##### Table of Contents



United States Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2006
 o
    
    Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 0-29129
 Innuity, Inc.
   Utah
    
    87-0370820(State or other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 8644 154 th Avenue NE
     þ o
  o þ
  Class
    
    Outstanding at July 31, 2006Common capital stock$.00025 par value
    
    20,262,534
  o þ




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##### 



Innuity, Inc.
  PagePART I FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006
(Unaudited) and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2006 (Unaudited) and June 30, 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 (Unaudited) and June 30, 2005 (Unaudited)
    
    
    4Supplemental Disclosures of Cash Flow Information for the six
months ended June 30, 2006 (Unaudited) and June 30, 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis or Plan of Operations
    
    
    13Item 3.
    
    Controls and Procedures
    
    
    39PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    40Item 2.
    
    Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    40Item 6
    
    Exhibits
    
    
    41SIGNATURES
    
    
    41EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    94,622
    
    
    $
    696,997Settlement deposits
    
    
    554,064
    
    
    
    529,900Settlement receivable, net of allowance for doubtful
accounts of $78,829 and $47,939, respectively
    
    
    223,122
    
    
    
    254,499Trade accounts receivable, net of allowance for doubtful
accounts of $366,174 and $254,106, respectively
    
    
    2,091,533
    
    
    
    1,848,819Inventories, net of allowance for obsolete inventory of $178,399 and $115,141, respectively
    
    
    469,866
    
    
    
    522,600Prepaid royalty
    
    
    415,749
    
    
    
    1,247,246Other current assets
    
    
    295,690
    
    
    
    209,813Total Current Assets
    
    
    4,144,646
    
    
    
    5,309,874Property and equipment, net
    
    
    641,575
    
    
    
    347,724Intangible assets, net
    
    
    1,870,858
    
    
    
    2,370,714Goodwill
    
    
    1,833,220
    
    
    
    1,833,220Total Assets
    
    $
    8,490,299
    
    
    $
    9,861,532LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesTrade accounts payable
    
    $
    2,061,558
    
    
    $
    1,595,272Accrued salaries and wages
    
    
    533,820
    
    
    
    406,036Merchant settlement payable
    
    
    730,962
    
    
    
    774,975Accrued liabilities
    
    
    1,183,380
    
    
    
    777,190Deferred revenues
    
    
    1,967,380
    
    
    
    1,575,442Line of credit
    
    
    599,515
    
    
    
    489,515Related party notes payable, current portion, net of discount of $2,700 and $2,700, respectively
    
    
    658,106
    
    
    
    658,106Long-term debt, current portion
    
    
    1,200,000
    
    
    
    1,215,000Capital lease obligations, current
portion
    
    
    107,007
    
    
    
    36,420Total Current Liabilities
    
    
    9,041,728
    
    
    
    7,527,956Long-Term LiabilitiesRelated party notes payable, net of discount of $313,954 and $22,944, respectively
    
    
    394,741
    
    
    
    1,470,867Long-term debt, net of discount of $0 and $254,087, respectively
    
    
    
    
    
    
    3,397,563Capital lease obligations
    
    
    185,981
    
    
    
    52,102Total Long-Term Liabilities
    
    
    580,722
    
    
    
    4,920,532Total Liabilities
    
    
    9,622,450
    
    
    
    12,448,488Commitments and Contingencies
    
    
    
    
    
    
    Stockholders DeficitCommon stock; 200,000,000 shares authorized; par value $0.00025 per share;
20,062,534 shares and 16,371,289 shares issued and outstanding, respectively
    
    
    5,016
    
    
    
    4,093Additional paid-in capital
    
    
    31,856,808
    
    
    
    26,430,420Deferred compensation
    
    
    
    
    
    
    (1,013,308
    )Accumulated deficit
    
    
    (32,993,975
    )
    
    
    (28,008,161
    )Total Stockholders Deficit
    
    
    (1,132,151
    )
    
    
    (2,586,956
    )Total Liabilities and Stockholders Deficit
    
    $
    8,490,299
    
    
    $
    9,861,532
 See accompanying notes to condensed consolidated financial statements.
 2




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesProduct sales
    
    $
    2,348,069
    
    
    $
    243,072
    
    
    $
    4,247,910
    
    
    $
    243,072Services
    
    
    3,210,626
    
    
    
    1,601,723
    
    
    
    6,268,656
    
    
    
    2,804,306Total revenues
    
    
    5,558,695
    
    
    
    1,844,795
    
    
    
    10,516,566
    
    
    
    3,047,378Operating expensesCost of product sales
    
    
    1,688,520
    
    
    
    158,660
    
    
    
    3,248,572
    
    
    
    158,660Cost of services
    
    
    1,820,444
    
    
    
    569,631
    
    
    
    3,532,389
    
    
    
    911,219General and administrative
    
    
    2,000,961
    
    
    
    873,139
    
    
    
    3,484,021
    
    
    
    3,834,489Selling and marketing
    
    
    1,509,988
    
    
    
    780,405
    
    
    
    2,862,174
    
    
    
    1,278,424Research and development
    
    
    341,027
    
    
    
    304,123
    
    
    
    705,472
    
    
    
    600,912Royalty expense
    
    
    415,748
    
    
    
    415,749
    
    
    
    831,497
    
    
    
    831,497Amortization expense
    
    
    245,761
    
    
    
    83,081
    
    
    
    500,097
    
    
    
    120,699Loss from operations
    
    
    (2,463,754
    )
    
    
    (1,339,993
    )
    
    
    (4,647,656
    )
    
    
    (4,688,522
    )Other income (expense)Interest expense
    
    
    (68,026
    )
    
    
    (34,649
    )
    
    
    (407,868
    )
    
    
    (63,286
    )Other income
    
    
    2,323
    
    
    
    
    
    
    
    69,710
    
    
    
    Total other expense
    
    
    (65,703
    )
    
    
    (34,649
    )
    
    
    (338,158
    )
    
    
    (63,286
    )Net Loss
    
    $
    (2,529,457
    )
    
    $
    (1,374,642
    )
    
    $
    (4,985,814
    )
    
    $
    (4,751,808
    )Basic and Diluted Loss Per Common
Share
    
    $
    (0.13
    )
    
    $
    (0.17
    )
    
    $
    (0.26
    )
    
    $
    (0.78
    )Basic and Diluted Weighted-Average
Common Shares Outstanding
    
    
    19,820,623
    
    
    
    8,042,646
    
    
    
    18,852,999
    
    
    
    6,087,282
 See accompanying notes to condensed consolidated financial statements.
 3




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six months ended June 30,
    
    2006
    
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (4,985,814
    )
    
    $
    (4,751,808
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    615,558
    
    
    
    205,703Accretion of discount on notes payable
    
    
    277,251
    
    
    
    42,816Non-cash share based compensation expense
    
    
    721,937
    
    
    
    198,749Common stock issued for services
    
    
    473,600
    
    
    
    2,631,495Bad debt provision
    
    
    246,963
    
    
    
    7,041Changes in assets and liabilities, net of acquisitions:Settlement deposits
    
    
    (24,164
    )
    
    
    (52,281
    )Trade accounts receivable
    
    
    (455,605
    )
    
    
    197,979Settlement receivable
    
    
    (2,695
    )
    
    
    (367,177
    )Inventories
    
    
    52,734
    
    
    
    (98,116
    )Prepaid royalty
    
    
    831,497
    
    
    
    831,496Other current assets
    
    
    (85,876
    )
    
    
    (162,206
    )Trade accounts payable
    
    
    466,287
    
    
    
    204,146Merchant settlement payable
    
    
    (44,013
    )
    
    
    491,166Accrued salaries and wages
    
    
    127,785
    
    
    
    12,962Deferred revenues
    
    
    391,938
    
    
    
    (81,787
    )Accrued liabilities
    
    
    604,917
    
    
    
    (276,687
    )Total adjustments
    
    
    4,198,114
    
    
    
    3,785,299Net cash used in operating activities
    
    
    (787,700
    )
    
    
    (966,509
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (166,120
    )
    
    
    (45,163
    )Change in restricted cash
    
    
    
    
    
    
    300,151Purchase of intangible assets
    
    
    
    
    
    
    (55,000
    )Cash acquired in purchase of Jadeon, Inc.
    
    
    
    
    
    
    498,822Net cash provided by (used in) investing activities
    
    
    (166,120
    )
    
    
    698,810Cash flows from financing activitiesProceeds from related party notes payable
    
    
    325,000
    
    
    
    Proceeds from convertible note
    
    
    
    
    
    
    1,000,000Increase in line of credit
    
    
    110,000
    
    
    
    489,515Payments on related party notes payable
    
    
    (35,683
    )
    
    
    (201,000
    )Payments on long-term debt
    
    
    (15,000
    )
    
    
    Payments on capital lease obligations
    
    
    (38,969
    )
    
    
    Proceeds from issuance of Series A preferred stock
    
    
    
    
    
    
    25,000Proceeds from exercise of options and warrants
    
    
    6,097
    
    
    
    604Common stock issued for cash
    
    
    
    
    
    
    27,953Net cash provided by financing activities
    
    
    351,445
    
    
    
    1,342,072Net increase (decrease) in cash and cash equivalents
    
    
    (602,375
    )
    
    
    1,074,373Cash and cash equivalents at beginning of period
    
    
    696,997
    
    
    
    187,444Cash and cash equivalents at end of period
    
    $
    94,622
    
    
    $
    1,261,817
 See accompanying notes to condensed consolidated financial statements.
 4




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INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six months ended June 30,2006
    
    
    2005Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    1,047
    
    
    $
    Noncash investing and financing activitiesIssuance of options and warrants
    
    $
    
    
    
    $
    310,719Stock options forfeited
    
    
    
    
    
    
    423,533Exercise of warrants for settlement of liabilities
    
    
    
    
    
    
    8,230Issuance of note payable for purchase of intangible assets
    
    
    
    
    
    
    45,000Note payable issued as prepayment of royalties
    
    
    
    
    
    
    1,824,471Common stock issued as prepayment of royalties
    
    
    
    
    
    
    1,350,000Common stock issued for settlement of certain liabilities
    
    
    
    
    
    
    158,837Discount on notes payable
    
    
    314,173
    
    
    
    Convertible debt converted to common stock
    
    
    4,726,085
    
    
    
    Accrued interest converted to common stock
    
    
    198,727
    
    
    
    Reclassification of deferrred compensation to APIC
in accordance with FAS 123R
    
    
    1,013,308
    
    
    
    Acquisition of property and equipment under terms of capital lease agreements
    
    
    243,434
    
    
    
    Write off of accounts receivable
    
    
    104,005
    
    
    
    Purchase of JadeonFair value of assets acquired
    
    
    
    
    
    
    5,602,842Liabilities assumed
    
    
    
    
    
    
    (3,656,324
    )Common stock issued
    
    
    
    
    
    
    (1,946,518
    )Purchase of 10X MarketingFair value of assets acquired
    
    
    
    
    
    
    700,906Liabilities assumed
    
    
    
    
    
    
    (126,346
    )Common stock issued
    
    
    
    
    
    
    (574,560
    )
 See accompanying notes to condensed consolidated financial statements.
 5




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##### Table of Contents



INNUITY, INC.
AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 June 30, 2006
 (Unaudited)
 1.
    
    BASIS OF PRESENTATION
         6




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##### Table of Contents



2.
    
    SHARE BASED PAYMENTS
 Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation,
 Share-Based Payment
   2006Dividend yield
    
    
    0.0
    %Expected Volatility
    
    
    141
    %Risk-free interest rate
    
    
    4.58
    %Expected term
    
    5 years
   7




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##### Table of Contents



Weighted
    
    
    WeightedShares
    
    
    Average
    
    
    Average
    
    
    Aggregateunder
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOption
    
    
    Price
    
    
    Contract Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    1,980,885
    
    
    $
    0.38Granted
    
    
    302,000
    
    
    $
    3.17Exercised
    
    
    (245,906
    )
    
    $
    0.24Forfeited or expired
    
    
    (213,330
    )
    
    $
    0.48Outstanding at June 30, 2006
    
    
    1,823,649
    
    
    $
    0.85
    
    
    8.66 Years
    
    $
    2,456,205Exercisable at June 30, 2006
    
    
    925,199
    
    
    $
    0.38
    
    
    8.08 Years
    
    $
    1,496,474
   Three Months
    
    
    Six MonthsEnded June
    
    
    Ended June 30,30, 2005
    
    
    2005Net loss attributable to common stockholders:
    
    $
    (1,374,642
    )
    
    $
    (4,751,808
    )Add stock-based compensation expense
included in net loss
    
    
    96,293
    
    
    
    198,749Deduct stock-based compensation expense
determined under fair value basis method
    
    
    (289,423
    )
    
    
    (514,314
    )Pro forma net loss
    
    $
    (1,567,772
    )
    
    $
    (5,067,373
    )Reported basic and diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.78
    )Pro forma basic and diluted loss per share
    
    $
    (0.19
    )
    
    $
    (0.83
    )
 3.
    
    INVENTORIES
  4.
    
    LONG-TERM DEBT AND CAPITAL LEASES
   8




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)Non-interest bearing note payable to an unrelated party,
interest imputed at 8%, payments
due monthly, in default, through September 2005,
net of $0 and $0 of unamortized discount, unsecured
    
    
    1,200,000
    
    
    
    1,200,000Convertible notes payable to individuals, interest at 8%, mature
September 2007, net of $0 and $254,807
of unamortized discount, unsecured
    
    
    
    
    
    
    3,397,563Non-interest bearing note payable to an individual, interest at
10% if monthly payment isnt made, monthly payments of
$5,000 through March 2006, unsecured
    
    
    
    
    
    
    15,000Total debt
    
    $
    1,200,000
    
    
    $
    4,612,563Less current maturities
    
    
    (1,200,000
    )
    
    
    (1,215,000
    )Long-term debt
    
    $
    
    
    
    $
    3,397,563
  June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)Notes payable to a shareholder, interest at 8%,
due on demand, unsecured
    
    
    200,000
    
    
    
    200,000Convertible note payable to a related party, interest at 8%,
matures June 2007, unsecured
    
    
    
    
    
    
    1,074,434Note payable to former owner of Jadeon, interest at 5%,
minimum payment of $45,000 quarterly, matures
June 2016, net of discount of $24,294 and $25,644,
unsecured
    
    
    539,400
    
    
    
    573,733Note payable to a related party, interest at 8%, matures
December 2009, monthly payments of $13,468 beginning
September 2005, in default, unsecured
    
    
    280,806
    
    
    
    280,806Convertible notes to related parties, interest at 15%, matures
beginning April 2008, net of discount of $292,539 and $0,
secured by assets of the Company
    
    
    32,641
    
    
    
    Total related party notes payable
    
    $
    1,052,847
    
    
    $
    2,128,973Less current maturities
    
    
    (658,106
    )
    
    
    (658,106
    )Long-term related party notes payable
    
    $
    394,741
    
    
    $
    1,470,867
 9




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##### Table of Contents



5.
    
    COMMON STOCK
      6.
    
    LOSS PER SHARE
 Earnings Per Share
 7.
    
    SUPPLEMENTAL PRO FORMA INFORMATION
    10




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##### Table of Contents



Three Months EndedJune 30, 2005Revenue
    
    $
    4,515,986Net loss
    
    $
    (1,354,511
    )Net loss per share
    
    $
    (0.17
    )
 Six Months EndedJune 30, 2005Revenue
    
    $
    8,724,312Net loss
    
    $
    (4,622,453
    )Net loss per share
    
    $
    (0.76
    )
 8.
    
    SEGMENT INFORMATION
     For The Three Months Ended June 30, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    877,171
    
    
    $
    4,681,524
    
    
    $
    
    
    
    $
    5,558,695Depreciation and amortization
    
    
    98,173
    
    
    
    209,715
    
    
    
    
    
    
    
    307,888Interest expense
    
    
    33,950
    
    
    
    34,076
    
    
    
    
    
    
    
    68,026Segment loss
    
    
    (1,341,480
    )
    
    
    (1,187,977
    )
    
    
    
    
    
    
    (2,529,457
    )Segment assets
    
    
    3,078,004
    
    
    
    8,986,216
    
    
    
    (3,573,921
    )
    
    
    8,490,299
 11




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##### Table of Contents



For the Six Months Ended June 30, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    1,760,925
    
    
    $
    8,755,641
    
    
    $
    
    
    
    $
    10,516,566Depreciation and amortization
    
    
    198,343
    
    
    
    417,215
    
    
    
    
    
    
    
    615,558Interest expense
    
    
    204,215
    
    
    
    203,653
    
    
    
    
    
    
    
    407,868Segment loss
    
    
    (2,452,174
    )
    
    
    (2,533,640
    )
    
    
    
    
    
    
    (4,985,814
    )Segment assets
    
    
    3,078,004
    
    
    
    8,986,216
    
    
    
    (3,573,921
    )
    
    
    8,490,299
  For The Three Months Ended June 30, 2005Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    663,784
    
    
    $
    1,181,011
    
    
    $
    
    
    
    $
    1,844,795Depreciation and amortization
    
    
    23,799
    
    
    
    105,218
    
    
    
    
    
    
    
    129,017Interest expense
    
    
    34,600
    
    
    
    49
    
    
    
    
    
    
    
    34,649Segment income (loss)
    
    
    (1,793,387
    )
    
    
    418,745
    
    
    
    
    
    
    
    (1,374,642
    )Segment assets
    
    
    3,817,413
    
    
    
    9,198,961
    
    
    
    (1,952,715
    )
    
    
    11,063,659
 For the Six Months Ended June 30, 2005Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    1,300,465
    
    
    $
    1,746,913
    
    
    $
    
    
    
    $
    3,047,378Depreciation and amortization
    
    
    29,255
    
    
    
    176,448
    
    
    
    
    
    
    
    205,703Interest expense
    
    
    63,237
    
    
    
    49
    
    
    
    
    
    
    
    63,286Segment loss
    
    
    (3,466,703
    )
    
    
    (1,285,105
    )
    
    
    
    
    
    
    (4,751,808
    )Segment assets
    
    
    3,817,413
    
    
    
    9,198,961
    
    
    
    (1,952,715
    )
    
    
    11,063,659
  12




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Item 2.
    
    Managements Discussion and Analysis or Plan of Operations
 Forward-Looking Statements
 The statements contained in this Quarterly Report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All forward-looking statements involve various risks and uncertainties.
Forward-looking statements contained in this Report include statements regarding our plans
to develop and deliver products and services, market opportunities and acceptance,
expectations, goals, revenues, financial performance, strategies, mission and intentions for
the future. Such forward-looking statements are included under Managements Discussion and
Analysis or Plan of Operation and encompass our beliefs, expectations, hopes or intentions
regarding future events. Words such as expects, intends, believes, anticipates,
should, and likely also identify forward-looking statements. All forward-looking
statements included in this Report are made as of the date hereof, based on information
available to us as of such date, and we assume no obligation  and specifically disclaim any
obligation  to update any forward-looking statement. It is important to note that such
statements may not prove to be accurate and that our actual results and future events will
vary, and may vary materially, from those anticipated in such statements. Among the factors
that could cause actual results to differ materially from our expectations are those
described under Managements Discussion and Analysis or Plan of Operation-Risks Related to
Existing and Proposed Operations. All subsequent written and oral forward-looking
statements attributable to Innuity or persons acting on our behalf are expressly qualified
in their entirety by this section and other factors included elsewhere in this Report.
Unless otherwise indicated we, us, our, and the Company refer to Innuity, Inc. and
its subsidiaries.
 Overview
  
    
    Our Business  a general description of our business and the industry in which
we operate.
    
    Significant Events  a discussion of events that have had a significant impact
on our accompanying consolidated financial statements.
    
    Application of Critical Accounting Policies  a discussion of accounting
policies that require critical judgments and estimates.
    
    Operations Review  an analysis of our Companys consolidated results of operations.
    
    Liquidity and Capital Resources  an analysis of our cash flows, sources and uses of cash.
    
    Risks Related to Existing and Proposed Operations  a description of certain
risks and uncertainties that could cause our actual results to differ materially
from our historical results or our current expectations or projections.
 Our Business
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Significant Events
     Application of Critical Accounting Policies
 Basis of Presentation and Consolidation
  14




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Revenue Recognition
    Subscriptions and Maintenance Support
 Transaction Processing and Affiliate (Reseller) Programs
 Professional Services
 Systems Sales
 15




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Allowance for Doubtful Accounts
  Long-Lived Assets
 Accounting for the impairment or disposal of long-lived
assets
 Goodwill
 Goodwill and other
tangible assets.
   Stock-Based Compensation
 Share-Based Payment Accounting for Stock Based Compensation
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Accounting for Stock
Issued to Employees
 Operations Review
 Analysis of Consolidated Statements of Operations
 Three months ended June 30,
    
    
    Six months ended June 30,%
    
    
    
    
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeRevenuesProduct sales
    
    $
    2,348,069
    
    
    $
    243,072
    
    
    
    866
    %
    
    $
    4,247,910
    
    
    $
    243,072
    
    
    
    1648
    %Services
    
    
    3,210,626
    
    
    
    1,601,723
    
    
    
    100
    %
    
    
    6,268,656
    
    
    
    2,804,306
    
    
    
    124
    %Total revenues
    
    
    5,558,695
    
    
    
    1,844,795
    
    
    
    201
    %
    
    
    10,516,566
    
    
    
    3,047,378
    
    
    
    245
    %Operating expensesCost of product sales
    
    
    1,688,520
    
    
    
    158,660
    
    
    
    964
    %
    
    
    3,248,572
    
    
    
    158,660
    
    
    
    1948
    %Cost of services
    
    
    1,820,444
    
    
    
    569,631
    
    
    
    220
    %
    
    
    3,532,389
    
    
    
    911,219
    
    
    
    288
    %General and administrative
    
    
    2,000,961
    
    
    
    873,139
    
    
    
    129
    %
    
    
    3,484,021
    
    
    
    3,834,489
    
    
    
    -9
    %Selling and marketing
    
    
    1,509,988
    
    
    
    780,405
    
    
    
    93
    %
    
    
    2,862,174
    
    
    
    1,278,424
    
    
    
    124
    %Research and development
    
    
    341,027
    
    
    
    304,123
    
    
    
    12
    %
    
    
    705,472
    
    
    
    600,912
    
    
    
    17
    %Royalty expense
    
    
    415,748
    
    
    
    415,749
    
    
    
    0
    %
    
    
    831,497
    
    
    
    831,497
    
    
    
    0
    %Amortization expense
    
    
    245,761
    
    
    
    83,081
    
    
    
    196
    %
    
    
    500,097
    
    
    
    120,699
    
    
    
    314
    %Loss from operations
    
    
    (2,463,754
    )
    
    
    (1,339,993
    )
    
    
    84
    %
    
    
    (4,647,656
    )
    
    
    (4,688,522
    )
    
    
    -1
    %Other income (expense)Interest expense
    
    
    (68,026
    )
    
    
    (34,649
    )
    
    
    96
    %
    
    
    (407,868
    )
    
    
    (63,286
    )
    
    
    544
    %Other expense, net
    
    
    2,323
    
    
    
    
    
    
    
    *
    
    
    
    69,710
    
    
    
    
    
    
    
    *Total other expense
    
    
    (65,703
    )
    
    
    (34,649
    )
    
    
    90
    %
    
    
    (338,158
    )
    
    
    (63,286
    )
    
    
    434
    %Net Loss
    
    $
    (2,529,457
    )
    
    $
    (1,374,642
    )
    
    
    84
    %
    
    $
    (4,985,814
    )
    
    $
    (4,751,808
    )
    
    
    5
    %
 *
    
    Calculation is not meaningful  17




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Revenues
   Expenses
 Cost of product sales
  Cost of services.
  General and administrative.
   18




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Selling and marketing.
  Research and development.
  19




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Royalty.
 Amortization.
  Interest.
  Liquidity and Capital Resources
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INNUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six months ended June 30,
    
    2006
    
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (4,985,814
    )
    
    $
    (4,751,808
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    615,558
    
    
    
    205,703Accretion of discount on notes payable
    
    
    277,251
    
    
    
    42,816Non-cash share based compensation expense
    
    
    721,937
    
    
    
    198,749Common stock issued for services
    
    
    473,600
    
    
    
    2,631,495Bad debt provision
    
    
    246,963
    
    
    
    7,041Changes in assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    (455,605
    )
    
    
    197,979Prepaid royalty
    
    
    831,497
    
    
    
    831,496Trade accounts payable
    
    
    466,287
    
    
    
    204,146Deferred revenues
    
    
    391,938
    
    
    
    (81,787
    )Accrued liabilities
    
    
    604,917
    
    
    
    (276,687
    )Other
    
    
    23,771
    
    
    
    (175,652
    )Total adjustments
    
    
    4,198,114
    
    
    
    3,785,299Net cash used in operating activities
    
    
    (787,700
    )
    
    
    (966,509
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (166,120
    )
    
    
    (45,163
    )Change in restricted cash
    
    
    
    
    
    
    300,151Purchase of intangible assets
    
    
    
    
    
    
    (55,000
    )Cash acquired in purchase of Jadeon, Inc.
    
    
    
    
    
    
    498,822Net cash provided by (used in) investing activities
    
    
    (166,120
    )
    
    
    698,810Cash flows from financing activitiesProceeds from related party notes payable
    
    
    325,000
    
    
    
    Proceeds from convertible note
    
    
    
    
    
    
    1,000,000Increase in line of credit
    
    
    110,000
    
    
    
    489,515Payments on related parties notes payable
    
    
    (35,683
    )
    
    
    (201,000
    )Payments on long-term debt
    
    
    (15,000
    )
    
    
    Payments on capital lease obligations
    
    
    (38,969
    )
    
    
    Proceeds from issuance of Series A preferred stock
    
    
    
    
    
    
    25,000Proceeds from exercise of options and warrants
    
    
    6,097
    
    
    
    604Common stock issued for cash
    
    
    
    
    
    
    27,953Net cash provided by financing activities
    
    
    351,445
    
    
    
    1,342,072Net increase (decrease) in cash and cash equivalents
    
    
    (602,375
    )
    
    
    1,074,373Cash and cash equivalents at beginning of period
    
    
    696,997
    
    
    
    187,444Cash and cash equivalents at end of period
    
    $
    94,622
    
    
    $
    1,261,817
  21




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Risks Related to Existing and Proposed Operations
   Our limited operating history makes evaluation of our business difficult.
  We have incurred losses since our inception, and we may not achieve or maintain profitability.
  We have a significant working capital deficit and will need additional funding to support
our operations and capital expenditures; sufficient funding may not be available to us, and
the unavailability of funding could adversely affect our business.
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Expansion in the sales of our Internet technology applications and solutions will depend on
the continued acceptance of the Internet as a communications and commerce platform for small
businesses.
   Our business depends in part on our ability to provide an increasing selection of
value-added Internet technology applications and solutions, many of which we do not
currently possess but plan to develop internally or to provide or obtain through agreements
with third parties; and our business will be harmed if we are unable to develop or offer
additional Internet technology applications and solutions in a timely and cost-effective
manner.
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To expand our Internet technology solutions offerings, we may need to license or acquire
other technologies or businesses; we may find that it is difficult to identify or conclude
such acquisitions on favorable terms, or to integrate future technology or business
acquisitions, which could limit our growth, disrupt our business and adversely affect our
operating results.
    Our ability to integrate successfully the businesses of Jadeon and 10x Marketing with our
business is uncertain.
  24




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
    
    retaining existing customers and strategic partners of the acquired businesses;
    
    combining all service offerings on a common technology platform;
    
    retaining and integrating our management and our other key employees with those
of our acquired businesses;
    
    coordination of sales and marketing efforts;
    
    integrating purchasing and procurement operations in multiple locations;
    
    combining service offerings effectively and quickly;
    
    integrating sales efforts so that customers can easily do business with us;
    
    transitioning all facilities to a common information technology system;
    
    offering our services and products to each others customers;
    
    incorporating acquired technology and rights into our service offerings;
    
    bringing together our marketing efforts so that the industry receives useful
information about the combined service offerings; and
    
    developing and maintaining uniform standards, controls, procedures, and
policies for operation of the combined businesses.
  
    
    the impairment of relationships with key employees, customers, strategic partners and suppliers;
    
    the potential disruption of our ongoing business and distraction of our management; and
    
    unanticipated expenses related to integration of the companies.
  Our acquisitions of Jadeon and 10x Marketing may fail to achieve the contemplated business
benefits and objectives.
  
    
    our ability to timely introduce new Internet technology applications
and solutions to the small business customers of the respective companies;
    
    the risk that the customers of the respective companies may not purchase
the additional services offered by one of the others or may defer purchasing
decisions;
    
    the risk of technical difficulties or failures that would interrupt
product and service offerings;
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
    
    the risk that strategic distribution partners may terminate their
relationship with us or not expand their distribution relationships, as a result of
the acquisitions; and
    
    the risk that, as a consequence of the acquisitions, it may be more
difficult to retain key management, marketing and technical personnel after the
combination.
  We may not realize the anticipated benefits of the merger with Vista.com.
   Our ability to compete successfully will depend upon the continuing development and
enhancement of our Internet technology applications and solutions.
  
    
    identify and anticipate emerging technological and market trends
affecting the small business segment in which we do business;
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
    
    enhance our current services offerings so as to increase their
functionality, features and cost-effectiveness;
    
    develop, license or acquire new applications or services that meet
emerging customer needs;
    
    modify our services offerings in response to changing business practices
and technical requirements of our customers, as well as new regulatory requirements;
    
    integrate our current and future services offerings with third-party systems and services; and
    
    create and maintain interfaces to changing customer and third party systems and services.
  We face intense and growing competition from larger, more established companies, as well as
new entrants into our market, and we may not be able to compete effectively, which could
reduce demand for our services.
  
    
    Website Servicescompanies such as Yahoo Small Business, Microsoft Office
Live, Website Pros, Web.com, Go Daddy, Verio, 1&1, and Network Solutions.
    
    Lead Generation Servicescompanies such as Yahoo Small Business, Google,
Microsoft, iCrossing, iProspect, SEO.com, Local Launch!, Marchex (Traffic Leader),
and local search engine optimization companies.
    
    Merchant Servicescompanies such as Authorize.net, PayPal, Heartland
Payment Systems, iPayment, CyberSource, Global Payments, The Sage Group, and
Peachtree, as well as banking competitors such as Bank of America, Chase Manhattan
Bank, Wells Fargo, and small independent sales organizations.
    
    In-Store Systemsintegrated equipment and software companies such as
Micros Systems, Radiant Systems; independent software vendors such as Positouch,
Digital Dining, and Microsoft Retail Management System; and hardware competitors
such as NCR, IBM, and Dell.
  Our future revenues may be uncertain because of reliance on third parties for marketing and
distribution.
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##### Table of Contents



Another way we plan to expand our business is by entering into additional distribution
relationships through which our strategic partners will private label Innuity applications
and market them under their own brands. If we are unable to maintain our existing private
label distribution arrangements or if we are unable to enter into additional private label
distribution arrangements, our future revenues would be significantly reduced and our
expenses would increase.
   Most of our Internet technology applications and solutions are sold individually on a
month-to-month subscription basis, and if our customers either are unable or choose not to
continue to subscribe to our Internet technology applications and solutions, our revenues may
decrease.
  28




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##### Table of Contents



Changes to credit card association rules or practices could adversely impact our business.
  Our reliance on suppliers and vendors could adversely affect our ability to provide our
services and products to our small business customers on a timely and cost-efficient basis,
which could reduce our revenues.
 .
 We have faced, and may in the future face, significant chargeback liability if our small
business customers refuse or cannot reimburse chargebacks resolved in favor of their
customers, and we may also face potential liability for merchant or customer fraud; we may
not accurately forecast or protect ourselves against these liabilities.
  29




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##### Table of Contents



On occasion, we experience increases in interchange costs; if we cannot pass these increases
along to our small business customers, our profit margins will be reduced.
  Our ability to effectively improve a websites positioning in search rankings depends on our
ability to determine and search engine algorithms; a significant change in the way these
algorithms function could negatively affect our success.
  
    
    search engines stop providing critical data used by our internally developed tools;
    
    search engine algorithms arbitrarily prevent new sites from obtaining rankings;
    
    search engine algorithms weigh new factors that are more difficult for us to control;
    
    search engines implementation of new algorithms; or
    
    search engines switch to an entirely fee-based system, eliminating
natural rankings as currently used.
 Margins on pay-per-click advertising may become too low to be profitable.
  30




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##### Table of Contents



Hackers or black-hat search engine optimization companies may negatively impact the
publics perception of the search engine optimization industry, which could impair our
ability to maintain our current customers and attract new customers.
  We have grown quickly and if we fail to manage our growth, our business could suffer.
  The loss of any members of our senior management could harm our current and future operations
and prospects.
 ,
 We face significant competition for a limited supply of qualified software engineers,
consultants and sales and marketing personnel.
  31




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##### Table of Contents



We may be unable to protect our intellectual property adequately or cost-effectively, which
may cause us to lose market share or force us to reduce our prices.
  We may become a party to intellectual property infringement claims, which could harm our
business.
   Our Internet technology applications and solutions involve the storage and transmission
of our small business customers proprietary information, as well as the personal
information of their customers.
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Our technical systems are vulnerable to interruption and damage that may be costly and
time-consuming for us to resolve and may harm our business and reputation, and we could be
subject to liability as a result of security breaches, service interruptions by
cyber-terrorists or fraudulent or illegal use of our services.
     We rely heavily on the reliability, security, and performance of our internally
developed systems and operations, and any difficulties in maintaining these systems may
result in service interruptions, decreased customer service, or increased expenditures.
  33




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##### Table of Contents



Our business may be harmed by errors in our software.
  
    
    we may suffer a loss of revenues if, due to software errors, we are
temporarily unable to provide Internet technology applications and solutions to our
customers;
    
    we may not be paid for the applications and services provided to a
customer that contain or result in errors, or we may be liable for losses or damages
sustained by a customer or its subscribers as a result of such errors;
    
    we may incur additional expenses to correct errors in our software, or to
fund product development projects that we may undertake to minimize the occurrence
of such errors in the future;
    
    we may damage our relationships with customers or suffer a loss of
reputation within our industry;
    
    we may become subject to litigation or regulatory scrutiny; and
    
    our customers may terminate or fail to renew their agreements with us or
reduce the services they purchase from us.
  If economic or other factors negatively affect the small business sector, our customers may
become unwilling or unable to purchase our Internet technology applications and solutions and
related products, which could cause our revenues to decline and impair our ability to operate
profitably.
  34




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##### Table of Contents



If we are unable to respond to the rapid technological changes that are characteristic of our
industry, our Internet technology applications and solutions may not be competitive.
  We and our small business customers must comply with complex and changing laws and
regulations.
  Government regulation of the Internet may adversely affect our business and operating
results.
  
    
    the Digital Millennium Copyright Act and its related safe harbors, are
intended to reduce the liability of online service providers for listing or linking
to third-party websites that include materials that infringe copyrights or other
rights of others;
    
    the Childrens Online Protection Act and the Childrens Online Privacy
Protection Act are intended to restrict the distribution of certain materials deemed
harmful to children, and impose additional restrictions on the ability of online
services to collect user information from minors;
    
    the Protection of Children from Sexual Predators Act of 1998 requires
online service providers to report evidence of violations of federal child
pornography laws under certain circumstances; and
    
    the CAN-SPAM Act of 2003 and certain state laws are intended to regulate
interstate commerce by imposing limitations and penalties on the transmission of
unsolicited commercial electronic mail via the Internet.
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##### Table of Contents



We may be subject to lawsuits for information displayed on our small business customers
websites, which may affect our business.
  State and local governments may in the future be permitted to levy additional taxes on
Internet access and electronic commerce transactions, which could result in a decrease in the
attractiveness of the Internet to our customers and potential customers, and could reduce
demand for our Internet technology applications and solutions.
  If we fail to develop and maintain an effective system of internal controls, we may not be
able to accurately report our financial results or prevent fraud; as a result, current and
potential shareholders could lose confidence in our financial reporting, which could harm our
business and the trading price of our common stock.
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##### Table of Contents



We will incur increased costs as a public company which may make it more difficult for us to
achieve profitability and an active trading market.
  Risks Related to Our Common Stock
 Shares of our common stock may continue to be subject to price volatility and illiquidity
because our shares may continue to be thinly traded and may never become eligible for trading
on Nasdaq or a national securities exchange.
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##### Table of Contents



Future sales of shares of our common stock may decrease the price for such shares.
  Our stock price may be volatile, and you may lose some or all of your investment.
  
    
    variations in our operating results;
    
    announcements of technological innovations, new services or service
enhancements, or significant agreements, by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    changes in estimates of our operating results, or changes in
recommendations by any securities analysts that may follow us;
    
    sales of our common stock, particularly sales by officers, directors and
significant shareholders; or
    
    conditions in our industry, the industries of our customers and the
economy as a whole.
 Our stock may be subject to regulation as a penny stock, which could severely limit the
liquidity of your securities.
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##### Table of Contents



As a result of increased trading activity occurring in our common stock prior to the
announcement of the proposed merger of Source Energy and Vista.com, we may be subject to
increased scrutiny by the National Association of Securities Dealers (NASD) or the SEC,
which could divert the attention of our management, possibly delay the effectiveness of
future registration statements, adversely affect the trading market for our stock, and cause
us to incur significant additional expenses.
  Mergers of the type we completed with Vista.com in late 2005 are often heavily scrutinized by
the SEC and we may encounter difficulties or delays in obtaining future regulatory
approvals.
 Historically, the SEC and Nasdaq have not generally favored transactions in which a
privately-held company merges into a largely inactive company with publicly traded stock,
and there is a significant risk that we may encounter difficulties in obtaining the
regulatory approvals necessary to conduct future financing or acquisition transactions,
or to eventually achieve a listing of shares on one of the Nasdaq stock markets or on
national securities exchange. On June 29, 2005, the SEC adopted rules dealing with
private company mergers into dormant or inactive public companies. As a result, it is
likely that we will be scrutinized carefully by the SEC and possibly by the National
Association of Securities Dealers or Nasdaq, which could result in difficulties or delays
in achieving SEC clearance of any future registration statements or other SEC filings
that we may pursue, in attracting NASD-member broker-dealers to serve as market-makers in
our stock, or in achieving admission to one of the Nasdaq stock markets or any other
national securities market. As a consequence, our financial condition and the value and
liquidity of your shares may be negatively impacted.
 
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##### Table of Contents



PART II.
    
    OTHER INFORMATION
 
    
     
   1.
    
    The shareholders considered whether to elect the following persons as
directors, each to serve until the next annual meeting of shareholders and until his
respective successor shall have been duly elected and qualified:
 John R. Wall
    
    John R. Dennis
    
    Marvin A. Mall
    
    Keith A. CannonMichael L. Snow
    
    Harold H. Kawaguchi
    
    Greg M. Stevenson
 
 2.
    
    The shareholders considered a proposal to approve an amendment to our Amended and Restated 1999 Stock Option Plan to increase the number of shares of common stock available for issuance under the
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##### Table of Contents



plan from 2,440,466 to
4,440,466. There were 15,399,969 votes cast in favor, 637 votes cast against and
142,919 votes withheld or not voted, which vote tally was sufficient for approval.3.
    
    The shareholders considered whether to appoint Hansen Barnett &
Maxwell as our independent public accountants. There were 15,542,240 votes cast in
favor, 19 votes cast against and 1,266 votes withheld or not voted, which vote tally
was sufficient for approval.
 
  Exhibit 10.1

    Letter of Termination of Proposed Merger with Hello Metro Incorporated,
Superfly Advertising, Inc, and Treefrog Commerce, Inc.
     
  
   INNUITY, INC.
(Registrant)By:
    
    /s/ JOHN R. WALL

John R. WallChief Executive Officer, Treasurer and Secretary(Principal executive officer)By:
    
    /s/ ROBERT K. BENCHRobert K. BenchChief Financial Officer(Principal financial and accounting officer)Dated August 4, 2006
 41