** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-QSB**

 

**(Mark One)**

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

 

**CommissionFile No. 0-31267**

 

**IWT TESORO CORPORATION**

(Exact Name of SmallBusiness Issuer in Its Charter)

 

|                                                                                | **Nevada**                                                       |   | **91-2048019**                           |   |
|-------------------------------------------------------------------------------------|------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                | (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |   |
|                                                                                |
| **101 Post  Road West, Suite 10, Westport, CT 06880**                               |
| (Address of principal  executive offices)                                           |
|                                                                                |
| **(203)  221-2770**                                                                 |
| (Issuer’s Telephone  Number, including area code)                              |
|                                                                                |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report) |
|                                                                                     |                                                                  |        |                                          |        |

 

Securitiesregistered pursuant to Section 12(b) of the Exchange Act:  **NONE**

 

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

 

Checkwhether the issuer: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days:

 

ýYes                   oNo

 

Statethe number of shares outstanding of each of the issuer’s class of commonequity, as of November 4, 2003: 11,225,541 shares

 

TransitionalSmall Business Disclosure Format:   oYes         ýNo

 

 

----

 

ITEM 1:          Financial Statement

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 

**Assets**

 
|                                 |   | **September 30,  2003** |       | **December 31,  2002** |   |
|--------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                 |   | **(Unaudited)**              |       | **(Audited)**               |   |
| Current  assets                      |   |                         |       |                        |   |
| Cash                                 |   | $                            | 647,634    |                        | $      | 574,046 |   |
| Accounts  receivable, net            |   | 5,224,476                    |       | 2,875,532                   |   |
| Inventory                            |   | 12,160,220                   |       | 6,047,876                   |   |
| Deferred  tax asset                  |   | 22,399                       |       | 34,348                      |   |
| Prepaid  income tax                  |   | 327,558                      |       | 188,500                     |   |
| Prepaid  expenses                    |   | 248,570                      |       | 98,320                      |   |
| Total  current assets                |   | 18,630,857                   |       | 9,818,622                   |   |
|                                 |   |                         |       |                        |   |
| Property  and equipment, net         |   | 4,009,986                    |       | 2,712,422                   |   |
|                                 |   |                         |       |                        |   |
| Other  assets                        |   |                         |       |                        |   |
| Organization  cost, net              |   | 7,064                        |       | —                      |   |
| Loan  cost, net                      |   | 85,000                       |       | —                      |   |
| Deposits                             |   | 47,610                       |       | 9,173                       |   |
| Other  receivables                   |   | 74,618                       |       | 64,205                      |   |
| Other  receivables - related parties |   | —                       |       | 5,500                       |   |
| Other  assets                        |   | 124,166                      |       | 112,835                     |   |
|                                 |   | 338,458                      |       | 191,713                     |   |
|                                 |   |                         |       |                        |   |
|                                 |   | $                            | 22,979,301 |                        | $      | 12,722,757 |   |

 

See notes to financial statements.

 

2

----

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

 

**Liabilities and Stockholders’ Equity**

 
|                                                                                                              |   | **September 30,  2003** |       | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                                                                                              |   | **(Unaudited)**              |       | **(Audited)**               |   |
|                                                                                                              |   |                         |       |                        |   |
| Current  liabilities                                                                                              |   |                         |       |                        |   |
| Accounts  payable                                                                                                 |   | $                            | 11,256,466 |                        | $      | 5,403,816 |   |
| Accrued  expenses                                                                                                 |   | 263,602                      |       | 126,340                     |   |
| Other  current liabilities                                                                                        |   | 160,161                      |       | 24,723                      |   |
| Current  portion of lease payable                                                                                 |   | 62,644                       |       | 47,222                      |   |
| Current  portion of notes payable - unrelated parties                                                             |   | 59,227                       |       | 48,780                      |   |
| Total  current liabilities                                                                                        |   | 11,802,100                   |       | 5,650,881                   |   |
|                                                                                                              |   |                         |       |                        |   |
| Long  term lease payable                                                                                          |   | 165,877                      |       | 108,438                     |   |
| Long  term notes payable - related parties                                                                        |   | 338,662                      |       | 448,712                     |   |
| Long  term notes payable - unrelated parties                                                                      |   | 52,878                       |       | 64,872                      |   |
| Long  term loan payable                                                                                           |   | 7,583,869                    |       | 4,864,778                   |   |
|                                                                                                              |   | 8,141,286                    |       | 5,486,800                   |   |
|                                                                                                              |   |                         |       |                        |   |
| Redeemable  common stock (450,000 shares issued and outstanding)                                                  |   | —                       |       | 1,073,160                   |   |
|                                                                                                              |   |                         |       |                        |   |
| Stockholders’  equity                                                                                        |   |                         |       |                        |   |
| Preferred  stock, $0.001 par value, 25,000,000 authorized; none issued                                            |   | —                       |       | —                      |   |
| Common  stock, $0.001 par value, 100 million shares authorized, 11,222,059 and  10,587,834 issued and outstanding |   | 11,222                       |       | 10,588                      |   |
| Additional  paid in capital                                                                                       |   | 2,360,519                    |       | 686,068                     |   |
| Retained  earnings (deficit)                                                                                      |   | 664,174                      |       | (184,740                    | )      |
|                                                                                                              |   | 3,035,915                    |       | 511,916                     |   |
|                                                                                                              |   |                         |       |                        |   |
|                                                                                                              |   | $                            | 22,979,301 |                        | $      | 12,722,757 |   |

 

See notes to financial statements.

 

3

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

** **
|                                     |   | **For the period ended September 30,** |      |
|------------------------------------------|--------|---------------------------------------------|-----------|
|                                     |   | **Three months ended**                      |      | **Nine months ended** |   |
|                                     |   | **2003**                                    |      | **2002** |   | **2003** |   | **2002** |   |
| Revenue                                  |   |                                        |      |   |   |   |   |   |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Sales,  net of discounts and returns     |   | $                                           | 8,969,586 |   | $ | 6,383,981 |   | $ | 24,209,576 |   | $ | 19,201,468 |   |
| Cost  of goods sold                      |   | 5,373,248                                   |      | 3,787,716 |   | 14,464,855 |   | 11,593,514 |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Gross  profit                            |   | 3,596,338                                   |      | 2,596,265 |   | 9,744,721 |   | 7,607,954 |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Expenses                                 |   |                                        |      |   |   |   |   |   |   |
| Payroll                                  |   | 1,490,911                                   |      | 805,698 |   | 3,922,674 |   | 2,597,063 |   |
| Delivery                                 |   | 388,247                                     |      | 342,462 |   | 1,137,367 |   | 930,094 |   |
| Lease  expenses                          |   | 330,015                                     |      | 123,755 |   | 662,650 |   | 350,961 |   |
| Depreciation  and amortization           |   | 174,278                                     |      | 102,613 |   | 469,404 |   | 303,230 |   |
| General  and administrative              |   | 241,583                                     |      | 89,574 |   | 576,778 |   | 268,556 |   |
| Insurance                                |   | 88,157                                      |      | 92,201 |   | 248,125 |   | 259,354 |   |
| Sales  expenses                          |   | 222,152                                     |      | 52,778 |   | 452,028 |   | 150,883 |   |
| Bad  debts                               |   | 120,034                                     |      | — |   | 173,851 |   | — |   |
| Repairs  and maintenance                 |   | 114,267                                     |      | 62,317 |   | 284,266 |   | 166,425 |   |
| Advertising                              |   | 19,947                                      |      | 27,554 |   | 60,297 |   | 133,659 |   |
| Travel  and entertainment                |   | 73,059                                      |      | 14,672 |   | 203,172 |   | 62,665 |   |
| Professional  fees                       |   | 64,425                                      |      | 1,969 |   | 302,167 |   | 45,870 |   |
|                                     |   | 3,327,076                                   |      | 1,715,593 |   | 8,492,779 |   | 5,268,760 |   |
| Income  from operations                  |   | 269,262                                     |      | 880,672 |   | 1,251,942 |   | 2,339,194 |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Other  income/(expenses)                 |   |                                        |      |   |   |   |   |   |   |
| Interest  expense                        |   | (175,885                                    | )         | (82,301 | ) | (350,465 | ) | (246,611 | ) |
| Other  income                            |   | 727                                         |      | 11,401 |   | 2,302 |   | 12,985 |   |
| Other  expense                           |   | —                                      |      | (11 | ) | (5,723 | ) | — |   |
| Gain  (loss)on disposal                  |   | —                                      |      | — |   | (5,352 | ) | 5,979 |   |
|                                     |   | (175,158                                    | )         | (70,911 | ) | (359,238 | ) | (227,647 | ) |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Net  income before taxes                 |   | 94,104                                      |      | 809,761 |   | 892,704 |   | 2,111,547 |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Income  tax benefit (expense) - deferred |   | 11,314                                      |      | — |   | (11,949 | ) | — |   |
| Income  tax benefit (expense) - current  |   | —                                      |      | — |   | (31,841 | ) | — |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Net  income                              |   | $                                           | 105,418   |   | $ | 809,761 |   | $ | 848,914 |   | $ | 2,111,547 |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Earnings  per common share - basic       |   | $                                           | 0.01      |   | $ | 0.09 |   | $ | 0.08 |   | $ | 0.23 |   |
|                                     |   |                                        |      |   |   |   |   |   |   |
| Earnings  per common share - diluted     |   | $                                           | 0.01      |   | $ | 0.09 |   | $ | 0.07 |   | $ | 0.23 |   |

 

See notes to financial statements.

 

4

----

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

** **
|                                                                               |   | **Nine months ended September 30,** |       |
|------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                               |   | **2003**                                 |       | **2002** |   |
|                                                                               |   |                                     | ** ** |   | ** ** |
| Cash  flows from operating activities:                                             |   |                                     |       |   |   |
| Net  Income                                                                        |   | $                                        | 848,914    |   | $ | 2,111,547 |   |
|                                                                               |   |                                     |       |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                                     |       |   |   |
| Depreciation  and amortization                                                |   | 469,404                                  |       | 303,230 |   |
| (Gain)  loss on disposal of assets                                                 |   | 5,352                                    |       | (5,979 | ) |
| Bad  debts                                                                         |   | 173,851                                  |       | — |   |
| (Increase)  decrease in accounts receivable                                        |   | (2,385,700                               | )          | (882,966 | ) |
| (Increase)  decrease in inventory                                                  |   | (6,112,344                               | )          | 523,140 |   |
| (Increase)  decrease in prepaid expenses                                           |   | (289,308                                 | )          | (3,950 | ) |
| (Increase)  decrease in other assets                                               |   | (222,859                                 | )          | (36,349 | ) |
| Increase  (decrease) in accounts payable and accrued expenses                      |   | 5,989,911                                |       | 550,065 |   |
| Increase  (decrease) in other liabilities                                          |   | 135,439                                  |       | 8,499 |   |
| Total  adjustments                                                                 |   | (2,236,254                               | )          | 455,690 |   |
| Net  cash provided by (used in) operating activities                               |   | (1,387,340                               | )          | 2,567,237 |   |
|                                                                               |   |                                     |       |   |   |
| Cash  flows from investing activities:                                             |   |                                     |       |   |   |
| Proceeds  from sale of property                                                    |   | —                                   |       | 11,000 |   |
| Cash  payments for the purchase of property                                        |   | (1,649,457                               | )          | (659,180 | ) |
| Net  cash used in investing activities                                             |   | (1,649,457                               | )          | (648,180 | ) |
|                                                                               |   |                                     |       |   |   |
| Cash  flows from financing activities:                                             |   |                                     |       |   |   |
| Proceeds  from issuance of stock                                                   |   | 558,564                                  |       | — |   |
| Proceeds  from loans                                                               |   | 31,466,902                               |       | 18,500,000 |   |
| Proceeds  from loans from related party                                            |   | —                                   |       | 125,273 |   |
| Distributions  to stockholders                                                     |   | —                                   |       | (1,864,020 | ) |
| Payments  on  stockholder loans                                               |   | (110,050                                 | )          | — |   |
| Principal  payments on notes payable                                               |   | (28,762,010                              | )          | (18,612,514 | ) |
| Principal  payment on capital leases                                               |   | (43,021                                  | )          | (27,991 | ) |
| Net  cash provided by (used in) financing activities                               |   | 3,110,385                                |       | (1,879,252 | ) |
|                                                                               |   |                                     |       |   |   |
| Net  increase in cash and cash equivalents                                         |   | 73,588                                   |       | 39,805 |   |
|                                                                               |   |                                     |       |   |   |
| Cash  and cash equivalents, beginning of period                                    |   | 574,046                                  |       | 402,500 |   |
|                                                                               |   |                                     |       |   |   |
| Cash  and cash equivalents, end of period                                          |   | $                                        | 647,634    |   | $ | 442,305 |   |
|                                                                               |   |                                     |       |   |   |
| Supplemental  disclosures of cash flow information:                                |   |                                     |       |   |   |
|                                                                               |   |                                     |       |   |   |
| Cash  paid during the period for:                                                  |   |                                     |       |   |   |
|                                                                               |   |                                     |       |   |   |
| Interest  expense                                                                  |   | $                                        | 350,465    |   | $ | 164,310 |   |

 

See notes to financial statements.

 

5

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(Unaudited)**

**NINE MONTHS ENDED SEPTEMBER 30, 2003**

 
|                                                         |   | **Common Stock** |   | **Additional  Paid in  Capital** |   | **Subscription  Receivable** |   | **Retained  Earnings  (Deficit)** |   | **TOTAL**  |    |
|--------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------------|--------|-----------------------------------|--------|------------|---------|
| **Shares**                                                   |   | **Amount**       |
| Balance,  December 31, 2001                             |   | 9,000,000        |   | $                                | 9,000  |                         | $      | 116,400                           |   | $          | (84,000 | ) | $ | 830,582 |   | $ | 871,982 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Distributions,  September 30, 2002                      |   | —           |   | —                           |   | —                       |   | —                            |   | (1,864,020 | )       | (1,864,020 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Payment  of subscription receivable                          |   | —           |   | —                           |   | —                       |   | 84,000                            |   | —     |    | 84,000 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Net  income, nine months ended September 30, 2002       |   | —           |   | —                           |   | —                       |   | —                            |   | 2,118,767  |    | 2,118,767 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Balance  September 30, 2002 - before recapitalization   |   | 9,000,000        |   | 9,000                            |   | 116,400                      |   | —                            |   | 1,085,329  |    | 1,210,729 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Recapitalization  on October 1, 2002                    |   | 1,800,000        |   | 1,800                            |   | 972,471                      |   | —                            |   | (1,085,329 | )       | (111,058 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Balance  after recapitalization on October 1, 2002      |   | 10,800,000       |   | 10,800                           |   | 1,088,871                    |   | —                            |   | —     |    | 1,099,671 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Reclassification  of redeemable stock                        |   | (450,000         | )      | (450                             | )      | (60,086                      | )      |                              |   |       |    | (60,536 | ) |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance  of shares in exchange for legal services           |   | 15,000           |   | 15                               |   | 40,635                       |   | —                            |   | —     |    | 40,650 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance  of shares to employees for services rendered (SIP) |   | 75,900           |   | 76                               |   | 205,613                      |   | —                            |   | —     |    | 205,689 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance  of shares to directors (SIP)                       |   | 40,000           |   | 40                               |   | 108,360                      |   | —                            |   | —     |    | 108,400 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Issuance  of shares to consultants (SIP)                     |   | 8,600            |   | 9                                |   | 23,297                       |   | —                            |   | —     |    | 23,306 |   |
|                                                         |   |             |   |                             |   |                         |   |                              |   |       |    |   |   |
| Sub-total                                                    |   | 10,489,500       |   | $                                | 10,490 |                         | $      | 1,406,690                         |   | $          | —  |   | $ | — |   | $ | 1,417,180 |   |

 

See notes to financial statements.

 

6

----

 
|                                                          |   | **Common Stock** |   | **Additional  Paid in  Capital** |   | **Subscription  Receivable** |   | **Retained  Earnings  (Deficit)** |   | **TOTAL** |   |
|---------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------------|--------|-----------------------------------|--------|-----------|--------|
| **Shares**                                                    |   | **Amount**       |
|                                                          |   | 10,489,500       |   | $                                | 10,490 |                         | $      | 1,406,690                         |   | $         | — |   | $ | — |   | $ | 1,417,180 |   |
| Issuance  of shares in exchange for consulting services       |   | 10,000           |   | 10                               |   | 27,090                       |   | —                            |   | —    |   | 27,100 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares - private offering                        |   | 83,334           |   | 83                               |   | 249,917                      |   | —                            |   | —    |   | 250,000 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Exercise  of warrants                                         |   | 5,000            |   | 5                                |   | 14,995                       |   | —                            |   | —    |   | 15,000 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Accretion  of redeemable stock                                |   |             |   |                             |   | (1,012,624                   | )      |                              |   |      |   | (1,012,624 | ) |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Net  loss, three months ended December 31, 2002          |   | —           |   | —                           |   | —                       |   | —                            |   | (184,740  | )      | (184,740 | ) |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Balance,  December 31, 2002                              |   | 10,587,834       |   | 10,588                           |   | 686,068                      |   | —                            |   | (184,740  | )      | 511,916 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares  - private offering                  |   | 93,334           |   | 93                               |   | 279,907                      |   | —                            |   | —    |   | 280,000 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Exercise  of warrants                                         |   | 10,000           |   | 10                               |   | 29,990                       |   | —                            |   | —    |   | 30,000 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares to employees for services rendered (SIP)  |   | 1,000            |   | 1                                |   | 2,709                        |   | —                            |   | —    |   | 2,710 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares to directors (SIP)                        |   | 15,000           |   | 15                               |   | 40,635                       |   | —                            |   | —    |   | 40,650 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares - private offering                        |   | 43,334           |   | 43                               |   | 129,957                      |   | —                            |   | —    |   | 130,000 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares in exchange for consulting services (SIP) |   | 5,000            |   | 5                                |   | 27,495                       |   | —                            |   | —    |   | 27,500 |   |
|                                                          |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Sub-total                                                     |   | 10,755,502       |   | $                                | 10,755 |                         | $      | 1,196,761                         |   | $         | — |   | $ | (184,740 | ) | $ | 1,022,776 |   |

 

See notes to financial statements.

 

7

----

 
|                                                   |   | **Common Stock** |   | **Additional  Paid in  Capital** |   | **Subscription  Receivable** |   | **Retained  Earnings  (Deficit)** |   | **TOTAL** |   |
|--------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------------|--------|-----------------------------------|--------|-----------|--------|
| **Shares**                                             |   | **Amount**       |
|                                                   |   | 10,755,502       |   | $                                | 10,755 |                         | $      | 1,196,761                         |   | $         | — |   | $ | (184,740 | ) | $ | 1,022,776 |   |
|                                                   |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares - public offering                  |   | 3,750            |   | 4                                |   | 20,621                       |   | —                            |   | —    |   | 20,625 |   |
|                                                   |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Cancellation  of stock repurchase agreement            |   | 450,000          |   | 450                              |   | 1,072,710                    |   | —                            |   | —    |   | 1,073,160 |   |
|                                                   |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Cancellation  of shares issued to consultant           |   | (5,000           | )      | (5                               | )      | (27,495                      | )      | —                            |   | —    |   | (27,500 | ) |
|                                                   |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Issuance  of shares - public offering                  |   | 17,807           |   | 18                               |   | 97,922                       |   | —                            |   | —    |   | 97,940 |   |
|                                                   |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Net  income, nine months ended September 30, 2003 |   |             |   |                             |   |                         |   |                              |   | 848,914   |   | 848,914 |   |
|                                                   |   |             |   |                             |   |                         |   |                              |   |      |   |   |   |
| Balance,  September 30, 2003 (Unaudited)          |   | 11,222,059       |   | $                                | 11,222 |                         | $      | 2,360,519                         |   | $         | — |   | $ | 664,174 |   | $ | 3,035,915 |   |

 

See notes to financial statements.

 

8

----

 

**IWTTESORO CORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 30, 2003**

 

**NOTE 1****                                                    BASISOF PRESENTATION AND PRINCIPLES OF 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) and IWT TesoroTransport, Inc. (Transport).  Allsignificant inter-company balances and transactions have been eliminated.

 

The accompanying consolidated financial statements of the Company havebeen prepared in accordance with the instructions to Form 10-QSB and,therefore, omit or condense certain footnotes and other information normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles.  It is suggestedthat these condensed financial statements should be read in conjunction withthe Company’s financial statements and notes thereto included in the Company’saudited financial statements on Form 10KSB/A for the fiscal year endedDecember 31, 2002.

 

The accounting policies followed for interim financial reporting arethe same as those disclosed in Note 1 of the Notes to Financial Statementsincluded in the Company’s audited financial statements for the fiscal yearended December 31, 2002, which are included in Form 10KSB/A.

 

In the opinion of management, the unaudited financial statementsinclude all necessary adjustments (consisting of normal, recurring accruals)for a fair presentation of the financial position, results of operations andcash flow for the interim periods presented. Preparing financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses.  Actual results may differfrom these estimates.  Interim resultsare not necessarily indicative of results for a full year.  The results of operations for the nine-monthperiod ended September 30, 2003 are not necessarily indicative ofoperating results to be expected for a full year.

 

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

 

Stock Options

 

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

 

No options were granted during the nine months ended September 30,2003 and 2002.

 

9

----

 

Had compensation costs for the Company’sstock option granted during the year ended December 31, 2002, beendetermined on the fair market value at the grant dates for the options,consistent with Statement of Accounting Standards No. 123, *Accounting for Stock Based Compensation*(Statement No. 123), the Company’s results of operations for the year endedDecember 31, 2002 would have changed to the pro-forma amounts indicated.

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

 

AccountingPronouncements

 

In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation — Transitionand Disclosure,* which amended SFAS No. 123, *Accounting for Stock-Based Compensation.*  The new standard provides alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  Additionally, the statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in the annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used in reported results.  This statement is effective for financialstatements for fiscal years ending after December 15, 2002.  In compliance with SFAS No. 148, the Companyhas elected to continue to follow the intrinsic value method in accounting forits stock-based employee compensation arrangement as defined by APB No. 25.

 

Earnings per Share

 

Basic earnings per share for each year is computed by dividing incomefor the year by the weighted average number of common shares outstanding duringthe year.  Diluted earnings per shareinclude the effects of common stock equivalents to the extent they aredilutive. 

 

10

----

 

Basic and diluted weighted average number of shares outstanding atSeptember 30th is as follows:

 
|                                                   |   | **2003**   |   | **2002**  |   |
|--------------------------------------------------------|--------|------------|--------|-----------|--------|
|                                                   |   |       |   |      |   |
| Basic weighted average number of shares  outstanding   |   | 11,167,720 |   | 9,000,000 |   |
|                                                   |   |       |   |      |   |
| Diluted weighted average number of shares  outstanding |   | 11,510,902 |   | 9,000,000 |   |

 

At September 30, 2003, the total number of additional shares thatcould further dilute basic EPS in the future, but were not included in thecomputation of diluted EPS because of their antidilutive effect, was 21,557shares.  At September 30, 2002,there were no common stock equivalents that could potentially dilute basic EPSin the future.

 

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

 

Financial instruments that potentially subject the Company to creditrisk include cash on deposit with two financial institutions amounting to$644,134 at September 30, 2003, which was insured for up to $100,000 perfinancial institution by the U.S. Federal Deposit Insurance Corporation.

 

The Company obtains detailed credit evaluations of customers andestablishes credit limits as required and routinely assesses the financialstrength of its customers.  The Companycompetes primarily in the sale of ceramic tile and marble markets and sells itsproducts to a multitude of customers. There is no disproportionate concentration of credit risk.

 

**NOTE 4****                                                    ACCOUNTSRECEIVABLE**

 

Accounts receivable consisted of the following:

 
|                                 |   | **September 30,  2003** |      | **December 31,  2002** |   |
|--------------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                                 |   |                         |      |                        |   |
| Accounts receivable                  |   | $                            | 5,344,476 |                        | $      | 2,958,777 |   |
| Less allowance for doubtful accounts |   | (120,000                     | )         | (83,245                     | )      |
|                                 |   |                         |      |                        |   |
|                                 |   | $                            | 5,224,476 |                        | $      | 2,875,532 |   |

 

Bad debt expense for the nine months ended September 30, 2003 was$173,851. There was no bad debt expense for the nine months endedSeptember 30, 2002.

 

11

----

 

**NOTE 5****                                                    INVENTORY**

 

Inventory consisted of the following:

 
|                 |   | **September 30,  2003** |       | **December 31,  2002** |   |
|----------------------|--------|------------------------------|------------|-----------------------------|--------|
|                 |   |                         |       |                        |   |
| Tiles                |   | $                            | 10,986,972 |                        | $      | 4,692,974 |   |
| Inventory in transit |   | 1,173,248                    |       | 1,354,902                   |   |
|                 |   |                         |       |                        |   |
|                 |   | $                            | 12,160,220 |                        | $      | 6,047,876 |   |

 

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

 

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

 

Property and equipment consisted of the following:

 
|                          |   | **September 30,  2003** |      | **December 31,  2002** |   | **Depreciation  Period  in Years** |   |
|-------------------------------|--------|------------------------------|-----------|-----------------------------|--------|------------------------------------|--------|
|                          |   |                         |      |                        |   |                               |   |
| Furniture and fixtures        |   | $                            | 303,371   |                        | $      | 89,227                             |   | 5-10 |   |
| Machinery and equipment       |   | 477,994                      |      | 326,165                     |   | 7-10                               |   |
| Vehicles                      |   | 262,434                      |      | 207,071                     |   | 5                                  |   |
| Display boards                |   | 868,376                      |      | 607,978                     |   | 5                                  |   |
| Sample boards                 |   | 2,918,385                    |      | 2,379,533                   |   | 10                                 |   |
| Computer equipment            |   | 322,392                      |      | 131,407                     |   | 3-5                                |   |
| Leasehold improvements        |   | 409,125                      |      | 108,220                     |   | 7                                  |   |
|                          |   |                         |      |                        |   |                               |   |
|                          |   | 5,562,077                    |      | 3,849,601                   |   |                               |   |
| Less accumulated depreciation |   | (1,552,091                   | )         | (1,137,179                  | )      |                               |   |
|                          |   |                         |      |                        |   |                               |   |
|                          |   | $                            | 4,009,986 |                        | $      | 2,712,422                          |   |   |   |

 

Depreciation expense for thenine months ended September 30, 2003 and 2002 was $468,157 and $303,230,respectively. (See Note 9)

 

12

----

 

Sample Boards

 

The samples in the field with customers and salespersons have twocharacteristics that distinguish them as fixed assets:

 

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

•                  They haverelatively long lives.

 

The carrying values of these samples are adjusted through systematicdepreciation to reflect wear and tear.

 

Capitalized samples in the field were as follows:

 
|                           |   | **September 30,  2003** |      | **December 31,  2002** |   |
|--------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                           |   |                         |      |                        |   |
| Sample boards                  |   | $                            | 2,918,385 |                        | $      | 2,379,533 |   |
| Less: accumulated depreciation |   | (784,771                     | )         | (586,507                    | )      |
|                           |   |                         |      |                        |   |
|                           |   | $                            | 2,133,614 |                        | $      | 1,793,026 |   |

 

Depreciation expense related tothe sample boards for the nine months ended September 30, 2003 and 2002was $198,264 and $148,469, respectively.

 

**NOTE 7****                                                    NOTESPAYABLE**

 

The Company has outstanding notes payable as follows:

 
|                                   |   | **September 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                   |   |                         |    |                        |   |
| Notes Payable – Related Parties   |   | $                            | 338,662 |                        | $      | 448,712 |   |
| Notes Payable – Unrelated Parties |   | 112,105                      |    | 113,652                     |   |
|                                   |   |                         |    |                        |   |
|                                   |   | 450,767                      |    | 562,364                     |   |
| Less current portion                   |   | (59,227                      | )       | (48,780                     | )      |
|                                   |   |                         |    |                        |   |
|                                   |   | $                            | 391,540 |                        | $      | 513,584 |   |

 

Interest expense for the nine months ended September 30, 2003 and2002 was $32,008 and $47,500, respectively.

 

13

----

 

Long-term debt maturities for all notes payable for the next five yearsand thereafter are as follows:

 
| 2003                  |   | $       | 18,070  |   |
|-----------------------|--------|---------|---------|--------|
| 2004                  |   | 50,578  |    |
| 2005                  |   | 25,880  |    |
| 2006                  |   | 7,622   |    |
| 2007                  |   | 7,622   |    |
| 2008 & thereafter |   | 340,995 |    |
|                  |   |    |    |
|                  |   | $       | 450,767 |   |

 

**NOTE 8****                                                    LOANSPAYABLE**

 

On September 10, 2003, the Companyentered into a new loan and security agreement with a financial institution fora revolving line of credit with a maximum limit of $17,000,000.  The agreement specifies that proceeds fromthis revolving credit loan must be used solely to satisfy the Company’sprevious existing line of credit in the amount of $7,288,903 and for generalworking capital needs.  All present andfuture assets of the Company collateralize this loan. The rate of interest in effectfor this agreement is calculated with reference to the Base Rate or LIBOR(London Interbank Offered Rate).  Thebalance due at September 30, 2003 is $7,583,869.

 

Base Rate advances bear a fluctuatinginterest rate per annum equal to prime plus 0.50%.  LIBOR advances bear a fixed rate per annum equal to 3.00% plusthe LIBOR for the applicable interest period.

 

The Company is subject to a number ofrestricted covenants under the loan agreement which are currently beingfinalized.

 

Interest expense for the nine months ended September 30, 2002 relatedto the previous line of credit was $167,097. For the nine months ended September 30, 2003, interest expense onthis line of credit amounted to $216,217. Additionally, a termination fee of $75,000 was assessed for prepaymentof this loan.

 

For the twenty-day period endedSeptember 30, 2003, interest expense related to the new revolving line ofcredit amounted to $17,409.

 

The Company incurred a closing fee of $85,000for the new revolving line of credit. This fee was deferred and will be amortized using the straight-linemethod over the 3-year life of the loan, with a charge to interest expense.

 

14

----

 

**NOTE 9****                                                    LEASES**

 

Capital Leases

 

The Company’s property under capital leases is included in property andequipment (See Note 6) and is summarized as follows:

 
|                                  |   | **September 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                  |   |                         |    |                        |   |
| Equipment                             |   | $                            | 394,326 |                        | $      | 266,672 |   |
| Less:   Accumulated depreciation |   | (84,904                      | )       | (58,724                     | )      |
|                                  |   |                         |    |                        |   |
| Net assets under capital leases       |   | $                            | 309,422 |                        | $      | 207,948 |   |

 

Operating Leases

 

The Company leases office and warehouse space under a non-cancelableoperating lease, which has an initial term in excess of one year.  In May 2003, the Company took occupancyof a new warehouse and office facility in Palm City, Florida.   The Company entered into a new leaseagreement for over 48,000 square feet of warehouse space at the old location,and a one-year sub-lease agreement for 20,000 square feet of warehouse spacewas signed effective August 1st, 2003. The Company also leasesoffice space in Westport, Connecticut for its corporate headquarters.

 

At September 30, 2003, future minimum annual lease payments underoperating and capital leases are as follows:

 
|                |   | **Operating  Leases** |      | **Capital  Leases** |   |
|---------------------|--------|-----------------------|-----------|---------------------|--------|
|                |   |                  |      |                |   |
| 2003                |   | $                     | 237,527   |                | $      | 15,311 |   |
| 2004                |   | 908,639               |      | 63,111              |   |
| 2005                |   | 851,887               |      | 58,924              |   |
| 2006                |   | 872,437               |      | 48,963              |   |
| 2007                |   | 893,800               |      | 35,982              |   |
| 2008 and thereafter |   | 5,232,645             |      | 6,230               |   |
|                |   |                  |      |                |   |
|                |   | $                     | 8,996,935 |                | $      | 228,521 |   |

 

Total lease expense under operating leases was $662,650 and $350,961for the nine months ended September 30, 2003 and 2002, respectively.

 

Total interest expense under capital leases was $9,831 and $8,330 forthe nine months ended September 30, 2003 and 2002, respectively.

 

15

----

 

**NOTE 10****                                             INCOMETAXES**

 

At September 30, 2003 the Company had utilized its losscarryforward of approximately $400,000 that would have expired onDecember 31, 2022.

 

The provision for income taxes at September 30, 2003 consisted ofthe following:

 
| Currently  payable: |   |   |   |
|---------------------|--------|--------|--------|
| Federal             |   | $      | 26,961 |   |
| State               |   | 4,880  |   |
|                |   |   |   |
|                |   | $      | 31,841 |   |
|                |   |   |   |
| Deferred provision: |   |   |   |
| Federal             |   | $      | 10,118 |   |
| State               |   | 1,831  |   |
|                |   |   |   |
|                |   | $      | 11,949 |   |

 

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

 

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

 

The Articles of Incorporation provide for the authorization of25,000,000 shares of convertible preferred stock at $0.001, and 100,000,000shares of common stock at $0.001 par value. Each share of preferred stock is convertible into 1 share of commonstock.  At September 30, 2003,11,222,059 shares of common stock were issued and outstanding.

 

Common Stock

 

During the quarter ended September 30, 2003, the Company issued17,807 shares of common stock and 17,807 warrants for $5.50 per unit, for atotal of $97,940, to various investors pursuant to the public offering. (SeeNote 16)

 

16

----

 

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

 

Stock Compensation Plan

 

On December 27, 2001, IWT Tesoro Corporation adopted the “StockIncentive Plan.”  The Company’s StockIncentive Plan provides that eligible employees, consultants, and affiliatesmay be granted shares of common stock. Under the plan, the options granted are non-qualified stock options,incentive stock options, and restricted stock. The aggregate total common stock that may be issued is 4,000,000shares.  For the nine months ended September 30,2003, 21,000 restricted shares were issued to employees directors andconsultants for services rendered.  Forthe nine months ended September 30, 2002, no restricted shares were issuedto employees, directors and consultants for services rendered under the “StockIncentive Plan.”    The aggregate totalof restricted shares issued under the Stock Incentive Plan is 145,500 throughSeptember 30, 2003.  These sharesare currently not registered and are subject to Rule 144 without any additionalrestrictions imposed by the Compensation Committee at the present time.

 

In accordance with SFAS No. 123, for options issued to employees, theCompany has elected to account for these stock options under APB No. 25 andrelated interpretations in accounting for its plan.  Accordingly, no compensation costs have been recognized foroptions issued under the plan as of December 31, 2002.  Had compensation costs for the Company’sstock option been determined on the fair market value at the grant dates forthe options, consistent with Statement of Accounting Standards No. 123, *Accounting for Stock Based Compensation*(Statement No. 123), the Company’s results of operations for the year endedDecember 31, 2002 would have changed to the pro-forma amountsindicated.  (See Note 2)  No options were issued during the ninemonths ended September 30, 2003.

 

**NOTE 13****                                             ACQUISITION**

 

On October 1, 2002, the Company acquired International WholesaleTile, Inc. In connection with the legal form of this transaction, InternationalWholesale Tile, Inc. became a wholly owned subsidiary of IWT TesoroCorporation.  A total of 9,000,000shares of common stock were issued for the acquisition.  For accounting purposes, the acquisition hasbeen treated as a capital transaction and as a recapitalization ofInternational Wholesale Tile, Inc.

 

As part of the transaction, the Company and each of the threeshareholders of International Wholesale Tile, Inc. entered into a repurchaseagreement, to commence on January 1, 2003 for three years, 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 istrading.  The amount of stock isgenerally up to 25,000 shares for the first year, up to 50,000 shares for the secondyear, and up to 75,000 shares for the third year.  The repurchase agreement was contingent upon trading of theCompany’s stock on the NYSE, the ASE, the NASDAQ, the Over the Counter BulletinBoard, or the “Pink Sheets”.

 

On June 26, 2003 the Company voted to cancel the repurchaseagreement; consequently the financial statements were adjusted to reflect thechange.

 

17

----

 

**NOTE 14****                                             SEGMENTINFORMATION**

 

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

 

**NOTE 15****                                             SUBSIDIARIES**

 

On January 8, 2003, the Companyincorporated a subsidiary, IWT Tesoro International, Ltd. (ITIL).  This subsidiary was set up as a foreignsubsidiary, to be based in Bermuda to handle future operations of foreignsubsidiaries.  Organizational costsrelated to the incorporation totaling $8,311 were capitalized and are beingamortized over 5 years.  Amortizationexpense for the nine months ended September 30, 2003 was $1,247.

 

On January 24, 2003, the Company set upIWT Tesoro Transport, Inc. (ITTI). Initially, this corporation will be a transport broker, but future plansinclude overland transport of tile from Florida to destinations within theUnited States and return shipments of other freight back to Florida.

 

**NOTE 16****                                             PUBLICOFFERING**

 

On April 11, 2003, the Company filed aregistration statement with the Securities and Exchange Commission that wasdeclared effective on June 17, 2003. Two offerings were included in theregistration statement. The first was the offer and sale of250,000 units at $5.50 per unit.  Eachunit consists of one share of Tesoro common stock and a warrant to purchase oneshare at $7.00 per share through June 17, 2006.  Through July 7, 2003, these units were offered exclusivelyto current stockholders of the Company. The second offering was to register on behalf of certain Tesorostockholders an aggregate of 1,243,502 shares for resale; of this total 443,500have no lock-up period, 699,002 are subject to a six-month lock-up period, and101,000 are subject to a 12-month lock-up period.  The Company elected to extend this offering to December 14,2003.  As of September 30, 2003, atotal of 21,557 units have been issued under this offering.

 

On September 22, 2003, the Company entered into a Selected Dealeragreement with an investment company to serve as an exclusive selected dealerfor the offering of 250,000 units.

 

In addition, the Company added a “Purchaser Questionnaire” to thesubscription agreement to be executed by all investors participating in theoffering of the 250,000 units.

 

**NOTE 17****                                             SUBSEQUENTEVENTS**

 

Effective October 28, 2003, the NASD approved Noble InternationalInvestments, Inc. as the exclusive selected dealer of the Company’s offer andsale of up to 250,000 units pursuant to its registration statement filed withthe SEC.

 

18

----

 

ITEM 2:          MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION

 

The following discussion should be read along with ourfinancial statements, which are included in another section of thisfiling. This discussion contains forward-looking statements about ourexpectations for our business and financial needs. These expectations aresubject to a variety of uncertainties and risks that may cause actual resultsto vary significantly from our expectations. The cautionary statements made inthis prospectus should be read as applying to all forward-looking statements inany part of this prospectus.

 

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

 

Effective October 1, 2002, we acquiredInternational Wholesale Tile, Inc. (IWT) through a share exchange and IWTbecame our wholly owned subsidiary. We issued a total of nine millionshares of our common stock in exchange for all of the IWT shares.

 

Through IWT, we provide hard floor and wall coveringmaterials primarily ceramic, porcelain and granite tiles to the newconstruction and remodeling industries for the commercial and residentialmarketplaces. We distribute our products through a network of independentlyowned dealers and distributors, buying groups and home center retailers. Wecurrently purchase our products predominately from foreign manufacturers.

 

Our primary source of revenue is the sale of hardflooring and wall covering materials and our primary costs relate to theacquisition, warehousing and delivery of those products. While sales are madethroughout the United States, the majority of our sales are in the southeasternquadrant of the country. The primary sources of working capital are a$17.0 million (US) revolving line of credit from a large US commercialbank, stockholders’ equity and our suppliers who have extended us terms. During2003, we expect to begin trading our stock on the OTC-BB and to raise equitythrough the public market. Any new equity raised will be used to strengthen ourbalance sheet and to provide capital for continued growth.

 

In 2003, we have created two new wholly ownedsubsidiary companies.  The first is IWTTesoro International Ltd (“International”). International is a Bermuda based exempt company.  International will serve as the holdingcompany for any internationally based ventures we need to support expanding oursales effort. The other subsidiary is IWT Tesoro Transport, Inc.(“Transport”).  Transport is a Floridacorporation and a licensed freight carrier that will handle our in and outbound freight operations and backhaul third party goods excluding household orhazardous materials.

 

*Results of Operations for the Quarter endingSeptember 30, 2003.*

 

The following discussion and analysis should be readin conjunction with the financial statements and notes thereto that appearelsewhere in this document. The table below sets forth certain operating data,percentage numbers are relative to total revenue for the periods indicated.

 
|                     |   | **Quarter Ending September 30,** |   |
|--------------------------|--------|---------------------------------------|--------|
|                     |   | **2001**                              |   | **2002** |   | **2003** |   |
|                     |   |                                  |   |   |   |   |   |
| Revenues                 |   | 4,966,258                             |   | 6,383,981 |   | 8,969,586 |   |
| Cost  of Goods Sold      |   | 3,092,352                             |   | 3,787,716 |   | 5,373,248 |   |
| Gross  Margin            |   | 1,873,906                             |   | 2,596,625 |   | 3,596,338 |   |
| Gross  Margin Percentage |   | 37.73                                 | %      | 40.67 | % | 40.09 | % |
| Operating  Expenses      |   | 1,384,586                             |   | 1,715,593 |   | 3,327,076 |   |

 

19

----

 

*Quarter ended September 30, 2003 Compared toQuarter Ended September 30, 2002*

 

Sales for the quarter ended September 30, 2003were $8,969,586 a 40% increase over sales for the quarter endedSeptember 30,2002. This growth follows a 28% growth from 2001 to 2002. Weare a relatively small player in a growing market. We are entering new marketsand adding new products; therefore, we expect to be able to grow faster thanthe market as a whole for the next several years. Our share of this market isapproximately 1%. According to Floor Covering Weekly, the tile market in theUnited States was approximately $2.34 billion in 2002 and is growing at a11.4% percent rate.

 

As we grow, we have been able to purchase product atlower prices and have consequently lowered our cost of goods to 60% in 2002from 64% in 2001 and 68% in 2000. While there are certainly finite limits toimproving our gross margin percentage, it is imperative that we maintain theseratios as we grow.  The gross margin forthe quarter ended September 30, 2003 was $3,596,338, a 38% increase overgross margin for the quarter ended September 30, 2002.

 

Inearly April 2003, we moved into a new warehouse facility of nearly 147,000square feet, an increase of nearly 50% over the previous facility. 5,000 squarefeet of the new facility is for office space. On June 4th and July 9th, 2003, leaseaddendums were signed that added approximately 75,000 square feet to thewarehouse capacity.  These new additionsbring the total warehouse capacity to approximately 220,000 square feet.  These new facilities will allow us toincrease our inventory and better serve our customers who rely upon us to meetthe short lead times and limited inventory capacity that exist in theirmarkets. We hope to improve the efficiency of our warehouse operations bysimplifying the receiving and shipping functions. We currently maintain betweeneight and ten million square feet of product in our facility.  Our inventory turns, in 2002, wereapproximately 3.8 times. We expect to lower those turns to about 2.0 during2003; however we cannot assure anyone that we will be successful in attainingthese expectations. Availability of product is a key success factor for us andis a good use of our capital.

 

InMay 2003, we commenced bulk sales of products, made exclusively for IWT,to wholesale distributors throughout the United States.  The sales of these products are made in fulltruckload or container load volumes, with some product being delivered directlyto 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.  InSeptember 2003, we began the installation of sample racks for our productsin home center stores in South Florida. As of September 30, 2003, our displays were installed in forty-eightlocations.

 

Making it easy for our customers to sell product isalso a key success factor for us. We have an extensive sampling and displayprogram that augments the training and marketing support we provide ourcustomers. Our inventory of samples in the field with our customers representsa significant investment that is capitalized as property and equipment.  The net value on September 30, 2003 andDecember 31, 2002 was $1,988,082 and $1,793,026, respectively on ourbalance sheet.

 

Operating expenses for the quarters endedSeptember 30, 2003 and September 30, 2002 were $3,227,076 and$1,715,593, respectively. This increase of 88.1% was a result of increases insales related expenses, such as commissions and delivery charges, driven by ourrevenue growth, and investments being made in people, infrastructure andcorporate organization for future growth. With the acquisition of IWT inOctober 2002, we began to incur certain professional and operatingexpenses that are not reflected in the comparable period for 2002. In addition,we began to issue common stock to non-executive employees, outside directorsand suppliers under the incentive stock plan. Generally Accepted AccountingPrinciples require that these shares be expensed in the period they are issuedat the fair market value of these shares. We expect these expenses to continue.

 

On June 17, 2003, our registration statementwith the Securities and Exchange Commission (SEC) became effective.  The one time costs of printing prospectusesfor both the selling shareholders and the new unit offering, the investmentbanking fees and legal and accounting fees associated with this offering haveimpacted our quarterly expenses for the quarter ending September 30, 2003.

 

20

----

 

During the second quarter of fiscal year 2003 weincreased our occupancy costs, including rent, in anticipation of the expansionof the bulk sales and home center store channels. We expect these expenses tocontinue and to generate proportionate sales growth in the future.  In addition, during the quarter endedSeptember 30, 2003, we completed a refinancing of our revolving creditfacility.  These one time refinancingcosts also increased operating expenses for the quarter endingSeptember 30, 2003.

 

*Liquidity and Capital Resources*

 

We had cash balances of $647,634 and $574,046 at theend of September 30, 2003 and December 31, 2002, respectively. Wehave generated positive cash flow from operations for the last three years.

 

In October 2002, we commenced a privateoffering of our common stock to accredited investors for up to one millionunits at $3.00 per unit. Each unit consists of one share of common stock andwarrants to purchase 11¤2 shares initially at $3.00 per share for fiveyears from the date the warrant was issued. The price of the warrants willincrease by $.25 per share at the beginning of each calendar quarter followingthe first public sale of Tesoro’s common stock and continuing until the warrantexpires.

 

Through its closing as of March 31, 2003, weraised $660,000 from units sold. We also raised an additional $45,000 from15,000 warrants that were exercised. All of the investors were provided with,or otherwise had access to, information about the Company and its subsidiaries,including financial information. The proceeds from the offering and the warrantexercises were used for general corporate purposes, including paying fees tooutside professionals and working capital.

 

On September 10, 2003, we entered into arevolving credit facility with Fleet Capital Corporation, a division of FleetBoston Financial Company.  This facilityis for a maximum of  $ 17 million andhas a three-year maturity.  The proceedsof this loan were first used to repay the existing line of credit ($7.5 million)to our wholly owned subsidiary, IWT. Subsequent proceeds have been used to expand IWT’s inventory purchasingcapability.  The Fleet facility providesfor certain financial and non-financial covenants and is mutually guaranteed byall of our subsidiaries.  Interest ratesfor this facility range from LIBOR plus 3.0 for 30, 60 or 90day certificates toFleet’s prime rate plus .5%.

 

On June 17, 2003, the Securities and ExchangeCommission declared IWT Tesoro Corporation’s registration statement on FormSB-2 effective.  In connection with the Registration Statement, twoofferings are occurring.  The first is the offer and sale of 250,000 unitsat $5.50 per unit.  Each unit consists of one share of Tesoro common stockand a warrant to purchase one share at $7.00 per share through June 17,2006.  The second offering was filed on behalf certain stockholders, forre-sale an aggregate of 1,243,502 shares.

 

The unit offering was sold on an exclusive basisthrough July 7, 2003 to Tesoro’s current stockholders.  Subsequently,the units are being offered and sold by Tesoro’s officers and directors, or bycertain registered broker-dealers who have entered into a Selected DealerAgreement with Tesoro and who have been approved by the National Association ofSecurities Dealers (NASD).  ThroughSeptember 30, 2003, we raised $118,565 from units sold under the currentregistration statement.

 

ITEM3: CONTROLS AND PROCEDURES

 

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

 

(b)                                 There have been no significant changes in our internal controls or in other factors that could

 

21

----

 

significantly affect these controls subsequent to the date of the evaluation described in the preceding paragraph.

 

22

----

 

PART II — OTHER INFORMATION

 

ITEM1.                              LEGALPROCEEDINGS

 

There are no legal proceedingsagainst the Company and the Company is unaware of such proceedings contemplatedagainst it.

 

ITEM2.                              CHANGESIN SECURITIES

 

(a)– (c)                                Notapplicable

 

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

 

In connectionwith the Registration Statement, two offerings are occurring.  The first is the offer and sale of 250,000units at $5.50 per unit.  Each unitconsists of one share of Tesoro common stock and a warrant to purchase oneshare at $7.00 per share through June 17, 2006.  The second is an offer by certain Tesoro’s stockholders to sellan aggregate of 1,243,502 shares registered for resale.

 

The unitoffering was sold on an exclusive basis through July 7, 2003 to Tesoro’scurrent stockholders.  Subsequently, theunits are being offered and sold by Tesoro’s officers and directors, or bycertain registered broker-dealers who have entered into a Selected DealerAgreement with Tesoro and who have been approved by the National Association ofSecurities Dealers (NASD).

 

As required by Rule 463, as of September 30, 2003, 21,557 units were sold by the Company, for which Tesoro received proceeds of $118,565.  These proceeds have been used for a. the first 125,000 for offering expenses and b. the remainder for inventory to support growth .

 

ITEM3.                              DEFAULTSUPON SENIOR SECURITIES

 

Not applicable.

 

ITEM4.                              SUBMISSIONOF MATTER TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

ITEM5.                              OTHERINFORMATION

 

Not applicable.

 

ITEM6.                              EXHIBITSAND REPORTS ON FORM 8-K

 
| (a)    |   | Exhibits             |
|--------|--------|----------------------|
|   |   |                 |
| (b)    |   | Reports on Form 8-K. |
|   |   |                 |
|   |   |                 | i. | On September 10, 2003, the Company filed a report on Form 8-K stating that it had entered into a three-year revolving credit facility with Fleet Capital Corporation. |

 

23

----

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                    | IWT  TESORO CORPORATION                  |
|-------------------------|------------------------------------------|
|                    |                                     |
|                    |                                     |
| November 12,  2003 | /s/  Henry J. Boucher, Jr.               |   |
|                    | Henry  J. Boucher, Jr., President        |
|                    |                                     |
| November 12,  2003 | /s/  Forrest Jordan                      |   |
|                    | Forrest  Jordan, Chief Financial Officer |
|                         |                                          |  |  |

 

24

----