**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

**(Amendment #2)**

 

**(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, 2004** |
|                                                  |       |                                                                                                    |
| **o**                                                 | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                          |
|                                                  |       |                                                                                                    |
| **Commission File No. 0-31267**                  |

 

**IWT TESORO CORPORATION**

(Exact Name of Small BusinessIssuer in Its Charter)

 
| **Nevada**                                                       | ** ** | **91-2048019**                            |
|------------------------------------------------------------------|------------|-------------------------------------------|
| (State or  Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S.  Employer  Identification Number) |

 

**101Post Road West, Suite 10, Westport, CT  06880**

(Address of principal executiveoffices)

 

**(203)221-2770**

(Issuer’s Telephone Number,including area code)

 

(Former Name, Former Addressand Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of theExchange Act: **NONE**

Securities registered pursuant to Section 12(g) of theExchange Act:**Common Stock, $.001 Per Share**

 

Check whether the issuer: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:

    ýYes        oNo

 

Indicate by check mark whether the registrant is an accelerated files(as defined in Rule 12b-2 of the Exchange Act)   oYes     ýNo

 

State the number of shares outstanding of each of the issuer’s class ofcommon equity, as of August 13, 2004:  11,695,612 shares

 

Transitional Small Business Disclosure Format:     oYes        ýNo

 

 

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EXPLANATORY NOTE

 

Tesorohas restated the consolidated balance sheets as of June 30, 2004 and December 31,2003, and the consolidated statements of operations, stockholders’ equity andcash flows for the six month ended June 30, 2004 and 2003,respectively.  In particular, Managementdetermined that Tesoro had been incorrectly calculating the accruals for salescommissions. Management revised this calculation and determined that accruedexpenses were understated by approximately $600,000 as of June 30,2004.  Management also determined thatthe Company had been incorrectly calculating the allowances for productreturns. Management revised this calculation and determined that accountsreceivable and net sales were overstated by approximately $108,000 as of thequarter ended June 30, 2004. Additionally, 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 increased net loss for the six months ended June 30, 2004 byapproximately $497,000. This change also reduced property and equipment as of June 30,2004 by approximately $3,647,000.  .  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, 2004. 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, 2003.  During the year ended December 31, 2003 therepurchase agreement was cancelled.  Thetransaction was accounted for by increasing additional paid in capital to theextent it was reduced in the prior year with the remaining portion decreasingthe accumulated deficit.  Other than thefinancial statements and related notes and Management's Discussion and Analysisset forth in Item 2 of this periodic report, which takes into account theeffect of the restatement, all other information is described in Amendment No.1 to the 10-Q/a for the quarter ended March 31, 2004, filed with the Securitiesand Exchange Commission on September 23, 2004.

 

PART 1

 

 ITEM 1:                          FINANCIAL STATEMENTS

 

**IWTTESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2004**

 

**TABLEOF CONTENTS**

 
| Report of Independent Accountants                                                                                                      |       |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** |
| Consolidated Balance Sheets June 30, 2004 (as restated)  (unaudited) and December 31, 2003 (as restated)                     |       |
|                                                                                                                                   |       |
| Consolidated Statements of Operations for  the Three months and Six months ended June 30, 2004 and 2003(as restated)  (unaudited) |       |
|                                                                                                                                   |       |
| Consolidated Statements of Stockholders’  Equity for the Six months ended June 30, 2004 and 2003 (as restated)  (unaudited)  |       |
|                                                                                                                                   |       |
| Consolidated Statements of Cash Flows for  the Six months ended June 30, 2004 and 2003 (as restated) (unaudited)                  |       |
|                                                                                                                                   |       |
| Notes to Consolidated Financial Statements  (as restated) (unaudited)                                                                  |       |

 

1

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[Kantor, Sewell & Oppenheimer, PA Letterhead]

 

*Certified Public Accountants and Associates*7705 Davie Road ExtensionHollywood, Florida 33024(954) 432-3100   (305) 620-0616   (954) 436-6898 Fax

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directors

IWT Tesoro Corporation andSubsidiaries

Westport, CT

 

We have reviewed the changesmade to accompanying consolidated balance sheet of IWT Tesoro Corporation andits wholly-owned Subsidiaries as of June 30, 2004, and the related consolidatedstatements of operations, stockholders' equity, and cash flows for thesix-month periods ended June 30, 2004 and 2003. These revised interim financial statements are the responsibility of theCompany's management.

 

We conducted our review of thechanges made in accordance with the standards of the Public Company AccountingOversight Board (United States).  Areview of interim financial information consists principally of applyinganalytical procedures to financial data and making inquiries of personsresponsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board, the objective of which is the expression of anopinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on our review, we are notaware of any material modifications that should be made to the accompanyinginterim financial statements for them to be in conformity with U.S. generallyaccepted accounting principles.

 

 

 

/s/ KANTOR, SEWELL &OPPENHEIMER, PA

 

Hollywood, Florida

July 23, 2004, except for Note 11 which is dated August 31, 2005

 

 

2

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                        | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                        | ** ** | **(Restated)**          | ** ** | **(Restated)**              | ** ** |
| ASSETS                                                                                                            |       |                    |       |                        |       |
| Current  Assets:                                                                                                  |       |                    |       |                        |       |
| Cash                                                                                                              |       | $                       | 661,144    |                        | $          | 867,361 |   |
| Accounts  receivable, net allowance for doubtful accounts                                                         |       | 7,215,153               |       | 4,852,705                   |       |
| Inventories                                                                                                       |       | 15,427,926              |       | 13,058,839                  |       |
| Prepaid  expenses                                                                                                 |       | 509,825                 |       | 754,281                     |       |
| Note  receivable arising from sale of stock                                                                       |       | —                  |       | 550,000                     |       |
| Deposit on  Inventories                                                                                           |       | 550,000                 |       | —                      |       |
| Total  current assets                                                                                             |       | 24,364,048              |       | 20,083,186                  |       |
|                                                                                                              |       |                    |       |                        |       |
| Property and  equipment, net                                                                                      |       | 1,625,306               |       | 1,236,979                   |       |
|                                                                                                              |       |                    |       |                        |       |
| Other assets                                                                                                      |       | 587,721                 |       | 382,101                     |       |
|                                                                                                              |       | $                       | 26,577,075 |                        | $          | 21,702,266 |   |
|                                                                                                              |       |                    |       |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                        |       |                    |       |                        |       |
|                                                                                                              |       |                    |       |                        |       |
| Current  Liabilities:                                                                                             |       |                    |       |                        |       |
| Accounts  payable                                                                                                 |       | $                       | 12,092,307 |                        | $          | 9,859,161 |   |
| Accrued  expenses                                                                                                 |       | 810,043                 |       | 536,963                     |       |
| Current  portion of capital lease obligations                                                                     |       | 34,106                  |       | 63,152                      |       |
| Current  portion of notes payable, other                                                                          |       | 34,458                  |       | 42,719                      |       |
| Total  current liabilities                                                                                        |       | 12,970,914              |       | 10,501,995                  |       |
|                                                                                                              |       |                    |       |                        |       |
| Long-Term  Debt:                                                                                                  |       |                    |       |                        |       |
| Note  payable, revolving line of credit                                                                           |       | 12,411,294              |       | 9,599,340                   |       |
| Capital  lease obligations                                                                                        |       | 156,835                 |       | 149,183                     |       |
| Subordinated  notes payable, stockholders                                                                         |       | 338,662                 |       | 338,662                     |       |
| Notes  payable, other                                                                                             |       | 47,959                  |       | 42,560                      |       |
| Total  long-term debt                                                                                             |       | 12,954,750              |       | 10,129,745                  |       |
| Total liabilities                                                                                                 |       | 25,925,664              |       | 20,631,740                  |       |
|                                                                                                              |       |                    |       |                        |       |
| Stockholders’  Equity:                                                                                       |       |                    |       |                        |       |
| Preferred  stock, $0.001 par value, 25,000,000 authorized; none issued                                            |       | —                  |       | —                      |       |
| Common  stock, $0.001 par value, 100 million shares authorized; 11,695,102 and 11,622,702  issued and outstanding |       | 11,695                  |       | 11,623                      |       |
| Additional  paid in capital                                                                                       |       | 4,172,052               |       | 3,883,949                   |       |
| Accumulated  deficit                                                                                              |       | (3,532,336              | )          | (2,825,046                  | )          |
|                                                                                                              |       | 651,411                 |       | 1,070,526                   |       |
|                                                                                                              |       | $                       | 26,577,075 |                        | $          | 21,702,266 |   |

 

See Notes to Consolidated InterimFinancial Statements.

 

3

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFOPERATIONS

(Unaudited)

 
| ** **                                    | ** ** | **For the period ended June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **Three months ended**                 | ** ** | **Six months ended** | ** ** |
| ** **                                    | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(Restated)**                         | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Revenue                                       |       |                                   |       |   |   |   |   |   |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Sales, net  of discounts and returns          |       | $                                      | 11,585,016 |   | $ | 8,477,575 |   | $ | 21,119,648 |   | $ | 15,191,385 |   |
| Cost of  goods sold                           |       | 7,144,406                              |       | 5,011,999 |   | 12,954,820 |   | 9,091,607 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Gross profit                                  |       | 4,440,610                              |       | 3,465,576 |   | 8,164,828 |   | 6,099,778 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Expenses                                      |       |                                   |       |   |   |   |   |   |   |
| Payroll                                       |       | 1,847,144                              |       | 1,225,587 |   | 3,515,300 |   | 2,403,229 |   |
| Delivery                                      |       | 535,117                                |       | 413,075 |   | 1,093,739 |   | 749,120 |   |
| General and  administrative                   |       | 276,862                                |       | 305,373 |   | 564,485 |   | 515,389 |   |
| Lease  expense                                |       | 390,810                                |       | 198,254 |   | 753,738 |   | 332,634 |   |
| Depreciation                                  |       | 68,216                                 |       | 59,749 |   | 128,859 |   | 100,299 |   |
| Insurance                                     |       | 209,284                                |       | 85,138 |   | 369,882 |   | 159,966 |   |
| Repairs and  maintenance                      |       | 129,837                                |       | 87,629 |   | 230,522 |   | 170,000 |   |
| Sales expenses                                |       | 261,943                                |       | 141,450 |   | 475,122 |   | 256,318 |   |
| Advertising                                   |       | 480,307                                |       | 311,548 |   | 1,122,459 |   | 577,115 |   |
| Professional  fees                            |       | 81,455                                 |       | 113,794 |   | 164,560 |   | 238,637 |   |
| Travel and  entertainment                     |       | 88,535                                 |       | 75,653 |   | 177,142 |   | 130,113 |   |
| Bad debts                                     |       | 22,598                                 |       | 50,570 |   | 45,209 |   | 53,817 |   |
|                                          |       | 4,392,108                              |       | 3,067,820 |   | 8,641,017 |   | 5,686,637 |   |
| Income  (loss) from operations                |       | 48,502                                 |       | 397,756 |   | (476,189 | ) | 413,141 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Other  income/(expenses)                      |       |                                   |       |   |   |   |   |   |   |
| Interest  expense                             |       | (139,111                               | )          | (98,632 | ) | (261,377 | ) | (174,581 | ) |
| Other  expense                                |       | —                                 |       | (5,723 | ) | — |   | (5,723 | ) |
| Other income                                  |       | 2,290                                  |       | 900 |   | 8,743 |   | 1,735 |   |
| Gain (loss)  on disposal                      |       | 21,533                                 |       | — |   | 21,533 |   | (5,352 | ) |
|                                          |       | (115,288                               | )          | (103,455 | ) | (231,101 | ) | (183,921 | ) |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Net income  (loss) before taxes               |       | (66,786                                | )          | 294,301 |   | (707,290 | ) | 229,220 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Income tax  benefit                           |       | —                                 |       | 43,211 |   | — |   | 56,304 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Net income  (loss)                            |       | $                                      | (66,786    | ) | $ | 337,512 |   | $ | (707,290 | ) | $ | 285,524 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Earnings  (loss) per common share -           |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                         |       | $                                      | (0.01      | ) | $ | 0.03 |   | $ | (0.06 | ) | $ | 0.02 |   |
| Diluted                                       |       |                                   | (0.01      | ) |   | 0.03 |   |   | (0.06 | ) |   | 0.02 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Weighted  Average Common Shares Outstanding - |       |                                   |       |   |   |   |   |   |   |
| Basic                                         |       | 11,687,377                             |       | 11,142,691 |   | 11,661,050 |   | 11,142,691 |   |
| Diluted                                       |       | 11,687,377                             |       | 11,645,873 |   | 11,661,050 |   | 11,485,873 |   |

 

See notes to consolidatedfinancial statements.

 

4

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS 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                               |       | 236,668          |       | 237         |       | 959,764        |       | —          |       | 960,001    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Exercise of  warrants                                                |       | 80,000           |       | 80          |       | 239,920        |       | —          |       | 240,000    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance of  shares to employees and directors for services rendered |       | 18,200           |       | 18          |       | 55,441         |       | —          |       | 55,459     |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance of  shares - public offering                                |       | 250,000          |       | 250         |       | 1,292,250      |       | —          |       | 1,292,500  |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Cancellation  of stock repurchase agreement                          |       | 450,000          |       | 450         |       | 669,907        |       | 402,803         |       | 1,073,160  |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance of  shares officer’s performance based stock options   |       |             |       |        |       | 666,667        |       |            |       | 666,667    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Net loss,  twelve months ended December 31, 2003                |       | —           |       | —      |       | —         |       | (1,865,317      | )          | (1,865,317 | )          |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Balance, December 31,  2003, as restated                        |       | 11,622,702       |       | 11,623      |       | 3,883,949      |       | (2,825,046      | )          | 1,070,526  |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Exercise of  warrants                                                |       | 45,500           |       | 45          |       | 147,830        |       |            |       | 147,875    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Issuance of  shares to employees and directors for services rendered |       | 26,900           |       | 27          |       | 140,273        |       |            |       | 140,300    |       |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Net loss,  six months ended June 30, 2004                       |       | —           |       | —      |       | —         |       | (707,290        | )          | (707,290   | )          |
|                                                                 |       |             |       |        |       |           |       |            |       |       |       |
| Balance,  June 30, 2004                                              |       | 11,695,102       |       | $           | 11,695     |           | $          | 4,172,052       |       | $          | (3,532,336 | ) | $ | 651,411 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**IWT TESOROCORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                    | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                    | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                                                    | ** ** | **(Restated)**                      | ** ** | **(Restated)** | ** ** |
|                                                                                          |       |                                |       |   |   |
| Cash flows  from operating activities:                                                        |       |                                |       |   |   |
| Net income (loss)                                                                             |       | $                                   | (707,290   | ) | $ | 285,524 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                                |       |   |   |
| Depreciation  and amortization                                                                |       | 128,859                             |       | 100,299 |   |
| Deferred  income taxes                                                                        |       | —                              |       | (56,304 | ) |
| Provision  for doubtful accounts and reserve for returns                                      |       | 97,966                              |       | 24,994 |   |
| (Gain) loss  on disposal of property and equipment                                            |       | (21,533                             | )          | 5,352 |   |
| Stock issued  for services and compensation                                                   |       | 140,300                             |       | — |   |
| Changes in  operating assets and liabilities:                                                 |       |                                |       |   |   |
| (Increase)  Decrease in:                                                                      |       |                                |       |   |   |
| Accounts  receivable                                                                          |       | (2,460,414                          | )          | (1,684,869 | ) |
| Inventories                                                                                   |       | (2,369,087                          | )          | (4,874,201 | ) |
| Prepaid  expenses                                                                             |       | 40,491                              |       | (56,163 | ) |
| Deposits for  inventories                                                                     |       | (550,000                            | )          | — |   |
| Increase in:                                                                                  |       |                                |       |   |   |
| Accounts  payable                                                                             |       | 2,233,146                           |       | 3,869,895 |   |
| Accrued  expenses                                                                             |       | 273,080                             |       | 117,032 |   |
| Net cash  used in operating activities                                                        |       | (3,194,482                          | )          | (2,268,441 | ) |
|                                                                                          |       |                                |       |   |   |
| Cash flows  from investing activities:                                                        |       |                                |       |   |   |
| Acquisitions  of property and equipment                                                       |       | (473,214                            | )          | (766,399 | ) |
| Proceeds  from sale of equipment                                                              |       | 25,000                              |       | — |   |
| Net cash  used in investing activities                                                        |       | (448,214                            | )          | (766,399 | ) |
|                                                                                          |       |                                |       |   |   |
| Cash flows  from financing activities:                                                        |       |                                |       |   |   |
| Proceeds  from revolving line of credit                                                       |       | 21,330,000                          |       | 16,228,000 |   |
| Payments on  revolving line of credit                                                         |       | (18,518,046                         | )          | (13,782,136 | ) |
| Proceeds  from issuance of stock                                                              |       | 147,875                             |       | 460,625 |   |
| Proceeds  from related party debt                                                             |       | —                              |       | 10,640 |   |
| Principal  payments on capital leases                                                         |       | (73,350                             | )          | (27,553 | ) |
| Principal  Payments on notes payable                                                          |       | —                              |       | (110,050 | ) |
| Collection  on notes receivable for stock                                                     |       | 550,000                             |       | — |   |
| Net cash  provided by financing activities                                                    |       | 3,436,479                           |       | 2,779,526 |   |
| Net Decrease  in Cash                                                                         |       | (206,217                            | )          | (255,314 | ) |
| Cash,  Beginning                                                                              |       | 867,361                             |       | 574,046 |   |
| Cash, Ending                                                                                  |       | $                                   | 661,144    |   | $ | 318,732 |   |
|                                                                                          |       |                                |       |   |   |
| Cash Paid  During the Period for:                                                             |       |                                |       |   |   |
| Interest  expense                                                                             |       | $                                   | 261,377    |   | $ | 174,581 |   |

 

See Notes to Consolidated InterimFinancial Statements.

 

6

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**SIXMONTHS ENDED JUNE 30, 2004**

 

**NOTE 1****                            PRINCIPLESOF CONSOLIDATION**

 

The accompanying consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries, International Wholesale Tile, Inc.(IWT), IWT Tesoro International, Inc. (International), IWT TesoroTransport, Inc. (Transport) and The Tile Club, Inc. (TCI), (collectivelythe “Company”).  All significant inter-company balances and transactionshave been eliminated.

 

**NOTE 2****                            BASISOF PRESENTATION**

 

The interim financial information included herein is unaudited;however, such information reflects all adjustments which are, in the opinion ofmanagement, necessary for a fair presentation of the Company’s financialposition, results of operations, changes in stockholders’ equity and cash flowsfor the interim periods.  All such adjustments are of a normal, recurringnature.  The results of operations for the first six months of the yearare not necessarily indicative of the results of operations which might beexpected for the entire year.

 

The accompanying consolidated financial statements of the Company havebeen prepared in accordance with the instructions to Form 10-Q and,therefore, omit or condense certain footnotes and other information normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles.  It is suggested that these condensed financialstatements should be read in conjunction with the Company’s financialstatements and notes thereto included in the Company’s audited financialstatements on Form 10-K for the fiscal year ended December 31, 2003.

 

**NOTE 3****                            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Stock Options

The Company accounts for stock options under the provisions ofAccounting Principles Board Opinion (APB) No. 25*Accounting For Stock Issued to Employees*and related interpretations.  Accounting for the issuance of stock optionsunder the provisions of APB No. 25 typically does not result incompensation expense for the Company since the exercise price of options isnormally established at the market price of the Company’s common stock on thedate granted.  Statement of Financial Accounting Standards (SFAS) No. 123*Accounting for Stock-Based Compensation*provides that the related expense may be recorded in the basic financialstatements or the pro forma effect on earnings may be disclosed in thefinancial statements.

 

A total of 50,000 options were granted to directors of the Companyduring the six months ended June 30, 2004.   No options weregranted during the six months ended June 30, 2003.

 

7

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The effect on net income (loss) and earnings per share if the Companyhad applied the fair value recognition provision of the SFAS No. 123, consisted of the following:

 
| ** **                                                                                                               | ** ** | **Six months ended  June 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
|                                                                                                                     |       |                                     |       |
| Net loss as  reported                                                                                                    |       | $                                        | (707,290   | ) |
|                                                                                                                     |       |                                     |       |
| Add: Stock-based  compensation cost determined under fair value based method for all awards,  net of related tax effects |       | (54,563                                  | )          |
|                                                                                                                     |       |                                     |       |
| Pro-forma  net loss                                                                                                      |       | $                                        | (761,853   | ) |
|                                                                                                                     |       |                                     |       |
| Basic and  diluted earnings per share                                                                                    |       |                                     |       |
| As reported                                                                                                              |       | $                                        | (0.06      | ) |
| Pro-forma                                                                                                                |       | $                                        | (0.06      | ) |

 

For the pro forma net loss calculation in the preceding table, the fairvalue of each option on the date of grant was estimated using the Black-Scholesoption-pricing model and the following assumptions for awards in 2004: dividendyields of .0 percent; expected volatility of 21.51 percent; risk-free interestrates of 2.20 percent; and expected lives of five years.  Using theseassumptions, the weighted average grant-date fair value per share of optionsgranted in 2004 was $1.21.

 

Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (FASB)issued SFAS No. 148,*Accounting forStock-Based Compensation – Transition and Disclosure,* which providesalternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employeecompensation as prescribed in SFAS No. 123. Additionally, SFAS No. 148requires more prominent and more frequent disclosures in financial statementsabout the effects of stock-based compensation. The provisions of this Statementare effective for fiscal years ending after December 15, 2002. Management does not expect the adoption of this Statement to have a materialimpact on the Company’s financial condition or results of operations.

 

Earnings per Share

Basic earnings per share are computed based on the weighted averagenumber of common shares outstanding during each year.  Diluted earningsper share are computed based on the weighted average number of common sharesoutstanding plus all potential dilutive common shares outstanding (stockoptions) during each year.

 

8

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**NOTE 4****                            INVENTORIES**

 

Inventories consisted of the following:

 

| ** **            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------|------------|-------------------------|------------|-----------------------------|------------|
|                  |       |                    |       |                        |       |
| Tiles                 |       | $                       | 13,567,305 |                        | $          | 11,102,115 |   |
| Inventory in  transit |       | 1,860,621               |       | 1,956,724                   |       |
|                  |       |                    |       |                        |       |
|                  |       | $                       | 15,427,926 |                        | $          | 13,058,839 |   |

 

Inventory in transit consists of merchandise purchased overseas, whichis not yet received in the warehouse.  The Company obtains legal title atthe shipping point.  Inventory cost includes the purchase price andin-bound freight.

 

**NOTE 5****                            DEPOSITON EXCLUSIVE AGREEMENT**

 

During February 2004, the Company entered into an agreement withan Italian supplier to develop an exclusive line of tile.  The agreementrequired a deposit of $550,000, and the initial shipment is anticipated in July 2004.

 

**NOTE 6****                            PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following:

 

| ** **                     | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                           |       |                    |       |                        |       |
| Furniture  and fixtures        |       | $                       | 397,100    |                        | $          | 307,247 |   |
| Machinery  and equipment       |       | 520,976                 |       | 477,996                     |       |
| Vehicles                       |       | 214,942                 |       | 211,215                     |       |
| Computer  equipment            |       | 350,984                 |       | 329,747                     |       |
| Leasehold  improvements        |       | 698,466                 |       | 409,125                     |       |
|                           |       |                    |       |                        |       |
|                           |       | 2,182,468               |       | 1,735,330                   |       |
| Less  accumulated depreciation |       | (557,162                | )          | (498,351                    | )          |
|                           |       |                    |       |                        |       |
|                           |       | $                       | 1,625,306  |                        | $          | 1,236,979 |   |

 

Depreciation expense for the six months ended June 30, 2004 and2003 was $128,859 and $100,299, respectively.

 

9

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**NOTE 7****                            LOANSPAYABLE**

 

The Company has a loan and security agreement with a financialinstitution for a revolving line of credit with a maximum limit of$17,000,000.  The agreement specifies that proceeds from this revolvingcredit loan be used for general working capital needs.  All present andfuture assets of the Company collateralize this loan. The rate of interest ineffect for this agreement is calculated with reference to the Base Rate and/orLIBOR (London Interbank Offered Rate).  The balance due at June 30,2004 and December 31, 2003 was $12,411,294 and $9,599,340, respectively.

 

Base Rate advances bear a fluctuating interest rate per annum equal toprime plus 0.50%.  LIBOR advances bear a fixed rate per annum equal to3.00% plus the LIBOR for the applicable interest period.  At June 30,2004, the Base Rate and the LIBOR rate were 4.50% and 4.59%, respectively.

 

For the six months ended June 30, 2004 and 2003, interest expenserelated to the credit lines amounted to $257,987 and $143,634, respectively.

 

**NOTE 8****                            STOCKHOLDERS’EQUITY**

 

Common Stock

During the six months ended June 30, 2004, the Company issued45,500 shares of common stock pursuant to warrants exercised at $3.25 pershare, for a total of $147,875.

 

During the six months ended June 30, 2004, the Company issued 16,900shares of common stock to consultants for services rendered, based on thetrading price at the date of issuance, for a total of $97,800, resulting in animmediate charge to operations.

 

On May 26, 2004, the Company issued 10,000 shares of common stockto a director under the Stock Incentive Plan for services rendered, based onthe contemporaneous trading price, for a total of $42,500, resulting in animmediate charge to operations.

 

In March 2004, the Company received $550,000 as full payment on asubscription receivable outstanding at December 2003.

 

**NOTE 9****                            SEGMENTINFORMATION**

 

The Company manages its operations as one segment and all revenue isderived from customers in the United States.

 

**NOTE 10****                     NEW SUBSIDIARY**

 

Subsequent to the fiscal quarter ended March 31, 2004, the Companyorganized The Tile Club, Inc. (TCI).  TCI will license thedistribution rights to designer and artistic based decorative wall tiles.

 

10

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**NOTE 11****       RESTATEMENT**

 

The Company has restated the consolidated balance sheet as of June 30,2004, and the consolidated statements of operations, stockholders’ equity andcash flows for the six months then ended as described below:

 

***Accounts Receivable***

 

Managementdetermined that the Company had been incorrectly calculating the allowances forproduct returns.  Management revised thiscalculation and determined that net sales were overstated by approximately$31,000 and $27,000 for the three months ended June 30, 2004 and 2003respectively. Accounts receivable was overstated by approximately $108,000 forthe period ended June 30, 2004.

 

***Accrued Expenses***

 

Management determined that the Company had been incorrectly calculatingthe accruals for sales commissions and rebates. Management revised thiscalculation and determined that accrued expenses were understated byapproximately $600,000 as of June 30, 2004. Operating expenses wereunderstated by approximately $127,000 and $88,000 for the three months ended June 30,2004 and 2003, respectively.

 

***Sample and DisplayBoards***

 

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 resultingfrom the restatement increased net loss by approximately $254,000 and $194,000for the three months ended June 30, 2004 and 2003, respectively. Thischange also reduced property and equipment as of June 30, 2004 byapproximately $3,647,000.

 

***Deferred Taxes***

 

Inconnection with the restatements for accounts receivable, accrued expenses andsample and display boards described above, the related tax effect was recordedresulting in a net deferred tax asset and the company recorded a valuationallowance, as needed, to reduce the net deferred tax asset to an amountconsidered by management more likely than not to be realized.

 

***Additional Paid In Capital***

 

Aspart of the recapitalization transaction of IWT effective October 1, 2002the Company and each 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.On June 26, 2003, the Company voted to cancel the repurchase agreement.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. As a result of therestatements described above, the recording of the cancellation of therepurchase agreement was also restated based on the restated balance inaccumulated deficit and additional paid in capital.

 

11

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**NOTE 11       RESTATEMENT (continued)**

 

The effects of these changesare summarized as follows:

 
| ** **                  | ** ** | **June 30, 2004**       | ** ** | **June 30, 2003** | ** ** |
|-----------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **As  Previously  Reported** | ** ** | **Adjustments**        | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| Consolidated Balance Sheet: |       |                         |       |                   |       |   |   |   |   |   |   |   |   |
| Accounts receivable         |       | $                            | 7,322,910  |                   | $          | (107,757 | ) | $ | 7,215,153 |   | $ | 4,583,646 |   | $ | (48,239 | ) | $ | 4,535,407 |   |
| Property and equipment, net |       | 5,271,853                    |       | (3,646,547             | )          | 1,625,306 |   | 3,811,678 |   | (2,564,866 | ) | 1,246,812 |   |
| Deferred tax assets         |       | 76,972                       |       | (76,972                | )          | — |   | — |   | 718,294 |   | 718,294 |   |
| Accrued expenses            |       | 209,644                      |       | 600,399                |       | 810,043 |   | 60,000 |   | 382,777 |   | 442,777 |   |
| Deferred tax liability      |       | 13,768                       |       | (13,768                | )          | — |   | 29,652 |   | (29,652 | ) | — |   |
| Additional paid in capital  |       | 5,260,923                    |       | (1,088,871             | )          | 4,172,052 |   | 2,290,092 |   | (1,088,871 | ) | 1,201,221 |   |
| Retained earnings (deficit) |       | $                            | (203,300   | )                      | $          | (3,329,036 | ) | $ | (3,532,336 | ) | $ | 484,860 |   | $ | (1,159,065 | ) | $ | (674,205 | ) |

 
| ** **                             | ** ** | **For the Quarter Ended June 30, 2004** | ** ** | **For the Quarter Ended June 30, 2003** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **As  Previously  Reported**                 | ** ** | **Adjustments**                              | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| Consolidated Statement of  Operations: |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Net Sales                              |       | $                                            | 11,616,257 |                                         | $          | (31,241 | ) | 11,585,016 |   | $ | 8,505,066 |   | $ | (27,491 | ) | $ | 8,477,575 |   |
| Gross profit                           |       | 4,471,851                                    |       | (31,241                                      | )          | 4,440,610 |   | 3,493,066 |   | (27,490 | ) | 3,465,576 |   |
| Operating expenses                     |       | 4,010,729                                    |       | 381,379                                      |       | 4,392,108 |   | 2,785,675 |   | 282,145 |   | 3,067,820 |   |
| Income (loss) before  income taxes     |       | 345,834                                      |       | (412,620                                     | )          | (66,786 | ) | 603,936 |   | (309,635 | ) | 294,301 |   |
| Income tax benefit                     |       | 84,400                                       |       | (84,400                                      | )          | — |   | (97,000 | ) | 140,211 |   | 43,211 |   |
| Net Income (loss)                      |       | $                                            | 430,234    |                                         | $          | (497,020 | ) | $ | (66,786 | ) | $ | 506,936 |   | $ | (169,424 | ) | $ | 337,512 |   |
|                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per share:             |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Basic & diluted               |       | $                                            | 0.04       |                                         | (0.05      | ) | $ | (0.01 | ) | $ | 0.05 |   | $ | (0.02 | ) | $ | 0.03 |   |

 
| ** **                             | ** ** | **For the Six Month Ended June 30, 2004** | ** ** | **For the Six Months Ended June 30, 2003** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **As  Previously  Reported**                   | ** ** | **Adjustments**                                 | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| Consolidated Statement of  Operations: |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Net Sales                              |       | $                                              | 21,172,404 |                                            | $          | (52,756 | ) | $ | 21,119,648 |   | $ | 15,239,624 |   | $ | (48,239 | ) | $ | 15,191,385 |   |
| Gross profit                           |       | 8,217,584                                      |       | (52,756                                         | )          | 8,164,828 |   | 6,148,017 |   | (48,239 | ) | 6,099,778 |   |
| Operating expenses                     |       | 7,774,037                                      |       | 866,980                                         |       | 8,641,017 |   | 5,165,702 |   | 520,935 |   | 5,686,637 |   |
| Income (loss) before  income taxes     |       | 212,446                                        |       | (919,736                                        | )          | (707,290 | ) | 798,600 |   | (569,174 | ) | 229,220 |   |
| Income tax benefit                     |       | (35,600                                        | )          | 35,600                                          |       | — |   | (129,000 | ) | 185,304 |   | 56,304 |   |
| Net Income (loss)                      |       | $                                              | 176,846    |                                            | $          | (884,136 | ) | $ | (707,290 | ) | $ | 669,600 |   | $ | (384,076 | ) | $ | 285,524 |   |
|                                   |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per share:             |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Basic & diluted               |       | $                                              | 0.02       |                                            | (0.08      | ) | $ | (0.06 | ) | $ | 0.06 |   | $ | (0.03 | ) | $ | 0.03 |   |

 

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

 

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

 

*Forward Looking Statements*

 

 Some of the statements made constitute “forward-lookingstatements”. For example, statements included in this prospectus regarding ourfinancial position, business strategy and other plans and objectives for futureoperations, and assumptions and predictions about future demand for ourservices and products, supply, costs, marketing and pricing factors are allforward-looking statements. When we use words like “intend,” “anticipate,” “believe,”“estimate,” “plan” or “expect,” we are making forward- lookingstatements.  These forward-looking statements are subject to risks anduncertainties and other factors that may cause our actual results, performanceor achievements to be materially different from the results, performance orachievements expressed or implied by the forward-looking statements. You shouldnot unduly rely on these statements. Forward-looking statements involveassumptions and describe our plans, strategies, and expectations. This reportcontains forward-looking statements that address, among other things,

 

•ourbusiness and financing plans;

•regulatoryenvironments in which we operate or plan to operate; and

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

 

Factors, risks, and uncertainties that could cause actual results todiffer materially from those in the forward-looking statements (CautionaryStatements) include, among others,

 

•ourability to raise capital;

•ourability to continue distributing our products;

•ourability to provide our products at competitive rates;

•ourability to execute our business strategy in a competitive environment;

•our degreeof financial leverage;

•regulatoryconsiderations and risks related to international economics,

•risksrelated to market acceptance and demand for our products and services;

•ourdependence on third party suppliers;

•the impactof competitive services; and

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

 

We believe that the assumptions and expectations reflected in this prospectus are reasonable, based on informationavailable to us in this report.  However, we cannot assure anyone thatthese assumptions and expectations will prove to have been correct or that wewill take any action that we may presently be planning. We assume no obligationto update forward-looking statements or reflect unanticipated future events.

 

**General**

 

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

 

Effective October 1, 2002, we acquired International WholesaleTile, Inc. (IWT) through a share exchange and IWT became our wholly ownedsubsidiary.  We issued nine million shares of our common stock in exchangefor all of the IWT shares.  Tesoro has three additional wholly ownedsubsidiaries.  The first is IWT Tesoro International, Ltd., which was createdto own and manage assets relating to any of the Company’s potential futureoverseas activities.  The second is IWT Transport, Inc., organized tohandle our domestic freight operations.  The Tile Club, Inc.,organized in 2004, was organized to acquire licensing, manufacturing anddistribution rights for high-end designer and artistic based decorative tiles.

 

**Company Overview**

 

The Company is a value added distributor of imported ceramic, porcelainand stone flooring and decorative wall tile.  Our warehousing anddistribution center contains over 220,000 square feet of storage space and overseven million square feet of product ready for immediate shipment to ourcustomers.  The company’s primary strategy is to be a reliable suppliernot a competitor to its customers.

 

Management believes that the critical success factors to the Company’sbusiness are its ability to:

 

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•     Maintain relationships withand serve a growing base of independent dealers, distributors and wholesalersby providing adequate stocks of in demand product at reasonable and competitiveprices

•     Stay ahead of the trends incolor, texture and format the drive demand for our fashion based products

•     Make the correct investmentsin product inventories, relationships with suppliers and logistics supportservices to ensure our continuing capability to meet our customer’sexpectations

 

Our primary source of revenue is the sale of hard flooring and wallcovering materials and our primary costs relate to the acquisition, sales anddelivery of those products.  While sales are made throughout the UnitedStates, to date the majority of our sales are in the southeastern quadrant ofthe country.  The primary sources of working capital are a $ 17 million(US) revolving line of credit from a division of a large US commercial bank,our suppliers who extend us terms and our stockholders equity.

 

On December 17, 2003 we began trading our stock on the OTCBB underthe symbol IWTT.  During 2004, we expect to raise additional equitythrough the public market.  Any new equity raised will be used tostrengthen our balance sheet and to provide capital for continued growth.

 

During the quarter ended June 30, 2004, the Company continued toexpand its distribution channels beyond its traditional small and mid sizedfloor covering dealers in the southeastern United States. These new channelsincluded larger regional distributors outside the southeastern United States,home center stores and floor-covering dealers that focus on the builders of newconstruction units.

 

*Results ofOperations for the Quarters ending June 30, 2002, 2003 and 2004.*

 

The following discussion and analysis should be read in conjunctionwith the financial statements and notes thereto that appear elsewhere in thisdocument. The table below sets forth certain operating data as, with grossmargins as a percentage of total revenue for the periods indicated.

 
| ** **               | ** ** | **Quarter Ending June 30,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
|                     |       |                             |       |   |   |   |   |
| Revenues                 |       | $                                | 6,803,466  |   | $ | 8,477,575 |   | $ | 11,585,016 |   |
| Cost of  Goods Sold      |       | 4,193,483                        |       | 5,011,999 |   | 7,144,406 |   |
| Gross Margin             |       | 2,609,983                        |       | 3,465,576 |   | 4,440,610 |   |
| Gross Margin  Percentage |       | 38.36                            | %          | 40.87 | % | 38.33 | % |
| Operating  Expenses      |       | $                                | 2,028,069  |   | $ | 3,067,820 |   | $ | 4,392,108 |   |

 

*Quarter ended June 30, 2004 Compared toQuarter Ended June 30, 2003*

 

Sales for the quarter ended June 30, 2004 were $11,585,016, a 37%increase over sales for the quarter ended June 30, 2003. This growthfollows a 25% growth from 2002 to 2003. We are a relatively small player in agrowing market. We are entering new markets and adding new products; therefore,we expect to be able to grow faster than the market as a whole for the nextseveral years. Our share of this market is approximately 1.5%.  The tilemarket in the United States is approximately $2.5 billion and is growingat a seven to ten percent rate.

 

As we grow, we have been able to purchase product at lower prices andhave consequently lowered our cost of goods to 60% for the year ended December 2003,from 60% in 2002 and 64% in 2001.  While there are certainly finite limitsto improving our gross margin percentage, it is imperative that we maintainthese ratios as we grow.  The gross margin for the quarter ended June 30,2004 was $4,440,610, a 28% increase over gross margin for the quarter ended June 30,2003.  This increase in gross margin resulted primarily from the increasein sales, somewhat offset by a slight increase in our cost of goods to 61.5%ending June 30, 2004.

 

Our operating expenses for the quarter ended June 30, 2004 haveincreased by $1,324,288 over the same period in 2003.  Our commissions andoutbound freight costs vary with sales and represent approximately $310,000 ofthis increase.  The balance of the cost increase relates to the expansionof our distribution channels to include home center stores and builder-baseddealers.   We currently maintain between ten and twelve millionsquare feet of product in our warehouse.  Our inventory turns in 2003 wereapproximately 1.5 times.  We expect to maintain turns during 2004 to2.0.  However, we cannot assure anyone that we will be successful inattaining these expectations. Availability of product is a key success factorin maintaining these turn ratios.

 

In May 2003, we commenced bulk sales of products, made exclusivelyfor IWT, to wholesale distributors throughout the United States.  Thesales of these products are made in full truckload or container load volumes,with some product being delivered directly to the customer from the factory(drop-shipped).  The gross margin on these sales could be lower than ourtraditional business; however, we believe that the lower handling costs mayoffset the lost gross margin.  For the quarter ended June 30, 2004,truck bulk sales represented approximately 20% of our total sales.

 

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Another success factor for us is maintaining our position as adependable supplier not only to meet customer demand but also to ensure leadingedge design and technical superiority of the product.  We establishedInternational as our subsidiary, which is responsible for dealing with theglobal array of manufacturers that supply us with product.  We continue todevelop key relationships in Europe and South America and have begun to sellsome of these new items through IWT’s network of dealers and distributors.

 

**Liquidity and Capital Resources**

 

We had cash balances of $661,144 and $867,361 at the end of June 30,2004 and December 31, 2003, respectively.  We have financed ourgrowth with new equity capital and increased borrowings from our commerciallender.  Thus, we have not generated positive cash flows from operationsduring the quarter ended June 30, 2004.  Tesoro expects to continueto grow and make use of outside capital for the foreseeable future.  Wecannot assure anyone; however, that we will be able to obtain outside capitalor if we do, that it will be on terms beneficial us.

 

During the six months ended June 30, 2004, Tesoro issued 45,500shares of common stock in connection with warrants exercised at $3.25 per sharefor a total of $147,875.  The purchasers were accredited investors, wereprovided with or had access to, information about the Company, includingfinancial information.  The transaction was exempt pursuant to Section 4(2) ofthe Securities Act.

 

On May 26, 2004, Tesoro issued 10,000 shares of common stock to anew outside member of our Board of Directors at a price of $4.25 per share,which was the then fair market value, for a total of $42,500.  On the samedate, we also issued 2,000 shares of common stock to a consultant a price of$4.25 per share for a total of $8,500.  Both the shares issued to theoutside director and the consultant was pursuant to Tesoro’s Stock IncentivePlan.

 

The balance due at June 30, 2004 to our commercial lender for theuse of the revolving line of credit was approximately $12.4 million.  Theloan and security agreement contains certain covenants, which include financialcovenants that require us to maintain a certain leverage ratio, a requiredminimum fixed charge coverage ratio, and a certain inventory turnoverratio.  At June 30, 2004, we are in compliance with the covenants setforth in our agreement with the financial institution.

 

**Critical Accounting Policies**

 

Please refer to the Notes to the Financial Statements regarding Tesoro’sForm 10-KSB for the fiscal year ended December 31, 2003 and filedwith the Securities and Exchange Commission on March 30, 2004.

 

**Segment Information**

 

We manage our operations in one segment and all revenue is derived fromcustomers in the United States.

 

**ITEM 3 – QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

**Quantitative and Qualitative Disclosures About Market Risk**

 

 The Company is exposed to market risk from changes in interestrates and foreign currency exchange rates since it funds its operations throughshort-term investments and has business transactions in Euros. A summary of theCompany’s market risk exposures is presented below.

 

*Interest Rate Risk*

 

Tesoro has fixed income investments consisting of cash equivalents andshort-term investments, which may be affected by changes in market interestrates. The Company does not use derivative financial instruments in itsinvestment portfolio. The Company places its cash equivalents and short-terminvestments with high-quality financial institutions, limits the amount ofcredit exposure to any one institution and has established investmentguidelines relative to diversification and maturities designed to maintainsafety and liquidity. Investments are reported at amortized cost, whichapproximates fair value.

 

*Foreign Currency Risk*

 

We currently purchase our products from foreign manufacturers in U.S.dollars.  Our fund transfers are relatively large.  The Office of theComptroller of the Currency (USOCC) monitors these activities.  Should theEURO continue to strengthen against the US dollar, we could see an increase inour cost of product that could, in time, pass on to our customers andtherefore have a detrimental impact on our profitability.  Our competitorsrely as heavily on imported product as we do.  Therefore, we do not seeany change in the

 

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competitivelandscape for ceramic tile as a result of the strength of the EURO. Tesoro does not currently hedge against the risk of exchange rate fluctuations.

 

**ITEM 4 – CONTROLS ANDPROCEDURES**

 

*Disclosure Controls and Procedures*

 

(a)                                  Withinthe 90 days prior to the date of this report, we carried out an evaluation,under the supervision and with the participation of management, including ourprincipal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14.  Based upon 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.

 

(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**

 

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

 

We are not a party to any material pending legal proceedings and, tothe best of our knowledge; no such action by or against us is contemplated,threatened or expected.

 

**ITEM 2:****                            CHANGESIN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OFEQUITY SECURITIES.**

 

During the six months ended June 20, 2004, Tesoro issued 45,500shares of common stock in connection with warrants exercised at $3.25 per sharefor a total of $147,875.  The purchasers were accredited investors, wereprovided with or had access to, information about the Company, includingfinancial information.  The transaction was exempt pursuant to Section 4(2) ofthe Securities Act.

 

On February 17, 2004, Tesoro issued 15,000 shares of common stockvalued at $5.99 per share, based on the trading price of the shares on the dateissued, for a total of  $89,850 to a consultant.

 

On May 26, 2004, Tesoro issued 10,000 shares of common stock to anew outside member of our Board of Directors at a price of $4.25 per share,which was the then fair market value, for a total of $42,500.  On the samedate, we also issued 2,000 shares of common stock to a consultant at a price of$4.25 per share for a total of $8,500.  Both the shares issued to theoutside director and the consultant were pursuant toTesoro’s Stock Incentive Plan.

 

The balance due at June 30, 2004 to our commercial lender for theuse of the revolving line of credit was approximately $12.4 million.  Theloan and security agreement contains certain covenants, which include financialcovenants that require us to maintain a certain leverage ratio, a requiredminimum fixed charge coverage ratio, and a certain inventory turnoverratio.  At June 30, 2004, we are in compliance with the covenants setforth in our agreement with the financial institution.

 

**ITEM 3:****                            DEFAULTUPON SENIOR SECURITIES.**

 

Not applicable

 

**ITEM 4:****                            SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On June 19, 2004, Tesoro held its Annual Stockholders Meeting. An information statement was provided to each of Tesoro’s stockholders thatincluded the proposal to elect the slate of directors proposed by Tesoro’sNominating and Governance Committee.  A majority of Tesoro stockholdershad previously approved the nominations.

 

**ITEM 5:****                            OTHERINFORMATION**

 

Not applicable

 

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**ITEM6:****                            EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                             |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Articles of Incorporation (filed as an Exhibit to  the Company’s Form 10-SB, filed with the Securities and Exchange  Commission on August 7, 2000)                                                                                                                      |
| 3.1.1               |       | Articles of Amendment to Articles of  Incorporation dated September 23, 2002 (filed as an Exhibit to the  Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on October 1, 2002)                                                     |
| 3.2.1               |       | Bylaws (filed as an Exhibit to the  Company’s Form 10-SB, filed with the Securities and Exchange Commission  on August 7, 2000)                                                                                                                                         |
| 3.2.2               |       | Amended and Restated Bylaws (filed as an Exhibit to  the Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2003)                                                                                                          |
| 3.3.1               |       | Specimen Stock Certificate (filed as an Exhibit to  the Company’s Form 10-SB, filed with the Securities and Exchange  Commission on August 7, 2000)                                                                                                                     |
| 3.3.2               |       | Audit Committee Charter (filed as an Exhibit to  the Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2003)                                                                                                              |
| 3.3.3               |       | Compensation Committee Charter (filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                       |
| 3.3.4               |       | Nominating And Governing Committee Charter  (filed as an Exhibit to the Company’s Report on Form 8-K, filed  with the Securities and Exchange Commission on February 4, 2003)                                                                                           |
| 3.4.1               |       | Code of Ethics for Senior Financial  Officers (filed as an Exhibit to the Company’s Registration Statement,  filed with the Securities and Exchange Commission on April 11, 2003)                                                                                            |
| 4.1.1               |       | Form of Warrant Agreement (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                          |
| 4.1.2               |       | Form of Stock Certificate (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                          |
| 4.1.3               |       | Form of Lock-Up Agreement (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                          |
| 10.1                |       | Agreement With Peter Goss (filed as an Exhibit to  the Company’s Form 10-SB, filed with the Securities and Exchange  Commission on August 7, 2000)                                                                                                                      |
| 10.2                |       | Stockholders Agreement (filed as an Exhibit to  the Company’s Form 10-SB, filed with the Securities and Exchange  Commission on August 7, 2000)                                                                                                                         |
| 10.3                |       | 2001 Ponca Acquisition Corporation Stock  Incentive Plan. (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2002)                                                                           |
| 10.4                |       | Employment Agreement Between Ponca  Acquisition Corporation And Henry Jr. Boucher, Jr. Dated As Of December 29,  2002 (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2002)     |
| 10.5                |       | Memorandum Of Understanding Between Ponca  Acquisition Corporation And The Stockholders Of International Wholesale Tile, Inc.  (filed as an Exhibit to the Company’s Report on Form 8-K, filed  with the Securities and Exchange Commission on September 11, 2002) |
| 10.6                |       | Stock Purchase Agreement Among The  Stockholders Of International Wholesale Tile, Inc., and IWT Tesoro Corporation,  Effective October 1, 2002 (filed as an Exhibit on Form 8-K,  filed with the Securities and Exhibit Commission on October 15,  2002).     |
| 10.7                |       | Termination Of Stockholders Agreement  (filed as an Exhibit to the Company’s Report on Form 8-K/A, filed  with the Securities and Exchange Commission on February 4, 2003)                                                                                              |
| 10.8                |       | Repurchase Agreement (filed as an Exhibit to  the Company’s Report on Form 8-K/A, filed with the Securities and  Exchange Commission on February 4, 2003)                                                                                                               |
| 10.9                |       | Form of Indemnity Agreement (filed as  an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                        |
| 10.00               |       | Employment Agreement between International  Wholesale Tile, Inc. and Forrest P. Jordan (exhibits omitted) (filed as  an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on May 21, 2003)                            |
| 10.11               |       | Employment Agreement between International  Wholesale Tile, Inc. and Paul F. Boucher (this document is omitted as it  is substantially similar to Forrest P. Jordan’s Employment Agreement with the  exception of the employee’s name and address)                           |
| 10.12               |       | Employment Agreement between International  Wholesale Tile, Inc. and Grey Perna (this document is omitted as it is  substantially similar to Forrest P. Jordan’s Employment Agreement with the  exception of the employee’s name                                             |

 

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|   |   | and address)                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13  |   | Subordination Agreement between Congress  Financial Corporation (Florida) and Forrest P. Jordan (filed as an Exhibit to  the Company’s Registration Statement, filed with the Securities and Exchange  Commission on May 21, 2003)                                                                                                                                                                                  |
| 10.14  |   | Subordination Agreement between Congress  Financial Corporation (Florida) and Paul F. Boucher (this document is omitted  as it is substantially similar to Forrest P. Jordan’s Subordination Agreement  with the exception of the employee’s name and address)                                                                                                                                                           |
| 10.15  |   | Subordination Agreement between Congress  Financial Corporation (Florida) and Grey Perna (this document is omitted as  it is substantially similar to Forrest P. Jordan’s Subordination Agreement  with the exception of the employee’s name and address)                                                                                                                                                                |
| 10.16  |   | Termination of Repurchase Agreement dated June 26,  2003 between IWT Tesoro Corporation and Forrest P. Jordan (filed as an Exhibit to  the Company’s Form 8-K, filed with the Securities and Exchange  Commission on June 26, 2003).                                                                                                                                                                      |
| 10.17  |   | Termination of Repurchase Agreement dated June 26,  2003 between IWT Tesoro Corporation and Paul F. Boucher (this document is  omitted as it is substantially similar to Forrest P. Jordan’s Termination of  Repurchase Agreement with the exception of the name and address) (filed as an  Exhibit to the Company’s Form 8-K, filed with the Securities and  Exchange Commission on June 26, 2003). |
| 10.18  |   | Termination of Repurchase Agreement dated June 26,  2003 between IWT Tesoro Corporation and Grey Perna (this document is omitted  as it is substantially similar to Forrest P. Jordan’s Termination of  Repurchase Agreement with the exception of the name and address) (filed as an  Exhibit to the Company’s Form 8-K, filed with the Securities and  Exchange Commission on June 26, 2003).      |
| 16.2   |   | Letter regarding change in Certifying  Accountants (filed as an Exhibit to the Company’s Report on Form 8-K/A  filed with the Securities and Exchange Commission on March 2, 2004).                                                                                                                                                                                                                            |
| 21.    |   | Subsidiaries of Registrant (filed as an Exhibit to  the Company’s Registration Statement, filed with the Securities and Exchange  Commission on April 11, 2003)                                                                                                                                                                                                                                                     |
| 31.1   |   | Certification of Henry J. Boucher, Jr.,  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act.*                                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Certification of Forrest P. Jordan, Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification of Henry J. Boucher, Jr.,  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act.*                                                                                                                                                                                                                                                                                                    |
| 32.2   |   | Certification of Forrest P. Jordan, Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*                                                                                                                                                                                                                                                                                                              |
| 99.1   |   | MRS’ Letter To The Securities And Exchange  Commission. (filed as an Exhibit to the Company’s Report on Form 8-K/A,  filed with the Securities and Exchange Commission on October 8, 2002)                                                                                                                                                                                                           |
| 99.2   |   | Letter from Peter Goss regarding fiscal  year end (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on October 15, 2002)                                                                                                                                                                                                                            |

 

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*                                         Filedherewith.

 

(b)                                 Reportson Form 8-K

 

Form 8-K, filed on April 1, 2004, regarding the resignationof a director and the appointment of a new director.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|              | IWT TESORO CORPORATION                     |
|-------------------|--------------------------------------------|
|              |                                       |
|              |                                       |
| September 2, 2004 | /s/ Henry J. Boucher, Jr.             |   |
|              | Henry J. Boucher, Jr., President      |
|              |                                       |
| September 2, 2004 | /s/ Forrest P. Jordan                      |   |
|              | Forrest P. Jordan, Chief Financial Officer |

 

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