UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K












x     ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended:





DECEMBER
31, 2009


OR





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





For the
transition period from _______________ to _______________





Commission
File Number 0-26897





JAVO
BEVERAGE COMPANY, INC.


(Name of
Registrant as Specified in Its Charter)




DELAWARE
            
            48-1264292(State
      or Other Jurisdiction
              of
      Incorporation or Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





1311
SPECIALTY DRIVE


VISTA,
CALIFORNIA 92081


(Address
of principal executive offices, including zip code)


(760)
560-5286


(Registrant’s
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:





NONE





Securities
registered under Section 12(g) of the Exchange Act:





COMMON
STOCK, PAR VALUE: $.001 PER SHARE,


SERIES-A
JUNIOR PARTICIPATING PREFERRED STOCK, PAR VALUE $.001 PER SHARE,


AND
RIGHTS TO PURCHASE SHARES SERIES-A JUNIOR PARTICIPATING


PREFERRED
STOCK, PAR VALUE $.001 PER SHARE


SERIES-B
PREFERRED STOCK, PAR VALUE $.001 PER SHARE,


(Title of
class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o  No þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o  No þ





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 þ  No o





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 o  No þ





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K.  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act).





Large
      accelerated filer o
            Accelerated
      filer þ
            Non-accelerated
      filer oSmaller
      Reporting Company o





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes o  No þ





The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2009 was $97,732,925 based on the last reported
sale price of the Company’s Common Stock as of that date, as reported on the
Over-the-Counter Bulletin Board quotation system.





The
number of shares outstanding of the registrant's Common Stock, $0.001 par value
per share, ("Common Stock") was 298,803,342 as of March 13, 2010.





Documents
Incorporated by Reference





The
information required by Part III of this Form 10-K, to the extent not
set forth herein, is incorporated by reference from the issuer's Proxy Statement
to be filed in connection with the 2010 Annual Meeting of
Stockholders.














PART
I


ITEM
1.  BUSINESS





FORWARD
LOOKING STATEMENTS





The
Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in this report and in
our other filings with the Securities and Exchange Commission (the "SEC”). These
statements use words such as "believes," "expects," "intends," "plans," "may,"
"will," "should," "anticipates," and other similar expressions. All statements
that address operating performance, events, or developments that the Company
expects or anticipates will occur in the future, including statements relating
to volume growth, share of sales or statements expressing general optimism about
future operating results, are forward-looking statements within the meaning of
the Act. The forward-looking statements are based on management's current views
and assumptions regarding future events and operating performance. We cannot
assure that anticipated results will be achieved since actual results may differ
materially because of risks and uncertainties. We do not undertake to revise
these statements to reflect subsequent developments.





CORPORATE
HISTORY





Javo®
Beverage Company, Inc. (the "Company" or "Javo") was originally incorporated in
the state of Washington as North West Converters, Inc. on February 9, 1987. In
June of 1999, the Company changed its name to La Jolla Fresh Squeezed Coffee
Co., Inc. and the Company then acquired the assets of Stephen's Coffee, Inc. and
merged with Stephen's Coffee Holding, Inc. On February 22, 2000, the Company
acquired all the outstanding shares of Sorisole Acquisition Corp. to become
successor issuer to Sorisole pursuant to Rule 12g-3 of the Securities Exchange
Act of 1934 and subject to the reporting requirements of the Securities &
Exchange Commission. On June 21, 2002, the Company reincorporated from the state
of Washington to the state of Delaware and simultaneously changed its name from
La Jolla Fresh Squeezed Coffee Company, Inc. to Javo Beverage Company,
Inc.  In September 2008, Sorisole was dissolved.  On
September 24, 2008, the Company incorporated a wholly owned subsidiary Javo
Dispenser, Inc. in the state of Delaware.  Javo Dispenser, Inc. has
not been capitalized and had no business activity in 2009.





BUSINESS
DESCRIPTION





Javo® Beverage Company is an
innovator and leader in the manufacture of coffee and tea-based dispensed
beverages, drink mixes and flavor systems. The Company has successfully
commercialized a proprietary brewing technology that yields fresh brewed coffees
and teas that are flavorful, concentrated and stable. As a result, they have
broad applications in the food service, food manufacturing and beverage
industries. For food service industry customers, Javo combines great
tasting coffees, teas and specialty beverages with the added convenience and
efficiency of dispenser-based systems. For food and beverage processors and
retailers looking for authentic coffee and tea flavors for their packaged foods
and ready-to-drink beverages, Javo supplies customized beverage formulations,
extracts, and flavors.





Over the
last ten years, consumers have become accustomed to drinking premium coffees and
teas that they discovered in specialty coffee shops.  Restaurants and
food service institutions wishing to cater to these same consumers are learning
that they must offer and serve a broader, more sophisticated beverage
menu.  Specialty coffee and tea beverages are operationally
challenging due to their long preparation times, short shelf lives and high
amounts of waste.  Today food service operators are searching for
turnkey beverage solutions that fit their current operating system while meeting
the increasingly higher quality standards of coffee shop style
beverages.  The Company’s specialty coffee and tea programs and
business model benefit from this market trend because they give foodservice
operators a familiar and operationally efficient dispensing platform from which
to serve and profit from these new beverages.





The
Company has a growing list of national and regional customers, including many of
the industry’s leading convenience store chains, contract foodservice operators
and chain restaurants.  Javo’s products reach these customers through
a national network of broadline and specialty distributors including Gordon
Foodservice, Shamrock Foods, Performance Food Group, McLane Foodservice, EBY
Brown, Sysco Food, and US Foodservice.





1





PRODUCTS





Javo
employs a proprietary brewing technology to manufacture coffee and tea drink
mixes and flavor systems that are more flavorful, more stable and easier for
customers to operate than competitive solutions.  At a time when
coffee shop-style beverages are proliferating to a growing number of the
estimated 2.5 million food service locations in the United States, Javo’s unique
production capabilities have equipped it to offer its customers the opportunity
to serve specialty beverage programs for hot “on- demand” coffee and for
specialty dispensed iced coffee and tea, but without the need to install and
learn a barista-style operating system.





The
Company addresses the needs of high-volume food service operators such as
hospitals, casinos, hotels, sports parks, universities, military bases and
caterers who are challenged to serve consistent, high quality coffees and teas,
with a variety of beverage concentrates that may be conveniently dispensed
“on-demand” from equipment similar to fountain juice and soda
machines.   Javo coffee concentrates arrive to the operator in
refrigerated bag-in-box packages ready for loading into dispensers that once
installed, create recurring revenue for Javo.  Javo’s hot coffee
program offers nine proprietary varieties with a concentration level as strong
as 45 parts water to 1 part coffee extract including: Fair Trade Organic French
Roast, 100% Colombian and House Blend in both regular and decaffeinated
varieties.





Javo was
an early innovator and is now a leading supplier of iced coffees and lattes that
may be dispensed from cold drink concentrate dispensers. The Company’s iced
coffee has been aggressively adopted within the U.S. convenience store industry,
which has more than 140,000 retailing sites.  Many of the largest
regional and national chains now feature Javo’s dispensed program at some or all
of their stores.  The Company’s specialty iced coffee product line
offers ten unique flavors with concentration levels as high as 7 to
1.  The most popular selections in this product line include Mocha
Latte, French Vanilla Latte, Caramel Latte, Hazelnut Iced Coffee and 100%
Colombian Iced Coffee.





Javo has
negotiated and contracted for a preferred position relative to other on-demand
coffee competitors.  Typically, the customer is obligated to purchase
products from Javo either exclusively or on a restricted basis for a period of
time, usually 2-5 years, a sufficient for Javo to earn a satisfactory return on
its dispensing equipment.





For other
food service operators and specialty coffee shops that have expanded their
beverage menus to serve increasingly popular specialty iced coffee and tea
flavored beverages, Javo offers a line of packaged beverage syrups and flavors
that quickly and easily prepare complex, value added drinks without the
requirement of expensive brewing equipment or highly trained
staff.  Varieties offered include:  Mocha Latte, French
Vanilla Latte, Lemonade Green Tea and Vanilla Black Tea, all for specialty
blended beverages.





The
Company enables food and beverage suppliers to the retail industry to better
align their coffee and tea flavored products to the elevated quality standards
of today’s consumer by supplying bulk flavor systems for institutional
customers.  Javo’s bulk packaged coffee and tea flavors are ideal for
these applications since they are freshly brewed, all natural, and highly
concentrated.  The Company’s proprietary brewing process uses only
water and avoids the punishing heat of other extraction methods that can
de-stabilize the flavor system prior to its use in packaged drink, ice cream,
yogurt, or confectionary applications.





The
Company continually enhances its lineup of dispensed specialty beverages with
the introduction of new product lines and flavor extensions to existing
programs.  The Company’s hot on-demand coffee portfolio has been
enhanced by the introduction of the first-ever dispensed coffee certified as
both fair trade and organic, as well as the first on-demand coffee certified by
the Rainforest Alliance®.  In 2009, Javo’s varieties of iced coffees
grew to include: Hazelnut Latte, Mocha Mint and Pumpkin Spice
Latte.  Also in 2009, the Company continued to penetrate the large and
growing iced tea market with its line of six specialty tea blends that feature
fresh brewed tea in a bag-in-box format capable of being dispensed from cold
drink concentrate equipment.





2





DISTRIBUTION





The
Company distributes its products through multiple, well established food
distribution methods.  Javo's dispensed on-demand coffee and tea
beverages utilize broad line food service distributors that supply a complete
range of food, beverage, and consumables to food service
operators.  The Company continues to expand the number of national and
regional distributors established to deliver its beverage concentrates to
restaurants in the United States and its products are currently stocked at
distribution centers operated by Sysco Foods, US Foodservice, Gordon Foods,
Shamrock Foods, McLane, Core-mark, EBY Brown, Dawn Foods and other broad line
and specialty distributors.  These distributors purchase Javo’s
products, manage inventories, process orders and deliver products as needed by
the Company’s food service customers.  In the case of chain restaurant
operators, designated captive distribution providers operate in a similar
fashion.  Javo’s distributors deliver its bag-in-box products to the
end user, typically a hospital, casino, hotel or convenience store, when regular
orders are placed for other restaurant supplies.  The end user places
the product into a dispenser usually supplied by Javo and serves fresh hot
and/or iced coffee to their customers, employees and/or
patients.  Javo supplies its industrial flavor systems to its food and
beverage manufacturing customers by shipping bulk extracts directly to the food
processing location.





SALES
AND SERVICE ORGANIZATIONS





Javo
employs a direct national sales force to communicate and demonstrate its product
value propositions to restaurants, convenience stores, healthcare and other
institutional food service operators and food distributors.  The
Company directed a major expansion of its sales capabilities in 2007 and 2008 to
better compete for national coffee and tea contracts.   As a
result the Company added a number of important national and regional food
purchasing organizations, convenience store chains and governmental agencies to
its customer group.  In many cases, Javo receives sales assistance
from its distributors, equipment suppliers and partner brands in initiating
sales efforts.





Javo’s
service organization manages all aspects of its equipment program, including:
installations, asset tracking, emergency service and preventive
maintenance.  To supplement its capabilities, Javo frequently employs
contract service partners who have been trained and certified by the Company to
install and service its dispensing equipment.





3


COMPETITION





Javo has
several significant direct competitors for its dispensed hot coffee business
offering in the United States, the largest being Douwe Egberts® Coffee Systems,
a brand of Sara Lee Corporation.   Most competitors offer either
frozen products (in order to overcome extract shelf-life and stability
limitations) or ambient, “shelf stable” products that rely on more aggressive
processing and preservatives to maintain their shelf life.  Management
believes that the Company’s ability to offer freshly produced, refrigerated
extracts gives it a competitive advantage in the market for on-demand
coffee that is increasingly quality and flavor conscious.  While each
of these companies has significantly larger financial resources and brand
awareness, management believes that each has distinct disadvantages
compared to Javo in product quality, features of their dispensing systems, and
equipment service.  Javo’s dispensed coffees are typically priced
favorably compared to major competitors’ products.





Even
though these companies are likely to dedicate substantial resources toward
the launch of their new products, an estimated 97% of the serving locations
in the United States still utilize traditional roast-and-ground preparation,
leaving a large potential market for conversion of traditional brewing to a
dispensing format offering high quality “on demand” coffee, such as that offered
by Javo.





OPERATIONS





Javo
operates a 40,000 square foot facility in Vista, California near San Diego that
houses all of its operations including its corporate office and manufacturing
infrastructure.  This facility receives coffees and teas and extracts
them for its various food service products.  Recently, Javo upgraded
and expanded key aspects of its manufacturing
capabilities.  Specifically, the Company expanded its in-house
roasting capacity and integrated the processing and packaging of iced coffees
and teas.  These initiatives significantly improved product quality,
expanded manufacturing capacity, and reduced costs.  Javo uses, as
necessary, off-site distribution and storage facilities as well as third-party
co-manufacturers to produce products in specialty processing and packaging
formats.





The Vista
facility houses the research and development laboratory where the Company
performs product design and formulation work both for its own products and for
those of its customers.  The staff continues to enhance its ability to
customize and improve the quality and variety of coffee and tea
products.





SEASONALITY





Sales of
hot and iced dispensed products are somewhat seasonal, with the second and third
calendar quarters accounting for the highest sales volumes for iced dispensed
products and the first and fourth calendar quarters the highest sales volumes
for hot dispensed products.





4





INTELLECTUAL
PROPERTY





Javo has
developed and owns intellectual property in the areas of manufacturing, new
product development, and product branding.  Most importantly, the
Company has developed what it believes is a novel method of extracting coffee
and tea.  This process produces concentrated extracts that combine
excellent flavor, purity, stability, and yield on a commercial scale allowing
the Company to offer concentrated products that meet demanding quality
expectations.  Javo’s research and development department has
developed a library of products around this extraction technology that includes
proprietary bean blends, flavors, and stability systems in a variety of
dispensed and non-dispensed platforms.   Javo relies on trade
secret protection rather than patents to protect its extraction
technology.  While properly managed trade secret protection has
certain advantages, competitors could independently develop similar processes
and products, or could “reverse-engineer” our processes, which could result in
the loss of a competitive advantage. The Company also owns certain trademarks,
including Javo®, that are registered with the United States Patent and Trademark
Office.  The Company continues to expand and refine its branding as it
develops new variations of its logo and trade dress for its new product
lines.





GREEN
COFFEE COST AND SUPPLY





The
Company utilizes outside brokers for its supply of un-roasted, or “green,”
coffees.  Coffee is a large globally traded commodity and its supply
and price are subject to volatility and cyclical swings in commodity markets,
based on supply and demand and other market forces.  In addition, a
number of other factors, such as pest damage and weather-related crop failure
could cause coffee prices to climb.  Sustained coffee cost increases are
typically passed on to customers through price increases.  Short-term
price movements could affect our results and long-term price increases could
temper demand and growth. The Company typically makes forward commitments to
ensure timely supply and more stable pricing.  The overall coffee
green bean prices are currently climbing due to some of these factors mentioned
above.  The Company expects that it and other coffee sellers will
raise prices of hot coffee concentrates to maintain margins sometime during
2010.





EMPLOYEES





As of
December 31, 2009, the Company employed 61 full-time employees. The Company also
uses outside consultants, brokers and other independent contractors from time to
time.  None of its employees are represented by a union and the
Company believes its employee relations to be generally good.





CORPORATE
GOVERNANCE AND EMPLOYEE DEVELOPMENT





The
Company has a Code of Ethics, which is posted on its website at
www.javobeverage.com.  In addition, the Company believes it has a
highly inclusive and collaborative work environment that encourages employees’
individual growth and personal awareness through a culture of personal
accountability and continuous learning.





GOVERNMENT
REGULATION





The
Company’s facility, operations and products are subject to various laws and
regulations relating to health and safety and environmental issues. The
operations of its in-house roaster are subject to various air quality and
environmental laws and its products are subject to various laws and regulations
to ensure food safety.  While the Company believes that its operations
are compliant with these laws, a finding of non-compliance could potentially
interfere with the Company’s operations.





FOOD
AND MANUFACTURING SAFETY





On a
periodic basis, the Company has an independent company audit its food safety and
manufacturing processes to ensure it maintains the highest industrial standard
for health and safety of its customers and employees.   The
Company had its production facility audited by a third party agent in 2009 and
received a rating of Superior, the highest evaluation possible.





AVAILABLE
INFORMATION





The
Company files annual and quarterly reports, proxy statements and other documents
with the Securities and Exchange Commission (“SEC”) under the Securities
Exchange Act of 1934 (the “Exchange Act”).  The public may read and
print any materials that Javo Beverage Company files with the SEC, free of
charge, through links to those filings on its website at www.javobeverage.com,
under Investor Relations – SEC Filings or directly through the SEC at
www.sec.gov.





5





ITEM
1A.  RISK FACTORS





In
addition to the other information in this report, you should carefully consider
the following risks.  If any of the following risks actually occur,
the Company’s business, financial condition and/or operating results could be
materially adversely affected.  The risk factors summarized below are
not the only risks Javo faces.  Additional risks and uncertainties not
currently known to the Company or those we currently deem to be immaterial also
may materially adversely affect the business, financial condition and/or
operating results.





The
Company has never been profitable and may need to obtain additional funding to
enable it to continue to execute its business plan.





The
Company has never been profitable and management’s current business plans rely
on growth in future revenue to supplement the Company’s liquid
assets.  The Company has  implemented cost cutting savings
through process changes, right sizing staff, in-house processing and packaging
of its syrups and mixes and longer term vendor payment arrangements. There can
be no assurance that the Company will achieve additional revenue growth, reach
profitability or find additional capital to fund ongoing operations, as needed.
If additional funds are required and not available, the Company may also be
required to curtail operations or to seek funds on unfavorable
terms.





The
current economic crisis may affect our revenues and our ability to access
capital.





The
ongoing global recession and liquidity crisis may adversely affect our
business.  The recession and higher unemployment rates may result in
lower revenues from product sales as end customers cut back on discretionary
spending.  We may also experience longer payment cycles from our
customers, as they manage their accounts payable in an effort to preserve
cash.  Additionally, the credit crisis has made financing much harder
to obtain and, when it is available, the available terms are often
unattractive.  We will need additional capital to service our debt
obligations and to fund our growth and the lack of available capital could
adversely affect our growth potential and results of operations.





The
Company depends on access to commodity goods and services at competitive prices
and access to co-manufacturers, distributors and dispenser manufacturers. The
Company also currently houses its principal manufacturing operations in one
location, which would result in at least a temporary cessation of its production
in the event of a catastrophic disaster.





As the
Company grows, it must be able to obtain at competitive prices substantial
amounts of certain green coffee beans and manage roasting and grinding costs.
Commodity agricultural goods such as coffee periodically experience significant
fluctuations in availability and prices, which could in turn, cause significant
interruptions in the manufacturing output and sales by the Company. Typically
these additional costs are passed through to customers as price increases.
Additionally, the Company uses the services of outside distributors and
dispenser manufacturers as well as contract manufacturing providers to produce
certain of its products that require particular processing and manufacturing
infrastructure not in place at the Company’s facility. While there are multiple
providers of such services, a disruption in service by such providers could
disrupt the Company’s production and revenues and the expansion of the Company’s
revenues will rely, in part, on the ability of these providers to accommodate
growth. Moreover, the Company also currently houses its principal manufacturing
operations in one location. In the event of a catastrophic disaster, such as
complete destruction of the Company’s Vista plant by fire or earthquake,
particularly in light of the Company’s increasing production volume, the
Company’s manufacturing operations would be at least temporarily halted during
implementation of the Company’s disaster recovery plan. Such a cessation of
manufacturing could materially and adversely impact the Company.  The
Company does have business interruption insurance that would protect against
some of this loss.





The
Company has seen particular volatility in the Colombian coffee bean market with
pricing increasing out of proportion to other coffee origins.  In the
second half of 2009, the Colombian shortage spread to other origins, especially
in the Americas.  When the price of a certain origin of beans becomes
temporarily elevated relative to the market, the Company generally has the
option of reformulating coffee blends used in the manufacture of its brewed
coffees or increasing product prices in order to maintain profit
margins.  These fluctuations in the market tend to affect all of the
suppliers in the industry in a similar fashion.





6


The
Company is in a very competitive industry.





Competition
to provide coffee products is intense and Javo expects the competition to
increase. There can be no assurance that other products that are functionally
equivalent or similar to the Company’s products have not been developed or are
not in development. As a result of their size and breadth, certain of the
Company’s competitors have been able to establish and in the future may create
new managed contract accounts by which they gain a disproportionate share of a
customer’s demand. Additionally, there is no assurance that consumers will
continue to purchase the Company’s products in the future or that it will be
able to anticipate market demands or trends. Javo may also be unable to
penetrate new markets.  If its revenues decline for any of these reasons,
the Company’s financial condition and operating results will be adversely
affected.





The
Company relies on a relatively new and proprietary extraction
process.





The
Company has developed what it believes is a novel method of extracting roasted
coffee and tea into a liquid concentrate. The Company also believes that it
derives a competitive advantage versus other liquid concentrate manufacturers
from the quality of concentrate that this process produces. The Company
currently relies on trade secret protection to prevent others from using this
process. Trade secret protection is only as effective as the Company’s ability
to keep the essential and material aspects of its process secret using
contractual and physical measures and the inability of competitors to reverse
engineer our processes. There is no guarantee that the Company’s efforts in this
regard can or will prevent a competitor from obtaining the Company’s secrets or
from independently developing the same or similar process.





The
Company is subject to various laws and regulations and from time to time may be
party to litigation with third parties. The violation of such applicable laws
and regulations or the unfavorable outcome of such litigation could materially
and adversely affect the Company.





The
manufacture, sale and distribution of Javo products are subject to various
federal, state and local laws and regulations. The Company’s status as a
reporting public company subjects it to various laws and regulations and it is
also subject to various accounting, tax and other laws and regulations. New laws
and regulations may also be instituted in the future that could apply to the
Company.  Failure to comply with such laws can result in fines and other
penalties. For example, if a regulatory authority deems that a product or
production run is not in compliance with applicable laws or regulations, the
Company could be fined or may have to institute a recall of such product. The
application of new laws and regulations and fines and other penalties relating
to noncompliance with laws and regulations could adversely affect the Company’s
financial condition and operations. Moreover, the Company could be party to
litigation, whether based on contract claims, product liability or otherwise
that could result in significant liability for the Company and adversely
affect its financial condition and operations.





The
Company manufactures and sells beverage products for consumption by
consumers.





The
Company manufactures and sells hot and iced concentrates that ultimately are
consumed by the general public.  Even though the Company believes it
manufacturing processes and product are safe, the Company has some potential
product risk from the consuming public.  The Company could be party to
litigation based on consumer claims, product liability or otherwise that could
result in significant liability to the Company and adversely affect its
financial condition and operations.





Trading
volume in the Company’s securities is limited and sporadic.





The
Company’s Common Stock is traded on the Over-the-Counter Bulletin Board under
the trading symbol “JAVO.” While currently there is an existing limited and
sporadic public trading market for the Company’s securities, the price paid for
the Company’s Common Stock on the Over-the-Counter market and the amount of
stock traded are volatile. There can be no assurance that these markets will
improve in the future.  In addition, issuance of additional shares
would dilute current shareholders, which dilution will likely affect stock
prices.





The
Company’s stock price is subject to volatility.





The
Company’s Common Stock price has experienced and is likely to continue to
experience significant price and volume fluctuation in the future. Such
fluctuations could adversely affect the market price of the Common Stock without
regard to its operating performance. In addition, management believes factors
such as the ability to generate sales, as well as other factors, could cause the
price of the Company’s Common Stock to fluctuate significantly.





7


The
Company expects growth and will face challenges in managing this
growth.





Compared
to its competitors, the Company is still a small organization with resources for
limited production, sales and marketing and administration. If the Company does
not manage growth well, it may lose sales or damage customer relationships,
which could negatively affect its results and long-term prospects.





The
Company may not be able to retain or hire key personnel.





To
operate successfully and manage potential future growth, the Company must
attract and retain qualified managerial, sales, and other personnel. Javo
faces competition for and cannot assure that it will be able to attract and
retain such qualified personnel. If Javo loses its key personnel or is unable to
hire and retain additional qualified personnel in the future, its business,
financial condition and operating results could be adversely
affected.





The
Company’s customer contracts generally do not provide for guaranteed sales
levels and the Company may not realize the expected revenues from any given
contract.





The
majority of the Company’s customer contracts establish only the general terms
and conditions of the customer relationship. Because these contracts do not
contain minimum purchase requirements, Javo cannot be certain that it will
actually realize expected sales levels under these agreements.  The Company
qualifies its customers prior to installation of dispensers and reserves the
right to remove and place dispensers in other customer
locations.  However, the loss of a major customer could render a
larger than usual number of dispensers as non-productive until they could be
redeployed to new accounts.  Such interruptions would cause a loss of
revenue.





Additional
capital to fund growth and continuing operations is not assured.





If the
Company expands more rapidly than currently anticipated, or if its working
capital needs exceed current expectations, then it may need to raise additional
capital through public or private equity offerings or debt financings. The
Company continues as a matter of ordinary business to seek debt financing for
the purchase of liquid coffee dispenser to be placed at customer
locations.  Future capital requirements depend on many factors
including its dispenser acquisitions, manufacturing, research and development
and sales and marketing activities. The Company does not know whether additional
financing will be available when needed, or will be available on terms favorable
to it. If the Company cannot raise needed funds on acceptable terms, it may not
be able to develop or enhance its products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
To the extent the Company raises additional capital by issuing equity
securities, its stockholders may experience substantial dilution and the new
equity securities may have greater rights, preferences or privileges than
existing Common Stock.  Currently, there are limited authorized common
shares available to issue in return of capital.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM
2.  PROPERTIES





Javo's
facilities, including its principal executive offices are located in Vista,
California in San Diego County. The Company entered into a seven-year lease of
an approximately 40,000 square foot building on June 30, 2002.  In
2008, the Company extended the lease to November 2010.  The Vista
facility houses Javo's entire operations.   The Company is currently
in negotiations for a new lease.   In January 2008, the Company
rented on a month-to-month basis an additional 5,000 square feet of warehouse
space near its Vista facility to store certain raw and packaging materials used
in production.





ITEM
3.  LEGAL PROCEEDINGS





At the
present time, the Company has no material pending legal
proceedings.  However, from time to time, the Company may become
involved in various minor litigation matters arising out of the normal conduct
of its business, including litigation relating to commercial transactions,
contracts, employment disputes and other matters. In the opinion of management,
the final outcome of any such litigation will not have a material effect on our
financial position, results of operations or cash flows.





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





At the
annual meeting, the then current board members were re-elected.  There
were no other matters submitted to a vote of our security holders during the
fourth quarter of fiscal year 2009.


8





PART
II





ITEM
5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





MARKET
INFORMATION





The
Company's Common Stock is traded over-the-counter and quoted on the OTC
Electronic Bulletin Board under the symbol "JAVO." The reported highest and
lowest prices for the Common Stock for each quarter as reported by the NASDAQ
OTC Bulletin Board are shown below for the last two fiscal years and for the
portion of the first quarter of the fiscal year 2010 as shown below. These
quotations represent prices between dealers and do not include retail markup,
markdown or commission nor do they necessarily represent actual
transactions.





2008
            High
            LowFirst
      Quarter
            $0.88
            $0.42Second
      Quarter
            $0.94
            $0.48Third
      Quarter
            $0.75
            $0.40Fourth
      Quarter
            $0.45
            $0.092009First
      Quarter
            $0.28
            $0.11Second
      Quarter
            $0.40
            $0.18Third
      Quarter
            $0.33
            $0.18Fourth
      Quarter
            $0.24
            $0.102010First
      Quarter (through February 17, 2010)
            $0.21
            $0.11





The
Company’s preferred stock and debt securities do not trade on a public
exchange.





SHAREHOLDERS





As of
December 31, 2009, the Company had approximately 500 holders of record of its
Common Stock and 298,803,342 shares of Common Stock outstanding.  In
addition, the Company had approximately 160 holders of record of its Series B
Preferred Stock and 2,362,746 shares of its Series B Preferred Stock
outstanding.





DIVIDENDS





The
Company has never declared a dividend to its Common Stockholders and does not
expect to declare any dividends in the foreseeable future.





In July
2009, the Company issued 214,794 shares of Series B Preferred Stock as payment
in kind for a $1 dividend per share to the holders of the Series B Preferred
Shares.  The issuance increased the shares of Series B Preferred
shares outstanding to 2,362,746.





9





STOCK
PERFORMANCE GRAPH












The above
stock performance graph compares the change in value of a $100 investment in
Javo Beverage Company, Inc., and an assumed $100 investment in indexes for Dow
Jones Beverages Index and Standard and Poor’s Small  Cap Index at the
end of 2004 and each year end through December 2009.





RECENT
SALES OF UNREGISTERED SECURITIES





In
November 2009, the Company received a $4 million investment from the sale of
units of a private debt offering.  As part of the investment, the
Company issued a 66-month subordinated promissory note due in a balloon payment
of interest and principal in May 2015 and 15,000,000 shares of common
stock.  In addition, the investor committed to advance an additional
$3,500,000 under like terms, for the payment of interest and principal on the
$12,000,000 8-year promissory note owed to the same investor.  The
Company is required to issue a 66 month promissory note and 3.75 shares of
common stock in order to receive advances on this $3,500,000
commitment.  At the present time, the Company has a limited number of
authorized common stock available to issue and therefore is limited in the
amount that they can draw on this additional commitment.  These
offerings were completed as a private placement under Section 4(2) of the
Securities Act of 1933 and Rule 506 and Regulation D promulgated there under.





PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED ENTITIES





None.


10





ITEM
6.  SELECTED FINANCIAL DATA





The table
below shows selected financial data for the Company’s last five fiscal years as
indicated and quarterly data for the last two fiscal years.   The
Company’s fiscal year ends on December 31 of each year.  There were no
dividends paid to Common Stockholders during the past four years.  
The prior year amounts for marketing allowances have been reclassified from
selling expenses to returns and allowances to conform to the current year
presentation. This reclassification did not affect net losses, but it reduced
gross profit and operating expenses.  In accordance with FASB ASC 250, this
reclassification is required to be presented as a restatement for prior years.
The data presented was derived from its audited financial statements and should
be read in conjunction with those financial statements and notes thereto, and
with Management’s Discussion and Analysis of the Financial Condition and Results
of Operations included in Part II, Item 7 of this Form 10-K for the relevant
period.





2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(In
      thousands $)Restated
            
            
            Restated
            
            
            Restated
            
            
            RestatedGross
      revenue
            
            $
            23,097
            
            
            $
            19,561
            
            
            $
            12,607
            
            
            $
            10,387
            
            
            $
            6,227Returns
      and allowances
            
            
            (4,409
            )
            
            
            (2,385
            )
            
            
            (956
            )
            
            
            (387
            )
            
            
            (145
            )Net
      sales
            
            
            18,688
            
            
            
            17,176
            
            
            
            11,651
            
            
            
            10,000
            
            
            
            6,082Gross
      profit
            
            
            7,727
            
            
            
            5,951
            
            
            
            3,145
            
            
            
            3,189
            
            
            
            1,974Loss
      from operations
            
            
            (6,564
            )
            
            
            (7,689
            )
            
            
            (7,105
            )
            
            
            (2,804
            )
            
            
            (2,032
            )Net
      loss
            
            
            *(13,658
            )
            
            
            **(10,770
            )
            
            
            ***(7,449
            )
            
            
            ****(9,926
            )
            
            
            (4,844
            )Total
      assets
            
            
            19,984
            
            
            
            20,249
            
            
            
            18,382
            
            
            
            21,175
            
            
            
            4,579Warrant
      liability
            
            
            9
            
            
            
            57
            
            
            
            2,389
            
            
            
            7,532
            
            
            
            --Debt
      obligations
            
            
            15,907
            
            
            
            9,525
            
            
            
            9,414
            
            
            
            8,630
            
            
            
            12,225Stockholders’
      equity/(deficit)
            
            
            (2,528
            )
            
            
            (2,045
            )
            
            
            152
            
            
            
            3,042
            
            
            
            (8,873
            )Loss
      per share
            
            $
            (0.05
            )
            
            $
            (0.07
            )
            
            $
            (0.05
            )
            
            $
            (0.07
            )
            
            $
            (0.03
            )





*The 2009
net loss includes non-cash option compensation expense of $820,000, non-cash
compensation expense of $250,000 and depreciation and amortization expense of
$9.8 million.  Approximately $6.3 million of the $9.1 million reported
interest expense was non-cash accretion of debt discount. Of the $6.3 million in
non-cash accretion expense, $4.9 million was the write off of the remaining
non-cash debt discount related to balance of the Company’s 2006 Senior
Convertible Debt redeemed at a discount in April 2009.  In addition
the net loss includes non-cash derivative income of $47,000.





**The
2008 net loss includes non-cash option compensation expense of $1.4 million and
depreciation and amortization expense of $5.9 million.  Approximately
$4.3 million of the $5.9 million reported interest expense was non-cash
accretion of debt discount. In addition it includes non-cash derivative income
of $2.3 million.





***The
2007 net loss includes non-cash option compensation expense of $964,000 and
depreciation and amortization expense of $5.1 million.  Approximately
$4.5 million of the $6.2 million reported interest expense was non-cash
accretion of debt discount/premium. In addition it includes non-cash derivative
income of $5.1 million.





****The
2006 net loss includes a one-time non-cash expense of $5.3 million in connection
with the conversion of $13.75 million in promissory notes and related accrued
interest of $4.0 million into Series B Preferred Stock, depreciation and
amortization expense of $5.4 million and non-cash derivative income of
$405,000.





11


Summarized
quarterly financial information for 2009 and 2008 follows (in
thousands):





First
            
            
            Second
            
            
            Third
            
            
            Fourth
            
            
            Total2009
      quarter
            
            Restated
            
            
            Restated
            
            
            RestatedGross
      revenue
            
            $
            4,667
            
            
            $
            7,088
            
            
            $
            6,527
            
            
            $
            4,815
            
            
            $
            23,097Returns
      and allowance
            
            
            (768
            )
            
            
            (1,043
            )
            
            
            (1,422
            )
            
            
            (1,176
            )
            
            
            (4,409
            )Gross
      Profit
            
            
            1,570
            
            
            
            2,760
            
            
            
            2,265
            
            
            
            1,132
            
            
            
            7,727Net
      sales
            
            
            3,899
            
            
            
            6,045
            
            
            
            5,105
            
            
            
            3,639
            
            
            
            18,688Loss
      from operations
            
            
            (1,814
            )
            
            
            (904
            )
            
            
            (1,301
            )
            
            
            (2,545
            )
            
            
            (6,564
            )Net
      income/(loss)
            
            
            (3,189
            )
            
            
            (4,694
            )
            
            
            (2,525
            )
            
            
            (3,250
            )
            
            
            (13,658
            )(Loss)
      per share
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.05
            )2008
      quarter
            
            Restated
            
            
            Restated
            
            
            Restated
            
            
            Restated
            
            
            RestatedGross
      revenue
            
            $
            3,893
            
            
            $
            6,723
            
            
            $
            5,708
            
            
            $
            3,237
            
            
            $
            19,561Returns
      and allowance
            
            
            (381
            )
            
            
            (538
            )
            
            
            (720
            )
            
            
            (746
            )
            
            
            (2,385
            )Gross
      Profit
            
            
            1,103
            
            
            
            2,757
            
            
            
            1,624
            
            
            
            468
            
            
            
            5,952Net
      sales
            
            
            3,512
            
            
            
            6,185
            
            
            
            4,988
            
            
            
            2,491
            
            
            
            17,176Loss
      from operations
            
            
            (1,675
            )
            
            
            (576
            )
            
            
            (2,405
            )
            
            
            (3,033
            )
            
            
            (7,689
            )Net
      income/(loss)
            
            
            (1,838
            )
            
            
            (2,220
            )
            
            
            (2,684
            )
            
            
            (4,028
            )
            
            
            (10,770
            )(Loss)
      per share
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (0.07
            )





Fourth
Quarter Adjustments





In the
fourth quarter of 2009, the Company recorded adjustments for its debt
discount.  Originally, the Company calculated the discount based on an
estimated stock price when the stock was highly volatile.  The estimate was
revised using actual stock prices on the dates the instruments were executed
resulting in a fourth quarter adjustment of $112,851 to the statement of
operations and a reclassification between liabilities and equity, decreasing
liabilities with an equal increase in equity of $2,086,989.  The
Company also reclassified the presentation of its marketing allowances from
selling expenses to net sales.





Below is
a table showing the quarterly income statement for 2008 and 2009 before and
after the reclassification of the marketing allowances.  See
discussion above.





First
            
            
            Second
            
            
            Third
            
            
            Fourth
            
            
            TotalBefore
            
            
            After
            
            
            Before
            
            
            After
            
            
            Before
            
            
            After
            
            
            After
            
            
            Before
            
            
            After2009
      quarterGross
      revenue
            
            $
            4,667
            
            
            $
            4,667
            
            
            $
            7,088
            
            
            $
            7,088
            
            
            $
            6,527
            
            
            $
            6,527
            
            
            $
            4,815
            
            
            $
            22,684
            
            
            $
            23,097Returns
      and allowance
            
            
            (20
            )
            
            
            (768
            )
            
            
            (42
            )
            
            
            (1,043
            )
            
            
            (222
            )
            
            
            (1,422
            )
            
            
            (1,176
            )
            
            
            (2,828
            )
            
            
            (4,409
            )Net
      sales
            
            
            4,647
            
            
            
            3,899
            
            
            
            7,046
            
            
            
            6,045
            
            
            
            6,305
            
            
            
            5,105
            
            
            
            3,639
            
            
            
            19,856
            
            
            
            18,688Gross
      profit
            
            
            2,318
            
            
            
            1,570
            
            
            
            3,761
            
            
            
            2,760
            
            
            
            3,464
            
            
            
            2,265
            
            
            
            1,132
            
            
            
            11,844
            
            
            
            7,727Loss
      from operations
            
            
            (1,814
            )
            
            
            (1,814
            )
            
            
            (904
            )
            
            
            (904
            )
            
            
            (1,301
            )
            
            
            (1,301
            )
            
            
            (2,545
            )
            
            
            (7,692
            )
            
            
            (6,564
            )Net
      income/(loss)
            
            
            (3,189
            )
            
            
            (3,189
            )
            
            
            (4,694
            )
            
            
            (4,694
            )
            
            
            (2,525
            )
            
            
            (2,525
            )
            
            
            (3,250
            )
            
            
            (11,550
            )
            
            
            (13,658
            )(Loss)
      per share
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.05
            )2008
      quarterGross
      revenue
            
            $
            3,893
            
            
            $
            3,893
            
            
            $
            6,723
            
            
            $
            6,723
            
            
            $
            5,708
            
            
            $
            5,708
            
            
            $
            3,237
            
            
            $
            (1,533
            )
            
            $
            19,561Returns
      and allowance
            
            
            (6
            )
            
            
            (381
            )
            
            
            (39
            )
            
            
            (538
            )
            
            
            (48
            )
            
            
            (720
            )
            
            
            (746
            )
            
            
            16,357
            
            
            
            (2,385
            )Gross
      profit
            
            
            1,479
            
            
            
            1,103
            
            
            
            3,256
            
            
            
            2,757
            
            
            
            2,295
            
            
            
            1,624
            
            
            
            468
            
            
            
            8,225
            
            
            
            5,952Net
      sales
            
            
            3,887
            
            
            
            3,512
            
            
            
            6,684
            
            
            
            6,185
            
            
            
            5,660
            
            
            
            4,988
            
            
            
            2,491
            
            
            
            14,824
            
            
            
            17,176Loss
      from operations
            
            
            (1,675
            )
            
            
            (1,675
            )
            
            
            (576
            )
            
            
            (576
            )
            
            
            (2,405
            )
            
            
            (2,405
            )
            
            
            (3,033
            )
            
            
            (7,689
            )
            
            
            (7,689
            )Net
      income/(loss)
            
            
            (1,838
            )
            
            
            (1,838
            )
            
            
            (2,220
            )
            
            
            (2,220
            )
            
            
            (2,684
            )
            
            
            (2,684
            )
            
            
            (4,028
            )
            
            
            (13,424
            )
            
            
            (10,770
            )(Loss)
      per share
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (0.07
            )
            
            $
            (0.07
            )





12


ITEM
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A)





The
following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes included in this report and,
except for historical information, may contain forward-looking statements within
the meaning of applicable federal securities law.  See “Forward
Looking Statements” under Part I, Item 1.





Overview





The
Company is a manufacturer of coffee and tea concentrates, drink mixes, and
flavor systems serving the food service, food and beverage manufacturing, and
retail industries. Javo employs proprietary brewing technology to produce fresh
brewed coffees and teas that are flavorful, concentrated and stable and offers a
variety of beverage concentrates that may be dispensed on-demand from equipment
similar to fountain juice and soda dispensers.  The Company’s coffee
and tea concentrates arrive at the operator in refrigerated bag-in-box packages
ready for loading into dispensers that serve hot and over-ice beverages on an
as-needed basis.  For food service industry customers, it combines
great tasting coffees, teas and specialty beverages with the added convenience
and efficiency of dispenser-based systems. For food and beverage manufacturers
and retailers looking for authentic coffee and tea flavor for their packaged
foods and ready-to-drink beverages, Javo supplies customized beverage
formulations, extracts and flavors.





The
expansion of the Company’s dispensed beverage programs in 2009 within its
established group of national chains and networked customers were key
to its growth.  Prior to 2009, the Company had entered into
agreements for various coffee and tea programs with convenience store chains,
national purchasing organizations, contract foodservice operators and restaurant
chains and expansion to new locations within these networks resulted in the
additional installations of new 2,000 dispensed beverage locations being in
2009.  The new dispensing locations produced additional demand for the
Company’s coffee and tea concentrates.





The
Company expects to experience continued revenue growth during 2010 as it
benefits from earning a full year’s revenue from dispensing locations installed
during mid to late 2009.  Additionally, the Company anticipates that
its national sales force will continue to sell and manage the installation of
new dispensing locations at foodservice locations across the U.S.  To
the extent it is successful in growing its installed dispenser
base, the Company will need capital or sources of debt to fund this
expansion.  The Company anticipates continued improvement in operating
income and cash generation during 2010.





13


Results
of Operations





Comparative
Summary of GAAP Income Statements





The
following is a comparative table of income statements for years ended December
31, 2009, 2008, and 2007.  Below is a discussion and analysis of the
period-over-period changes. The 2008 and 2007 marketing allowances have been
reclassified from selling expenses to returns and allowances to conform to the
Company’s current year income statement presentation





ChangeIncome
      Statements
            
            2009
            
            
            2008
            
            
            2007
            
            
            2009
      to 2008
            
            
            2008
      to 2007Restated
            
            
            RestatedGross
      sales
            
            $
            23,097,334
            
            
            $
            19,560,988
            
            
            $
            12,607,076
            
            
            $
            3,536,346
            
            
            
            18.10%
            
            
            $
            6,953,912
            
            
            
            55.20%Returns
      and Allowances ****
            
            
            (4,408,682
            )
            
            
            (2,385,069
            )
            
            
            (956,759
            )
            
            
            (2,023,613
            )
            
            
            84.80%
            
            
            
            (1,428,310
            )
            
            
            149.30%Net
      sales
            
            
            18,688,652
            
            
            
            17,175,919
            
            
            
            11,650,317
            
            
            
            1,512,733
            
            
            
            8.80%
            
            
            
            5,525,602
            
            
            
            47.40%Cost
      of sales
            
            
            (10,961,560
            )
            
            
            (11,223,960
            )
            
            
            (8,504,863
            )
            
            
            262,400
            
            
            
            -2.30%
            
            
            
            (2,719,097
            )
            
            
            32.00%Gross
      profit $
            
            
            7,727,092
            
            
            
            5,951,959
            
            
            
            3,145,454
            
            
            
            1,775,133
            
            
            
            29.80%
            
            
            
            2,806,505
            
            
            
            89.20%Gross
      profit % of net sales
            
            
            41.3%
            
            
            
            34.7%
            
            
            
            27.0%
            
            
            
            
            
            
            
            6.7%
            
            
            
            
            
            
            
            7.7%Operating
      expenses:Selling
      and marketing
            
            
            (4,721,913
            )
            
            
            (4,976,564
            )
            
            
            (3,778,268
            )
            
            
            254,651
            
            
            
            -5.10%
            
            
            
            (1,198,296
            )
            
            
            31.70%General
      and administrative
            
            
            (9,568,715
            )
            
            
            (8,664,409
            )
            
            
            (6,472,440
            )
            
            
            (904,306
            )
            
            
            10.40%
            
            
            
            (2,191,969
            )
            
            
            33.90%Total
      operating expenses $
            
            
            (14,290,628
            )
            
            
            (13,640,973
            )
            
            
            (10,250,708
            )
            
            
            (649,655
            )
            
            
            4.80%
            
            
            
            (3,390,265
            )
            
            
            33.10%Total
      operating expenses % of net sales
            
            
            76.5%
            
            
            
            79.4%
            
            
            
            88.0%
            
            
            
            
            
            
            
            3.0%
            
            
            
            
            
            
            
            8.6%Loss
      from operations $
            
            
            (6,563,536
            )
            
            
            (7,689,014
            )
            
            
            (7,105,254
            )
            
            
            1,125,478
            
            
            
            -14.60%
            
            
            
            (583,760
            )
            
            
            8.20%Loss
      from operations % of net sales
            
            
            35.1%
            
            
            
            44.8%
            
            
            
            61.0%
            
            
            
            
            
            
            
            9.6%
            
            
            
            
            
            
            
            16.2%Other
      income (expenses):Interest
      income
            
            
            18,306
            
            
            
            165,058
            
            
            
            673,597
            
            
            
            (146,752
            )
            
            
            -88.90%
            
            
            
            (508,539
            )
            
            
            -75.50%Interest
      expense
            
            
            (9,070,702
            )
            
            
            (5,897,573
            )
            
            
            (6,200,874
            )
            
            
            (3,173,129
            )
            
            
            53.8%
            
            
            
            303,301
            
            
            
            -4.90%Cancellation  of
      debt and other income
            
            
            1,983,430
            
            
            
            339,121
            
            
            
            46,297
            
            
            
            1,644,309
            
            
            
            484.9%
            
            
            
            292,824
            
            
            
            632.50%Income
      from derivatives
            
            
            47,294
            
            
            
            2,332,444
            
            
            
            5,143,156
            
            
            
            (2,285,150
            )
            
            
            -98.00%
            
            
            
            (2,810,712
            )
            
            
            -54.60%Gain/(loss)
      on disposal of  assets
            
            
            (72,362
            )
            
            
            (20,014
            )
            
            
            (5,858
            )
            
            
            (52,348
            )
            
            
            261.60%
            
            
            
            (14,156
            )
            
            
            241.70%Total
      other expense $
            
            
            (7,094,034
            )
            
            
            (3,080,964
            )
            
            
            (343,682
            )
            
            
            (4,013,070
            )
            
            
            130.3%
            
            
            
            (2,737,282
            )
            
            
            796.50%Total
      other expense % of net sales
            
            
            38.0%
            
            
            
            17.9%
            
            
            
            2.95%
            
            
            
            
            
            
            
            -20.10%
            
            
            
            
            
            
            
            -15.0%Net
      loss $
            
            $
            *(13,657,570
            )
            
            $
            **(10,769,978
            )
            
            $
            ***(7,448,936
            )
            
            $
            (2,887,592
            )
            
            
            26.8%
            
            
            $
            (3,321,042
            )
            
            
            44.60%Net
      loss % of net sales
            
            
            73.1%
            
            
            
            62.7%
            
            
            
            63.9%
            
            
            
            
            
            
            
            -10.4%
            
            
            
            
            
            
            
            1.2%





*The 2009
net loss includes non-cash option compensation expense of $820,000, non-cash
compensation expense of $250,000 and depreciation and amortization expense of
$9.8 million.  Approximately $6.3 million of the $9.1 million reported
interest expense was non-cash accretion of debt discount. Of the $6.3 million in
non-cash accretion of debt discount, $4.9 million was the write-off of the
remaining non-cash debt discount related to our 2006 Senior Convertible debt
which was redeemed at a discount in April 2009.  In addition, the net
loss includes non-cash derivative income of $47,000.





** The
2008 net loss includes non-cash option compensation expense of $1.4 million and
depreciation and amortization expense of $6.2 million.  Approximately
$4.3 million of the $5.9 million reported interest expense was non-cash
accretion of debt discount.  In addition, the net loss includes
non-cash derivative income of $2.3 million.





***The
2007 net loss includes non-cash option compensation expense of $964,000 and
depreciation and amortization expense of $5.1
million.  Approximately $4.5 million of this $6.2 million reported
interest expense and was non-cash accretion of debt discount. In addition, the
net loss includes non-cash derivative income of $5.1 million.





****In
presenting the comparative income statements in the Form 10K for 2009, the
Company has reclassified marketing allowances paid to various customers through
bill backs or direct payments from a selling and marketing expense to a
reduction of gross sales in arriving at net sales.  Below find a table
showing a comparison of the two presentations of the income statements presented
in this Form 10K:





14


Reclassification
of Marketing Allowances





As
illustrated below the reclassification of marketing allowances in calculating
net sales has no effect on the Company’s gross sales, net loss from operations
or net loss. Additionally, selling and marketing expenses are expressed without
the variable marketing allowances giving the reader a better view of both the
variable marketing allowances and selling and marketing expenses.  The
variable marketing expenses are primarily paid to national account customers as
part of supply and pricing agreements.





Comparative
      Income Statements before & after
  reclassification





2008
            
            
            2007Before
            
            
            After
            
            
            Difference
            
            
            Before
            
            
            After
            
            
            DifferenceGross
      sales
            
            $
            19,560,988
            
            
            $
            19,560,988
            
            
            $
            --
            
            
            $
            12,607,076
            
            
            $
            12,607,076
            
            
            $
            --Returns
      and allowances
            
            
            (112,166
            )
            
            
            (2,385,069
            )
            
            
            2,272,903
            
            
            
            (47,944
            )
            
            
            (956,759
            )
            
            
            908,815Net
      sales
            
            
            19,448,822
            
            
            
            17,175,919
            
            
            
            2,272,903
            
            
            
            12,559,132
            
            
            
            11,650,317
            
            
            
            908,815Cost
      of sales
            
            
            (11,223,960
            )
            
            
            (11,223,960
            )
            
            
            --
            
            
            
            (8,504,863
            )
            
            
            (8,504,863
            )
            
            
            --Gross
      profit
            
            
            8,224,862
            
            
            
            5,951,959
            
            
            
            2,272,903
            
            
            
            4,054,269
            
            
            
            3,145,454
            
            
            
            908,815Gross
      profit % of net sales
            
            
            42.3%
            
            
            
            34.7%
            
            
            
            7.6%
            
            
            
            32.3%
            
            
            
            27.0%
            
            
            
            5.3%Operating
      expenses:Selling
      and marketing
            
            
            (4,976,564
            )
            
            
            (4,976,564
            )
            
            
            --
            
            
            
            (3,778,268
            )
            
            
            (3,778,268
            )
            
            
            --Allowances
            
            
            (2,272,903
            )
            
            
            --
            
            
            
            (2,272,903
            )
            
            
            (908,815
            )
            
            
            --
            
            
            
            (908,815
            )Total
      selling & marketing
            
            
            (7,249,467
            )
            
            
            (4,976,564
            )
            
            
            (2,272,903
            )
            
            
            (4,687,083
            )
            
            
            (3,778,268
            )
            
            
            (908,815
            )Total
      selling & marketing % of net sales
            
            
            37.3%
            
            
            
            29.0%
            
            
            
            8.3%
            
            
            
            37.3%
            
            
            
            32.4%
            
            
            
            4.9%General
      and administrative
            
            
            (8,664,409
            )
            
            
            (8,664,409
            )
            
            
            --
            
            
            
            (6,472,440
            )
            
            
            (6,472,440
            )
            
            
            --Total
      operating expenses
            
            
            (15,913,876
            )
            
            
            (13,640,973
            )
            
            
            (2,272,903
            )
            
            
            (11,159,523
            )
            
            
            (10,250,708
            )
            
            
            (908,815
            )Total
      operating expenses %of
      net sales
            
            
            81.8%
            
            
            
            79.4%
            
            
            
            2.4%
            
            
            
            88.9%
            
            
            
            88.0%
            
            
            
            0.9%Loss
      from operations
            
            
            (7,689,014
            )
            
            
            (7,689,014
            )
            
            
            --
            
            
            
            (7,105,254
            )
            
            
            (7,105,254
            )
            
            
            --Other
      income (expenses):Interest
      income
            
            
            165,058
            
            
            
            165,058
            
            
            
            --
            
            
            
            673,597
            
            
            
            673,597
            
            
            
            --Interest
      expense
            
            
            (5,897,573
            )
            
            
            (5,897,573
            )
            
            
            --
            
            
            
            (6,200,874
            )
            
            
            (6,200,874
            )
            
            
            --Cancellation
      of debt and other income
            
            
            339,121
            
            
            
            339,121
            
            
            
            --
            
            
            
            46,297
            
            
            
            46,297
            
            
            
            --Income
      from derivatives
            
            
            2,332,444
            
            
            
            2,332,444
            
            
            
            --
            
            
            
            5,143,156
            
            
            
            5,143,156
            
            
            
            --Gain/(loss)
      on disposal of  assets
            
            
            (20,014
            )
            
            
            (20,014
            )
            
            
            --
            
            
            
            (5,858
            )
            
            
            (5,858
            )
            
            
            --Total
      other expense $
            
            
            (3,080,964
            )
            
            
            (3,080,964
            )
            
            
            --
            
            
            
            (343,682
            )
            
            
            (343,682
            )
            
            
            --Net
      loss $
            
            $
            (10,769,978
            )
            
            $
            (10,769,978
            )
            
            $
            --
            
            
            $
            (7,448,936
            )
            
            $
            (7,448,936
            )
            
            $
            --





GROSS
SALES





In 2009,
the Company achieved gross sales (revenue) of $23.1 million, an increase of $3.5
million, or 18.1% growth, over the same period 2008.  Company’s 2009
gross sales of hot and iced dispensed products were $15.7 million, an increase
of 33.9% over dispensed sales in 2008.  This increase was primarily
the result of an increase in the number of installed dispensing
locations.  During 2009, the Company’s owned dispensers in place a
customer accounts increased from 3,602 to 5209, while its estimated installed
customer owned dispensers increased from 5,599 to 6,323 from the year end
2008.  Each installed dispenser generates from $2,000 to $5,000 in
annual gross revenue depending upon the type of product being dispensed, the
demand at the location and whether the equipment is owned by the Company or the
customer.  The Company’s 2009 non-dispensed gross sales were $3.6
million, a decrease of 45.5% from 2008.  In 2009 the Company expects
growth in hot and iced dispensed products as it realizes a full year of revenue
from dispensing locations installed during 2009.


15


The
Company will see continued seasonality in its quarterly gross sales as iced
coffee sales are higher in the second and third quarters and hot coffee sales
are higher in the first and fourth quarters of the year.





MARKETING
ALLOWANCES, DISCOUNTS AND RETURNS





In 2009,
the Company’s marketing allowances, discounts and returns were $4.4 million, an
increase of $2.0 million versus prior year.  This increase reflects
the Company' substantially higher sales to national account customers which earn
negotiated discounts when the Company sells its products into these
networks.  The Company expects its marketing allowance expense to grow
roughly in line with gross revenues for dispensed products.




In2008, the Company's marketing
allowances, discounts and returns were $2.4 million, an increase of $1.4 million
versus theprior
year. This increase reflects the Company's higher sales to national account
customers, which earn negotiated discounts whenthe
Company sells its products into these networks.





NET
SALES





In 2009,
the Company achieved net sales of $18.7 million, an increase of $1.5 million, or
8.8% growth, over 2008.  The Company increased net sales of its hot
and iced dispensed coffee by 33.9% in 2009 over 2008.  This increase
was primarily the result of an increase in installed dispensing locations as
discussed in the Gross Sales paragraph above.





In 2008,
the Company achieved net sales of $17.2 million, an increase of $5.5 million, or
47.4% growth, over 2007.  The Company increased sales of its hot and
iced dispensed coffee by 95.7% in 2008 over 2007.  This increase was
primarily the result of its ability to install new dispensing
locations.  The Company’s non-dispensed revenue decreased by 7.4% in
2008 over 2007: the reduction was primarily the result of lower mixes and syrup
sales.





As
indicated earlier in Item 7 - MD&A, we reclassified marketing allowance from
selling and marketing expense to reduce gross sales in this Form
10-K.  This reclassification did not affect the Company’s gross sales,
operating income or net loss but did change the amount of net sales, gross
profit, gross profit margin and total operating expenses.





GROSS
PROFIT AND GROSS PROFIT MARGIN





In 2009,
the Company’s gross profit increased to $7.7 million from $6.0 million in 2008
or an increase of 29.8%.  The 2009 gross profit increase was due in
part to increased sales but also due to the increase in its gross profit margin
which accompanied the integration of certain processing and packaging operations
for its dispensed products.  Gross profit margin improved by 6.6% from
34.7% in 2008 to 41.3% in 2009.





In 2008,
the Company’s gross profit increased to $6.0 million up from $3.2 million in
2007 or an increase of 89.2%.  The increase was primarily due to plant
improvements and to increased sales in 2008.





For 2010,
the Company expects that gross margins will show modest improvement due to
efficiencies gained at the higher sales levels.





16


SELLING
AND MARKETING EXPENSES





In 2009,
the Company’s sales and marketing expenses were $4.7 million a decrease of
$255,000 or 5.1% from 2008. The decreased expenses were primarily due to lower
sales supplies and other marketing expenses of $249,000, a decrease in tradeshow
expenses of $75,000 and recruiting and other sales expenses of $104,000 offset
by an increase in sales and marketing payroll and travel and entertainment
expenses of $173,000.  The Company anticipates its sales and marketing
expenses will continue to decrease as a percentage of net sales in
2010.





In 2008,
sales and marketing expenses were $5.0 million compared to $3.8 million in 2007,
or an increase of 31.7%.  The increased expenses of $1.2 million were
primarily the result of increased sales expenditures and the addition of sales
professionals along with their related expenses.  More specifically,
approximately $710,000 of the increase was due to an increase in sales and
marketing payroll expenses, $282,000 was attributable to related travel and
entertainment costs, $125,000 was attributable to increased marketing expenses,
$105,000 on tradeshow expenses offset by a decrease of $22,000 for other sales
expenses.





GENERAL
AND ADMINISTRATIVE EXPENSES





In 2009,
general and administrative expenses for 2009 were $9.6 million compared to $8.7
million in 2008.  The increase of $0.9 million or 10.4% was primarily
due to an increase in non-executive expenses included an increase in overhead,
warehouse and quality control expenses of $90,000, increased accounting,
auditing and SEC and Sarbanes-Oxley compliance fees and expenses of $160,000,
higher executive expenses for payroll, benefits and travel and entertainment of
$211,000 and an increase in depreciation and amortization expense of $1.3
million, offset by a decrease in outside investor relations consultant fees
and expenses of $430,000. The significant increase in depreciation expense was
due to depreciation on the Company’s investment in processing systems and
dispensing equipment.





In 2008,
general and administrative expenses for 2008 were $8.7 million compared to $6.5
million in 2007.  The increase of $2.2 million or 33.9% was primarily
due to an increase in other general and administrative expenses of $2,365,000
offset by a decrease in executive expenses for payroll and benefits of $165,000.
The increase in non-executive expenses included an increase in overhead,
warehouse and quality control expenses of $441,000, an increase in outside
investor relations consultant fees and expenses of $430,000, of which $378,000
is a non-cash stock expense incurred for the payment of services to the current
Board of Directors, increased accounting, auditing and SEC and Sarbanes-Oxley
compliance fees and expenses of $102,000, increased dispenser lease costs of
$12,000, and an increase in depreciation and amortization expense of
$1,380,000.  The significant increase in depreciation expense was due
to depreciation on the Company’s substantial investment in processing systems
and purchases of dispensers.





In 2010,
the Company expects to report non-cash stock compensation expense of $98,000 per
quarter (or $424,000 for the year) as part of its general and administrative
expense.  In addition, the Company anticipates depreciation expense in
2009 will be at least $3.3 million.





OTHER
INCOME/EXPENSES





Other
expenses were $7.0 million in 2009 compared to $3.1 million in 2008. The
increase in other expenses of $3.9 million was primarily due to an additional
non-cash interest expense related to the write off of the remaining $4.9 million
in debt discount on the redemption of its Senior Convertible debt, an increase
in other interest expense of $2.3 million, an increase in other debt discount
accretion interest expense of $654,000,  an increase in the loss on
disposal of assets of $52,000, offset by a reduction of $2.3 million in non-cash
derivative gain, a reduction of interest income of $147,000 and the recognition
of income for the payment of liabilities at a discount from face of $2.0
million.





17





Other
expenses were $3.1 million in 2008 compared to $344,000 in 2007. The increase in
other expenses of $2.7 million was primarily due to a reduction in the non-cash
recognition of derivative income of $2.8 million reported in connection with
warrants issued to our senior convertible debt holders, a decrease in interest
income of $509,000, an increase in other income of $293,000, a decrease in
interest expense of $303,000, and a $14,000 increase in the loss on disposal of
assets.  The 2008 interest expense of $5.9 million includes non-cash
amortization of debt discount of $4.3 million and $1.2 million of accrued
interest on the senior convertible debt that was paid by the issuance of Common
Stock.





In 2010,
the Company expects to report at least $1.9 million in non-cash interest expense
due to accretion of debt discount.





NET
LOSS





The net
loss for the Company for 2009 was $13.7 million compared to $10.8 million in
2008, an increase in loss of $2.9 million or 26.8%. The increase in loss was
primarily due to the write off of the remaining balances of non-cash debt
discount of $4.9 million related to the redemption of Senior Convertible debt in
April 2009 offset by income from payment of liabilities at a discount of $2.0
million which was also related to the discount redemption of the Senior
Convertible debt. The increase in general and administrative expenses of
$904,000 was due primarily to additional depreciation expense and additional
executive costs.  The sales and marketing expenses decrease of
$255,000 was primarily due to decreased payroll and its related travel and
entertainment costs.





The net
loss for the Company for 2008 was $10.8 million compared to $7.5 million in
2007, an increase in loss of $3.3 million or 44.6%. The increase in loss was
primarily due to reduction of $2.8 million in non-cash derivative income and a
decrease in interest income of $509,000, offset by an increase in other income
of $292,000.  Excluding the non-cash derivative income, the Company’s
year-over-year change in net loss would have been higher by approximately
$510,000 or 4.1%.  This increase was due to increased sales and
marketing expenses of $1.2 million and increased general and administrative
expenses of $2.2 million offset by increased gross profit of $2.8
million.  The increase in sales and marketing expense of $1.2 million
was due primarily to an increase in sales personnel and the increase in general
and administrative expenses of $2.2 million was due to an increase in
depreciation expense and non-cash stock compensation expense.





18





OUTLOOK





The
Company anticipates an increase in 2010 gross sales will occur as it continues
to sell dispensed beverage concentrates to existing installed customer locations
and pursues new opportunities with existing customer networks that are not yet
fully developed





In 2009,
the Company successfully restructured its debt obligations to reduce its current
liabilities by approximately $11.0 million while increasing its overall debt
obligations by only $2.2 million.  This restructuring of debt
significantly reduced its demand for cash to pay debt service in 2010 and
2011.





LIQUIDITY
AND CAPITAL RESOURCES





The
Company had cash and cash equivalents of $1.6 million in 2009 versus $905,000 in
2008.  The Company used $4.6 million cash in operating activities in 2009,
a significant portion which was the result of increased receivables and
inventory.  The Company received net funds of $4.1 million from
investment and financing activities primarily by the use of restricted cash to
pay off its Wells Fargo line of credit in April 2009.  The Company
funded a net $25.3 million in promissory notes and factoring advances with $11.6
million of the proceeds being used to redeem at a discount the remainder of its
2006 Senior Convertible debt and $9.6 million to paid line of credits,
promissory notes and factoring advances.





The
Company used approximately $3.6 million and $7.6 million in cash and cash
equivalents to purchase dispensers, roasting, processing and packaging equipment
in 2009 and 2008, respectively.  These capital purchases have
positioned the Company to further improve its gross profit margins and provided
dispensers to grow its dispenser placements which will generate an increase in
the Company’s gross sales in 2010.





The
financing of the dispensers for installation at customer locations continues to
be a large demand on the Company’s working capital.  The Company has
working capital credit lines and it is using them to provide funds for
operations and dispenser purchases in 2010.  The Company is in
negotiation with certain vendors to provide more favorable terms for capital
purchases.  The Company will continue to explore financing options to
provide working capital and equipment purchase capital.





The
Company anticipates that current cash and cash equivalents, as well as expected
cash flows from anticipated increased sales and gross profits in 2010,
anticipated dispenser financing, operational cost cutting, reduced staff and
cost deferral measures, restructuring of certain debt instruments, and advances
from its current commitment to fund debt service payments will provide adequate
working capital to fund operations, sales growth and capital expenditures
needs.





19





FACTORS
AFFECTING QUARTERLY PERFORMANCE





The
Company experienced variations in sales from quarter to quarter due to the sales
mix of products and a variety of other factors including consumer buying trends,
marketing programs, seasonality and weather.  Therefore, the results
of any quarter are not necessarily indicative of the results that maybe achieved
for the full fiscal year.  The Company anticipates continued growth in
sales of its hot and iced dispensed products in 2010.  Sales are
expected to be greater in the spring, summer and early fall.





CRITICAL
ACCOUNTING POLICIES





Application
of Critical Accounting Policies





Application
of the Company's accounting policies requires management to make certain
judgments and estimates about the amounts reflected in the financial statements.
Management uses historical experience and all other available information to
make these estimates and judgments, although materially differing amounts could
be reported under different conditions or if there are changes in the
assumptions and estimates. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts, inventory allowances,
impairment costs, depreciation and amortization, warranty costs, taxes,
calculation of debt discount and contingencies. Management has identified the
following accounting policies as critical to an understanding of its
financial statements and/or as areas most dependent on management's judgments
and estimates.





Revenue
Recognition





Javo recognizes
revenue when persuasive evidence of an arrangement exists, title transfer has
occurred, the price is fixed or readily determinable, and collection ability is
probable. It records sales net of returns and discounts; returns are
estimated at the time of shipment based upon historical data.  The
Company generally does not receive, and does not anticipate receiving, any
material amount of product returns.  Total return credits issued in
2009 were $229,919 or 1.0% of sales.  Periodically, after requests in
writing from a distributor/customer and after confirmation and approval of
quantities, dates and amount of credit, the Company will grant a distributor a
credit to be applied for out-of-code product.  Total out-of-code
product credits issued in 2009 were $129,948 or 0.56% of gross
sales.  The Company has a limited number of distributors that have
negotiated payment terms with cash discounts for early payments, usually
2%.  In 2009, the cash discounts taken were $62,223 or 0.27% of gross
revenue.





Stock-Based
Compensation





Compensation
costs for all share-based awards to employees are measured based on the grant
date fair value of those awards and recognized over the period during which the
employee is required to perform services in exchange for the award (generally
over the vesting period of the award). In 2007, the Company issued 5,000,000
employee options or share-based payment awards with market or performance
conditions. The shares were to vest over a 5-year period with the first vesting
in the third year.  The Company cancelled these employee options in
June of 2009.  The Company reported non-cash option expense related to
the 2007 option grants of $602,717 and $1,446,520 in 2009 and 2008,
respectively.  In June of 2009, the Company issued 5,000,000 in
forfeitable common stock to employees.  The shares vest over a 5-year
period with the first vesting in the third year.  The Company reported
non-cash compensation expense of $217,500 in 2009.  The Company did
not issue any employee options in 2009.





Debt
Discount





The
Company calculates debt discount on its promissory notes using the relative fair
value of the note and related common stock issued as part of the debt
offering.





Derivative
Gain





In
accordance with generally accepted accounting principles, the Company is
required to account for the warrants issued in connection with the Company’s
senior convertible debt as derivative liabilities.  The Company is
required to mark to market each quarter the value of the warrants issued in
connection with its senior convertible debt. The Company revalues these warrants
at the end of each reporting period.  The periodic change in value of
the warrants is recorded as either non-cash derivative gain (if the value of the
warrants decreases) or as non-cash derivative loss (if the value of the warrants
increases).  Although the value of the warrants is affected by
interest rates and the Company’s stock volatility, the primary cause of the
change in the value of the warrants will be the value of the Company’s Common
Stock.  If the stock price goes up, the value of the warrants will
generally increase and if the stock price goes down the value of the warrants
will generally decrease.  Most of the Company’s outstanding warrants
were retired in 2009.




20


RECENT
ACCOUNTING PRONOUNCEMENTS





The
Company adopted the “FASB Accounting Standards Codification” and the Hierarchy
of Generally Accepted Accounting Principles.  This guidance
establishes only two levels of U.S. generally accepted accounting principles
(“GAAP”), authoritative and non-authoritative. The Financial Accounting Standard
Board (“FASB”) Accounting Standards Codification (the “Codification”) became the
source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. This new guidance is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  The adoption of this guidance has changed
how we reference various elements of GAAP when preparing our financial statement
disclosures, but did not have an impact on the Company’s financial
statements.





In June
2009, the Company adopted new accounting guidance on the accounting for
transfers of financial assets.  The new standard eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional disclosures in order to
enhance information reported to users of financial statements by providing
greater transparency about transfers of financial assets, including
securitization transactions, and an entity’s continuing involvement in and
exposure to the risks related to transferred financial assets. The new guidance
is effective for fiscal years beginning after November 15, 2009. The
adoption of the new guidance is not expected to have a material effect on the
Company’s financial position, results of operations, or cash flows.




In May
2009, the Company adopted new accounting guidance on subsequent events. The
objective of this guidance is to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This new
accounting guidance was effective for interim and annual periods ending after
June 15, 2009. The impact of adopting this new guidance had no effect on
the Company’s financial statements.





In April
2009, the Company adopted new accounting guidance on fair value measurements.
The new guidance impacts certain aspects of fair value measurement and related
disclosures. The new guidance was effective beginning in the second quarter of
2009. The impact of adopting this new guidance did not have a material effect on
the Company’s results of operations or financial position.





In
September 2009, the Company adopted new accounting guidance on derivatives and
hedging, which changes the disclosure requirements for derivative instruments
and hedging activities. This new guidance requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. The Company has
applied the provisions of this new guidance to its financial statement
disclosures beginning in the third quarter of 2009. The impact of adopting this
new guidance did not have a material effect on the Company’s results of
operations or financial position.





In
January 2009, the Company adopted new accounting guidance on consolidations,
which requires the presentation of a non-controlling interest (formerly known as
minority interest) as equity in the consolidated balance sheet and separate from
the parent’s equity. The new guidance also requires that the amount of net
income attributable to the non-controlling interest be included in consolidated
net income on the face of the income statement and that any dividends paid to
non-controlling interests be reported as a financing activity in the statement
of cash flows. This new guidance requires changes in the parent’s ownership
interest in consolidated subsidiaries to be accounted for as equity
transactions. This new guidance also includes expanded disclosure requirements
regarding the interests of the parent and related non-controlling interests.
Beginning January 1, 2009, the Company has applied the new guidance to its
accounting for non-controlling interests and its financial statement
disclosures. The provisions of the new guidance have been applied to all periods
presented in the accompanying financial statements.  The impact of
adopting this new guidance did not have a material effect on the Company’s
results of operations or financial position.





In
January 2009, the Company adopted new accounting guidance on business
combinations. The new guidance retains the underlying concepts of previously
issued accounting guidance in that all business combinations are still required
to be accounted for at fair value under the acquisition method of accounting
(formerly known as the purchase method of accounting), but this new guidance
changes the method of applying the acquisition method in a number of significant
aspects. Under the new guidance, acquisition costs are generally to be expensed
as incurred; non-controlling interests are valued at fair value at the
acquisition date; in-process research and development is recorded at fair value
as an indefinite-lived intangible asset at the acquisition date; restructuring
costs associated with a business combination are generally expensed subsequent
to the acquisition date; and changes in deferred tax asset valuation allowances
and income tax uncertainties after the acquisition date generally affect income
tax expense. These changes are effective on a prospective basis for all business
combinations for which the acquisition date is on or after January 1, 2009,
with an exception related to the accounting for valuation allowances on deferred
taxes and acquired tax contingencies related to acquisitions completed before
that date. This new guidance amends the accounting guidance for income taxes to
require adjustments, made after the effective date of this statement, to
valuation allowances for acquired deferred tax assets and uncertain income tax
positions to be recognized as income tax expense. The adoption of this new
guidance as of January 1, 2009 did not have an effect on the accompanying
financial statements.


21





OFF-BALANCE
SHEET ARRANGEMENTS





In 2005,
the Company entered into a seven-year rental agreement with Javo Dispenser, LLC
(the “LLC”), a related party, to rent liquid concentrate dispensers for
placement at its customer locations.  The LLC is a Delaware limited
liability company owned by Company directors, Baker, Hackett, and Solomon, two
former directors, and three other Company shareholders.  The Company’s
Chief Financial Officer serves, without remuneration, as the General Manager of
the LLC.  The LLC has agreed to acquire, as needed, up to $2,000,000
worth of liquid dispensers, which will then be rented to the Company on terms
that the Company believes to be arm’s length and no less favorable than could be
obtained from an unaffiliated supplier.  The term of the rental
agreement extends to 2010 and, at the end of the term; the Company has the right
to acquire the dispensers for nominal consideration of $1.00.  The
Company believes that the terms of this agreement are fair and are consistent
with the terms that would be obtained in an arm’s length
transaction.





As of
December 31, 2009, the LLC had purchased 896 dispensers.  The Company
has incurred dispenser rental expense of $728,160, $728,160, and $716,640
in 2009, 2008, and 2007, respectively.  The LLC has purchased all
the dispensers it contracted for and will not purchase additional dispensers
beyond the 896 it has already purchased.





COMMITMENTS
AND CONTINGENCIES





Set forth
below is a table that summarizes our material obligations as of December 31,
2009 by type and by time period when these obligations become
payable.





Payments
      Due by PeriodTotal
            
            
            Less
      than 1 Year
            
            
            2-3
      Years
            
            
            4-5
Years
            
            
            More
      than 5 Years8 year note holders
            
            $
            22,500,000
            
            
            
            --
            
            
            $
            3,375,000
            
            
            $
            9,000,000
            
            
            $
            10,125,00066 month note holders
            
            
            4,000,000
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            4,000,000Other long-term debt
      obligations
            
            
            463,855
            
            
            
            271,732
            
            
            
            192,123
            
            
            
            --
            
            
            
            --Total
            
            $
            26,963,855
            
            
            $
            271,732
            
            
            $
            3,567,123
            
            
            $
            9,000,000
            
            
            $
            14,125,000





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





The
Company’s market risks relating to its operations result primarily from changes
in commodity prices and the ability to pass along those cost increases through
customer price increases.  Javo does not use financial instruments or
commodity contracts in hedging transactions or for trading purposes,
although it does contract for future delivery to mitigate against these
risks, as described below.





Green
coffee prices are subject to substantial price fluctuations due to various
factors including weather and political and economic conditions in
coffee-producing countries.  Gross profit margins can be impacted by
changes in the price of green coffee.  The Company enters into
commitments with coffee brokers to purchase, on a forward-looking basis,
commercial grade coffees, that give it significant flexibility in selecting the
date of the market price and timing of delivery.   Depending on
the demand and the condition of the coffee markets, the Company will generally
make commitments for one to six months ahead; as of December 31, 2009, Javo had
approximately $885,000 in green coffee purchase commitments.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
financial statements and supplementary data of the Company required in this item
are set forth beginning on Page F-1 of this Form 10-K.





22


Javo
Beverage Company, Inc.
 Index
to Financial Statements December
31, 2009


PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-1FINANCIAL
      STATEMENTSBalance
      Sheets
            
            F-2Statements
      of Operations
            F-3Statements
      of Stockholder's Deficit
            F-4Statements
      of Cash Flows
            F-7Notes
      to Financial Statements
            F-9








F-1





REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders
 Javo
Beverage Company, Inc.
 Vista,
CA
  
 We have
audited the accompanying balance sheets of Javo Beverage Company, Inc. as of
December 31, 2009 and 2008, and the related statements of operations,
stockholders’ deficit, and cash flows for each of the years in the three-year
period ended December 31, 2009. Javo Beverage Company, Inc.’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Javo Beverage Company, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
  As
described in Note 3, the Company changed its presentation of Net Sales by
reclassifying marketing allowances from Selling Expenses to Net Sales for 2008
and 2007.  This reclassification did not change the net loss of the
Company for those years, but reduced gross profit and operating expenses and
therefore resulted in a restatement of the statement of operations for the years
ended December 31, 2008 and 2007.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Javo Beverage Company, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 16, 2010 expressed an
adverse opinion related to the reclassification of marketing allowances as
discussed in the preceding paragraph.
 /s/
Farber Hass Hurley LLP
 
 Granada
Hills, CA
 March 16,
2010
   F-2




JAVO
BEVERAGE COMPANY, INC.
 BALANCE
SHEETS
 As
of December 31, 2009 and 2008
  2009
              
              
              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              1,604,578
              
              
              $
              905,344Restricted
      cash
              
              
              140,000
              
              
              
              4,777,000Total
      cash, restricted cash and cash equivalents
              
              
              1,744,578
              
              
              
              5,682,344Accounts
      receivable, less allowances
              
              
              2,573,723
              
              
              
              1,526,120Inventory,
      net of reserve for obsolescence
              
              
              1,246,129
              
              
              
              785,713Prepaid
      expenses
              
              
              370,052
              
              
              
              103,607Total
      current assets
              
              
              5,934,482
              
              
              
              8,097,784Property
      and equipment, net
              
              
              11,629,536
              
              
              
              11,365,253Intangibles,
      net
              
              
              2,396,015
              
              
              
              761,979Deposits
              
              
              23,858
              
              
              
              23,858Total
      assets
              
              $
              19,983,891
              
              
              $
              20,248,874LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              4,006,857
              
              
              $
              6,386,952Lines
      of credit
              
              
              1,772,801
              
              
              
              5,816,230Accrued
      payroll and related benefits
              
              
              238,108
              
              
              
              250,369Accrued
      short-term interest payable
              
              
              578,847
              
              
              
              259,629Warrants
      payable
              
              
              9,477
              
              
              
              56,771Current
      portion of long-term debt
              
              
              271,732
              
              
              
              5,128,747Total
      current liabilities
              
              
              6,877,822
              
              
              
              17,898,698Long-term
      debt, net of current portion
              
              
              26,692,123
              
              
              
              10,577,674Unamortized
      discount on long-term debt
              
              
              (11,126,194
              )
              
              
              (6,197,748
              )Accrued
      long-term interest payable
              
              
              68,379
              
              
              
              15,504Total
      liabilities
              
              
              22,512,130
              
              
              
              22,294,128Commitments
      and contingencies
              
              
              --
              
              
              
              --Stockholders'
      Deficit:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, 2,362,746 shares
      issued and outstanding as of December 31, 2009, 2,147,952 shares issued
      and outstanding as of December 31, 2008.  150,000 shares have
      been reserved for the Junior A Participating Preferred
    stock.
              
              
              2,363
              
              
              
              2,148Common
      stock, $0.001 par value, 300,000,000 shares authorized, 298,803,342 shares
      issued and outstanding as of December 31, 2009, 186,403,648 shared issued
      and outstanding as of December 31, 2008.
              
              
              298,803
              
              
              
              186,404Additional
      paid in capital
              
              
              75,228,355
              
              
              
              60,018,442Accumulated
      deficit
              
              
              (78,057,760
              )
              
              
              (62,252,248
              )Total
      stockholders' deficit
              
              
              (2,528,239
              )
              
              
              (2,045,254
              )Total
      liabilities and stockholders' deficit
              
              $
              19,983,891
              
              
              $
              20,248,874


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


F-3


JAVO
BEVERAGE COMPANY, INC.
 STATEMENTS
OF OPERATIONS
 For
the Years Ended December 31, 2009, 2008,
and 2007


2009
            
            
            2008
            
            
            2007Restated
            
            
            RestatedGross
      sales
            
            $
            23,097,334
            
            
            $
            19,560,988
            
            
            $
            12,607,076Returns
      and allowances
            
            
            (4,408,682
            )
            
            
            (2,385,069
            )
            
            
            (956,759
            )Net
      sales
            
            
            18,688,652
            
            
            
            17,175,919
            
            
            
            11,650,317Cost
      of sales
            
            
            (10,961,560
            )
            
            
            (11,223,960
            )
            
            
            (8,504,863
            )Gross
      profit
            
            
            7,727,092
            
            
            
            5,951,959
            
            
            
            3,145,454Operating
      expenses:Selling
      and marketing
            
            
            (4,721,913
            )
            
            
            (4,976,564
            )
            
            
            (3,778,268
            )General
      and administrative
            
            
            (9,568,715
            )
            
            
            (8,664,409
            )
            
            
            (6,472,440
            )Total
      operating expenses
            
            
            (14,290,628
            )
            
            
            (13,640,973
            )
            
            
            (10,250,708
            )Loss
      from operations
            
            
            (6,563,536
            )
            
            
            (7,689,014
            )
            
            
            (7,105,254
            )Other
      income (expenses):Interest
      income
            
            
            18,306
            
            
            
            165,058
            
            
            
            673,597Interest
      expense
            
            
            (9,070,702
            )
            
            
            (5,897,573
            )
            
            
            (6,200,874
            )Income
      from derivatives
            
            
            47,294
            
            
            
            2,332,444
            
            
            
            5,143,156Gain
      on cancellation of debt and other income
            
            
            1,983,430
            
            
            
            339,121
            
            
            
            46,297Loss
      on disposal of assets
            
            
            (72,362
            )
            
            
            (20,014
            )
            
            
            (5,858
            )Total
      other expense
            
            
            (7,094,034
            )
            
            
            (3,080,964
            )
            
            
            (343,682
            )Net
      loss
            
            $
            (13,657,570
            )
            
            $
            (10,769,978
            )
            
            $
            (7,448,936
            )Basic
      and diluted loss per share
            
            $
            (0.05
            )
            
            $
            (0.07
            )
            
            $
            (0.05
            )Weighted
      average number of shares outstanding, basic and diluted
            
            
            262,649,484
            
            
            
            160,598,172
            
            
            
            150,709,665





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


F-4





JAVO
BEVERAGE COMPANY, INC.


STATEMENTS
OF STOCKHOLDERS' DEFICIT


For
the Years Ended December 31, 2007, 2008 and 2009




AdditionalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            TotalBalances
      at January 1, 2007
            
            
            1,775,166
            
            
            $
            1,775
            
            
            
            149,504,927
            
            
            $
            149,504
            
            
            $
            43,196,496
            
            
            $
            --
            
            
            $
            (40,305,486
            )
            
            $
            3,042,289Stock
      returned to treasury by terminated employee
            
            
            --
            
            
            
            --
            
            
            
            (4,000
            )
            
            
            (4
            )
            
            
            4
            
            
            
            --
            
            
            
            --
            
            
            
            --Stock
      options granted to executive team
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            4,988,000
            
            
            
            (4,988,000
            )
            
            
            --
            
            
            
            --Recognition
      of stock option expense
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            964,347
            
            
            
            --
            
            
            
            964,347Stock
      issued in repayment of Sr. Convertible debt
            
            
            --
            
            
            
            --
            
            
            
            3,077,780
            
            
            
            3,079
            
            
            
            2,876,575
            
            
            
            --
            
            
            
            --
            
            
            
            2,879,654Stock
      issued in repayment of Sr. Convertible interest
            
            
            --
            
            
            
            --
            
            
            
            685,330
            
            
            
            685
            
            
            
            704,117
            
            
            
            --
            
            
            
            --
            
            
            
            704,802Preferred
      shares issued as a stock dividend at $.001 per share
            
            
            177,517
            
            
            $
            178
            
            
            
            --
            
            
            
            --
            
            
            
            1,774,989
            
            
            
            --
            
            
            
            (1,775,167
            )
            
            
            --Warrants
      redeemed at a strike price of $0.085 per agreement with
      consultant
            
            
            --
            
            
            
            --
            
            
            
            114,760
            
            
            
            115
            
            
            
            9,640
            
            
            
            --
            
            
            
            --
            
            
            
            9,755Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (7,448,936
            )
            
            
            (7,448,936
            )Balance
      at December 31, 2007
            
            
            1,952,683
            
            
            $
            1,953
            
            
            
            153,378,797
            
            
            $
            153,379
            
            
            $
            53,549,821
            
            
            $
            (4,023,653
            )
            
            $
            (49,529,589
            )
            
            $
            151,911





The
accompanying notes are an integral part of these financial
statements


F-5


JAVO
BEVERAGE COMPANY, INC.
 STATEMENTS
OF STOCKHOLDERS' DEFICIT
 For
the Years Ended December 31, 2007, 2008 and 2009


AdditionalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            TotalBalances
      at January 1, 2008
            
            
            1,952,683
            
            
            $
            1,953
            
            
            
            153,378,797
            
            
            $
            153,379
            
            
            $
            53,549,821
            
            
            $
            (4,023,653
            )
            
            $
            (49,529,589
            )
            
            $
            151,911Stock
      returned to treasury by terminated employee
            
            
            --
            
            
            
            --
            
            
            
            (16,500
            )
            
            
            (16
            )
            
            
            16
            
            
            
            --
            
            
            
            --
            
            
            
            --Stock
      issued to non-employee directors
            
            
            --
            
            
            
            --
            
            
            
            900,000
            
            
            
            900
            
            
            
            377,100
            
            
            
            --
            
            
            
            --
            
            
            
            378,000Recognition
      of stock option expense
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,446,520
            
            
            
            --
            
            
            
            1,446,520Stock
      issued in repayment of Sr. Convertible debt
            
            
            --
            
            
            
            --
            
            
            
            13,730,093
            
            
            
            13,730
            
            
            
            4,276,697
            
            
            
            --
            
            
            
            --
            
            
            
            4,290,427Stock
      issued in repayment of Sr. Convertible interest
            
            
            --
            
            
            
            --
            
            
            
            2,211,258
            
            
            
            2,211
            
            
            
            1,149,650
            
            
            
            --
            
            
            
            --
            
            
            
            1,151,861Preferred
      shares issued as a stock dividend at $.001 per share
            
            
            195,269
            
            
            
            195
            
            
            
            --
            
            
            
            --
            
            
            
            1,952,486
            
            
            
            --
            
            
            
            (1,952,681
            )
            
            
            --Stock
      issued in 2008 offering
            
            
            --
            
            
            
            --
            
            
            
            16,200,000
            
            
            
            16,200
            
            
            
            1,289,805
            
            
            
            --
            
            
            
            --
            
            
            
            1,306,005Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (10,769,978
            )
            
            
            (10,769,978
            )Balance
      at December 31, 2008
            
            
            2,147,952
            
            
            $
            2,148
            
            
            
            186,403,648
            
            
            $
            186,404
            
            
            $
            62,595,575
            
            
            $
            (2,577,133
            )
            
            $
            (62,252,248
            )
            
            $
            (2,045,254
            )





The
accompanying notes are an integral part of these financial
statements


F-6





JAVO
BEVERAGE COMPANY, INC.


STATEMENTS
OF STOCKHOLDERS' DEFICIT


For
the Years Ended December 31, 2007, 2008 and 2009




AdditionalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            TotalBalances
      at January 1, 2009
            
            
            2,147,952
            
            
            $
            2,148
            
            
            
            186,403,648
            
            
            $
            186,404
            
            
            $
            62,595,575
            
            
            $
            (2,577,133
            )
            
            $
            (62,252,248
            )
            
            $
            (2,045,254
            )Recognition
      of stock grant expense
            
            
            --
            
            
            
            --
            
            
            
            5,000,000
            
            
            
            5,000
            
            
            
            1,345,000
            
            
            
            (1,132,500
            )
            
            
            --
            
            
            
            217,500Recognition
      of stock option cancellation
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,974,416
            )
            
            
            2,577,134
            
            
            
            --
            
            
            
            602,718Stock
      issued in repayment of Sr. Convertible debt
            
            
            --
            
            
            
            --
            
            
            
            4,225,900
            
            
            
            4,226
            
            
            
            384,663
            
            
            
            --
            
            
            
            --
            
            
            
            388,889Stock
      issued in repayment of Sr. Convertible interest
            
            
            --
            
            
            
            --
            
            
            
            1,873,794
            
            
            
            1,873
            
            
            
            210,074
            
            
            
            --
            
            
            
            --
            
            
            
            211,947Preferred
      shares issued as a stock dividend at $.001 per share
            
            
            214,794
            
            
            
            215
            
            
            
            --
            
            
            
            --
            
            
            
            2,147,727
            
            
            
            --
            
            
            
            (2,147,942
            )
            
            
            --Stock
      issued in 2008 debt offering
            
            
            --
            
            
            
            --
            
            
            
            86,300,000
            
            
            
            86,300
            
            
            
            9,955,291
            
            
            
            --
            
            
            
            --
            
            
            
            10,041,591Stock
      issued for 66mo debt offering
            
            
            --
            
            
            
            --
            
            
            
            15,000,000
            
            
            
            15,000
            
            
            
            1,696,940
            
            
            
            --
            
            
            
            --
            
            
            
            1,711,940Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (13,657,570
            )
            
            
            (13,657,570
            )Balance
      at December 31, 2009
            
            
            2,362,746
            
            
            $
            2,363
            
            
            
            298,803,342
            
            
            $
            298,803
            
            
            $
            76,360,854
            
            
            $
            (1,132,499
            )
            
            $
            (78,057,760
            )
            
            $
            (2,528,239
            )





The
accompanying notes are an integral part of these financial
statements


F-7





JAVO
BEVERAGE COMPANY, INC.


STATEMENTS
OF CASH FLOWS


For
the Years Ended December 31, 2009, 2008, 2007


2009
            
            
            2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (13,657,570
            )
            
            $
            (10,769,978
            )
            
            $
            (7,448,936
            )Non-cash
      items:Depreciation
      and amortization
            
            
            9,770,873
            
            
            
            6,241,246
            
            
            
            5,100,958Gain
      on derivatives
            
            
            (47,294
            )
            
            
            (2,332,444
            )
            
            
            (5,143,156
            )Deferred
      compensation
            
            
            820,218
            
            
            
            1,446,520
            
            
            
            964,347Provision
      for bad debt
            
            
            49,900
            
            
            
            55,901
            
            
            
            179,750Issuance
      of common stock for compensation or services
            
            
            --
            
            
            
            378,000
            
            
            
            --Loss
      on disposal of assets
            
            
            72,362
            
            
            
            20,014
            
            
            
            5,858Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,097,503
            )
            
            
            (100,097
            )
            
            
            (817,529
            )Inventories
            
            
            (460,416
            )
            
            
            (94,293
            )
            
            
            16,746Prepaid
      expenses and other assets
            
            
            (266,445
            )
            
            
            (193,977
            )
            
            
            (575,132
            )Employee
      advances
            
            
            --
            
            
            
            --
            
            
            
            1,362Accounts
      payable and accrued expenses
            
            
            (196,223
            )
            
            
            4,276,389
            
            
            
            847,382Accrued
      payroll and related benefits
            
            
            (12,260
            )
            
            
            111,010
            
            
            
            98,344Accrued
      interest payable
            
            
            417,805
            
            
            
            1,037,612
            
            
            
            876,787Net
      cash provided by/(used in) operating activities
            
            
            (4,606,553
            )
            
            
            75,903
            
            
            
            (5,893,219
            )Cash
      flows from investing activities:Change
      in restricted cash
            
            
            4,637,000
            
            
            
            (914,000
            )
            
            
            (3,863,000
            )Proceeds
      from disposal of equipment
            
            
            21,794
            
            
            
            15,726
            
            
            
            7,317Purchases
      of property and equipment
            
            
            (3,459,333
            )
            
            
            (7,635,044
            )
            
            
            (4,080,876
            )Net
      cash provided by/(used in) investing activities
            
            
            1,199,461
            
            
            
            (8,533,318
            )
            
            
            (7,936,559
            )Cash
      flows from financing activities:Proceeds
      from long-term debt
            
            
            23,860,000
            
            
            
            3,240,000
            
            
            
            --Proceeds
      from lines-of-credit borrowing
            
            
            2,767,773
            
            
            
            4,153,230
            
            
            
            3,863,000Repayment
      on line-of-credit
            
            
            (9,576,394
            )
            
            
            (2,200,000
            )
            
            
            (713,000
            )Factoring
      liability
            
            
            733,571
            
            
            
            --
            
            
            
            --Loan
      costs
            
            
            (2,053,446
            )
            
            
            --
            
            
            
            --Payments
      on long-term debt
            
            
            (11,625,178
            )
            
            
            (2,467,379
            )
            
            
            (1,017,230
            )Proceeds
      from exercised warrants
            
            
            --
            
            
            
            --
            
            
            
            9,755Net
      cash provided by financing activities
            
            
            4,106,326
            
            
            
            2,725,851
            
            
            
            2,142,525Net
      change in cash and cash equivalents
            
            
            699,234
            
            
            
            (5,731,564
            )
            
            
            (11,687,253
            )Cash
      and cash equivalents at beginning of period
            
            
            905,344
            
            
            
            6,636,908
            
            
            
            18,324,161Cash
      and cash equivalents at end of period
            
            $
            1,604,578
            
            
            $
            905,344
            
            
            $
            6,636,908





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


F-8


JAVO
BEVERAGE COMPANY, INC.
 STATEMENTS
OF CASH FLOWS (Continued)
 For
the Years Ended December 31, 2009, 2008, 2007


2009
            
            
            2008
            
            
            2007Non-cash
      activities:Issuance
      of preferred stock as in-kind dividend
            
            $
            2,147,943
            
            
            $
            1,952,683
            
            
            $
            1,775,167Issuance
      of common stock in exchange for debt
            
            $
            19,226
            
            
            $
            4,290,427
            
            
            $
            2,879,654Issuance
      of common stock in exchange for interest due
            
            $
            211,947
            
            
            $
            1,151,861
            
            
            $
            704,802Conversion
      of accounts payable to line of credit
            
            $
            3,290,930
            
            
            $
            --
            
            
            $
            --Equipment
      from capital lease
            
            $
            --
            
            
            $
            732,392
            
            
            $
            362,982Return
      of common stock to treasury
            
            $
            --
            
            
            $
            16
            
            
            $
            4Supplemental
      cash flow information:Cash
      paid for interest
            
            $
            2,129,667
            
            
            4
            539,893
            
            
            $
            689,806Cash
      paid for income taxes
            
            $
            8,775
            
            
            $
            18,664
            
            
            $
            3,918





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





F-9





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
1.    NATURE OF OPERATIONS





Organization





Javo
Beverage Company, Inc., (the "Company") was incorporated in the state of
Delaware on June 21, 2002.





Nature of
Operations





Javo
manufactures and sells concentrated beverage solutions that allow restaurants,
healthcare facilities, casinos and convenience stores in the food service
industry and food and beverage manufacturers in the retail industry to serve
popular hot and iced specialty coffees and teas. For food service industry
customers, Javo combines great tasting coffees, teas and specialty beverages
with the added convenience and efficiency of dispenser-based systems. For food
and beverage processors and retailers looking for authentic coffee and tea
flavors for their packaged foods and ready-to-drink beverages, Javo supplies
customized beverage formulations, extracts, and flavors.





NOTE
2.    BASIS OF PRESENTATION





The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business.  The Company has
incurred operating losses since inception of $78,057,760 at December 31, 2009
and has a working capital deficit of $943,340 at December 31,
2009.  Management is in the process of cutting its operating costs,
cutting staff, deferring other operating costs, restructuring certain lease
payments, and obtaining additional financing.  Management further
expects to continue to increase sales activity and develop markets for its
products.  If the Company is unsuccessful with obtaining additional
financing or if Management’s plans do not succeed, the Company will be required
to modify its plans, which may impact its ability to continue current
operations.





NOTE
3.    SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Reclassifications





Certain
prior year amounts in the accompanying financial statements have been
reclassified to conform to the current year’s presentation.





In
presenting the comparative income statements in the Form 10-K for 2009, the
Company has reclassified marketing allowances paid to various customers through
bill backs or direct payments from a selling and marketing expense to a
reduction of gross sales in arriving at net sales.  This
reclassification did not change gross sales or the net loss of the
Company.  However, it does reduce our gross profit margin and total
operating costs as illustrated in the table below.  In accordance with
FASB ASC 250, this reclassification is required to be presented as a restatement
for prior years.  Below find a table showing a comparison of the two
presentations of the income statements presented in this Form 10-K.





F-10


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)





Comparative
      Income Statements before & after
  reclassification





2008
            
            
            2007Before
            
            
            After
            
            
            Difference
            
            
            Before
            
            
            After
            
            
            DifferenceGross
      sales
            
            $
            19,560,988
            
            
            $
            19,560,988
            
            
            $
            --
            
            
            $
            12,607,076
            
            
            $
            12,607,076
            
            
            $
            --Discounts
      & returns
            
            
            (112,166
            )
            
            
            (2,385,069
            )
            
            
            2,272,903
            
            
            
            (47,944
            )
            
            
            (956,759
            )
            
            
            908,815Net
      sales
            
            
            19,448,822
            
            
            
            17,175,919
            
            
            
            2,272,903
            
            
            
            12,559,132
            
            
            
            11,650,317
            
            
            
            908,815Cost
      of sales
            
            
            (11,223,960
            )
            
            
            (11,223,960
            )
            
            
            --
            
            
            
            (8,504,863
            )
            
            
            (8,504,863
            )
            
            
            --Gross
      profit $
            
            
            8,224,862
            
            
            
            5,951,959
            
            
            
            2,272,903
            
            
            
            4,054,269
            
            
            
            3,145,454
            
            
            
            908,815Gross
      profit % of net Sales
            
            
            42.3%
            
            
            
            34.7%
            
            
            
            7.6%
            
            
            
            32.3%
            
            
            
            27.0%
            
            
            
            5.3%Operating
      expenses:Selling
      and marketing
            
            
            (4,976,564
            )
            
            
            (4,976,564
            )
            
            
            --
            
            
            
            (3,778,268
            )
            
            
            (3,778,268
            )
            
            
            --Allowances
            
            
            (2,272,903
            )
            
            
            --
            
            
            
            (2,272,903
            )
            
            
            (908,815
            )
            
            
            --
            
            
            
            (908,815
            )Total
      selling and marketing
            
            
            (7,249,467
            )
            
            
            (4,976,564
            )
            
            
            (2,272,903
            )
            
            
            (4,687,083
            )
            
            
            (3,778,268
            )
            
            
            (908,815
            )Total
      selling and marketing % of net sales
            
            
            37.3%
            
            
            
            29.0%
            
            
            
            8.3%
            
            
            
            37.3%
            
            
            
            32.4%
            
            
            
            4.9%General
      and administrative
            
            
            (8,664,409
            )
            
            
            (8,664,409
            )
            
            
            --
            
            
            
            (6,472,440
            )
            
            
            (6,472,440
            )
            
            
            --Total
      operating expenses
            
            
            (15,913,876
            )
            
            
            (13,640,973
            )
            
            
            (2,272,903
            )
            
            
            (11,159,523
            )
            
            
            (10,250,708
            )
            
            
            (908,815
            )Total
      operating expenses % of net sales
            
            
            81.8%
            
            
            
            79.4%
            
            
            
            2.4%
            
            
            
            88.9%
            
            
            
            88.0%
            
            
            
            0.9%Loss
      from operations
            
            
            (7,689,014
            )
            
            
            (7,689,014
            )
            
            
            --
            
            
            
            (7,105,254
            )
            
            
            (7,105,254
            )
            
            
            --Other
      income (expenses):Interest
      income
            
            
            165,058
            
            
            
            165,058
            
            
            
            --
            
            
            
            673,597
            
            
            
            673,597
            
            
            
            --Interest
      expense
            
            
            (5,897,573
            )
            
            
            (5,897,573
            )
            
            
            --
            
            
            
            (6,200,874
            )
            
            
            (6,200,874
            )
            
            
            --Cancellation
      of debt and other income
            
            
            339,121
            
            
            
            339,121
            
            
            
            --
            
            
            
            46,297
            
            
            
            46,297
            
            
            
            --Income
      from derivatives
            
            
            2,332,444
            
            
            
            2,332,444
            
            
            
            --
            
            
            
            5,143,156
            
            
            
            5,143,156
            
            
            
            --Gain/(loss)
      on disposal of  assets
            
            
            (20,014
            )
            
            
            (20,014
            )
            
            
            --
            
            
            
            (5,858
            )
            
            
            (5,858
            )
            
            
            --Total
      other expense $
            
            
            (3,080,964
            )
            
            
            (3,080,964
            )
            
            
            --
            
            
            
            (343,682
            )
            
            
            (343,682
            )
            
            
            --Net
      loss $
            
            $
            (10,769,978
            )
            
            $
            (10,769,978
            )
            
            $
            --
            
            
            $
            (7,448,936
            )
            
            $
            (7,448,936
            )
            
            $
            --





F-11





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Use of
Estimates





The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods.  Actual results could materially differ
from those estimates. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.





Concentration of Credit
Risk





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivables.





Concentration
of credit risk with respect to cash and cash equivalents and restricted cash is
the result of the Company having $1.7 million in three separate financial
institutions.  The invested funds are in cash bank accounts, bank
money market accounts, and cash reserve funds.  The cash or cash
equivalent investments are liquid and the Company can access all funds with 3
days or less notice.  The restricted cash amounting to $140,000 is in
a restricted money market account and secures the Company credit card program.
The Company funds are in large reputable financial institutions.  The
Company does not believe that it is subject to any unusual credit or market risk
because the funds are invested with a large stable national bank that has not
been included in the group of banks with known financial problems.





Concentration
of credit risk with respect to trade receivables has decreased as the Company
continues to diversify its customer base.  The Company routinely
assesses the financial strength of its customers.  At December 31,
2009, the Company had three customers whose balances approximated 10%, 9% and 7%
compared to 13%, 11%, and 5% of gross accounts receivable as of December 31,
2008.  No other customer balance exceeded 10% of gross accounts
receivable.





Revenue
Recognition





The
Company recognizes gross sales when persuasive evidence of an arrangement
exists, title transfer has occurred, the price is fixed or readily determinable,
and collection is probable. It recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition." Net sales are recorded
after of sales returns, discounts and allowances, which are estimated at the
time of shipment based upon historical data.  The Company recorded
$4,408,682, $2,385,069 and $956,758 in discounts, allowances and returns in
2009, 2008 and 2007, respectively.





Shipping and Handling
Charges





The
Company records shipping and handling charges, which are invoiced to customers
with actual shipping and handling costs recorded as part of its cost of goods
sold in the Statement of Operations.





Advertising
Costs





Advertising
and promotional costs are expensed as incurred. Advertising and promotional
expenses were $38,955, $58,681 and $99,388 for the years ended December 31,
2009, 2008 and 2007, respectively.





Research and Development
Expenses





Research
and development costs are expensed as incurred.





F-12


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Income
Taxes





The
Company accounts for income taxes under the provisions of Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”) 740," whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between bases used for
financial reporting and income tax purposes. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is provided for certain deferred tax assets if it
is more likely than not that the Company will not realize tax assets through
future operations.





Stock-Based
Compensation





In
accordance with FASB ASC 718 the Company calculates compensation costs for all
share-based awards to employees based on the grant date fair value of those
awards and recognized over the period during which the employee is required to
perform services in exchange for the award (generally over the vesting period of
the award). Other than the forfeitable stock issued to the executives and an
employee in June 2009 that vest over five years, the Company has no outstanding
employee options or share-based payment awards with market or performance
conditions.





Derivative
Gain





In
accordance with FASB ASC 815, the Company is required to account for the
warrants issued in connection with the Company’s senior convertible debt as
derivative liabilities.  The Company is required to mark to market
each reporting quarter the value of the warrants issued in connection with its
senior convertible debt. The Company revalues these warrants at the end of each
reporting period.  The periodic change in value of the warrants is
recorded as either non-cash derivative income (if the value of the warrants
decreases) or as non-cash derivative expense (if the value of the warrants
increases).  Although the value of the warrants is affected by
interest rates and the Company’s stock volatility, the primary cause of the
change in the value of the warrants will be the value of the Company’s Common
Stock.  If the stock price goes up, the value of the warrants will
generally increase and if the stock price goes down the value of the warrants
will generally decrease.  Due to the retirement of most of the
warrants in 2009, which were accounted for as a liability, this accounting
policy has limited applicability in 2009.





Loss per
Share





Basic EPS
is computed as net loss, divided by the weighted average shares outstanding
during the period.  The potential common shares that can be issued
total 1,196,657 at December 31, 2009, 17,978,590 at December 31, 2008, and
22,101,690 at December 31, 2007.  Inclusion of these shares is not
incorporated in the computation as their effect would be
anti-dilutive.  If the Company considered the in-kind dividend accrued
on the Series B Preferred Stock in calculating the loss available to common
shareholders the net loss per weighted average common share would increase from
$(0.05) to $(0.06) for 2009 and from $(0.07) to $(0.08) for 2008.





Cash and Cash
Equivalents





The
Company considers all highly liquid instruments with a maturity of three months
or less at purchase date to be cash equivalents. Cash and cash equivalents
include money market funds, which are carried at cost, plus accrued interest,
which approximates market.





Trade Accounts
Receivable





Trade
accounts receivable are recorded on shipment of products to customers and are
generally due net 30 days.  The trade receivables are not
collateralized and interest is not accrued on past due accounts. Periodically,
management reviews the adequacy of its provision for doubtful accounts based on
historical bad debt expense results and current economic conditions using
factors based on the aging of its accounts receivable. After management has
exhausted all collection efforts, management writes off receivables and the
related reserve.  Additionally, the Company may identify additional
allowance requirements based on indications that a specific customer may be
experiencing financial difficulties.  Actual bad debt results could
differ materially from these estimates.





F-13


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Inventory





Inventories
consist principally of raw materials and finished goods and are stated at the
lower of cost (first-in, first-out method) or market.  The inventories
include an allocation of general overhead in 2009.





Property and
Equipment





Property
and equipment are depreciated over their estimated useful lives using the
straight-line method over three to seven years. Additions are capitalized when
acquired. The cost of maintenance and repairs is charged to expense as
incurred.





Intangibles





Intangibles
are amortized over the life of the contract using straight-line
method.





Fair Value of Financial
Instruments





The
Company uses fair value measurements under the three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosure for fair value
measures. The three levels are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.


·
            Level
      2 inputs to the valuation methodology include quoted prices for
      similar assets and liabilities in active markets, and inputs that are
      observable for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.


·
            Level
      3 inputs to the valuation methodology are unobservable and
      significant to the fair value.





Carrying
      Value
              December
      31,
              2009
            
            
            Fair
      Value Measurements
              December
      31, 2009
              Using
      Fair Value HierarchyLevel
      1
            
            
            Level
      2
            
            
            Level
      3Promissory
      notes (net of discount)
            
            $
            15,373,806
            
            
            $
            --
            
            
            $
            --
            
            
            $
            15,373,806Warrants
            
            $
            9,477
            
            
            $
            --
            
            
            $
            --
            
            
            
            9,477





The
following table provides a summary of the changes in fair value of the Company’s
Promissory Notes and Warrants, which are both Level 3 liabilities as of December
31, 2009:





Promissory
      Notes
            
            
            WarrantsBalance
      at December 31, 2008
            
            $
            11,477,203
            
            
            $
            56,771Promissory
      Notes Paid in 2009 - net
            
            
            (8,237,203
            )
            
            
            --Income
      from change of indexed stock price
            
            
            --
            
            
            
            (47,294
            )Issuance
      of notes with debt premium – net
            
            
            23,260,000
            
            
            
            --Unamortized
      debt discount
            
            
            (11,126,194
            )
            
            
            --Balance
      December 31, 2009
            
            $
            15,373,806
            
            
            $
            9,477





The
Company determined the value of its promissory notes based on the comparative
value of the promissory note using a 15.5% interest rate and the value of the
stock issued at the time of the transaction less the accretion.  There
is no active market for the debt and the value was based on the delayed payment
terms in addition to other facts and circumstances at the end of December
2009.





The
Company carries the warrants on its balance sheet as a liability at fair
value determined by using the Black Scholes valuation model.   As of
December 31, 2009, the factors used in the valuation of the warrants was the
Company’s stock price of $0.13, interest rate of 1.09%, 713 days remaining and
volatility percentage of  123.4 %.





F-14


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





Subsequent
events





Management
has reviewed and evaluated material subsequent events from the balance sheet
date of December 31, 2009, through the financial statements issue date of March
16, 2010.  All appropriate subsequent event disclosures have been made in
the notes to the financial statements.





Recent Pronouncements and
Accounting Changes





The
Company adopted the “FASB Accounting Standards Codification” and the Hierarchy
of Generally Accepted Accounting Principles.  This guidance
establishes only two levels of U.S. generally accepted accounting principles
(“GAAP”), authoritative and non-authoritative. The Financial Accounting Standard
Board (“FASB”) Accounting Standards Codification (the “Codification”) became the
source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. This new guidance is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  The adoption of this guidance has changed
how we reference various elements of GAAP when preparing our financial statement
disclosures, but did not have an impact on the Company’s financial
statements.





In June
2009, the Company adopted new accounting guidance on the accounting for
transfers of financial assets.  The new standard eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional disclosures in order to
enhance information reported to users of financial statements by providing
greater transparency about transfers of financial assets, including
securitization transactions, and an entity’s continuing involvement in and
exposure to the risks related to transferred financial assets. The new guidance
is effective for fiscal years beginning after November 15, 2009. The
adoption of the new guidance is not expected to have a material effect on the
Company’s financial position, results of operations, or cash flows.




In May
2009, the Company adopted new accounting guidance on subsequent events. The
objective of this guidance is to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This new
accounting guidance was effective for interim and annual periods ending after
June 15, 2009. The impact of adopting this new guidance had no effect on
the accompanying financial statements.





In April
2009, the Company adopted new accounting guidance on fair value measurements.
The new guidance impacts certain aspects of fair value measurement and related
disclosures. The new guidance was effective beginning in the second quarter of
2009. The impact of adopting this new guidance did not have a material effect on
the Company’s results of operations or financial position.





In
September 2009, the Company adopted new accounting guidance on derivatives and
hedging, which changes the disclosure requirements for derivative instruments
and hedging activities. This new guidance requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. The Company has
applied the provisions of this new guidance to its financial statement
disclosures beginning in the third quarter of 2009. The impact of adopting this
new guidance did not have a material effect on the Company’s results of
operations or financial position.





In
January 2009, the Company adopted new accounting guidance on consolidations and
requires the presentation of a non-controlling interest (formerly known as
minority interest) as equity in the consolidated balance sheet and separate from
the parent’s equity. The new guidance also requires that the amount of net
income attributable to the non-controlling interest be included in consolidated
net income on the face of the income statement and that any dividends paid to
non-controlling interests be reported as a financing activity in the statement
of cash flows. This new guidance requires changes in the parent’s ownership
interest in consolidated subsidiaries to be accounted for as equity
transactions. This new guidance also includes expanded disclosure requirements
regarding the interests of the parent and related non-controlling interests.
Beginning January 1, 2009, the Company has applied the new guidance to its
accounting for non-controlling interests and its financial statement
disclosures. The provisions of the new guidance have been applied to all periods
presented in the accompanying financial statements.   The impact
of adopting this new guidance did not affect the Company’s results of operations
or financial position.





F-15


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





Recent Pronouncements and
Accounting Changes (Continued)





In
January 2009, the Company adopted new accounting guidance on business
combinations. The new guidance retains the underlying concepts of previously
issued accounting guidance in that all business combinations are still required
to be accounted for at fair value under the acquisition method of accounting
(formerly known as the purchase method of accounting), but this new guidance
changes the method of applying the acquisition method in a number of significant
aspects. Under the new guidance, acquisition costs are generally to be expensed
as incurred; non-controlling interests are valued at fair value at the
acquisition date; in-process
research and development is recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination are generally expensed subsequent to the acquisition date;
and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally affect income tax expense. These changes are
effective on a prospective basis for all business combinations for which the
acquisition date is on or after January 1, 2009, with an exception related
to the accounting for valuation allowances on deferred taxes and acquired tax
contingencies related to acquisitions completed before that date. This new
guidance amends the accounting guidance for income taxes to require adjustments,
made after the effective date of this statement, to valuation allowances for
acquired deferred tax assets and uncertain income tax positions to be recognized
as income tax expense. The adoption of this new guidance as of January 1,
2009 did not have an effect on the accompanying financial
statements.





NOTE
4.    MAJOR CUSTOMERS AND VENDORS





The
Company purchases certain products from five suppliers, which accounted for
approximately 79%, 68% and 62% of total purchases in 2009, 2008 and 2007,
respectively.  Management does not believe that the loss of these
suppliers would have a severe impact on the result of operations since the
Company has identified available products at other vendors.





During
the years ended December 31, 2009, 2008, and 2007, the Company had sales to
three major customers, which accounted for 13%, 10% and 9% of sales in 2009,
14%, 12% and 9% of sales in 2008, 20%, 16% and 13% of sales in 2007,
respectively.  The Company recorded a bad debt expense of $49,900,
$55,901 and $179,750 in 2009, 2008 and 2007, respectively.





Accounts
receivable consists of the following at December 31, 2009 and 2008:





2009
            
            
            2008Accounts
      receivable
            
            $
            2,640,163
            
            
            $
            1,542,660Allowance
      for doubtful accounts
            
            
            (66,440
            )
            
            
            (16,540
            )$
            2,573,723
            
            
            $
            1,526,120





2009
            
            
            2008Beginning
      balance
            
            $
            16,540
            
            
            $
            211,600Write-offs
            
            
            --
            
            
            
            (250,961
            )Bad
      debt expense
            
            
            (49,900
            )
            
            
            (55,901
            )Ending
      balance
            
            $
            66,440
            
            
            $
            16,540




NOTE
5.    INVENTORY





Inventory
consists of the following at December 31, 2009 and 2008:





2009
            
            
            2008Raw
      materials
            
            $
            1,053,415
            
            
            $
            603,845Finished
      goods
            
            
            212,714
            
            
            
            220,1241,266,129
            
            
            
            823,969Reserve
      for obsolescence
            
            
            (20,000
            )
            
            
            (38,256
            )$
            1,246,129
            
            
            $
            785,713





F-16


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
6.    PROPERTY AND EQUIPMENT





Property
and equipment consists of the following at December 31, 2009 and
2008:





2009
            
            
            2008Production
      equipment
            
            $
            17,068,830
            
            
            $
            13,831,850Leasehold
      improvements
            
            
            476,230
            
            
            
            472,229Office
      equipment
            
            
            312,119
            
            
            
            302,602Vehicles
            
            
            46,897
            
            
            
            46,897Construction-in-process
            
            
            41,323
            
            
            
            --Total
      cost
            
            
            17,945,399
            
            
            
            14,653,578Less
      accumulated depreciation
            
            
            (6,315,863
            )
            
            
            (3,288,325
            )$
            11,629,536
            
            
            $
            11,365,253





During
the years ended December 31, 2009, 2008 and 2007 depreciation expense totaled
$3,101,817, $1,780,593 and $506,592, respectively.





NOTE
8.    INTANGIBLE ASSETS





Intangible
assets include loan costs of $3,221,400, net of amortization of $1,322,206, or
$1,899,194.  The loan costs related to the promissory notes are being
amortized over the life of the loan; sixty six months, five years or eight
years.  The loan costs related to the 2008 factoring fee are being
amortized over the three year contract term.  Amortization expense as of
December 2009, 2008 and 2007 was $182,748, $7,867, $16,834,
respectively.





In 2005,
the Company entered into a five-year contract to be the primary liquid coffee
provider for a group purchasing organization owned by a large contract
foodservice operator.  In connection with that contract, the Company
agreed to pay the group purchasing organization a $900,000 conversion fee that
is being amortized based on the quantity of product sold over the term of the
contract.  The agreement was modified in April 2007 to include iced
dispensed products and extended the terms of the agreement through 2012,
therefore, the remaining conversion fee is being amortized through the end of
the amended contract. The Company recorded an amortization expense for 2009,
2008 and 2007 of $156,450, $87,330 and $80,802, respectively.  The
conversion fee net of the $403,178 accumulated amortization is reported as an
allowance on the statement of operations and an intangible asset on the
Company’s balance sheet.





In 2008,
the Company entered into one year exclusivity period contracts with three
regional convenience store chains.  The Company paid for the
installation of 1,050 machines at a cost of $183,718.  The
installation costs were fully amortized in 2009.  The Company recorded
an amortization expense for 2009 and 2008 of $80,212 and $103,506,
respectively.





Intangible
      Assets
            
            2009
            
            
            2008Loan
      fees
            
            $
            3,221,400
            
            
            $
            1,167,954Conversion
      fee
            
            
            900,000
            
            
            
            900,000Installation
      Costs
            
            
            183,718
            
            
            
            183,7184,305,118
            
            
            
            2,251,672Accumulated
      amortization
            
            
            (1,909,103
            )
            
            
            (1,489,693
            )Net
      intangibles
            
            $
            2,396,015
            
            
            $
            761,979





Amortization
of the intangibles is as follows:





2009December
      31, 2010
            
            $
            475,9682011
            
            
            523,5602012
            
            
            328,6552013
            
            
            271,8342014
            
            
            271,834Thereafter
            
            
            524,164$
            2,396,015





F-17


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
9.    LINES OF CREDIT





In April
2009, the Company entered into financing arrangements with two of its
vendors.  The initial terms of the arrangement provide for the Company
to make 12 monthly payments and pay interest of 10% and 12% per annum on the
outstanding balance.  As of December 31, 2009, the outstanding
balances were $854,768 and $404,542.  The company incurred $139,000 in
interest expense on these facilities in 2009.





In April
2009, the Company paid off its $4,777,000 working capital line of credit balance
through Wells Fargo Bank, N.A. The line matured July 1, 2009 and was not
renewed. The company incurred $30,000 in interest expense on the line in
2009.





In
October 2008, the Company entered into a financing arrangement with a factoring
company.  The terms of the lending facility provided for the Company
to receive advance funding of up to 75% on the balance of its receivables up to
$6,000,000.  In September 2008, the Company paid a due diligence fee
of $29,500 which is being amortized over the life of the contract, 36
months.  The Company pays a 0.465% administrative fee for factoring a
specific receivable for each thirty (30) day period the receivable is
outstanding plus interest at three percent over prime. As of December 31, 2009,
the rate was 6.25% on the amount advanced by the factoring based on the days the
receivables is outstanding.  In addition, the factoring facility
allows the Company, at its option, to receive as an advance an additional 25% of
the eligible receivables.  This optional advance must be repaid over a
13 week period before it can be advanced again.  The Company pays a
0.5% draw down fee and interest of 0.467% per diem on the outstanding balance
for the optional advance. The amount owed on the factoring line as of December
31, 2009 was $1,772,801.





NOTE
10.    LONG-TERM DEBT





Promissory
Notes





On April
11, 2002, the Company issued $5,000,000 in promissory notes bearing 10% interest
per year, which matured on April 11, 2007. The proceeds of this funding paid off
a prior loan commitment and provided the Company with working capital to begin
operations.  In connection with these promissory notes, the Company
issued 30,000,000 shares of its restricted Common Stock and paid a 10% loan cost
totaling $500,000. The Company determined that per FASB ASC 470 “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants”,the note holders had
effectively purchased the 30,000,000 shares of restricted Common Stock for
$2,910,973 and had paid $2,089,027 for the debt, based on the relative fair
values of the respective equity and debt instruments
issued.  Accordingly, a $2,910,973 debt discount was recognized on the
$5,000,000 principal value of the promissory notes, which was amortized over the
five-year life of the debt.  This accounting makes the effective
compound interest rate on the notes approximately 25% over the term of the
debt.  Of the $5,000,000 in promissory notes $4,500,000 plus related
accrued interest were converted to Series B Preferred Stock in
2006.  The remaining $500,000 of principal plus accrued interest of
$250,000 was paid by the Company in April 2007.





In 2003,
the Company issued $6,000,000 in promissory notes bearing 10% interest per year,
which matured in 2008. The proceeds of this funding provided the Company with
working capital to continue operations. In connection with these promissory
notes, the Company issued 36,000,000 shares of its restricted Common Stock and
paid loan costs totaling $313,550.  The Company determined per FASB
ASC 470, the note holders had effectively purchased the 36,000,000 shares of
restricted Common Stock for $3,365,466 and had paid $2,634,534 for the debt,
based on the relative fair values of the respective equity and debt instruments
issued. Accordingly, a $3,365,466 debt discount was recognized on the $6,000,000
principal value of the promissory notes, which is being amortized over the
five-year life of the debt. This accounting makes the effective compound
interest rate on the notes approximately 25% over the life of the
debt.  Of the $6,000,000 in promissory notes, $5,775,000 plus related
accrued interest were converted to Series B Preferred Stock in 2006 and the
remainder paid in cash.





In 2004,
the Company issued $2,700,000 in promissory notes bearing 10% interest per year,
which mature in 2010. The proceeds of this funding provided the Company with
working capital to continue operations.  In connection with these
promissory notes, the Company issued 6,750,000 shares of Common Stock and
incurred loan costs totaling $225,000.   The Company determined
that per APBO No. 14 the note holders had effectively purchased the 6,750,000
shares of restricted Common Stock for $1,518,914 and had paid $1,181,086 for the
debt, based on the relative fair values of the respective equity and debt
instruments issued. Accordingly, a $1,518,914 debt discount was recognized on
the $2,700,000 principal value of the promissory notes, which is being amortized
over the five-year life of the debt. This accounting makes the effective
compound interest rate on the notes approximately 25% over the life of the
debt.  All of the $2,250,000 in promissory notes plus accrued interest
was converted to Series B Preferred Stock in 2006.  In 2009, $175,000
plus accrued interest was paid, the remaining $25,000 is due in February 2010
but remains unpaid as of March 2010.





F-18


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
10.    LONG-TERM DEBT (continued)





In June
2005, the Company issued $1,000,000 in promissory notes bearing 10% interest per
year, which mature in 2010. The proceeds of this funding provided the Company
with working capital to continue operations.  In connection with these
promissory notes, the Company issued 3,000,000 shares of its restricted Common
Stock and incurred loan costs totaling $50,000.  The Company
determined that per APBO No. 14 the note holders had effectively purchased the
3,000,000 shares of restricted Common Stock for $538,003 and had paid $461,997
for the debt, based on the relative fair values of the respective equity and
debt instruments issued.  Accordingly, a $538,003 debt discount was
recognized on the $1,000,000 principal value of the promissory notes, which is
being amortized over the five-year life of the debt. This accounting makes the
effective compound interest rate on the notes approximately 25% over the life of
the debt.  All but $25,000 of the $1,000,000 in plus related accrued
interest were converted to Series B Preferred Stock in 2006. The remaining
$25,000 plus accrued interest is due in 2010.





Senior
Subordinated Promissory Notes





From late
December 2008 to April 2009, the Company entered into Securities Purchase
Agreements with certain accredited investors for the sale of an aggregate of
$22.5 million in principal amount of senior subordinated promissory notes and an
aggregate of 102.5 million shares of the Company’s Common Stock.  
With the exception of the private equity firm, discussed below, all other
investors received a promissory note in the amount of their investment plus five
shares of restricted common stock per dollar invested.  The Company
relied on exemption from registration pursuant to Rule 506 of Regulation D of
the Securities Act of 1933 for the issuance of restricted common stock in
connection with its debt offering.





Of the
$22.5 million invested in senior subordinate promissory notes, $12.0 million was
received from a private equity firm. The private equity firm investor received
an eight year promissory note for $12.0 million and 50,000,000 shares of the
Company’s restricted common stock in accordance with its securities purchase
agreement. In connectionwith the
private debt offering, the Company also entered into a professional services
agreement with a private equity firm.  Pursuant to the services
agreement, the Company engaged the private equity firm to provide financial and
management consulting services to the Company and paid $500,000 for consulting
services provided by it to the Company prior to the closing of the
funding.  Under the services agreement, in consideration of the
consulting services to be provided by the private equity firm during the term of
the agreement, the Company will pay the private equity firm an annual management
fee of $100,000, which will be payable in quarterly installments.  The
Services Agreement terminates by its terms on September 30, 2014.  The
Company has capitalized the $500,000 consulting service fee as an intangible
asset and will amortize it as additional interest expense over the period of the
loan.   The annual management fee will be expensed over the
related period of the services.





The
Company also agreed to appoint a representative of the private equity firm
investor to the Company’s Board of Directors prior to the first meeting of the
Board of Directors following the closing of the funding.  The Company
agreed to nominate the investor’s representative to serve on the Company’s Board
of Directors so long as the investor continues to hold certain agreed amounts of
outstanding shares and outstanding principal under the notes; but not beyond the
tenth anniversary of the closing of the financing.   Mr. Scott
Dickey was nominated and elected to the Company’s Board of Directors in
September 2009.   Additional details are disclosed in the Form
8-K filed April 10, 2009.





In
connection with the private equity investment of $12.0 million in this private
debt offering, the Company recorded a debt discount of $4,321,183 on the
promissory note which is being amortized as additional interest over the period
of the note.   The discount was determined using the relative
fair value of the promissory note and the restricted common stock issued in
connection with the debt offering.   The effective interest rate
including the discount amortization is approximately 13.95%.





In
connection with the other $10.5 million investment in this private debt
offering, the Company determined that the best accounting treatment of the 52.5
million shares of stock issued is to use the relative fair value method to
calculate the discounted fair value of the debt and amortize the discount over
the maturity of the debt on an effective interest basis.  The Company
recorded a debt discount of $4,232,424, which is being amortized as an
additional non-cash interest expense over the eight-year period of the
promissory notes at an effective compound interest rate of approximately
12.9%.





As a part
of the $10.5 million raised, Company board members, Mssrs. Baker, Beard, Carlton
and Hackett, invested a total of $2,600,000 or $2.0 million, $100,000, $200,000,
and $300,000, respectively and received a promissory note for the amount of
their investment plus five shares per dollar invested for a total of 13,000,000
shares of the Company’s restricted common stock in the same ratio as other
similar investors.





F-19


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
10.    LONG-TERM DEBT (continued)





These
Senior Subordinated  promissory notes bear simple interest at the rate
of 10% per annum, are payable upon demand at any time on or after January 1,
2017, and may be prepaid by the Company without penalty at any
time.  Interest under the notes is payable in consecutive quarterly
installments beginning on April 1, 2009 and principal and interest become
payable in quarterly installments commencing on April 1, 2012.  The
obligations represented by the notes and the payment of the principal and
interest on the Notes are subordinate and subject to certain existing promissory
notes issued by the Company in private placement offerings conducted from 2002
to 2005, capital leases, senior debt and certain other permitted
indebtedness.  In 2009, the Company incurred $1.8 million of interest
expense in connection with this debt and $1.2 million in non-cash accretion of
the $8.6 million debt discount recorded as part of the transaction.





In 2008,
the Company incurred $9,000 of interest expense in connection with this debt and
$6,000 in non-cash accretion expense.





In
November 2009, the Company entered into Securities Purchase Agreements for
senior subordinate promissory notes with the private equity firm noted
above.  The private equity firm investor received a sixty-six month
promissory note for $4.0 million and 15,000,000 shares of the Company’s
restricted common stock in accordance with its securities purchase agreement.
These Senior Subordinated  promissory notes bear simple interest at
the rate of 12% per annum, are payable upon demand at any time on or after
January 1, 2017, and may be prepaid by the Company without penalty at any
time.   In 2009, the Company incurred $58,000 of interest expense
in connection with this debt and $31,649 in non-cash accretion expense of the
$1.8 million debt discount recorded as part of the transaction, paying an
effective interest rate of 12.7%





In
addition, as part of the November 2009 transaction, the private equity firm
committed to advance, at the Company’s election subject to certain conditions up
to another $3.5 million, under similar terms to fund debt service on their $12.0
million Senior Subordinated promissory notes funded in April
2009.  The Company would issue a sixty-six month promissory note and
3.75 shares of common stock for every dollar funded on this
commitment.  However, the Company does not currently have sufficient
shares available to issue in order to fully make use of this
commitment.





Senior Convertible
Debt





In
December 2008, the Company entered into an agreement with the Senior Convertible
Debt holders which gave it the right to prepay the Senior Convertible Debt at a
discount.  In December 2008, the Company prepaid $1,289,436 of the
then outstanding balance for $928,394.  The Company reported
forgiveness of debt income of $361,042 in connection with the
prepayment.  In April 2009, the Company prepaid the remaining balance
of $10,457,551 for $8,575,192.  The Company reported forgiveness of
debt income of $1,882,359, for a net of $1,798,629.





In
December 2006, the Company issued $21,000,003 in Senior Convertible
Debt.  The Senior Convertible Debt bears annual interest at 6.95% per
annum based on a 360-day year.  The debt agreement provides for
quarterly interest payments starting April 1, 2007 and fifty-four equal monthly
principal payments of $388,889 starting May 1, 2007.  At the Company’s
option, the interest and principal payments may be paid in either cash or in
registered Common Stock valued at a 12% discount to the volume weighted average
stock price for the 20 trading days following the due date (the “VWAP”), if the
VWAP is over $1.00 per share.  If the VWAP stock price is more than
$0.60 and less than or equal to $1.00 per share, then the principal payments at
the Company’s option may be paid in registered Common Stock valued at a 15%
discount to the VWAP.  At no time will the conversion value of the
registered shares used for payment of the debt exceed $1.79 per
share.  If the VWAP stock price is $0.60 or less, then the Company
will be required to pay the interest and principal payments in
cash.  The investors may elect at any time to convert any or all of
the debt to registered shares at a value based on $1.79 per
share.  The Senior Convertible Debt is a complex instrument requiring
the Company to strictly adhere to certain notifications and payment schedules or
be in default under its provisions.  If an event of default occurs
under the debt, the debt will bear interest at a rate of 15% for so long as the
default continues.  See the Senior Convertible Debt agreement attached
to the Company’s 8-K filed on December 18, 2006 for further
details.  The fair value of the Senior Convertible Debt without the
beneficial conversion feature was determined by first determining the fair value
of the warrants issued in connection with the transaction and allocating the
remainder of net proceeds to the debt.  The allocation to the debt was
$13,062,911 before expenses paid to third parties.  The Company
recorded a debt discount of $9,767,431, which is accreted at an interest rate of
approximately 26.9% over the life of the senior convertible debt as interest
expense.





F-20


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
10.    LONG-TERM DEBT (continued)





In 2007,
the Company paid in cash $388,889 of principal and $433,796 of accrued interest
related to its Senior Convertible debt. In addition, the Company issued
3,763,110 shares of its Common Stock in payment of $2,879,654 in principal and
$704,802 in accrued interest of the Senior Convertible debt.





In 2008,
the Company paid in cash $1,603,977 of principal and $22,846 of accrued interest
related to its Senior Convertible debt.  In addition, the Company
issued 15,941,351 shares of its Common Stock in payment $4,290,427 in principal
and $1,151,861 in accrued interest. The Company recorded a non-cash accretion
expense of $4,261,949 and $4,496,279 in 2009 and 2008,
respectively.





In April
2009, pursuant to a modification agreement to the Senior Convertible Debt
agreement, the Company notified the Senior Convertible Debt holders that the
Company intended to redeem the Senior Convertible Debt and related warrants
using the proceeds from its private offering.  The Company’s Senior
Convertible Debt was redeemed in April 2009 in accordance with the terms of a
modification agreement.





In 2009,
the Company recorded interest expense in connection with its $21 million Senior
Convertible Debt of $5,087,461. The interest expense is made up of accrued
interest on the convertible notes of $200,069 plus non-cash accretion of its
debt discount of $4,887,392.





In
connection with the Senior Convertible Debt, the Company issued warrants for the
purchase of 6,644,554 of the Company’s Common Stock.  The Company
issued Series A Warrants for 3,519,555 common shares at a strike price of $1.95
per share and Series B Warrants for 3,124,999 at a strike price of $2.24 per
share.  Any or all of the warrants maybe exercised any time between
June 2007 and December 2011.  The Company would receive gross proceeds
of $13,863,130 if these warrants were exercised in full at their current strike
prices. The A and B Warrant agreements are identical except for the strike
price. These warrants were valued at the time of issuance using the
Black-Scholes option valuation, which resulted in a fair value of $3,906,076 for
the A Warrants and $3,406,249 for the B Warrants, representing a total fair
value of these warrants of $7,312,955 as of December 15,
2006.  Because the warrants may be settled in cash under certain
circumstances, the Company was required under FASB ASC 815 to use liability
accounting for the warrants.  The fair value of the A and B warrants
of $7,312,955 was recorded as a warrant liability.  In connection with
the issuance of the Senior Convertible Debt, the Company also issued Series C
Warrants for the purchase of 11,731,844 at a strike price of $1.79 per
share.  These warrants only become exercisable if and to the extent
the Company exercises its option to pre-pay part or all of the Senior
Convertible Debt after April 8, 2009.  These warrants were retired in
April 2009 as part of the redemption of the Senior Convertible
Debt.





Cowen and
Co., LLC acted as exclusive private placement agent for the Senior Convertible
Debt offering and was paid a fee of $1,470,000 in cash in 2006.  In
addition, the Company reimbursed Cowen for its out-of-pocket expenses and issued
Cowen Conversion Share Warrants to purchase 351,955 shares of Common Stock with
a strike price of $1.79 per share, Series A Warrants to purchase 105,583 shares
of Common Stock with a strike price of $1.95 per share and Series B Warrants to
purchase 93,750 shares of Common Stock with a strike price of
$2.24.  The warrants are the same terms as other warrants issued in
connection the Senior Convertible Debt with the exception of the strike
prices.  The fair value of $624,137 for these warrants was determined
using Black-Scholes in the same manner as the warrants issued to the
investors.  The Company recorded the $624,137 as a warrant liability
as of the closing.





In
addition to the above, the Senior Convertible debt was determined to have a
beneficial conversion feature due to anticipated conversion of the debt
principal to Common Stock at a discount to market if the stock price at time of
conversion was between $0.60 and $1.79.  The fair value of this
beneficial conversion feature was determined to be $4,065,583 at the closing of
the debt transaction.  The fair value was determined by dividing the
Conversion Price of $1.79 into the total debt to get the Conversion Shares of
11,731,844 and multiplying the number of conversion shares times the VWAP stock
price at closing of $1.46 to get a determined debt value of $17,128,492.
Comparing this with the determined debt value of $13,062,912, the resulting
value of the beneficial conversion feature was determined to be
$4,065,583.  The value of this beneficial conversion feature was
recorded as an additional discount to the debt and an addition to
paid-in-capital as of the closing of the transaction.  The beneficial
conversion feature discount will be accreted to decrease the Beneficial
Conversion Feature (BCF) Discount and to record an Other Expense over the period
of the note using an effective interest rate of approximately 8.6%.





F-21


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
10.    LONG-TERM DEBT (continued)





In
connection with the issuance of the Senior Convertible Debt, the Company entered
into a Registration Rights Agreement that required it to file for registration
of a number of shares of Common Stock sufficient to allow full conversion of the
principal and interest payments and exercise of the warrants.  In
January 2007, the Company filed an S-3 Registration Statement with the
Securities and Exchange Commission.  It was declared effective April
25, 2007.





The
Company determined that all the conversion shares and Series A and B Warrants
issued in connection with the Senior Convertible Debt were to be accounted for
as derivative liabilities.  This accounting treatment requires the
Company to value the warrants at the end of each reporting period and record the
change in value (mark-to-market) as an increase or decrease in warrant liability
through a charge to other income or expense.





As of
December 31, 2009, the Company determined that, using the Black-Scholes formula,
the fair value of the remaining warrants had declined.  Accordingly,
the Company recorded “Income from derivatives” and recorded a corresponding
reduction in the “Warrants liability” of $47,294 and $2,332,444 in 2009 and
2008, respectively.  The Company used the following factors in
calculation of Black Scholes value, fixed interest of 1.9%, stock price of
$0.13, days remaining of 713 and volatility of 123.4% in December 31, 2009 and
fixed interest rate of 1.8%, stock price of $0.12, days remaining of 1,078 and
volatility of 90.6% as of December 31, 2008.





Long-term
debt at December 31, 2009 and 2008 consisted of the following:





2009
            
            
            2008Notes
      payable, unsecured, payable at quarterly starting April
      2012.  Interest paid quarterly starting April 2009 interest at
      10% per annum.  Matures 2016
            
            $
            22,500,000
            
            
            $
            3,240,000Notes
      payable, unsecured, payable at maturity including interest at 12% per
      annum.  Matures 2015.
            
            
            4,000,000
            
            
            
            --Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matures 2009
            
            
            25,000
            
            
            
            200,000Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matures 2010.
            
            
            25,000
            
            
            
            25,000Lease
      payable, secured by equipment, payable in monthly installments of
      $16,528.  Interest paid separately at 15.5% per
      annum.  Matures 2011.
            
            
            363,611
            
            
            
            561,944Lease
      payable, secured by equipment, payable in monthly installments of $631,
      including interest at 6% per annum.  Matures
    2012.
            
            
            17,537
            
            
            
            23,850Lease
      payable, secured by equipment, payable in monthly installments of $564,
      including interest at 9.879% per annum.  Matures
      2012.
            
            
            14,940
            
            
            
            19,960Lease
      payable, secured by equipment, payable in monthly installments of $438,
      including interest at 8.394% per annum.  Matures
      2012.
            
            
            11,104
            
            
            
            15,237Lease
      payable, secured by equipment, payable in monthly installments of $6,754,
      including interest at 16.41% per annum. Matures 2010.
            
            
            6,663
            
            
            
            79,943Senior
      convertible debt, unsecured, payable in installments from May 2007 through
      October 2011 with interest at 6.95% per annum due quarterly starting April
      2007 through maturity in 2011.  The debt was redeemed in full in
      2009
            
            
            --
            
            
            
            11,540,487Total
      long-term debt
            
            
            26,963,855
            
            
            
            15,706,421Less
      current portion
            
            
            271,732
            
            
            
            5,128,747Long-term
      debt less current portion.
            
            $
            26,692,123
            
            
            $
            10,577,674








Long-term
      debt matures as follows:2010
            
            $
            271,732
            
            
            $
            5,128,7472011
            
            
            183,391
            
            
            
            4,938,4002012
            
            
            3,383,732
            
            
            
            2,390,5422013
            
            
            4,500,000
            
            
            
            494,7322014
            
            
            4,500,000
            
            
            
            648,000Thereafter
            
            
            14,125,000
            
            
            
            2,106,000$
            26,963,855
            
            
            $
            15,706,421







F-22


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
11.    COMMITMENTS AND CONTINGENCIES





As of
December 31, 2009, Javo had forward commitments to purchase green coffee beans
of approximately $885,283.





Leases





The
Company entered into a non-cancelable operating lease for its office and
manufacturing space in October 2002. The lease was extended for an additional
year in December of 2008 and will expire in November 2010. The Company is
currently in lease negotiations for a new lease for it corporate and production
facility.  Also, in 2008, the Company entered into a cancelable
operating lease for additional warehouse space.  Total rent expense
for all operating leases for the years ended December 31, 2009, 2008 and 2007
amounted to $434,873, $393,960 and $337,624, respectively.





The
Company's future annual minimum lease payments as of December 31, 2009 are as
follows:





Year
      Ending2010
            
            $
            437,946$
            437,946


Litigation





As of
December 31, 2009 there were no material claims filed against the
Company.  The Company in its normal course of doing business is
subject from time to time to disputes and to legal proceedings against
it.





NOTE
12.    STOCK AND WARRANT TRANSACTIONS





Stock Option
Issuances





On April
25, 2007, the Company adopted its 2007 Stock Option and Incentive Plan, which
had been recommended by the Compensation Committee of the Board and approved by
the Board.  The Plan allows for the grant of equity options to the
Company’s officers, employees, directors and consultants and currently reserves
15 million shares of the Company’s Common Stock for
issuances.  Details of these actions are set forth in the Company’s
report on Form 8-K filed April 27, 2007.  The expense price under the
plan may not be less than 100% of the fair market value of the Company’s Common
Stock on the date of grant.





On April
25, 2007, a majority of the independent members of the Board approved the award
of incentive options for the purchase of a total of 5,000,000 shares of the
Company’s restricted Common Stock at a strike price of $1.16 to four Company
executives and one key employee.  Sixty percent of the options vest
after 3 years, 20% after 4 years, and the remaining 20% after 5
years.  The fair value of the ten-year options was determined to be
$4,988,000.  This was calculated using Black Scholes with a 105% stock
volatility, 2,555 days for the estimated remaining life of the options, a fixed
interest rate of 4.5%, and the strike price of $1.16.  The Company
recognized the value of the options as non-cash deferred compensation over the
term of the options based on their vesting schedule. The Company recorded a
non-cash expense of $602,717 and $1,446,520 related to the stock options, in
2009 and 2008 respectively.  The options were forfeited in June
2009.  A summary of option activity for 2009 is presented
below:





Options
            
            SharesOutstanding
      at December 31, 2008
            
            
            5,000,000Granted
            
            
            --Exercised
            
            
            --Forfeited
            
            
            (5,000,000
            )Expired
            
            
            --Outstanding
      at December 31, 2009
            
            
            --








F-23


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE
12.    STOCK AND WARRANT TRANSACTIONS
(Continued)





Compensation
costs for all share-based awards to employees are measured based on the grant
date fair value of those awards and recognized over the period during which the
employee is required to perform services in exchange for the award (generally
over the vesting period of the award). In 2007, the Company issued 5,000,000
employee options or share-based payment awards with market or performance
conditions. The shares vested over a 5-year period with the first vesting in the
third year.  In connection with the issuance of these options, the
Company recorded deferred compensation of $4,988,000, which was being amortized
as an expense based on the five year vesting period. The Company and executives
holding the options agreed to cancel these employee options in June of
2009.  The Company reported non-cash option expense related to the
2007 option grants of $602,717 and $1,446,520 in 2009 and 2008,
respectively.





In June
of 2009, the Company Board approved and the Company issued 5,000,000 shares of
forfeitable common stock to employees. The shares vest over a 5-year period with
the first vesting in the third year.  The Company reported non-cash
compensation expense of $217,500 in 2009.  The Company did not issue
any employee options in 2009.





The
following table shows information regarding outstanding equity awards at
December 31, 2009 for our named executive officers.




Shares
      ofForfeitable
            
            
            Vesting
      PeriodRestricted
            
            
            60%
            
            
            20%
            
            
            20%Common
      Stock
            
            
            June
      2012
            
            
            June
      2013
            
            
            June
      2014Cody
      C. Ashwell
            
            
            2,000,000
            
            
            
            1,200,000
            
            
            
            400,000
            
            
            
            400,000Gary
      A. Lillian
            
            
            1,300,000
            
            
            
            780,000
            
            
            
            260,000
            
            
            
            260,000Richard
      A. Gartrell
            
            
            500,000
            
            
            
            300,000
            
            
            
            100,000
            
            
            
            100,000William
      E. Marshall
            
            
            1,000,000
            
            
            
            600,000
            
            
            
            200,000
            
            
            
            200,000Total
            
            
            4,800,000
            
            
            
            2,880,000
            
            
            
            960,000
            
            
            
            960,000





The
calculation of stock-based compensation requires the Company to make numerous
estimates and assumptions and is particularly sensitive to the expected life of
each stock option and the estimated volatility of its stock, both of which the
Company estimates based primarily on historical
experience.  Accordingly, this expense may not be representative of
that to be expected in future years.





Stock
Issuances





On
September 21, 2008, a majority of the independent members of the Board approved
the awarding of 150,000 shares of Common Stock to each of the non-employee
directors of the Company under the 2007 Stock Option and Incentive
Plan.  In connection with the award, the Company recognized a $378,000
or $0.42 per share non cash stock expense.





During
2008, the Company converted $4,290,427 in principal and $1,151,861 in accrued
interest of its senior convertible debt principal and accrued interest into
15,941,351 shares of its Common Stock.  The conversion price was at a
discount from the weight volume average stock price for the relevant periods or
an average conversion price of $0.34 per share.





In July
2009, the Company issued 214,794 shares of Series B Preferred Stock as payment
in kind for a $1 dividend per share to the holders of the Series B Preferred
Shares.  The Series B Preferred Stock earns a $1 per share dividend payable
in kind or cash at the Company's option each July.





F-24


Warrants – Senior
Convertible Debt





The
outstanding warrants for the purchase of the Company’s Common Stock as of
December 31, 2009, are listed below.  None of the warrants is owned by
a director, officer or employee of the Company.





Strike
      Price
            Number
      of Warrants
            Exercise
      Period$1.79
            351,955
            June
      2007 through December 2011$1.95
            105,587
            June
      2007 through December 2012$2.24
            93,750
            June
      2007 through December 2013551,292





If these
warrants were exercised, the Company would receive $1 million in additional
capital.  These warrants are being accounted for as derivative
instruments and the fair value is determined on a mark-to-market basis using the
Black Scholes Valuation Model.  During 2009, the Company recorded
non-cash derivative income of $47,294, compared to $2,332,444 in 2008 before the
retirement of most of its outstanding warrants.  The warrants listed
above are the amount prior to any anti-dilution resets.





In 2008,
the Company retired 351,956 warrants with a $1.95 strike price and 312,500
warrants with a $2.24 strike price for a total of 664,455 warrants from the
Senior Convertible debt holders.  In 2009, the Company retired 837,990
warrants with a $1.95 strike price and 744,047 warrants with a $2.24 strike
price for a total of 664,455 warrants from the Senior Convertible debt holders.
Due to the retirement of most of the Company’s warrants in 2009 this liability
is insignificant at $9,477.  The following table is a summary of the
warrants calculation:





2009
            
            2008
            
            2007Strike
      Price
            $1.79
            $1.95
            $2.24
            
            $1.79
            $1.95
            $2.24
            
            $1.79
            $1.95
            $2.24Share
      price
            $0.13
            $0.13
            $0.13
            
            $0.12
            $0.12
            $0.12
            
            $0.74
            $0.74
            $0.74Warrants
      outstanding
            351,955
            105,587
            93,750
            
            351,955
            3,273,187
            2,906,249
            
            351,955
            3,625,142
            3,218,749Remaining
      days
            713
            713
            713
            
            1,078
            1,078
            1,078
            
            1,444
            1,444
            1,444Volatility
            123.41%
            123.41%
            123.41%
            
            90.6%
            90.6%
            90.6%
            
            88.0%
            88.0%
            88.0%Interest
      rate
            1.09%
            1.09%
            1.09%
            
            1.80%
            1.80%
            1.80%
            
            4.5%
            4.5%
            4.5%Black-Scholes
      value
            $0.018
            $0.0167
            $0.0147
            
            $0.0103
            $0.0094
            $0.0077
            
            $0.3536
            $0.3407
            $0.3199





NOTE
13.    PROVISION FOR INCOME TAXES





No
provision for income taxes was recorded in 2009, 2008 or 2007 since the Company
generated both book and tax losses.  The Company’s deferred tax assets
consist of the following:





2009
            
            
            2008
            
            
            2007Net
      operating loss carry forward
            
            $
            78,000,000
            
            
            $
            62,300,000
            
            
            $
            49,500,000Calculated
      deferred tax benefit
            
            
            31,200,000
            
            
            
            24,900,000
            
            
            
            19,800,000Valuation
      allowance
            
            
            (31,200,000
            )
            
            
            (24,900,000
            )
            
            
            (19,800,000
            )Deferred
      tax asset
            
            $
            --
            
            
            $
            --
            
            
            $
            --Provision
      for income tax benefits were as follows:Tax
      benefit, calculated at statutory rate
            
            
            (4,680,000
            )
            
            
            (3,934,200
            )
            
            
            (3,128,400
            )Increase
      in valuation allowance
            
            
            4,680,000
            
            
            
            3,934,200
            
            
            
            3,128,400$
            --
            
            
            $
            --
            
            
            $
            --





At
December 31, 2009, the Company had net operating loss carry forward of
approximately $40 million for federal and state purposes that expire in various
years through 2027.  The extent to which these loss carry forwards can
be used to offset future taxable income may be limited.





F-25


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE  14.    RELATED
PARTY TRANSACTIONS





Private Debt
Offering





As a part
of the $10.5 million raised in 2008 and 2009, Company board members, Mssrs.
Baker, Beard, Carlton and Hackett, invested a total of $2.6 million or $2.0
million, $100,000, $200,000, and $300,000, respectively and received a
promissory note for the amount of their investment plus five shares per dollar
invested or for a total of 13 million shares of the Company’s restricted common
stock in the same ratio as other similar investors.





Preferred Stock
Dividend





The
Company issued in-kind dividends of 16,225, 14,754 and 13,409 shares of Series B
Preferred Stock, respectively, to six of its Board members in 2009, 2008 and
2007, respectively.  The following table breaks down the ownership of
preferred shareholders by non-related and related parties.





2009
            
            
            2008
            
            
            2007Non-related
      parties
            
            
            2,184,268
            
            
            
            1,985,698
            
            
            
            1,805,181Board
      of Directors
            
            
            178,478
            
            
            
            162,253
            
            
            
            147,502Total
            
            
            2,362,746
            
            
            
            2,147,951
            
            
            
            1,952,683





Dispenser





In 2005,
the Company entered into a seven year rental agreement with Javo Dispenser, LLC
(“LLC”) to rent liquid concentrate dispensers for placement at its customer
locations.  The LLC is a Delaware limited liability company owned by
Company directors Baker, Hackett and Solomon, two former directors and three
other Company shareholders.  The Company’s Chief Financial Officer
serves, without remuneration of any kind, as the General Manager of the
LLC.  The LLC has agreed to acquire, as needed, up to $2,000,000 worth
of liquid dispensers.  The term of the rental agreement extends to
2010 and, at the end of the term, the Company has the right to acquire the
dispensers for nominal consideration of $1.00.





F-26


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2009





NOTE  14.    RELATED
PARTY TRANSACTIONS (CONTINUED)





Dispenser





As of
December 31, 2009, the LLC had purchased 896 dispensers.  The Company
incurred dispenser rental expense of $728,160, $728,160 and $716,640, in 2009,
2008 and 2007, respectively.  Presented below are the Condensed
Balance Sheets as of December 31, 2009 and 2008, and the Statements of
Operations for the years ended December 31, 2009, 2008, and 2007
respectively.





JAVO
DISPENSER, LLC. CONDENSED
BALANCE SHEETS As
of December 31, 2009 and 2008 (UNAUDITED)


2009
            
            
            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,167
            
            
            $
            704Accounts
      receivable
            
            
            452,120
            
            
            
            253,326Total
      current assets
            
            
            453,287
            
            
            
            254,030Property
      and equipment, net
            
            
            594,416
            
            
            
            1,041,210Total
      assets
            
            $
            1,047,703
            
            
            $
            1,295,240LIABILITIES
      AND MEMBER EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            23,950
            
            
            $
            52,284Long-term
      debt
            
            
            338,764
            
            
            
            806,610Total
      liabilities
            
            
            362,714
            
            
            
            858,894Member
      Equity
            
            
            684,989
            
            
            
            436,346Total
      liabilities and member equity
            
            $
            1,047,703
            
            
            $
            1,295,240





JAVO
DISPENSER, LLC. CONDENSED
STATEMENTS OF OPERATIONS For
the Years Ended December 31, 2009,  2008 and 2007 (UNAUDITED)


2009
            
            
            2008
            
            
            2007Rental
      Income
            
            $
            730,482
            
            
            $
            728,160
            
            
            $
            716,640Operating
      expenses:General
      and administrative
            
            
            (457,849
            )
            
            
            (443,302
            )
            
            
            (434,307
            )Total
      operating expenses
            
            
            (457,849
            )
            
            
            (443,302
            )
            
            
            (434,307
            )Income
      from operations
            
            
            272,633
            
            
            
            284,858
            
            
            
            282,333Other
      income (expenses):Interest
      expense
            
            
            (23,990
            )
            
            
            (69,031
            )
            
            
            (143,887
            )Net
      Income
            
            $
            248,643
            
            
            $
            215,827
            
            
            $
            138,446







F-27


ITEM
9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
STATEMENTS




Not
applicable.





ITEM
9A.  CONTROLS
AND PROCEDURES







Disclosure
Controls and Procedures





The
Company management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31,
2009.   Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) are effective.





Management’s
Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in the
Exchange Act Rule 13a-15(f).  The Company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide responsible assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reuse, or disposition of the Company’s assets
that could have a material effect on the financial statements.





Internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements prepared for external purposes in accordance with generally
accepted accounting principles.  Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Under the
supervision and with the participation of management, including its
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of its internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.   Based on this evaluation, management has determined that
as of December 31, 2009, there was a material weakness in our internal
control over financial reporting. The Company previously reported its marketing
allowances as a part of its selling and marketing expenses instead of properly
reporting them as part of net sales in accordance with FASB ASC 605. This error
had no effect on previously reported net loss, but it reduced gross profit and
operating expenses and therefore resulted in a restatement of the 2008 and 2007
statements of operations. Thus, the Company reclassified marketing allowances
presenting them as a part of net sales instead of selling expenses. In light
of this material weakness, management has concluded that, as of
December 31, 2009, we did not maintain effective internal control over
financial reporting. As defined by the Public Company Accounting Oversight Board
Auditing Standard No. 5, a material weakness is a deficiency or a
combination of deficiencies, such that there is a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. In order to ensure the effectiveness of our presentation
controls in the future we intend on adding financial staff resources to our
accounting and finance department.





Changes
in Internal Control over Financial Reporting





The
Company periodically hires an independent consultant to help the Company
develop, test and implement the best process to ensure that its internal
controls over Financial Reporting are effective and
efficient.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been reviewed and attested by Farber Hass Hurley LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.


23


Item
9B.  Other
Information







Not
applicable.


















































24





PART
III


ITEM
10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE







Directors
and Executive Officers





Set forth
below are the names and ages of Javo’s executive officers and directors, as of
December 2009, as well as certain biographical information.





CODY C. ASHWELL,
39





Cody C.
Ashwell is the Chairman and Chief Executive Officer of Javo Beverage Company.
Mr. Ashwell has served as the Company's CEO and Chairman since September 2001,
acted as a consultant to the Company prior to that, and has held a major stake
in the Company since 1999. Prior to joining Javo, Mr. Ashwell was managing
partner of Ashwell, Marshall & Associates. Prior to this, he was the founder
and principal of a successful financial and insurance services firm, which was
sold to the Allstate Insurance Corporation.





GARY LILLIAN,
53





Gary A.
Lillian is Javo’s President, responsible for the company's commercial strategy
and the development of key industry alliances. Prior to becoming Javo's
President in January 2002, Mr. Lillian held executive level sales and marketing
positions at consumer products companies including PepsiCo, Ford Motor Company,
Pennzoil-Quaker State and The Clorox Company.  He also founded
start-up companies, including a beverage company and a packaged food company,
which was later sold to Nestle. Lillian earned a bachelor's and a master's
degree in business administration from Northwestern University.





RICHARD A. GARTRELL,
61





Richard
A. Gartrell has served as Javo's Chief Financial Officer since 2001 and acted as
a consultant to the Company for two years prior to that.  Mr. Gartrell
was a certified public accountant (inactive) and has more than 32 years of
accounting experience.  He has acted successfully in the position of
chief financial officer at several company’s, most recently AMX Resorts, Inc.
Mr. Gartrell has been qualified as an expert witness in forensic accounting and
holds a Bachelor of Science degree in accounting from Colorado State
University.





WILLIAM E. MARSHALL,
39





William
E. Marshall is Javo’s Senior Executive Vice President of Operations and General
Counsel and, since March 2002, the Company's corporate secretary. Prior to
becoming general counsel in January 2002, Mr. Marshall served as the Company's
Chief Administrative Officer. Mr. Marshall became Senior Executive Vice
President in September 2002.  A member of the California State Bar,
Marshall earned his juris doctorate from the University of California at Los
Angeles. He completed his undergraduate studies at the University of California
at Santa Barbara.





WILLIAM C. BAKER,
76





William
C. Baker has been a director of the Company since January, 2004.  Mr.
Baker also serves as a director of Public Storage, Inc. and California Pizza
Kitchen, Inc. Previously, Mr. Baker served as a Director of Callaway Golf
Company and of La Quinta Corporation (f/k/a The Meditrust Companies), President
and Chief Executive Officer of the Los Angeles Turf Club, Inc., a subsidiary of
Magna International, Inc., Chairman and Chief Executive Officer of The Santa
Anita Companies, Inc., Chairman of Santa Anita Realty Enterprises, Inc. and
Chairman, President and Chief Executive Officer of Santa Anita Operating
Company. Mr. Baker also served as President and Chief Operating Officer of Red
Robin International, Inc. (a restaurant chain) from May 1993 to May 1995, and
Chairman and Chief Executive Officer of Carolina Restaurant Enterprises, Inc.
from August 1992 to December 1995. He was the principal shareholder and Chief
Executive Officer of Del Taco, Inc.





RONALD S. BEARD,
71





Ronald S.
Beard has served as a Director of Callaway Golf Company since June 2001. He
is the non-executive Chair and also serves as lead independent director.
Mr. Beard is currently a partner in the Zeughauser Group, consultants to
the legal industry. Mr. Beard is a retired former partner of the law firm
of Gibson, Dunn & Crutcher LLP. He joined the firm in 1964, served as
Chairman of the firm from April 1991 until December 2001, and was also
its Managing Partner from April 1991 until mid-1997. Mr. Beard served
as Callaway Golf Company's general outside counsel from 1998 until he joined the
Board of Directors. He received his law degree in 1964 from Yale Law
School.


25


JERRY W. CARLTON,
68




Jerry W.
Carlton serves as vice-chair of the Board of Oakmont Corporation, which manages
various investments.  Mr. Carlton is an attorney specializing in tax
and general business law and was a partner in O'Melveny & Myers L.L.P. for
30 years. As Managing Partner of the firm's Orange County office for 15 years,
Mr. Carlton handled hospital acquisitions and divestitures and was responsible
for all legal aspects of a large managed care entity. Mr. Carlton has served as
a director of numerous public and privately-held companies and on the boards of
several charitable organizations, including: Phoenix House, Prentice Day School,
Willametta K. Day Foundation, Arlington Investment Company, Vicente Management
Company and the Foley Timber Company, Oakmont Corporation and Fibres
International. Mr. Carlton earned his law degree from the University of Texas in
1967.




SCOTT P. DICKEY,
43





Scott P.
Dickey has been an Operating Partner of Falconhead and President of Competitor
Group, Inc., a private endurance sports media and event entertainment company,
since May 2008.  From 2006 to 2007, he served as President of
Transworld Media, an action sports media company and a former division of Time
Warner. From 2004 to 2006, Mr. Dickey was at K2 Inc., a publicly-traded
manufacturer and distributor of premier branded sporting goods equipment,
serving as President of K2 Licensed Products Inc. and K2 Properties, a division
he organized and launched. From 2001 to 2004, Mr. Dickey served as President and
Chief Operating Officer of Fotoball USA, Inc., a publicly-traded sports and
entertainment marketer and manufacturer specializing in licensed sporting goods,
which K2 Inc. acquired. He currently serves on the board of directors of
Competitor Group, Inc. Mr. Dickey received a Bachelor of Arts degree from Bates
College in Lewiston, Maine.





STANLEY L. GREANIAS ,
65





Stanley
L. Greanias joined the board in March 9, 2010.  Mr. Greanias has
served as the President and Chief Executive Officer of the Greek American
Restaurant Cooperative since 2009.  From 2005 to 2007, he served as
the President and Chief Executive Officer of Grecian Delight Foods,
Inc.  From 1999 to 2003, Mr. Greanias was the Vice President of Sara
Lee Corporation and the Chief Executive Officer of Sara Lee Coffee and Tea,
North America.  From 1990 to 1999, he was Group President of Sara Lee
Coffee and Tea, North America and from 1985 to 1990, the President and CEO of
Superior Coffee.  From 1992 to 1993, Mr. Greanias served as the
chairman of the National Coffee Association.





TERRY C. HACKETT,
61





Terry C.
Hackett has been a director of the Company since January 2004.  Mr.
Hackett has specialized in business and real estate transactions during his
legal career. Currently he is the President of Hackett Management Corporation, a
real estate management company, which manages certain real estate assets,
primarily retail properties. For fifteen years Mr. Hackett sat on the Board of
Directors of Knott's Berry Farm Foods, which manufactured preserves, salad
dressings, and other products for distribution throughout the United States. The
company was sold to ConAgra in 1995. Mr. Hackett also sat on the Board of the
parent company, Knott's Berry Farm, which was involved in the theme park, retail
and food service business. Subsequently, he was the representative for the Knott
family on the Board of Cedar Fair LP, which acquired Knott's. Mr. Hackett has a
degree in business finance from the University of Southern California School of
Business and juris doctorate from the University of Southern California School
of Law.





STANLEY A. SOLOMON,
69





Stanley
A. Solomon has been a director of the Company since January 2004.  Mr.
Solomon is a Certified Public Accountant currently operating a professional
practice specializing in providing tax consulting services. Previously, Mr.
Solomon was a partner in the national accounting firm of Kenneth Leventhal &
Company. Mr. Solomon has served as an outside director of two publicly traded
corporations. He earned a B.S. degree in accounting from Hunter College and a
law degree from Brooklyn Law School.





RICHARD B. SPECTER,
57





Richard
B. Specter has been a director of the Company since January,
2004.  Mr. Specter is a partner in the Southern California law firm of
Corbett, Steelman & Specter. Mr. Specter has served as a litigator for over
thirty-three years with extensive experience in both Federal and State courts.
He has acted as lead counsel in major litigation involving franchise disputes,
distribution rights, unfair competition and trademark issues. He has also been
involved in antitrust matters affecting the petroleum, sports and newspaper
industries, Federal and State securities claims, and commercial transactions.
Mr. Specter's trial experience includes the areas of product liability, business
disputes, real estate matters, insurance, professional malpractice and banking
litigation, and antitrust litigation. Mr. Specter received his B.A. degree from
Washington University and his law degree from George Washington University. Mr.
Specter is a member of the Orange County Bar Association, American Bar
Association, Pennsylvania Bar Association, Illinois State Bar Association, and
Missouri Bar Association.





There are
no family relationships among our directors or executive officers. With the
exception of Scott P. Dickey, who joined the board in 2009, and Stanley
L. Greanias, who joined the board in 2010, each outside director received
150,000 shares of the Company's Common Stock as compensation for his service on
the board of directors in 2004 and in 2008.  No additional
compensation has been given or paid to outside directors or executive committee
members.


26





Compliance
With Section 16(a) of the Exchange Act





Under
Section 16(a) of the Securities Exchange Act of 1934 and SEC
rules, the Company's directors, executive officers and beneficial
owners of more than 10% of any class of equity security are required to file
periodic reports of their ownership, and changes in that ownership, with the
SEC.  Executive officers, directors and greater-than-10% stockholders
are required by SEC regulations to furnish the Company with copies of
all reports filed under Section 16(a).  To the Company’s knowledge,
based solely on the review of copies of the reports furnished to the Company,
reports required to be filed by its executive officers, directors and
greater-than-10% stockholders were timely filed with the exception of Forms 4
for Messrs. Beard, Carlton and Hackett that were due to be filed on April 8,
2009 but were not filed until April 9, 2009.





Code
of Ethics





The
Company has adopted a formal written code of ethics that applies to its
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions.  Javo
has posted a copy of its code of ethics on its website at www.javobeverage.com.  If
we make substantive amendments to the code of ethics, or grant any waiver,
including any implicit waiver, to our principal executive, financial or
accounting officer, or persons performing similar functions, we will disclose
the nature of such amendment or waiver on our website and/or in a report on Form
8-K in accordance with applicable rules and regulations.  You may also
request a printed copy of the code of ethics, without charge, by
writing the Company at 1311 Specialty Drive, Vista,
California  92081, Attn: Investor Relations.





Audit
Committee





The
Company does not have a standing audit committee.  As a small company
that is traded on the OTC market, it believes that all members of its
Board of Directors acting together, as opposed to a subset of them acting by
means of a committee, is the most efficient and effective framework for us to
perform the functions otherwise associated with an audit committee;
therefore, the entire Board of Directors acts as the audit
committee.  The Board of Directors has determined that William C.
Baker qualifies as an audit committee financial expert as defined in Item 407 of
Regulation S-K of the Securities and Exchange Act of 1934.  The
Company believes that Mr. Baker does not satisfy the independence standards
promulgated by the NASDAQ Stock Market (including independence standards for
audit committee members) due to his ownership interest in Javo Dispenser,
LLC.  Because Javo does not have a separate audit
committee, it does not currently have a written audit committee charter or
similar document.  We plan to form a standing audit committee during
fiscal 2010.




ITEM
11.  EXECUTIVE
COMPENSATION







The
information required by this item is incorporated by reference from the
Company’s proxy statement for its 2010 Annual Meeting of
Stockholders.


ITEM
12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.




The
information required by this item is incorporated by reference from the
Company’s proxy statement for its 2010 Annual Meeting of
Stockholders.


ITEM
13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




The
information required by this item is incorporated by reference from the
Company’s proxy statement for its 2010 Annual Meeting of
Stockholders.


ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES


The
information required by this item is incorporated by reference from the
Company’s proxy statement for its 2010 Annual Meeting of
Stockholders.





27





ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
Financial Statements – See Index on page F-1





(b) Exhibits





The
following exhibits are incorporated by reference or filed as part of this
report.





Exhibit
              Number
            
            Description
            
            Incorporated
      by Reference From
            
            Filing
      Date3.1
            
            Amended
      and Restated Certificate of Incorporation of the
Registrant
            
            Current
      Report on Form 8-K, as Exhibit 3.5
            
            November
      6, 20063.2
            
            Bylaws
      of the Registrant, as adopted June 21, 2002
            
            Current
      Report on Form 8-K, as Exhibit 3.3
            
            August
      19, 20024.1
            
            Shareholder
      Rights Agreement, dated July 1, 2002, by and between Javo Beverage
      Company, Inc. and Corporate Stock Transfer, Inc. as Rights
      Agent
            
            Current
      Report on Form 8-K, as Exhibit 4.2
            
            August
      19, 20024.2
            
            Amendment
      No. 1 to Rights Agreement, dated as of November 17, 2009, by and between
      the Company and Corporate Stock Transfer, Inc.
            
            Current
      Report on Form 8-K, as Exhibit 4.1
            
            November
      19, 20094.3
            
            Certificate
      of Designation of Series B Preferred Stock
            
            Current
      Report on Form 8-K, as Exhibit 3.4
            
            June
      7, 20064.4
            
            Registration
      Rights Agreement, dated December 15, 2006, by and among Javo Beverage
      Company, Inc. and the Investors named therein
            
            Current
      Report on Form 8-K, as Exhibit 10.7
            
            December
      18, 20064.5
            
            Form
      of Series A Warrant to Purchase Common Stock
            
            Current
      Report on Form 8-K, as Exhibit 10.9
            
            December
      18, 20064.6
            
            Form
      of Series B Warrant to Purchase Common Stock
            
            Current
      Report on Form 8-K, as Exhibit 10.10
            
            December
      18, 20064.7
            
            Form
      of Series C Warrant to Purchase Common Stock
            
            Current
      Report on Form 8-K, as Exhibit 10.11
            
            December
      18, 200610.1*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Cody C. Ashwell
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.1
            
            April
      16, 200210.2*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Gary A. Lillian
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.2
            
            April
      16, 200210.3*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Richard A. Gartrell
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.3
            
            April
      16, 200210.4*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      William E. Marshall
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.4
            
            April
      16, 200210.5*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Stephen F. Corey
            
            Annual
      Report on Form 10-KSB for the Fiscal year ended December 31, 2001, as
      Exhibit 10.5
            
            April
      16, 200210.6
            
            Net
      Industrial Lease (Facility Lease), dated August 12, 2002, by and between
      Square One Partners and La Jolla Fresh Squeezed Coffee Company,
      Inc.
            
            Quarterly
      Report on Form 10-QSB for the Quarter ended June 30, 2002, as Exhibit
      10.1
            
            August
      15, 2002





28





Exhibit
              Number
            
            Description
            
            Incorporated
      by Reference From
            
            Filing
      Date10.7*
            
            2007
      Stock Option and Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.1
            
            May
      1, 200810.8*
            
            Form
      of Non-Qualified Stock Option Agreement for Company Employees for use with
      2007 Stock Option and Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.2
            
            May
      1, 200810.9*
            
            Form
      of Non-Qualified Stock Option Agreement for Company Non-Employee Directors
      for use with 2007 Stock Option and Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.3
            
            May
      1, 200810.10*
            
            Form
      of Restricted Stock Award Agreement for use with 2007 Stock Option and
      Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.4
            
            May
      1, 200810.11*
            
            Form
      of Performance Share Award Agreement for use with 2007 Stock Option and
      Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.5
            
            May
      1, 200810.12
            
            Javo
      Dispenser LLC Master Equipment Lease Agreement
            
            Quarterly
      Report on Form 10-Q for the Quarter ended June 30, 2008, as Exhibit
      10.1
            
            August
      1, 200810.13
            
            Limited
      Liability Agreement of Javo Dispenser, LLC
            
            Quarterly
      Report on Form 10-Q for the Quarter ended June 30, 2008, as Exhibit
      10.2
            
            August
      1, 200810.14
            
            Amendment
      No. 1 to Limited Liability Company Operating Agreement
            
            Quarterly
      Report on Form 10-Q for the Quarter ended June 30, 2008, as Exhibit
      10.3
            
            August
      1, 200810.15
            
            Securities
      Purchase Agreement, dated December 14, 2006, by and among Javo Beverage
      Company, Inc. and the Investors named therein
            
            Current
      Report on Form 8-K, as Exhibit 10.6
            
            December
      18, 200610.16
            
            Securities
      Purchase Agreement, dated April 6, 2009, by and between the Company and
      Coffee Holdings LLC
            
            Current
      Report on Form 8-K, as Exhibit 10.1
            
            April
      10, 200910.17
            
            Form
      of Senior Convertible Note
            
            Current
      Report on Form 8-K, as Exhibit 10.8
            
            December
      18, 200610.18
            
            [Form
      of Senior Subordinated Promissory Note from April 6, 2009]
            
            Current
      Report on Form 8-K, as Exhibit 10.2
            
            April
      10, 200910.19
            
            Professional
      Services Agreement, dated April 6, 2009, by and between the Company and
      Falconhead Capital, LLC
            
            Current
      Report on Form 8-K, as Exhibit 10.3
            
            April
      10, 200910.20
            
            Form
      of Unit Financing Securities Purchase Agreement
            
            Current
      Report on Form 8-K, as Exhibit 10.4
            
            April
      10, 200910.21
            
            Form
      of Unit Financing Senior Subordinated Promissory Note
            
            Current
      Report on Form 8-K, as Exhibit 10.5
            
            April
      10, 200910.22
            
            Securities
      Purchase Agreement, dated as of November 17, 2009, by and between the
      Company and Coffee Holdings LLC
            
            Current
      Report on Form 8-K, as Exhibit 10.1
            
            November
      19, 200910.23
            
            Form
      of Senior Subordinated 12% Note (Initial Note)
            
            Current
      Report on Form 8-K, as Exhibit 10.2
            
            November
      19, 200910.24
            
            Form
      of Senior Subordinated 12% Note (Additional Note)
            
            Current
      Report on Form 8-K, as Exhibit 10.3
            
            November
      19, 200923.1
            
            Consent
      of Independent Registered Public Accounting Firm
            
            Filed
      herewith31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith31.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith32.1
            
            Certification
      of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith32.2
            
            Certification
      of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith


_____________


*
Management contract or compensatory plan or arrangement.


29





SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Javo
Beverage Company, Inc. has caused this report to be signed on its behalf by the
undersigned, there under duly authorized, this March 16, 2010.





Javo
      Beverage Company, Inc.,
              a
      Delaware corporationBy:
            /s/ Cody
      C. AshwellCody
      C. AshwellIts:  Chairman
      and Chief Executive Officer





By:
            /s/ Richard
      A. GartrellRichard
      A. GartrellIts:  Chief
      Financial Officer








POWER
OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Cody Ashwell and Richard Gartrell, jointly and
severally, his attorney-in-fact, each with the power of substitution, for such
person in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection herewith, as fully to all intents and purposes as he
might do or could do in person hereby ratifying and confirming all that each of
said attorneys-in-fact and agents, or his substitute, may do or cause to be done
by virtue hereof.





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 in the
City of Vista, California, on March 16, 2010.





Javo
      Beverage Company, Inc.,
              a
      Delaware corporationBy:
            /s/ Cody
      C. AshwellCody
      C. AshwellIts:   Chairman
      and Chief Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities.





By:
            /s/ Cody
      C. AshwellCody
      C. Ashwell





By:
            /s/ William
      C. BakerWilliam
      C. BakerDirector





By:
            /s/ Ronald
      S. BeardRonald
      S. BeardDirector





By:
            s/
      Jerry W. CarltonJerry
      W. CarltonDirector





By:
            /s/
      Scott P. DickeyScott
      P. DickeyDirector





By:Stanley
      L. GreaniasDirectorBy:
            /s/
      Terry C. HackettTerry
      C. HackettDirector





By:
            /s/
      Stanley A. SolomonStanley
      A. SolomonDirector





By:Richard
      B. SpecterDirector





30