TC GLOBAL, INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - SECTION 906 CEO CERTIFICATION - TC GLOBAL, INC.	tcglobal321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - TC GLOBAL, INC.	tcglobal322.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - TC GLOBAL, INC.	tcglobal311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - TC GLOBAL, INC.	tcglobal312.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________

FORM 10-Q

__________________________

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

FOR THE QUARTERLY PERIOD ENDED JULY 3, 2011

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM to

Commission file number: 001-33646

__________________________

TC GLOBAL, INC.

(Exact Name of Registrant as Specified in its Charter)

__________________________



Washington	91-1557436
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3100 Airport Way South, Seattle, Washington 98134

(Address of principal executive offices)

(206) 233-2070

(Registrant’s telephone number, including area code)

__________________________

Indicate by check mark whether the registrant (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. Yes  No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer, accelerated filer, non-accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):



Large accelerated filer		Accelerated filer		Non-accelerated filer		Smaller reporting company	

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Common Stock, No Par Value	3,565,664
(Title of Each Class)	Number of Shares Outstanding at August 10, 2011

Table of Contents

TC GLOBAL, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 3, 2011

INDEX



		Page No.
	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	3
PART I	FINANCIAL INFORMATION	4
Item 1	Financial Statements	4
	Condensed Consolidated Balance Sheets at April 3, 2011 and July 3, 2011	4
	Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended June 27, 2010 and July 3, 2011	5
	Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods Ended June 27, 2010 and July 3, 2011	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4	Controls and Procedures	23
PART II	OTHER INFORMATION	23
Item 1	Legal Proceedings	23
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6	Exhibits	24
	SIGNATURE	25

****

We end our fiscal year on the Sunday closest to March 31. As a result, we record our revenue and expenses on a 52- or 53-week annual period, depending on the year. In this report, we refer to our fiscal periods as follows:



Reference in this report	Fiscal year ending (number of weeks)
Fiscal 2012	April 1, 2012 (52 weeks)
Fiscal 2011	April 3, 2011 (53 weeks)

	Interim fiscal period
First Quarter Fiscal 2012	13-week period ended July 3, 2011
First Quarter Fiscal 2011	13-week period ended June 27, 2010

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this report, we refer to TC Global, Inc. and its consolidated subsidiaries and joint ventures controlled by the company as “we,” “us,” “our,” “the Company,” or “Tully’s.”

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by those sections. These statements reflect our current views with respect to our future financial condition, results of operations, objectives, strategies, plans, goals, targets or future performance and business for future periods, and generally may be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “initiatives,” “models,” “hope,” “goal,” “foresee” or other words of similar import.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those identified below, that could cause events, including our actual results, to differ materially from those expressed or implied by any forward-looking statements. These factors, among others, could cause our financial performance to differ materially from our goals, targets, objectives, intentions and expectations.

The following factors, among others, could cause our future results to differ materially from historical results or those anticipated:


•	our ability to successfully execute on our Fiscal 2012 operating plan;


•	the performance of existing and new stores, including our ability to achieve comparable store sales growth, increase the average unit volume of new stores, and increase operating margins;


•	the success of our domestic and international franchisees;


•	our ability to raise additional capital or to consummate a strategic transaction to fund our business; and


•	our ability to compete successfully against current or future competitors.

These and other risk factors discussed in Part I, Item 1A (“Risk Factors”) of our Annual Report on Form 10-K are among important factors of which we are currently aware that could cause actual results, performance or achievements to differ materially from those expressed in our forward-looking statements. We operate in a continually changing business environment, and new risk factors emerge from time to time. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We cannot assure you that projected results or events will be achieved or will occur. Consequently, you should not place undue reliance on our forward-looking information and statements.

We qualify all of our forward-looking statements by these cautionary statements. Except to the extent required by the federal securities laws, we do not intend to update or revise the forward-looking statements contained in this report.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TC GLOBAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



	April 3, 2011			July 3, 2011
	(audited)			(unaudited)
	(dollars in thousands, except share data)
Assets
Current assets
Cash and cash equivalents	$	2,809		$	2,697
Accounts receivable, net of allowance for doubtful accounts of $994 and $1,031 at April 3, 2011 and July 3, 2011, respectively	1,213			999
Inventories	628			617
Prepaid expenses and other current assets	272			321
Total current assets	4,922			4,634
Property and equipment, net	2,207			2,276
Related party receivable, net of current portion	1,000			1,000
Goodwill and other assets	344			360
Total assets	$	8,473		$	8,270
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	2,542		$	2,666
Accrued liabilities	1,883			1,655
Current portion of long-term debt	54			81
Deferred revenue	4,540			4,758
Current portion of deferred gain on sale of wholesale segment	169			169
Obligation to minority shareholder in TCAPPLP	4,000			4,000
Total current liabilities	13,188			13,329
Deferred lease costs	362			362
Deferred revenue, net of current portion	831			819
Deferred gain on sale of wholesale segment, net of current portion	2,020			1,978
Total liabilities	16,401			16,488
Commitments and contingencies (Note 4)
Stockholders’ deficit
Series A Convertible Preferred stock, no par value; 31,000,000 shares authorized, 12,790,874 issued and outstanding at April 3, 2011 and July 3, 2011, respectively; stated value of $2.50 per share and a liquidation preference	28,473			28,473
Common stock, no par value; 120,000,000 shares authorized; 3,563,867 and 3,565,664 shares issued and outstanding at April 3, 2011 and July 3, 2011, respectively; stated value of $18.00 per share and a liquidation preference	19,706			19,706
Series B Convertible Preferred stock, no par value; 8,000,000 shares authorized; 3,590,349 issued and outstanding at April 3, 2011 and July 3, 2011, respectively; stated value of $2.50 per share and a liquidation preference	7,958			7,958
Additional paid-in capital	24,166			24,190
Accumulated other comprehensive loss	(93		)	(112		)
Accumulated deficit	(89,585		)	(89,854		)
Total stockholders’ deficit attributable to TC Global, Inc.	(9,375		)	(9,639		)
Non-controlling interest	1,447			1,421
Total stockholders’ deficit	(7,928		)	(8,218		)
Total liabilities and stockholders’ deficit	$	8,473		$	8,270

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

TC GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



	Thirteen Week Periods Ended
	June 27, 2010			July 3, 2011
	(unaudited)			(unaudited)
	(dollars in thousands, except per share data)
Net sales
Retail store sales	$	8,858		$	9,109
Specialty sales of products	499			293
Total sales of products	9,357			9,402
Licenses, royalties, and fees	129			105
Recognition of deferred licensing revenue	10			52
Net sales	9,496			9,559
Cost of goods sold and operating expenses
Retail cost of goods sold	3,240			3,410
Retail occupancy expenses	1,047			1,054
Total retail cost of goods sold and related occupancy expenses	4,287			4,464
Specialty cost of goods sold	294			36
Cost of goods sold and related occupancy expenses	4,581			4,500
Store operating expenses	3,894			3,905
Other operating expenses	584			373
Marketing, general and administrative costs	1,852			1,045
Depreciation and amortization	237			184
Store closure and lease termination costs	8			—
Total cost of goods sold and operating expenses	11,156			10,007
Operating loss	(1,660		)	(448		)
Other income (expense)	6			64
Loss before income taxes	(1,654		)	(384		)
Income tax benefit (expense)	(26		)	89
Net loss	$	(1,680	)	$	(295	)
Non-controlling interest	$	52		$	26
Net loss attributable to TC Global, Inc.	$	(1,628	)	$	(269	)
Loss per share - basic and diluted	$	(0.46	)	$	(0.08	)
Weighted average shares used in computing basic and diluted loss per share	3,563			3,566

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

TC GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW



	Thirteen Week Periods Ended
	June 27, 2010			July 3, 2011
	(unaudited)			(unaudited)
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,680	)	$	(295	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	237			184
Store closure and lease termination costs	8			—
Stock compensation expense	21			24
Provision for doubtful accounts	(66		)	37
Gain on sale of fixed assets	(15		)	(94		)
Recognition of deferred gain on sale of wholesale segment	(42		)	(42		)
Recognition of deferred license revenues	(29		)	(33		)
Changes in assets and liabilities:
Accounts receivable	(633		)	176
Inventories	539			11
Prepaid expenses and other assets	37			86
Accounts payable	217			124
Accrued liabilities	226			(228		)
Deferred revenue	(129		)	239
Deferred lease costs	45			—
Net cash provided by (used in) operating activities	(1,264		)	189
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted Cash (Escrow Receivable)	3,500			—
Purchases of property and equipment	(708		)	(234		)
Proceeds from sale of property and equipment	18			76
Net cash provided by (used in) investing activities	2,810			(158		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital leases	(104		)	(124		)
Foreign currency translation adjustment	1			(19		)
Net cash used in financing activities	(103		)	(143		)
Net increase (decrease) in cash and cash equivalents	1,443			(112		)
Cash and cash equivalents at beginning of period	3,558			2,809
Cash and cash equivalents at end of period	$	5,001		$	2,697
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	2		$	1
Non-cash investing and financing activities:
Insurance premiums financed through note payable	$	253		$	151

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of TC Global, Inc. and its consolidated subsidiaries and joint ventures controlled by the Company. In these condensed consolidated financial statements, references to “we,” “us,” “Tully’s” or the “Company” refer to TC Global, Inc.

The accompanying condensed consolidated financial statements are unaudited; however, they include all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to fairly present the financial information set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Results of operations for the thirteen week period ended June 27, 2010 (“First Quarter Fiscal 2011”) and the thirteen week period ended July 3, 2011 (“First Quarter Fiscal 2012”) are not necessarily indicative of future financial results.

Investors should read these interim financial statements in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in our Annual Report on Form 10-K for our fiscal year ended April 3, 2011, filed with the SEC on July 6, 2011 (the “Fiscal 2011 Form 10-K”). As discussed in Note 2 to the condensed consolidated financial statements, circumstances exist that raise substantial doubt about the Company's ability to continue as a going concern. The condensed consolidated financial statements as of and for the periods ended July 3, 2011 and June 27, 2010 and the consolidated financial statements as of April 3, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

All amounts in the preceding financial statements and in the following notes to the condensed consolidated financial statements are assumed to be denominated in US dollars, unless otherwise indicated.

Recent Developments

During the First Quarter Fiscal 2012, the Company opened one new Company-operated store. During this period, the Company’s franchise and license partners added two new locations and closed one existing locations. During First Quarter Fiscal 2012, the Company’s licensees in Asia closed one store in South Korea.

Recent Accounting Pronouncements

In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within fiscal years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on our financial statements.

In May 2011, the FASB issued guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within fiscal years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on our financial statements.

Cash and Cash Equivalents

Cash equivalents in excess of current operating requirements are invested in short-term, interest-bearing instruments with maturities of three months or less at the date of purchase and are stated at cost, which approximates market value.

Escrow and Related Party Receivable

In connection with the closing of the sale of the assets associated with Tully’s business names, trademarks, and wholesale business to Green Mountain Coffee Roasters, Inc. (“GMCR”), a Delaware Corporation, pursuant to the terms of an Asset Purchase

Table of Contents

Agreement (“Green Mountain transaction”), dated September 15, 2008, as amended by Amendment No. 1 thereto dated November 12, 2008 and Amendment No. 2 thereto dated February 6, 2009 by and among the TC Global, Inc., GMCR and Tully’s Bellaccino, LLC (the “GMCR Agreement”), $3.5 million of the purchase price was placed in escrow for one year to satisfy Tully’s post-closing indemnification obligations to GMCR . The full amount of this escrow was released to Tully’s on March 29, 2010.

2. Liquidity

As of July 3, 2011 we had cash and cash equivalents of $2.7 million, of which $456,000 was held in our Asian joint venture, Tully’s Coffee Asia Pacific Partners, LP (“TCAPPLP”) and limited in use, and a working capital deficit of $8.7 million, which includes a $4.0 million obligation of Tully’s Coffee Asia Pacific, Inc. (“TCAP”), our wholly-owned subsidiary, to Asia Food Culture Management Pte. Ltd. (“AFCM”), a Singapore company and the limited partner in TCAPPLP; such obligation is not expected to be satisfied by funds held by TC Global, Inc.

The Company has realized improvements during its most recent periods in sales volumes as compared to previous periods and has made certain reductions in staffing and other expenses, including such reductions during First Quarter Fiscal 2012. With the exception of the third and fourth quarters of Fiscal 2011 and First Quarter Fiscal 2012, the Company has consistently incurred negative cash flows from operations. If sales volumes do not meet expectations during Fiscal 2012 or if increased costs result from pending litigation or contingent obligations, the Company does not believe it will be able to offset such negative events through additional overhead cost reductions. As a result, if operating results do not meet expectations, the Company may not have sufficient resources to cover its working capital and capital expenditure requirements and, without additional sources of capital made available to the Company during Fiscal 2012, there will be substantial doubt that the Company will be able to continue as a going concern. In order to maintain an appropriate level of liquidity, the Company believes it will need to either effectively implement its operational plans and objectives or obtain additional capital in the next six to nine months in order to fund its working capital requirements for the remainder for Fiscal 2012 and is evaluating a variety of alternatives, including the reorganization of existing operations and/or the sale of some of its stores or other selected assets. Certain financing alternatives could result in significant interest and other costs, be highly dilutive to existing shareholders or require the divestiture or sale of some or all of the Company’s assets. There can be no assurance that any debt or equity financing arrangement will be available to the Company on acceptable terms, if at all. In addition, there can be no assurance that these financing alternatives would provide the Company with sufficient funds to meet its current or long term capital requirements.

If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then the Company could be required to substantially reduce or discontinue its investments in store improvements, new customers and new products; reduce operating, marketing, general and administrative costs related to its continuing operations; or limit the scope of its continuing operations. Due to various contractual obligations of the Company, including store operating leases, supply agreements and franchise agreements, the Company may not have the discretion to reduce operations in an orderly manner to a more sustainable level. The potential sale of stores or other income-producing assets could adversely affect future operating results and cash flows.

3. Credit lines and long term debt

Northrim Credit Facility

Currently, Tully’s has an available credit facility with Northrim Bank which allows the Company to borrow up to $1.5 million, subject to the amount of eligible accounts receivable. As of July 3, 2011, there were no outstanding borrowings under this facility.

Tully’s Coffee Asia Pacific – Limited Partnership Loan

On December 31, 2008, pursuant to the Limited Partnership Agreement dated December 21, 2007 between TCAP and AFCM, TCAP issued a promissory note in the principal amount of $1,120,000 (the “GP Loan”) to TCAPPLP. The GP Loan accrues interest at an annualized rate of 15%.

Also on December 31, 2008, as subsequently amended by Amendment No. 1 dated March 6, 2009, and Amendment No. 2 dated March 17, 2009, TCAPPLP issued a convertible promissory note to AFCM in the principal amount of $1,120,000 (the “LP Loan”). The LP Loan bears interest of an annualized rate of 0.44%. The LP Loan is due and payable five business days after the date that TCAPPLP has made distributions to AFCM in an amount equal to all principal and accrued interest on the LP Loan or in the event the partners clear certain security interests in partnership obligations. In connection with this loan, Tully’s has granted AFCM a preferential right to receive from TCAPPLP, prior to any future distribution to TCAP, cash distributions equal to $500,000 out of TCAPPLP’s profits available for distribution, and that, after receipt by AFCM of the full preference amount, all subsequent cash distributions of profits shall be shared equally between TCAP and AFCM. Any subsequent cash distributions to AFCM would first be applied to retire the LP Loan.

Table of Contents

Tully’s Coffee Asia Pacific – Limited Partnership Interest Obligation

On March 27, 2009, TCAP agreed to purchase, or cause a third party to purchase, one-half of AFCM’s partnership interest in TCAPPLP, equal to twenty-five percent (25%) of the total partnership interests outstanding, at a purchase price of $4.0 million, by March 27, 2010. As of July 3, 2011, TCAP had not met its obligation. TCAP and AFCM continue to work on a settlement and to seek a buyer for AFCM’s partnership interest. If TCAP is unsuccessful in either finding a buyer for AFCM’s interest or in its settlement negotiations, it could have an adverse impact on TCAP’s financial position or results of operations, or cause renegotiation of the partnership agreement.

Other obligations under credit lines and long-term debt consist of the following:



	April 3, 2011			July 3, 2011
	(dollars in thousands)
Note payable for purchase of insurance, payable in variable monthly installments of approximately $16,000 - $43,000, including interest at 4.31%, through September 2011, and collateralized by unearned or return insurance premiums, accrued dividends and loss payments	$	54		$	81
Note payable due to Limited Partner in TCAPPLP	4,000			4,000
	4,054			4,081
Less: Current portion	(4,054		)	(4,081		)
Long-term debt, net of current portion	—			—

4. Commitments and contingencies

Lease commitments

The Company leases all of its retail and office space under operating leases, which have expiration dates through 2020. The leases provide for minimum annual payments, and (in certain cases) contingent rentals based upon gross sales, escalation clauses and/or options to renew. Rental expense is recorded on a straight-line basis over the respective terms of the leases.

In connection with certain leases, lessors have granted tenant improvement allowances. These amounts, included in liabilities under the caption “deferred lease costs,” are amortized into income on a straight-line basis over the life of the related lease. Also recorded in deferred lease costs is the “stepped rent” excess of rental expense computed on a straight-line basis over the actual rent payments required by the terms of these leases.

Minimum future rental payments under non-cancellable operating leases as of July 3, 2011 are summarized as follows:



Fiscal year
(dollars in thousands)
Remainder of Fiscal 2012	3,325
2013	2,768
2014	2,116
2015	1,559
2016	897
2017	499
Thereafter	1,139
Total	$	12,303

The Company has subleased some of its leased premises to third parties under agreements with varying terms through 2013. Expected future sublease receipts under such sub-lease agreements are summarized as follows:

Table of Contents



Fiscal year
(dollars in thousands)
Remainder of Fiscal 2012	$	27
2013	15
Total	$	42

Contingencies

On May 17, 2011, a lawsuit was filed against the Company in California state court by JH Development, LLC, a franchise area developer, alleging that (i) at the time the Company entered into agreements with the plaintiff, the Company concealed its financial strength and the fact that it was contemplating a sale of its wholesale division and rights to the “Tully’s” trademark; (ii) the Company breached the franchise agreements with the plaintiff; (iii) the Company made false promises to the plaintiff; and (iv) the Company violated certain provisions of the California Corporations Code governing the sale of franchises. The plaintiff is seeking damages, rescission, and attorneys’ fees and costs. We are investigating the claims, have retained California counsel, have removed the case to federal court in the Central District of California, and intend to vigorously defend this litigation, but cannot predict the outcome or financial impact to the Company at this time.

We are a party to various other legal proceedings arising in the ordinary course of our business, but are not currently a party to any other legal proceeding that we believe could have a material adverse effect on our financial position or results of operations.

Tully’s Coffee Asia Pacific – Limited Partnership Interest

On March 27, 2009, TCAP agreed to purchase, or cause a third party to purchase, one-half of AFCM’s partnership interest in TCAPPLP, equal to twenty-five percent (25%) of the total partnership interests outstanding, at a purchase price of US $4.0 million by March 27, 2010. As of July 3, 2010, TCAP had not met its obligation. TCAP and AFCM continue to work on a settlement and to seek a buyer for AFCM’s partnership interest. If TCAP is unsuccessful in either finding a buyer for AFCM’s interest or in its settlement negotiations, the Company could face adverse economic consequences surrounding its wholly owned subsidiary TCAP.

5. Stock options

Company Stock Incentive Plan

In 1994, Tully’s shareholders approved a Stock Incentive Plan (the “1994 Plan”). In August 1999, the Company’s shareholders approved an amended plan, which established the maximum number of shares issuable under the 1994 Plan and the Employee Stock Purchase Plan at 525,000; and in June 2003, the Company’s Board of Directors further amended the 1994 Plan. By its terms, the 1994 Plan expired in October 2004 (this did not terminate outstanding options).

In December 2004, Tully’s shareholders approved the 2004 Stock Option Plan, which authorizes the issuance of up to 312,500 shares of common stock under the 2004 Stock Option Plan and Tully’s Employee Stock Purchase Plan.

In March 2010, Tully’s shareholders approved the 2010 Stock Option Plan, which authorizes the issuance of up to 312,500 shares of common stock under the 2010 Stock Option Plan and Tully’s Employee Stock Purchase Plan. As of December 26, 2010, no options had been granted under the 2010 Stock Option Plan. The provisions of the 2010 Stock Option Plan, 2004 Stock Option Plan (and the 1994 Plan prior to its expiration) are summarized as follows:


•	The Company may issue incentive or nonqualified stock options to its employees and directors. Stock options are granted solely at the discretion of the Company’s Board of Directors and are issued at a price determined by its Board of Directors.


•	The term of each option granted is for such period as determined by the Board of Directors, but not more than ten years from date of grant.


•	Options are nontransferable and may generally be exercised based on a vesting schedule determined by the Company’s Board of Directors.


•	The plan provides for acceleration of outstanding options under certain conditions, including but limited to certain changes in control of the Company.

Other Equity Instruments

The Company has granted warrants to purchase common stock. These warrants have up to one year vesting periods and generally have ten year lives. Issued, outstanding and exercisable warrants as of July 3, 2011 are summarized as follows:

Table of Contents



	Outstanding warrants	Number exercisable	Exercise Price
Issued to guarantors of debt	93,191	93,191	$	2.64
Issued with Series A Preferred Stock investment units	783	783	$	0.08
Totals	93,974	93, 974

Stock Options

The Company issues new shares of common stock upon the exercise of stock options granted under the 1994 Plan, the 2004 Stock Option Plan and the 2010 Stock Option Plan, although it is no longer granting options from the 1994 Plan.

Determining Fair Value of Stock Awards Using Black Scholes

Valuation and Amortization Method.

The Company estimates the fair value of stock option awards granted using the Black-Scholes option valuation model. The fair value of each option grant is estimated on the date of grant. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life.

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based primarily on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, expected exercises and post-vesting forfeitures.

Expected Volatility.

The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor used in the Black-Scholes option valuation model is based on its historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate.

The risk-free interest rate used in the Black-Scholes option valuation model is the implied risk-free interest rate with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield.

The Company uses an expected dividend yield of zero in the Black-Scholes option valuation model, consistent with historical experience on the date of grant.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. A summary of the weighted average assumptions and resulting weighted average fair value results for options granted during the periods presented is as follows:



	Thirteen Week Periods Ended
	June 27, 2010			July 3, 2011
Weighted average risk free interest rate	17.2		%	—
Expected dividend yield	—		%	—
Expected lives	5 years			—
Weighted average expected volatility	113		%	—
Weighted average fair value at date of grant	$	1.32		—

No assumptions are presented for the First Quarter Fiscal 2012 because no options were granted during this period.

Expected Forfeitures.

The Company primarily uses historical data to estimate pre-vesting option forfeitures. It records stock-based compensation

Table of Contents

only for those awards that are expected to vest. For Fiscal 2012 the Company estimates its pre-vesting option forfeiture rate at 18%.

Stock-based Compensation

Stock-based compensation expense related to stock-based awards was $21,000 and $24,000, respectively, for First Quarter Fiscal 2011 and First Quarter Fiscal 2012, respectively. Stock-based compensation expense is included in marketing, general and administrative costs in our Condensed Consolidated Statements of Operations. This is a non-cash expense.

As of July 3, 2011, the Company had approximately $141,000 of total unrecognized compensation cost related to 69,000 non-vested stock-based awards granted under all equity compensation plans. The Company expects to recognize this cost over a period of approximately five years.

Stock Award Activity

As of July 3, 2011 options for 308,990 shares were outstanding under the 1994 Plan, the 2004 Stock Option Plan, and the 2010 Stock Option Plan, of which 283,990 were fully vested.

The following table summarizes activity under our stock option plans:



	Number of shares		Weighted- average exercise price per share		Weighted- average remaining contractual term
Outstanding at April 3, 2011	316,488		$	5.02	8.6 years
Granted	—		—
Exercised	—		—
Forfeited	(7,498	)	$	10.73
Outstanding at July 3, 2011	308,990		$	4.25	8.4 years
Exercisable or convertible at the end of the period	283,990		$	5.70	8.6 years

The aggregate intrinsic value of options outstanding at July 3, 2011 was $20,000. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the actuarially-determined fair market value of the Company’s stock of $0.31 per share as of June 30, 2010 and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders had all option holders exercised their options on July 3, 2011.

No options were exercised in First Quarter Fiscal 2011 or First Quarter Fiscal 2012.

6. Stockholders’ Equity

Preferred stock

Each outstanding share of the Company’s Series A Preferred Stock is convertible at any time by the holder thereof into shares of common stock at the then-effective conversion price. In addition, each outstanding share of Series A Preferred Stock is automatically convertible into shares of common stock if Tully’s completes an underwritten public offering of its shares of common stock with gross proceeds to the Company in excess of $15 million (“Qualified Offering”). The Series A Preferred Stock contains an anti-dilution protection right that provides for a weighted average adjustment of the conversion price in the event the Company issues shares of capital stock at an effective price less than the Series A Preferred conversion price then in effect, subject to certain limitations and exclusions. At December 26, 2010, each eight shares of the Company’s outstanding Series A Convertible Preferred were convertible into approximately 1.12 shares of common stock (giving effect to the one-for-eight reverse split of its common stock).

Voting rights of the Series A Preferred Stock are subject to adjustment for the anti-dilution adjustment. Series A Preferred shareholders may exercise cumulative voting rights with respect to the election of Directors.

In the event of any liquidation or winding up of Tully’s, each share of Series A Preferred Stock is entitled to receive, prior and in preference to all other payments to the holders of Series B Preferred Stock and the shares of common stock, an amount equal to $2.50, plus any and all declared but unpaid dividends with respect to such share of Series A Preferred Stock (the “Series A Liquidation Preference”). Assuming distribution of the full Series A Liquidation Preference, common stock liquidation preference (described below), and the Series B Liquidation Preference (described below), and subject to the rights of any additional preferred

Table of Contents

stock that may in the future be designated and issued by Tully’s, the Company’s remaining assets available for distribution to shareholders would be distributed pro rata among the holders of the Series A Preferred Stock, Series B Preferred Stock and shares of common stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.

Certain holders of Series A Preferred Stock have certain rights to require the Company to register the shares of common stock issued upon conversion of the Series A Preferred Stock. These rights generally allow persons holding the underlying shares of common stock to require Tully’s to use its best efforts to register the shares for resale under the Securities Act of 1933, as amended, and under such state securities laws as may be necessary. These rights include the right to demand that the Company file a registration statement for the underlying shares of common stock at the shareholders’ option no more than one time following an initial public offering, if any, and thereafter, unlimited rights once Tully’s is eligible to use Form S-3.

Each outstanding share of Series B Preferred Stock is convertible at any time by the holder thereof into shares of common stock at the then-effective conversion price. In addition, each outstanding share of Series B Preferred Stock is automatically convertible into shares of common stock at the then-effective conversion price when and if the Company makes a Qualified Offering. The conversion price for the Series B Preferred shares is subject to an anti-dilution adjustment, but no adjustment has been required. Giving effect to the one-for-eight reverse split of the Company’s common stock, each eight Series B Preferred shares could be converted at the option of the shareholder into one share of common stock as of December 26, 2010. Each eight shares of Series B Preferred Stock also are entitled to cast one vote on all matters submitted to a vote of the shareholders of Tully’s (giving effect to the one-for-eight reverse split of its common stock).

In the event of any liquidation or winding up of Tully’s, each share of Series B Preferred Stock is entitled to receive, after full satisfaction of the Series A Liquidation Preference and the common stock liquidation preference (described below), and prior and in preference to all other payments to the holders of shares of common stock, an amount equal to $2.50, plus any and all declared but unpaid dividends with respect to such share of Series B Preferred Stock (the “Series B Liquidation Preference”). Assuming distribution of the full Series A Liquidation Preference, common stock liquidation preference and the Series B Liquidation Preference, and subject to the rights of any additional series or classes of preferred stock that may in the future be designated and issued by Tully’s, the remaining assets of Tully’s available for distribution to shareholders would be distributed pro rata among the holders of the Series A Preferred Stock, Series B Preferred Stock and shares of common stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.

Common stock

In the event of any liquidation or winding up of the Company, after distribution of the full Series A Liquidation Preference, each common share is entitled to receive an amount per share equal to $18.00 (giving effect to the one-for-eight reverse split of the Company’s common stock), plus any and all declared but unpaid dividends with respect to such share of common stock (the “common stock liquidation preference”). Assuming distribution of the full Series A Liquidation Preference, common stock liquidation preference and the Series B Liquidation Preference (described above), and subject to the rights of any additional preferred stock that may in the future be designated and issued by the Company, its remaining assets available for distribution to shareholders would be distributed pro rata among the holders of the Series A Preferred Stock, Series B Preferred Stock and shares of common stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.

7. Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by senior management. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. The Company does not allocate its assets among its business units for purposes of making business decisions, and therefore does not present asset information by operating segment. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) exclude the effects of financing costs, income taxes, and non-cash depreciation and amortization. EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States (“GAAP”), and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of operating efficiency and overall financial performance of operating segments and the Company believes it to be a helpful measure for those evaluating companies in the retail industry. Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

The tables below present information by operating segment:

Table of Contents



	Thirteen Week Periods Ended
	June 27, 2010			July 3, 2011
	(unaudited)			(unaudited)
	(dollars in thousands)
Net sales
Retail division	$	8,858		$	9,109
Specialty division	638			450
	$	9,496		$	9,559
Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
Retail division	$	669		$	740
Specialty division	(240		)	41
Corporate and other expenses	(1,864		)	(1,045		)
Loss before interest, taxes, depreciation and amortization	(1,435		)	(264		)
Depreciation and amortization	(237		)	(184		)
Interest income, interest expense, and loan guarantee fees	(34		)	64
Non-controlling interest	52			26
Income taxes	26			89
Net loss attributable to TC Global, Inc.	$	(1,628	)	$	(269	)
Depreciation and amortization
Retail division	$	199		$	156
Specialty division	3			3
Corporate and other expenses	35			25
Total depreciation and amortization	$	237		$	184

8. Loss Per Common Share

Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the effect of dilutive common share equivalents, if any.

Tully’s has granted options and warrants to purchase common stock, and issued preferred stock that is convertible into common stock (collectively, the “common share equivalent instruments”). Under some circumstances, the common share equivalent instruments may have a dilutive effect on the calculation of earnings or loss per share.

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that TC Global, Inc. believes is relevant to an assessment and understanding of our results of operations and financial condition for the thirteen week periods ended July 3, 2011 (“First Quarter Fiscal 2012”). The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes appearing elsewhere in this report, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended April 3, 2011, filed with the SEC on July 6, 2011 (the “Fiscal 2011 Form 10-K”). This discussion and analysis contains “forward-looking statements” that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to the factors referenced at “Special Note Regarding Forward-Looking Statements” and described in “Risk Factors” section of our Fiscal 2011 Form 10-K.

Business Overview

We are a specialty gourmet coffee retailer. We generate revenues through two operating divisions:


•	Retail. Our retail division operates Tully’s Coffee retail stores in the United States and generates revenues through the sales of products in these stores.


•	Specialty. Our specialty division oversees the domestic licensing and franchising of Tully’s Coffee retail stores and manages our international joint venture, foreign licensing, and business development activities. We generate revenues through licensing fees from U.S. and foreign franchisees and sales of products to foreign customers.

We have realized some improvements in sales volumes in recent periods as compared to previous periods, and have made some reductions in staffing and other expenses in recent months to bring operating expenses more in line with operating revenues. Despite these revenue improvements and expense reductions, with the exception of the Third and Fourth Quarters of Fiscal 2011 and First Quarter Fiscal 2012, the Company has consistently incurred negative cash flows from operations. If sales volumes decline significantly or we do not meet expectations of sustained increases during Fiscal 2012, we do not believe that we will be able to offset such negative trends through additional overhead cost reductions.

For most of our operating history, we have generated insufficient cash to fully fund operations. We have historically financed this cash shortfall through the issuance of debt and equity securities, borrowings, asset sales, and cash provided under our international licensing relationships.

On March 27, 2009, we completed the sale of the assets associated with our wholesale business and supply chain (including Tully’s business names and trademarks) to Green Mountain Coffee Roasters, Inc. a Delaware corporation (“GMCR”), pursuant to the Asset Purchase Agreement dated September 15, 2008, as amended by Amendment No. 1 thereto dated November 12, 2008, and Amendment No. 2 thereto dated February 6, 2009, by and among TC Global, Inc., GMCR and Tully’s Bellaccino, LLC (the “Green Mountain Transaction”).

In connection with the closing of the Green Mountain Transaction, we entered into a Supply Agreement, a License Agreement, and a Noncompetition Agreement with GMCR. We also secured a perpetual license to use the “Tully’s” brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale business outside of North America, utilizing an exclusive coffee supply arrangement. Our current shareholders and executive management team continue to own and operate the Company’s domestic retail business (Company-operated, franchised and licensed retail store locations) and international retail and wholesale businesses.

In connection with the Green Mountain Transaction, we changed our corporate name to “TC Global, Inc.”

We intend to pursue growth by executing the following strategies:

1. Drive comparable store sales growth and profitability by executing on our fundamental retail strategies. We intend to drive comparable store sales and average unit volume growth by executing on our fundamental retail strategies to increase store traffic and average transaction size.

2. Expand our geographic footprint by leveraging international opportunities. Our international growth strategy emphasizes joint ventures and licensing relationships with companies situated in promising foreign markets, and sales of coffee and other products to those partners. We believe the success of our former licensee, Tully’s Coffee Japan (“TCJ”), demonstrates the broader opportunity available to us in foreign markets.

3. More effectively control operating expenses and enhance process controls. We are "right-sizing" the business and establishing not only accountability, but also responsibility for sound spending decisions, down to the lowest level employees in

Table of Contents

the organization. We are focusing on making decisions to spend in light of return on investment or overall profitability of the business decision. We are also putting into place further process controls and policies to reinforce accountabilities and engage the highest levels of the organization in tactical and strategic activities.

4. Execute our licensing/franchising strategy. Our licensing/franchising strategy focuses on adding licensed and franchised stores in market areas and venues that complement our company-operated stores. We have used these means to extend our presence in special venues, such as grocery stores, airports, hotels and university campuses.

Trends in Our Business

Retail Division.

As of July 3, 2011, Tully’s had 75 company-operated retail stores and 111 franchised stores in Washington, California, Arizona, Colorado, Idaho, Oregon, Montana and Wyoming. Our stores are located in a variety of urban and suburban neighborhoods, and in the Seattle and San Francisco central business districts. We also operate or franchise smaller footprint stores in special venues, such as within the premises of corporate facilities, and kiosks and cafes that are located in grocery stores, hotels, hospitals and on university campuses. These facilities are operated under contracts with varying terms. While not our core business, addition and/or loss of any of these locations could have an impact on our results of operations.

We continue to critically review our retail business, and we are continuing to implement initiatives to improve our retail operations, retail distribution, store facilities and merchandising strategies. The ongoing goal of our retail division initiatives is to increase retail store average unit volume, increase comparable store sales and improve new store unit economics. We are simultaneously targeting operational improvements to enhance our retail margins and achieve profitability. All of these initiatives are designed to collectively improve our sales and achieve profitability.

Further, we continue to review our retail locations and leasing arrangements in order to enhance operating efficiencies during the current economic conditions. During the quarterly period ended July 3, 2011, we opened one new store within a corporate campus. New stores generally require several months to reach their full sales potential so the impact of new store openings may not be reflected in operating results in the very near future.

Over the course of the last several years, the cost of coffee, a key ingredient in most of our beverages, has increased dramatically. Raw coffee prices have increased more than 50% in the past year alone. Since the sale of our wholesale and supply chain operations to GMCR in 2009, we have purchased our coffee from GMCR under the Supply Agreement negotiated as part of that sale. The market price of dairy products also continues to steadily increase. While we have taken steps to increase prices for some products and in certain markets to attempt to maintain margins and operating profit levels, market conditions have prevented us from recovering all of the increased costs which has significantly impacted the profitability of our retail operations. Cost of goods sold as a percentage of retail sales in First Quarter Fiscal 2012 was 37.4% as compared to 36.6% in the same period of Fiscal 2011.

Specialty Division.

Our specialty division oversees the licensing and franchising of Tully’s Coffee retail stores. Franchising complements our company-operated retail business by making Tully’s genuine community coffeehouse experience more widely available and convenient for customers. Franchising also extends the Tully’s brand and promotes consumer familiarity with Tully’s products. At July 3, 2011 there were 111 U.S. licensed and franchisee-operated stores, primarily in special venues such as grocery stores, airports, hotels and university campuses.

Additionally, our specialty division oversees TCAPLLP, which seeks to develop the Tully’s brand in Asia (excluding Japan), Australia and New Zealand, foreign licensing, wholesale distribution and other business activities. As of July 3, 2011 there are four stores in Singapore through our master licensee Kitchen Language PTE LTD, which is obligated to develop 15 locations, and three stores in South Korea through our master licensee DK Retail Co., Ltd., (“DK Retail”) a South Korean corporation, which is obligated to develop 100 locations over the next five years. We also have a new licensee in the Philippines who had not yet opened any locations as of July 3, 2011, but is obligated to develop 50 locations in the Philippines over the next five years.

Revenue Trends

Our quarterly sales from our retail and specialty operations are summarized as follows:

Table of Contents



	First Quarter	Second Quarter	Third Quarter	Fourth Quarter⁽¹⁾
	(unaudited–dollars in thousands)
Fiscal 2011⁽¹⁾	9,496	9,200	9,562	10,010
Fiscal 2012	9,559	—	—	—


(1)	Each fiscal quarter included 13 weeks, except for the Fourth Quarter of Fiscal 2011, which had 14 weeks. We estimate that the 14^th week accounted for $675,000 in net sales in the Fourth Quarter of Fiscal 2011.

Operating Cost Trends

Retail Cost Trends. We experience both variable and fixed cost trends in our retail division cost structure. Cost of products (cost of goods sold), labor costs, occupancy costs other than rent, supplies, and other operating expenses typically increase or decrease according to broader pricing trends for those products. During the first, second and third quarters of Fiscal 2011 we experienced a mixture of increased costs associated with some of the products we sell and negotiated lower costs for other products and components. In addition, we have increased prices for some of our coffee-based beverages in our stores to offset these cost increases. In some cases, store-level retail operating expenses may increase or decrease depending on the sales volume at a particular location. Generally, our leases provide for periodic rent increases (which are generally leveled for financial reporting purposes by “straight-line rent” accounting). We continue to undertake certain retail business initiatives with the objective of reducing costs as a percentage of sales through increased efficiencies and operating leverage. However, initiatives intended to produce a future benefit may cause a short-term increase in costs, both in absolute dollars and as a percentage of sales. We analyze retail division operating costs as a percentage of store sales and manage the stores to that metric.

During the First Quarter Fiscal 2011 we entered into a distribution agreement that enabled us to outsource the inventory warehousing and distribution of products to our Company–operated, licensed, and franchised stores. We believe that this will provide substantial operating efficiencies over time. It also means that, beginning in the First Quarter Fiscal 2011 we no longer recognized Specialty Sales of Product or Specialty Cost of Goods Sold for the sale of these products to our franchised or licensed stores. This has had the effect of decreasing net sales and cost of sales as compared to prior periods; however, we expect an overall increase in operating income and net income as a result of the efficiencies gained from this distribution arrangement.

Over the course of the last several years the cost of coffee, a key ingredient in most of our beverages, has increased dramatically. Raw coffee prices have increased more than 50% in the past year alone. Since the sale of our wholesale and supply chain operations to GMCR in 2009, we have purchased our coffee from GMCR under the Supply Agreement whereby costs are pre-determined on a cost–plus basis. The market price of dairy products also continues to steadily increase. While we have taken steps to increase prices for some products and in certain markets to attempt to maintain margins and operating profit levels, market conditions have prevented us from recovering all of the increased costs which has significantly impacted the profitability of our retail operations. Since the prices paid to GMCR are in large part determined by market rates, we expect expense trends to follow market rates for Arabica coffee.

Specialty Cost Trends. Most of our specialty division costs consist of labor, travel and legal expenses. Labor and travel costs have increased to support our U.S. franchise store base as well as the development of stores associated with the Tully’s Coffee Asia joint venture. We also incur legal and compliance costs in connection with our franchising operations.

Marketing, General and Administrative Cost Trends. Most of our marketing expenditures are discretionary in nature and depend on the type, intensity and frequency of the marketing programs we employ. Examples of marketing expenses include point-of-sale and promotion materials, community initiatives, use of social media, sponsorships and advertising.

Our general and administrative costs are less discretionary than our marketing costs. During the second and third quarters of Fiscal 2011, and again during First Quarter Fiscal 2012, we eliminated various overhead staff positions and cut other administrative expenses in an effort to further reduce costs. Since the beginning of Fiscal 2011, we have decreased staff size in our corporate offices by 20.5 full-time equivalent personnel, or 37%.

Table of Contents

Retail Performance Measures

Our U.S. retail stores are summarized as follows:



	Thirteen Week Periods Ended
	June 27, 2010		July 3, 2011
NUMBER OF STORES:
Company-operated stores
Stores at beginning of the period	78		74
New stores	4		1
Closed stores	(3	)	—
End of the period	79		75
Franchisee-operated stores
Stores at beginning of the period	107		110
New stores	1		2
Closed stores	—		(1	)
End of the period	108		111
Total company-operated and franchised stores by location
Arizona	19		20
California	28		26
Oregon	5		5
Washington	100		99
Montana	5		5
Idaho	11		11
Utah	1		—
Wyoming	2		2
Colorado	16		18
End of the period	187		186

International franchised and licensed stores at the end of each respective fiscal period are set forth in the table below:



	Thirteen Week Periods Ended
	June 27, 2010	July 3, 2011
International franchise and licensees	7	7

Our quarterly comparable store sales increases (decreases) over prior year’s comparable quarter are summarized as follows:



	Fiscal Years
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter ⁽¹⁾
Fiscal 2011 ⁽¹⁾	(0.8	)%	1.1	%	3.5	%	14	%
Fiscal 2012	4.8	%	—		—		—


(1)	Each fiscal quarter included 13 weeks, except for the Fourth Quarter of Fiscal 2011, which had 14 weeks. We estimate that the 14^th week accounted for $675,000 in net sales in the Fourth Quarter of Fiscal 2011, amounting to 60% of the increase, so that comparable sales in the Fourth Quarter Fiscal 2011 without the impact of the 14^th week was 5.6%.

Table of Contents

Results of Operations



	Thirteen Week Periods Ended
	June 27, 2010		July 3, 2011
	(unaudited)		(unaudited)
Total Net Sales Metrics
Amounts as Percent of Total Net Sales
Retail store sales	93.3	%	95.3	%
Specialty - product sales	5.2	%	3.1	%
Total sales of products	98.5	%	98.4	%
Specialty - Licenses, royalties and fees	1.4	%	1.1	%
Specialty - Recognition of deferred revenue	0.1	%	0.5	%
Total net sales	100.0	%	100.0	%
Retail Metrics
Amounts as Percent of Retail Store Sales
Retail cost of goods sold	36.6	%	37.4	%
Retail occupancy expenses	11.8	%	11.6	%
Store operating expenses	44.0	%	42.9	%
Marketing, General and Administrative Expenses as Percent of Total Net Sales	19.5	%	10.9	%

First Quarter Fiscal 2012 Compared To First Quarter Fiscal 2011

Net Sales

Total net sales increased $63,000, or 0.7%, to $9.6 million for the First Quarter Fiscal 2012, as compared to $9.5 million for the First Quarter Fiscal 2011. Sales of products increased $45,000, or 0.5%, to $9.4 million for the First Quarter Fiscal 2012, as compared to $9.4 million for the First Quarter Fiscal 2011. Licenses, royalties and fees decreased $24,000, or 18.6%, to $105,000 as compared to $129,000 for the First Quarter Fiscal 2011. Revenue recognized from deferred license arrangements increased $42,000 to $52,000 for the First Quarter Fiscal 2012 as compared to $10,000 for the First Quarter Fiscal 2011, due to a several franchise and license arrangements that were consummated during the latter part of Fiscal 2011.

The divisional increase (decrease) in net sales was comprised as follows:



Total Company First Quarter Fiscal 2012 compared to First Quarter Fiscal 2011 (dollars in thousands)	Increase (Decrease) in Net Sales
Retail	$	251
Specialty	(188		)
Total company	$	63

For the First Quarter Fiscal 2012, comparable retail store sales increased 4.8%. The factors comprising the retail sales increase are summarized as follows:



Retail division Components of net sales increase First Quarter Fiscal 2012 compared to First Quarter Fiscal 2011 (dollars in thousands)	Increase (Decrease) in Net Sales
Comparable store sales increase	$	392
Sales increase from new stores	352
Sales decrease from stores closed during Fiscal 2012 and Fiscal 2011	(493		)
Total retail division	$	251

Specialty net sales decreased $188,000 to $450,000 in the First Quarter Fiscal 2012 from $638,000 in the First Quarter

Table of Contents

Fiscal 2011, due to the distribution agreement that we entered into during the first quarter of Fiscal 2011, and that enabled us to outsource the inventory warehousing and distribution of products to our Company-operated, licensed and franchised stores. We believe that this will provide substantial operating savings over time. It also means that beginning in mid-First Quarter Fiscal 2011 we no longer recognized Sales Revenue or Cost of Sales for the sale of these products to our franchised stores. This did have and will continue to have the effect of decreasing Net Sales, Specialty Sales, and Cost of Goods Sold, as compared to prior periods.

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs increased by $170,000, or 5.2%, to $3.4 million for the First Quarter Fiscal 2012 as compared to First Quarter Fiscal 2011. Cost of goods sold and related occupancy costs as a percentage of total net sales increased slightly to 37.4% for the First Quarter Fiscal 2012, compared to 36.6% in the corresponding period last year. Our retail cost of goods sold has increased in recent periods as the commodity price of coffee beans has increased.

Store operating expenses decreased as a percentage of retail sales to 42.9% for First Quarter Fiscal 2012 compared to 44.0% for First Quarter Fiscal 2011.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) decreased $211,000 or 36.1% to $373,000 during First Quarter Fiscal 2012 from $584,000 in First Quarter Fiscal 2011 due to the staffing and expense reductions that we undertook early in First Quarter Fiscal 2012.

Marketing, general and administrative costs decreased significantly by $807,000, or 43.6%, to $1.0 million during First Quarter Fiscal 2012, as compared to $1.9 million during First Quarter Fiscal 2011. This decrease is the result of the staffing and expense reductions that we undertook throughout Fiscal 2011 and early in First Quarter Fiscal 2012. Since the beginning of Fiscal 2011, we have reduced corporate staffing by 20.5 full-time equivalent personnel, or 37%.

Depreciation and amortization expense decreased $53,000, or 22.4%, to $184,000 in the First Quarter Fiscal 2012 from $237,000 in the First Quarter Fiscal 2011. This expense has decreased as assets have aged and become fully depreciated, and are not being replaced by the acquisition of new capital assets due to cash restraints for such expenditures.

Net Loss from Continuing Operations

As a result of the factors described above, we had a loss from continuing operations of $448,000 for the First Quarter Fiscal 2012 as compared to a net loss of $1.7 million for the First Quarter Fiscal 2011, representing a loss improvement of $1.2 million, or 70.6%.

Liquidity and Financial Condition

Sources and Uses of Cash in our Business

The following table sets forth, for the periods indicated, selected statements of cash flows data:

Table of Contents



	First Quarter Fiscal 2011			First Quarter Fiscal 2012
	(dollars in thousands)
STATEMENTS OF CASH FLOWS DATA
Cash provided by (used for):
Net loss	$	(1,680	)	$	(295	)
Deferred Gain on Green Mountain Transaction	(42		)	(42		)
Adjustments for depreciation and other non-cash operating activities	163			138
Net loss adjusted for non-cash operating statement amounts	(1,559		)	(199		)
Cash provided by other changes in assets and liabilities	295			388
Net cash provided by (used in) operating activities	(1,264		)	189
Escrow receivable established in connection with Green Mountain transaction	3,500			—
Purchases of property and equipment	(708		)	(234		)
Other investing activities	18			76
Net repayments of notes payable	(104		)	(124		)
Foreign currency translation adjustment	1			(19		)
Net increase (decrease) in cash and cash equivalents	$	1,443		$	(112	)

Overall, our operating, investing and financing activities used $112,000 of cash during the First Quarter Fiscal 2012 as compared to providing $1.4 million of cash during the Three Months Fiscal 2011, which included the release of $3.5 million from Escrow in connection with the Green Mountain transaction.

Cash provided by operating activities during the First Quarter Fiscal 2012 was $189,000, an improvement of nearly $1.5 million, compared to First Quarter Fiscal 2011, when operating activities used cash of $1.3 million.

Investing activities used cash of $158,000 in the First Quarter Fiscal 2012, compared to providing $2.8 million of cash in the First Quarter Fiscal 2011, again relating to the release of $3.5 million from Escrow related to the Green Mountain transaction.

Financing activities used cash of $143,000 in the First Quarter Fiscal 2012, compared to use of $103,000 in the First Quarter Fiscal 2011. In both quarterly periods, this use was primarily related to payments made on financed insurance policies.

Liquidity and Capital Resources

As of July 3, 2011 we had cash and cash equivalents of $2.7 million, of which $456,000 was held in TCAPPLP and limited in use, and a working capital deficit of $8.7 million, which also includes TCAP’s $4.0 million obligation to AFCM; such obligation is not expected to be satisfied by funds held by TC Global, Inc.

The Company has realized some improvements during its most recent periods in sales volumes as compared to previous periods and has made certain reductions in staffing and other expenses, including such reductions during First Quarter Fiscal 2012. With the exception of the third and fourth quarters of Fiscal 2011 and First Quarter Fiscal 2012, the Company has consistently incurred negative cash flows from operations. If sales volumes do not meet expectations during Fiscal 2012 or if increased costs result from pending litigation or contingent obligations, the Company does not believe it will be able to offset such negative events through additional overhead cost reductions. As a result, if operating results do not meet expectations, the Company may not have sufficient resources to cover its working capital and capital expenditure requirements and, without additional sources of capital made available to the Company during Fiscal 2012, there will be substantial doubt that the Company will be able to continue as a going concern. In order to maintain an appropriate level of liquidity, the Company believes it will need to either effectively implement its operational plans and objectives or obtain additional capital in the next six to nine months in order to fund its working capital requirements for the remainder for Fiscal 2012 and is evaluating a variety of alternatives, reorganization of existing operations and/or sale of some of its stores or other selected assets. Certain financing alternatives could result in significant interest and other costs, be highly dilutive to existing shareholders or require the divestiture or sale of some or all of the Company’s assets. There can be no assurance that any debt or equity financing arrangement will be available to the Company on acceptable terms, if at all. In addition, there can be no assurance that these financing alternatives would provide the Company with sufficient funds to meet its current or long term capital requirements.

Table of Contents

operations. Due to various contractual obligations of the Company, including store operating leases, supply agreements and franchise agreements, the Company may not have the discretion to reduce operations in an orderly manner to a more sustainable level. The potential sale of stores or other income-producing assets could adversely affect future operating results and cash flows.

During the remainder of Fiscal 2012, we expect that the majority of new store locations will be franchised and/or licensed stores, rather than Company-operated stores. Franchised and licensed stores do not require capital investment in property and equipment, although they do require selling and support costs for such new stores related to store opening, training, and quality control. Typically, a new company-operated store will require capital investment of approximately $100,000 to $400,000, but this varies depending on a specific location. We invested $234,000 primarily for limited refurbishment of some existing stores during the First Quarter Fiscal 2012, and expect that we will continue to perform limited refurbishment on our group of aging retail locations throughout Fiscal 2012 and beyond.

SEASONALITY

Our business is subject to moderate seasonal fluctuations. Greater portions of Tully’s net sales are generally realized during the third quarter of Tully’s fiscal year, which includes the November and December holiday season. Seasonal patterns are generally applicable to each of our operating divisions. In addition, quarterly results are affected by the timing of the opening of new stores (by Tully’s and our franchisees) or the closure of stores not meeting our expectations. Because of these factors, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The supply and price of coffees are subject to significant volatility and can be affected by multiple factors in green coffee producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or restricting coffee bean supplies worldwide. Because we purchase all of our coffee according to the terms of a Supply Agreement with GMCR, we are limited to offsetting the cost exposure of the main commodity used in our business, as we are unable to enter into fixed-price purchase commitments with other roasters.

We currently have no foreign currency exchange rate exposure related to our purchasing of coffee beans because all transactions are denominated in U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed, under the supervision of, and with the participation of, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the 1934 Act)). Based on that evaluation, the CEO and CFO have concluded that, as of July 3, 2011, our disclosure controls and procedures were ineffective due to limited technical resources and lack of segregation of duties with regard to financial accounting and reporting disclosures. As part of the cost savings initiatives discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," we reduced finance staff. Management continues to assess and remediate disclosure controls and procedures as part of their reorganization and “right sizing” effort and will continue to do so during Fiscal 2012; we also continue to assess the appropriate level of staffing to support our organization, given our limited financial resources at the present time.

There has been no change in our internal control over financial reporting during the three month period ended July 3, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently a party to any other legal proceeding that we believe could have a material adverse effect on our financial position or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

No Company securities were offered or sold during First Quarter Fiscal 2012.

Table of Contents

ITEM 6. EXHIBITS

(a) The exhibits listed below are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q

EXHIBIT INDEX



3.1	Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on October 26, 1999 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2001 as filed with the SEC on October 19, 2001, and incorporated herein by reference)
3.1(a)	Articles of Amendment of the Restated Articles of Incorporation containing the Statement of Rights and Preferences of Series B Preferred Stock filed with the Washington Secretary of State on June 27, 2000 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2001, as filed with the Commission on October 19, 2001, and incorporated herein by reference)
3.1(b)	Articles of Correction to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on August 8, 2000 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)
3.1(c)	Articles of Correction to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on August 8, 2000 (Filed with the Registrant’s Annual Report Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)
3.1(d)	Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on December 16, 2004 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)
3.1(e)	Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on December 16, 2004 (Filed with the Registrant’s Current Report on Form 8-K, dated March 26, 2009, as filed with the SEC on March 27, 2009, and incorporated herein by reference)
3.1(f)	Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on June 27, 2007 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)
3.2	Amended and Restated Bylaws adopted on July 18, 2007 (Filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, as filed with the SEC on July 26, 2007, and incorporated herein by reference)
3.2(a)	Amendment to Amended and Restated Bylaws, adopted effective July 8, 2010 (Filed with the Registrant’s Current Report on Form 8-K, as filed with the SEC on July 8, 2010, and incorporated herein by reference)
4.1	Description of capital stock contained in the Amended and Restated Articles of Incorporation (see Exhibit 3.1)
4.2	Description of rights of security holders contained in the Bylaws (see Exhibit 3.2)
4.2(c)	Common Stock Purchase Warrant dated April 26, 2007, issued to Benaroya Capital Company, L.L.C. (Filed with the Registrant’s Annual Report on Form 10-K for the year ended March 30, 2008, as filed with the SEC on September 18, 2008, and incorporated herein by reference)
4.3	Form of Registration Rights Agreement with Series A Preferred Shareholders (Filed with the Registrant’s Annual Report on Form 10-K for the year ended March 30, 2008, as filed with the SEC on September 18, 2008, and incorporated herein by reference)
4.4	Registration Rights Agreement, dated December 14, 2000 between Tully’s and KWM Investments LLC (Filed with the Registrant’s Annual Report on Form 10-K for the year ended March 30, 2008, as filed with the SEC on 139 18, 2008, and incorporated herein by reference)
31.1*	Certification of principal executive officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of principal financial officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of principal executive officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

Table of Contents

SIGNATURE

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, in Seattle, Washington on August 17, 2011.



TC Global, Inc.
By:	/S/ CATHERINE M. CAMPBELL
	Catherine M. Campbell
	Chief Financial Officer & Principal Financial Officer

	Signing on behalf of the Registrant

Attached files

TC GLOBAL, INC. Reports

Also read