**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB/A**

**(AmendmentNo. 3)**

**(MarkOne)**

 

**ý****       ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF****1934**

** **

**Forthe period from January 1, 2003 to March 31, 2003**

 

**o****        TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**CommissionFile No. 0-31267**

 

**IWTTESORO CORPORATION**

(Exact Name ofSmall Business Issuer in Its Charter)

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

 

**5Wicks Lane, Wilton, CT 06897**

(Address ofprincipal executive offices)

** **

**(203)858-9951**

(Issuer’sTelephone Number, including area code)

 

 

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

 

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

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

 

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

ýYes                                    oNo

 

State the number ofshares outstanding of each of the issuer’s class of common equity, as of May 9.2003:  11,200,502 shares.

 

Transitional SmallBusiness Disclosure Format:     oYes              ýNo

 

 

----

 

EXPLANATORY NOTE

 

Tesoro has restated theconsolidated balance sheets as of March 31, 2003 and December 31,2002, and the consolidated statements of operations, stockholders’ equity andcash flows for the three month ended March 31, 2003 and 2002,respectively.  In particular, Managementdetermined that Tesoro had been incorrectly calculation the accruals for salescommissions. Management revised this calculation and determined that accruedexpenses were understated by approximately $295,000 as of March 31,2003.  Additionally, managementreassessed its methodology for accounting for sample and display boards anddetermined that this promotional merchandise should have been expensed whendistributed rather than capitalized and depreciated. The adjustments resultingfrom the restatement decreased net income by approximately $148,000 for thethree months ended March 31, 2003. This change also reduced property andequipment as of March 31, 2003 by approximately $2,371,000.  In connection with the restatements foraccrued expenses and sample and display boards described above, the related taxeffect was recorded resulting in a gross deferred tax asset for the three monthended March 31, 2003 of approximately $13,000.  Finally, as part of the recapitalizationtransaction of IWT effective October 1, 2002 (see Note 1), the Company andeach of the three stockholders of International Wholesale Tile, Inc.entered into a repurchase agreement to commence on January 1, 2003. Themaximum number of redeemable shares under the repurchase agreement was 450,000.The transaction was accounted for by reducing additional paid in capital to theextent a balance existed with the remaining portion of the transaction appliedto accumulated deficit as of December 31, 2002.

 

Other than the financial statementsand related notes, and Management’s Discussion and Analysis set forth in Item 1and 2 of this periodic report, which takes into account the effect of therestatement, all other information is as described in Amendment No. 2 tothe 10-QSB for the year ended March 31, 2003, filed with the Securitiesand Exchange Commission on June 27, 2003.

 

PART I

 

ITEM1:      FINANCIAL STATEMENTS

 

**TABLEOF CONTENTS**

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

 

1

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                        | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                        | ** ** | **2003**        | ** ** | **2002**         | ** ** |
| ** **                                                                                                        | ** ** | **(Restated)**  | ** ** | **(Restated)**   | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| ASSETS                                                                                                            |       |            |       |             |       |
| Current Assets:                                                                                                   |       |            |       |             |       |
| Cash                                                                                                              |       | $               | 664,358    |             | $          | 574,046 |   |
| Accounts  receivable, net allowance for doubtful accounts and returns                                             |       | 3,486,903       |       | 2,875,532        |       |
| Inventories                                                                                                       |       | 8,496,466       |       | 6,047,876        |       |
| Subscription  receivable                                                                                          |       | 130,000         |       | —           |       |
| Prepaid expenses                                                                                                  |       | 325,587         |       | 286,820          |       |
| Deferred tax  asset                                                                                               |       | 610,290         |       | 597,196          |       |
| Total current  assets                                                                                             |       | 13,713,604      |       | 10,381,470       |       |
|                                                                                                              |       |            |       |             |       |
| Property and  equipment, net                                                                                      |       | 988,140         |       | 489,502          |       |
|                                                                                                              |       |            |       |             |       |
| Other assets                                                                                                      |       | 192,974         |       | 191,725          |       |
|                                                                                                              |       | $               | 14,894,718 |             | $          | 11,062,697 |   |
|                                                                                                              |       |            |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                         |       |            |       |             |       |
|                                                                                                              |       |            |       |             |       |
| Current  Liabilities:                                                                                             |       |            |       |             |       |
| Accounts payable                                                                                                  |       | $               | 7,726,994  |             | $          | 5,403,816 |   |
| Accrued expenses                                                                                                  |       | 705,320         |       | 354,863          |       |
| Current portion  of capital lease obligations                                                                     |       | 54,709          |       | 47,222           |       |
| Current portion  of notes payable, other                                                                          |       | 49,850          |       | 48,780           |       |
| Total current  liabilities                                                                                        |       | 8,536,873       |       | 5,854,681        |       |
|                                                                                                              |       |            |       |             |       |
| Long-Term Debt:                                                                                                   |       |            |       |             |       |
| Note payable,  revolving line of credit                                                                           |       | 5,591,361       |       | 4,864,778        |       |
| Capital lease  obligations                                                                                        |       | 138,323         |       | 108,438          |       |
| Subordinated  notes payable, stockholders                                                                         |       | 423,662         |       | 448,712          |       |
| Notes payable,  other                                                                                             |       | 51,911          |       | 64,872           |       |
| Total long-term  debt                                                                                             |       | 6,205,257       |       | 5,486,800        |       |
| Total  liabilities                                                                                                |       | 14,742,130      |       | 11,341,481       |       |
|                                                                                                              |       |            |       |             |       |
| Redeemable  common stock (450,000 shares issued and outstanding)                                                  |       | 1,073,160       |       | 1,073,160        |       |
|                                                                                                              |       |            |       |             |       |
| Stockholders’  Equity:                                                                                       |       |            |       |             |       |
| Preferred stock,  $0.001 par value, 25,000,000 authorized; none issued                                            |       | —          |       | —           |       |
| Common stock,  $0.001 par value, 100 million shares authorized; 10,750,502 and 10,587,834  issued and outstanding |       | 10,750          |       | 10,588           |       |
| Additional paid  in capital                                                                                       |       | 483,198         |       | —           |       |
| Accumulated  deficit                                                                                              |       | (1,414,520      | )          | (1,362,532       | )          |
|                                                                                                              |       | (920,572        | )          | (1,351,944       | )          |
|                                                                                                              |       | $               | 14,894,718 |             | $          | 11,062,697 |   |

 

See notes tofinancial statements.

 

2

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** **

**IWTTESORO CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATEDSTATEMENTS OF OPERATIONS 

(Unaudited)

 
| ** **                                       | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **March 31,**          | ** ** |
| ** **                                       | ** ** | **2003**               | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(Restated)**         | ** ** | **(Restated)** | ** ** |
| Revenue                                          |       |                   |       |   |   |
|                                             |       |                   |       |   |   |
| Sales, net of  discounts and returns             |       | $                      | 6,713,810  |   | $ | 6,014,020 |   |
| Cost of goods  sold                              |       | 4,079,608              |       | 3,612,316 |   |
|                                             |       |                   |       |   |   |
| Gross profit                                     |       | 2,634,202              |       | 2,401,704 |   |
|                                             |       |                   |       |   |   |
| Expenses                                         |       |                   |       |   |   |
| Payroll                                          |       | 1,177,642              |       | 771,201 |   |
| Delivery                                         |       | 336,045                |       | 271,518 |   |
| General and  administrative                      |       | 210,016                |       | 79,045 |   |
| Lease expense                                    |       | 134,380                |       | 114,716 |   |
| Depreciation and  amortization                   |       | 40,550                 |       | 29,705 |   |
| Insurance                                        |       | 74,828                 |       | 82,351 |   |
| Repairs and  maintenance                         |       | 82,371                 |       | 34,988 |   |
| Sales expenses                                   |       | 114,868                |       | 39,592 |   |
| Advertising                                      |       | 265,567                |       | 175,232 |   |
| Professional  fees                               |       | 124,843                |       | 20,036 |   |
| Travel and  entertainment                        |       | 54,460                 |       | 33,625 |   |
| Bad debts                                        |       | 3,247                  |       | — |   |
|                                             |       | 2,618,817              |       | 1,652,009 |   |
| Income from  operations                          |       | 15,385                 |       | 749,695 |   |
|                                             |       |                   |       |   |   |
| Other  income/(expenses)                         |       |                   |       |   |   |
| Interest expense                                 |       | (75,949                | )          | (74,631 | ) |
| Other income                                     |       | 835                    |       | 709 |   |
| Gain (loss) on  disposal                         |       | (5,352                 | )          | 5,990 |   |
|                                             |       | (80,466                | )          | (67,932 | ) |
|                                             |       |                   |       |   |   |
| Net income  before taxes                         |       | (65,081                | )          | 681,763 |   |
|                                             |       |                   |       |   |   |
| Income tax  benefit                              |       | 13,093                 |       | — |   |
|                                             |       |                   |       |   |   |
| Net income  (Loss)                               |       | $                      | (51,988    | ) | $ | 681,763 |   |
|                                             |       |                   |       |   |   |
| Earnings per  common share - Basic & diluted |       | $                      | (0.00      | ) | $ | 0.06 |   |
|                                             |       |                   |       |   |   |
| Weighted Average  Common Shares Outstanding:     |       |                   |       |   |   |
| Basic and  diluted                               |       | 11,081,516             |       | 9,000,000 |   |

 

3

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

See notes tofinancial statements.

 

4

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 
| ** **                                                                 | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                                                 | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Earnings**   | ** ** | ** **      | ** ** |
| ** **                                                                 | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
|                                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Balance,  December 31, 2002, as restated                                   |       | 10,587,834       |       | $           | 10,588     |           | $          | —          |       | $          | (1,362,532 | ) | $ | (1,351,944 | ) |
|                                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Issuance of  shares - private offering                                     |       | 136,668          |       | 136         |       | 409,864        |       | —          |       | 410,000    |       |
| Exercise of  warrants                                                      |       | 10,000           |       | 10          |       | 29,990         |       | —          |       | 30,000     |       |
|                                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Issuance of shares  to employees and directors for services rendered (SIP) |       | 16,000           |       | 16          |       | 43,344         |       | —          |       | 43,360     |       |
|                                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Net loss, three  months ended March 21, 3003                               |       | —           |       | —      |       | —         |       | (51,988         | )          | (51,988    | )          |
|                                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Balance, March  31, 2003, as restated                                      |       | 10,750,502       |       | $           | 10,750     |           | $          | 483,198         |       | $          | (1,414,520 | ) | $ | (920,572 | ) |

 

See notes tofinancial statements.

 

5

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 

(Unaudited)

 
| ** **                                                                                           | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                           | ** ** | **March 31,**          | ** ** |
| ** **                                                                                           | ** ** | **2003**               | ** ** | **2002** | ** ** |
| ** **                                                                                           | ** ** | **(Restated)**         | ** ** | **(Restated)** | ** ** |
|                                                                                                 |       |                   |       |   |   |
| Cash flows from  operating activities:                                                               |       |                   |       |   |   |
| Net income  (loss)                                                                                   |       | $                      | (51,988    | ) | $ | 681,763 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                                       |       | 40,550                 |       | 29,705 |   |
| Deferred income  taxes                                                                               |       | (13,094                | )          | — |   |
| Common stock  issued for services and compensation                                                   |       | 43,360                 |       | — |   |
| Provision for  doubtful accounts and reserve for returns                                             |       | 24,202                 |       | — |   |
| (Gain) loss on  disposal of property and equipment                                                   |       | 5,352                  |       | (5,990 | ) |
| Changes in  operating assets and liabilities:                                                        |       |                   |       |   |   |
| (Increase)  Decrease in:                                                                             |       |                   |       |   |   |
| Accounts  receivable                                                                                 |       | (635,573               | )          | (785,763 | ) |
| Inventories                                                                                          |       | (2,448,590             | )          | 1,290,938 |   |
| Prepaid expenses  and other assets                                                                   |       | (158,886               | )          | (28,642 | ) |
| Increase in:                                                                                         |       |                   |       |   |   |
| Accounts payable  and accrued expenses                                                               |       | 2,651,145              |       | (945,933 | ) |
| Other  Liabilities                                                                                   |       | 15,200                 |       | 5,625 |   |
| Net cash  provided by (used in) operating activities                                                 |       | (528,322               | )          | 241,703 |   |
|                                                                                                 |       |                   |       |   |   |
| Cash flows from  investing activities:                                                               |       |                   |       |   |   |
| Acquisitions of  property and equipment                                                              |       | (371,267               | )          | (3,946 | ) |
| Proceeds from  sale of equipment                                                                     |       | —                 |       | 11,000 |   |
| Net cash used in  investing activities                                                               |       | (371,267               | )          | 7,054 |   |
|                                                                                                 |       |                   |       |   |   |
| Cash flows from  financing activities:                                                               |       |                   |       |   |   |
| Proceeds from  revolving line of credit                                                              |       | 6,788,000              |       | 5,350,000 |   |
| Payments on  revolving line of credit                                                                |       | (6,060,817             | )          | (5,107,797 | ) |
| Proceeds from  issuance of stock                                                                     |       | 440,000                |       | — |   |
| Collection on  notes receivable arising from sale of stock                                           |       | (130,000               | )          | — |   |
| Payments on  capital leases and notes payable                                                        |       | (22,232                | )          | (10,287 | ) |
| Repayment of  related party loan                                                                     |       | (25,050                | )          | — |   |
| Distribution to  stockholders                                                                        |       | —                 |       | (531,458 | ) |
| Proceeds from  related party note                                                                    |       | —                 |       | 10,650 |   |
| Net cash  provided by (used in) financing activities                                                 |       | 989,901                |       | (288,892 | ) |
|                                                                                                 |       |                   |       |   |   |
| Net Increase  (Decrease) in Cash                                                                     |       | 90,312                 |       | (40,135 | ) |
|                                                                                                 |       |                   |       |   |   |
| Cash, Beginning                                                                                      |       | 574,046                |       | 402,500 |   |
| Cash, Ending                                                                                         |       | $                      | 664,358    |   | $ | 362,365 |   |
|                                                                                                 |       |                   |       |   |   |
| Cash Paid  (Received) During the Period for:                                                         |       |                   |       |   |   |
| Interest expense                                                                                     |       | $                      | 75,949     |   | $ | 74,631 |   |

 

See notes tofinancial statements.

 

6

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**THREEMONTHS ENDED MARCH 31, 2003**

 

**NOTE 1                 BASIS OF PRESENTATION ANDPRINCIPLES OF CONSOLIDATION**

 

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

 

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

 

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

 

In the opinion ofmanagement, the unaudited financial statements include all necessaryadjustments (consisting of normal, recurring accruals) for a fair presentationof the financial position, results of operations and cash flow for the interimperiods presented.  Preparing financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses.  Actual results may differ from theseestimates.  Interim results are not necessarily indicative of results fora full year.  The results of operations for the three-month period ended March 31,2003 are not necessarily indicative of operating results to be expected for afull year.

 

**NOTE 2                 NATURE OF OPERATIONS ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Stock Options

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

 

7

----

 

No options were grantedduring the three months ended March 31, 2003 and 2002.

 

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

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

 

Accounting Pronouncements

In December 2002,the FASB issued SFAS No. 148,*Accounting for Stock-Based Compensation – Transition and Disclosure,*which amended SFAS No. 123,*Accountingfor Stock-Based Compensation.*  The new standard providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS No. 123to require prominent disclosures in the annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used in reported results.  This statement iseffective for financial statements for fiscal years ending after December 15,2002.  In compliance with SFAS No. 148, the Company has elected tocontinue to follow the intrinsic value method in accounting for its stock-basedemployee compensation arrangement as defined by APB No. 25.

 

Earnings per Share

Basic earnings per sharefor each year is computed by dividing income for the year by the weightedaverage number of common shares outstanding during the year.  Dilutedearnings per share include the effects of common stock equivalents to theextent they are dilutive. At March 31, 2003 all common stock equivalentswere antidilutive and therefore diluted earnings per share equaled basicearnings per share.

 

Basic and dilutedweighted average number of shares outstanding at March 31st is as follows:

 

 
| ** **                                                       | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------|------------|
|                                                             |       |       |       |      |       |
| Basic and  diluted weighted average number of shares outstanding |       | 11,081,516 |       | 9,000,000 |       |

 

**NOTE 3                 CONCENTRATION OF CREDIT RISK**

 

Financial instrumentsthat potentially subject the Company to credit risk include cash on depositwith two financial institutions amounting to $664,358 at March 31, 2003,which was insured for up to $100,000 per financial institution by the U.S.Federal Deposit Insurance Corporation.

 

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

 

8

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**NOTE 4                 ACCOUNTS RECEIVABLE**

 

Accounts receivableconsisted of the following:

 
| ** **                                        | ** ** | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Accounts  receivable                              |       | $                        | 3,547,858  |                        | $          | 2,958,777 |   |
| Less allowance  for doubtful accounts and returns |       | (60,955                  | )          | (83,245                     | )          |
|                                              |       |                     |       |                        |       |
|                                              |       | $                        | 3,486,903  |                        | $          | 2,875,532 |   |

 

Bad debt expense for thethree months ended March 31, 2003 was $3,247. There was no bad debtexpense for the three months ended March 31, 2002.

 

**NOTE 5                 INVENTORY**

 

Inventory consisted ofthe following:

 
| ** **            | ** ** | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|-----------------------|------------|--------------------------|------------|-----------------------------|------------|
|                  |       |                     |       |                        |       |
| Tiles                 |       | $                        | 7,022,025  |                        | $          | 4,692,974 |   |
| Inventory in  transit |       | 1,474,441                |       | 1,354,902                   |       |
|                  |       |                     |       |                        |       |
|                  |       | $                        | 8,496,466  |                        | $          | 6,047,876 |   |

 

9

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**NOTE 6                 PROPERTY AND EQUIPMENT**

 

Property and equipmentconsisted of the following:

 
| ** **                     | ** ** | **March 31,  2003** | ** ** | **December 31,   2002** | ** ** | **Depreciation  Period  in Years** | ** ** |
|--------------------------------|------------|--------------------------|------------|------------------------------|------------|------------------------------------|------------|
|                           |       |                     |       |                         |       |                               |       |
| Furniture and  fixtures        |       | $                        | 199,585    |                         | $          | 89,238                             |       | 5-10 |   |
| Machinery and  equipment       |       | 381,347                  |       | 326,165                      |       | 7-10                               |       |
| Vehicles                       |       | 214,571                  |       | 207,071                      |       | 5                                  |       |
| Computer  equipment            |       | 274,176                  |       | 131,407                      |       | 3-5                                |       |
| Leasehold  improvements        |       | 314,740                  |       | 108,220                      |       | 7                                  |       |
|                           |       |                     |       |                         |       |                               |       |
|                           |       | 1,384,419                |       | 862,101                      |       |                               |       |
| Less accumulated  depreciation |       | (396,279                 | )          | (372,599                     | )          |                               |       |
|                           |       |                     |       |                         |       |                               |       |
|                           |       | $                        | 988,140    |                         | $          | 489,502                            |       |   |   |

 

Depreciation expense forthe three months ended March 31, 2003 and 2002 was $40,550 and $29,705,respectively. (See Note 9)

 

**NOTE 7                 NOTES PAYABLE**

 

The Company hasoutstanding notes payable as follows:

 
| ** **                              | ** ** | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                    |       |                     |       |                        |       |
| Notes Payable –  Related Parties   |       | $                        | 423,662    |                        | $          | 448,712 |   |
| Notes Payable –  Unrelated Parties |       | 101,761                  |       | 113,652                     |       |
|                                    |       |                     |       |                        |       |
|                                    |       | 525,423                  |       | 562,364                     |       |
| Less current  portion                   |       | (49,850                  | )          | (48,780                     | )          |
|                                    |       |                     |       |                        |       |
|                                    |       | $                        | 475,573    |                        | $          | 513,584 |   |

 

Interest expense relatedto these notes for the three months ended March 31, 2003 and 2002 was$13,531 and $16,209, respectively.

 

10

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

 
| 2003                        |   | $       | 36,889  |   |
|-----------------------------|--------|---------|---------|--------|
| 2004                        |   | 46,456  |    |
| 2005                        |   | 18,416  |    |
| 2006                        |   | 0       |    |
| 2007                        |   | 0       |    |
| 2008 &  thereafter |   | 423,662 |    |
|                        |   |    |    |
|                        |   | $       | 525,423 |   |

 

**NOTE 8                  LOAN PAYABLE**

 

On November 13,2002, the subsidiary (IWT) renegotiated its existing line of credit to increasethe amount of the maximum credit to $7,500,000.  The average interest ratewas about 5% for the three months ended March 31, 2003.  IWT owed$5,591,361 at March 31, 2003, and $4,864,778 at December 31, 2002against these revolving loans.

 

IWT is subject to anumber of restricted covenants under the debt agreement.  IWT is incompliance with all covenants during the three months ended March 31,2003.

 

Interest expense relatedto these loans for the three months ended March 31, 2003 and 2002 was$59,151 and $72,051, respectively.

 

**NOTE 9                 LEASES**

 

Capital Leases

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

 
| ** **                            | ** ** | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                  |       |                     |       |                        |       |
| Equipment                             |       | $                        | 316,855    |                        | $          | 266,672 |   |
| Less:   Accumulated depreciation |       | (66,332                  | )          | (58,724                     | )          |
|                                  |       |                     |       |                        |       |
| Net assets under  capital leases      |       | $                        | 250,523    |                        | $          | 207,948 |   |

 

11

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Operating Leases

The Company leases officeand warehouse space under a non-cancelable operating lease, which has aninitial term in excess of one year.  In May 2003, the Company tookoccupancy of a new warehouse and office facility in Palm City,Florida.   The Company also leases office space in Westport,Connecticut for its corporate headquarters.

 

At March 31, 2003,future minimum annual lease payments under operating and capital leases are asfollows:

 
| ** **           | ** ** | **Operating  Lease** | ** ** | **Capital  Leases** | ** ** |
|----------------------|------------|----------------------|------------|---------------------|------------|
|                 |       |                 |       |                |       |
| 2003                 |       | $                    | 454,427    |                | $          | 41,807 |   |
| 2004                 |       | 634,550              |       | 51,611              |       |
| 2005                 |       | 649,250              |       | 46,746              |       |
| 2006                 |       | 663,950              |       | 34,977              |       |
| 2007                 |       | 678,650              |       | 15,976              |       |
| 2008 and  thereafter |       | 3,866,100            |       | 1,915               |       |
|                 |       |                 |       |                |       |
|                 |       | $                    | 6,946,927  |                | $          | 193,032 |   |

 

Total lease expense underoperating leases was $134,380 and $114,716 for the three months ended March 31,2003 and 2002, respectively.

 

Total interest expenseunder capital leases was $2,146 and $2,350 for the three months ended March 31,2003 and 2002, respectively.

 

**NOTE 10               INCOME TAXES**

 

At March 31, 2003the Company had useable net operating loss carryforwards of approximately $610,290for income tax purposes, available to offset future taxable income of the U.S.entity, expiring through 2022.  No valuation allowance has been recordeddue to the certainty of the Company’s ability to generate future taxableincome.

 

12

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**NOTE 11               STOCKHOLDERS’ EQUITY**

 

The Articles ofIncorporation provide for the authorization of 25,000,000 shares of convertiblepreferred stock at $0.001, and 100,000,000 shares of common stock at $0.001 parvalue.  Each share of preferred stock is convertible into 1 share ofcommon stock.

 

Common Stock

During the three monthsended March 31, 2003, the Company issued 136,668 shares of common stockand 205,002 warrants for $3.00 per unit, or a total of $410,000, to accreditedinvestors pursuant to the private offering. (See Note 14)

 

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

 

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

 

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

 

**NOTE 12               STOCK OPTIONS AND COMPENSATIONPLAN**

 

Stock Compensation Plan

On December 27,2001, IWT Tesoro Corporation adopted the “Stock Incentive Plan.”  TheCompany’s Stock Incentive Plan provides that eligible employees, consultants,and affiliates may be granted shares of common stock.  Under the plan, theoptions granted are non-qualified stock options, incentive stock options, andrestricted stock.  The aggregate total common stock that may be issued is4,000,000 shares.  For the three months ended March 31, 2003, 16,000restricted shares were issued to employees and directors for servicesrendered.  The total number of restricted shares issued under the StockIncentive Plan is 140,500 through March 31, 2003.

 

In accordance with SFAS No. 123,for options issued to employees, the Company has elected to account for thesestock options under APB No. 25 and related interpretations in accountingfor its plan.  Accordingly, no compensation costs have been recognized foroptions issued under the plan as of December 31, 2002.  Had compensationcosts for the Company’s stock option been determined on the fair market valueat the grant dates for the options, consistent with Statement of AccountingStandards No. 123,*Accounting for StockBased Compensation* (Statement No. 123), the Company’s resultsof operations for the year ended December 31, 2002 would have changed tothe pro-forma amounts indicated.  No options were issued during the threemonths ended March 31, 2003.

 

13

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The following illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123.

 
| ** **                  | ** ** | ** **  | ** ** | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|-----------------------------|------------|-------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | ** **  | ** ** | **(Restated)**           | ** ** | **(Restated)**              | ** ** |
|                        |       |        |       |                     |       |                        |       |
| Net income  (loss)          |       | As reported |       | $                        | (51,988    | )                           | $          | 1,677,538 |   |
|                        |       | Pro-forma   |       | $                        | (51,988    | )                           | $          | 1,674,841 |   |
|                        |       |        |       |                     |       |                        |       |
| Net income per  share basic |       | As reported |       | $                        | 0.00       |                        | $          | 0.15 |   |
|                        |       | Pro-forma   |       | $                        | 0.00       |                        | $          | 0.15 |   |

 

**NOTE 13               ACQUISITION**

 

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

 

As part of thetransaction, the Company and each of the three shareholders of InternationalWholesale Tile, Inc. entered into a repurchase agreement by which thethree shareholders may sell a certain amount of the Company’s common stock backto the Company for a price based on an amount equal to 88% of the averagetrading price of the Company’s common stock so long as the stock is trading. The amount of stock is generally up to 25,000 shares for the first year, up to50,000 shares for the second year, and up to 75,000 shares for the third year.

 

**NOTE 14               PRIVATE OFFERING**

 

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

 

From adoption of thesubscription agreement on October 1, 2002 through March 31, 2003, theCompany sold 220,002 units for a total of $660,000.  In addition, 15,000warrants were exercised for a total of $45,000.

 

14

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**NOTE 15               SEGMENT INFORMATION**

 

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

 

**NOTE 16               NEW SUBSIDIARIES**

 

On January 8, 2003,the Company incorporated a subsidiary, IWT Tesoro International, Ltd.(ITIL).  This subsidiary was set up as a foreign subsidiary, to be basedin Bermuda to handle future operations of foreign subsidiaries. Organizational costs related to the incorporation totaling $8,311 werecapitalized and are being amortized over 5 years.  Amortization expensefor the three months ended March 31, 2003 was $416.

 

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

 

**NOTE 17               SUBSEQUENT EVENT**

 

On April 11, 2003,the Company filed a registration statement with the Securities and ExchangeCommission to register 250,000 units to be sold to the public at $5.50 perunit.  Each unit consists of one share of common stock and one warrant topurchase one share at $7.00 per share for three years.

 

**NOTE 18               RESTATEMENT**

 

The Company has restatedthe consolidated balance sheet as of March 31, 2003, and the consolidatedstatements of operations, stockholders’ equity and cash flows for the threemonths 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 accounts receivable and net sales wereoverstated by approximately $21,000 as of and for the period ended March 31,2003.

 

***Accrued Expenses***

 

Management determinedthat the Company had been incorrectly calculating the accruals for salescommissions. Management revised this calculation and determined that accruedexpenses were understated by approximately $295,000 as of March 31, 2003.

 

***Sample and Display Boards***

 

Management reassessed itsmethodology for accounting for sample and display boards and determined thatthis promotional merchandise should have been expensed when distributed ratherthan capitalized and depreciated. The adjustments resulting from therestatement decreased net income by approximately $148,000 for the three monthsended March 31, 2003. This change also reduced property and equipment asof March 31, 2003 by approximately $2,371,000.

 

***Deferred Taxes***

 

In connection with therestatements for accounts receivable, accrued expenses and sample and displayboards described above, the related tax effect was recorded resulting in a netdeferred tax assets for the three month period ended March 31, 2003 ofapproximately $610,000, an approximate $13,000 increase over the three monthperiod.

 

***Stockholders Equity***

 

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

 

15

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The effects of thesechanges are summarized as follows:

 

| ** **                             | ** ** | **March 31, 2003**                       | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **As**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Previously**                           | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                             | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated  Balance Sheet:           |       |                                     |       |   |   |   |   |
| Accounts  receivable                   |       | $                                        | 3,507,858  |   | $ | (20,955 | ) | $ | 3,486,903 |   |
| Property and  equipment, net           |       | 3,358,786                                |       | (2,370,646 | ) | 988,140 |   |
| Deferred tax  assets                   |       | 2,480                                    |       | 607,810 |   | 610,290 |   |
| Accrued expenses                       |       | 410,467                                  |       | 294,853 |   | 705,320 |   |
| Deferred tax  liability                |       | —                                   |       | — |   | — |   |
| Additional paid  in capital            |       | 1,169,266                                |       | (686,068 | ) | 483,198 |   |
| Retained deficit                       |       | $                                        | (21,944    | ) | $ | (1,392,576 | ) | $ | (1,414,520 | ) |
|                                   |       |                                     |       |   |   |   |   |
| ** **                             | ** ** | **For the Quarter Ended March 31, 2003** | ** ** |
| ** **                             | ** ** | **As**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Previously**                           | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                             | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated  Statement of Operations: |       |                                     |       |   |   |   |   |
| Net Sales                              |       | $                                        | 6,734,765  |   | $ | (20,955 | ) | $ | 6,713,810 |   |
| Gross profit                           |       | 2,655,157                                |       | (20,955 | ) | 2,634,202 |   |
| Operating  expenses                    |       | 2,380,026                                |       | 238,791 |   | 2,618,817 |   |
| Income (loss)  before income taxes     |       | 194,665                                  |       | (259,746 | ) | (65,081 | ) |
| Income tax  benefit (expense)          |       | (31,869                                  | )          | 44,962 |   | 13,093 |   |
| Net Income  (loss)                     |       | $                                        | 162,796    |   | $ | (214,784 | ) | $ | (51,988 | ) |
|                                   |       |                                     |       |   |   |   |   |
| Earnings (loss)  per share:            |       |                                     |       |   |   |   |   |
| Basic &  diluted                   |       | $                                        | 0.01       |   | $ | (0.02 | ) | $ | (0.00 | ) |

 

ITEM 2:          MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

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

 

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

 

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

 

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

 

Our primary source ofrevenue is the sale of hard flooring and wall covering materials and ourprimary costs relate to the acquisition, warehousing and delivery of thoseproducts. While sales are made throughout the United States, the majority ofour sales are in the southeastern quadrant of the country. The primary sourcesof working capital are a $7.5 million (US) revolving line of credit from a

 

16

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division of a large UScommercial bank, stockholders’ equity and our suppliers who have extended usterms. Specifically, the terms we have negotiated with our internationalsuppliers are more advantageous than those we extend to our customers. Thisallows us, in some instances, to collect our receivables prior to paying oursuppliers. During 2003, we expect to begin trading our stock on the OTC-BB andto raise equity through the public market. Any new equity raised will be usedto strengthen our balance sheet and to provide capital for continued growth.

 

In the first quarter of2003, we have created two new wholly owned subsidiary companies. The first isIWT Tesoro International Ltd, a Bermuda based exempt company. A Bermudaexempt company is a company domiciled in Bermuda that is not actively involvedin trade or business on the island and is therefore exempt from certainlicensing requirements. International will serve as the holding company for anyinternational based ventures we need to support expanding our sales effort. Theother subsidiary is IWT Tesoro Transport, Inc., a Florida corporation, anda licensed freight broker that will handle our in and out bound freightoperations.

 

*Resultsof Operations for the Quarter ending March 31, 2003.*

 

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

 
| ** **               | ** ** | **Quarter Ending March 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2001**                          | ** ** | **2002** | ** ** | **2003** | ** ** |
|                     |       |                              |       |   |   |   |   |
| Revenues                 |       | 4,513,755                         |       | 6,014,020 |   | 6,713,810 |   |
| Cost of Goods  Sold      |       | 2,995,589                         |       | 3,612,316 |   | 4,079,608 |   |
| Gross Margin  Percentage |       | 33.6                              | %          | 39.9 | % | 39.2 | % |
| Operating  Expenses      |       | 1,301,252                         |       | 1,652,009 |   | 2,618,817 |   |

 

*March 31,2003 Compared to March 31, 2002*

 

Sales for the quarterended March 31, 2003 were $6,713,810 a 12% increase over sales for thequarter ended March 31, 2002. This growth follows a 33% growth from 2001to 2002. We are a relatively small player in a growing market. We are enteringnew markets and adding new products; therefore, we expect to be able to growfaster than the market as a whole for the next several years. Our

 

17

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share of this market isapproximately 1%. The tile market in the United States is approximately $2.1 billionand is growing at a five to seven percent rate.

 

As we grow, we have beenable to purchase product at lower prices and have consequently lowered our costof goods to 60% in 2002 from 64% in 2001 and 68% in 2000. While there arecertainly finite limits to improving our gross margin percentage, it isimperative that we maintain these ratios as we grow.

 

We have included reconciliationfrom our net income to EBITDA:

 
| ** **               | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Net income               |       | $        | 1,677,538  |     | $          | 822,391 |   |
| Interest expense         |       | 328,920  |       | 424,527  |       |
| Income taxes  (deferred) |       | (597,174 | )          | 0        |       |
| Depreciation             |       | 129,732  |       | 120,371  |       |
| Amortization             |       | 0        |       | 0        |       |
| EBITDA                   |       | $        | 1,539,016  |     | $          | 1,367,289 |   |

 

•              Themajor causes of the increased EBITDA were (a) an increase of 29% in salesand (b) an increase of 4% on the gross margin.

 

•              EBIDTAis not a GAAP concept and should not be used as the only measure of a company’sfinancial performance. Investors should refer to our financial statementsbefore making any investment decisions.

 

•              Ourearnings before interest, taxes, depreciation and amortization (EBITDA) grewfrom $1.3 million in 2001 to $1.5 million in 2002, a 12% growth rate.EBITDA is a concept used by financial managers to compare businesses thatoperate in different industries with different capital needs, tax circumstancesand debt structure.

 

In early April 2003,we moved into a new warehouse facility of nearly 147,000 square feet, anincrease of nearly 50% over the previous facility. 5,000 square feet of the newfacility is for office space. This new facility will allow us to increase ourinventory and better serve our customers who rely upon us to meet the shortlead times and limited inventory capacity that exist in their markets. We hopeto improve the efficiency of our warehouse operations by simplifying thereceiving and shipping functions. We currently maintain between four and fivemillion square feet of product in our facility and expect that this willincrease to between six and seven million square feet. Our inventory turns, in2002, were approximately 3.8 times. We expect to lower those turns to about 3.2during 2003 and to 3.0 in 2004, however we cannot assure anyone that we will besuccessful in attaining these expectations. Availability of product is a keysuccess factor for us and is a good use of our capital.

 

Operating expenses forthe quarters ended March 31, 2003 and 2002 were $2,618,817 and $1,652,009,respectively. This increase of 58.5% was a result of investments being made inpeople, infrastructure and corporate organization for future growth. With theacquisition of IWT in October 2002, we began to incur certain professionaland operating expenses that are not reflected in the comparable period for2002. In addition, we began to issue common stock to non-executive employees, outsidedirectors and suppliers under the incentive stock plan. Generally AcceptedAccounting Principles require that these shares be expensed in the period theyare issued at the fair market value of these shares. We expect these expensesto continue.

 

The first quarter offiscal year 2003 also saw the increase in our sales staff at IWT inanticipation of its expansion of the buying group and home center storechannels. We expect these increased expenses to generate proportionate salesgrowth in the future.

 

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* *

*Liquidityand Capital Resources*

 

We had cash balances of$664,358 and $574,046 at the end of March 31, 2003 and December 31,2002, respectively. We have generated positive cash flow from operations for thelast three years.

 

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

 

Through its closing as ofMarch 31, 2003, we raised $660,000 from units sales. We also raised anadditional $45,000 from 15,000 warrants that were exercised. All of theinvestors were provided with, or otherwise had access to, information about theCompany and its subsidiaries, including financial information. The proceedsfrom the offering and the warrant exercises were used for general corporatepurposes, including paying fees to outside professionals and working capital.

 

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

 

•              onall outstanding obligations following termination or non-renewal of the creditfacility;

 

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

 

•              duringany time the amounts available to us are made or arise without our lender’sknowledge or consent.

 

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

 

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

 

ITEM 3: CONTROLS ANDPROCEDURES

 

(a)                Within the 90 days prior to thedate of this report, we carried out an evaluation, under the supervision andwith the participation of management, including our principal executive officerand principal financial officer, of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.Based upon this evaluation, our principal executive officer and principalfinancial officer concluded that our disclosure controls and procedures areeffective in timely alerting them to material information relating to us(including our consolidated subsidiaries) that is required to be included inour periodic SEC reports. There have been no significant changes in ourinternal controls or in other factors that could significantly affect thosecontrols subsequent to the date we carried out this evaluation.

 

(b)               There have been no significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of the evaluation described in thepreceding paragraph.

 

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PART II — OTHERINFORMATION

 

ITEM1.      LEGAL PROCEEDINGS

 

There are no legalproceedings against the Company and the Company is unaware of such proceedingscontemplated against it.

 

ITEM2.      CHANGES IN SECURITIES

 

Not applicable.

 

ITEM3.      DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM4.      SUBMISSION OF MATTER TO A VOTE OF SECURITYHOLDERS

 

Not applicable.

 

ITEM5.      OTHER INFORMATION

 

Not applicable.

 

ITEM6.      EXHIBITS AND REPORTS ON FORM 8-K

 

(a)               Exhibits

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                    |
| 1.1                 |       | Selected Dealers  Agreement (9)                                                                                                         |
| 3.1                 |       | Articles of Incorporation  (1)                                                                                                          |
| 3.1.1               |       | Articles of Amendment  to Articles of Incorporation dated September 23, 2002(3)                                                    |
| 3.2.1               |       | Bylaws (1)                                                                                                                              |
| 3.2.2               |       | Amended and Restated  Bylaws (8)                                                                                                        |
| 3.3.1               |       | Specimen Stock  Certificate (1)                                                                                                         |
| 3.3.2               |       | Audit Committee Charter  (8)                                                                                                            |
| 3.3.3               |       | Compensation Committee  Charter (8)                                                                                                     |
| 3.3.4               |       | Nominating And  Governing Committee Charter (8)                                                                                         |
| 3.4.1               |       | Code of Ethics for  Senior Financial Officers (9)                                                                                       |
| 4.1.1               |       | Form of Warrant  Agreement (9)                                                                                                     |
| 4.1.2               |       | Form of Stock  Certificate (9)                                                                                                     |
| 4.1.3               |       | Form of Lock-Up  Agreement (9)                                                                                                     |
| 10.1                |       | Agreement With Peter  Goss (1)                                                                                                          |
| 10.2                |       | Stockholders Agreement  (1)                                                                                                             |
| 10.3                |       | 2001 Ponca Acquisition  Corporation Stock Incentive Plan. (2)                                                                           |
| 10.4                |       | Employment Agreement  Between Ponca Acquisition Corporation And Henry Jr. Boucher, Jr. Dated  As Of December 29, 2002. (2)    |
| 10.5                |       | Memorandum Of  Understanding Between Ponca Acquisition Corporation And The Stockholders Of  International Wholesale Tile, Inc. (2) |

 

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| 10.6 |   | Stock Purchase  Agreement Among The Stockholders Of International Wholesale Tile, Inc.,  And IWT Tesoro Corporation, Effective October 1, 2002. (5) |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7 |   | Termination Of  Stockholders Agreement (6)                                                                                                                    |
| 10.8 |   | Repurchase Agreement  (7)                                                                                                                                     |
| 10.9 |   | Form of Indemnity  Agreement (9)                                                                                                                         |
| 21.  |   | Subsidiaries of  Registrant (9)                                                                                                                               |
| 31.1 |   | Certification of CEO                                                                                                                                          |
| 31.2 |   | Certification of CFO                                                                                                                                          |
| 32.1 |   | CERTIFICATION PURSUANT  TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE  SARBANES-OXLEY ACT OF 2002                                    |
| 32.2 |   | CERTIFICATION PURSUANT  TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE  SARBANES-OXLEY ACT OF 2002                                    |
| 99.1 |   | MRS’ Letter To The  Securities and Exchange Commission. (4)                                                                                              |
| 99.2 |   | Letter from Peter Goss  regarding fiscal year end (5)                                                                                                         |

 

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| (1)    |   | Filed as an  Exhibit to the Company’s Form 10-SB, filed with the Securities and  Exchange Commission on August 7, 2000.                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                 |
| (2)    |   | Filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on September 11, 2002.              |
|   |   |                                                                                                                                                                 |
| (3)    |   | Filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on October 1, 2002.                 |
|   |   |                                                                                                                                                                 |
| (4)    |   | 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.               |
|   |   |                                                                                                                                                                 |
| (5)    |   | Filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on October 15, 2002.                |
|   |   |                                                                                                                                                                 |
| (6)    |   | 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.              |
|   |   |                                                                                                                                                                 |
| (7)    |   | 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.              |
|   |   |                                                                                                                                                                 |
| (8)    |   | Filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003.                |
|   |   |                                                                                                                                                                 |
| (9)    |   | Filed as an Exhibit to  the Company’s Registration Statement on Form SB-2, filed with the  Securities and Exchange Commission on April 11, 2003. |

 

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SIGNATURES

 

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

 

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

 

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