UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


____________________________________________________





FORM 10-K/A-1





(Mark One)


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


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





Commission File No.  _____________-___________





Muscato Group, Inc.(Exact name of issuer as specified in its charter)








Nevada

__-________(State or other jurisdiction of incorporation or organization)

(I.R.S.  Employer Identification No.)





2301 Maitland Center Parkway, Suite 240

Maitland, Florida 32751

32751(Address of principal executive offices)

(Zip Code)





Registrant’s telephone number, including area code: (407) 551-1300





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 $0.0001 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 x





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 x





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












Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 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 Part III of this Form 10-K or any amendment to this Form 10-K.   x





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 o





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





Large accelerated filer
o

Accelerated filer
oNon-accelerated filer

(Do not check if a smaller reporting company)
o

Smaller reporting company
x





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





As of the last business day of the registrant’s most recently completed second fiscal quarter, there was no public trading market for our common stock.





As of March 29, 2010, the registrant had 8,127,500 shares issued and outstanding, respectively.




Documents Incorporated by Reference:





None.











TABLE OF CONTENTS





PART IITEM 1.
BUSINESS


1ITEM 2.
PROPERTIES


8ITEM 3.
LEGAL PROCEEDINGS


8ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


8PART IIITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


9ITEM 6.
SELECTED FINANCIAL DATA


9ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


10ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


13ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


13ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


14ITEM 9A.
CONTROLS AND PROCEDURES


14PART IIIITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


15ITEM 11.
EXECUTIVE COMPENSATION


17ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


17ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


18ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES


18PART IVITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES


19SIGNATURES



20













PART I





ITEM 1.         BUSINESS





Muscato Group, Inc. (the "Company") is the holding company for all M2 operating companies. With a 23-year track record of architecting, developing and implementing transaction processing and financial software, the Company is widely recognized as the gold standard in middleware software engineering and e-commerce system.





Through its operating entities, the Company is defining the next generation of message brokering and e-commerce technology, prepaid and debit card processing technology, money transfer, mobile banking, transaction security and innovative consumer and business solutions for the changing world of health care, financial services and many other industries.





On September 30, 2009, we entered into a share exchange agreement (the “Share Exchange Agreement”) and consummated a share exchange (the “Share Exchange”) with M2 Systems Corporation, a Florida corporation, (hereinafter, “M2 Systems”), and each of the shareholders of M2 Systems (the “M2 Systems Shareholders”).





Upon the closing of the Share Exchange on September 30, 2009 (the “Closing”), the M2 Systems Shareholders transferred all of their shares of common stock in M2 Systems to us.  In exchange, we issued to the M2 Systems Shareholders an aggregate of 6,600,000 shares of our common stock (the “Common Stock”), $0.0001 par value per share, representing 81.21% of the shares issued and outstanding immediately after the Closing.  As a result of the Share Exchange, M2 Systems became our wholly-owned subsidiary.





M2 Systems was formed on April 27, 2002 under the laws of the State of Florida, as M2 Systems Corporation.  Immediately prior to the Closing, Michael Muscato and Joseph Adams were the two directors and officers of M2 Systems.





At Closing, our officers and directors resigned from their positions.  Michael Muscato was appointed as our Chief Technology Officer and Director, Joseph Adams was appointed as our Chief Executive Officer and Director, Randy Oveson was appointed as our Chief Financial Officer, and Malcolm Kirschenbaum was appointed as a Director.





The Share Exchange Agreement contained customary terms and conditions for a transaction of this type, including representations, warranties and covenants, as well as provisions describing the process of exchanging the consideration and the effect of the Share Exchange.  In addition, as a condition to Closing, 5,000,000 shares of our Common Stock held by Diane Pyun were placed in escrow to be canceled within 120 days from Closing.  As of the Closing date, the Company had 8,127,100 shares of Common Stock outstanding, not including the 5,000,000 shares held in escrow and pending cancellation.





Closing of the Share Exchange Agreement





As described in Item 1.01 above, on September 30, 2009, we entered into a Share Exchange Agreement with M2 Systems and M2 Systems Shareholders.





At Closing, pursuant to the terms of the Share Exchange Agreement, the M2 Systems Shareholders transferred all of their shares of common stock in M2 Systems to us in exchange for an issuance to them of an aggregate of 6,600,000 newly-issued shares of our Common Stock (or 81.21% of our Common Stock), resulting in M2 Systems becoming our wholly-owned subsidiary.





Prior to the Share Exchange, Joseph Adams, our newly appointed CEO and director, and Michael Muscato, our newly appointed Chief Technology Officer and director, owned an aggregate of 100 shares or 100% of the issued and outstanding capital stock of M2 Systems.  Following the Share Exchange, Michael Muscato and Joseph Adams own an aggregate of 6,600,000 shares or 81.21% of our issued and outstanding Common Stock.





1





At this time, we intend to carry on M2 Systems’ business as our sole line of business which is a developer and operator of technology for financial and healthcare companies.





At Closing, our current officers and directors resigned from their positions and Michael Muscato was appointed and elected as Chief Technology Officer and Director, Joseph Adams was appointed and elected as Chief Executive Officer and Director, Randy Oveson was appointed as Chief Financial Officer and Malcolm Kirschenbaum was appointed as a Director.  All directors hold office for one-year terms until the election and qualification of their successors.  Officers are elected by the board of directors and serve at the discretion of the board of directors.





The Share Exchange is being accounted for as a “reverse merger” because the M2 Systems’ Shareholders now own a majority of the outstanding shares of our Common Stock immediately following the Share Exchange.  M2 Systems is deemed the acquirer in the reverse merger.  Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements prior to the Share Exchange are those of M2 Systems and are recorded at the historical cost basis of M2 Systems, and the consolidated financial statements after completion of the Share Exchange include our assets and liabilities and those of M2 Systems, historical operations of M2 Systems, and our operations from the Closing of the Share Exchange.





Except as described in the previous paragraphs, no arrangements or understandings exist among present or former controlling stockholders with respect to the election of members of our board of directors and, to our knowledge, no other arrangements exist that might result in a change of control of the Company. Further, because of the issuance of the shares of our Common Stock pursuant to the Share Exchange, a change in control of the Company occurred on the date of consummation of the Share Exchange. We will continue to be a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act” ), following the Share Exchange.





The Registrant was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) immediately before the completion of the Share Exchange Agreement.  Accordingly, pursuant to the requirements of Item 2.01(a)(f) of Form 8-K, set forth below is the information that would be required if the Company were filing a general form for registration of securities on Form 10-SB under the Exchange Act, reflecting the Company’s common stock, which is the only class of its securities subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act upon consummation of the Share Exchange, with such information reflecting the Company and its securities upon consummation of the Share Exchange.





Overview of M2’s Business





General


M2 Systems is a software technology company with an emphasis on healthcare services and financial transaction processing. Depending on the business needs of a customer, we can license our software, sell the software as a package, or host and operate the technology for our customer. M2 customers primarily are located in the United States representing industries that include banking, healthcare, insurance, transportation, government and others.





Our technical and market strengths are built on our sophisticated, enterprise level software that can capture, authenticate, translate and route information from any source and send that information to any other business or application for handling. This technology is often referred to as “Interoperability” software or “Middleware.” M2 has architected, developed and owns all of its intellectual property.





Our customers have applied this technology to business processes that include:


·
Medical Claims (including Laboratory, Pharmacy, Medicare and Medicaid)


·
Insurance Enrollments


·
Decision Support Systems


·
Insurance Eligibility


·
Supply Chain Management


·
Electronic Mail (e-mail)


·
Coordination of Benefits (COB)


·
Electronic Funds Transfer/Electronic Remittance Advice (EFT/ERA)




2




·
Electronic Benefits Transfer/Electronic Payroll Payment (EBT/EPP)


·
Authorization Systems


·
Message Brokering


·
Reservation Systems


·
Pharmacy Encounters


·
Financial Card Management for Financial Institutions





Our largest applications are in the processing of Medicare claims, where we are one of, if not the largest processor of Medicare claims in the US, where our technology handles millions of transactions a day for our customers. M2 Systems is the software vendor for two of the largest US government-sponsored Medicare healthcare companies. Our second strength is in the Prepaid Debit Card business, processing financial transactions from initiation to settlement that originate from all around the world.




Our products are difficult to replicate and compete in fast growing markets and much of our intellectual property is patent protected. Our fixed costs are largely covered by established recurring revenue, leading to increases in revenue that are expected to generate high margin, incremental operating income and profit.





Products




Software Licensing


M2 System’s portfolio of software products is focused on delivering real-time transaction processing capability to several technology markets, including Health Care, Banking and Financial Services, Transportation and others. Our products are built using the latest technology as well as on methods that we have developed over the course of fifteen years of licensing software to clients in markets including finance, healthcare and transportation that require high-availability, high-capacity technology infrastructures. M2 Systems currently owns, maintains and develops two primary software products:




ENGIN®


ENGIN is a sophisticated enterprise-class software product that facilitates communications between different and dissimilar software applications of any kind, by different manufactures or using different languages. ENGIN, (an acronym for “ENterprise Generic INtegrator”) functions as a business-wide system that links different systems together. Simply said, ENGIN helps different systems “talk” to each other, thereby facilitating communication, data transfer and translation between various computer systems that otherwise could not share data.





For example, the system used by an insurance company to receive and process claims will likely be different than the systems used the wide range of providers such as those in a doctor’s office or hospital. ENGIN can link all of these systems so claim data can efficiently be received, translated and processed. It accepts information from one source, translates it, and passes it on to another system in a way that the recipient system can understand and process it.





ENGIN is currently in use in numerous, large corporations worldwide and in a number of major markets including Healthcare (primarily Insurance Payer Specific Applications), Financial Services (Electronic Benefits Transfer, Credit and Debit card processing, Prepaid Cards, Automated Settlement, Banking Transactions), Transportation, Insurance and Telecommunications. More than 100 million messages per day pass through ENGIN installations. Our customers use our software products to pursue new revenue opportunities, cut operating costs, reduce process cycle times, decrease process errors, improve customer service, increase efficiencies and more easily adapt their business processes to changing requirements and conditions.





In 2000, we developed, in close collaboration with a consortium of seven Blue Cross/Blue Shield plans, a HIPAA (Health Insurance Portability and Accountability Act) compliant healthcare application for ENGIN. The suite of healthcare specific tools that came out of this initiative remains the leading Business Process Automation technology in the global healthcare industry.





ENGIN is the first, and still only, HIPAA certified application to combine trading partner interoperability, platform integration, date store/data translation and routing capabilities in one, completely integrated, product suite. As a result it can be deployed quickly and safely in any hardware/software environment – qualities ideally suited to the “need-to-change-now” environment that exists in the US healthcare market today.




3




M2 Systems offers a number of advantages in the marketplace. Our “message broker” software addresses a pressing application for businesses to connect legacy systems and offers data integration without disrupting existing systems. The solution provides reliable transformation and exchange of real-time information, delivers industry-leading performance advantages, and allows business decision-makers to easily modify and configure rules in our system with an intuitive user interface (Graphical User Interface). The solution enables rapid data exchange based on user-defined business rules for inbound and outbound messages. The platform processes 90% of business rules immediately, so records like payments, claims updates, and order information are routed accurately and rapidly.




The ENGIN solution is unique because M2 Systems offers all three commonly sought middleware components by IT professionals – message broker, trading partner services and data mart processing. Other vendors offer one or two of the three, and then partner with other providers to complete their offerings. No other company has a fully integrated solution with this kind of end-to-end information integration. ENGIN resides peacefully between existing systems, databases and applications.





ENGIN also is very flexible when compared to competitive solutions, allowing easy customization for a particular business need. Plus, there is no need for technical developers to help set up, customize and run the system. Non-technical people who understand the data they need to manage can configure the system. The solution offers a very user-friendly experience when compared our competitors.




authENGIN


authENGIN® was designed specifically for banks and other financial institutions that issue domestic and international payment cards and serve as an “acquiring” institution accepting card transactions through merchants at retail locations, on the Web or from ATM's. It is a software product, commonly referred to as a “Payment Platform” used to accept, authenticate, route, switch and authorize electronic financial transactions in concert with the major networks, including Visa and MasterCard, domestic and international banks, retail merchants worldwide, ATMs and nearly any other point of contact in the card processing world.





Our target clients are domestic and international banks and payment processors that prefer to license software instead of investing to develop their own. Every time a consumer uses a credit or debit card, a number of systems are involved, including the merchant processor; Visa, MasterCard, or the ATM; and the card issuer systems. authENGIN essentially provides the "electronic handshake" that connects these systems to complete the transaction. authENGIN is a secure, flexible and scalable processing system that is easy to implement with very robust management tools and real-time transaction authorization and settlement capability.





authENGIN includes the capability to provide:


·
Credit and debit card issuing capability


·
PIN and signature based debit card processing


·
Card management and authorization


·
Card production and issuance


·
Payment Gateway services


·
Loyalty programs


·
Payroll programs


·
Incentive and gift card processing


·
Automated Clearing House (ACH) processing


·
Retail loading


·
And much more.






4





In addition to processing millions of Visa, MasterCard, JCB, Discover, STAR and other network transactions per day, our financial services products include:


MpowerMe – An online portal allowing cardholder to manage their card accounts, set limits, set-up Text Messaging alerts and transactions, move money to multiple accounts and much more.





MpowerManager – This online portal provides the bank or card program managers a wide array of functions for creating and managing cardholder accounts, setting parameters for card use, generating reports, batch loading of cards, managing Know-Your-Customer data, and all of the functions necessary to confidently and easily manage a card program.





MpowerService – This online system is for customer service representatives to provide cardholder support, such as changing a PIN, researching a transaction, issuing a lost or stolen card and so on.





Intellectual Property and Patent Licensing


M2 Systems owns, maintains and develops patented technology.





Secure Access for E-Commerce – SAFE:Card-not-present transactions now are safer than ever before. M2’s US Patented SAFE technology gives cardholders the highest level of comfort when shopping online. SAFE is an unparalleled security feature which is the security equivalent of issuing a new credit or debit card to a cardholder for each transaction. This dynamic CVVOverview of technology (Card Verification Value, printed on the card) makes it possible for a cardholder to easily generate and confirm a unique CVV for every card transaction. SAFE codes are always changing, are transaction specific and have a short life span. All M2 cards carry this patented security feature and it can be licensed for use by other card issuing banks and processors.





Material Agreements





We have entered into agreements with three customers, whereby these agreements comprise of nearly 44% of our revenues. We have sought confidential treatment for these agreements on the basis that the agreements include confidential and proprietary information relating to our business. Additionally, each of the agreements includes a confidentiality provision. As such, all copies of these agreements annexed as Exhibits to this Form 10-K have been redacted, pending the SEC’s final decision regarding our confidentiality request.





Contract with JP Morgan Chase Bank





On March 13, 2009 we entered into a service agreement with JP Morgan Chase Bank (“JPM”) to provide application development, enhancement, testing and support to JPM for a series of software applications. The agreement with JPM provides for a one year term from March 13, 2009, with automatic one year extensions, unless the agreement is otherwise terminated. A redacted copy of the JPM agreement is annexed as Exhibit 10.1




5




Pursuant to the agreement with JPM, we have agreed to provide members of our staff to assist JPM in the development and testing of specific applications. Our application development services include the creation of new software or the modification of existing software. Additionally, this includes breaks/fixes, change orders, new applications, and the new implementation of existing applications.





Furthermore, we have agreed to provide JPM with program administration and support services. As such, we will provide JPM with 24 hours/7 days per week 2nd level support. In that regard, we have agreed to provide support services both during normal business hours, as well as after hours for critical and emergency support issues. Specific after hour support requiring emergency software changes or software development will be agreed upon with JPM prior to delivery.





Contract with National Government Services





On April 28, 2000, we entered into a Hardware, Software License and Services Agreement with United Wisconsin Services, Inc. On June 16, 2007, we entered into an agreement with Crossroads Acquisition Corp. and National Government Services (“NGS”) whereby we agreed to have our initial contract with United Wisconsin Services, Inc. assigned to them. A redacted copy of the NGS agreement is annexed as Exhibit 10.2.





Pursuant to the agreement, we provide software licensing, hardware as well as support services. In that regard, we have agreed to provide a series of agreed upon software applications. The agreement also provides for the purchase of additional software at a discounted rate.





We have also agreed to provide specified hardware and components, including our obligation to install the components. All installation will be performed during normal business hours and all fees and costs, including applicable taxes and shipping fees, must be paid within 30 days of receipt of our invoice.





The agreement also provides for our continued maintenance of our software and hardware components. In that regard, we have agreed to provide an extended maintenance program, which will take effect upon the expiration of the warranty of our products. Our maintenance will be available on a 24 hours/7 days per week basis, with four separate categories of problems: Category 1: critical problem; Category 2: serious problem; Category 3: normal problem; and Category 4: minor problem. Each specified level of problems will be addressed, although Category 3 and Category 4 problems will be provided a specific customer service representative to coordinate assistance for the problem’s resolution.





Contract with Excellus




On August 3, 1993, we entered into a Software License Agreement with Excellus (“Excellus”). The agreement with Excellus provided for the sale of a software license for our base ENGIN software system, as well as data services and asynchronous transaction manager software products. Additionally, the agreement with Excellus also provides for a maintenance program, whereby we have agreed to provide a five day per week customer service support to Excellus. The software license agreement and maintenance agreement are for a one year term, which automatically renews from year to year unless notice of an intent to cancel the agreement is provided by Excellus.  A redacted copy of the Excellus agreement is annexed as Exhibit 10.3.





6





Competition





SOFTWARE LICENSINGThe electronic payments market is highly competitive and subject to rapid change. Generally, our most significant competition comes from in-house information technology departments of potential customers, as well from ACIWorldwide. Other third party software transaction engine competitors include eFunds Corporation and S1 Corporation, as well as small, more regionally-focused companies such as OpenWay, Distra Pty Ltd. and CTL, Ltd.





In the Healthcare payer market M2 competes with companies like Virtia and to a lesser extent Trizetto and in the general interoperability / BPM market with Microsoft, EDS, TIBCO and Mercator. The general interoperability market can be very competitive which is why M2 tends to focus its development and licensing sales efforts on vertical plug-in opportunities such as healthcare and financial services.





Revenue and Cost Model





We generate revenue from licensing our products to our customers.  Our licensing revenue is largely comprised of paid-up fees supported by annual maintenance fees. We also charge our licensees for support, any and all custom development and, in some cases, per transaction fees. Our business is comprised almost entirely of fixed costs (developers). We are like most software businesses in that once our cost of developing a product is covered incremental sales revenue for this product drops almost entirely down to the bottom line. ENGIN and health ENGIN are mature, and consequently, high margin products. authENGIN is a relatively young application and we are still working to pay back its development costs.





All of our licensed products are based on a “right” to use basis and we also provide maintenance services pursuant to separate maintenance agreements, relating to our licensed products. Our license agreements are typically 5 year licenses with a perpetual renewal unless terminated by either party, with 90 days notice. Our new license model for authENGIN will be based on the same strategy, along with a cost per transaction fee that will based on projected volumes and consumer use. This is standard practice in the financial community as we target a specific vendor in this marketplace.


7





Competitive Strengths





We are competitively differentiated on several fronts.





In-house Programming.  We have a full in-house development team. In today’s e-commerce environment, many scenarios are constantly encountered that require immediate resolution. Our staff, including Michael Muscato, has decades of programming experience, especially relating to processing technology and systems. We have the ability to both problem solve (fast) and to develop new products in-house.





We are currently the named inventor on two new payment technologies and intend to continue to expand our portfolio of intellectual property.





Highly Scalable Platform.  Our scalable, efficient operating structure allows us to expand our operations easily and without significantly increasing our fixed costs.





Stable and Recurring Revenue Base.  Our business is characterized by sources of revenue that are fee orientated. We also have little incremental cost to add transactions to our network.





Employees





As of September 25, 2009, we had a total of 42 employees. We believe that our employee relations are good. Our employees are not subject to any collective bargaining agreements, and we are not aware of any current efforts to implement such agreements.





ITEM 1A.      RISK FACTORS





Not applicable for smaller reporting companies.





ITEM 1B.        UNRESOLVED STAFF COMMENTS





Not applicable for smaller reporting companies.





ITEM 2.         DESCRIPTION OF PROPERTY.





We do not own any property.  We lease our corporate headquarters located at 2301 Maitland Center Parkway, Maitland, Florida 32751.  We pay a total rent of $12,722 per month for this location.  We also lease two data centers.  One data center is located at 348 East Winchester Road, Murray, Utah and we pay $5,600 per month for rent.  The other data center is located at 850 Trafalgar Drive, Maitland, Florida 32751 and we pay $5,331 per month for rent.





ITEM 3.         LEGAL PROCEEDINGS.





To the best of our knowledge, there are no known or pending litigation proceedings against us.





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





Pursuant to the approval of the board of directors (the “Board”) of Color Accents Holdings, Inc., a Nevada corporation (the “Company”), and the written consent of at least a majority of the outstanding shares of common stock of the Company, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to change the name of the Company from “Color Accents Holdings, Inc.” to “Muscato Group, Inc.” The Certificate of Amendment became effective on October 5, 2009.  A copy of the Certificate of Amendment is incorporated by reference and were filed with the Company’s Current Report on Form 8-K filed on December 18, 2009.







8








PART II





ITEM 5.         MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.





Market Information





Our common stock has traded on the OTC Bulletin Board system under the symbol “MGRP” since December 3, 2009.  To date there has been a very limited trading market for our Common Stock.





2009


2008Quarter Ended:

High


Low


High


LowMarch 31

$
-



-


$
-


$
-June 30


-



-



-



-September 30


-



-



-



-December 31


6.10



5.50



-



-





The market price of our common stock will be subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.





Holders





As of March 29, 2010, in accordance with our transfer agent records, we had 87 record holders of our Common Stock.





Dividends





To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock, when issued pursuant to this offering. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future.





Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.





Stock Option Grants





To date, we have not granted any stock options.




ITEM 6.         SELECTED FINANCIAL DATA.
 
 Not applicable.


9


ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS





The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.





Overview





Results of Operations





For the period ending December 31, 2009, we had $5,311,967 in revenue. Expenses for the period ending December 31, 2009 totaled $5,487,343 resulting in a Net gain (loss) of ($238,244).





Revenues. Revenue increased $2,848,628, or 116%, to $5,311,967 for the year ended December 31, 2009, compared to the same period of the prior year. The increase in revenue was attributable to addition of significant new clients accounting for the majority of this increase.




Cost of revenues.Cost of revenues consisted of materials and labor directly related to customer revenues such as development costs and applicable overhead allocations. Cost of revenues increased $409,756, or 76%, to $945,748 for the year ended December 31, 2009, compared to the same period of the prior year. The increase in cost of revenues was attributable to the increase in revenue specifically personnel required to provide services for the new clients.






Gross Profit.The gross profit is attributable to the increased revenues. Gross profit increased $2,438,872 or 127% for the year ended December 31, 2009, compared to the same period for the prior year. Gross margin was 82% and 78% respectively, for the years ended December 31, 2009 and 2008.






General and administrative.General and administrative expenses decreased $435,787, or 13%, to $2,881,681, for the year ended December 31, 2009 when compared to the same period of the prior year. The decrease was primarily due to increased management attention to general and overhead costs.






Sales and marketing expense.Sales and marketing increased by $75,722 to $75,722 for the year ended December 31, 2009, compared to the same period of the prior year. The increase is attributable to the hiring of sales and marketing staff, travel and trade show expenses and other sales and marketing related expenses to support the renewed sales efforts in 2009.






Bad Debt Expense. Bad Debt Expense increased primarily due to the write-down of invoices directly attributable to a single large processing client. Bad Debt Expense for the year ending December 31, 2009 was $1,576,035 as compared to $0 for the same period in the prior year.






Depreciation and Amortization.Depreciation and Amortization increased by $26,627 or 43% to $88,921 for the year ended December 31, 2009, compared to the same period of the prior year. This is attributable to the depreciation of the additional capital expenditures for 2008 and 2009.






Net loss.Net loss for the year ended December 31, 2009, was $(238,244), or $(0.02) per basic and diluted share compared to Net income of $651,642, or $6,516.42 per basic and diluted share, for the same period of the prior year.




10





Capital Resources and Liquidity





As of December 31, 2009, we had $48,109 of cash and cash equivalents, compared to $101,362 of cash and cash equivalents at December 31, 2008. We have incurred operational losses for 2009 and have a deficit in net working capital for both 2009 and 2008. However we believe that our current available cash and cash equivalents along with anticipated revenues will be sufficient to meet our anticipated cash needs for the foreseeable future. Consequently, our ability to continue as a going concern is not contingent on us receiving additional funds in the form of equity or debt financing. However, we are pursuing strategic financing alternatives to ensure ongoing that ongoing financial stability is not only dependent upon anticipated revenues.





Net cash provided by operating activities was $941,208 for 2009 and cash used in operating activities was $1,468,898 for 2008. Net cash provided by operating activities in 2009 was primarily attributable to the aggressive collection of client accounts receivable and increase in funding/deposit liability account (See note 2). Net cash used in operating activities in 2008 was primarily attributable to a one-time adjustment of long-term debt and its associated accrued interest. (See note 2). We plan to focus on expending our resources prudently given our current state of liquidity.





Net cash used in investing activities was $39,464 for 2009 and cash used in investing activities was $105,891 for 2008. These are both attributable to capital expenditures for acquisition of equipment--primarily computer hardware and software required for use in business operations.





Net cash used in financing activities was $954,997 for 2009 and cash provided by financing activities was $1,331,633 for 2008. Net cash used in financing activities for 2009 is attributable to the repayment of related party loans and net cash provided by financing activities for 2008 is attributable to the receipt of proceeds from the related party loan.





Recent Accounting Pronouncements





In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”.  This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners.  SFAS No. 160 affects those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.




11





In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.





In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  This statement shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.  The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of this pronouncement will have a material impact on its financial position, results of operations or cash flows.





In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. The adoption of FASB 163 is not expected to have a material impact on the Company’s financial position.





Critical Accounting Policies and Estimates





Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.





Use of Estimates:In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.





12








Revenue Recognition:Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured.  We had no revenue for the twelve months ended June 30, 2009 and 2007, respectively.





Stock-Based Compensation:





The Company accounts for its stock-based compensation under the provisions of SFAS No.123(R) Accounting for Stock Based Compensation. Under SFAS No. 123(R), the Company is permitted to record expenses for stock options and other employee compensation plans based on their fair value at the date of grant. Any such compensation cost is charged to expense on a straight-line basis over the periods the options vest. If the options had cashless exercise provisions, the Company utilizes variable accounting.





Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by SFAS No. 123(R), which is measured as of the date required by EITF Issue 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. In accordance with EITF 96-18, the stock options or common stock warrants are valued using the Black-Scholes model on the basis of the market price of the underlying common stock on the valuation date, which for options and warrants related to contracts that have substantial disincentives to non­performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.





In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123(R), requiring prominent disclosure in annual and interim financial statements regarding a company's method for accounting for stock-based employee compensation and the effect of the method on reported results.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).





ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





We are subject to certain market risks, including changes in interest rates and currency exchange rates.  We have not undertaken any specific actions to limit those exposures.





ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





13











REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the Board of Directors and Shareholders of
 Muscato Group, Inc. & Subsidiary
 
 We have audited the accompanying consolidated balance sheets of Muscato Group Inc. & Subsidiary as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Muscato Group, Inc. & Subsidiary  as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.
 
 As more fully described in Note 11 to the consolidated financial statements, the Company determined that certain account balances and the presentation of financial information was  not accurately presented in the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. These include modifying the description of loan payable, reclassification of expenses on the Statement of Operations and the Statement of Shareholders’ Equity and providing additional disclosures relating to revenue recognition and intangible assets.  Accordingly, the consolidated balance sheets as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in shareholders’ equity and cash for flows for the years ended December 31, 2009 and 2008 have been revised to reflect corrections to previously reported amounts.
 
 
 
 /s/ JEWETT, SCHWARTZ, WOLFE AND ASSOCIATES
 Hollywood, Florida
 March 31, 2010
 Except for Notes 2, 4 and 11, which are dated February22, 2011


200 South Park Road, Suite 150  •  Hollywood, Florida 33021  •  Main 954.922.5885  •  Fax 954.922.5957  •  www.jsw-cpa.com


Member - American Institute of Certified Public Accountants • Florida Institute of Certified Public Accountants


Private Companies Practice Section of the AICPA • Registered with the Public Company Accounting Oversight Board of the SEC







F-1


MUSCATO GROUP, INC. & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


CONSOLIDATED BALANCE SHEETS





December 31,


December 31,2009


2008(Audited)


(Audited)ASSETSCURRENT ASSETSCash

$
48,109


$
101,362Accounts receivable, net


507,506



793,467Prepaid expenses


13,348



60,681TOTAL CURRENT ASSETS


568,962



955,510PROPERTY and EQUIPMENT, net


116,794



140,619DEPOSITS


21,080



94,782INTANGIBLE ASSETS, net


24,999



50,000TOTAL ASSETS

$
731,835


$
1,240,911LIABILITIES AND SHAREHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable and accrued expenses

$
359,727


$
168,869Deferred revenue


771,159



747,996Loans from related parties


287,360



1,247,619Current portion of note payable


14,967



13,235Funding liability


488,641



-TOTAL CURRENT LIABILITIES


1,921,854



2,177,719LONG TERM NOTE PAYABLE


55,812



70,779TOTAL LIABILITIES


1,977,666



2,248,498COMMITMENTS AND CONTINGENCIESSHAREHOLDERS' DEFICITCommon stock, $.0001 par value, 100,000,000 sharesauthorized, 8,127,000   and 13,127,000 shares issued andoutstanding as of December 31, 2009 and 2008


813



1,313Additional paid in capital


86,243



85,743Retained earnings (accumulated deficit)


(1,332,887
)


(1,094,643
)TOTAL SHAREHOLDERS' DEFICIT


(1,245,831
)


(1,007,587
)TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT

$
731,835


$
1,240,911




Amortizing intangible assets, which are included in other intangible assets in the Consolidated Balance Sheets, include the following:





December 31, 2009

December 31, 2008Gross

Carrying Value

Accumulated

Amortization

Gross

Carrying Value

Accumulated

AmortizationCustomer lists

$
487,000


$
(462,000
)

$
487,000


$
(437,000
)Total

$
487,000


$
(462,000
)

$
487,000


$
(437,000
)





We review our amortizing intangible assets at least annually to determine whether events and circumstances warrant a revision to the remaining period of amortization.




Amortization expense relating to our intangible assets was $25,000 during 2009 and $25,000 during 2008.




Estimated future amortization expense for the year ended December 31, 2010 is $25,000.     Our customer lists will be fully amortized as of December 31, 2010.





F-2





MUSCATO GROUP, INC. & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


CONSOLIDATED STATEMENTS OF OPERATIONS





Year Ended December 31,2009


2008CONTRACT REVENUES EARNED

$
5,311,967


$
2,463,339COST OF REVENUES EARNED


945,748



535,992GROSS PROFIT


4,366,219



1,927,347OPERATING EXPENSESGeneral and administrative expenses


2,881,681



3,317,468Sales and marketing


75,722



-Bad debt expenses


1,576,035



-Depreciation and amortization


88,291



62,292Total operating expenses


4,622,359



3.379,760LOSS FROM CONTINUING OPERATIONSBEFORE INTEREST INCOME, EXPENSE AND INCOME TAXES


(256,140
)


(1,452,413
)Other income


-



2,104,055Interest income


5,652



-Interest expense


(9,656
)


-Income Tax expense


21,900



-INCOME (LOSS) FROM OPERATIONS

$
(238,244
)

$
651,642BASIC AND FULLY DILUTED NET LOSS PER SHARE

$
(0.02
)

$
6,516.42WEIGHTED AVERAGE SHARES OUTSTANDING


13,127,000



100








F-3





MUSCATO GROUP, INC. & SUBSIDIARY


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT


FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007








Common Stock, no par valuePar


Paid in


Accumulated


Shareholders'Shares


Value


Capital


Deficit


DeficitBALANCE AT DECEMBER 31, 2007


13,127,500


$
1,313


$
85,743


$
(1,746,285
)

$
(1,659,229
)Net income


-







-



651,642



651,642BALANCE AT DECEMBER 31, 2008


13,127,500



1,313


$
85,743


$
(1,094,643
)

$
(1,007,587
)Cancellation of shares


(5,000,000
)


(500
)


500



-



-Net loss


-







-



(238,244
)


(238,244
)BALANCE AT DECEMBER 31, 2009


8,127,500


$
813


$
86,243


$
(1,332,887
)

$
(1,245,831
)











F-4





MUSCATO GROUP, INC. & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the year ended December 31,





2009


2008Cash flows from operating activities:Net income (loss)

$
(238,244
)

$
651,642Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities:Depreciation and amortization


88,289



62,292Allowance for doubtful accounts


-



69,000Net adjustment debt forgiveness


-



(2,152,229
)Changes in operating assets and liabilities:Accounts receivable


285,961



5,838Prepaid assets


47,333



(23,030
)Deposits


73,702



1,681Accounts payable and accrued expenses


190,363



(262,711
)Deferred revenue


23,163



178,619Other current liabilities


470,641



-Net cash provided by (used in) operating activities


941,208



(1,468,898
)Cash flows from investing activities:Acquisition of property and equipment


(39,464
)


(105,891
)Net cash used in investing activities


(39,464
)


(105,891
)Cash flows from financing activities:Proceeds from loans payable


5,262



1,331,633Repayments of loans payable


(960,259
)


-Net cash provided by financing activities


(954,997
)


1,331,633NET DECREASE IN CASH


(53,253
)


(243,156
)CASH AT BEGINNING OF YEAR


101,362



344,518CASH AT END OF PERIOD

$
48,109


$
101,362Supplemental disclosure of cash flow information:Cash paid during the year for interest

$
-


$
-Cash paid for taxes

$
-


$
-














F-5





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





NOTE 1 – ORGANIZATION





Overview





Color Accents Holdings, Inc. (the "Company") was incorporated under the laws of the State of Nevada on April 28, 2008.  Color Accents Holdings, Inc. is planning to provide total interior design, color analysis and home staging to the entire housing market network including home builders, home renovators and real estate firms and agents.





M2 Systems and its wholly owned subsidiary, Muscato Corporation, (collectively referred to as M2 Systems) are incorporated under the laws of the state of Florida. M2 Systems is engaged primarily in the development and sale of software which serves the online transaction processing systems marketplace. M2 Systems primarily serves organizations which are located throughout the United States and operate in the banking, healthcare, insurance and transportation industries.





On September 30, 2009, the Company  entered into a share exchange agreement (the “Share Exchange Agreement”) and consummated a share exchange (the “Share Exchange”) with M2 Systems and each of the shareholders of M2 Systems (the “M2 Systems Shareholders”).





Upon the closing of the Share Exchange on September 30, 2009 (the “Closing”), the M2 Systems Shareholders transferred all of their shares of common stock in M2 Systems to Color.  In exchange, Color issued to the M2 Systems Shareholders an aggregate of 6,600,000 shares of our common stock (the “Common Stock”), $0.0001 par value per share, representing 81.21% of the shares issued and outstanding immediately after the Closing.  As a result of the Share Exchange, M2 Systems became a wholly-owned subsidiary.





The Share Exchange is being accounted for as a “reverse merger” because the M2 Systems’ Shareholders now own a majority of the outstanding shares of our Common Stock immediately following the Share Exchange.  M2 Systems is deemed the acquirer in the reverse merger.  Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements prior to the Share Exchange are those of M2 Systems and are recorded at the historical cost basis of M2 Systems, and the consolidated financial statements after completion of the Share Exchange include our assets and liabilities and those of M2 Systems, historical operations of M2 Systems, and our operations from the Closing of the Share Exchange.  Except as described in the previous paragraphs, no arrangements or understandings exist among present or former controlling stockholders with respect to the election of members of our board of directors and, to our knowledge, no other arrangements exist that might result in a change of control of the Company.  Further, because of the issuance of the shares of our Common Stock pursuant to the Share Exchange, a change in control of the Company occurred on the date of consummation of the Share Exchange.





On October 5, 2009, the Company changed its name to Muscato Group, Inc.








F-6





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





On October 5, 2009, the Company changed its name to Muscato Group, Inc.





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of Financial Accounting Standards (SFAS) No. 168,“The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB StatementNo. 162”. SFAS No. 168 made the FASB Accounting Standards Codification (ASC ) the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates (ASU). The FASB will not consider ASUs as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.





Principles of Consolidation





The consolidated financial statements include the accounts of Muscato Group, Inc. (f/k/a Color Accents, Inc.), M2 Systems Corporation and and Muscato Corporation. All significant intercompany balances and transactions have been eliminated in consolidation.





Revenue Recognition





Software License Fees.The Company recognizes software license fee revenue in accordance with the ASC 605-985, Revenue Recognition: Softwareand ASC 605, Revenue Recognition.For software license arrangements for which services rendered are not considered essential to the functionality of the software, the Company recognizes revenue upon delivery, provided (i) there is persuasive evidence of an arrangement, (ii) collection  of the fee is considered probable and (iii) the fee is fixed or determinable.


In most arrangements, vendor specific objective evidence (“VSOE”) of fair value does not exist for the license element; therefore, the Company uses the relative sales price to determine the amount of revenue to be allocated to the license element, if not readily determinable.





Under ASC 605-985, the fair value of all undelivered elements, such as post contract customer support (maintenance or “PCS”) or other products or services, is deferred and subsequently recognized as the products are delivered or the services are performed, with the difference between the total arrangement fee and revenues allocated to undelivered elements being allocated to the delivered element.





ASC 605-985 (SOP 97-2) requires the seller of software that includes PCS to establish VSOE of fair value of the undelivered element of the contract in order to account separately for the PCS revenue. The Company establishes VSOE of the fair value of PCS by reference to stated renewals or separate sales with consistent pricing of PCS, expressed in either dollar or percentage terms. In determining whether a stated renewal is substantive, the Company considers factors such as whether the period of the initial PCS term is relatively long when compared to the term of the software license or whether the PCS renewal rate is significantly below the Company’s normal pricing practices. In determining whether PCS pricing is consistent, the Company considers the population of separate sales that are within a reasonably narrow range of the median within the identified market segment over the trailing twelve month period.





ASC 605-985 (SOP 97-2) also requires the seller of software that includes services to establish VSOE of fair value of the undelivered element of the contract in order to account separately for the services revenue. The Company establishes VSOE of the fair value of services by reference to separate sales of comparable services with consistent pricing. In determining whether services pricing is consistent, the Company considers the population of separate sales that are within a reasonably narrow range of the median within the identified market segment over the trailing twelve month period.





For those software license arrangements that include customer-specific acceptance provisions, such provisions are generally presumed to be substantive and the Company does not recognize revenue until the earlier of the receipt of a written customer acceptance, objective demonstration that the delivered product meets the customer-specific acceptance criteria or the expiration of the acceptance period. The Company also defers the recognition of revenue on transactions involving less-established or newly released software products that do not have a history of successful implementation. The Company recognizes revenues on such arrangements upon the earlier of receipt of written acceptance or the first production use of the software by the customer. In the absence of customer-specific acceptance provisions, software license arrangements generally grant customers a right of refund or replacement only if the licensed software does not perform in accordance with its published specifications. If the Company’s product history supports an assessment by management that the likelihood of non-acceptance is remote, the Company recognizes revenue when all other criteria of revenue recognition are met.





Maintenance Fees.The Company typically enters into a separate arrangement that include an initial (bundled) PCS term of one year with subsequent renewals for additional years within the initial license period.





Services.The Company provides various professional services to customers, primarily project management, software implementation and software modification services. Revenues from arrangements to provide professional services are generally recognized as the related services are performed. For those arrangements in which services revenue is deferred and the Company determines that the direct costs of services are recoverable, such costs are deferred and subsequently expensed in proportion to the services revenue as it is recognized.





F-7





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





The Company recognizes revenue for the software development upon execution of a non-cancelable contract and the acceptable delivery of the software to the end-user. Software support, consulting, processing fees and other services are recognized as the services are performed. Software maintenance fees are recognized over the term of the underlying maintenance contracts.





Use of Estimates


The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangible assets and goodwill; valuation allowances for receivables and deferred income tax assets.





Cash and Cash Equivalents


For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of one year or less to be cash equivalents. From time to time, cash accounts held in United States based checking accounts may exceed the Federal Deposit Insurance Corporation (FDIC) $250,000 insured limit. Management believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the credit worthiness and financial viability of their banks.





Accounts Receivable


Accounts receivable are recorded at amounts due and do not bear interest. The Company reviews these receivables on a monthly basis for collectibility. An allowance is established to provide for estimated uncollectable accounts receivable. In estimating the collectability of accounts receivable, management considered the most recent financial information available for the applicable party as well as the most recent payment history. Account balances are charged off against the allowance after all means of collection have been exhausted and potential for recovery is considered remote.  The Company has recorded as allowance of approximately $69,000 as of December 31, 2009 and December 31, 2008.





Property and Equipment


Property and equipment are stated at cost at the date of acquisition. Major additions and betterments are capitalized, while replacements, maintenance, and the repairs that do not improve or extend the life of the respective assets are expensed in current operations. Depreciation of property and equipment is calculated using straight-line methods over the estimated useful lives the asset. Estimated useful lives are as follows:





F-8








MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008








Furniture and Fixtures                                                                             3-5 years


Computer and office equipment                                                            3-7 years


Leasehold improvements                                                                       10 years





Income Taxes





The Company accounts for income taxes as follows:





The Company makes no provision for Federal or State income taxes for entities that have elected to be taxed as an S Corporation under Subchapter S of the Internal Revenue Code.   Entities that have not made this election are accounted for under provisions for “Accounting for Income Taxes” which requires an asset and liability approach to financial accounting for income taxes. Deferred income tax assets and liabilities are computed annually for the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities.





The Corporation adopted the provisions of "Accounting for Uncertainty in Income Taxes. This provision prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. This provision also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of this provision did not have a significant impact on the Company's financial statements.











F-9





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008








Long-Lived Assets





The Company reviews long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change, such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted cash flows of the long-lived assets are less than the carrying amount, their carrying amounts are reduced to fair value, and an impairment loss is recognized.





Goodwill and Indefinite-Lived Intangible Assets





In accordance with ASC 359 Intangibles – Goodwill and Other goodwill, represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The Company accounts for business combinations using the purchase method of accounting and accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date. The primary driver that generates goodwill is the value of synergies between the acquired entities and the Company, which does not qualify as an identifiable intangible asset.  The Company does not amortize the goodwill balance.





The Company assesses goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events and circumstances indicate impairment may have occurred. If the carrying value of goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. The fair value of indefinite-lived purchased intangible assets should be estimated and compared to the carrying value. The Company recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value.





Funding Liability





The funding liability account represents amounts that the Company is holding in connection with an ACH remittance program.  These amounts are classified as a liability as they are expected to be remitted at a future time.  The balance in the funding liability account is $488,641 and $0 as of December 31, 2009 and 2008, respectively.





The origin of the ACH remittance program stems from a prior arrangement entered into with M2 Global Ltd. In 2008, M2 Global Ltd. acquired the iKobo remittance program. The iKobo program was an unsuccessful venture undertaken by M2 Financial Ltd. (“M2 Financial”). We provided M2 Financial with software, support and ACH services through 2009 for the iKobo remittance program. Additionally, we assisted M2 Financial in passing ACH funds to the appropriate issuing bank, the Global Bank of Commerce (“GBC”), as a part of its remittance program. To account for these funds, a funding liability account was implemented on the M2 Systems general ledger. As such, as funds came into the account they were credited. Conversely, as funds were paid they were debited from the funding liability account. M2 Financial endured financial difficulty and as a result M2 Systems stopped forwarding iKobo remittance funds to GBC. In December 2009, GBC shut down the iKobo program and as a result M2 Systems incurred a large balance in the ACH/funding liability account.





In May 2010, Muscato Group Inc. purchased from M2 Global 4 entities including M2 Financial Ltd. At that time all balances became internal due from/due to with the exception of the liability owed to GBC. In July 2010 Muscato Group reached an agreement with GBC on these balances and the required adjustments were made to the appropriate books. As a result, Muscato Group Inc's M2 Financial entity took on a $300,000 liability payable to GBC, which is now reflected on the balance sheet in Q3.





Fair Value of Financial Instruments





Fair value of certain of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accrued compensation, and other accrued liabilities approximate cost because of their short maturities.





The Company has adopted the provisions of ASC 820 Fair Value Measurements and Disclosure which, ASC 820 establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.  The provision was effective for financial assets and liabilities on January 1, 2008.











F-10





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, whether using an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the company’s credit risk.





Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques requires significant judgment and are primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:





–
Level 1 Inputs:  These inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.





–
Level 2 Inputs:  These inputs are other than quoted prices that are observable, for an asset or liability. This includes: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.





–
Level 3 Inputs:  These are unobservable inputs for the asset or liability which require the company’s own assumptions.


Advertising Costs





The Company expenses all advertising costs as incurred.





Software Development Costs





Software development costs are expensed as incurred.











F-11


MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008








Earnings Per Share





Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and excludes dilutive potential common shares outstanding, as their effect is anti-dilutive. Dilutive potential common shares would primarily consist of employee stock options and restricted common stock.  The Company had no such dilutive common shares as of September 30, 2009 and 2008, respectively.





Recent Accounting Pronouncements





In August 2009, the FASB issued ASU 2009-05 which includes amendments to Subtopic 820-10, “Fair Value Measurements and Disclosures—Overall”. The update provides clarification that in circumstances, in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The amendments in this ASU clarify that a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and also clarifies  that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this ASU is effective for the first reporting period, including interim periods, beginning after issuance.  The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.





In September 2009, the FASB has published ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This ASU also requires new disclosures, by major category of investments including the attributes of investments within the scope of this amendment to the Codification. The guidance in this Update is effective for interim and annual periods ending after December 15, 2009. Early application is permitted.   The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.











F-12





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





In October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. The guidance in this update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have a material impact any impact on the Company’s consolidated financial position and results of operations.





In October 2009, the FASB has published ASU 2009-14, “Software (Topic 985)-Certain Revenue Arrangements that Include Software Elements” and changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and nonsoftware components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in Subtopic 985-605, “Software-Revenue Recognition”. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance.  The guidance in this ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.  The Company is currently evaluating the impact of this standard. Other ASUs not effective until after December 31, 2009, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.





NOTE 3 – PROPERTY AND EQUIPMENT





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





2009


2008Computer hardware and software

$
552,131


$
513,261Furniture and fixtures


14,294



14,294Office equipment


60,442



59,847Leasehold improvements


96,847



96,847723,714



684,249Less:  accumulated depreciation


(606,920
)


(543,629
)$
116,794


$
140,620














F-13





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





For the year ended December 31, 2009 and 2008, the Company recorded $63,291 and $37,000 respectively in depreciation and amortization expense.





NOTE 4 – INTANGIBLE ASSETS




Amortizing intangible assets, which are included in other intangible assets in the Consolidated Balance Sheets, include the following:





December 31, 2009

December 31, 2008Gross

Carrying Value

Accumulated

Amortization

Gross

Carrying Value

Accumulated

AmortizationCustomer lists

$
487,000


$
(462,000
)

$
487,000


$
(437,000
)Total

$
487,000


$
(462,000
)

$
487,000


$
(437,000
)





We review our amortizing intangible assets at least annually to determine whether events and circumstances warrant a revision to the remaining period of amortization.




Amortization expense relating to our intangible assets was $25,000 during 2009 and $25,000 during 2008.




Estimated future amortization expense for the year ended December 31, 2010 is $25,000.     Our customer lists will be fully amortized as of December 31, 2010.








NOTE 5 – CAPITAL LEASE OBLIGATIONS





The Company entered into a lease agreement with De Lage Landen Financial Services for purposes of leasing HP Fiserv Rack/Servers.  The Company entered into this lease agreement on November 6, 2008.  The present value of the minimum lease payments on this date was $85,045.  The Company is making sixty equal monthly payments of $1,907.55 on the 6th of each month.





Principal lease payment obligations over the next four years are due as follows:





Year Ending2010

$
14,9682011


16,9272012


19,1432013


19,742$
70,779





NOTE 6 - ACQUISITION





On September 30, 2009, Color Accents Holdings, Inc. (Color) entered into a share exchange agreement (the “Share Exchange Agreement”) and consummated a share exchange (the “Share Exchange”) with M2 Systems Corporation, a Florida corporation, (hereinafter, “M2 Systems”), and each of the shareholders of M2 Systems (the “M2 Systems Shareholders”).





Upon the closing of the Share Exchange on September 30, 2009 (the “Closing”), the M2 Systems Shareholders transferred all of their shares of common stock in M2 Systems to Color.  In exchange, Color issued to the M2 Systems Shareholders an aggregate of 6,600,000 shares of our common stock (the “Common Stock”), $0.0001 par value per share, representing 81.21% of the shares issued and outstanding immediately after the Closing.  As a result of the Share Exchange, M2 Systems became our wholly-owned subsidiary.











F-14


MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008





NOTE 7 – COMMON STOCK





In connection with the Acquisition (see Note 4), the previous owner of Color Accents placed 5,000,000 shares of common stock into an escrow account in connection with the Share Exchange Agreement.  These shares were cancelled as of December 31, 2009.





NOTE 8 – COMMITMENTS AND CONTINGENCIES





Operating Leases





The Company leases office space, and office machines under non-cancelable operating leases, which expire at various dates through 2012. Rental expense under these leases amounted to approximately $215,000 and $200,000 for the years ended December 31, 2009 and 2008, respectively





Future minimum lease payments under the Company’s non-cancelable operating leases as of December 31, 2009, are as follows:





2009

$
211,6062010


215,0752011


210,0262012


41,475Total

$
678,182





NOTE 9 – CONCENTRATION OF CREDIT RISK





Accounts receivable - Revenues generated from three customers, comprised approximately 44% of revenues for the year ended December 31, 2009. At December 31, 2009 approximately 44% of accounts receivables were from these three customers. As such, we are dependent on these three customers as they account for a significant and material portion of our generated revenues. If any of these three customers were to discontinue the purchase and use of our products it would have a materially adverse effect on our revenues and would significantly hinder our business operations.











F-15





MUSCATO GROUP, INC & SUBSIDIARY


(f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009 and 2008








NOTE 10 – INCOME TAXES





The provision (benefit) for income taxes from continued operations for the year ended December 31, 2009 includes only expected tax benefit from entities subject to taxation. The provision (benefit) consists of the following:


2009


2008Current:Federal


-



-State

$
-


$
-Deferred:Federal

$
(81,000
)


(451,000
)State


(14,000
)


(79,000
)(95,000
)


(530,000
)Benefit from the operating losscarryforward


95,000



530,000Provision (benefit) for income taxes, net





$
-





The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:





2009



2008Statutory federal income tax rate


34.0
%


34.0
%Decrease in valuation allowance


(40.0
)%


(40.0
)%State income taxes


6.0
%


6.0
%Effective tax rate


(0
)%


(0
)%





Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes.   The net deferred tax assets and liabilities are comprised of the following:





2009


2008Deferred income tax asset:Net operating loss carry-forwards

$
453,000


$
356,000Allowance for Doubtful Accounts


69,000



69,000Research and Development Tax and

Credit carryover


624,000



624,000Valuation allowance


(1,146,000
)


(1,049,000
)Deferred income tax asset

$
-





The Company has a net operating loss carry-forward of approximately $453,000 available to offset future taxable income through 2023.  In accordance with Internal Revenue Code Section 382, the Company may be limited in its ability to recognize the benefit of future net operating loss carry-forwards.  Consequently, the Company did not include a benefit from operating loss carry-forwards.





The Company has recorded a valuation allowance at December 31, 2009, as it is not expected that the deferred tax assets and liabilities will be realized.  The net change in valuation allowance during the year ended December 31, 2009 resulted in a increase of $97,000.  The net change in valuation allowance stems from the acquisition of Muscato Corporation, a wholly owned subsidiary of M2 Systems Corporation, and its valuation allowance at year end December 31, 2007.






F-16


MUSCATO GROUP, INC & SUBSIDIARY
 (f/k/a COLOR ACCENTS HOLDINGS, INC. & SUBSIDIARY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2009 and 2008


NOTE 11 – RESTATEMENT





As previously


As restatedrecordedSTATEMENT OF OPERATIONSYear ended December 31, 2009COST OF REVENUES EARNED


80,765



945,748

(a)OPERATING EXPENSESSalaries and related expenses


3,113,720



-

(b)Professional services


119,343



-

(b)Rent



235,714



-

(b)General and administrative expense


1,930,276



4,457,716

(b)Sales and marketing


-



75,722

(b)Depreciation and amortization


88,921



88,921

(b)Total


5,487,974



4,622,359STATEMENT OF OPERATIONSYear ended December 31, 2008COST OF REVENUES EARNED


-



535,992

(a)OPERATING EXPENSESSalaries and related expenses


2,233,444



3,317,468

(b)Professional services


807,019



-

(b)Rent



175,983



-

(b)General and administrative expense


637,014



-

(b)Sales and marketing


-



-

(b)Depreciation and amortization


62,292



62,292

(b)Total


3,915,752



3,379,760Other income


2,320,258



2,104,055

(c )STATEMENT OF SHAREHOLDERS' EQUITYYear ended December 31, 2008Reclassification


(216,203
)


0

(c )Net income


867,845



651,642

(c )Total


651,642



651,642(a)
Upon further review of its expense allocations, the Company reclassified salaries and related payrollexpenses associated with research and development and consulting services specifically associated withits software product from general and administrative expense to cost of revenues earned.There was no change in net income (loss) to the Company as a result of these reclassifications(b)
The Company reclassified its expense allocations to better reflect the nature of the expense.There was no change in net income (loss) to the Company as a result of these reclassifications(c )
The reclassification represented a reversal of a related party receivable carried over from prior years.Such amount has since been reclassified as an "other expense" on the Statement of Operations. Therewas no impact on the accumulated deficit as of December 31, 2008 as a result of this reclassification





NOTE 12 – SUBSEQUENT EVENTS





In accordance with the guidance offered in ASC Topic 855, formerly SFAS 165 – “Subsequent Events”, the Company has evaluated its activities from December 31, 2009 through March 31, 2010, the date the financial statements were issued, and determined that there were no reportable subsequent events.





F-17





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





Our accountant is Jewett Schwartz Wolfe & Associates, certified public accountants.  We do not presently intend to change accountants. At no time have there been any disagreements with such accountants regarding any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.





ITEM 9A.      CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.





Management's Annual Report on Internal Control Over Financial Reporting





The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but 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.





Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009.  The framework used by management in making that assessment was the criteria set forth in the document entitled “ Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our CEO and CFO have determined and concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective.





This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.





Changes in Internal Control over Financial Reporting





No change in our system of internal control over financial reporting occurred during the period covered by this report, fourth quarter of the fiscal year ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





14





PART III





ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





Our executive officers and directors and their respective age as of December 31, 2009 is as follows:





NAME

AGE

POSITIONMichael Muscato

51

Chief Technology Officer, Chairman of the Board of DirectorsJoseph W. Adams

53

Chief Executive Officer and DirectorRandy Oveson

47

Chief Financial OfficerMalcolm Kirschenbaum

68

Director





Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years.





Michael A. Muscato: Chief Technology Officer and Chairman, Mr. Muscato is an entrepreneur with 30 years experience in the software industry. He started with Martin Marietta Information Systems building a Public Health Information System (PHAMIS) utilizing fault-tolerant computers. He has held numerous technology leadership positions where he was responsible for architecting business enterprise solutions. He was the lead architect responsible for building an Electronic Funds Transfer Network (HONOR/STAR) supporting debit cards in a shared environment. It was one of the first of its kind. His responsibilities included engineering, database management, network engineering and planning data centre operations and customer service for the HONOR Network to primarily support Debit cards in a shared environment.





In 1986 Mr. Muscato formed Muscato Corporation as a consulting firm specializing in application interoperability for banks and financial institutions that eventually expanded into several vertical markets. He served as Chairman and Chief Executive Officer for 14 years. Muscato Corporation developed middleware architecture and leading edge applications infrastructure centered around its technologies. Muscato Corporation developed its proprietary platform known as "ENGIN" (Enterprise Generic Integrator). Its customer base included companies such as Citicorp, Delta Airlines and many large healthcare providers. In the ensuing years, under his guidance Muscato Corporation became a multi-million dollar global organization which was later sold to a public company in March 2000.





In February 2001, Mr. Muscato founded M2 Systems, which repurchased Muscato Corporation. The same year he formed Symmetrex Corporation, a transaction application service provider, established to provide a turn-key service company geared for electronic payments (prepaid, remittance, payroll and stored value cards) and the automation of health-care claims processing utilizing the payments infrastructure. Symmetrex was sold to a private company in September 2006.





Joseph W. Adams: Chief Executive Officer and Director, Joe Adams has over 25 years experience in the information technology and healthcare industries. Mr. Adams has successfully held senior level positions ranging from vice president to President and chief executive officer in companies specializing in healthcare insurance, EDI, electronic commerce, and enterprise application integration markets. He has extensive business and technical experience in providing leadership, direction, and management of a successful organization.





Mr. Adams has prior senior executive experience working at companies such as Muscato Corporation, a multi-million dollar global organization specializing in financial interoperability for banks and financial institutions along with administrative and financial interoperability for the health care market; a Blue Cross and Blue Shield Plan doing over $500M in annual revenues; an Application Services Provider company that offered electronic commerce solutions for the health insurance payer market; and a company that offered electronic claims processing solutions.





He was one of the principals responsible for the strategic vision, design, and implementation of a national company that offered a transaction network/system for the use of e-commerce, electronic data interchange and financial transactions in the health care industry. He was also an officer on the board of directors.





Randy Oveson: Chief Financial Officer, Mr. Oveson started his career in 1987 as a Financial Analyst with Suite Thinking, Inc., a boutique hospitality consulting firm in Newport Beach, CA. There Mr. Oveson developed systems and processes used to analyze dozens of hotels in various operational categories. Mr. Oveson also acted as liaison between hotel owners and management companies, meeting with each monthly and utilizing the proprietary systems developed he was able to increase the profitability of all hotels placed in the Suite Thinking portfolio.








15








Upon completion of his MBA at Pepperdine University in 1989 Mr. Oveson was offered the position of VP of Finance and Technology of Osar, Ltd., a hotel management company, where Mr. Oveson oversaw the acquisition, asset and financial management, and human resources of 5 hotels through 1994. From 1994 to 1998 he pursued various start-up opportunities in the aerospace, manufacturing, brokerage, and action sports industries where he acted as CFO and in some cases CFO and CIO of these start-up ventures. In 1998 he joined In Touch Communications, Inc. a leader in prepaid home phone service, located in Lake Forest, CA. There Mr. Oveson helped the company grow to become the largest alternative home dial-tone company in the State.





He has now spent ten years in the rapidly growing prepaid industry. He has been instrumental in the business development of prepaid telecommunications, stored-value, and electronic bill payment companies. Mr. Oveson has worked with TransFirst, a multi-billion dollar merchant processing group, as AVP of Business Development leading the product development and sales of prepaid debit cards, prepaid telecommunication products, prepaid open-loop gift cards, money remittance, and electronic bill-pay products. During this time Mr. Oveson has also directed the start-up company, Debit Resources, which provides IVR and telecommunication services in support of Prepaid Stored Value cards issued through numerous prepaid processors. In 2005 Mr. Oveson joined M2 Systems/Symmetrex as CFO where his skills and knowledge of the prepaid industry helped the Symmetrex processing company through a significant growth phase and sale. He holds joint responsibility today as CFO of M2 Systems Corporation and COO of FirstPay Limited where he is responsible for payment services development and the processing center management for payment products.





Malcolm Kirschenbaum: Director, After Mr. Kirschenbaum graduated from University of Florida Law School in 1964, he began his career as a business lawyer at the firm of Gray, Harris & Robinson, Attorneys at Law in Melbourne , Florida where he continues Of Counsel. Over the years he has obtained extensive experience in banking and real estate law, as well as transportation issues, which led to various directorships and chairman positions almost from the beginning of his career.





From 1972 to 1978 Mr. Kirschenbaum served as Director of United National Bank, Cocoa Beach, Florida. He also served as Director of Merritt Square Bank of Merritt Island, and subsequently he served until 1999 as Director of Merritt Island Bank of Merritt Island, Florida. He is currently a Director and substantial shareholder of Prime Bank.





He was appointed by the Governor of Florida, the Speaker of the House and the President of the Senate of The State of Florida as Chairman of the Florida High Speed Rail Transportation Commission from 1988 to 1990, which focuses on the advancement of the development of a Statewide High Speed Rail System in Florida. This distinguished position led to his appointment as Chairman of Florida Transportation Commission from 1994 to 1998.





In 1979 he became President and Owner of EKS, Inc., a real estate development firm located in Cocoa, Florida. He remains President and Co -Owner of EKS, which focuses on new construction and single family homes.





Beginning in February of 1994 he became part owner of TGO Realty, Inc. located in Titusville, Florida. In February of 1996, he became part owner of Mowbray Land Trust of Melbourne, Florida. And in April of 1998 he became part owner of High Point Property Trust of Cocoa, Florida. Mr. Kirschenbaum remains part owner of all three.





Mr. Kirshenbaum also serves as  Of Counsel at Gray, Harris & Robinson, where he specializes in banking and real estate law, as well as transportation issues.





Additionally, Mr. Kirshenbaum also currently serves as theVice Chairman of Ron Jon Surf Shop, Inc. and most notably a member of The Freedom Forum and Newseum Board of Trustees where he is Chairman of the Finance/ Investment Committee. The Freedom Forum and Newseum Board of Trustees is a nonpartisan foundation dedicated to free press, free speech and free spirit for all people founded in 1991 and is made up of various high profile media and civic leaders, such as Tom Daschle, U.S. Senate Majority Leader and Kenneth A. Paulson, editor of USA TODAY.





Mr. Kirshenbaum considers his civic duty essential and notably has served on a comprehensive list of various groups and organizations. These include: former Member of Brevard Community College Board of Trustees, Member and former Chairman of Cape Canaveral Hospital Foundation, former Member and Chairman of Cape Canaveral Hospital Board of Trustees, Member Board of Trustees, Florida Institute of Technology, Chairman, Leadership Giving of UNITED WAY, former Member and Chairman of WMFE (Public Television & Radio) Board of Trustees and Member, Board of Directors, Florida 2012, Effort to bring Olympic Games to Florida.





Director Qualifications





We believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience at the policy-making level in business or banking. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties for us. Each director must represent the interests of all stockholders. When considering potential director candidates, the Board of Directors also considers the candidate’s character, judgment, diversity, age and skills, including financial literacy and experience in the context of our needs and the needs of the Board of Directors.





Term of Office





Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board





Current Issues and Future Management Expectations





To date, we do not have an audit committee financial expert serving on our audit committee.





Compliance With Section 16(A) Of The Exchange Act.





Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and are required to furnish copies to the Company. To the best of the Company’s knowledge, any reports required to be filed were timely filed in fiscal year ended June 30, 2009.








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Code of Ethics





The Company has not adopted a Code of Ethics. This officers and directors expect to adopt a code of ethics at the next annual meeting.





ITEM 11.       EXECUTIVE COMPENSATION





The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officer during the years ended December 31, 2009 and 2008 in all capacities for the accounts of our executive, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO):





SUMMARY COMPENSATION TABLE





Name and Principal Position

Year

Salary

($)

Bonus

($)

Stock

Awards

($)

Option Awards

($)

Non-Equity Incentive Plan Compensation ($)

Non-Qualified Deferred Compensation Earnings

($)
All Other Compensation

($) (1)

Totals

($)Michael Muscato

2009

$
240,000

-

$
-

-


-

-
$4,749.44

$
244,750CTO and Chairman

2008

$
150,000

-

$
-

-


-

-
$4,506.64

$
154,507Joseph Adams

2009

$
240,000

-

$
-

-


-

-
$4,749.44

$
244,750CEO and Director

2008

$
240,000

-

$
-

-


-

-
$4,506.64

$
244,507Randy Oveson

2009

$
135,000

-

$
-

-


-

-
$4,749.44

$
139,750Chief Financial Officer

2008

$
135,000

-

$
-

-


-

-
$4,506.64

$
139,507Malcolm Kirschenbaum

2009

$
-

-

$
-

-


-

-
-

$
-Director

2008

$
-

-

$
-

-


-

-
-

$





(1)
This amount is the Company paid portion of the health benefit plan.





Option Grants Table.There were no individual grants of stock options to purchase our common stock made to the executive officer named in the Summary Compensation Table through December 31, 2009.





Aggregated Option Exercises and Fiscal Year-End Option Value Table.There were no stock options exercised during period ending December 31, 2009 by the executive officer named in the Summary Compensation Table.





Long-Term Incentive Plan (“LTIP”) Awards Table.There were no awards made to a named executive officer in the last completed fiscal year under any LTIP





Compensation of Directors





Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.





Employment Agreements





We do not have any employment agreements in place with our sole officer and director.





Auditors; Code of Ethics; Financial Expert





We do not have an audit committee financial expert.  We do not have an audit committee financial expert because we believe the cost related to retaining a financial expert at this time is prohibitive.  Furthermore, because we are only beginning our commercial operations, at the present time, we believe the services of a financial expert are not warranted.





Additionally, we have not yet adopted a code of ethics. The Company has not adopted such a code of ethics because all of management’s efforts have been directed to maintaining the business of the Company.  At a later time, a code of ethics may be adopted by the Board of Directors.





ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The following table provides the names and addresses of each person known to us to own more than 5% of our outstanding shares of common stock as of December 31, 2009 and by the officers and directors, individually and as a group. Except as otherwise indicated, all shares are owned directly.





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Title of Class

Name and Address

of Beneficial Owner

Amount and Nature

of Beneficial Owner

Percent

of Class (1)Common Stock

Michael A. Muscato

2301 Maitland Center Parkway

Suite 240

Maitland, Florida 32751

4,400,000

54.14%Common Stock

Joseph W. Adams

2301 Maitland Center Parkway

Suite 240

Maitland, Florida 32751

2,200,000

27.07%Common Stock

Randy Oveson

4044 W. Lake Mary Blvd Unit#104-120

Lake Mary, Florida 32746

0

0%Common Stock

All executive officers and directors as a group

6,600,000

81.21%





Stock Option Grants





We have not granted any stock options to our executive officer since our incorporation.





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





Other than the transactions described under the heading “Executive Compensation” (or with respect to which such information is omitted in accordance with SEC regulations), since December 31, 2009 there have not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a participant in which the amount involved exceeded or will exceed one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any director, executive officer, holder of 5% or more of any class of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.





ITEM 14.       PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit Fees





For the Company’s fiscal years ended December 31, 2009 and 2008, we were billed approximately $25,000 and $0 for professional services rendered for the audit and review of our financial statements.





Audit Related Fees





There were no fees for audit related services for the years ended December 31, 2009 and 2008.





Tax Fees





For the Company’s fiscal years ended December 31, 2009 and 2008, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.





All Other Fees





The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2009 and 2008.





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:





-approved by our audit committee; or





-entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular  service,  the  audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.





We do not have an audit committee.  Our entire board of directors pre-approves all services provided by our independent auditors.





18








The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does  not have  records of  what percentage of the above fees were pre-approved.  However, all of the above services and fees were reviewed and approved by the entire board of directors either before or after the respective services were rendered.








PART IV





ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





a) Documents filed as part of this Annual Report





1. Consolidated Financial Statements





2. Financial Statement Schedules





3. Exhibits





10.1
Agreement between M2 Systems Corp. and JP Morgan Chase, dated March 31, 2009. (1)10.2
Agreement between Muscato Corporation and National Government Services, dated June 16, 2007.(1)10.3
Agreement between Muscato Corporation and Excellus, dated August 3, 1993. (1)31.1
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer31.2
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer32.1
Section 1350 Certification of Chief Executive Officer32.2
Section 1350 Certification of Chief Financial Officer







(1)
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.











19





SIGNATURES





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.




Dated: February 22, 2011





By/s/Joseph W. Adams


Joseph W. Adams,


Chief Executive Officer





In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title

Date/s/ Michael A. Muscato

Chairman of the Board of Directors

February 22, 2011Michael A. Muscato/s/ Joseph W. Adams

Director

February 22, 2011Joseph W. Adams


/s/ Randy Oveson

Chief Financial OfficerRandy Oveson

Chief Accounting Officer

February 22, 2011








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