                  Accountsreceivable and revenue recognition. Revenues are recognized when goods areshipped and legal title passes to the customer. The Company provides anallowance for expected doubtful accounts based upon historical bad debt andclaims experience and periodic evaluation of specific customer accounts and theaging of accounts receivable. If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

15

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•                  Inventoriesare stated at the average landed cost, which matches current costs with currentrevenues. Inventories on hand are compared against anticipated future usage,which is a function of historical usage and anticipated future selling price,in order to evaluate obsolescence, excessive quantities, and expected salesbelow cost. Actual results could differ from assumptions used to valueobsolete, excessive inventory or inventory expected to be sold below cost.

 

•                  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which the temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in the tax rates is recognized in earnings (loss) in the periodthat includes the enactment date. Additionally, taxing jurisdictions couldretroactively disagree with the Company’s tax treatment of certain items, andsome historical transactions have income tax effects going forward. Accounting rules requirethese future effects to be evaluated using current laws, rules andregulations, each of which can change at any time and in an unpredictablemanner.

 

# **Segment Information**

# ** **

We manage our operations in onesegment and all revenue is derived from customers in the United States.

 

**ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES****ABOUT MARKET RISKS**

 

**Quantitativeand Qualitative Disclosures About Market Risk**

 

Information about theCompany’s exposure to market risk was disclosed in its Annual Report on Form 10-Kfor the year ended December 31, 2004, which was filed with the Securitiesand Exchange Commission on April 15, 2005. No material quantitative or qualitative changes in market risk exposurehas occurred since the date of that filings

 

**ITEM 4 – CONTROLS AND PROCEDURES**

 

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, Tesoro’smanagement, with participation of the Company’s principal executive officer andprincipal financial officer, have performed an evaluation of the Company’sdisclosure controls and procedures, (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (“ExchangeAct”)) to ensure that information required to be disclosed by Tesoro in thereports that Tesoro files or submits under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified by theSEC’s rules and forms.

 

Based onthat evaluation, Tesoro’s principal executive officer and principal financialofficer have concluded that its disclosure controls and procedures were noteffective in ensuring that information required to be disclosed by the Companyin the reports that it files or submits under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified by theSEC’s rules and forms. At this time, management has determined that theCompany’s current system of disclosure controls and procedures may not be sufficienti) to ensure that data errors, control problems, or acts of fraud aredetected and ii) to confirm that appropriate corrective action, includingprocess improvements, is undertaken in a timely manner.

 

Attached as Exhibits31.1 and 31.2 to this Quarterly Report are certifications of the CEO and theCFO, which are required in accordance with Rule 13a-14 of theSecurities Exchange Act of 1934 (the Exchange Act). This Controls andProcedures section includes the information concerning the controlsevaluation referred to in the certifications and it should be read inconjunction with the certifications.

 

16

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*Definitionof Disclosure Controls*

 

Disclosurecontrols are controls and procedures designed to ensure that informationrequired to be disclosed in Tesoro’s reports filed under the Exchange Act isrecorded, processed, summarized and reported timely. Disclosure Controls arealso designed to ensure that such information is accumulated and communicatedto our management, including the CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure.

 

*Limitationson the Effectiveness of Controls*

 

Our management,including the CEO and CFO, does not expect that its disclosure controls willprevent all errors and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within Tesoro have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Controls can also be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the controls. Because of the inherent limitations ina cost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**Deficienciesin the Company’s Controls and Procedures**

 

In connection withpreparing its Annual Report on Form 10-K for the fiscal year ended December 31,2004 and this Quarterly Report on Form 10-Q,  Tesoro’s management identified deficienciesin its methodologies that it considered being material weaknesses in theeffectiveness of Tesoro’s internal disclosure controls pursuant to standardsestablished by the American Institute of Certified Public Accountants. A “materialweakness” is a reportable condition in which the design or operation of one ormore of the specific internal control components has a defect or defects thatcould have a material adverse effect on the Company’s ability to record,process, summarize and report financial data in the financial statements in atimely manner. The material weaknesses identified by Tesoro include thefollowing:

 

•                                          Promotional merchandise should have beenexpensed when distributed rather than capitalized and depreciated;

 

•                                          Tesoro had incorrectly estimated the accrualsfor sales related expenses; and

 

•                                          Incorrectly estimated its allowances forproduct returns and the allowances.

 

**As aresult, Tesoro’s management concluded that certain accounting errors occurredin its previously issued financial statements for the fiscal year ended December 31,2002, each of the three fiscal quarters ended March 31, 2003, June 30,2003 and September 30, 2003, the fiscal year ended December 31, 2003and each of the three fiscal quarters ended March 31, 2004, June 30,2004 and September 30, 2004.**

** **

Based upon the resultsof management’s investigation of the accounting errors, the Company’s principalexecutive officer and principal financial officer concluded that the accountingerrors resulted from material weaknesses in the Company’s disclosure controlsand procedures, particularly in the areas of documented policies and proceduresalong with competent personnel. Detailed validation work was performed by theCompany’s internal personnel in order to substantiate the financial informationcontained in the Company’s consolidated financial statements and relateddisclosures that are contained in financial statements noted above.

 

**Management’sResponse and Plan for Improvement**

 

**Managementdiscussed the proposed restatement of the specified financial statements andinformation with Tesoro’s Audit Committee, financial consultants and bothcurrent and former independent auditors who concur with management’sassessments. On March 19, 2005, the Audit Committee reported on itsdiscussions with its management and the current auditors to Tesoro’s Board ofDirectors with respect to the restatements who supported theirconclusions.  On March 21, 2005,Tesoro filed a report on Form 8-K concerning these errors andadvised that its Consolidated Financial Statements for the years ended 2003 and2002 and for the interim periods should no longer be relied upon and that therestatement would not have any effect on the Company’s gross revenue for anyperiods or on its cash flow**.

 

17

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As a result management has responded to these deficiencies bydeveloping a plan to implement the following controls and proceduralenhancements, designed to improve the Company’s disclosure controls:

 
| • |   | Capitalization and amortization of asset balances - i) regular  detailed analyses of fixed assets and accumulated depreciation accounts  should be performed by preparing detailed account reconciliations, and ii) on  a timely basis, account reconciliations and other significant transactions should  be reviewed by an appropriate member of management;                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | Recording and processing transactions - transactions must be  supported by i) appropriate transaction documentation and ii) appropriate  documentation of review by management;                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | Reconciliation of accounts - detailed reconciliations of subsidiary  accounts to the general ledger must be performed on a regular basis, and  quarterly accounting review procedures must be enhanced by requiring an  appropriate member of management to perform an independent review of material  general ledger accounts and reserves;                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | Management review of journal entries, account balances and financial  statements - all material journal entries must be reviewed and approved by an  appropriate member of management;                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | Internal audit function - an internal audit function should conduct  audit procedures and test internal controls in order to ensure that the  Company’s policies and procedures for transactional recording, transactional  review, segregation of duties, and review of significant transactions at the  appropriate level of management are both effective and being followed; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | Competent personnel - staffing should be enhanced to provide  sufficient resources to accomplish the foregoing objectives.                                                                                                                                                                                                                                                                |

 

**Statusof Management’s Plan for Improvement**

 

As of March 31,2005, Tesoro has made the following progress in the implementation of its planfor improvement: 

 
| • |   | Recording and processing transactions - controls are being  implemented which require transactions to be supported by i) appropriate  transaction documentation and ii) documentation that the transaction has been  reviewed and approved by an appropriate member of management;                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| • |   | Reconciliation of accounts - policies and controls are being  implemented which require regular reconciliations of subsidiary accounts to  the general ledger, with timely review by an appropriate member of  management. Procedures regarding the quarterly accounting review are being  enhanced by requiring independent reviews of account reconciliations,  material general ledger accounts, and reserves;                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| • |   | Management review of journal entries, account balances and financial  statements - controls and procedures are being implemented which require that  all material journal entries are reviewed and approved by an appropriate  member of management;                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| • |   | Internal audit function - the Company has engaged a registered public  accounting firm, which is not affiliated with the Company’s independent  registered public accounting firm, to perform the internal audit function  (the “Internal Auditor”). The Internal Auditor has conducted, and will  continue to conduct, internal audit procedures and tests of internal controls  to ensure that the Company’s controls and procedures for transactional  recording, transactional review, segregation of duties, and review of  significant transactions at the appropriate level of management are both  effective and being followed; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| • |   | Competent personnel - the Company has made, and will continue to  make, appropriate staffing enhancements in order to provide sufficient  resources to accomplish the Company’s objectives of recording, processing,  summarizing and reporting, on a timely basis, Tesoro’s financial information.                                                                                                                                                                                                                                                                                                                                                    |

 

Management believes that the disclosure controls and procedures, whichhave been, and are continuing to be, implemented, are addressing the identifieddeficiencies in Tesoro’s system of disclosure controls. Management will, on anongoing basis,

 

18

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further monitor and assess the implementation of its plan to improvethe effectiveness of its disclosure controls and procedures, and will takeaction as appropriate.

 

Exclusiveof implementing the changes in Tesoro’s procedures and control resulting from management’simprovements described above, there have been no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation described in the precedingsection.

 

We are in the processof implementing the requirements of Section 404 of the Sarbanes-Oxley Actof 2002 which requires our management to assess the effectiveness of ourinternal control over financial reporting and include an assertion in our 2005annual report as to the effectiveness of our internal controls over financialreporting. Subsequently, our independent registered public accounting firm,McGladrey & Pullen LLP, will be required to attest to whether ourassessment of the effectiveness of our internal controls over financialreporting is fairly stated in all material respects and separately report onwhether it believes we maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006. We are in theprocess of performing the system and process documentation, evaluation andtesting required for management to make this assessment and for the registeredpublic accounting firm to provide its attestation report. We have not completedthis process or its assessment, and this process will require significantamounts of management time and resources. In the course of evaluation andtesting, management may identify deficiencies that would need to be addressedand remediate.

 

**PART II**

 

###### **ITEM 1:**                                                    LEGALPROCEEDINGS

######  

Weare not a party to any material pending legal proceedings and, to the best ofour knowledge; no such action by or against us is contemplated, threatened orexpected.

 

 
| **ITEM 6:** | **EXHIBITS AND REPORTS ON FORM 10-Q** |
|-------------|--------------------------------------------|

 

(a)          **Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Articles of Incorporation (filed as an Exhibit to the Company’s Form 10-SB,  filed with the Securities and Exchange Commission on August 7, 2000)                                                                                                                       |
| 3.1.1               |       | Articles of Amendment to Articles of Incorporation dated September 23,  2002 (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on October 1, 2002)                                                      |
| 3.2.2               |       | Amended and Restated Bylaws (filed as an Exhibit to the Company’s  Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2003)                                                                                                          |
| 3.3.2               |       | Audit Committee Charter (filed as an Exhibit to the Company’s  Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2003)                                                                                                              |
| 3.3.3               |       | Compensation Committee Charter (filed as an Exhibit to the  Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                  |
| 3.3.4               |       | Nominating And Governing Committee Charter (filed as an Exhibit to  the Company’s Report on Form 8-K, filed with the Securities and  Exchange Commission on February 4, 2003)                                                                                           |
| 3.4.1               |       | Code of Ethics for Senior Financial Officers (filed as an Exhibit to  the Company’s Registration Statement, filed with the Securities and Exchange  Commission on April 11, 2003)                                                                                            |
| 4.1.1               |       | Form of Warrant Agreement (filed as an Exhibit to the  Company’s Registration Statement, filed with the Securities and Exchange  Commission on April 11, 2003)                                                                                                          |
| 4.1.2               |       | Form of Stock Certificate (filed as an Exhibit to  the Company’s Registration Statement, filed with the Securities and Exchange  Commission on April 11, 2003)                                                                                                          |
| 10.3                |       | 2001 Ponca Acquisition Corporation Stock Incentive Plan. (filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on September 11, 2002)                                                                           |
| 10.4                |       | Employment Agreement Between Ponca Acquisition  Corporation And Henry Jr. Boucher, Jr. Dated As Of December 29,  2002 (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2002)     |
| 10.5                |       | Memorandum Of Understanding Between Ponca Acquisition Corporation And  The Stockholders Of International Wholesale Tile, Inc. (filed as an Exhibit to  the Company’s Report on Form 8-K, filed with the Securities and  Exchange Commission on September 11, 2002) |

 

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| 10.6  |   | Stock Purchase Agreement Among The Stockholders Of International  Wholesale Tile, Inc., and Ponca Acquisition Corporation effective October 1,  2002 (filed as an Exhibit on Form 8-K, filed with the  Securities and Exhibit Commission on October 15, 2002).                                                        |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Form of Indemnity Agreement (filed as an Exhibit to the  Company’s Registration Statement, filed with the Securities and Exchange  Commission on April 11, 2003)                                                                                                                                                                |
| 10.10 |   | Employment Agreement between International Wholesale Tile, Inc.  and Forrest Jordan (exhibits omitted) (filed as an Exhibit to the  Company’s Registration Statement, filed with the Securities and Exchange  Commission on May 21, 2003)                                                                                       |
| 10.11 |   | Employment Agreement between International Wholesale Tile, Inc.  and Paul F. Boucher (this document is omitted as it is substantially similar  to Forrest Jordan’s Employment Agreement with the exception of the employee’s  name and address)                                                                                      |
| 10.12 |   | Employment Agreement between International Wholesale Tile, Inc.  and Grey Perna (this document is omitted as it is substantially similar to  Forrest Jordan’s Employment Agreement with the exception of the employee’s  name and address)                                                                                           |
| 10.13 |   | Subordination Agreement between Congress Financial Corporation  (Florida). and Forrest Jordan (filed as an Exhibit to the Company’s  Registration Statement, filed with the Securities and Exchange Commission on May 21,  2003)                                                                                                     |
| 10.14 |   | Subordination Agreement between Congress Financial Corporation  (Florida). and Paul F. Boucher (this document is omitted as it is substantially  similar to Forrest Jordan’s Subordination Agreement with the exception of the  employee’s name and address)                                                                              |
| 10.15 |   | Subordination Agreement between Congress Financial Corporation  (Florida). and Grey Perna (this document is omitted as it is substantially  similar to Forrest Jordan’s Subordination Agreement with the exception of the  employee’s name and address)                                                                                   |
| 10.16 |   | Amended and Restated Loan and Security  Agreement between by and between Fleet Capital Corporation, IWT Tesoro  Corporation and International Wholesale Tile, Inc. effective December 31,  2004 (filed as an  exhibit to the Company Report on Form 10-K filed with the  Securities and Exchange Commission on April 14, 2005). |
| 13    |   | Annual report to security holders (filed as an exhibit to the Company Report  on Form 10-K filed with the Securities and Exchange Commission on April 14,  2005).                                                                                                                                                                         |
| 16    |   | Letter from Kantor Sewell & Oppenheimer, P.A., concurring  with statements concerning their resignation (filed as an exhibit to the  Company Report on Form 8-K filed with the Securities and Exchange  Commission on September 14, 2004).                                                                                       |
| 21    |   | Subsidiaries of Registrant (filed as an exhibit to the Company Report  on Form 10-K filed with the Securities and Exchange Commission on April 14,  2005).                                                                                                                                                                                |
| 31.1  |   | Certification of Henry  J. Boucher, Jr., Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act.*                                                                                                                                                                                                                     |
| 31.2  |   | Certification of Forrest Jordan, Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                  |
| 32.1  |   | Certification of Henry J. Boucher, Jr.,  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act.*                                                                                                                                                                                                                     |
| 32.2  |   | Certification of Forrest Jordan, Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                  |

 

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| *      |   | Included in this filing.   Exhibits are available without charge, upon request of IWT Tesoro. |
|--------|--------|----------------------------------------------------------------------------------------------------|
|   |   |                                                                                               |
| (6)    |   | Reports on Form 8-K.                                                                          |

 

(b)         Reports on Form 8-K

 

Form 8-K, filed on January 6, 2005, regarding increasing its revolving credit line from $17.0 million to $25.0 million.

 

Form 8-K, filed on March 17, 2005, regarding entering into a lease for warehouse space in Irvine, CA.

 

Form 8-K, filed on March  21, 2005, regarding non-reliance on previously issued financial statements or a related audit report or completed interim review.

 

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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 theundersigned thereunto duly authorized.

 

 
|              |   |   | IWT TESORO CORPORATION                     |
|-------------------|--------|--------|--------------------------------------------|
|              |   |   |                                       |
|              |   |   |                                       |
| May 13, 2005 |   |   | /s/ Henry J. Boucher, Jr.             |   |
|              |   |   | Henry J. Boucher, Jr., President      |
|              |   |   |                                       |
| May 13, 2005 |   |   | /s/Forrest P. Jordan                       |   |
|              |   |   | Forrest P. Jordan, Chief Financial Officer |

 

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