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Table of Contents

 

 

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 DECEMBER 27, 2009

or

 

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

FOR THE TRANSITION PERIOD FROM              to              

Commission file number: 001-33646

 

 

TC GLOBAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Washington   91-1557436

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3100 Airport Way South, Seattle, Washington 98134

(Address of principal executive offices)

(206) 233-2070

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    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

 

3,563,742

(Title of Each Class)  

Number of Shares Outstanding at

December 27, 2009

 

 

 


Table of Contents

TC GLOBAL, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 2009

INDEX

 

          Page
No.
   SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS    3

PART I FINANCIAL INFORMATION

  

Item 1

   Financial Statements    4
   Condensed Consolidated Balance Sheets at December 27, 2009 and March 29, 2009    4
   Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Week Periods Ended December 27, 2009 and December 28, 2008    5
   Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Week Periods Ended December 27, 2009 and December 28, 2008    6
   Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Thirty-Nine Week Period Ended December 27, 2009    7
   Notes to Condensed Consolidated Financial Statements    8

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    20

Item 3

   Quantitative and Qualitative Disclosures about Market Risk    28

Item 4T

   Controls and Procedures    28

PART II OTHER INFORMATION

Item 1

   Legal Proceedings    29

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds    29

Item 6

   Exhibits    29
   SIGNATURE    32

****

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 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 2010

   March 28, 2010 (52 weeks)

Fiscal 2009

   March 29, 2009 (52 weeks)

Fiscal 2008

   March 30, 2008 (52 weeks)

Fiscal 2007

   April 1, 2007 (52 weeks)

Fiscal 2006

   April 2, 2006 (52 weeks)

Fiscal 2005

   April 3, 2005 (53 weeks)
    

Interim fiscal period

Third Quarter Fiscal 2010

   13 week period ended December 27, 2009

Third Quarter Fiscal 2009

   13 week period ended December 28, 2008

Nine Months Fiscal 2010

   39 week period ended December 27, 2009

Nine Months Fiscal 2009

   39 week period ended December 28, 2008

 

2


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and is subject to the safe harbor created by those sections. These statements include descriptions of our future financial condition, results of operations, objectives, strategies, plans, goals, targets or future performance and business for future periods. These forward-looking statements 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 described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other parts of this report, that could cause events, including our actual results, to differ materially from those anticipated in these forward-looking statements. If one or more of the factors affecting our forward-looking statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements contained in this report. Consequently, you should not place undue reliance on our forward-looking 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.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

TC GLOBAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     December 27,
2009
    March 29,
2009
 
    

(dollars in thousands,

except share data)

 
Assets     

Current assets

    

Cash and cash equivalents

   $ 4,594      $ 11,994   

Escrow receivable

     4,000        3,500   

Accounts receivable, net of allowance for doubtful accounts of $442 and $578 at December 27, 2009 and March 29, 2009, respectively

     1,710        6,617   

Inventories

     1,186        1,112   

Prepaid expenses and other current assets

     346        538   

Related party receivable

     —          1,162   
                

Total current assets

     11,836        24,923   

Property and equipment, net

     2,330        2,783   

Goodwill

     253        332   

Related party receivable, net of current portion

     1,000        1,000   

Other assets

     234        216   
                

Total assets

   $ 15,653      $ 29,254   
                
Liabilities and Stockholders’ Equity (Deficit)     

Current liabilities

    

Accounts payable

   $ 1,807      $ 4,973   

Accrued liabilities

     2,567        4,613   

Credit line and current portion of long-term debt

     140        266   

Current portion of capital lease obligations

     —          1   

Deferred revenue

     4,510        3,369   

Current portion of deferred gain on sale of wholesale business

     169        169   

Current portion of obligation to minority shareholder in TCAP

     4,000        4,000   
                

Total current liabilities

     13,193        17,391   

Other liabilities

     —          151   

Deferred lease costs

     297        416   

Deferred revenue, net of current portion

     763        386   

Deferred gain on Sale of Wholesale Business, net of current portion

     2,232        2,358   
                

Total liabilities

     16,485        20,702   
                

Noncontrolling interest in joint venture

     1,640        1,786   
                

Commitments and contingencies (Note 5)

    

Stockholders’ equity (deficit)

    

Series A Convertible Preferred stock, no par value; 31,000,000 shares authorized, 12,790,874 issued and outstanding at December 27, 2009 and March 29, 2009, 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 at 2009 and 2008; 3,563,742 and 3,288,772 shares issued and outstanding at December 27, 2009and March 29, 2009, respectively, stated value of $18.00 per share and a liquidation preference

     19,706        19,594   

Series B Convertible Preferred stock, no par value; 8,000,000 shares authorized, 3,590.349,349 and 3,584,349 issued and outstanding at December 27, 2009 and March 29, 2009, respectively, stated value of $2.50 per share and a liquidation preference

     7,958        7,958   

Additional paid-in capital

     24,074        29,955   

Accumulated other comprehensive (loss)

     (22     (34

Accumulated deficit

     (82,661     (79,180
                

Total stockholders’ equity (deficit)

     (2,472     6,766   
                

Total liabilities and stockholders’ equity

   $ 15,653      $ 29,254   
                

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

 

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Table of Contents

TC GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Thirteen Week Periods Ended     Thirty-Nine Week Periods Ended  
     December 27,
2009
(unaudited)
    December 28,
2008
(unaudited)
    December 27,
2009
(unaudited)
    December 28,
2008
(unaudited)
 
     (dollars in thousands, except per share data)  

Net sales

        

Retail store sales

   $ 8,970      $ 8,903      $ 26,720      $ 29,779   

Specialty sales of products

     1,001       48       2,776       48  
                                

Total sales of products

     9,971        8,951        29,496        29,827   

Licenses, royalties, and fees

     117        148        334        261   

Recognition of deferred licensing revenue

     10       —          30        —     
                                

Net sales

     10,098        9,099        29,860        30,088   
                                

Cost of goods sold and operating expenses

        

Retail cost of goods sold

     3,201        3,220        9,393        10,800   

Retail occupancy expenses

     1,099        1,198        3,318        3,795   
                                

Total retail cost of goods sold and related occupancy expenses

     4,300        4,418        12,711        14,595   

Specialty cost of goods sold

     599       38       1,802       38  
                                

Cost of goods sold and related occupancy expenses

     4,899        4,456        14,513        14,633   

Store operating expenses

     4,033        3,951        11,706        12,839   

Other operating expenses

     589        266        1,521        807   

Marketing, general and administrative costs

     1,569        1,804        4,474        5,393   

Depreciation and amortization

     284        350        935        1,278   

Impairment of long lived assets

     —          —          78        —     

Store closure and lease termination costs

     —          3        —          221   
                                

Total cost of goods sold and operating expenses

     11,374        10,830        33,227        35,171   
                                

Operating loss from continuing operations

     (1,276     (1,731     (3,367     (5,083

Other income (expense)

        

Interest expense

     (3     (567     (9     (1,965

Loan guarantee fee

     —          —          —          (131

Loss of foreign exchange

     (6     (9     (6     (20

Miscellaneous income (expense)

     (12     (5     (84     34   
                                

Total other income (expense)

     (21     (581     (99     (2,082
                                

Loss from continuing operations before income taxes

     (1,297     (2,312     (3,466     (7,165

Income tax expense

     (162 )     —          (162     (2

Noncontrolling interest in joint venture

     70        —          147        —     
                                

Loss from continuing operations

   $ (1,389   $ (2,312   $ (3,481   $ (7,167
                                

Discontinued operations (Note 2)

        

Income from discontinued operations

   $ —        $ 1,712      $ —        $ 4,187   
                                

Income from discontinued operations

   $ —        $ 1,712      $ —        $ 4,187   
                                

Net loss

   $ (1,389   $ (600   $ (3,481   $ (2,980
                                

Continuing operations—basic and diluted

        

Continuing operations—basic

   $ (0.39   $ (0.71   $ (0.99   $ (2.20

Continuing operations—diluted

   $ (0.39   $ (0.71   $ (0.99   $ (1.11

Discontinued operations—basic and diluted

        

Discontinued operations—basic

   $ —        $ 0.52      $ —        $ 1.28   

Discontinued operations—diluted

   $ —        $ 0.27      $ —        $ 0.65   

Loss per share—basic and diluted

        

Loss per share—basic

   $ (0.39   $ (0.18   $ (0.99   $ (0.91

Loss per share—diluted

   $ (0.39   $ (0.36   $ (0.99   $ (0.46

Weighted average shares used in computing basic and diluted loss per share

        

Loss per share—basic

     3,561        3,265        3,528        3,265   

Loss per share—diluted

     3,561        6,456        3,528        6,456   

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

 

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TC GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Thirty-Nine Week Periods Ended  
     December 27,
2009
(unaudited)
    December 28,
2008
(unaudited)
 
     (dollars in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (3,481   $ (2,980

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     935        1,278   

Impairment of long lived assets

     78        —     

Loan guarantee fee

     —          131   

Store closure and lease termination costs

     —          221   

Employee stock option compensation expense

     112        150   

Non-cash interest expense (accretion of debt discount)

     —          549   

Provision for doubtful accounts

     185        188   

Gain on sale of property and equipment

     (15     (33

Recognition of deferred gain on Sale of Wholesale Business

     (127     —     

Noncontrolling interest in joint venture

     (147     —     

Recognition of deferred license revenues

     (18     (13

Changes in assets and liabilities

    

Change in escrow receivable

     (500     —     

Accounts receivable

     5,223        (3,760

Inventories

     (74     (381

Prepaid expenses and other assets

     1,621        (167

Accounts payable

     (3,166     1,360   

Accrued liabilities

     (2,297     1,224   

Deferred revenue

     1,220        742   

Deferred lease costs

     (119     (351
                

Net cash used in operating activities

     (570     (1,842
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (485     (490

Additions of intangible assets

     —          15   

Proceeds from sale of property and equipment

     18        227   

Proceeds from sale of development rights

     —          469   
                

Net cash provided by (used in) investing activities

     (467     221   
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net borrowings under Northrim credit facility

     —          1,212   

Payments on long-term debt and capital leases

     (409     (286

Minority interest contribution in joint venture

     —          3,000   

Foreign currency translation adjustment

     12       —     

Proceeds from exercise of warrants and stock options

     27       —     

Shareholder distribution

     (5,993 )     —     
                

Net cash provided by (used in) financing activities

     (6,363     3,926   
                

Net increase (decrease) in cash and cash equivalents

     (7,400     2,305   

Cash and cash equivalents at beginning of period

     11,994        1,271   
                

Cash and cash equivalents at end of period

   $ 4,594      $ 3,576   
                

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash paid during the period for interest

   $ 9      $ 1,965   

Non-cash investing and financing activities:

    

Accrued expense paid through grant of stock options

   $ —        $ 36  

Liability paid through issuance of stock

   $ 84     $ 132  

Insurance premiums financed through note payable

   $ 175     $ 354  

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

 

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Table of Contents

TC GLOBAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THIRTY-NINE WEEK PERIOD ENDED DECEMBER 27, 2009 (UNAUDITED)

 

     Convertible Preferred Stock    Common Stock     Additional
paid-in
capital
    Accumulated
Other
Comprehensive
Loss
    Accumulated
deficit
    Total     Minority
Interest
 
     Series A
Shares
   Series A
Amount
   Series B
Shares
   Series B
Amount
   Shares    Amount            

Balance, March 29, 2009

   12,790,874    $ 28,473    3,584,349    $ 7,958    3,288,772    $ 19,594      $ 29,955      $ (34   $ (79,180   $ 6,766      $ 1,786   

Exercise of common stock warrants

               205,332    $ 32            $ 32     

Exercise of stock options

               51,726    $ 3            $ 3     

Exercise of stock options utilizing net exercise

               10,880    $ (8         $ (8  

Adjustments to Preferred B Shares

         6,000                   

Stock option expense

                    $ 112            112     

Shareholder Distribution

                    $ (5,993       $ (5,993  

Liability paid through issuance of stock

               7,032    $ 85            $ 85     

Noncontrolling interest in joint venture

                            $ (146

Comprehensive income

                        ($ 3,481   ($ 3,481  

Foreign currency translation adjustment

                      $ 12          12     

Total comprehensive income

                            (3,469  

Balance, December 27, 2009

   12,790,874    $ 28,473    3,590,349    $ 7,958    3,563,742    $ 19,706      $ 24,074      $ (22   $ (82,661   $ (2,472   $ 1,640   

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

 

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Table of Contents

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

The accompanying condensed consolidated financial statements 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 (the “SEC”). Results of operations for the thirteen week period ended December 28, 2008 (“Third Quarter Fiscal 2009”), the Thirty-Nine week period ended December 28, 2008 (“Nine Months Fiscal 2009”), the thirteen week period ended December 27, 2009 (“Third Quarter Fiscal 2010”), and the Thirty-Nine week period ended December 27, 2009 (“Nine Months Fiscal 2010”), 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 March 29, 2009, filed with the SEC on June 29, 2009 (the “Fiscal 2009 Form 10-K”). Further, in connection with preparation of the condensed financial statements and in accordance with the Subsequent Events Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, the Company evaluated subsequent events after the balance sheet date of December 27, 2009 through February 10, 2010.

Recent Accounting Pronouncements

In September 2009, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards CodificationTM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Financial Statements.

In December 2006, the FASB issued FASB ASC 820 – Fair Value Measurements and Disclosures. The guidance defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 – Fair Value Measurements and Disclosures is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. FASB ASC 820 – Fair Value Measurements and Disclosures does not expand or require any new fair value measures; however, the application of this statement may change current practice. The requirements of the guidance are effective for our fiscal year beginning March 31, 2008. The adoption had no impact on our condensed consolidated financial position, results of operations, cash flows or financial statement disclosures. See also discussion of the interpretation of this pronouncement below.

In December 2007, the FASB issued FASB ASC 805 – Business Combinations. The guidance retains the fundamental requirements in FASB ASC 805 – Business Combinations that the acquisition method of accounting (which FASB ASC 805 – Business Combinations called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. FASB ASC 805 – Business Combinations also establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (b) improves the completeness of the information reported about a business combination by changing the requirements for recognizing assets acquired and liabilities assumed arising from contingencies; (c) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (d) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FASB ASC 805 – Business Combinations applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (for acquisitions closed on or after January 1, 2009 for the Company). Early application is not permitted. We have not yet determined the impact, if any, will have on our consolidated financial statements.

 

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TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In December 2007, the FASB issued established accounting and reporting standards for the noncontrolling interest (currently referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. The gudiance establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation by requiring that ownership transactions not resulting in deconsolidation be accounted for as equity with no gain or loss recognition in the income statement. The guidance also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, which is the date the parent ceases to have a controlling financial interest in the subsidiary. The guidance, which is effective for the Company at the beginning of the fiscal year 2010, is to be applied prospectively upon adoption except for the presentation and disclosure provisions, which require retrospective application for all periods presented. The presentation provisions require that (1) the noncontrolling interest be reclassified to equity, (2) consolidated net income be adjusted to include the net income attributed to the noncontrolling interest and (3) consolidated comprehensive income be adjusted to include the comprehensive income attributed to the noncontrolling interest. The Company is evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.

In February 2008, the FASB issued changes to fair value accounting. This guidance delayed the effective date until January 1, 2009 for all nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. Nonfinancial assets and liabilities include, among other things: intangible assets acquired through business combinations; long-lived assets when assessing potential impairment; and liabilities associated with restructuring activities. The adoption had no impact on our condensed consolidated financial position, results of operations, cash flows or financial statement disclosures.

In October 2008, the Company adopted changes issued by the FASB to fair value disclosures of financial instruments changes require a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value. The adoption of these changes did not have a material impact on the Company’s results from operations or financial position.

On June 29, 2009, the Company adopted changes issued by the FASB to accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued, otherwise known as “subsequent events.” Specifically, these changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of these changes had no impact on the financial statements as management already followed a similar approach prior to the adoption of this new guidance. We have evaluated subsequent events after the balance sheet date to February 10, 2010 which is the date the financial statements were issued.

In June 2009, the FASB amended the consolidation guidance that applies to variable interest entities and the definition of a variable interest entity and requires enhanced disclosures to provide more information about an enterprise’s involvement in a variable interest entity. This Statement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. We are currently evaluating the impact the adoption for the third quarter Fiscal 2010 will have on our consolidated financial position and results of operations.

Cash and Cash Equivalents

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

Escrow and Related Party Receivable

In connection with the closing of the Green Mountain Transaction, as defined in Note 2, $3,500,000 of the purchase price was placed in escrow for one year to satisfy Tully’s post-closing indemnification obligations to GMCR under the GMCR Agreement. On September 24, 2009 Green Mountain filed a claim for indemnification, contending we failed to disclose as required by Sections 3.4, 3.8, 3.15 subsections (a) and (c) subparts (b), (f) and (g), and 3.18 of the Purchase Agreement the existence of that certain Supply and Distributor Agreement (the “Supply Agreement”), dated April 6, 2004, by and among TC Global and Quick Dispense, Inc (“Quick Dispense”). Accordingly, on October 15, 2009 we filed a dispute notice of any and all claims for indemnification made pursuant to sections 7.2(a) and 7.5 of the Purchase Agreement.

 

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(Unaudited)

 

Further, on October 30, 2009 we filed a declaratory judgment establishing that no contract between Tully’s and Quick Dispense survived the original three-year term on the Supply Agreement. An Order of Dismissal was filed by the Company with the court on January 27, 2010 as TC Global and Quick Dispense agreed the Supply Agreement was rightfully terminated. We believe that Tully’s has complied appropriately with the termination of the contract and plan to vigorously defend GMCR’s claim. We expect to collect the entire amount of the escrow balance on March 27, 2010.

Tully’s granted Asia Food Culture Management Pte. Ltd. (“Limited Partner”) a $1,000,000 loan to be paid through future distributions of Tully’s Coffee Asia Pacific Partners, LP (“the Asian Joint Venture”). Further, $1,162,000 as of March 29, 2009 was receivable from Limited Partner in full satisfaction of the Company’s promissory note owed by Tully’s to the Asian Joint Venture and on March 27, 2009 paid to Limited Partner directly and subsequently distributed by Limited Partner to the Asian Joint Venture on April 22, 2009 (See Note 4).

2. Discontinued Operations – Sale of Wholesale Business

On March 27, 2009, we completed the sale of the assets associated with Tully’s business names, trademarks, and wholesale business to Green Mountain Coffee Roasters, Inc. a Delaware Corporation (“GMCR”), pursuant to the terms of the previously disclosed 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 the TC Global, Inc., GMCR and Tully’s Bellaccino, LLC (the “GMCR Agreement”). GMCR paid a total purchase price of $40.3 million, of which $3.5 million was placed in escrow for one year to satisfy our post-closing indemnification obligations to GMCR. We refer to the asset sale to, and related transactions with, GMCR as the “Green Mountain Transaction.”

Therefore, the Company classified the results of operations for the wholesale business in discontinued operations. The discontinued operations represent only those pertaining to the Green Mountain Transaction, and do not include any results relating to those activities which are expected to continue under the license agreement due to this continuing involvement. Prior year financial statements for the year ended March 29, 2009 (“Fiscal 2009”) have been retroactively adjusted in conformity with generally accepted accounting principles to present the operations of our wholesale business as a discontinued operation.

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

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. Tully’s 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. Tully’s current shareholders and executive management team continue to own and operate the Company’s domestic retail business (company owned, franchised and licensed retail store locations) and international retail and wholesale businesses.

Utilizing a valuation method that included the income approach and relief from royalty rate method, the company has valued the use of the trademarks in the License Agreement at $2,523,000 and began amortizing the deferred gain of the perpetual license in Marketing, General, and Administrative costs over a 15 year period in First Quarter Fiscal 2010. Since there are no direct revenue streams related to the Supply Agreement and the Agreement is at market rates, we determined that a market participant would pay no more than the costs required to replace or recreate the Supply Agreement. Therefore, the Company valued the Supply Agreement at $4,400 and began amortizing the deferred gain over a 5 year period in First Quarter Fiscal 2010.

 

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(Unaudited)

 

Discontinued Operations

The operating results of discontinued operations for the wholesale business included in the accompanying condensed consolidated statements of operations are as follows:

 

     Thirteen Week
Periods Ended
   Thirty-Nine Week
Periods Ended
     December 28,
2008
(unaudited)
   December 28,
2008
(unaudited)
     (dollars in thousands)

Net Sales

   $ 10,782    $ 27,846
             

Income before income taxes

     1,712      4,187

Income taxes

     —        —  
             

Income from discontinued operations

   $ 1,712    $ 4,187
             

Direct and indirect costs associated with the Green Mountain Transaction, may be incurred in Fiscal 2010 and will be recorded during the period incurred as expenses. No such expenses occurred in the Nine Month fiscal 2010.

3. Liquidity

On March 27, 2009, we completed the sale of the assets associated with Tully’s business names, trademarks, and wholesale business to GMCR. We received $40,300,000 million, less $3,500,000 held in escrow, in cash proceeds in this transaction. We used these proceeds to improve our liquidity without shareholder dilution, repay our debt, provide for a shareholder distribution paid May 20, 2009, and for the development of our domestic retail and franchise and license businesses as well as our international retail, wholesale, and franchise businesses.

As of December 27, 2009 we had cash and cash equivalents of $4,594,000, of which $904,828 was held in the Asian Joint Venture and limited in use, and a working capital deficit of $1,357,000. Historically we have not required a significant net investment in working capital and operated with current liabilities in excess of our current assets. Our inventory levels are expected to increase during winter due to holiday season merchandise. Inventories are also subject to short-term fluctuations based upon the timing of coffee receipts.

During Fiscal 2010, we expect that the majority of the new Tully’s stores will be franchised and licensed stores, rather than company-operated stores. Franchised and licensed stores do not require capital investment in property and equipment by us, but we do incur selling and support costs for such new stores related to store opening, training, and quality control. We expect to open between two and four new company-operated stores in the remainder of Fiscal 2010. Typically, a new company-operated store will require capital investment of approximately $100,000 to $400,000, but this varies depending on the specific location.

We believe that the operating cash flows, financing cash flows, and investing cash flows projected for Fiscal 2010, and the cash and cash equivalents of $4,594,000 at December 27, 2009, of which $904,828 was held in the Asian Joint Venture and limited in use, along with the collection of the $3,500,000 in outstanding Escrow in connection with the Green Mountain Transaction, subject to claim indemnifications, will be sufficient to fund ongoing operations of Tully’s through Fiscal 2010. We expect our business improvement initiatives and other actions will improve our operating income and cash flow results. However, the timing and extent of success for these strategies cannot be predicted with any level of certainty. In order to maintain an appropriate level of liquidity, we expect to seek additional sources of business funding (such as debt or equity financings) during Fiscal 2011 as a result of meeting our obligation to purchase an additional 25% ownership share in the Asian Joint Venture for $4,000,000 on or before March 27, 2010, and our continued inability to sustain positive cash flows from operations. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then we could be required to substantially reduce operating, marketing, general and administrative costs related to our continuing operations, or reduce or discontinue our investments in store improvements, new customers and new products. We could be required to sell stores or other assets and could be unable to take advantage of business opportunities. The sale of stores or other income-producing assets could adversely affect our future operating results and cash flows.

4. Credit lines and long term debt

Benaroya Credit Facility

On April 26, 2007, we borrowed $4,000,000 from Benaroya Capital (less an initial loan fee of $100,000) and issued a promissory note (“the Benaroya Note”) to evidence that indebtedness. In connection with the loan, we granted warrants to

 

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(Unaudited)

 

purchase 12,411 shares of common stock at an exercise price of $2.64 per share to Benaroya Capital, which were recorded at their estimated aggregate fair value of $109,000 when granted. On July 12, 2007, the Benaroya Note amount was amended to establish a credit facility (the “Benaroya credit facility”) with allowable borrowings of up to $10 million, to reduce the interest rate from 15% to 13.5% per annum (effective July 12, 2007) and to extend its maturity date. Interest accrued on the outstanding principal balance of the Benaroya Note, calculated on a daily basis and payable on the maturity date. Overdue amounts bear interest at a rate equal to eighteen percent (18%) per annum. Loan fees of $482,000 were added to the principal balance in connection with the amendment and warrants to purchase 59,780 shares of common stock at an exercise price of $2.64 per share were issued to Benaroya Capital, which were recorded at their estimated aggregate fair value of $526,000 when granted. The Benaroya Capital warrants became exercisable on April 26, 2008.

Our chairman guaranteed our obligations under the Benaroya credit facility, and another shareholder guaranteed up to $3,000,000 under the Benaroya credit facility. Our chairman was not compensated for his guaranty. We agreed to compensate the second guarantor through the cash payment of a $167,000 commitment fee and a grant of warrants to purchase 21,000 shares of our common stock at an exercise price of $2.64 per share, which were recorded at their estimated aggregate fair value of $185,000 when granted (these warrants became exercisable on July 12, 2008).

The Benaroya Note was due on August 31, 2008. The Company and Benaroya Capital entered into a Forbearance Agreement on September 11, 2008.

As a condition under the terms of the Green Mountain Transaction, on March 27, 2009, outstanding indebtedness under the Benaroya credit facility of $9,566,000 was repaid in full satisfaction of outstanding principal and accrued interest. Concurrently with the repayment of the Benaroya credit facility, the guaranty agreements between Tully’s and the guarantors were terminated and Benaroya Capital and the guarantors released their conditional security interest in Tully’s assets.

Northrim Credit Facility

On June 22, 2005, Tully’s entered into a credit facility with Northrim Funding (the “Northrim Facility”). Under this credit facility, Tully’s was allowed to borrow up to $6,500,000, subject to the amount of eligible accounts receivable and inventories. Borrowings under this facility accrued interest at the prime rate plus 7.0% with a floor of 12.0% and a ceiling of 14.0% and were secured by our inventories and through the assignment (with recourse) of our accounts receivable.

As a condition under the terms of the Green Mountain Transaction, on March 27, 2009, outstanding indebtedness under the Northrim Facility of $5,777,000 was repaid in full satisfaction of outstanding principal and accrued interest. Concurrently with the repayment of the Northrim Facility, Northrim Funding released its conditional security interest in Tully’s assets.

UCC Settlement Promissory Note

In April 2001, Tully’s granted UCC Ueshima Coffee Company, Ltd. (“UCC”) a license to establish and operate Tully’s specialty coffee stores, including a license to use Tully’s business names, trademarks and intellectual property rights for purposes of establishing and operating Tully’s stores, and to sell Tully’s coffee at wholesale, in 25 Asian territories (excluding Japan which is served by Tully’s Coffee Japan).

In November 2006, UCC commenced a lawsuit against the Company relating to the license agreement. In January 2008, Tully’s and UCC settled their respective claims. Under the settlement agreement, the parties agreed to a mutual release of claims and to the dismissal of the lawsuit with prejudice. UCC also assigned all of its rights and interest under the 2001 license agreement to Tully’s.

In consideration for the settlement, Tully’s agreed to pay $6.0 million to UCC, consisting of $2.0 million paid to UCC on January 8, 2008, and a $4.0 million promissory note issued by TCAP, a wholly owned subsidiary of Tully’s, to UCC. The promissory note accrued interest at 3.0% per year and is due in annual principal installments of $1,000,000 commencing on December 28, 2008. Tully’s had issued a limited guaranty for Tully’s Coffee Asia Pacific, Inc. (“TCAP”) obligations under the note, which was generally secured by the assets of Tully’s and TCAP related to the licensed territories, including Tully’s stock in TCAP, TCAP’s interest in the Asian Joint Venture, Tully’s trademarks for the Licensed Territories and Tully’s interest as licensor of Asian Joint Venture, but was non-recourse as to Tully’s other assets.

As a condition under the terms of the Green Mountain Transaction, on March 27, 2009, the promissory note with UCC was repaid in full. Concurrently with the repayment of the promissory note, UCC released its conditional security interest in Tully’s assets.

 

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Tully’s Coffee Asia Pacific – Limited Partnership Loan

On December 31, 2008, pursuant to the Limited Partnership Agreement dated December 21, 2007 between TCAP, a and the Limited Partner, TCAP issued a promissory note in the principal amount of $1,120,000 (the “GP Loan”) to the Asian Joint Venture. The GP Loan accrued 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 on March 17, 2009, the Asian Joint Venture issued a convertible promissory note to the Limited Partner 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 the Asian Joint Venture has made distributions to the Limited Partner 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, Tully’s has granted the Limited Partner a preferential right to receive from the partnership, prior to any future distribution to Tully’s, cash distributions equal to US$500,000 out of partnership profits available for distribution, and that, after receipt by the Limited Partner of the full preference amount all subsequent cash distributions of partnership profits shall be shared equally between the General Partner and the Limited partner. Any subsequent cash distributions to the Limited Partner would first be applied to retire the LP Loan.

Other Obligations

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

 

     December 27,
2009
    March 29,
2009
 
     (dollars in thousands)  

Note payable for purchase of insurance, payable in variable monthly installments of approximately $16,000—$43,000 including interest at 5.90%, through September 2009 collateralized by unearned or return insurance premiums, accrued dividends and loss payments

     138        257   

Vehicle purchase note payable in monthly installments of approximately $833 including interest at 3.98%, through March 2010, secured by the related vehicles

     2        10   
                
     140        267   

Less: Current portion

     (140     (267
                

Long-term debt, net of current portion

   $ —        $ —     
                

Tully’s Coffee Asia Pacific – Limited Partnership Interest Obligation

On March 27, 2009, our wholly-owned subsidiary TCAP negotiated the right and obligation to purchase, or cause a third party to purchase, one-half (1/2) of the Limited Partner’s partnership interest in our Asian Joint Venture, TCAPLP, equal to twenty-five percent (25%) of the total partnership interests outstanding, at a purchase price of US$4,000,000, by March 27, 2010.

Deferred licensing revenue recognized under international and domestic license agreements and store value cards is summarized as follows (dollars in thousands):

 

     December 27,
2009
 

Deferred licensing revenue:

  

Additions to deferred licensing revenue in the period

   $ 513   

Less: Deferred licensing revenue recognized in net sales

     (30
        

Net decrease in deferred licensing revenue for the period

     483   

Deferred license revenue

  

Beginning of period

     488   
        

End of period

     971   

Less: Non-current portion

     763   
        

Current portion of deferred licensing revenue

     208   

Deferred revenue from stored value cards

     4,302   
        

Current portion deferred revenue

   $ 4,510   

 

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5. Commitments and contingencies

Lease commitments

We lease all of our retail and office space under operating leases, which expire through 2016. 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 to us. 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 our leases.

Minimum future rental payments under noncancellable operating leases as of December 27, 2009 are summarized as follows:

 

Fiscal year

    
(dollars in thousands)     

Remainder of Fiscal 2010

   $ 868

2011

     3,019

2012

     2,101

2013

     1,704

2014

     1,156

Thereafter

     1,019
      

Total

   $ 9,867
      

We have subleased some of our leased premises to third parties under subleases with varying terms through 2012. Expected future sublease receipts under such sub-lease agreements are summarized as follows:

 

Fiscal year

    
(dollars in thousands)     

Remainder of Fiscal 2010

   $ 47

2011

     55

2012

     43
      

Total

   $ 145
      

Contingencies

In February 2004 a lawsuit was filed against Tully’s in Superior Court of California, Los Angeles County (the “Court”) by two former store managers on behalf of themselves and on behalf of other former and current store managers in the state of California. The suit alleged that Tully’s improperly classified such managers as exempt under California’s wage and hour laws and sought damages, restitution, reclassification and attorneys’ fees and costs. On April 21, 2005, the parties entered into a memorandum of understanding regarding the settlement of this matter, which was subsequently reflected by the parties in a Joint Stipulation of Settlement and Release (the “Settlement Agreement”). On September 14, 2006, the Court granted final approval of the Settlement Agreement and dismissed the suit with prejudice.

In Fiscal 2005, Tully’s incurred a one-time charge of approximately $1.6 million for the settlement and associated costs. In connection with the final approval of the settlement, Tully’s incurred additional expenses of $72,000 in Fiscal 2007. Under the settlement, Tully’s agreed to make cash payments totaling approximately $800,000 to the settlement class over a three year period starting in October 2006 and to issue 37,500 shares of its common stock, with an agreed value of $450,000, to the settlement class during that period. In October 2006, Tully’s issued 7,000 shares of common stock and paid $164,000 to the settlement class. In October 2007 and October 2008, Tully’s issued 11,719 shares of common stock and paid $266,000 to the settlement class in both periods. In October 2009, Tully’s issued 7,032 shares of common stcok and paid the remaining obligation of $159,000.

In December 2007, a lawsuit was filed against Tully’s in California state court by a former store employee alleging that Tully’s failed to provide meal and rest periods for its employees. We anticipate that the plaintiff will seek class action certification on behalf of all hourly employees in Tully’s California stores. The plaintiff is seeking damages, restitution, injunctive relief, and attorneys’ fees and costs. Similar lawsuits alleging missed meal and rest periods have been filed in

 

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(Unaudited)

 

California against many other companies. We are investigating the claims and intend to vigorously defend this litigation, but cannot predict the financial impact to us of the litigation at this time. We believe that Tully’s has complied with all laws that require providing meal and rest periods for its employees. We have accrued $277,000 as of December 27, 2009 to defend this litigation.

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.

6. Stock options

Company Stock Incentive Plan

In 1994, Tully’s shareholders approved a Stock Incentive Plan (the “1994 Plan”). In August 1999 our 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, our 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, the Tully’s shareholders approved the 2004 Stock Option Plan, effective as of November 1, 2004. The 2004 Stock Option Plan 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.

The provisions of the 2004 Stock Option Plan (and the 1994 Plan prior to its expiration) are summarized as follows. We may issue incentive or nonqualified stock options to our employees and directors. Stock options are granted solely at the discretion of our Board of Directors and are issued at a price determined by our Board of Directors. The term of each option granted is for such period as determined by our 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 our Board of Directors. The plan provides for acceleration of outstanding options under certain conditions, including certain changes in control of Tully’s.

Founder’s Stock Option Plan

In addition to options granted under the 1994 Plan and 2004 Stock option Plan, our chairman and founder has granted options to purchase shares of his stock to employees and third parties (the “Founder’s Plan”). No options have been granted by the Chairman under the Founder’s Plan since Fiscal 2002. These options have vesting periods ranging from immediate vesting to five year vesting and have a twenty-five year life. In October 2005, the chairman and founder contributed his holdings of Tully’s common stock to TTOK, LLC, a limited liability company owned by the chairman, and the Founder’s Plan stock option obligations were assigned to TTOK, LLC.

Other Equity Instruments

Tully’s has granted warrants to purchase common stock. These warrants have up to one year vesting periods and generally have ten year lives. Warrants issued in connection with Series A Preferred Stock investment units had a term of ten years from issuances and expired during the Third Quarter Fiscal 2010.

Issued, outstanding and exercisable warrants as of December 27, 2009 are summarized as follows:

 

     Outstanding
warrants
   Number
exercisable
   Exercise
Prices

Issued with Series A Preferred Stock investment units

   297    297    $ 2.64

Issued to guarantors of debt

   93,191    93,191    $ 0.40

Other

   8,719    8,719    $ 0.08-$2.64
            

Totals

   102,207    102,207   
            

Stock Options

We issue new shares of common stock upon the exercise of stock options granted under the 1994 Plan and the 2004 Stock Option Plan. The exercise of options granted under the Founder’s Plan results in a transfer of shares to the exercising optionee from the shares owned by TTOK, LLC, and does not affect the total outstanding shares of stock or provide cash proceeds to Tully’s.

 

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(Unaudited)

 

Determining Fair Value

Valuation and Amortization Method.

We estimated the fair value of stock option awards granted using the Black-Scholes option valuation model. We amortize 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. We determined the expected life based primarily on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, expected exercises and post-vesting forfeitures.

Expected Volatility.

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

Risk-Free Interest Rate.

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

Expected Dividend Yield.

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

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

 

     Thirteen Week
Periods Ended
   Thirty-Nine Week
Periods Ended
 
     December 27,
2009
   December 28,
2008
   December 27,
2009
    December 28,
2008
 

Weighted average risk free interest rate

   —      —        0.53     1.91

Expected dividend yield

   —      —        0     0

Expected lives

   —      —        3 years        3 years   

Weighted average expected volatility

   —      —        191     80

Weighted average fair value at date of grant

   —      —      $ 1.27      $ 5.93   

Expected Forfeitures.

We primarily use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. For Fiscal 2010 we estimated our pre-vesting option forfeiture rate at 18%.

Stock-based Compensation

Stock-based compensation expense related to stock-based awards was $32,000 and $25,000 for the Third Quarter Fiscal 2010 and Third Quarter 2009, respectively, and $112,000 and $150,000 for the Nine Months Fiscal 2010 and Nine Months Fiscal 2009, respectively, which is included in marketing, general and administrative costs in our Condensed Consolidated Statements of Operations. This is a non-cash expense.

As of December 27, 2009, we had approximately $307,000 of total unrecognized compensation cost related to the 62,894 non-vested stock-based awards granted under all equity compensation plans. We expect to recognize this cost over a period of approximately five years.

 

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(Unaudited)

 

Stock Award Activity

As of December 27, 2009 options for 330,021 shares were outstanding under the 1994 Plan and the 2004 Stock Option Plan, of which 270,687 were fully vested.

The following table summarizes activity under our stock option plans:

 

     Number
of Shares
    Weighted-
average
exercise
price Per
Share
   Weighted-
average
remaining
contractual
life (years)
   Aggregate
intrinsic
value

Outstanding at March 29, 2009

   548,975      5.29    8.55    3,159,341

Granted

   6,500      11.28      

Exercised(1)

   (189,668   .08      

Forfeited

   (14,180   11.18      

Outstanding at June 28, 2009

   351,627      7.97      

Granted

   —        —        

Exercised

   —        —        

Forfeited

   (17,754   10.92      

Outstanding at September 27, 2009

   333,873      7.82      

Granted

   —        —        

Exercised

   —        —        

Forfeited

   (3,852   10.42      

Outstanding at December 27, 2009

   330,021      7.79      
                  

Exercisable or convertible at the end of the period

   267,127      6.83    7.9    141,481
                  

 

(1) Includes 121,275 shares issued under the Founder’s plan. Includes 56,856 shares of common stock issued by us upon exercise of options under the Company’s stock incentive plans and 121,275 shares of common stock transferred from TTOK, LLC upon exercise of options under the Founder’s Plan.

The aggregate intrinsic value of options outstanding at December 27, 2009 is calculated as the difference between the market price of the underlying common stock and the exercise price of the options for the 90,693 exercisable options that had exercise prices that were lower than the $1.64 fair market value, as determined by our Board of Directors, of our common stock at March 29, 2009.

The total intrinsic value of options exercised during the Nine Months Fiscal 2010 and Nine Months Fiscal 2009 was $296,000 and $2,000, respectively.

7. Stockholders’ Equity

Preferred stock

Each outstanding share of our 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 when and if Tully’s completes an underwritten public offering of Tully’s shares of common stock with gross proceeds to Tully’s 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 we issue 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.

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 we make a Qualified Offering. The conversion price for the Series B Preferred shares is subject to an anti-dilution adjustment, but no adjustment has been required.

Shareholder Distribution

On May 5, 2009, our Board of Directors declared a special cash distribution of:

 

   

$1.03 per share of Common Stock calculated on a post split basis;

 

   

$0.14560 per share of Series A Preferred Stock (calculated on an unconverted basis); and

 

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TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

   

$0.12875 per share of Series B Preferred Stock (calculated on an unconverted basis).

The special cash distribution on our preferred stock calculated on an “as-converted to common stock” basis, was equivalent to $1.03 per share.

The special distribution totaled $5,990,000 and was paid on May 20, 2009, to shareholders of record on the close of business on April 30, 2009. Subsequently, the company has paid $3,000 due to the correction of shareholder files subsequent to the distribution date. We have recorded the shareholder distribution as a reduction to APIC.

8. Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by our senior management. We are organized into three business units: (1) the Retail division, which includes our U.S. company-operated retail store operations, (2) the wholesale business division, which sells to domestic customers in the grocery, food service, office coffee service, restaurant and institutional channels, and which also handles our mail order and internet sales, and (3) the Specialty division, which sells products and materials to our international licensees and manages the international licensing of the Tully’s brand and is responsible for the franchising of Tully’s stores in the United States.

As a result of the Company’s decision to exit the wholesale business, the wholesale business has been classified as discontinued operations in the Company’s Consolidated Condensed Statement of Operations for all periods presented. In addition, the wholesale assets and liabilities have been classified as held for sale in the Company’s Condensed Consolidated Balance Sheet.

Our net sales are comprised as follows:

 

     Thirteen Week Periods Ended    Thirty-Nine Week Periods Ended
    

December 27,

2009

  

December 28,

2008

  

December 27,

2009

  

December 28,

2008

     (unaudited)    (unaudited)    (unaudited)    (unaudited)
     (dollars in thousands)

Net sales

           

Sales in the United States

      $ 9,049    $ 29,716    $ 30,038

International sales

        50      144      50
                           
   $ 10,098    $ 9,099    $ 29,860    $ 30,088
                           

The tables below present information by operating segment:

 

     Thirteen Week Periods Ended     Thirty-Nine Week Periods Ended  
    

December 27,

2009

   

December 28,

2008

   

December 27,

2009

   

December 28,

2008

 
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
     (dollars in thousands)  

Net sales

        

Retail division

   $ 8,970      $ 8,903      $ 26,720      $ 29,779   

Specialty division

     1,128        196        3,140        309   
                                
   $ 10,098      $ 9,099      $ 29,860      $ 30,088   
                                

Net loss

   $ (1,389   $ (600   $ (3,481   $ (2,980

Depreciation and amortization

        

Retail division

   $ 120      $ 331      $ 771      $ 1,056   

Specialty division

     *     *     *     *

Corporate and other expenses

     164        19        164        222   
                                

Total depreciation and amortization

   $ 284      $ 350      $ 935      $ 1,278   
                                

 

** Amounts are less than $1,000.

 

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TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9. Loss Per Common Share

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

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

 

     Thirteen Week Periods Ended     Thirty-Nine Week Periods Ended  
    

December 27,

2009

   

December 28,

2008

   

December 27,

2009

   

December 28,

2008

 
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
     (dollars and shares in thousands, except per share data)  

Computation of basic loss per share

        

Loss from continuing operations

   $ (1,389   $ (2,312   $ (3,481   $ (7,167

Income from discontinued operations

     —          1,712        —          4,187   
                                

Net loss for basic loss per share

   $ (1,389   $ (600   $ (3,481   $ (2,980
                                

Weighted average shares used in computing basic loss per share

     3,561        3,265        3,528        3,265   

Basic loss per share from continuing operations

   $ (0.39   $ (0.71   $ (0.99   $ (2.19

Basic earnings per share from discontinued operations

     —          0.52        —          1.28   
                                

Basic loss per share

   $ (0.39   $ (0.18   $ (0.99   $ (0.91
                                

Computation of diluted loss per share

        

Loss from continuing operations

   $ (1,389   $ (2,312   $ (3,481   $ (7,167

Income from discontinued operations

     —          1,712        —          4,187   
                                

Net loss for diluted loss per share

   $ (1,389   $ (600   $ (3,481   $ (2,980
                                

Weighted average shares used in computing diluted loss per share

     3,561        6,456        3,528        6,456   

Diluted loss per share from continuing operations

   $ (0.39   $ (0.71   $ (0.99   $ (2.20

Diluted earnings per share from discontinued operations

     —          0.27        —          0.65   
                                

Diluted loss per share

   $ (0.39   $ (0.36   $ (0.99   $ (0.91
                                

Weighted average shares used in computing loss per share Weighted average common shares outstanding, used in computing basic loss per share

     3,561        3,265        3,528        3,265   

Total common share equivalent instruments for computing diluted loss per share

     —          3,191        —          3,191   
                                

Weighted average shares used in computing diluted loss per share

     3,561        6,456        3,528        6,456   
                                

 

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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 week period ended December 27, 2009 (“Third Quarter Fiscal 2010”) and Thirty-Nine week period ended December 27, 2009 (“Nine Months Fiscal 2010”) . 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 March 29, 2009, filed with the SEC on June 29, 2009 (the “Fiscal 2009 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 the “Risk Factors” section of our Fiscal 2009 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 franchising of Tully’s Coffee retail stores and manages our international joint venture, foreign licensing, and business development activities. We generate revenues through licensing fees from U.S. and foreign franchisees and sales of products to foreign customers.

For most of our operating history, we have not generated sufficient cash to fully fund operations. We historically have 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 Tully’s business names, trademarks, and wholesale business to Green Mountain Coffee Roasters, Inc. a Delaware corporation (“GMCR”), pursuant to the terms of 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 the TC Global, Inc., GMCR and Tully’s Bellaccino, LLC. GMCR paid a total purchase price of $40.3 million for the assets it acquired. The purchase price was subject to an inventory adjustment to be calculated within 120 days of March 27, 2009 (the “Green Mountain Transaction”), or July 25, 2009, no adjustment to the purchase price was made as a result of this inventory review.

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 owned, franchised and licensed retail store locations) and international retail and wholesale businesses.

The Company has classified the results of operations for the wholesale business in discontinued operations. The discontinued operations represent only those pertaining to the Green Mountain Transaction, and do not include any results relating to those activities which are expected to continue under the License Agreement due to this continuing involvement.

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

We believe we have significant growth opportunities in our ongoing operations, which we intend to pursue by implementing the following strategies:

Drive comparable store sales growth 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.

 

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Execute our franchising strategy to expand our geographic footprint.

Our franchising strategy focuses on adding franchised stores in market areas and venues that complement our company-operated stores. We have used franchising to extend our presence in special venues, such as grocery stores, airports, hotels, and university campuses. We also are pursuing multi-unit area agreements with franchisees that we believe are experienced and well-capitalized, to open Tully’s-branded coffeehouses in markets not targeted for development directly by us. We have implemented this approach successfully in the Idaho market, and hope to achieve similar success in Spokane, Washington, Southern California, and in the Portland, Oregon metropolitan area, with our new area developers.

Leverage 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, demonstrates the broader opportunity available to us in foreign markets.

Our Company History

Since our founding in 1992, our objective has been to make our gourmet coffees and genuine community coffeehouse experience the first choice for consumers in our markets. To achieve this goal, we have made significant investments in marketing and building our brand and have concentrated on opening company-operated retail stores and developing our wholesale and specialty business.

Between 1992 and 2001, we expanded to 114 company-operated stores. Between Fiscal 2001 and 2003, our financial performance was negatively impacted by the economic downturn that affected Seattle and San Francisco. To manage through this period and these challenges, rather than to seek additional and potentially dilutive growth capital, we chose to reduce normal operating expenses by closing certain under-performing stores and slowing our new store development plans to preserve capital. Between Fiscal 2002 and 2006, we streamlined aspects of our operations and emphasized less capital intensive business opportunities such as wholesale and franchising. From Fiscal 2006 to Fiscal 2009, we undertook a strategic business review and began implementing initiatives to improve our financial position and create a foundation for future growth which included the sale of our wholesale business and tradenames for $40.3 million.

Trends in Our Business

Retail Division.

As of December 27, 2009, Tully’s has 79 company-operated retail stores and 104 franchised stores in Washington, California, Arizona, Oregon, Idaho, Montana, Utah, Wyoming, and Colorado. 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 manufacturing facilities, and kiosks and cafes that are located in grocery stores, hotels, hospitals and airports and on university campuses.

We have recently undertaken a strategic review of our retail business. As a result, we are implementing initiatives to improve our retail operations, 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 profitability. All of these initiatives are designed to collectively improve our sales and profitability.

Further, we continue to review of our retail locations and leasing arrangements. During Fiscal 2009 we closed thirteen locations. Some of these store closures were a result of natural closures on lease arrangements, store refranchising, and lease terminations.

Specialty Division.

Our specialty division oversees the 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. As of December 27, 2009 there were 104 U.S. franchisee-operated stores, primarily in special venues such as grocery stores, airports, hotels and university campuses.

Additionally, our specialty division oversees our Asian Joint Venture which seeks to develop the Tully’s brand in Asia (excluding Japan), Australia, foreign licensing, wholesale distribution and other business activities. As of December 27, 2009 we had franchised four stores in Singapore.

 

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On November 23, 2009, Tully’s Coffee International, PTE LTD, (“Tully’s Coffee International”) a wholly owned subsidiary of Tully’s Coffee Asia Pacific Partners, LP the joint venture formed by Tully’s Coffee Asia Pacific, Inc. (“TCAP”), a wholly-owned subsidiary of TC Global, Inc. and Asia Food Culture Management Pte, Ltd (“AFCM”), a Singapore company, entered into a Master License Agreement with DK Retail Co., Ltd., (“DK Retail”) a South Korean corporation, to develop the Tully’s brand in South Korea. Under the terms of the Master License Agreement, DK Retail will pay Tully’s Coffee International an initial commitment fee, an additional per store fee and is obligated to develop 100 Tully’s retail locations in South Korea over the next five years. The Master License Agreement has a renewable five year term, subject to payment of an extension fee.

Revenue Trends

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

 

     Fiscal Years
     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
     (unaudited–dollars in thousands)

Fiscal 2008

   $ 10,575    $ 10,898    $ 11,119    $ 8,353

Fiscal 2009

     10,830      10,107      9,049      9,059

Fiscal 2010

     9,980      9,782      10,098   

Our revenue levels are expected to increase during autumn due to holiday season sales on recent trends in comparable stores sales.

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 cost, occupancy costs other than rent, supplies, and other operating expenses typically increase or decrease according to broader pricing trends for those products. During the Nine Months Fiscal 2010 we experienced increasing pricing associated with costs for dairy, paper and baked goods, as well as minimal increases in energy-related costs. 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.

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 growing 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. U.S. franchising costs continue to decrease as a percentage of franchise royalty and license revenues as we leverage our investment in franchising infrastructure and labor, travel and legal expenses while realizing the leverage from a larger franchised store base.

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 materials, community initiatives, sponsorships and advertising. We expect marketing expenses to decrease as we initiate a limited number of retail programs.

Our general and administrative costs are less discretionary than our marketing costs. We have determined that we can scale back our development and support spending and maintain a steady level of support to our operations and scale back expenses for our administrative staff in connection with the Green Mountain Transaction. During Fiscal 2010, we have continued to reduce our administrative staff by several positions and implemented other cost savings initiatives.

 

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Retail Performance Measures

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

 

     Periods Ended
     December 27,
2009
   December 28,
2008

NUMBER OF STORES:

     

Company-operated stores

   79    83

Franchisee-operated stores

   104    82
         

End of the period

   183    165
         

Total company-operated and franchised stores by location

     

Arizona

   19    15

California

   25    24

Oregon

   5    4

Washington

   98    99

Montana

   5    5

Idaho

   13    11

Utah

   1    1

Wyoming

   2    1

Colorado

   15    5
         

End of the period

   183    165
         

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

 

     December 27,
2009
   December 28,
2008

International franchise and licensees

   4    —  
         

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

 

     Fiscal Years  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Fiscal 2007

   (2.5 )%    4.1   7.0   7.1

Fiscal 2008

   9.5   7.6   8.8   2.1

Fiscal 2009

   (0.4 )%    (5.5 )%    (14.1 )%    (7.9 )% 

Fiscal 2010

   (8.4 )%    (6.1 )%    4.2  

 

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Table of Contents

Results of Operations

 

     Thirteen Week Periods Ended     Thirty-Nine Periods Ended  
     December 27,
2009
(unaudited)
    December 28,
2008
(unaudited)
    December 27,
2009
(unaudited)
    December 28,
2008
(unaudited)
 
Total Net Sales Metrics         

Amounts as Percent of Total Net Sales

        

Retail store sales

   88.8   97.8   89.5   99.0

Specialty—international product sales

   11.2   2.2   10.5   1.0

Total sales of products

   98.7   98.4   98.8   99.1

Specialty—Licenses, royalties and fees

   1.2   1.6   1.1   0.9

Specialty—Recognition of deferred revenue

   0.1   0.0   0.1   0.0

Total net sales

   100.0   100.0   100.0   100.0
Retail Metrics         

Amounts as Percent of retail store sales

        

Retail cost of goods sold

   35.7   36.2   35.2   36.3

Retail occupancy expenses

   12.3   13.5   12.4   12.7

Store operating expenses

   45.0   44.4   43.8   43.1

Marketing, general and administrative expenses as percent of Total Net Sales

   15.5   19.8   15.0   17.9

Third Quarter Fiscal 2010 Compared To Third Quarter Fiscal 2009

Net Sales

Total net sales increased $999,000 or 11.0% to $10,098,000 for the Third Quarter Fiscal 2010, as compared to $9,099,000 for the Third Quarter Fiscal 2009. Sales of products increased $1,020,000 or 11.4% to $9,971,000 for the Third Quarter Fiscal 2010, as compared to $8,951,000 for the Third Quarter Fiscal 2009.

The divisional increase in net sales was comprised as follows:

 

Total company

Third Quarter Fiscal 2010 compared to Third Quarter Fiscal 2009

(dollars in thousands)

   Increase in
Net Sales

Retail

   $ 67

Specialty

     932
      

Total company

   $ 999
      

For the Third Quarter Fiscal 2010 comparable retail store sales increased 4.2%. The factors comprising the retail sales increase are summarized as follows:

 

Retail division

Components of net sales increase

Third Quarter Fiscal 2010 compared to Third Quarter Fiscal 2009

(dollars in thousands)

   Increase
(Decrease) in
Net Sales
 

Comparable stores sales increase

   $ 362   

Sales increase from new stores

     53   

Sales decrease from stores closed during Fiscal 2010 and Fiscal 2009

     (348
        

Total retail division

   $ 67   
        

Specialty net sales increased $932,000 to $1,128,000 for the Third Quarter Fiscal 2010 from $196,000 for the Third Quarter Fiscal 2009. The increase reflects the Company’s significant ramp in business on product sales throughout the franchise units and international expansion. Further, in prior periods the Company allocated product sales to licensed and franchise stores in the wholesale business. The Company did not reclassify these revenues out of discontinued operations as immaterial in previous periods.

 

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Table of Contents

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs decreased $118,000, or 2.7%, to $4,300,000 for the Third Quarter Fiscal 2010 as compared to Third Quarter Fiscal 2009. Cost of goods sold and related occupancy costs decreased slightly to 48.0% of total sales for the Third Quarter Fiscal 2010, compared to 49.7% in the corresponding period last year. Retail occupancy cost of goods sold also decreased to 12.3% in the Third Quarter Fiscal 2010 as compared to 13.5% in the Third Quarter Fiscal 2009.

Store operating expenses remained steady despite the decrease in product sales as a percentage of retail sales, store operating expenses were 45.0% for Third Quarter Fiscal 2010 compared to 44.4% for Third Quarter Fiscal 2009.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) increased $323,000 or 121.4% to $589,000 during Third Quarter Fiscal 2010 from $266,000 in Third Quarter Fiscal 2009. The increase reflects the higher level of franchised sales in the current period.

Marketing, general and administrative costs decreased $235,000 or 13.0%, to $1,569,000 during the Third Quarter Fiscal 2010 from $1,804,000 in the Third Quarter Fiscal 2009.

Depreciation and amortization expense decreased $66,000, or 18.9%, to $284,000 for the Third Quarter Fiscal 2010 from $350,000 for the Third Quarter Fiscal 2009, reflecting the lower depreciable base in company owned stores.

Other Income (Expense)

Interest expense decreased $564,000 to $3,000 for the Third Quarter Fiscal 2010 as compared to $567,000 for the Third Quarter Fiscal 2009, primarily due to the repayment of outstanding indebtedness under the Benaroya Credit Facility and Northrim Credit Facility in the prior year (see Note 4 of the Notes to the Condensed Consolidated Financial Statements).

Net Loss from Continuing Operations

As a result of the factors described above, we had a loss from continuing operations of $1,389,000 for the Third Quarter Fiscal 2010 as compared to the net loss of $2,312,000 for the Third Quarter Fiscal 2009, an improvement of $923,000 or 39.9%.

Discontinued Operations

Income from discontinued operations was to $1,712,000 for the Third Quarter Fiscal 2009. The company had no discontinued operations for the Third Quarter Fiscal 2010

Nine Months Fiscal 2010 Compared To Nine Months Fiscal 2009

Net Sales

Total net sales decreased $228,000 or 0.8% to $29,860,000 for the Nine Months Fiscal 2010, as compared to $30,008,000 for the Nine Months Fiscal 2009. Sales of products decreased $331,000 or 1.1% to $29,496,000 for the Nine Months Fiscal 2010, as compared to $29,827,000 for the Nine Months Fiscal 2009.

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

 

Total company

Nine Months Fiscal 2010 compared to Nine Months Fiscal 2009

(dollars in thousands)

   Increase
(Decrease) in
Net Sales
 

Retail

   $ (3,059

Specialty

     2,831   
        

Total company

   $ (228
        

 

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Table of Contents

For the Nine Months Fiscal 2010 comparable retail store sales fell 3.6%. The factors comprising the retail sales decrease are summarized as follows:

 

Retail division

Components of net sales decrease

Nine Months Fiscal 2010 compared to Nine Months Fiscal 2009

(dollars in thousands)

   Increase
(Decrease) in
Net Sales
 

Comparable stores sales decrease

   $ (994

Sales increase from new stores

     85   

Sales decrease from stores closed during Fiscal 2010 and Fiscal 2009

     (2,150
        

Total retail division

   $ (3,059
        

Specialty net sales increased $2,831,000 to $3,140,000 for the Nine Months Fiscal 2010 from $309,000 for the Nine Months Fiscal 2009. The increase reflects the company’s significant ramp in business on products sales throughout the franchise units and international expansion. Further, in prior periods the company allocated product sales to licensed and franchise stores in the wholesale business. The company did not reclassify these revenues out of discontinued operations as immaterial in previous periods.

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs decreased $1,884,000, or 12.9%, to $12,711,000 for the Nine Months Fiscal 2010 as compared to Nine Months Fiscal 2009. Cost of goods sold and related occupancy costs decreased slightly to 47.6% of total sales for the Nine Months Fiscal 2010, compared to 49.0% in the corresponding period last year. Retail occupancy cost of goods sold also remained steady at 12.4% in the Nine Months Fiscal 2010 as compared to 12.7% in the Nine Months Fiscal 2009.

Store operating expenses remained steady despite the decrease in product sales as a percentage of retail sales, store operating expenses were 43.8% of sales for Nine Months Fiscal 2010 compared to 43.1% for Nine Months Fiscal 2009.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) increased $714,000 or 88.5% to $1,521,000 during Nine Months Fiscal 2010 from $807,000 in Nine Months Fiscal 2009. The increase reflects the higher level of franchised sales in the current period.

Marketing, general and administrative costs decreased $919,000, or 17.0%, to $4,474,000 for the Nine Months Fiscal 2010 from $5,393,000 for the Nine Months Fiscal 2009.

Depreciation and amortization expense decreased $343,000, or 26.8%, to $935,000 for the Nine Months Fiscal 2010 from $1,278,000 for the Nine Months Fiscal 2009, reflecting the lower depreciable base in company owned stores.

Other Income (Expense)

Interest expense decreased $1,956,000 to $9,000 for the Nine Months Fiscal 2010 as compared to $1,965,000 for the Nine Months Fiscal 2009, primarily due to the repayment of outstanding indebtedness under the Benaroya Credit Facility and Northrim Credit Facility in the prior year (see Note 4 of the Notes to the Condensed Consolidated Financial Statements).

Net Loss from Continuing Operations

As a result of the factors described above, we had a loss from continuing operations of $3,481,000 for the Nine Months Fiscal 2010 as compared to the net loss of $7,167,000 for the Nine Months Fiscal 2009, an improvement of $3,686,000 or 51.4%.

Discontinued Operations

Income from discontinued operations was $4,187,000 for the Nine Months Fiscal 2009. The company had no discontinued operations for the Nine Months Fiscal 2010.

 

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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:

 

     Nine Months
Fiscal 2010
    Nine Months
Fiscal 2009
 
     (dollars in thousands)  
STATEMENTS OF CASH FLOWS DATA     

Cash provided by (used for):

    

Net loss

   $ (3,481   $ (2,980

Deferred Gain on Green Mountain Transaction

     (127     —     

Adjustments for depreciation and other non-cash operating statement amounts

     1,130        2,471   
                

Net loss adjusted for non-cash operating statement amounts

     (2,478     (509

Cash provided by (used) for other changes in assets and liabilities

     1,908        (1,333
                

Net cash provided by (used) in operating activities

     (570     (1,842

Purchases of property and equipment

     (485     (490

Proceeds from sale of development rights

     —          469   

Other investing activities

     18        242   

Minority interest contribution in joint venture

     —          3,000   

Net borrowings (repayments) of Northrim Credit Facility and capital leases

     (409     926   

Foreign currency translation adjustment

     12        —     

Shareholder distribution

     (5,993     —     

Proceeds from warrant and stock option exercise

     27        —     
                

Net increase (decrease) in cash and cash equivalents

   $ (7,400   $ 2,305   
                

Overall, our operating activities, investing activities, and financing activities used $7,400,000 of cash during Nine Months Fiscal 2010 as compared to $2,305,000 of cash provided during Nine Months Fiscal 2009 primarily due to the shareholder distribution on May 20, 2009 and minority investment into the Asian Joint Venture in the Nine Months Fiscal 2010.

Cash used by operating activities for Nine Months Fiscal 2010 was $570,000, a change of $1,272,000 compared to Nine Months Fiscal 2009 when operating activities used cash of $1,842,000. This related primarily to collections of accounts receivable of $5,223,000 due to final collection of certain trade receivables related to the discontinued wholesale business, offset by a cash usage in accounts payable and accrued liabilities of $5,463,000 as the company made final payments to wholesale vendors as required under the GMCR Agreement.

Investing activities used cash of $467,000 in Nine Months Fiscal 2010, as capital expenses decreased with minimal company owned store investments in the period, offset by development fees collected in the prior period.

Financing activities used cash of $6,363,000 in Nine Months Fiscal 2010, which included the special distribution of $5,993,000 paid on May 20, 2009, to shareholders of record on the close of business on April 30, 2009.

Liquidity and Capital Resources

On March 27, 2009, we completed the sale of the assets associated with Tully’s business names, trademarks, and wholesale business to GMCR. We received $40,300,000 million, less $3,500,000 held in escrow, in cash proceeds in this transaction. We used these proceeds to improve our liquidity without shareholder dilution, repay our debt, provide for a shareholder distribution paid May 20, 2009, and for the development of our domestic retail and franchise and license businesses as well as our international retail, wholesale, and franchise businesses.

As of December 27, 2009 we had cash and cash equivalents of $4,594,000, of which $904,828 was held in the Asian Joint Venture and limited in use, and a working capital deficit of $1,357,000. Historically we have not required a significant net investment in working capital and operated with current liabilities in excess of our current assets. Our inventory levels are expected to increase during winter due to holiday season merchandise. Inventories are also subject to short-term fluctuations based upon the timing of coffee receipts.

 

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During Fiscal 2010, we expect that the majority of the new Tully’s stores will be franchised and licensed stores, rather than company-operated stores. Franchised and licensed stores do not require capital investment in property and equipment by us, but we do incur selling and support costs for such new stores related to store opening, training, and quality control. We expect to open between two and four new company-operated stores in the remainder of Fiscal 2010. Typically, a new company-operated store will require capital investment of approximately $100,000 to $400,000, but this varies depending on the specific location.

We believe that the operating cash flows, financing cash flows, and investing cash flows projected for Fiscal 2010, and the cash and cash equivalents of $4,594,000 at December 27, 2009, of which $904,828 was held in the Asian Joint Venture and limited in use, along with the collection of the $3,500,000 in outstanding Escrow in connection with the Green Mountain Transaction, subject to claim indemnifications, will be sufficient to fund ongoing operations of Tully’s through Fiscal 2010. We expect our business improvement initiatives and other actions will improve our operating income and cash flow results. However, the timing and extent of success for these strategies cannot be predicted with any level of certainty. In order to maintain an appropriate level of liquidity, we expect to seek additional sources of business funding (such as debt or equity financings) during Fiscal 2011 as a result of meeting our obligation to purchase an additional 25% ownership share in the Asian Joint Venture for $4,000,000 on or before March 27, 2010, and our continued inability to sustain positive cash flows from operations. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then we could be required to substantially reduce operating, marketing, general and administrative costs related to our continuing operations, or reduce or discontinue our investments in store improvements, new customers and new products. We could be required to sell stores or other assets and could be unable to take advantage of business opportunities. The sale of stores or other income-producing assets could adversely affect our future operating results and cash flows.

SEASONALITY

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

 

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 the majority of our coffee under 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 estimate that a ten percent increase in coffee bean pricing could reduce operating income by $250,000 to $450,000 annually if we were unable to adjust our retail prices.

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

 

ITEM 4T. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms in a manner that allows timely decisions regarding required disclosures. We carried out, under the supervision and with the participation of management, including our principal executive officer (“CEO”) and our Chief Financial Officer and Vice President and principal financial officer (“CFO”), an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 27, 2009. Based on their evaluation as of December 27, 2009, our CEO and CFO concluded that the current disclosure controls and procedures are not effective due to the untimely filings and our inability to meet required filing timelines, including required amendments to such filings.

Management is committed to improving its internal controls and will continue to work to put effective controls in place to file complete regulatory filing requirements in a timely manner.

There has been no change in our internal control over financial reporting during the Nine Months Fiscal 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are a party to various other legal proceedings arising in the ordinary course of our business, including, in December 2007, a lawsuit was filed against Tully’s in California state court by a former store employee alleging that Tully’s failed to provide meal and rest periods for its employees. We anticipate that the plaintiff will seek class action certification on behalf of all hourly employees in Tully’s California stores. The plaintiff is seeking damages, restitution, injunctive relief, and attorneys’ fees and costs. Similar lawsuits alleging missed meal and rest periods have been filed in California against many other companies. We are investigating the claims and intend to vigorously defend this litigation, but cannot predict the financial impact to us of the litigation at this time. We believe that Tully’s has complied with all laws that require providing meal and rest periods for its employees. We have accrued $277,000 as of December 27, 2009 to defend this litigation.

On September 24, 2009 Green Mountain filed a claim for indemnification, contending we failed to disclose as required by Sections 3.4, 3.8, 3.15 subsections (a) and (c) subparts (b), (f) and (g), and 3.18 of the Purchase Agreement the existence of that certain Supply Agreement, dated April 6, 2004, by and among TC Global and Quick Dispense. Accordingly, on October 15, 2009 we filed a dispute notice of any and all claims for indemnification made pursuant to sections 7.2(a) and 7.5 of the Purchase Agreement. Further, on October 30, 2009 we filed a declaratory judgment establishing that no contract between Tully’s and Quick Dispense survived the original three-year term on the Supply Agreement. An Order of Dismissal was filed by the Company with the court on January 27, 2010 as TC Global and Quick Dispense agreed the Supply Agreement was rightfully terminated. We believe that Tully’s has complied appropriately with the termination of the contract and plan to vigorously defend GMCR’s claim. We expect to collect the entire amount of the escrow balance on March 27, 2010.

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

 

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

Tully’s issued and sold securities in the transactions described below during Nine Months Fiscal 2010.

Stock Issued upon Exercise of Warrants—In Nine Months Fiscal 2010, we issued 205,332 shares of common stock to 10 warrant holders for aggregate consideration of $31,909. The offer and sale of these securities was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as an offer and sale not involving a public offering.

Stock Issued upon Settlement of a Claim—In October 2009 we issued 7,032 shares of our common stock, with an agreed value of $12.00 per share, to 64 members of a settlement class that filed an employment related lawsuit against us in February 2004. The offer and sale of these securities was made in reliance on the exemption from registration provided by Section 3(a) (10) of the Securities Act of 1933, as amended.

 

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:

 

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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)
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(a)    Form of Common Stock Purchase Warrants issued in Series A Preferred Stock financing (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)
4.2(b)    Common Stock Purchase Warrant, dated December 14, 2000, issued to 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 September 18, 2008, and incorporated herein by reference)
4.2(c)    Form of Common Stock Purchase Warrants issued to Guarantors of Kent Central, LLC Promissory Note (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)
4.2(d)    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)
4.2(e)    Stock Purchase Warrant dated July 12, 2007, issued to Benaroya Capital Company, L.L.C. (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)

 

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4.2(f)    Form of Stock Purchase Warrant issued July 12, 2007 to Guarantor of Benaroya Capital credit facility (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)
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 September 18, 2008, and incorporated herein by reference)
31.1*      Certification of principal executive officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*      Certification of principal financial officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*      Certification of principal executive officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*      Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Filed herewith

 

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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 10, 2010.

 

TC Global, Inc.
By:  

/s/    ANDREW M. WYNNE        

  Andrew M. Wynne
  Vice President and Chief Financial Officer
 

Signing on behalf of the Registrant and as

principal financial officer

 

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