10QSB/A 1 a05-2897_210qsba.htm 10QSB/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB/A

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File No. 0-31267

IWT TESORO CORPORATION

(Exact Name of Small Business Issuer in Its Charter)

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

101 Post Road West, Westport, CT 06880
(Address of principal executive offices)

(203) 221-2770
(Issuer’s Telephone Number, including area code)


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

Securities registered pursuant to Section 12(b) of the Exchange Act: NONE

Securities registered pursuant 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) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

ýYes oNo

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

Transitional Small Business Disclosure Format: oYes ýNo

EXPLANATORY NOTE

Tesoro has restated the consolidated balance sheets as of June 30, 2003 and December 31, 2002, and the consolidated statements of operations, stockholders’ equity and cash flows for the three month ended June 30, 2003 and 2002, respectively. In particular, Management determined that Tesoro had been incorrectly calculation the accruals for sales commissions. Management revised this calculation and determined that accrued expenses were understated by approximately $383,000 as of June 30, 2003. Additionally, management reassessed its methodology for accounting for sample and display boards and determined that this promotional merchandise should have been expensed when distributed rather than capitalized and depreciated. The adjustments resulting from the restatement decreased net income by approximately $194,000 for the three month ended June 30, 2003. This change also reduced property and equipment as of June 30, 2003 by approximately $2,565,000. In connection with the restatements for accrued expenses and sample and display boards described above, the related tax effect was recorded resulting in a gross deferred tax asset for the three month ended June 30, 2003 of approximately $43,000. Finally, as part of the recapitalization transaction of IWT effective October 1, 2002 (see Note 1), the Company and each of the three stockholders of International Wholesale Tile, Inc. entered into a repurchase agreement to commence on January 1, 2003. The maximum number of redeemable shares under the repurchase agreement was 450,000. The transaction was accounted for by reducing additional paid in capital to the extent a balance existed with the remaining portion of the transaction applied to accumulated deficit as of December 31, 2002. During the three months ended June 30, 2003 the repurchase agreement was cancelled. The transaction was accounted for by increasing additional paid in capital to the extent it was reduced in the prior year with the remaining portion decreasing the accumulated deficit.

Part 1. Financial Information

Item 1. Financial Statements

IWT TESORO CORPORATION AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2003

TABLE OF 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

IWT TESORO CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2003			2002
	(Restated)			(Restated)
	(Unaudited)
ASSETS
Current Assets:
Cash	$	318,732		$	574,046
Accounts receivable, net allowance for doubtful accounts and returns	4,535,407			2,875,532
Inventories	10,922,077			6,047,876
Prepaid expenses	331,261			286,820
Deferred tax asset	718,294			597,196
Total current assets	16,825,771			10,381,470

Property and equipment, net	1,246,812			489,502

Other Assets	218,433			191,725
	$	18,291,016		$	11,062,697

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	9,273,711		$	5,403,816
Accrued expenses	442,777			330,140
Other liabilities	29,097			24,723
Current portion of capital lease obligations	57,196			47,222
Current portion of notes payable, other	57,832			48,780
Total current liabilities	9,860,613			5,854,681

Long-Term Debt:
Note payable, revolving line of credit	7,335,904			4,864,778
Capital lease obligations	149,164			108,438
Subordinated notes payable, stockholders	338,662			448,712
Notes payable, other	68,448			64,872
Total long-term debt	7,892,178			5,486,800
Total liabilities	17,752,791			11,341,481

Redeemable common stock (450,000 shares issued and outstanding)	—			1,073,160

Stockholders’ Equity:
Preferred stock, $0.001 par value, 25,000,000 authorized; none issued
Common stock, $0.001 par value, 100 million shares authorized; 11,209,252 and 10,587,834 issued and outstanding	11,209			10,588
Additional paid in capital	1,201,221			—
Accumulated deficit	(674,205		)	(1,362,532		)
	538,225			(1,351,944		)
	$	18,291,016		$	11,062,697

See notes to financial statements.

IWT TESORO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the period ended June 30,
	Three months ended						Six months ended
	2003			2002			2003			2002
	(Restated)			(Restated)			(Restated)			(Restated)
Revenue
Sales, net of discounts and returns	$	8,477,575		$	6,803,466		$	15,191,385		$	12,817,486
Cost of goods sold	5,011,999			4,193,483			9,091,607			7,805,799

Gross profit	3,465,576			2,609,983			6,099,778			5,011,687

Expenses
Payroll	1,225,587			1,004,736			2,403,229			1,775,937
Delivery	413,075			316,114			749,120			587,632
General and administrative	305,373			111,194			515,389			190,239
Lease expense	198,254			112,490			332,634			227,206
Depreciation and amortization	59,749			33,933			100,299			63,638
Insurance	85,138			84,803			159,966			167,154
Repairs and maintenance	87,629			69,120			170,000			104,108
Sales expenses	141,450			58,513			256,318			98,105
Advertising	311,548			198,935			577,115			374,167
Professional fees	113,794			23,864			238,637			43,900
Travel and entertainment	75,653			14,367			130,113			47,992
Bad debts	50,570			—			53,817			—
	3,067,820			2,028,069			5,686,637			3,680,078

Income from operations	397,756			581,914			413,141			1,331,609

Other income/(expenses)
Interest expense	(98,632		)	(89,679		)	(174,581		)	(164,310		)
Other expense	(5,723		)	(11		)	(5,723		)	(11		)
Other income	900			876			1,735			1,585
Gain (loss) on disposal	—			—			(5,352		)	5,990
	(103,455		)	(88,814		)	(183,921		)	(156,746		)

Net income before taxes	294,301			493,100			229,220			1,174,863

Income tax benefit	43,211			—			56,304			—

Net income	$	337,512		$	493,100		$	285,524		$	1,174,863

Earnings per common share
Basic	$	0.03		$	0.04		$	0.02		$	0.10
Diluted	$	0.03		$	0.05		$	0.02		$	0.13

Weighted Average Common Shares Outstanding:
Basic	11,142,691			9,000,000			11,142,691			9,000,000
Diluted	11,485,873			9,000,000			11,485,873			9,000,000

IWT TESORO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS 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 to financial statements.

IWT TESORO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

				Additional		Accumulated
	Common Stock			Paid in		Earnings
	Shares	Amount		Capital		Deficit			Total

Balance, December 31, 2002, as restated	10,587,834	$	10,588	$	—	$	(1,362,532	)	$	(1,351,944	)

Issuance of shares - private offering	136,668	136		409,864		—			410,000

Exercise of warrants	10,000	10		29,990		—			30,000

Issuance of shares to employees and directors for services rendered	21,000	21		70,839		—			70,860

Issuance of shares - public offering	3,750	4		20,621		—			20,625

Cancellation of stock repurchase agreement	450,000	450		669,907		402,803			1,073,160

Net income, six months ended June 30, 3003	—	—		—		285,524			285,524

Balance, June 30, 2003, as restated	11,209,252	$	11,209	$	1,201,221	$	(674,205	)	$	538,225

See notes to financial statements.

IWT TESORO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	June 30,
	2003			2002
	(Restated)			(Restated)

Cash flows from operating activities:
Net income	$	285,524		$	1,174,863
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	100,299			63,638
Deferred income taxes	(56,304		)	—
Provision for doubtful accounts and reserve for returns	24,994			—
(Gain) loss on disposal of property and equipment	5,352			(5,979		)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable	(1,684,869		)	(1,100,740		)
Inventories	(4,874,201		)	448,739
Prepaid expenses	(56,163		)	101,521
Other assets	—			(19,876		)
Increase in:
Accounts payable	3,869,895			147,043
Accrued expenses	117,032			5,482
Net cash provided by (used in) operating activities	(2,268,441		)	814,691

Cash flows from investing activities:
Acquisitions of property and equipment	(766,399		)	(44,171		)
Proceeds from sale of equipment	—			11,000
Net cash used in investing activities	(766,399		)	(33,171		)

Cash flows from financing activities:
Proceeds from loans	16,228,000			11,800,000
Payments on revolving line of credit	(13,782,136		)	(11,856,737		)
Proceeds from issuance of stock	460,625			—
Principal payments on capital leases	(27,553		)	(20,771		)
Principal Payments on notes payable	(110,050		)	—
Distribution to stockholders	—			(650,000		)
Proceeds from related party note	10,640			14,360
Net cash provided by (used in) financing activities	2,779,526			(713,148		)

Net Increase (Decrease) in Cash	(255,314		)	68,372

Cash, Beginning	574,046			402,500
Cash, Ending	$	318,732		$	470,872

Cash Paid (Received) During the Period for:
Interest expense	$	174,581		$	164,310

See notes to financial statements.

IWT TESORO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2003

NOTE 1 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, International Wholesale Tile, Inc. (IWT), IWT Tesoro International, Inc. (International) and IWT Tesoro Transport, Inc. (Transport). All significant inter-company balances and transactions have been eliminated.

The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-QSB and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these condensed financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s audited financial statements on Form 10-KSB for the fiscal year ended December 31, 2002.

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

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

NOTE 2 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Options

The Company elected to account for stock options issued to employees in accordance with Accounting Principles Board Opinion No. 25 (APB Opinion No. 25) Accounting For Stock Issued to Employees and related interpretations, which established financial accounting and reporting for compensation cost of stock issued to employees through non-variable plans, variable plans, and non-compensatory plans, and accounts for stock options and warrants issued to non-employees in accordance with SFAS 123, Accounting for Stock-Based Compensation, which established a fair value method of accounting for stock compensation plans with employees and others.

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

Had compensation costs for 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 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 ended December 31, 2002 would have changed to the pro-forma amounts indicated.

	2002
Net income as reported	$	1,677,538

Add: Stock based employee compensation cost determined under fair value based method for all awards, net of related tax effects.	(2,697		)

Pro-forma net income	$	1,674,841

Net income per share basic – diluted
As reported	$	0.15
Pro-forma	$	0.15

Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based Compensation. The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used in reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. In compliance with SFAS No. 148, the Company has elected to continue to follow the intrinsic value method in accounting for its 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 income for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per share include the effects of common stock equivalents to the extent they are dilutive.

Basic and diluted weighted average number of shares outstanding at June 30^th is as follows:

	2003	2002

Basic weighted average number of shares outstanding	11,142,691	9,000,000

Diluted weighted average number of shares outstanding	11,485,873	9,000,000

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

NOTE 3 CONCENTRATION OF CREDIT RISK

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

The Company obtains detailed credit evaluations of customers and establishes credit limits as required and routinely assesses the financial strength of its customers. The Company competes primarily in the sale of ceramic tile and marble markets and sells its products to a multitude of customers. There is no disproportionate concentration of credit risk.

NOTE 4 ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	June 30, 2003			December 31, 2002

Accounts receivable	$	4,643,646		$	2,958,777
Less allowance for doubtful accounts	(108,239		)	(83,245		)

	$	4,535,407		$	2,875,532

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

NOTE 5 INVENTORY

Inventory consisted of the following:

	June 30, 2003		December 31, 2002

Tiles	$	9,327,589	$	4,692,974
Inventory in transit	1,594,488		1,354,902

	$	10,922,077	$	6,047,876

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

NOTE 6 PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	June 30, 2003			December 31, 2002			Depreciation Period in Years

Furniture and fixtures	$	337,904		$	89,238		5-10
Machinery and equipment	433,290			326,165			7-10
Vehicles	223,458			207,071			5
Computer equipment	317,929			131,407			3-5
Leasehold improvements	355,846			108,220			7

	1,668,427			862,101
Less accumulated depreciation	(421,615		)	(372,599		)

	$	1,246,812		$	489,502

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

NOTE 7 NOTES PAYABLE

The Company has outstanding notes payable as follows:

	June 30, 2003			December 31, 2002

Notes Payable – Related Parties	$	338,662		$	448,712
Notes Payable – Unrelated Parties	126,280			113,652

	464,942			562,364
Less current portion	(57,832		)	(48,780		)

	$	407,110		$	513,584

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

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

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

	$	464,942

NOTE 8 LOAN PAYABLE

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

IWT is subject to a number of restricted covenants under the debt agreement. IWT is in compliance with all covenants during the six months ended June 30, 2003.

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

NOTE 9 LEASES

Capital Leases

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

	June 30, 2003			December 31, 2002

Equipment	$	355,448		$	266,672
Less: Accumulated depreciation	(75,155		)	(58,724		)

Net assets under capital leases	$	280,293		$	207,948

Operating Leases

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

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

	Operating Leases		Capital Leases

2003	$	409,631	$	30,426
2004	832,312		57,587
2005	851,887		53,328
2006	872,437		41,216
2007	893,800		21,310
2008 and thereafter	5,232,645		2,493

	$	9,092,712	$	206,360

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

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

NOTE 10 INCOME TAXES

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

NOTE 11 STOCKHOLDERS’ EQUITY

The Articles of Incorporation provide for the authorization of 25,000,000 shares of convertible preferred stock at $0.001, and 100,000,000 shares of common stock at $0.001 par value. Each share of preferred stock is convertible into 1 share of common stock. At June 30, 2003 11,209,252 shares of common stock were issued and outstanding.

Common Stock

During the six months ended June 30, 2003, the Company issued 136,668 shares of common stock and 205,002 warrants for $3.00 per unit, for a total of $410,000, to accredited investors pursuant to the private offering. (See Note 14)

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

On February 18^th and February 25^th, 2003, the Company issued 15,000 shares of common stock valued at $2.71 per share, based on the contemporaneous offering price, for a total of $40,650, to directors under the Stock Incentive Plan for services rendered resulting in an immediate charge to operations.

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

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

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

NOTE 12 STOCK OPTIONS AND COMPENSATION PLAN

Stock Compensation Plan

On December 27, 2001, IWT Tesoro Corporation adopted the “Stock Incentive Plan.” The Company’s Stock Incentive Plan provides that eligible employees, consultants, and affiliates may 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 4,000,000 shares. For the six months ended June 30, 2003, 21,000 restricted shares were issued to employees, directors and consultants for services rendered. For the six months ended June 30, 2002, no restricted shares were issued to employees, directors and consultants for services rendered under the “Stock Incentive Plan.” The aggregate total of restricted shares issued under the Stock Incentive Plan is 145,500 through June 30, 2003. These shares are currently not registered and are subject to Rule 144 without any additional restrictions imposed by the Compensation Committee at the present time.

In accordance with SFAS No. 123, for options issued to employees, the Company has elected to account for these stock options under APB No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation costs have been recognized for options issued under the plan as of December 31, 2002. Had compensation costs for the Company’s stock option been determined 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 ended December 31, 2002 would have changed to the pro-forma amounts indicated. No options were issued during the six months ended June 30, 2003.

NOTE 13 ACQUISITION

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

As part of the transaction, the Company and each of the three shareholders of International Wholesale Tile, Inc. entered into a repurchase agreement, to commence on January 1, 2003 for three years, by which the three shareholders may sell a certain amount of the Company’s common stock back to the Company for a price based on an amount equal to 88% of the average trading 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 to 50,000 shares for the second year, and up to 75,000 shares for the third year. The repurchase agreement is contingent upon trading of the Company’s stock on the NYSE, the ASE, the NASDAQ, the Over the Counter Bulletin Board, or the “Pink Sheets”.

On June 26, 2003 the Company voted to cancel the repurchase agreement; consequently the financial statements were adjusted to reflect the change.

NOTE 14 PRIVATE OFFERING

The Company adopted a subscription agreement on October 1, 2002 to commence a private offering of 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 and warrants to purchase 1½ shares initially at $3.00 per share. The price of the warrants will increase by $.25 per share at the beginning of each calendar quarter following the first public sale of the common stock of IWT Tesoro Corporation, pursuant to the Company’s form 211 to be filed with the National Association of Securities Dealers (NASD).

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

NOTE 15 SEGMENT INFORMATION

The Company manages its operations as one segment and all revenue is derived from customers in the United 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 based in Bermuda to handle future operations of foreign subsidiaries. Organizational costs related to the incorporation totaling $8,311 were capitalized and are being amortized over 5 years. Amortization expense for the six months ended June 30, 2003 was $831.

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

NOTE 17 PUBLIC OFFERING

On April 11, 2003, the Company filed a registration statement with the Securities and Exchange Commission that was declared effective on June 17, 2003. Two offerings were included in the registration statement. The first was the offer and sale of 250,000 units at $5.50 per unit. Each unit consists of one share of Tesoro common stock and a warrant to purchase one share at $7.00 per share through June 17, 2006. This offering will end the earlier of September 15, 2003 or until all 250,000 shares are sold. The Company may extend this offering for an additional ninety days through December 14, 2003. Through July 7, 2003, the Company will offer these units to its current stockholders exclusively. The second offering was by certain Tesoro stockholders to sell an aggregate of 1,243,502 registered shares; of this total 443,500 have no lock-up period, 699,002 are subject to a six-month lock-up period, and 101,000 are subject to a 12-month lock-up period.

NOTE 18 RESTATEMENT

The Company has restated the consolidated balance sheets as of June 30, 2003 and the consolidated statements of operations, stockholders’ equity and cash flows for the year then ended as described below:

Accounts Receivable

Management determined that the Company had been incorrectly calculating the allowances for product returns. Management revised this calculation and determined that accounts receivable and net sales were overstated by approximately $48,000 as of and for the period ended June 30, 2003.

Accrued Expenses

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

Sample and Display Boards

Management reassessed its methodology for accounting for sample and display boards and determined that this promotional merchandise should have been expensed when distributed rather than capitalized and depreciated. The adjustments resulting from the restatement decreased net income by approximately $194,000 for the three months ended June 30, 2003. This change also reduced property and equipment as of June 30, 2003 by approximately $2,565,000.

Deferred Taxes

In connection with the restatements for accounts receivable, accrued expenses and sample and display boards described above, the related tax effect was recorded resulting in a gross deferred tax assets at the period ended June 30, 2003 of approximately $718,000.

Stockholders Equity

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

The effects of these changes are summarized as follows:

	June 30, 2003
	As
	Previously						As
	Reported			Adjustments			Restated
Consolidated Balance Sheet:
Accounts receivable	$	4,583,646		$	(48,239	)	$	4,535,407
Property and equipment, net	3,811,678			(2,564,866		)	1,246,812
Deferred tax assets	—			718,294			718,294
Accrued expenses	60,000			382,777			442,777
Deferred tax liability	29,652			(29,652		)	—
Additional paid in capital	2,290,092			(1,088,871		)	1,201,221
Retained earnings (deficit)	$	484,860		$	(1,159,065	)	$	(674,205	)

	For the Quarter Ended June 30, 2003
	As
	Previously						As
	Reported			Adjustments			Restated
Consolidated Statement of Operations:
Net Sales	$	8,505,066		$	(27,491	)	$	8,477,575
Gross profit	3,493,066			(27,490		)	3,465,576
Operating expenses	2,785,675			282,145			3,067,820
Income (loss) before income taxes	603,936			(309,635		)	294,301
Income tax benefit (expense)	(97,000		)	140,211			43,211
Net Income (loss)	$	506,936		$	(169,424	)	$	337,512

Earnings (loss) per share:
Basic & diluted	$	0.05		$	(0.02	)	$	0.03

	For the Six Months June 30, 2003
	As
	Previously						As
	Reported			Adjustments			Restated
Consolidated Statement of Operations:
Net Sales	$	15,239,624		$	(48,239	)	$	15,191,385
Gross profit	6,148,017			(48,239		)	6,099,778
Operating expenses	5,165,702			520,935			5,686,637
Income (loss) before income taxes	798,600			(569,174		)	229,220
Income tax benefit (expense)	(129,000		)	185,304			56,304
Net Income (loss)	$	669,600		$	(384,076	)	$	285,524

Earnings (loss) per share:
Basic & diluted	$	0.06		$	(0.03	)	$	0.03

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion should be read along with our financial statements, which are included in another section of this prospectus. This discussion contains forward-looking statements about our expectations for our business and financial needs. These expectations are subject to a variety of uncertainties and risks that may cause actual results to vary significantly from our expectations. The cautionary statements made in this prospectus should be read as 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 Road West, Suite 10, Westport, CT 06880. Any reference in this “Management’s Discussion 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 share exchange and IWT became our wholly owned subsidiary. We issued a total of 9 million shares of our common stock in exchange for all of the IWT shares. As part of the transaction, Tesoro and each of the three IWT stockholders entered into a repurchase agreement by which the three stockholders may each sell a total of 150,000 shares of Tesoro’s common stock over a three-year period back to us for a price based on an amount equal to 88% of its then weighted average trading price. Effective June 28, 2003, Tesoro and three former IWT shareholders terminated the repurchase agreement.

Through IWT, we provide hard floor and wall covering materials primarily ceramic, porcelain and granite tiles to the new construction and remodeling industries for the commercial and residential marketplaces. We distribute our products through a network of independently owned dealers and distributors, buying groups and home center retailers. We currently purchase our products predominately from foreign manufacturers.

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

Results of Operations for the Quarter ending June 30, 2003.

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

	Quarter Ending June 30,
	2001		2002		2003

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

Quarter ended June 30, 2003 Compared to Quarter Ended June 30, 2002

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

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

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

In May 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 full truckload or container load volumes, with some product being delivered directly to the customer from the factory (drop-shipped). The gross margin on these sales could be lower than our traditional business; however, we believe that the lower handling costs may offset the lost gross margin.

Another success factor for us is maintaining our position as a dependable supplier not only to meet customer demand but also to ensure leading edge design and technical superiority of the product. We established IWT Tesoro International Ltd., as our subsidiary responsible for dealing with the global array of manufacturers that supply us with product. During the second quarter, we continued to develop key relationships in Europe and South America and began to sell some of these new items through the IWT network of dealers and distributors. The impact of these activities on our second quarter results was minimal, but we believe it will grow during the remainder of this fiscal year.

Operating expenses for the quarters ended June 30, 2003 and June 30, 2002 were $3,067,820 and $2,028,069, respectively. This increase of 51.2% was a result of increases in sales related expenses, such as commissions and delivery charges, driven by our revenue growth, and investments being made in people, infrastructure and corporate organization for future growth. With the acquisition of IWT in October 2002, we began to incur certain professional and operating expenses that are not reflected in the comparable period for 2002. In addition, we began to issue common stock to non-executive employees, outside directors and suppliers under the stock incentive plan. Generally Accepted Accounting Principles require that these shares be expensed in the period they are issued at the fair market value of these shares. We expect these expenses to continue.

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

Liquidity and Capital Resources

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

In October 2002, we commenced a private offering of our common stock to accredited investors for up to one million units at $3.00 per unit. Each unit consists of one share of common stock and warrants to purchase 1 1/2 shares initially at $3.00 per share for five years from the 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 first public sale of Tesoro’s common stock and continuing until the warrant expires.

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

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

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

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

• during any time the amounts available to us are made or arise without our lender’s knowledge or consent.

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

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

ITEM 3: 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 significantly affect these controls subsequent to the date of the evaluation described in the preceding paragraph.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no legal proceedings against us and we are unaware of such proceedings contemplated against it.

ITEM 2. CHANGES IN SECURITIES

(a) — (c) Not applicable

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

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

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits

31.1		Certification of CEO
31.2		Certification of CFO
32.1		CERTIFICATION PURSUANT TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
32.2		CERTIFICATION PURSUANT TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(b)		Reports on Form 8-K.

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

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

SIGNATURES

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

	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