Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - TC GLOBAL, INC. | Financial_Report.xls |
| EX-32.2 - SECTION 906 CFO CERTIFICATION - TC GLOBAL, INC. | tcglobal322-11.htm |
| EX-31.2 - SECTION 302 CFO CERTIFICATION - TC GLOBAL, INC. | tcglobal312-11.htm |
| EX-31.1 - SECTION 302 CEO CERTIFICATION - TC GLOBAL, INC. | tcglobal311-11.htm |
| EX-32.1 - SECTION 906 CEO CERTIFICATION - TC GLOBAL, INC. | tcglobal321-11.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JANAURY 1, 2012
or
o | 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 o No x
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 x No o
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 | o | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | x |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
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 February 10, 2012 |
TC GLOBAL, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 1, 2012
INDEX
Page No. | ||
PART I | ||
Item 1 | ||
Item 2 | ||
Item 3 | ||
Item 4 | ||
PART II | ||
Item 1 | ||
Item 1A | ||
Item 5 | ||
Item 6 | ||
****
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 2013 | March 31, 2013 (52 weeks) |
Fiscal 2012 | April 1, 2012 (52 weeks) |
Fiscal 2011 | April 3, 2011 (53 weeks) |
Interim fiscal period | |
Third Quarter Fiscal 2012 | 13-week period ended January 1, 2012 |
Third Quarter Fiscal 2011 | 13-week period ended December 26, 2010 |
Nine Months Fiscal 2012 | 39-week period ended January 1, 2012 |
Nine Months Fiscal 2011 | 39-week period ended December 26, 2010 |
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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 and Fiscal 2013 operating plans; |
• | 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
TC GLOBAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
April 3, 2011 | January 1, 2012 | |||||||
(audited) | (unaudited) | |||||||
(dollars in thousands, except share data) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 2,809 | $ | 1,786 | ||||
Accounts receivable, net of allowance for doubtful accounts of $994 and $906 at April 3, 2011 and January 1, 2012, respectively | 1,213 | 1,000 | ||||||
Inventories | 628 | 572 | ||||||
Prepaid expenses and other current assets | 272 | 268 | ||||||
Total current assets | 4,922 | 3,626 | ||||||
Property and equipment, net | 2,207 | 2,509 | ||||||
Related party receivable, net of current portion | 1,000 | 1,000 | ||||||
Goodwill and other assets | 344 | 342 | ||||||
Total assets | $ | 8,473 | $ | 7,477 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 2,542 | $ | 2,770 | ||||
Accrued liabilities | 1,883 | 1,473 | ||||||
Current portion of long-term debt and capital lease obligation | 54 | 115 | ||||||
Deferred revenue | 4,540 | 5,444 | ||||||
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 | 13,971 | ||||||
Deferred lease costs | 362 | 346 | ||||||
Deferred revenue, net of current portion | 831 | 689 | ||||||
Long-term portion of capital lease obligation | — | 43 | ||||||
Deferred gain on sale of wholesale segment, net of current portion | 2,020 | 1,893 | ||||||
Total liabilities | 16,401 | 16,942 | ||||||
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 January 1, 2012, 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 January 1, 2012, 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 January 1, 2012, respectively; stated value of $2.50 per share and a liquidation preference | 7,958 | 7,958 | ||||||
Additional paid-in capital | 24,166 | 24,223 | ||||||
Accumulated other comprehensive loss | (93 | ) | (49 | ) | ||||
Accumulated deficit | (89,585 | ) | (91,158 | ) | ||||
Total stockholders’ deficit attributable to TC Global, Inc. | (9,375 | ) | (10,847 | ) | ||||
Non-controlling interest | 1,447 | 1,382 | ||||||
Total stockholders’ deficit | (7,928 | ) | (9,465 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 8,473 | $ | 7,477 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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TC GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Week Periods Ended | Thirty-Nine Week Periods Ended | ||||||||||||||
December 26, 2010 | January 1, 2012 | December 26, 2010 | January 1, 2012 | ||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||
(dollars in thousands, except per share data) | (dollars in thousands, except per share data) | ||||||||||||||
Net sales | |||||||||||||||
Retail store sales | $ | 9,127 | $ | 8,959 | $ | 26,758 | $ | 27,149 | |||||||
Specialty sales of products | 288 | 461 | 1,057 | 1,008 | |||||||||||
Total sales of products | 9,415 | 9,420 | 27,815 | 28,157 | |||||||||||
Licenses, royalties, and fees | 136 | 157 | 412 | 360 | |||||||||||
Recognition of deferred licensing revenue | 11 | 52 | 31 | 155 | |||||||||||
Net sales | 9,562 | 9,629 | 28,258 | 28,672 | |||||||||||
Cost of goods sold and operating expenses | |||||||||||||||
Retail cost of goods sold | 3,400 | 3,509 | 9,930 | 10,467 | |||||||||||
Retail occupancy expenses | 906 | 898 | 2,954 | 2,784 | |||||||||||
Total retail cost of goods sold and related occupancy expenses | 4,306 | 4,407 | 12,884 | 13,251 | |||||||||||
Specialty cost of goods sold | 85 | 277 | 505 | 369 | |||||||||||
Cost of goods sold and related occupancy expenses | 4,391 | 4,684 | 13,389 | 13,620 | |||||||||||
Store operating expenses | 3,919 | 3,973 | 11,665 | 12,159 | |||||||||||
Other operating expenses | 439 | 241 | 1,652 | 944 | |||||||||||
Marketing, general and administrative costs | 1,578 | 1,056 | 5,054 | 3,082 | |||||||||||
Depreciation and amortization | 223 | 168 | 705 | 522 | |||||||||||
Store closure and lease termination costs | 44 | 82 | 67 | 14 | |||||||||||
Total cost of goods sold and operating expenses | 10,594 | 10,204 | 32,532 | 30,341 | |||||||||||
Operating loss | (1,032 | ) | (575 | ) | (4,274 | ) | (1,669 | ) | |||||||
Other income (expense) | 7 | (20 | ) | 1 | (58 | ) | |||||||||
Loss before income taxes | (1,025 | ) | (595 | ) | (4,273 | ) | (1,727 | ) | |||||||
Income tax benefit (expense) | (1 | ) | — | (23 | ) | 89 | |||||||||
Net loss | $ | (1,026 | ) | $ | (595 | ) | $ | (4,296 | ) | $ | (1,638 | ) | |||
Non-controlling interest | $ | 26 | $ | 22 | $ | 131 | $ | 65 | |||||||
Net loss attributable to TC Global, Inc. | $ | (1,000 | ) | $ | (573 | ) | $ | (4,165 | ) | $ | (1,573 | ) | |||
Loss per share - basic and diluted | $ | (0.28 | ) | $ | (0.16 | ) | $ | (1.17 | ) | $ | (0.44 | ) | |||
Weighted average common shares used in computing basic and diluted loss per share | 3,564 | 3,566 | 3,564 | 3,566 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TC GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Thirty-Nine Week Periods Ended | ||||||||
December 26, 2010 | January 1, 2012 | |||||||
(unaudited) | (unaudited) | |||||||
(dollars in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (4,296 | ) | $ | (1,638 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 705 | 522 | ||||||
Store closure and lease termination costs | 67 | 14 | ||||||
Stock compensation expense | 61 | 57 | ||||||
Provision for doubtful accounts | (293 | ) | 10 | |||||
Gain on sale of fixed assets | (12 | ) | (7 | ) | ||||
Recognition of deferred gain on sale of wholesale segment | (127 | ) | (127 | ) | ||||
Recognition of deferred license revenues | 14 | (179 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (69 | ) | 203 | |||||
Inventories | 678 | 56 | ||||||
Prepaid expenses and other assets | 240 | 311 | ||||||
Accounts payable | (143 | ) | 228 | |||||
Accrued liabilities | (181 | ) | (425 | ) | ||||
Deferred revenue | 326 | 941 | ||||||
Deferred lease costs | 25 | (16 | ) | |||||
Net cash used in operating activities | (3,005 | ) | (50 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Restricted Cash (Escrow Receivable) | 3,500 | — | ||||||
Purchases of property and equipment | (1,139 | ) | (911 | ) | ||||
Proceeds from sale of property and equipment | 39 | 94 | ||||||
Net cash provided by (used in) investing activities | 2,400 | (817 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Principal payments on long-term debt and capital leases | (316 | ) | (200 | ) | ||||
Foreign currency translation adjustment | (31 | ) | 44 | |||||
Net cash used in financing activities | (347 | ) | (156 | ) | ||||
Net decrease in cash and cash equivalents | (952 | ) | (1,023 | ) | ||||
Cash and cash equivalents at beginning of period | 3,558 | 2,809 | ||||||
Cash and cash equivalents at end of period | $ | 2,606 | $ | 1,786 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for interest | $ | 4 | $ | 6 | ||||
Non-cash investing and financing activities: | ||||||||
Insurance premiums financed through note payable | $ | 195 | $ | 305 | ||||
Equipment purchased through capital lease | $ | — | $ | 74 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 and thirty-nine week periods ended January 1, 2012 (“Third Quarter Fiscal 2012” and "Nine Months Fiscal 2012," respectively) and the thirteen and thirty-nine week periods ended December 26, 2010 (“Third Quarter Fiscal 2011” and "Nine Months Fiscal 2011," respectively) 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 January 1, 2012 and December 26, 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 Nine Months Fiscal 2012, the Company added four Company-operated store locations, but closed seven Company-operated store locations, either because of poor operating performance or because of the natural end of the location's lease coupled with under-performance. During this period, the Company’s franchise and license partners added two new locations and closed seven existing locations. During the Nine Months Fiscal 2012, the Company’s licensees in Asia opened one store in the Philippines, but closed one store in South Korea, leaving a total of eight international franchise locations as of January 1, 2012.
Recent Accounting Pronouncements
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other. The objective of this update is to simplify how entities test goodwill for impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company believes that the adoption of this update will not have a material impact on its financial statements.
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income, ASU 2011-05, 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 ASU 2011-04, Fair Value Measurement, which provides guidance on fair value measurements and 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
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adoption of this guidance is not expected to have a material impact on our financial statements.
2. Liquidity
As of January 1, 2012 we had cash and cash equivalents of $1.8 million, of which $50,000 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 $10.3 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 metrics, factoring out sales from closed locations, as compared to previous periods and has made certain reductions in staffing and other expenses. Historically, the Company continues to incur negative cash flows from operations, but has seen improvements in this metric in its most recent periods. If sales volumes do not meet expectations during Fiscal 2012 and Fiscal 2013, or if the Company incurs increased costs resulting 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 2013, 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 beyond Fiscal 2012 and is evaluating a variety of alternatives, including the reorganization of existing operations and/or the sale or closure of some of its stores or the sale of 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
Farnam Street Lease Facility
Currently, the Company has an available lease facility with Farnam Street Financial, Inc. which allows the Company to borrow up to $825,000. This lease facility is being utilized to support the purchase and implementation of new point of sale systems in the Company's retail locations, as well as to upgrade back-end accounting systems. As of January 1, 2012, there was $370,000 outstanding under this facility. The lease has a term of 24 months, which commences upon acceptance of equipment on any given lease schedule associated with the lease agreement. This lease fails to meet the conditions of capital lease accounting and is therefore accounted for as an operating lease within the accompanying consolidated financial statements.
CIT Technology Financing Services Lease
In June, 2011, the Company entered into a lease agreement with CIT Technology Financing Services, Inc. ("CIT") in order to finance the purchase of hardware and software to update the Company's corporate computer network. As of January 1, 2012, there was approximately $65,000 outstanding under this facility. The lease has a term of 36 months, which commenced on July 29, 2011. This lease is being accounted for as capital lease within the accompanying consolidated financial statements.
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
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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.
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 January 1, 2012, 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.
Obligations under notes payable and capital leases as of January 1, 2012 consist of the following:
April 3, 2011 | January 1, 2012 | |||||||
(dollars in thousands) | ||||||||
Note payable for purchase of insurance, payable in monthly installments of approximately $16,000, including interest at 2.65%, through June 2012, and collateralized by unearned or return insurance premiums, accrued dividends and loss payments | $ | 54 | $ | 93 | ||||
Capital lease obligation | — | 65 | ||||||
Note payable due to Limited Partner in TCAPPLP | 4,000 | 4,000 | ||||||
Total long-term debt | 4,054 | 4,158 | ||||||
Less: Current portion | (4,054 | ) | (4,115 | ) | ||||
Long-term debt, net of current portion | $ | — | $ | 43 | ||||
4. Commitments and contingencies
Real estate 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-cancelable operating leases as of January 1, 2012 are summarized as follows:
Fiscal year | ||||
(dollars in thousands) | ||||
Remainder of Fiscal 2012 | $ | 799 | ||
2013 | 2,778 | |||
2014 | 2,099 | |||
2015 | 1,573 | |||
2016 | 941 | |||
2017 | 578 | |||
Thereafter | 1,153 | |||
Total | $ | 9,921 | ||
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:
9
Fiscal year | ||||
(dollars in thousands) | ||||
Remainder of Fiscal 2012 | $ | 7 | ||
2013 | 15 | |||
Total | $ | 22 | ||
Capital lease commitments
As discussed in Note 3 above, the Company leases certain hardware and software under a capital lease arrangement with CIT. Minimum future lease payments as per the lease agreement are summarized as follows:
Fiscal year (dollars in thousands) | ||||
Remainder of Fiscal 2012 | $ | 7 | ||
2013 | 30 | |||
2014 | 30 | |||
2015 | 10 | |||
Total capital lease commitments | $ | 77 | ||
Interest | (12 | ) | ||
Capital lease obligation | 65 | |||
Less current portion of capital lease commitments | (22 | ) | ||
Long-term portion of capital lease obligation | 43 | |||
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. In its complaint, the plaintiff sought damages, rescission, and attorneys' fees and costs. After the lawsuit was removed to federal court, the court dismissed plaintiff's causes of action for concealment, breach of contract, false promise, intentional misrepresentation, and breach of the implied covenant of good faith and fair dealing. We have filed counterclaims against the plaintiff, and answered the plaintiff's only remaining claim, regarding violation of franchise law. On January 27, 2012 the court granted the Company's motion for preliminary injunction but the plaintiff filed a Chapter 7 bankruptcy petition later that day, which stayed any further action against the plaintiff.
On October 17, 2011, a complaint was filed against the Company and GMCR, jointly, by Spinelli Pte. Ltd., a Singapore company. The lawsuit claims breach of contract, declaratory relief and fraudulent procurement related to the Spinelli brand and marks. We intend to vigorously defend these claims but cannot predict the outcome or financial impact to the Company at this time.
On November 4, 2011, The Irvine Company, LLC (the “plaintiff”), a landlord for one of the Company's stores, filed suit against the Company and JH Development, LLC ("JHD"), a franchise area developer. The plaintiff alleges that the Company entered a lease with the plaintiff in May 2000, then assigned the lease to JHD in October 2008. The plaintiff alleges that the Company and JHD then breached the lease by vacating prior to termination and failing to make payments. The only cause of action is a cause of action for breach of lease. The plaintiff seeks compensatory damages in the amount of $250,000, as well as attorney's fees and costs. We are investigating the claim and plan to vigorously defend against it. We have accrued for the present value of the lease payments, for a total of $216,000, which we approximate as the amount outstanding and owed through the end of the lease term.
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
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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 January 1, 2012, 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 October 2, 2011, 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. |
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.
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 January 1, 2012 are summarized as follows:
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 | ||||||||
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
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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:
Thirty-Nine Week Periods Ended | ||||||
December 26, 2010 | January 1, 2012 | |||||
Weighted average risk free interest rate | 1.72 | % | — | |||
Expected dividend yield | 0% | — | ||||
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 thirty-nine weeks of 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 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 $19,000, respectively, for Third Quarter Fiscal 2011 and Third Quarter Fiscal 2012, respectively, and $61,000 and $57,000 for the Nine Months Fiscal 2011 and Nine Months 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 January 1, 2012, the Company had approximately $95,000 of total unrecognized compensation cost related to 62,500 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 January 1, 2012 options for 306,718 shares were outstanding under the 1994 Plan, the 2004 Stock Option Plan, and the 2010 Stock Option Plan, of which 281,718 were fully vested.
The following table summarizes activity under our stock option plans:
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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 | |||||
Forfeited | (7,498 | ) | $ | 10.73 | |||||
Outstanding at July 3, 2011 | 308,990 | $ | 4.25 | 8.4 years | |||||
Forfeited | (1,648 | ) | $ | 10.33 | |||||
Outstanding at October 2, 2011 | 307,342 | $ | 4.85 | 8.2 years | |||||
Forfeited | (624 | ) | $ | 9.05 | |||||
Outstanding at January 1, 2012 | 306,718 | $ | 4.71 | 7.9 years | |||||
Exercisable or convertible at the end of the period | 281,718 | $ | 4.13 | 8.1 years | |||||
The aggregate intrinsic value of options outstanding at January 1, 2012 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 common 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 January 1, 2012.
No options were exercised in Nine Months Fiscal 2011 or in Nine Months 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 January 1, 2012, 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 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
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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 January 1, 2012. 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 of our Annual Report on Form 10-K. 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:
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Thirteen Week Periods Ended | Thirty-nine Week Periods Ended | |||||||||||||||
December 26, 2010 | January 1, 2012 | December 26, 2010 | January 1, 2012 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
Net sales | ||||||||||||||||
Retail division | $ | 9,127 | $ | 8,959 | $ | 26,758 | $ | 27,149 | ||||||||
Specialty division | 435 | 670 | 1,500 | 1,523 | ||||||||||||
$ | 9,562 | $ | 9,629 | $ | 28,258 | $ | 28,672 | |||||||||
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) | ||||||||||||||||
Retail division | $ | 858 | $ | 497 | $ | 2,142 | $ | 1,725 | ||||||||
Specialty division | (89 | ) | 152 | (657 | ) | 210 | ||||||||||
Corporate and other expenses | (1,578 | ) | (1,056 | ) | (5,054 | ) | (3,082 | ) | ||||||||
Loss before interest, taxes, depreciation and amortization | (809 | ) | (407 | ) | (3,569 | ) | (1,147 | ) | ||||||||
Depreciation and amortization | (223 | ) | (168 | ) | (705 | ) | (522 | ) | ||||||||
Interest income, interest expense, and loan guarantee fees | 7 | (20 | ) | 1 | (58 | ) | ||||||||||
Non-controlling interest | 26 | 22 | 131 | 65 | ||||||||||||
Income taxes | (1 | ) | — | (23 | ) | 89 | ||||||||||
Net loss attributable to TC Global, Inc. | $ | (1,000 | ) | $ | (573 | ) | $ | (4,165 | ) | $ | (1,573 | ) | ||||
Depreciation and amortization | ||||||||||||||||
Retail division | $ | 187 | $ | 139 | $ | 609 | $ | 436 | ||||||||
Specialty division | 4 | 3 | 10 | 10 | ||||||||||||
Corporate and other expenses | 32 | 26 | 86 | 76 | ||||||||||||
Total depreciation and amortization | $ | 223 | $ | 168 | $ | 705 | $ | 522 | ||||||||
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 has issued preferred stock that is convertible into common stock (collectively, the “common share equivalent instruments”). Outstanding stock options, stock warrants, Series A Convertible Preferred shares and Series B Convertible Preferred shares are antidilutive because of net losses, and as such, their effect has not been included in the calculation of basic or diluted net loss per share. For the Third Quarter Fiscal 2012 and Third Quarter Fiscal 2011, respectively, potential gross common shares of 2.4 million and 2.6 million, respectively, were antidilutive and are not included in computing loss per share.
9. Subsequent Events
On January 27, 2012 the U.S. federal court granted the Company's motion for preliminary injunction in the legal matter between it and JH Development, LLC, but the plaintiff then filed a Chapter 7 bankruptcy petition later that day, which stayed any further action against the plaintiff.
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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 and thirty-nine week periods ended January 1, 2012 (“Third Quarter Fiscal 2012” and "Nine Months Fiscal 2012," respectively). 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 licensees. |
We have realized improvements during our most recent periods in sales metrics, factoring out sales from closed locations, and have made some reductions in staffing and other expenses over the past year to bring operating expenses more in line with operating revenues. Despite these revenue improvements and expense reductions, the Company continues to incur negative cash flows from operations. If sales volumes decline significantly or we do not meet expectations of sustained increases during Fiscal 2012 and into Fiscal 2013, 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
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the organization. We are focusing on making investment decisions 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 January 1, 2012, Tully’s had 71 company-operated retail stores and 105 licensed and franchisee-operated 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 Nine Months Fiscal 2012, we opened three new stores within a corporate campus and one new store as a drive-thru location, while closing seven other locations. 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 Third Quarter Fiscal 2012 was 39.2% as compared to 37.3% 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 January 1, 2012, there were 105 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, performs foreign licensing, wholesale distribution and other business activities. As of January 1, 2012, 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 opened its first location in November 2011, and is obligated to develop 50 locations in total in the Philippines over the next five years.
Revenue Trends
Our quarterly sales from our retail and specialty operations are summarized as follows:
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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 | 9,484 | 9,629 | — | ||||||||
(1) | Each fiscal quarter included 13 weeks, except for the Fourth Quarter of Fiscal 2011, which had 14 weeks. We estimate that the 14th 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 Fiscal 2011 and into Fiscal 2012, we have experienced a mixture of increased costs associated with some of the products we sell and negotiated lower costs for other products and components. To compensate for overall cost increases, we have increased prices for our coffee-based beverages and bakery items in our stores. 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 beans.
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. From the beginning of Fiscal 2011 through Nine Months Fiscal 2012, we have decreased staff size in our corporate offices by 15 full-time equivalent personnel, or 27%.
Retail Performance Measures
Our U.S. retail stores are summarized as follows:
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Thirty-nine Week Periods Ended | ||||||
December 26, 2010 | January 1, 2012 | |||||
NUMBER OF STORES: | ||||||
Company-operated stores | ||||||
Stores at beginning of the period | 78 | 74 | ||||
New stores | 6 | 4 | ||||
Closed stores | (8 | ) | (7 | ) | ||
End of the period | 76 | 71 | ||||
Licensee- and Franchisee-operated stores | ||||||
Stores at beginning of the period | 106 | 110 | ||||
New stores | 8 | 2 | ||||
Closed stores | (2 | ) | (7 | ) | ||
End of the period | 112 | 105 | ||||
Total company-operated, licensed and franchised stores by location | ||||||
Arizona | 20 | 19 | ||||
California | 27 | 20 | ||||
Oregon | 5 | 5 | ||||
Washington | 101 | 99 | ||||
Montana | 5 | 5 | ||||
Idaho | 11 | 10 | ||||
Wyoming | 2 | 1 | ||||
Colorado | 17 | 17 | ||||
End of the period | 188 | 176 | ||||
International franchised and licensed stores at the end of each respective fiscal period are set forth in the table below:
Thirty-nine Week Periods Ended | ||||
December 26, 2010 | January 1, 2012 | |||
International franchise and licensees | 8 | 8 | ||
Our increase (decrease) in quarterly comparable store sales, which is the same-store comparison of sales in the current period to sales in the prior comparable period without the impact of new stores or closed stores that have occurred in the interim, over the prior year’s comparable quarter are summarized as follows:
Fiscal Quarters | ||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter (1) | |||||||||
Fiscal 2011 (1) | (0.8 | )% | 1.1 | % | 3.5 | % | 14 | % | ||||
Fiscal 2012 | 4.8 | % | 5.3 | % | 1.3 | % | — | |||||
(1) | Each fiscal quarter included 13 weeks, except for the Fourth Quarter of Fiscal 2011, which had 14 weeks. We estimate that the 14th 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 14th week was 5.6%. |
Results of Operations
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Thirteen Week Periods Ended | Thirty-nine Week Periods Ended | |||||||||||
December 26, 2010 | January 1, 2012 | December 26, 2010 | January 1, 2012 | |||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||
Total Net Sales Metrics | ||||||||||||
Amounts as a Percent of Total Net Sales | ||||||||||||
Retail store sales | 95.5 | % | 93.0 | % | 94.7 | % | 94.7 | % | ||||
Specialty - product sales | 3.0 | % | 4.8 | % | 3.7 | % | 3.5 | % | ||||
Total sales of products | 98.5 | % | 97.8 | % | 98.4 | % | 98.2 | % | ||||
Specialty - Licenses, royalties and fees | 1.4 | % | 1.6 | % | 1.5 | % | 1.3 | % | ||||
Specialty - Recognition of deferred revenue | 0.1 | % | 0.6 | % | 0.1 | % | 0.5 | % | ||||
Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Retail Metrics | ||||||||||||
Amounts as a Percent of Retail Store Sales | ||||||||||||
Retail cost of goods sold | 37.3 | % | 39.2 | % | 37.1 | % | 38.6 | % | ||||
Retail occupancy expenses | 9.9 | % | 10.0 | % | 11.0 | % | 10.4 | % | ||||
Store operating expenses | 42.9 | % | 44.3 | % | 43.6 | % | 44.8 | % | ||||
Marketing, General and Administrative Expenses as Percent of Total Net Sales | 16.6 | % | 8.7 | % | 17.9 | % | 10.0 | % | ||||
Third Quarter Fiscal 2012 Compared To Third Quarter Fiscal 2011
Net Sales
Total net sales increased $67,000, or 0.7%, to $9.6 million for the Third Quarter Fiscal 2012, as compared to slightly under $9.6 million for the Third Quarter Fiscal 2011. Sales of products increased by 0.1%, to $9.4 million for the Third Quarter Fiscal 2012, as compared to $9.4 million for the Third Quarter Fiscal 2011. Licenses, royalties and fees increased $21,000, or 15.4%, to $157,000 as compared to $136,000 for the Third Quarter Fiscal 2011. Revenue recognized from deferred license arrangements increased $41,000 to $52,000 for the Third Quarter Fiscal 2012 as compared to $11,000 for the Third Quarter Fiscal 2011, due to 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 Third Quarter Fiscal 2012 compared to Third Quarter Fiscal 2011 (dollars in thousands) | Increase (Decrease) in Net Sales | |||
Retail | $ | (168 | ) | |
Specialty | 235 | |||
Total Company | $ | 67 | ||
For the Third Quarter Fiscal 2012, comparable retail store sales increased 1.3%. The factors comprising the divisional retail sales increase are summarized as follows:
Retail division Components of net sales increase Third Quarter Fiscal 2012 compared to Third Quarter Fiscal 2011 (dollars in thousands) | Increase (Decrease) in Net Sales | |||
Comparable store sales increase | $ | 113 | ||
Sales increase from new stores | 338 | |||
Sales decrease from stores closed during Fiscal 2012 and Fiscal 2011 | (619 | ) | ||
Total retail division | $ | (168 | ) | |
Specialty net sales increased $235,000 to $670,000 in the Third Quarter Fiscal 2012 from $435,000 in the Third Quarter Fiscal 2011, due mainly to an increase in royalty revenue from licensees and franchisees who have experienced stronger sales in recent periods.
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Cost of Goods Sold and Operating Expenses
Cost of goods sold and related occupancy costs increased by $101,000, or 2.3%, to $4.4 million for the Third Quarter Fiscal 2012 as compared to Third Quarter Fiscal 2011. Cost of goods sold and related occupancy costs as a percentage of total net sales increased to 48.6% for the Third Quarter Fiscal 2012, compared to 45.9% in the corresponding period last year. Our retail cost of goods sold has increased significantly in recent periods as the commodity price of coffee beans and dairy have increased. However, our occupancy expenses have decreased in the same time period, as we have closed underperforming locations.
Store operating expenses increased as a percentage of retail sales to 44.3% for Third Quarter Fiscal 2012 compared to 42.9% for Third Quarter Fiscal 2011, due mainly to an overall increase in the cost of supplies and an increase in repair and maintenance expenses as we maintain our aging retail assets.
Other operating expenses (expenses associated with all operations other than company-operated retail stores) decreased $198,000 or 45.1% to $241,000 during Third Quarter Fiscal 2012 from $439,000 in Third Quarter Fiscal 2011 due to the staffing and expense reductions that we undertook during most of Fiscal 2011 and into First Quarter Fiscal 2012.
Marketing, general and administrative costs decreased significantly by $522,000, or 33.1%, to $1.1 million during Third Quarter Fiscal 2012, as compared to $1.6 million during Third Quarter Fiscal 2011. This decrease is the result of the staffing reductions that we undertook throughout Fiscal 2011 and early in First Quarter Fiscal 2012, as well as of the overall emphasis on expense reduction throughout Fiscal 2012. Since the beginning of Fiscal 2011, we have reduced corporate staffing by 15 full-time equivalent personnel, or 27%.
Depreciation and amortization expense decreased $55,000, or 24.7%, to $168,000 in the Third Quarter Fiscal 2012 from $223,000 in the Third 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 experienced a net loss of $573,000 for the Third Quarter Fiscal 2012 as compared to a net loss of $1.0 million for the Third Quarter Fiscal 2011, representing a loss improvement of $427,000, or 42.7%.
Nine Months Fiscal 2012 Compared To Nine Months Fiscal 2011
Net Sales
Total net sales increased $414,000, or 1.5%, to $28.7 million for the Nine Months Fiscal 2012, as compared to $28.3 million for the Nine Months Fiscal 2011. Sales of products increased $342,000, or 1.2%, to $28.2 million for the Nine Months Fiscal 2012, as compared to $27.8 million for the Nine Months Fiscal 2011. Licenses, royalties and fees decreased $52,000, or 12.6%, to $360,000 for the NIne Months Fiscal 2012, as compared to $412,000 for the Nine Months Fiscal 2011.
The divisional increase in net sales was comprised as follows:
Total Company Nine Months Fiscal 2012 compared to Nine Months Fiscal 2011 (dollars in thousands) | Increase in Net Sales | |||
Retail | $ | 391 | ||
Specialty | 23 | |||
Total Company | $ | 414 | ||
For the Nine Months Fiscal 2012, comparable retail store sales increased 4.1%. The factors comprising the retail sales increase are summarized as follows:
Retail division Components of net sales increase Nine Months Fiscal 2012 compared to Nine Months Fiscal 2011 (dollars in thousands) | Increase (Decrease) in Net Sales | |||
Comparable store sales increase | $ | 962 | ||
Sales increase from new stores | 857 | |||
Sales decrease from stores closed during Fiscal 2012 and Fiscal 2011 | (1,428 | ) | ||
Total retail division | $ | 391 | ||
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Specialty net sales increased $23,000 to slightly over $1.5 million for the Nine Months Fiscal 2012 from $1.5 million for the Nine Months Fiscal 2011. During the First Quarter Fiscal 2011 we entered into a distribution agreement that enabled us to outsource the inventory 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 since First Quarter Fiscal 2011 we no longer recognize Sales Revenue or Cost of Sales for the sale of these products to our franchise or licensed stores. This did have and will continue to have the effect of decreasing Net Sales, Specialty Sales, and Cost of Sales, as compared to prior periods.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and related occupancy costs increased $231,000, or 1.7%, to $13.6 million for the Nine Months Fiscal 2012 as compared to Nine Months Fiscal 2011. Cost of goods sold and related occupancy costs slightly increased to 47.5% of net sales for Nine Months Fiscal 2012, compared to 47.4% in the corresponding prior year period. Retail occupancy expenses as a percentage of retail store sales were lower at 10.3% in the Nine Months Fiscal 2012 as compared to 11.0% in the Nine Months Fiscal 2011. Retail cost of good sold has increased as a percentage of retail store sales to 38.6% in the Nine Months Fiscal 2012, as compared to 37.1% in the Nine Months Fiscal 2011. Our retail cost of goods sold has increased in recent periods as the commodity price of coffee beans, dairy products, wheat, and other commodities used in the products we sell has increased.
Store operating expenses as a percentage of retail sales increased to 44.8% of retail sales for the Nine Months Fiscal 2012 compared to 43.6% for the Nine Months Fiscal 2011, due mainly to an overall increase in the cost of supplies and an increase in repair and maintenance expenses as we maintain our aging retail assets.
Other operating expenses (expenses associated with all operations other than company-operated retail stores) decreased $708,000 or 42.9% to $944,000 during Nine Months Fiscal 2012 from $1.7 million in Nine Months Fiscal 2011 due to the continuing benefit we have experienced from staffing reductions that we undertook during Fiscal 2011 and into First Quarter Fiscal 2012, as well as particular emphasis throughout Fiscal 2012 on decreasing expenses.
Marketing, general and administrative costs decreased $2.0 million, or 39.0%, to $3.1 million for the Nine Months Fiscal 2012 from $5.1 million for the Nine Months Fiscal 2011. This decrease is again the result of the staffing and expense reductions that we undertook throughout Fiscal 2011 and Fiscal 2012. Since the beginning of Fiscal 2011, we have reduced corporate staffing by 15 full-time equivalent personnel, or 27%.
Depreciation and amortization expense decreased $183,000, or 26.0%, to $522,000 for the Nine Months Fiscal 2012 from $705,000 for the Nine Months Fiscal 2011. This expense has decreased as assets have aged and become fully depreciated.
Net Loss from Continuing Operations
As a result of the factors described above, we experienced a loss from continuing operations of $1.6 million for the Nine Months Fiscal 2012 as compared to a net loss of $4.2 million for the Nine Months Fiscal 2011, representing a loss improvement of $2.6 million, or 62.2%.
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:
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Nine Months Fiscal 2011 | Nine Months Fiscal 2012 | |||||||
(dollars in thousands) | ||||||||
STATEMENTS OF CASH FLOWS DATA | ||||||||
Cash provided by (used for): | ||||||||
Net loss | $ | (4,296 | ) | $ | (1,638 | ) | ||
Deferred gain on Green Mountain Transaction | (127 | ) | (127 | ) | ||||
Adjustments for depreciation and other non-cash operating activities | 542 | 417 | ||||||
Net loss adjusted for non-cash operating statement amounts | (3,881 | ) | (1,348 | ) | ||||
Cash provided by other changes in assets and liabilities | 876 | 1,298 | ||||||
Net cash used in operating activities | (3,005 | ) | (50 | ) | ||||
Escrow receivable established in connection with Green Mountain Transaction | 3,500 | — | ||||||
Purchases of property and equipment | (1,139 | ) | (911 | ) | ||||
Other investing activities | 39 | 94 | ||||||
Net repayments of notes payable | (316 | ) | (200 | ) | ||||
Foreign currency translation adjustment | (31 | ) | 44 | |||||
Net decrease in cash and cash equivalents | $ | (952 | ) | $ | (1,023 | ) | ||
Overall, our operating, investing and financing activities used $1.0 million of cash during the Nine Months Fiscal 2012 as compared to using $952,000 of cash during the Nine Months Fiscal 2011, which included the release of $3.5 million from Escrow in connection with the Green Mountain Transaction.
Cash used by operating activities during the Nine Months Fiscal 2012 was $50,000, an improvement of nearly $3.0 million, compared to Nine Months Fiscal 2011, when operating activities used cash of $3.0 million.
Investing activities used cash of $817,000 in the Nine Months Fiscal 2012, compared to providing $2.4 million of cash in the Nine Months Fiscal 2011, again relating to the release of $3.5 million from Escrow related to the Green Mountain Transaction.
Financing activities used cash of $156,000 in the Nine Months Fiscal 2012, compared to use of $347,000 in the Nine Months Fiscal 2011. In both periods, this use was primarily related to payments made on financed insurance policies.
Liquidity and Capital Resources
As of January 1, 2012, we had cash and cash equivalents of $1.8 million, of which $50,000 was held in TCAPPLP and limited in use, and a working capital deficit of $10.3 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.
As of January 1, 2012, we had cash commitments as summarized below:
Remainder of 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||||||||||||
Real estate operating leases | $ | 799 | $ | 2,778 | $ | 2,099 | $ | 1,573 | $ | 941 | $ | 578 | $ | 1,153 | $ | 9,921 | |||||||||||||||
Equipment operating lease | 52 | 208 | 156 | — | — | — | — | 416 | |||||||||||||||||||||||
Capital lease | 7 | 30 | 30 | 10 | — | — | — | 77 | |||||||||||||||||||||||
Sublease income | (7 | ) | (15 | ) | — | — | — | — | — | (22 | ) | ||||||||||||||||||||
Total | $ | 851 | $ | 3,001 | $ | 2,285 | $ | 1,583 | $ | 941 | $ | 578 | $ | 1,153 | $ | 10,392 | |||||||||||||||
The Company has realized some improvements during its most recent periods in sales metrics, factoring out sales from closed locations, as compared to previous periods and has made certain reductions in staffing and other expenses. Historically, the Company has consistently incurred negative cash flows from operations, though we have experienced significant improvement in this trend in recent periods. If sales volumes do not meet expectations during Fiscal 2012 and Fiscal 2013, or if the Company incurs 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,
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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 for the remainder of Fiscal 2012 and beyond, 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 Fiscal 2013 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.
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.
During the remainder of Fiscal 2012 and into Fiscal 2013, 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. During the Nine Months Fiscal 2012, we invested $911,000 primarily to implement new point-of-sale systems in our retail locations, and to a lesser extent for limited refurbishment of some existing stores. We 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 not subject to seasonal fluctuations. 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.
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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 January 1, 2012, 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 January 1, 2012 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
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. In its complaint, the plaintiff sought damages, rescission, and attorneys' fees and costs. After the lawsuit was removed to federal court, the court dismissed plaintiff's causes of action for concealment, breach of contract, false promise, intentional misrepresentation, and breach of the implied covenant of good faith and fair dealing. We have filed counterclaims against the plaintiff, and answered the plaintiff's only remaining claim, regarding violation of franchise law. On January 27, 2012 the court granted the Company's motion for preliminary injunction but the plaintiff filed a Chapter 7 bankruptcy petition later that day, which stayed any further action against the plaintiff.
On October 17, 2011, a complaint was filed against the Company and GMCR, jointly, by Spinelli Pte. Ltd., a Singapore company. The lawsuit claims breach of contract, declaratory relief and fraudulent procurement related to the Spinelli brand and marks. We intend to vigorously defend these claims but cannot predict the outcome or financial impact to the Company at this time.
On November 4, 2011, The Irvine Company, LLC (the “plaintiff”), a landlord for one of the Company's stores, filed suit against the Company and JH Development, LLC ("JHD"), a franchise area developer. The plaintiff alleges that the Company entered a lease with the plaintiff in May 2000, then assigned the lease to JHD in October 2008. The plaintiff alleges that the Company and JHD then breached the lease by vacating prior to termination and failing to make payments. The only cause of action is a cause of action for breach of lease. The plaintiff seeks compensatory damages in the amount of $250,000, as well as attorney's fees and costs. We are investigating the claim and plan to vigorously defend against it.
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 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K
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ITEM 5. OTHER INFORMATION
On September 27, 2011, the Company convened its annual meeting of shareholders. Due to a lack of quorum, the Company adjourned the meeting to November 15, 2011 and then again to December 15, 2011 in order to provide additional time for management to solicit proxies from the Company’s shareholders. At the reconvened meeting on December 15, 2011, the shareholders elected each nominee for director to serve until the next annual meeting of shareholders and until such director's successor is duly elected and qualified. The table below sets forth the voting results:
Director | For | Against | Abstain | ||
Scott I. Anderson | 3,151,264 | — | 67,313 | ||
Janet L. Hendrickson | 3,151,077 | — | 67,500 | ||
Gregory A. Hubert | 3,143,791 | — | 74,786 | ||
Stephen B. Loeb | 3,151,264 | — | 67,313 | ||
Ronald G. Neubauer | 3,111,182 | — | 107,395 | ||
Scott M. Pearson | 3,151,201 | — | 67,376 | ||
Paul W. Reed | 3,151,077 | — | 67,500 | ||
Note that the number of votes cast by the holders of our preferred stock at the Annual Meeting reflects the 8:1 reverse split of our common stock, effected in June 2007.
Also on December 15, 2011, as previously disclosed, John M. Fluke's retirement as a director of the Company became effective upon the election of the directors.
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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 |
101.INS** | XBRL Instance Document |
101.SCH** | XBRL Taxonomy Extension Schema Document |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Filed herewith |
** | Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is “furnished” with this Quarterly Report on Form 10-Q and is not deemed to be “filed” or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, (b) is deemed not to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and (c) is not otherwise subject to liability under those sections. |
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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 February 15, 2012.
TC Global, Inc. | |
By: | /S/ CATHERINE M. CAMPBELL |
Catherine M. Campbell | |
Chief Financial Officer & Principal Financial Officer | |
Signing on behalf of the Registrant | |
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