**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB/A**

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

 

**CommissionFile No. 0-31267**

 

**IWTTESORO CORPORATION**

(Exact Name ofSmall Business Issuer in Its Charter)

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

 

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

 

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

 

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

 

ýYes                                                                oNo

 

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

 

Transitional SmallBusiness Disclosure Format:  oYes                                                ýNo

 

 

----

 

EXPLANATORY NOTE

 

Tesoro has restated theconsolidated balance sheets as of June 30, 2003 and December 31,2002, and the consolidated statements of operations, stockholders’ equity andcash flows for the three month ended June 30, 2003 and 2002,respectively.  In particular, Managementdetermined that Tesoro had been incorrectly calculation the accruals for salescommissions. Management revised this calculation and determined that accruedexpenses were understated by approximately $383,000 as of June 30,2003.  Additionally, managementreassessed its methodology for accounting for sample and display boards anddetermined that this promotional merchandise should have been expensed whendistributed rather than capitalized and depreciated. The adjustments resulting fromthe restatement decreased net income by approximately $194,000 for the threemonth ended June 30, 2003. This change also reduced property and equipmentas of June 30, 2003 by approximately $2,565,000.  In connection with the restatements foraccrued expenses and sample and display boards described above, the related taxeffect was recorded resulting in a gross deferred tax asset for the three monthended June 30, 2003 of approximately $43,000.  Finally, as part of the recapitalizationtransaction of IWT effective October 1, 2002 (see Note 1), the Company andeach of the three stockholders of International Wholesale Tile, Inc.entered into a repurchase agreement to commence on January 1, 2003. Themaximum number of redeemable shares under the repurchase agreement was 450,000.The transaction was accounted for by reducing additional paid in capital to theextent a balance existed with the remaining portion of the transaction appliedto accumulated deficit as of December 31, 2002.  During the three months ended June 30,2003 the repurchase agreement was cancelled. The transaction was accounted forby increasing additional paid in capital to the extent it was reduced in theprior year with the remaining portion decreasing the accumulated deficit.

 

Part 1. FinancialInformation

 

Item 1. FinancialStatements

 

**IWTTESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2003**

 

**TABLEOF CONTENTS**

 
| Consolidated Balance Sheets (as  Restated) (Unaudited)                                     |   |
|--------------------------------------------------------------------------------------------|--------|
|                                                                                       |   |
| Consolidated Statements of  Operations (as Restated) (Unaudited)                           |   |
|                                                                                       |   |
| Consolidated Statements of  Changes in Stockholders’ Equity (as Restated) (Unaudited) |   |
|                                                                                       |   |
| Consolidated Statements of  Cash Flows (as Restated) (Unaudited)                           |   |
|                                                                                       |   |
| Notes to Consolidated  Financial Statements                                                |   |

 

1

----

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2003**          | ** ** | **2002**              | ** ** |
| ** **                                                                                                        | ** ** | **(Restated)**    | ** ** | **(Restated)**        | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                                                                            |       |              |       |                  |       |
| Current  Assets:                                                                                                  |       |              |       |                  |       |
| Cash                                                                                                              |       | $                 | 318,732    |                  | $          | 574,046 |   |
| Accounts  receivable, net allowance for doubtful accounts and returns                                             |       | 4,535,407         |       | 2,875,532             |       |
| Inventories                                                                                                       |       | 10,922,077        |       | 6,047,876             |       |
| Prepaid  expenses                                                                                                 |       | 331,261           |       | 286,820               |       |
| Deferred  tax asset                                                                                               |       | 718,294           |       | 597,196               |       |
| Total  current assets                                                                                             |       | 16,825,771        |       | 10,381,470            |       |
|                                                                                                              |       |              |       |                  |       |
| Property  and equipment, net                                                                                      |       | 1,246,812         |       | 489,502               |       |
|                                                                                                              |       |              |       |                  |       |
| Other  Assets                                                                                                     |       | 218,433           |       | 191,725               |       |
|                                                                                                              |       | $                 | 18,291,016 |                  | $          | 11,062,697 |   |
|                                                                                                              |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                        |       |              |       |                  |       |
|                                                                                                              |       |              |       |                  |       |
| Current  Liabilities:                                                                                             |       |              |       |                  |       |
| Accounts  payable                                                                                                 |       | $                 | 9,273,711  |                  | $          | 5,403,816 |   |
| Accrued  expenses                                                                                                 |       | 442,777           |       | 330,140               |       |
| Other  liabilities                                                                                                |       | 29,097            |       | 24,723                |       |
| Current  portion of capital lease obligations                                                                     |       | 57,196            |       | 47,222                |       |
| Current  portion of notes payable, other                                                                          |       | 57,832            |       | 48,780                |       |
| Total  current liabilities                                                                                        |       | 9,860,613         |       | 5,854,681             |       |
|                                                                                                              |       |              |       |                  |       |
| Long-Term  Debt:                                                                                                  |       |              |       |                  |       |
| Note  payable, revolving line of credit                                                                           |       | 7,335,904         |       | 4,864,778             |       |
| Capital  lease obligations                                                                                        |       | 149,164           |       | 108,438               |       |
| Subordinated  notes payable, stockholders                                                                         |       | 338,662           |       | 448,712               |       |
| Notes  payable, other                                                                                             |       | 68,448            |       | 64,872                |       |
| Total  long-term debt                                                                                             |       | 7,892,178         |       | 5,486,800             |       |
| Total  liabilities                                                                                                |       | 17,752,791        |       | 11,341,481            |       |
|                                                                                                              |       |              |       |                  |       |
| Redeemable  common stock (450,000 shares issued and outstanding)                                                  |       | —            |       | 1,073,160             |       |
|                                                                                                              |       |              |       |                  |       |
| Stockholders’  Equity:                                                                                       |       |              |       |                  |       |
| Preferred  stock, $0.001 par value, 25,000,000 authorized; none issued                                            |       |              |       |                  |       |
| Common  stock, $0.001 par value, 100 million shares authorized; 11,209,252 and  10,587,834 issued and outstanding |       | 11,209            |       | 10,588                |       |
| Additional  paid in capital                                                                                       |       | 1,201,221         |       | —                |       |
| Accumulated  deficit                                                                                              |       | (674,205          | )          | (1,362,532            | )          |
|                                                                                                              |       | 538,225           |       | (1,351,944            | )          |
|                                                                                                              |       | $                 | 18,291,016 |                  | $          | 11,062,697 |   |

 

See notes tofinancial statements.

 

2

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

 
| ** **                                   | ** ** | **For the period ended June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **Three months ended**                 | ** ** | **Six months ended** | ** ** |
| ** **                                   | ** ** | **2003**                               | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(Restated)**                         | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Revenue                                      |       |                                   |       |   |   |   |   |   |   |
| Sales,  net of discounts and returns         |       | $                                      | 8,477,575  |   | $ | 6,803,466 |   | $ | 15,191,385 |   | $ | 12,817,486 |   |
| Cost  of goods sold                          |       | 5,011,999                              |       | 4,193,483 |   | 9,091,607 |   | 7,805,799 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Gross  profit                                |       | 3,465,576                              |       | 2,609,983 |   | 6,099,778 |   | 5,011,687 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Expenses                                     |       |                                   |       |   |   |   |   |   |   |
| Payroll                                      |       | 1,225,587                              |       | 1,004,736 |   | 2,403,229 |   | 1,775,937 |   |
| Delivery                                     |       | 413,075                                |       | 316,114 |   | 749,120 |   | 587,632 |   |
| General  and administrative                  |       | 305,373                                |       | 111,194 |   | 515,389 |   | 190,239 |   |
| Lease  expense                               |       | 198,254                                |       | 112,490 |   | 332,634 |   | 227,206 |   |
| Depreciation  and amortization               |       | 59,749                                 |       | 33,933 |   | 100,299 |   | 63,638 |   |
| Insurance                                    |       | 85,138                                 |       | 84,803 |   | 159,966 |   | 167,154 |   |
| Repairs  and maintenance                     |       | 87,629                                 |       | 69,120 |   | 170,000 |   | 104,108 |   |
| Sales  expenses                              |       | 141,450                                |       | 58,513 |   | 256,318 |   | 98,105 |   |
| Advertising                                  |       | 311,548                                |       | 198,935 |   | 577,115 |   | 374,167 |   |
| Professional  fees                           |       | 113,794                                |       | 23,864 |   | 238,637 |   | 43,900 |   |
| Travel  and entertainment                    |       | 75,653                                 |       | 14,367 |   | 130,113 |   | 47,992 |   |
| Bad  debts                                   |       | 50,570                                 |       | — |   | 53,817 |   | — |   |
|                                         |       | 3,067,820                              |       | 2,028,069 |   | 5,686,637 |   | 3,680,078 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Income  from operations                      |       | 397,756                                |       | 581,914 |   | 413,141 |   | 1,331,609 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Other  income/(expenses)                     |       |                                   |       |   |   |   |   |   |   |
| Interest  expense                            |       | (98,632                                | )          | (89,679 | ) | (174,581 | ) | (164,310 | ) |
| Other  expense                               |       | (5,723                                 | )          | (11 | ) | (5,723 | ) | (11 | ) |
| Other  income                                |       | 900                                    |       | 876 |   | 1,735 |   | 1,585 |   |
| Gain  (loss) on disposal                     |       | —                                 |       | — |   | (5,352 | ) | 5,990 |   |
|                                         |       | (103,455                               | )          | (88,814 | ) | (183,921 | ) | (156,746 | ) |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Net  income before taxes                     |       | 294,301                                |       | 493,100 |   | 229,220 |   | 1,174,863 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Income  tax benefit                          |       | 43,211                                 |       | — |   | 56,304 |   | — |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Net  income                                  |       | $                                      | 337,512    |   | $ | 493,100 |   | $ | 285,524 |   | $ | 1,174,863 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Earnings  per common share                   |       |                                   |       |   |   |   |   |   |   |
| Basic                                        |       | $                                      | 0.03       |   | $ | 0.04 |   | $ | 0.02 |   | $ | 0.10 |   |
| Diluted                                      |       | $                                      | 0.03       |   | $ | 0.05 |   | $ | 0.02 |   | $ | 0.13 |   |
|                                         |       |                                   |       |   |   |   |   |   |   |
| Weighted  Average Common Shares Outstanding: |       |                                   |       |   |   |   |   |   |   |
| Basic                                        |       | 11,142,691                             |       | 9,000,000 |   | 11,142,691 |   | 9,000,000 |   |
| Diluted                                      |       | 11,485,873                             |       | 9,000,000 |   | 11,485,873 |   | 9,000,000 |   |

 

3

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

 
| ** **                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**   | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                        | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Subscription** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**      | ** ** | **Receivable**  | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Balance,  December 31, 2001, as restated                     |       | 9,000,000        |       | $           | 9,000      |             | $          | 116,400         |       | $           | (84,000    | )          | $          | (776,789 | ) | $ | (735,389 | ) |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Year  Ended December 31, 2002:                               |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Distributions,  September 30, 2002                           |       | —           |       | —      |       | —           |       | —          |       | (1,864,020  | )          | (1,864,020 | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Payment  of subscription receivable                               |       | —           |       | —      |       | —           |       | 84,000          |       |        |       | 84,000     |       |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Net  income, nine months ended September 30, 2002            |       | —           |       | —      |       | —           |       | —          |       | 2,214,239   |       | 2,214,239  |       |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Balance  September 30, 2002 - Before Recapitalization        |       | 9,000,000        |       | 9,000       |       | 116,400          |       | —          |       | (426,570    | )          | (301,170   | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Recapitalization,  October 1, 2002                           |       | 1,800,000        |       | 1,800       |       | (116,400         | )          | —          |       | 3,542       |       | (111,058   | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Balance  After Recapitalization on October 1, 2002           |       | 10,800,000       |       | 10,800      |       | —           |       | —          |       | (423,028    | )          | (412,228   | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Reclassification  of redeemable stock                             |       | (450,000         | )          | (450        | )          |             |       |            |       | (60,086     | )          | (60,536    | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Issuance  of shares in exchange for legal services                |       | 15,000           |       | 15          |       | 40,635           |       | —          |       | —      |       | 40,650     |       |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Issuance  of shares to employees, directors and consultants (SIP) |       | 134,500          |       | 135         |       | 364,360          |       | —          |       | —      |       | 364,495    |       |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Issuance  of shares - private offering                            |       | 83,334           |       | 83          |       | 249,917          |       | —          |       | —      |       | 250,000    |       |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Exercise  of warrants                                             |       | 5,000            |       | 5           |       | 14,995           |       | —          |       | —      |       | 15,000     |       |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Net  loss 3 months ended December 31, 2002                   |       | —           |       | —      |       | —           |       | —          |       | (536,701    | )          | (536,701   | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Accretion  of redeemable stock                                    |       | —           |       | —      |       | (669,907         | )          | —          |       | (342,717    | )          | (1,012,624 | )          |
|                                                              |       |             |       |        |       |             |       |            |       |        |       |       |       |
| Balance  December 31, 2002, as restated                      |       | 10,587,834       |       | $           | 10,588     |             | $          | —          |       | $           | —     |       | $          | (1,362,532 | ) | $ | (1,351,944 | ) |

 

See notes tofinancial statements.

 

4

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 
| ** **                                                           | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Earnings**   | ** ** | ** **      | ** ** |
| ** **                                                           | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Balance,  December 31, 2002, as restated                        |       | 10,587,834       |       | $           | 10,588     |           | $          | —          |       | $          | (1,362,532 | ) | $ | (1,351,944 | ) |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance  of shares - private offering                               |       | 136,668          |       | 136         |       | 409,864        |       | —          |       | 410,000    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Exercise  of warrants                                                |       | 10,000           |       | 10          |       | 29,990         |       | —          |       | 30,000     |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance  of shares to employees and directors for services rendered |       | 21,000           |       | 21          |       | 70,839         |       | —          |       | 70,860     |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance  of shares - public offering                                |       | 3,750            |       | 4           |       | 20,621         |       | —          |       | 20,625     |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Cancellation  of stock repurchase agreement                          |       | 450,000          |       | 450         |       | 669,907        |       | 402,803         |       | 1,073,160  |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Net  income, six months ended June 30, 3003                     |       | —           |       | —      |       | —         |       | 285,524         |       | 285,524    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Balance,  June 30, 2003, as restated                            |       | 11,209,252       |       | $           | 11,209     |           | $          | 1,201,221       |       | $          | (674,205   | ) | $ | 538,225 |   |

 

See notes tofinancial statements.

 

5

----

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                    | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**    | ** ** |
| ** **                                                                                    | ** ** | **2003**             | ** ** | **2002** | ** ** |
| ** **                                                                                    | ** ** | **(Restated)**       | ** ** | **(Restated)** | ** ** |
|                                                                                          |       |                 |       |   |   |
| Cash  flows from operating activities:                                                        |       |                 |       |   |   |
| Net  income                                                                                   |       | $                    | 285,524    |   | $ | 1,174,863 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                                |       | 100,299              |       | 63,638 |   |
| Deferred  income taxes                                                                        |       | (56,304              | )          | — |   |
| Provision  for doubtful accounts and reserve for returns                                      |       | 24,994               |       | — |   |
| (Gain)  loss on disposal of property and equipment                                            |       | 5,352                |       | (5,979 | ) |
| Changes  in operating assets and liabilities:                                                 |       |                 |       |   |   |
| (Increase)  Decrease in:                                                                      |       |                 |       |   |   |
| Accounts  receivable                                                                          |       | (1,684,869           | )          | (1,100,740 | ) |
| Inventories                                                                                   |       | (4,874,201           | )          | 448,739 |   |
| Prepaid  expenses                                                                             |       | (56,163              | )          | 101,521 |   |
| Other  assets                                                                                 |       | —               |       | (19,876 | ) |
| Increase  in:                                                                                 |       |                 |       |   |   |
| Accounts  payable                                                                             |       | 3,869,895            |       | 147,043 |   |
| Accrued  expenses                                                                             |       | 117,032              |       | 5,482 |   |
| Net  cash provided by (used in) operating activities                                          |       | (2,268,441           | )          | 814,691 |   |
|                                                                                          |       |                 |       |   |   |
| Cash  flows from investing activities:                                                        |       |                 |       |   |   |
| Acquisitions  of property and equipment                                                       |       | (766,399             | )          | (44,171 | ) |
| Proceeds  from sale of equipment                                                              |       | —               |       | 11,000 |   |
| Net  cash used in investing activities                                                        |       | (766,399             | )          | (33,171 | ) |
|                                                                                          |       |                 |       |   |   |
| Cash  flows from financing activities:                                                        |       |                 |       |   |   |
| Proceeds  from loans                                                                          |       | 16,228,000           |       | 11,800,000 |   |
| Payments  on revolving line of credit                                                         |       | (13,782,136          | )          | (11,856,737 | ) |
| Proceeds  from issuance of stock                                                              |       | 460,625              |       | — |   |
| Principal  payments on capital leases                                                         |       | (27,553              | )          | (20,771 | ) |
| Principal  Payments on notes payable                                                          |       | (110,050             | )          | — |   |
| Distribution  to stockholders                                                                 |       | —               |       | (650,000 | ) |
| Proceeds  from related party note                                                             |       | 10,640               |       | 14,360 |   |
| Net  cash provided by (used in) financing activities                                          |       | 2,779,526            |       | (713,148 | ) |
|                                                                                          |       |                 |       |   |   |
| Net  Increase (Decrease) in Cash                                                              |       | (255,314             | )          | 68,372 |   |
|                                                                                          |       |                 |       |   |   |
| Cash,  Beginning                                                                              |       | 574,046              |       | 402,500 |   |
| Cash,  Ending                                                                                 |       | $                    | 318,732    |   | $ | 470,872 |   |
|                                                                                          |       |                 |       |   |   |
| Cash  Paid (Received) During the Period for:                                                  |       |                 |       |   |   |
| Interest  expense                                                                             |       | $                    | 174,581    |   | $ | 164,310 |   |

 

See notes tofinancial statements.

 

6

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2003**

 

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

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries, International Wholesale Tile, Inc. (IWT), IWTTesoro International, Inc. (International) and IWT Tesoro Transport, Inc.(Transport).  All significant inter-company balances and transactions havebeen eliminated.

 

The accompanyingconsolidated financial statements of the Company have been prepared inaccordance with the instructions to Form 10-QSB and, therefore, omit orcondense certain footnotes and other information normally included in financialstatements prepared in accordance with generally accepted accountingprinciples.  It is suggested that these condensed financial statementsshould be read in conjunction with the Company’s financial statements and notesthereto included in the Company’s audited financial statements on Form 10-KSBfor the fiscal year ended December 31, 2002.

 

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

 

In the opinion ofmanagement, the unaudited financial statements include all necessaryadjustments (consisting of normal, recurring accruals) for a fair presentationof the financial position, results of operations and cash flow for the interimperiods presented.  Preparing financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses.  Actual results may differ from theseestimates.  Interim results are not necessarily indicative of results fora full year.  The results of operations for the six-month period ended June 30,2003 are not necessarily indicative of operating results to be expected for afull year.

 

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

 

Stock Options

The Company elected toaccount for stock options issued to employees in accordance with AccountingPrinciples Board Opinion No. 25 (APB Opinion No. 25)*Accounting For Stock Issued to Employees*and related interpretations, which established financial accounting andreporting for compensation cost of stock issued to employees throughnon-variable plans, variable plans, and non-compensatory plans, and accountsfor stock options and warrants issued to non-employees in accordance with SFAS123,*Accounting for Stock-Based Compensation*,which established a fair value method of accounting for stock compensationplans with employees and others.

 

No options were grantedduring the six months ended June 30, 2003 and 2002.

 

7

----

 

Had compensation costsfor the Company’s stock option granted during the year ended December 31,2002, been determined on the fair market value at the grant dates for theoptions, consistent with Statement of Accounting Standards No. 123,*Accounting for Stock Based Compensation*(Statement No. 123), the Company’s results of operations for the yearended December 31, 2002 would have changed to the pro-forma amountsindicated.

 
| ** **                                                                                                                         | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net  income as reported                                                                                                            |       | $        | 1,677,538  |   |
|                                                                                                                               |       |     |       |
| Add:  Stock based employee compensation cost determined under fair value based  method for all awards, net of related tax effects. |       | (2,697   | )          |
|                                                                                                                               |       |     |       |
| Pro-forma  net income                                                                                                              |       | $        | 1,674,841  |   |
|                                                                                                                               |       |     |       |
| Net  income per share basic – diluted                                                                                         |       |     |       |
| As  reported                                                                                                                       |       | $        | 0.15       |   |
| Pro-forma                                                                                                                          |       | $        | 0.15       |   |

 

Accounting Pronouncements

In December 2002,the FASB issued SFAS No. 148,*Accounting for Stock-Based Compensation*–*Transition and Disclosure,* which amended SFAS No. 123,*Accounting for Stock-Based Compensation.* The new standard provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  Additionally, the statement amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures in theannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used in reportedresults.  This statement is effective for financial statements for fiscalyears ending after December 15, 2002.  In compliance with SFAS No. 148,the Company has elected to continue to follow the intrinsic value method inaccounting for its stock-based employee compensation arrangement as defined byAPB No. 25.

 

Earnings per Share

Basic earnings per sharefor each year is computed by dividing income for the year by the weightedaverage number of common shares outstanding during the year.  Dilutedearnings per share include the effects of common stock equivalents to theextent they are dilutive.

 

8

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

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

 

At June 30, 2003,the total number of additional shares that could further dilute basic EPS inthe future, but were not included in the computation of diluted EPS because oftheir antidilutive effect, was 3,750 shares.  At June 30, 2002, therewere no common stock equivalents that could potentially dilute basic EPS in thefuture.

 

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

 

Financial instrumentsthat potentially subject the Company to credit risk include cash on depositwith two financial institutions amounting to $315,232 at June 30, 2003,which was insured for up to $100,000 per financial institution by the U.S.Federal Deposit Insurance Corporation.

 

The Company obtainsdetailed credit evaluations of customers and establishes credit limits asrequired and routinely assesses the financial strength of its customers. The Company competes primarily in the sale of ceramic tile and marble marketsand sells its products to a multitude of customers.  There is nodisproportionate concentration of credit risk.

 

**NOTE 4****                                                    ACCOUNTSRECEIVABLE**

 

Accounts receivableconsisted of the following:

 
|                                 |   | **June 30,  2003** |      | **December 31,  2002** |   |
|--------------------------------------|--------|-------------------------|-----------|-----------------------------|--------|
|                                 |   |                    |      |                        |   |
| Accounts receivable                  |   | $                       | 4,643,646 |                        | $      | 2,958,777 |   |
| Less allowance for doubtful accounts |   | (108,239                | )         | (83,245                     | )      |
|                                 |   |                    |      |                        |   |
|                                 |   | $                       | 4,535,407 |                        | $      | 2,875,532 |   |

 

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

 

9

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**NOTE 5****                                                    INVENTORY**

 

Inventory consisted ofthe following:

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

 

Inventory in transitconsists of merchandise purchased overseas, which is not yet received in thewarehouse.  The Company obtains legal title at the shipping point. Inventory cost includes the purchase price and in-bound freight.

 

**NOTE 6****                                                    PROPERTYAND EQUIPMENT**

 

Property and equipment consistedof the following:

 
|                           |   | **June 30,  2003** |      | **December 31,  2002** |   | **Depreciation  Period  in Years** |   |
|--------------------------------|--------|-------------------------|-----------|-----------------------------|--------|------------------------------------|--------|
|                           |   |                    |      |                        |   |                               |   |
| Furniture and fixtures         |   | $                       | 337,904   |                        | $      | 89,238                             |   | 5-10 |   |
| Machinery and equipment        |   | 433,290                 |      | 326,165                     |   | 7-10                               |   |
| Vehicles                       |   | 223,458                 |      | 207,071                     |   | 5                                  |   |
| Computer equipment             |   | 317,929                 |      | 131,407                     |   | 3-5                                |   |
| Leasehold improvements         |   | 355,846                 |      | 108,220                     |   | 7                                  |   |
|                           |   |                    |      |                        |   |                               |   |
|                           |   | 1,668,427               |      | 862,101                     |   |                               |   |
| Less accumulated  depreciation |   | (421,615                | )         | (372,599                    | )      |                               |   |
|                           |   |                    |      |                        |   |                               |   |
|                           |   | $                       | 1,246,812 |                        | $      | 489,502                            |   |   |   |

 

Depreciation expense forthe six months ended June 30, 2003 and 2002 was $100,299 and $63,638,respectively. (See Note 9)

 

10

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**NOTE 7****                                                    NOTESPAYABLE**

 

The Company hasoutstanding notes payable as follows:

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

 

Interest expense relatedto these notes for the six months ended June 30, 2003 and 2002 was $25,489and $32,682, respectively.

 

11

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

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

 

**NOTE 8****                                                    LOANPAYABLE**

 

On November 13, 2002,the subsidiary (IWT) renegotiated its existing line of credit to increase theamount of the maximum credit to $7,500,000.  The average interest rate wasapproximately 5% for the six months ended June 30, 2003.  IWT owed$7,335,904 at June 30, 2003, and $4,864,778 at December 31, 2002against these revolving loans.

 

IWT is subject to anumber of restricted covenants under the debt agreement.  IWT is incompliance with all covenants during the six months ended June 30, 2003.

 

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

 

**NOTE 9****                                                    LEASES**

 

Capital Leases

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

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

 

12

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Operating Leases

The Company leases officeand warehouse space under a non-cancelable operating lease, which has aninitial term in excess of one year.  In May 2003, the Company tookoccupancy of a new warehouse and office facility in Palm City,Florida.   Additionally, the Company entered into a new leaseagreement for over 48,000 square feet of warehouse space at the old location.The Company also leases office space in Westport, Connecticut for its corporateheadquarters.

 

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

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

 

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

 

Total interest expenseunder capital leases was $5,558 and $4,700 for the six months ended June 30,2003 and 2002, respectively.

 

**NOTE 10****                                             INCOMETAXES**

 

At March 31, 2003the Company had useable net operating loss carryforwards of approximately$718,000 for income tax purposes, available to offset future taxable income ofthe U.S. entity, expiring through 2022.  No valuation allowance has beenrecorded due to the certainty of the Company’s ability to generate futuretaxable income.

 

13

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**NOTE 11****                                             STOCKHOLDERS’EQUITY**

 

The Articles ofIncorporation provide for the authorization of 25,000,000 shares of convertiblepreferred stock at $0.001, and 100,000,000 shares of common stock at $0.001 parvalue.  Each share of preferred stock is convertible into 1 share ofcommon stock.  At June 30, 2003 11,209,252 shares of common stockwere issued and outstanding.

 

Common Stock

During the six monthsended June 30, 2003, the Company issued 136,668 shares of common stock and205,002 warrants for $3.00 per unit, for a total of $410,000, to accreditedinvestors pursuant to the private offering. (See Note 14)

 

On March 3, 2003,the Company issued 1,000 shares of common stock valued at $2.71 per share,based on the contemporaneous offering price, for a total of $2,710, toemployees under the Stock Incentive Plan for services rendered resulting in animmediate charge to operations.

 

On February 18th and February 25th, 2003, the Company issued15,000 shares of common stock valued at $2.71 per share, based on thecontemporaneous offering price, for a total of $40,650, to directors under theStock Incentive Plan for services rendered resulting in an immediate charge tooperations.

 

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

 

On May 12, 2003, theCompany issued 5,000 shares of common stock valued at $5.50 per share, based onthe contemporaneous public offering price, for a total of $27,500, to aconsultant under the Stock Incentive Plan for services rendered resulting in animmediate charge to operations.

 

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

 

14

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**NOTE 12****                                             STOCKOPTIONS AND COMPENSATION PLAN**

 

Stock Compensation Plan

On December 27,2001, IWT Tesoro Corporation adopted the “Stock Incentive Plan.”  TheCompany’s Stock Incentive Plan provides that eligible employees, consultants,and affiliates may be granted shares of common stock.  Under the plan, theoptions granted are non-qualified stock options, incentive stock options, andrestricted stock.  The aggregate total common stock that may be issued is4,000,000 shares.  For the six months ended June 30, 2003, 21,000restricted shares were issued to employees, directors and consultants forservices rendered.  For the six months ended June 30, 2002, norestricted shares were issued to employees, directors and consultants forservices rendered under the “Stock Incentive Plan.”    Theaggregate total of restricted shares issued under the Stock Incentive Plan is145,500 through June 30, 2003.  These shares are currently notregistered and are subject to Rule 144 without any additional restrictionsimposed by the Compensation Committee at the present time.

 

In accordance with SFAS No. 123,for options issued to employees, the Company has elected to account for thesestock options under APB No. 25 and related interpretations in accountingfor its plan.  Accordingly, no compensation costs have been recognized foroptions issued under the plan as of December 31, 2002.  Hadcompensation costs for the Company’s stock option been determined on the fairmarket value at the grant dates for the options, consistent with Statement ofAccounting Standards No. 123,*Accounting for Stock Based Compensation* (Statement No. 123),the Company’s results of operations for the year ended December 31, 2002would have changed to the pro-forma amounts indicated.  No options wereissued during the six months ended June 30, 2003.

 

**NOTE 13****                                             ACQUISITION**

 

On October 1, 2002,the Company acquired International Wholesale Tile, Inc. In connection withthe legal form of this transaction, International Wholesale Tile, Inc.became a wholly owned subsidiary of IWT Tesoro Corporation.  A total of9,000,000 shares of common stock were issued for the acquisition.  Foraccounting purposes, the acquisition has been treated as a capital transactionand as a recapitalization of International Wholesale Tile, Inc.

 

As part of thetransaction, the Company and each of the three shareholders of InternationalWholesale Tile, Inc. entered into a repurchase agreement, to commence on January 1,2003 for three years, by which the three shareholders may sell a certain amountof the Company’s common stock back to the Company for a price based on anamount equal to 88% of the average trading price of the Company’s common stockso long as the stock is trading.  The amount of stock is generally up to25,000 shares for the first year, up to 50,000 shares for the second year, andup to 75,000 shares for the third year.  The repurchase agreement iscontingent upon trading of the Company’s stock on the NYSE, the ASE, theNASDAQ, the Over the Counter Bulletin Board, or the “Pink Sheets”.

 

On June 26, 2003 theCompany voted to cancel the repurchase agreement; consequently the financialstatements were adjusted to reflect the change.

 

**NOTE 14****                                             PRIVATEOFFERING**

 

The Company adopted asubscription agreement on October 1, 2002 to commence a private offeringof its common stock to accredited investors only, for up to 1.0 million unitsat $3.00 per unit; each consisting of one (1) share of common stock andwarrants to purchase 11⁄2 shares initially at $3.00 per share.  The price ofthe warrants will increase by $.25 per share at the beginning of each calendarquarter following the first public sale of the common stock of IWT Tesoro Corporation,pursuant to the Company’s form 211 to be filed with the National Association ofSecurities Dealers (NASD).

 

Under this private offering,the Company sold 220,002 units for a total of $660,000.  In addition,15,000 warrants were exercised for a total of $45,000.

 

**NOTE 15****                                             SEGMENTINFORMATION**

 

The Company manages itsoperations as one segment and all revenue is derived from customers in theUnited States.

 

15

----

 

**NOTE 16****                                             NEWSUBSIDIARIES**

 

On January 8, 2003,the Company incorporated a subsidiary, IWT Tesoro International, Ltd.(ITIL).  This subsidiary was set up as a foreign subsidiary, to be basedin Bermuda to handle future operations of foreign subsidiaries. Organizational costs related to the incorporation totaling $8,311 werecapitalized and are being amortized over 5 years.  Amortization expensefor the six months ended June 30, 2003 was $831.

 

On January 24, 2003,the Company set up IWT Tesoro Transport, Inc. (ITTI).  Initially,this corporation will be a transport broker, but future plans include overlandtransport of tile from Florida to destinations within the United States andreturn shipments of other freight back to Florida.

 

**NOTE 17****                                             PUBLICOFFERING**

 

On April 11, 2003,the Company filed a registration statement with the Securities and ExchangeCommission that was declared effective on June 17, 2003. Two offeringswere included in the registration statement. The first was the offer and saleof 250,000 units at $5.50 per unit.  Each unit consists of one share ofTesoro common stock and a warrant to purchase one share at $7.00 per sharethrough June 17, 2006. This offering will end the earlier of September 15,2003 or until all 250,000 shares are sold.  The Company may extend thisoffering for an additional ninety days through December 14, 2003. Through July 7,2003, the Company will offer these units to its current stockholdersexclusively.  The second offering was by certain Tesoro stockholders tosell an aggregate of 1,243,502 registered shares; of this total 443,500 have nolock-up period, 699,002 are subject to a six-month lock-up period, and 101,000are subject to a 12-month lock-up period.

 

**NOTE 18****                                             RESTATEMENT**

 

The Company has restatedthe consolidated balance sheets as of June 30, 2003 and the consolidatedstatements of operations, stockholders’ equity and cash flows for the year thenended as described below:

 

***Accounts Receivable***

 

Managementdetermined that the Company had been incorrectly calculating the allowances forproduct returns.  Management revised thiscalculation and determined that accounts receivable and net sales wereoverstated by approximately $48,000 as of and for the period ended June 30,2003.

 

***Accrued Expenses***

 

Management determinedthat the Company had been incorrectly calculating the accruals for salescommissions. Management revised this calculation and determined that accruedexpenses were understated by approximately $383,000 as of June 30, 2003.

 

***Sample and Display Boards***

 

Management reassessed itsmethodology for accounting for sample and display boards and determined thatthis promotional merchandise should have been expensed when distributed ratherthan capitalized and depreciated. The adjustments resulting from therestatement decreased net income by approximately $194,000 for the three monthsended June 30, 2003. This change also reduced property and equipment as ofJune 30, 2003 by approximately $2,565,000.

 

***Deferred Taxes***

 

In connection with therestatements for accounts receivable, accrued expenses and sample and displayboards described above, the related tax effect was recorded resulting in agross deferred tax assets at the period ended June 30, 2003 ofapproximately $718,000.

 

***Stockholders Equity***

 

As part of therecapitalization transaction of IWT effective October 1, 2002 (see Note1), the Company and each of the three stockholders of International WholesaleTile, Inc. entered into a repurchase agreement to commence on January 1,2003. The maximum number of redeemable shares under the repurchase agreementwas 450,000. The transaction was accounted for by reducing additional paid incapital to the extent a balance existed with the remaining portion of thetransaction applied to accumulated deficit as of December 31, 2002.

 

16

----

 

The effects of thesechanges are summarized as follows:

 
| ** **                            | ** ** | **June 30, 2003**                       | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **As**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Previously**                               | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**                                 | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated Balance Sheet:           |       |                                         |       |   |   |   |   |
| Accounts receivable                   |       | $                                            | 4,583,646  |   | $ | (48,239 | ) | $ | 4,535,407 |   |
| Property and equipment, net           |       | 3,811,678                                    |       | (2,564,866 | ) | 1,246,812 |   |
| Deferred tax assets                   |       | —                                       |       | 718,294 |   | 718,294 |   |
| Accrued expenses                      |       | 60,000                                       |       | 382,777 |   | 442,777 |   |
| Deferred tax liability                |       | 29,652                                       |       | (29,652 | ) | — |   |
| Additional paid in capital            |       | 2,290,092                                    |       | (1,088,871 | ) | 1,201,221 |   |
| Retained earnings (deficit)           |       | $                                            | 484,860    |   | $ | (1,159,065 | ) | $ | (674,205 | ) |
|                                  |       |                                         |       |   |   |   |   |
| ** **                            | ** ** | **For the Quarter Ended June 30, 2003** | ** ** |
| ** **                            | ** ** | **As**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Previously**                               | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**                                 | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated Statement of Operations: |       |                                         |       |   |   |   |   |
| Net Sales                             |       | $                                            | 8,505,066  |   | $ | (27,491 | ) | $ | 8,477,575 |   |
| Gross profit                          |       | 3,493,066                                    |       | (27,490 | ) | 3,465,576 |   |
| Operating expenses                    |       | 2,785,675                                    |       | 282,145 |   | 3,067,820 |   |
| Income (loss) before income taxes     |       | 603,936                                      |       | (309,635 | ) | 294,301 |   |
| Income tax benefit (expense)          |       | (97,000                                      | )          | 140,211 |   | 43,211 |   |
| Net Income (loss)                     |       | $                                            | 506,936    |   | $ | (169,424 | ) | $ | 337,512 |   |
|                                  |       |                                         |       |   |   |   |   |
| Earnings (loss) per share:            |       |                                         |       |   |   |   |   |
| Basic & diluted              |       | $                                            | 0.05       |   | $ | (0.02 | ) | $ | 0.03 |   |
|                                  |       |                                         |       |   |   |   |   |
| ** **                            | ** ** | **For the Six Months June 30, 2003**    | ** ** |
| ** **                            | ** ** | **As**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Previously**                               | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**                                 | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated Statement of Operations: |       |                                         |       |   |   |   |   |
| Net Sales                             |       | $                                            | 15,239,624 |   | $ | (48,239 | ) | $ | 15,191,385 |   |
| Gross profit                          |       | 6,148,017                                    |       | (48,239 | ) | 6,099,778 |   |
| Operating expenses                    |       | 5,165,702                                    |       | 520,935 |   | 5,686,637 |   |
| Income (loss) before income taxes     |       | 798,600                                      |       | (569,174 | ) | 229,220 |   |
| Income tax benefit (expense)          |       | (129,000                                     | )          | 185,304 |   | 56,304 |   |
| Net Income (loss)                     |       | $                                            | 669,600    |   | $ | (384,076 | ) | $ | 285,524 |   |
|                                  |       |                                         |       |   |   |   |   |
| Earnings (loss) per share:            |       |                                         |       |   |   |   |   |
| Basic & diluted              |       | $                                            | 0.06       |   | $ | (0.03 | ) | $ | 0.03 |   |

 

ITEM2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

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

 

We were incorporated on May 5,2000 as a Nevada corporation. Our principal office is located at 191 Post RoadWest, Suite 10, Westport, CT 06880. Any reference in this “Management’sDiscussion and Analysis or Plan of Operations” discussion to “the company,” “our,”“we” or “us” refers to Tesoro.

 

Effective October 1,2002, we acquired International Wholesale Tile, Inc. (IWT) through a shareexchange and IWT became our wholly owned subsidiary. We issued a total of9 million shares of our common stock in exchange for all of the IWTshares. As part of the transaction, Tesoro and each of the three IWTstockholders entered into a repurchase agreement by which the threestockholders may each sell a total of 150,000 shares of Tesoro’s common stockover a three-year period back to us for a price based on an amount equal to 88%of its then weighted average trading price.  Effective June 28, 2003,Tesoro and three former IWT shareholders terminated the repurchase agreement.

 

Through IWT, we providehard floor and wall covering materials primarily ceramic, porcelain and granitetiles to the new construction and remodeling industries for the commercial andresidential marketplaces. We distribute our products through a network ofindependently owned dealers and distributors, buying groups and home centerretailers. We currently purchase our products predominately from foreignmanufacturers.

 

Our primary source ofrevenue is the sale of hard flooring and wall covering materials and ourprimary costs relate to the acquisition, warehousing, selling and delivery ofthose products. While sales are made throughout the United States, the majorityof our sales are in the southeastern quadrant of the country. The primarysources of working capital are a $7.5 million (US) revolving line ofcredit from a division of a large US commercial bank, stockholders’ equity andour suppliers who have extended us terms. During 2003, we expect to begintrading our stock on the OTC-BB and to raise equity through the public market.Any new equity raised will be used to strengthen our balance sheet and toprovide capital for continued growth.

 

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*Resultsof Operations for the Quarter ending June 30, 2003.*

 

The following discussionand analysis should be read in conjunction with the financial statements andnotes thereto that appear elsewhere in this document. The table below setsforth certain operating data as a percentage of total revenue for the periodsindicated.

 
|                    |   | **Quarter  Ending June 30,** |   |
|-------------------------|--------|-----------------------------------|--------|
|                    |   | **2001**                          |   | **2002** |   | **2003** |   |
|                    |   |                              |   |   |   |   |   |
| Revenues                |   | 4,913,633                         |   | 6,803,466 |   | 8,477,575 |   |
| Cost of Goods Sold      |   | 3,271,102                         |   | 4,193,483 |   | 5,011,999 |   |
| Gross Margin            |   | 1,642,531                         |   | 2,609,983 |   | 3,465,576 |   |
| Gross Margin Percentage |   | 33.43                             | %      | 38.36 | % | 40.88 | % |
| Operating Expenses      |   | 1,101,381                         |   | 2,028,069 |   | 3,067,820 |   |

 

*Quarterended June 30, 2003 Compared to Quarter Ended June 30, 2002*

 

Sales for the quarterended June 30, 2003 were $8,477,575 a 25% increase over sales for thequarter ended June 30, 2002. This growth follows a 38% growth from 2001 to2002. We are a relatively small player in a growing market. We are entering newmarkets and adding new products; therefore, we expect to be able to grow fasterthan the market as a whole for the next several years. Our share of this marketis approximately 1%. The tile market in the United States is approximately$2.1 billion and is growing at a five to seven percent rate.

 

As we grow, we have beenable to purchase product at lower prices and have consequently lowered our costof goods sold to 60% in 2002 from 64% in 2001 and 68% in 2000. While there arecertainly finite limits to improving our gross margin percentage, it isimperative that we maintain these ratios as we grow.  The gross margin forthe quarter ended June 30, 2003 was $3,465,576, a 33% increase over grossmargin for the quarter ended June 30, 2002.  This increase in grossmargin resulted from the increase in sales and a slight improvement in our costof goods to 59.12% for the quarter ending June 30, 2003.

 

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

 

In May 2003, wecommenced bulk sales of products, made exclusively for IWT, to wholesaledistributors throughout the United States.  The sales of these productsare made in full truckload or container load volumes, with some product beingdelivered directly to the customer from the factory (drop-shipped).  Thegross margin on these sales could be lower than our traditional business;however, we believe that the lower handling costs may offset the lost grossmargin.

 

Another success factorfor us is maintaining our position as a dependable supplier not only to meetcustomer demand but also to ensure leading edge design and technicalsuperiority of the product.  We established IWT Tesoro International Ltd.,as our subsidiary responsible for dealing with the global array ofmanufacturers that supply us with product.  During the second quarter, wecontinued to develop key relationships in Europe and South America and began tosell some of these new items through the IWT network of dealers anddistributors.  The impact of these activities on our second quarterresults was minimal, but we believe it will grow during the remainder of thisfiscal year.

 

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Operating expenses forthe quarters ended June 30, 2003 and June 30, 2002 were $3,067,820and $2,028,069, respectively. This increase of 51.2% was a result of increasesin sales related expenses, such as commissions and delivery charges, driven byour revenue growth, and investments being made in people, infrastructure andcorporate organization for future growth. With the acquisition of IWT in October 2002,we began to incur certain professional and operating expenses that are notreflected in the comparable period for 2002. In addition, we began to issuecommon stock to non-executive employees, outside directors and suppliers underthe stock incentive plan. Generally Accepted Accounting Principles require thatthese shares be expensed in the period they are issued at the fair market valueof these shares. We expect these expenses to continue.

 

The second quarter offiscal year 2003 also saw the increase in our occupancy costs including rentand moving expenses at IWT in anticipation of its expansion of the bulk salesand home center store channels. We expect these increased expenses to generateproportionate sales growth in the future.

 

*Liquidityand Capital Resources*

 

We had cash balances of$318,732 and $574,046 at the end of June 30, 2003 and December 31,2002, respectively. We have generated positive cash flow from operations atyear end for the last three years.

 

In October 2002, wecommenced a private offering of our common stock to accredited investors for upto one million units at $3.00 per unit. Each unit consists of one share ofcommon stock and warrants to purchase 1 1/2 shares initially at $3.00 per sharefor five years from the date the warrant was issued. The price of the warrantswill increase by $.25 per share at the beginning of each calendar quarterfollowing the first public sale of Tesoro’s common stock and continuing untilthe warrant expires.

 

Through it’s closing asof June 30, 2003, we raised $660,000 from units sales. We also raised anadditional $45,000 from 15,000 warrants that were exercised. All of theinvestors were provided with, or otherwise had access to, information about usand our subsidiaries, including financial information. The proceeds from theoffering and the warrant exercises were used for general corporate purposes,including paying fees to outside professionals and working capital.

 

On November 21,2000, our subsidiary, IWT, entered into a new loan and security agreement witha financial institution totaling $5 million as a revolving loan, for aperiod of three years, with an option to renew for one additional year. Thiswas amended and restated effective November 13, 2002 and the amount of themaximum credit was increased from $5 million to $7.5 million. Theinterest rate on this loan is the Wachovia announced prime rate plus .75% peryear. Additionally, at the lender’s option, we also pay prime plus 2.75% withrespect to any non-contingent obligations

 

•           on all outstandingobligations following termination or non-renewal of the credit facility;

 

•                                          formand after the date of an event of default occurs and for so long as such eventis continuing, as determined by lender;

 

•           during any time theamounts available to us are made or arise without our lender’s knowledge orconsent.

 

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On June 17, 2003,the Securities and Exchange Commission declared IWT Tesoro Corporation’sregistration statement on Form SB-2 effective.  In connection withthe Registration Statement, two offerings are occurring.  The first is theoffer and sale of 250,000 units at $5.50 per unit.  Each unit consists ofone share of Tesoro common stock and a warrant to purchase one share at $7.00per share through June 17, 2006.  The second is an offer by certainTesoro’s stockholders to sell an aggregate of 1,243,502 registered shares.

 

The unit offering isbeing sold on an exclusive basis through July 7, 2003 to Tesoro’s currentstockholders.  Thereafter, the units will be offered and sold by Tesoro’sofficers and directors, or by certain registered broker-dealers who haveentered into a Selected Dealer Agreement with Tesoro and who have been approvedby the National Association of Securities Dealers (NASD).  Through June 30,2003, we raised $20,625 from unit sales under the current registration statement.

 

ITEM 3:  CONTROLSAND PROCEDURES

 

(a)                                  Withinthe 90 days prior to the date of this report, we carried out an evaluation,under the supervision and with the participation of management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14. Based upon thisevaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information relating to us (including ourconsolidated subsidiaries) that is required to be included in our periodic SECreports. There have been no significant changes in our internal controls or inother factors that could significantly affect those controls subsequent to thedate we carried out this evaluation.

 

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

 

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PART II —OTHER INFORMATION

 

 ITEM 1.                                                  LEGALPROCEEDINGS

 

There are no legalproceedings against us and we are unaware of such proceedings contemplatedagainst it.

 

 ITEM 2.                                                  CHANGESIN SECURITIES

 

(a) — (c)                                                 Notapplicable

 

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

 

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

 

The unit offering isbeing sold on an exclusive basis through July 7, 2003 to Tesoro’s currentstockholders.  Thereafter, the units will be offered and sold by Tesoro’sofficers and directors, or by certain registered broker-dealers who haveentered into a Selected Dealer Agreement with Tesoro and who have been approvedby the National Association of Securities Dealers (NASD).

 

As required by Rule 463,as of August 4, 2003, 9,328 units were sold by us, for which Tesororeceived proceeds of $51,304.  These proceeds have been used for offeringcosts and expense for its Registration Statement.

 

 ITEM 3.                                                  DEFAULTSUPON SENIOR SECURITIES

 

Not applicable.

 

 ITEM 4.                                                  SUBMISSIONOF MATTER TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

 ITEM 5.                                                  OTHERINFORMATION

 

Not applicable.

 

 ITEM 6.                                                  EXHIBITSAND REPORTS ON FORM 8-K

 
| (a)    |   | Exhibits                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                       |
| 31.1   |   | Certification of CEO                                                                                                       |
| 31.2   |   | Certification of CFO                                                                                                       |
| 32.1   |   | CERTIFICATION PURSUANT  TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE  SARBANES-OXLEY ACT OF 2002 |
| 32.2   |   | CERTIFICATION PURSUANT  TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE  SARBANES-OXLEY ACT OF 2002 |
|   |   |                                                                                                                       |
| (b)    |   | Reports on  Form 8-K.                                                                                                 |

 

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

 

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

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                 | IWT TESORO CORPORATION                   |
|----------------------|------------------------------------------|
|                 |                                     |
|                 |                                     |
| August 22, 2005 | /s/ Henry J. Boucher, Jr.           |   |
|                 | Henry J. Boucher, Jr.,  President   |
|                 |                                     |
| August 22, 2005 | /s/ Forrest Jordan                       |   |
|                 | Forrest Jordan, Chief  Financial Officer |
|                      |                                          |  |  |

 

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