TC GLOBAL, INC. - FORM 10-Q

TC GLOBAL, INC. - FORM 10-Q - August 11, 2010

Attached files

Attached files

TC GLOBAL, INC. Reports

Attached files

TC GLOBAL, INC. Reports

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

file	filename
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - TC GLOBAL, INC.	dex321.htm
EX-31.1 - SECTION 302 CEO AND CFO CERTIFICATION - TC GLOBAL, INC.	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2010

¨	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 x No ¨

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

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

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

3,563,867

(Title of Each Class)

Number of Shares Outstanding at

August 8, 2010

TC GLOBAL, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2010

INDEX


		Page No.

	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	3

PART I	FINANCIAL INFORMATION	4

Item 1	Financial Statements	4

	Condensed Consolidated Balance Sheets at June 27, 2010 and March 28, 2010	4

	Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended June 27, 2010 and June 28, 2009	5

	Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods Ended June 27, 2010 and June 28, 2009	6

	Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Thirteen Week Periods Ended June 27, 2010	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4T	Controls and Procedures	27

PART II	OTHER INFORMATION	27

Item 1	Legal Proceedings	27

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6	Exhibits	27

	SIGNATURE	29

****

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 2011		April 3, 2011 (53 weeks)
Fiscal 2010		March 28, 2010 (52 weeks)
Fiscal 2009		March 29, 2009 (52 weeks)

		Interim fiscal period
First Quarter Fiscal 2011		13 week period ended June 27, 2010
First Quarter Fiscal 2010		13 week period ended June 28, 2009

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 “Risk Factors” and “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.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

TC GLOBAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 27, 2010			March 28, 2010
	(unaudited)			(audited)
	(dollars in thousands, except share data)
Assets
Current assets
Cash and cash equivalents	$	5,001		$	3,558
Escrow Receivable		—			3,500
Income Tax Receivable		931			931
Accounts receivable, net of allowance for doubtful accounts of $777 and $704 at June 27, 2010 and March 28, 2010, respectively		1,283			585
Inventories		842			1,381
Prepaid expenses and other current assets		263			274

Total current assets		8,320			10,229
Property and equipment, net		2,597			2,184
Goodwill		45			45
Related party receivable, net of current portion		1,000			1,000
Other assets		330			263

Total assets	$	12,292		$	13,721


Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	2,718		$	2,498
Accrued liabilities		2,295			2,061
Credit line and current portion of long-term debt		88			157
Deferred revenue		4,145			4,271
Current portion of deferred gain on sale of wholesale segment		169			169
Current portion of obligation to minority shareholder in TCAP		4,000			4,000

Total current liabilities		13,415			13,156
Deferred lease costs		294			249
Deferred revenue, net of current portion		684			715
Deferred gain on Sale of Wholesale Segment, net of current portion		2,147			2,189

Total liabilities		16,540			16,309


Commitments and contingencies (Note 4)
Stockholders’ equity (deficit)
Series A Convertible Preferred stock, no par value; 31,000,000 shares authorized, 12,790,874 issued and outstanding at June 27, 2010 and March 28, 2010, 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 June 2010 and 2009; 3,563,867 shares issued and outstanding at June 27, 2010 and March 28, 2010, respectively, stated value of $18.00 per share and a liquidation preference		19,706			19,706
Series B Convertible Preferred stock, no par value; 8,000,000 shares authorized; 3,590,349 issued and outstanding at June 28, 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		24,110			24,089
Accumulated other comprehensive (loss)		(42	)		(41	)
Accumulated deficit		(85,999	)		(84,371	)

Total stockholders’ equity (deficit) attributable to TC-Global, Inc.		(5,794	)		(4,186	)
Non-controlling Interest		1,546			1,598

Total stockholders equity (deficit)		(4,248	)		(2,588	)

Total liabilities and stockholders’ equity	$	12,292		$	13,721

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

TC GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Thirteen Week Periods Ended
	June 27, 2010			June 28, 2009
	(unaudited)			(unaudited)
	(dollars in thousands, except per share data)
Net sales

Retail store sales	$	8,858		$	9,000
Specialty sales of products		499			871

Total sales of products		9,357			9,871
Licenses, royalties, and fees		129			99
Recognition of deferred licensing revenue		10			10

Net sales		9,496			9,980

Cost of goods sold and operating expenses
Retail cost of goods sold		3,240			3,136
Retail occupancy expenses		1,047			1,115

Total retail cost of goods sold and related occupancy expenses		4,287			4,251
Specialty cost of goods sold		294			585

Cost of goods sold and related occupancy expenses		4,581			4,836
Store operating expenses		3,894			3,834
Other operating expenses		584			453
Marketing, general and administrative costs		1,852			1,418
Depreciation and amortization		237			334
Store closure and lease termination costs		8			1

Total cost of goods sold and operating expenses		11,156			10,876

Operating Loss		(1,660	)		(896	)
Other income (expense)
Interest expense		(2	)		(5	)
Miscellaneous income (expense)		8			2

Total other income (expense)		6			(3	)

Loss before income taxes		(1,654	)		(899	)
Income tax benefit (expense)		(26	)		—


Net Income (loss)		(1,680	)		(899	)
Non –controlling interest		52			32

Net loss attributable to TC-Global, Inc.	$	(1,628	)	$	(867	)


Loss per share—basic and diluted
Loss per share—basic	$	(0.46	)	$	(0.25	)
Loss per share—diluted	$	(0.46	)	$	(0.25	)
Weighted average shares used in computing basic and diluted loss per share
Loss per share—basic		3,563			3,466
Loss per share—diluted		3,563			3,466

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

TC GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Thirteen Week Periods Ended
	June 27, 2010			June 28, 2009
	(unaudited)			(unaudited)
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,628	)	$	(867	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		237			334
Store closure and lease termination costs		8			1
Employee stock option compensation expense		21			44
Provision for doubtful accounts		(66	)		52
Gain on sale of fixed asset		(15	)		(8	)
Recognition of deferred gain on Sale of Wholesale Segment		(42	)		(42	)
Minority Interest		(57	)		(32	)
Recognition of deferred license revenues		(29	)		(1	)
Changes in assets and liabilities
Accounts receivable		(633	)		4,889
Inventories		539			(75	)
Prepaid expenses and other assets		37			1,222
Accounts payable		220			(2,978	)
Accrued liabilities		226			(1,988	)
Deferred revenue		(129	)		(23	)
Deferred lease costs		45			(46	)

Net cash provided by (used in) operating activities		(1,266	)		482

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(708	)		(71	)
Proceeds from sale of property and equipment		18			—

Net cash used in investing activities		(690	)		(71	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital leases		(104	)		(160	)
Foreign currency translation adjustment		1			(1	)
Shareholder distribution		0			(5,990	)
Proceeds from exercise of warrants and stock options		0			27

Net cash provided by (used in) financing activities		(103	)		(6,124	)

Net increase (decrease) in cash and cash equivalents		(2,057	)		(5,713	)
Cash and cash equivalents at beginning of period		7,058			11,994

Cash and cash equivalents at end of period	$	5,001		$	6,281

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest		2		$	5
Non-cash investing and financing activities:
Accrued expense paid through grant of stock options		0		$	36
Insurance premiums financed through note payable		253		$	47

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

TC GLOBAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THIRTEEN WEEK PERIOD ENDED JUNE 27, 2010 (UNAUDITED)


	Convertible Preferred Stock						Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total			Non-Controlling Interest
	Series A Shares	Series A Amount		Series B Shares	Series B Amount		Shares	Amount		Additional Paid in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total			Non-Controlling Interest
Balance, March 28, 2010	12,790,874	$	28,473	3,590,349	$	7,958	3,563,867	$	19,706	$	24,089	($	41	)	($	84,371	)	($	4,186	)	$	1,598
Stock Option Expense										$	21							$	21
Non Controlling Interest																					($	52	)
Comprehensive Loss												($	1	)				($	1	)

Net Loss															($	1,628	)	($	1,628	)
Balance, June 27, 2010*	12,790,874	$	28,473	3,590,349	$	7,958	3,563,867	$	19,706	$	24,110	($	42	)	($	85,999	)	($	5,794	)	$	1,546

Totals may not equal due to rounding.

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

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 June 27, 2010 (“First Quarter Fiscal 2011”) and the thirteen week period ended June 28, 2009 (“First Quarter 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 28, 2010, filed with the SEC on June 28, 2010 (the “Fiscal 2010 Form 10-K”).

Recent Developments

During the First Quarter Fiscal 2011 we opened four new Company-operated stores and closed three stores. In addition, we launched our single unit franchising program in Washington State for individuals who are interested in operating a single franchise store. As of the end of First Quarter Fiscal 2011, our licensees in Asia had opened four stores in Singapore and three in South Korea.

During the First Quarter Fiscal 2011, we entered into a three year , renewable distribution agreement with a third party distributor, under which the distributor will warehouse and distribute merchandise and supplies for domestic Company-operated, licensed and franchised retail stores. Under the terms of the distribution agreement, the Company may be obligated to repurchase any unsold inventory held by the distributor at the end of the term, however such purchase commitments or obligations are not expected to be material or result in any loss to the Company at this time.

During the period ended June 27, 2010, the consolidated revenues include $82,000 derived from international licensing. Revenues derived from similar international sources for the period June 28, 2009 amounted to $26,000.

Recent Accounting Pronouncements

In 2007, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on accounting and reporting for noncontrolling interests in subsidiaries. The guidance clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent company’s equity. It also requires the presentation of both net earnings attributable to noncontrolling interests and net earnings attributable to TC-Global, Inc. on the face of the consolidated statement of earnings. We adopted the new guidance relating to noncontrolling interests effective for the fiscal year ended March 28, 2010 on a prospective basis, except for the presentation and disclosure requirements, which were applied retrospectively.

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities (“VIE”), which will be effective for our first fiscal quarter of 2011. The new guidance requires a qualitative approach to identify a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. We are evaluating the impact that adoption may have on our consolidated financial statements.

Cash and Cash Equivalents

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

Escrow and Related Party Receivable

In connection with the closing of the sale of the assets associated with Tully’s business names, trademarks, and wholesale business to Green Mountain Coffee Roasters, Inc. 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 (the “GMCR Agreement”), $3,500,000 of the purchase price was placed in escrow for one year to satisfy Tully’s post-closing indemnification obligations to GMCR . The full amount of this escrow was released to Tully’s on March 29, 2010.

In December 2008, Tully’s Coffee Asia Pacific, Inc. (“TCAP”), a wholly-owned subsidiary of TC Global, Inc., granted Asia Food Culture Management Pte. Ltd. (“AFCM”), a Singapore company and the limited partner in Tully’s Coffee Asia Pacific Partners, LP (“Tully’s Coffee Asia”), a $1,000,000 loan to be paid through future distributions of Tully’s Coffee Asia.

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

2. 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. On March 29, 2010, the full $3,500,000 was released from the Escrow and paid to the Company.

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. On March 29, 2010, the full $3,500,000 was released from the escrow and paid to the Company.

As of June 27, 2010, we had cash and cash equivalents of $5,000,877, of which $768,969 was held in Tully’s Coffee Asia and limited in use. We had a working capital deficit of $1,095,349, exclusive of TCAP’s $4,000,000 obligation to AFCM, our limited partner in Tully’s Coffee Asia. TCAP’s obligation arises from its agreement to purchase, or to cause a third party to purchase, one-half of AFCM’s partnership interest in Tully’s Coffee Asia, at a purchase price of US$4,000,000, on or before March 27, 2010. As of June 27, 2010, TCAP had not met its obligation to AFCM. TC Global, which is neither a party to the agreement nor a guarantor of the obligation, does not intend to provide funding to TCAP to enable it to satisfy its obligation to AFCM. TCAP and AFCM continue to work on a settlement and to seek a buyer for AFCM’s partnership interest. If TCAP is unsuccessful in either finding a buyer for AFCM’s interest or in its settlement negotiations, TCAP could be subject to a claim that could have a material adverse impact on its financial position.

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 decreased during the quarter as we entered into a distribution agreement that enabled us to outsource the supply of merchandise and supplies to our Company Operated, licensed, and franchised stores. Store inventories are also subject to short-term fluctuations based upon the timing of merchandise receipts. Tully’s expects that its investment in accounts receivable and inventories will increase, primarily as the result of anticipated sales growth in coming quarters.

Cash requirements for Fiscal 2011, other than operating expenses and the commitments described in the condensed consolidated financial statements and notes included in this Form 10-Q, are expected to consist primarily of capital expenditures related to the opening of new company-operated stores and equipment, general working capital needs, and accounts receivable related to new Specialty division business.

During Fiscal 2011, 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 Tully’s, but we do incur selling and support costs for such new stores related to store opening, training, and quality control. We opened four new Company-operated stores during the First Quarter Fiscal 2011. 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 invested $708,000 during the quarter in property and equipment primarily related to the four stores opened this quarter and one new store which opened subsequent to quarter end.

We believe that the operating cash flows, financing cash flows, and investing cash flows projected for Fiscal 2011, and the cash and cash equivalents balance of approximately $5 million, of which $768,969 was held in Tully’s Coffee Asia, at June 27, 2010, will be sufficient to fund ongoing operations of Tully’s through Fiscal 2011. Because we do not believe we are able to achieve additional cost reductions, if our sales volumes decline significantly or do not meet expectations during Fiscal 2011, we may be unable to generate enough cash flow from operations to cover our working capital and capital expenditure requirements. However, the timing and extent of success for our 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 and Fiscal 2012. If the pricing or terms for any new financing do not meet our expectations, we may be required to choose between completion of the financing on such unfavorable terms or not completing the financing.

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.

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Further, based on our current projections beyond Fiscal 2011, we expect that without additional financing we will deplete our cash during the second quarter of Fiscal 2012. As such, we believe we will likely need to secure financing in the next 12 months in order to fund all of our working capital requirements in Fiscal 2012. Although we believe we have financing alternatives available to us, these alternatives would likely involve significant interest and other costs or would likely be highly dilutive to our existing shareholders. We continue to monitor whether credit facilities may be available to us on acceptable terms. There can be no assurance any debt or equity financing arrangement will be available to us when needed on acceptable terms, if at all. In addition, there can be no assurance that these financing alternatives would provide us with sufficient funds to meet our long term capital requirements. If we are unable to secure additional financing or generate sufficient cash flow from operations to fund our working capital and capital expenditures requirements, we could be required to sell stores or other significant assets to provide capital to fund our business. The sale of stores or other income-producing assets could adversely affect our future operating results and cash flows.

3. Credit lines and long term debt

Northrim Credit Facility

Currently, Tully’s has an available credit facility with Northrim Bank which allows the Company to borrow up to $1,500,000, subject to the amount of eligible accounts receivable. Currently there are no borrowings under this facility.

Tully’s Coffee Asia Pacific – Limited Partnership Loan

On December 31, 2008, pursuant to the Limited Partnership Agreement dated December 21, 2007 between TCAP, and AFCM, TCAP issued a promissory note in the principal amount of $1,120,000 (the “GP Loan”) to Tully’s Coffee Asia . 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 dated March 17, 2009, Tully’s Coffee Asia issued a convertible promissory note to AFCM in the principal amount of $1,120,000 (the “LP Loan”). The LP Loan bears interest of an annualized rate of 0.44%. The LP Loan is due and payable five business days after the date that Tully’s Coffee Asia has made distributions to AFCM in an amount equal to all principal and accrued interest on the LP Loan or in the event the partners clear certain security interests in partnership obligations. In connection, Tully’s has granted AFCM a preferential right to receive from Tully’s Coffee Asia, prior to any future distribution to Tully’s, cash distributions equal to US$500,000 out of Tully’s Coffee Asia profits available for distribution, and that, after receipt by AFCM of the full preference amount all subsequent cash distributions of profits shall be shared equally between TCAP and AFCM. Any subsequent cash distributions to AFCM would first be applied to retire the LP Loan.

Tully’s Coffee Asia Pacific – Limited Partnership Interest Obligation

On March 27, 2009, TCAP agreed to purchase, or cause a third party to purchase, one-half of AFCM’s partnership interest in Tully’s Coffee Asia, 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. As of June 27, 2010, TCAP had not met its obligation. TCAP and AFCM continue to work on a settlement and to seek a buyer for AFCM’s partnership interest. If TCAP is unsuccessful in either finding a buyer for AFCM’s interest or in its settlement negotiations, we could face adverse economic consequences surrounding our wholly owned subsidiary TCAP.

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


	June 27, 2010			March 29, 2010
	(dollars in thousands)
Note payable for purchase of insurance, payable in variable monthly installments of approximately $16,000—$43,000 including interest at 4.31%, through March 2011 collateralized by unearned or return insurance premiums, accrued dividends and loss payments		88			157
Less: Current portion		(88	)		(157	)

Long-term debt, net of current portion	$	—		$	—

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

4. Commitments and contingencies

Lease commitments

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

In connection with certain leases, lessors have granted tenant improvement allowances 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 June 27, 2010 are summarized as follows:


Fiscal year
(dollars in thousands)
Remainder of Fiscal 2011	$	2,512
2012		2,610
2013		2,230
2014		1,683
2015		1,126
2016		652
2017		535
Thereafter		1,309

Total	$	12,657

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 2011	$	31
2012		43
Total	$	74

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Contingencies

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 breaks for its hourly retail employees in California. In June 2010 we entered into a settlement agreement to settle this lawsuit and agreed to pay $375,000 and have accrued this amount as of June 27, 2010 in anticipation of this payment.

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

Tully’s Coffee Asia Pacific – Limited Partnership Interest

5. 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, Tully’s shareholders approved the 2004 Stock Option Plan. 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.

On March 2010, Tully’s shareholders approved the 2010 Stock Option Plan. The 2010 Stock Option Plan authorizes the issuance of up to 312,500 shares of common stock under the 2010 Stock Option Plan and Tully’s Employee Stock Purchase Plan. As of June 27, 2010, no options had been granted under the 2010 Stock Option Plan. The provisions of the 2010 Stock Option Plan, 2004 Stock Option Plan (and the 1994 Plan prior to its expiration) are summarized as follows. 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, our founder and former chairman Tom T. O’Keefe has granted options to purchase shares of his stock to employees and third parties (the “Founder’s Plan”). To our knowledge, no options have been granted by Mr. O’Keefe 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, Mr. O’Keefe contributed his holdings of Tully’s common stock to TTOK, LLC, a limited liability company owned by Mr. O’Keefe 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. Issued, outstanding and exercisable warrants as of June 27, 2010 are summarized as follows:


	Outstanding warrants	Number exercisable	Exercise Prices
Issued to guarantors of debt	93,191	93,191	$	0.40

Totals	93,191	93,191

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Stock Options

We issue new shares of common stock upon the exercise of stock options granted under the 1994 Plan, the 2004 Stock Option Plan and the 2010 Stock Option Plan. 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. We issue new shares of common stock upon the exercise of stock options granted under the 1994 Plan, 2004 and 2010 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.

Determining Fair Value Under SFAS 123R

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
	June 27, 2010			June 28, 2009
	(unaudited)			(unaudited)
Weighted average risk free interest rate		1.72	%		0.53	%
Expected dividend yield		0	%		0	%
Expected lives		5 years			3 years
Weighted average expected volatility		113	%		191	%
Weighted average fair value at date of grant	$	1.32		$	1.27

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 2011 we estimated our pre-vesting option forfeiture rate at 22%.

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Stock-based Compensation Under SFAS 123(R)

Stock-based compensation expense related to stock-based awards under SFAS 123(R) was $21,307 and $44,000 for the First Quarter Fiscal 2011 and First Quarter Fiscal 2010, 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 June 27, 2010, we had approximately $245,000 of total unrecognized compensation cost related to the 39,669 non-vested stock-based awards granted under all equity compensation plans. We expect to recognize this cost over a period of approximately five years.

Stock Award Activity

As of June 27, 2010 options for 421,460 shares were outstanding under the 1994 Plan, the 2004 Stock Option Plan, and the 2010 Stock Option Plan of which 381,791 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 28, 2010	326,396		$	7.81	8.43	$	138,063
Granted	97,353		$	1.64
Exercised	—			—
Forfeited	(2,289	)	$	8.84
Outstanding at June 27, 2010	421,460		$	6.38

Exercisable or convertible at the end of the period	381,791		$	5.80	8.19	$	136,342

The aggregate intrinsic value of options outstanding at June 27, 2010 is calculated as the difference between the market price of the underlying common stock and the exercise price of the options for the 87,399 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 28, 2010.

No options were exercised during the First Quarter Fiscal 2011. The total intrinsic value of options exercised during the First Quarter Fiscal 2010 was $295,822,

6. 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 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. At June 27, 2010, each eight shares of our outstanding Series A Convertible Preferred were convertible into approximately 1.12 shares of common stock (giving effect to the one-for-eight reverse split of our common stock).

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

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

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

Each outstanding share of Series B Preferred Stock is convertible at any time by the holder thereof into shares of common stock at the then-effective conversion price. In addition, each outstanding share of Series B Preferred Stock is automatically convertible into shares of common stock at the then-effective conversion price when and if 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. Giving effect to the one-for-eight reverse split of our common stock, each eight Series B Preferred shares could be converted at the option of the shareholder into one share of common stock as of June 27, 2010. Each eight shares of Series B Preferred Stock also are entitled to cast one vote on all matters submitted to a vote of the shareholders of Tully’s (giving effect to the one-for-eight reverse split of our common stock).

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

Common stock and Warrants

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

7. Segment Reporting

We present segment information in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), which established reporting and disclosure standards for an enterprise’s operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by our senior management.

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

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The tables below present information by operating segment:


	Thirteen Week Periods Ended
	June 27, 2010			June 28, 2009
	(unaudited)			(unaudited)
	(dollars in thousands)
Net sales
Retail division	$	8,858		$	9,000
Specialty division		638			980

	$	9,496		$	9,980

Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
Retail division	$	669		$	914
Specialty division		(240	)		(58	)
Corporate and other expenses		(1,865	)		(1,418	)

Loss before interest, taxes, depreciation and amortization of continuing operations		(1,436	)		(562	)
Depreciation and amortization		(237	)		(334	)
Interest income, interest expense, and misc. expense		(34	)		(3	)
Income taxes		26			—
Minority Interest		52			32

Net loss	$	(1,629	)	$	(867	)

Depreciation and amortization
Retail division	$	199		$	282
Specialty division		3			*	*
Corporate and other expenses		35			52

Total depreciation and amortization	$	237		$	334

**	Not material—less than $1,000

TC GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

8. Loss Per Common Share

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

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


	Thirteen Week Periods Ended
	June 27, 2010			June 28 2009
	(unaudited)			(unaudited)
	(dollars and shares in thousands, except per share data)
Computation of basic loss per share
Loss from operations	$	(1,626	)	$	(867	)

Net loss for basic loss per share	$	(1,626	)	$	(867	)

Weighted average shares used in computing basic loss per share		3,563			3,466
Basic loss per share from operations	$	(0.46	)	$	(0.25	)

Basic loss per share	$	(0.46	)	$	(0.25	)

Computation of diluted loss per share
Loss from operations	$	(1,626	)	$	(867	)

Net loss for diluted loss per share	$	(1,626	)	$	(867	)
Weighted average shares used in computing diluted loss per share		3,563			3,466
Diluted loss per share from operations	$	(0.46	)	$	(0.25	)

Diluted loss per share	$	(0.46	)	$	(0.25	)

Weighted average common shares outstanding, used in computing basic loss per share		3,563			3,466
Total common share equivalent instruments for computing diluted loss per share		—			—

Weighted average shares used in computing diluted loss per share		3,563			3,466

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 June 27, 2010 (“First Quarter Fiscal 2011”). 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 28, 2010, filed with the SEC on June 28, 2010 (the “Fiscal 2010 Form 10-K”). This discussion and analysis contains “forward-looking statements” that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to the factors referenced at “Special Note Regarding Forward-Looking Statements” and described in “Risk Factors” section, and others described in the “Risk Factors” section of our Fiscal 2010 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 our wholesale business and supply chain (including Tully’s business names and trademarks) to Green Mountain Coffee Roasters, Inc. a Delaware Corporation (“GMCR”), pursuant to the Asset Purchase Agreement dated September 15, 2008, as amended by Amendment No. 1 thereto dated November 12, 2008, and Amendment No. 2 thereto dated February 6, 2009, by and among the TC Global, Inc., GMCR and Tully’s Bellaccino, LLC (the “Green Mountain Transaction”).

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

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

We 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.

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 experienced, well-capitalized franchisees, to open Tully’s-branded coffeehouses in markets not targeted for development directly by us.

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.

Trends in Our Business

Retail Division.

As of June 27, 2010, Tully’s had 79 company-operated retail stores and 108 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 continue to critically review our retail business,, and we are continuing to implement initiatives to improve our retail operations, retail distribution, store facilities and merchandising strategies. The ongoing goal of our retail division initiatives is to increase retail store average unit volume, increase comparable store sales and improve new store unit economics. We are simultaneously targeting operational improvements to enhance our retail margins and achieve profitability. All of these initiatives are designed to collectively improve our sales and achieve profitability.

Further, we continue to review of our retail locations and leasing arrangements in order to enhance operating efficiencies during the current economic conditions. During the quarter ended June 27, 2010 we opened four new stores and closed three stores in Washington State.

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. At June 27, 2010 there were 107 U.S. franchisee-operated stores, primarily in special venues such as grocery stores, airports, hotels and university campuses.

Additionally, our specialty division oversees Tully’s Coffee Asia, which seeks to develop the Tully’s brand in Asia (excluding Japan) Australia and New Zealand, foreign licensing, wholesale distribution and other business activities. As of June 27, 2010 we had franchised four stores in Singapore through our master licensee Kitchen Language PTE LTD, which is obligated to develop 15 locations.

On November 23, 2009, Tully’s Coffee International, PTE LTD, (“Tully’s Coffee International”), a wholly owned subsidiary of Tully’s Coffee Asia, 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. As of June 27, 2010, DK Retail has opened three stores in South Korea.

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 2009	10,830	10,107	9,049	9,059
Fiscal 2010	9,980	9,782	10,098	9,710
Fiscal 2011	9,496

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 First Quarter 2011 we experienced a mixture of increased prices associated with some of the products we sell and negotiated lower costs for other products and components. In some cases, store-level retail operating expenses may increase or decrease depending on the sales volume at a particular location. Generally, our leases provide for periodic rent increases (which are generally leveled for financial reporting purposes by “straight-line rent” accounting).

We continue to undertake certain retail business initiatives with the objective of reducing costs as a percentage of sales through increased efficiencies and operating leverage. However, initiatives intended to produce a future benefit may cause a short-term increase in costs, both in absolute dollars and as a percentage of sales. We analyze retail division operating costs as a percentage of store sales and manage the stores to that metric.

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

In connection with the Green Mountain Transaction we entered into a five year supply agreement, whereby costs are pre-determined on a cost-plus basis. We determined that the Supply Agreement is at market rates, and thus we expect expense trends to follow market rates for Arabica coffee.

Specialty Cost Trends. Most of our specialty division costs consist of labor, travel and legal expenses. Labor and travel costs have increased to support our 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. During the past quarter, we continue to strive to implement various cost savings initiatives.

Retail Performance Measures

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


	Thirteen Week Periods Ended
	June 27, 2010		June 28, 2009
NUMBER OF STORES:
Company-operated stores
Stores at beginning of the period	78		80
New stores	4		—
Closed stores	(3	)	(1	)

End of the period	79		79

Franchisee-operated stores
Stores at beginning of the period	107		87
New stores	1		4
Closed stores	—		—

End of the period	108		91

Total company-operated and franchised stores by location
Arizona	19		18
California	28		24
Oregon	5		5
Washington	100		96
Montana	5		5
Idaho	11		11
Utah	1		1
Wyoming	2		2
Colorado	16		8

End of the period	187		170

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


	Thirteen Week Periods Ended
	June 27, 2010	June 28, 2009
International franchise and licensees	7	3

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 2009	(0.4	)%	(5.5	)%	(14.1	)%	(7.9	)%
Fiscal 2010	(8.4	)%	(6.1	)%	4.2	%	(0.2	)%
Fiscal 2011	(0.8	)%

Results of Operations


	Thirteen Week Periods Ended
	June 27, 2010			June 28, 2009
	(unaudited)			(unaudited)
	(dollars in thousands)

Net Sales
Retail store sales	$	8,858		$	9,000
Specialty—International product sales		499			871

Total sales of products		9,357			9,871
Specialty—U.S. franchising licenses, royalties and fees		129			99
Specialty—Recognition of deferred revenue		10			10

Total net sales	$	9,496		$	9,980
Cost of Goods Sold and Related Occupancy Expenses
Retail cost of goods sold	$	3,240		$	3,136
Retail occupancy expenses		1,047			1,115
Specialty		294			585

Total	$	4,581		$	4,836
Operating Expenses
Store operating expenses	$	3,894		$	3,834
Other operating expenses:
Specialty—U.S. franchising expenses		(188	)		281
Specialty—International division expenses (income)		772			172

Total other operating expenses	$	584		$	453

Marketing, general and administrative expenses	$	1,852		$	1,418


	Thirteen Week Periods Ended
	June 27, 2010		June 28, 2009
	(unaudited)		(unaudited)

Total Net Sales Metrics
Amounts as Percent of Total Net Sales
Retail store sales	93.3	%	90.2	%
Specialty—International product sales	5.2	%	8.7	%

Total sales of products	98.5	%	98.9	%
Specialty—Licenses, royalties and fees	1.4	%	1.0	%
Specialty—Recognition of deferred revenue	0.1	%	0.1	%

Total net sales	100.0	%	100.0	%

Retail Metrics
Amounts as Percent of retail store sales
Retail cost of goods sold	36.6	%	34.8	%
Retail occupancy expenses	11.8	%	12.4	%
Store operating expenses	44.0	%	42.6	%
Marketing, general and administrative expenses as percent of Total Net Sales	19.5	%	14.2	%

First Quarter Fiscal 2010 Compared To First Quarter Fiscal 2009

Net Sales

Total net sales decreased $484,000 or 4.8% to $9,496,000 for the First Quarter Fiscal 2011, as compared to $9,980,000 for the First Quarter Fiscal 2010. Overall sales of products decreased $514,000 or 5.2% to $9,357,000 for the First Quarter Fiscal 2011, as compared to $9,871,000 for the First Quarter Fiscal 2010. Licenses, royalties and fees increased $30,000 or 30.3% to $129,000 as compared to $99,000 for the First Quarter Fiscal 2010.

The divisional decrease in net sales was comprised as follows:


Total company First Quarter Fiscal 2011 compared to First Quarter Fiscal 2010 (dollars in thousands)	Decrease in Net Sales
Retail	$	(142	)
Specialty		(342	)

Total company	$	(484	)

For the First Quarter Fiscal 2011 comparable retail store sales decreased 0.8%. The factors comprising the retail sales increase are summarized as follows:


Retail division Components of net sales decrease First Quarter Fiscal 2011 compared to First Quarter Fiscal 2010 (dollars in thousands)	Increase (Decrease) in Net Sales
Comparable stores sales decrease	$	(57	)
Sales increase from new stores		232
Sales decrease from stores closed during the Fiscal year 2010 and 2011		(317	)

Total retail division	$	(142	)

Specialty net sales decreased $372,000 to $499,000 for the First Quarter Fiscal 2011 from $871,000 for the First Quarter Fiscal 2011. During the First quarter of Fiscal 2011 we entered into a distribution agreement that enabled us to outsource the inventory and distribution of products to our Company-operated. licensed and franchised stores. We believe that this will provide substantial operating efficiencies over time. It also means that beginning in the first quarter of 2011 we will no longer be recognizing Sales Revenue or Cost of Sales for the sale of these products to our franchised stores. This did have and will continue to have the effect of decreasing Net Sales and Cost of Sales as compared to prior periods however; we expect an overall increase to Gross Profit on these sales as a result of the efficiencies of the new program.

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs decreased $255,000, or 5.3%, to $4,581,000 for the First Quarter Fiscal 2011 as compared to First Quarter Fiscal 2010. Cost of goods sold and related occupancy costs totaled 48.4% of total retail store sales for the First Quarter Fiscal 2011, compared to 47.2% in the corresponding period last year. Retail occupancy costs decreased to 11.8% in the First Quarter Fiscal 2011 as compared to 12.4% in the First Quarter Fiscal 2010.

Store operating expenses remained steady despite the decrease in product sales as a percentage of retail sales, store operating expenses were 44.0% of total retail store sales for First Quarter Fiscal 2011 compared to 42.6% of total retail store sales for First Quarter Fiscal 2010.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) increased $131,000 or 28.9% to $584,000 during First Quarter Fiscal 2011 from $453,000 in First Quarter Fiscal 2010. This increase is related to increases in activities related to expansion of our franchising efforts and in support of our international growth objectives.

Marketing, general and administrative costs increased $434,000 or 30.6%, to $1,852,000 during the First Quarter Fiscal 2011 from $1,418,000 in the First Quarter Fiscal 2010. This increase was primarily due to an increase in marketing efforts to increase sales activities and special promotions in the First Quarter Fiscal 2011.

Depreciation and amortization expense decreased $97,000, or 29.0%, to $237,000 for the First Quarter Fiscal 2011 from $334,000 for the First Quarter Fiscal 2010, reflecting a lower level of depreciable assets in the current period.

Other Income (Expense)

Other Income increased to $6,000 for the First Quarter Fiscal 2011 as compared to $3,000 of expense for the First Quarter Fiscal 2010, primarily as the result of minimal use of debt and credit facilities in the current quarters.

Income Taxes

Income taxes increased $26,000 from $0 for the First Quarter Fiscal 2011, reflecting state tax paid in the First Quarter Fiscal 2010.

Net Loss

As a result of the factors described above, we had a loss of $1,626,000 for the First Quarter Fiscal 2011 as compared to the net loss of $ 867,000 for the First Quarter Fiscal 2010, an increase in net loss of $759,000 or 87.5%.

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:


	Thirteen Week Periods Ended
	June 27, 2010			June 28, 2009
	(unaudited)			(unaudited)
	(dollars in thousands)

STATEMENTS OF CASH FLOWS DATA
Cash provided by (used for):
Net income (loss)	$	(1,626	)	$	(867	)
Deferred Gain on Green Mountain Transaction		(42	)		(42	)
Adjustments for depreciation and other non-cash operating statement amounts		99			390

Net loss adjusted for non-cash operating statement amounts		(1,569	)		(519	)
Cash provided by (used) for other changes in assets and liabilities		305			1,001

Net cash provide by (used) in operating activities		(1,264	)		482
Purchases of property and equipment		(690	)		(71	)
Other investing activities		—			—
Minority interest contribution in joint venture		—			—
Net borrowings (repayments) of capital leases		(104	)		(160	)
Foreign currency translation adjustment		1			(1	)
Shareholder distribution					(5,990	)
Proceeds from warrant and stock option exercise					27

Net increase (decrease) in cash and cash equivalents	$	(2,057	)	$	(5,713	)

Overall, our operating activities, investing activities, and financing activities used $2,057,000 of cash during First Quarter Fiscal 2010 as compared to $5,713,000 of cash used during First Quarter Fiscal 2009 which included an extraordinary distribution to shareholders of $5,990,000 in May 2009.

Cash used in operating activities for First Quarter Fiscal 2011 totaled $1,264,000 compared to First Quarter Fiscal 2010 when operating activities provided $482,000 of cash.

Investing activities used $690,000 of cash of which the majority of this amount related primarily to capital costs related to four new store openings during the First Quarter Fiscal 2011. For the year earlier period net cash used for investing activities totaled $ $71,000.

Liquidity and Capital Resources

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

ITEM 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”) who is currently also our Acting Chief Financial Officer 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 June 27, 2010. Based on their evaluation as of June 27, 2010, our CEO who is also Acting CFO concluded that the current disclosure controls and procedures are effective.

There has been no change in our internal control over financial reporting during the three months ended June 27, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

No Company securities were offered or sold during First Quarter Fiscal 2011.

ITEM 6.

EXHIBITS

(a)

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

EXHIBIT INDEX


3.1		Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on October 26, 1999 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2001 as filed with the SEC on October 19, 2001, and incorporated herein by reference)

3.1(a)		Articles of Amendment of the Restated Articles of Incorporation containing the Statement of Rights and Preferences of Series B Preferred Stock filed with the Washington Secretary of State on June 27, 2000 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2001, as filed with the Commission on October 19, 2001, and incorporated herein by reference)

3.1(b)		Articles of Correction to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on August 8, 2000 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)

3.1(c)		Articles of Correction to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on August 8, 2000 (Filed with the Registrant’s Annual Report Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)

3.1(d)		Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on December 16, 2004 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)

3.1(e)		Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on December 16, 2004 (Filed with the Registrant’s Current Report on Form 8-K, dated March 26, 2009, as filed with the SEC on March 27, 2009, and incorporated herein by reference)

3.1(f)		Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on June 27, 2007 (Filed with the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)

3.2		Amended and Restated Bylaws adopted on July 18, 2007 (Filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, as filed with the SEC on July 26, 2007, and incorporated herein by reference)

3.2(a)		Amendment to Amended and Restated Bylaws, adopted effective July 8, 2010 (Filed with the Registrant’s Current Report on Form 8-K, as filed with the SEC on July 8, 2010, and incorporated herein by reference)

4.1		Description of capital stock contained in the Amended and Restated Articles of Incorporation (see Exhibit 3.1)

4.2		Description of rights of security holders contained in the Bylaws (see Exhibit 3.2)

4.2(a)		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(b)		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(c)		Common Stock Purchase Warrant dated April 26, 2007, issued to Benaroya Capital Company, L.L.C. (Filed with the Registrant’s Annual Report on Form 10-K for the year ended March 30, 2008, as filed with the SEC on September 18, 2008, and incorporated herein by reference)

4.2(d)		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 and acting 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 and acting 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

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized, in Seattle, Washington on August 11, 2010.


TC Global, Inc.

By:		/S/ CARL W. PENNINGTON, SR.
		Carl W. Pennington, Sr.
		President, Chief Executive Officer and Chairman of the Board of Directors

		Signing on behalf of the Registrant

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company