##### 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 Ended March 31, 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 154th Avenue NE
   þ o
  o þ
  Class
    
    Outstanding at April 30, 2006Common capital stock
$.00025 par value
    
    19,719,540
  o þ




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##### 



Innuity, Inc.
  PagePART I            FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2006
(Unaudited) and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations for the three
months ended March 31, 2006 (Unaudited) and March 31, 2005
(Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 (Unaudited) and March 31, 2005
(Unaudited)
    
    
    4Supplemental Disclosures of Cash Flow Information for the three
months ended March 31, 2006 (Unaudited) and March 31, 2005
(Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis or Plan of Operations
    
    
    12Item 3. Controls and Procedures
    
    
    37PART II            OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    38Item 5. Other Information
    
    
    38Item 6 Exhibits
    
    
    38SIGNATURES
    
    
    38EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    December 31,2006
    
    2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    180,817
    
    
    $
    696,997Settlement deposits
    
    
    713,633
    
    
    
    529,900Settlement receivable, net of allowance for doubtful
accounts of $47,810 and $47,939, respectively
    
    
    448,172
    
    
    
    254,499Trade accounts receivable, net of allowance for doubtful
accounts of $242,053 and $254,106, respectively
    
    
    2,431,167
    
    
    
    1,848,819Inventories, net of allowance for obsolete inventory of $173,622 and $115,141, respectively
    
    
    529,366
    
    
    
    522,600Prepaid royalty
    
    
    831,498
    
    
    
    1,247,246Other current assets
    
    
    240,781
    
    
    
    209,813Total Current Assets
    
    
    5,375,434
    
    
    
    5,309,874Property and equipment, net
    
    
    349,367
    
    
    
    347,724Intangible Assets, net
    
    
    2,116,619
    
    
    
    2,370,714Goodwill
    
    
    1,833,220
    
    
    
    1,833,220Total Assets
    
    $
    9,674,640
    
    
    $
    9,861,532LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current LiabilitiesTrade accounts payable
    
    $
    1,792,671
    
    
    $
    1,595,272Accrued salaries and wages
    
    
    534,020
    
    
    
    406,036Merchant settlement payable
    
    
    1,242,927
    
    
    
    774,975Accrued liabilities
    
    
    942,309
    
    
    
    777,190Deferred revenues
    
    
    1,913,696
    
    
    
    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
    
    
    50,579
    
    
    
    36,420Total Current Liabilities
    
    
    8,933,823
    
    
    
    7,527,956Long-Term LiabilitiesRelated party notes payable, net of discount of $22,268 and $22,944, respectively
    
    
    397,109
    
    
    
    1,470,867Long-term debt, net of discount of $0 and $254,087, respectively
    
    
    
    
    
    
    3,397,563Capital lease obligations
    
    
    75,399
    
    
    
    52,102Total Long-Term Liabilities
    
    
    472,508
    
    
    
    4,920,532Total Liabilities
    
    
    9,406,331
    
    
    
    12,448,488Stockholders Equity (Deficit)Common stock; 200,000,000 shares authorized; par value $0.00025 per share;
19,719,540 shares and 16,371,289 shares issued and outstanding, respectively
    
    
    4,930
    
    
    
    4,093Additional
paid-in Capital
    
    
    30,727,897
    
    
    
    26,430,420Deferred compensation
    
    
    
    
    
    
    (1,013,308
    )Accumulated deficit
    
    
    (30,464,518
    )
    
    
    (28,008,161
    )Total Stockholders Equity (Deficit)
    
    
    268,309
    
    
    
    (2,586,956
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    9,674,640
    
    
    $
    9,861,532
 See accompanying notes to condensed consolidated financial statements.
 2




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 For the Three Months Ended March 31,
    
    2006
    
    2005RevenuesProduct sales
    
    $
    1,899,841
    
    
    $
    Services
    
    
    3,058,030
    
    
    
    1,202,583Total revenues
    
    
    4,957,871
    
    
    
    1,202,583Operating expensesCost of product sales
    
    
    1,560,053
    
    
    
    Cost of services
    
    
    1,711,945
    
    
    
    342,211General and administrative
    
    
    1,483,060
    
    
    
    2,961,395Selling and marketing
    
    
    1,352,186
    
    
    
    498,023Research and development
    
    
    364,445
    
    
    
    296,165Royalty expense
    
    
    415,748
    
    
    
    415,749Amortization expense
    
    
    254,336
    
    
    
    37,618Loss from operations
    
    
    (2,183,902
    )
    
    
    (3,348,578
    )Other income/expenseInterest expense
    
    
    (339,842
    )
    
    
    (28,588
    )Other income
    
    
    67,387
    
    
    
    Net Loss
    
    $
    (2,456,357
    )
    
    $
    (3,377,166
    )Basic and Diluted Loss Per Common Share
    
    $
    (0.13
    )
    
    $
    (0.82
    )Basic and Diluted Weighted-Average
Common Shares Outstanding
    
    
    18,291,089
    
    
    
    4,097,753
 See accompanying notes to condensed consolidated financial statements.
 3




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Three Months Ended March 31,
    
    2006
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (2,456,357
    )
    
    $
    (3,377,166
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    307,669
    
    
    
    76,686Accretion of discount on notes payable
    
    
    254,764
    
    
    
    21,408Share-based
compensation expense
    
    
    380,743
    
    
    
    65,906Common stock issued for services
    
    
    
    
    
    
    2,457,823Bad debt provision
    
    
    3,000
    
    
    
    3,000Changes in assets and liabilities, net of acquisitions:Settlement deposits
    
    
    (183,733
    )
    
    
    (102,822
    )Trade accounts receivable
    
    
    (582,348
    )
    
    
    78,739Settlement receivable
    
    
    (196,673
    )
    
    
    22,691Inventories
    
    
    (6,766
    )
    
    
    Prepaid royalty
    
    
    415,748
    
    
    
    415,749Other current assets
    
    
    (30,968
    )
    
    
    24,543Trade accounts payable
    
    
    197,399
    
    
    
    7,760Merchant settlement payable
    
    
    467,952
    
    
    
    6,286Accrued salaries and wages
    
    
    127,984
    
    
    
    6,982Deferred revenues
    
    
    338,254
    
    
    
    80,097Accrued liabilities
    
    
    363,846
    
    
    
    (347,012
    )Total adjustments
    
    
    1,856,871
    
    
    
    2,817,836Net cash used in operating activities
    
    
    (599,486
    )
    
    
    (559,330
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (4,400
    )
    
    
    (25,218
    )Change in restricted cash
    
    
    
    
    
    
    274,902Net cash provided by (used in) investing activities
    
    
    (4,400
    )
    
    
    249,684Cash flows from financing activitiesIncrease in line of credit
    
    
    110,000
    
    
    
    389,515Payments on long-term debt
    
    
    (15,000
    )
    
    
    Payments on capital lease obligations
    
    
    (13,361
    )
    
    
    Proceeds from issuance of Series A preferred stock
    
    
    
    
    
    
    25,000Proceeds from exercise of options and warrants
    
    
    6,067
    
    
    
    Common stock issued for cash
    
    
    
    
    
    
    9,318Net cash provided by financing activities
    
    
    87,706
    
    
    
    423,833Net increase in cash and cash equivalents
    
    
    (516,180
    )
    
    
    114,187Cash and cash equivalents at beginning of period
    
    
    696,997
    
    
    
    187,444Cash and cash equivalents at end of period
    
    $
    180,817
    
    
    $
    301,631
 See accompanying notes to condensed consolidated financial statements.
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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Three Months Ended March 31,
    
    2006
    
    2005Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    15,227
    
    
    $
    1,235Noncash investing and financing activitiesStock options cancelled
    
    $
    
    
    
    $
    423,533Note payable issued as prepayment of royalties
    
    
    
    
    
    
    1,824,471Common stock issued as prepayment of royalties
    
    
    
    
    
    
    1,200,000Common stock issued for a subscription receivable
    
    
    
    
    
    
    308,400Common stock issued for accrued wages
    
    
    
    
    
    
    24,404Common stock issued for accounts payable
    
    
    
    
    
    
    115,350Convertible debt converted to common stock
    
    
    4,726,085
    
    
    
    Accrued interest converted to common stock
    
    
    198,727
    
    
    
    Reclassification of deferred compensation to additional paid-in capital in accordance with
FAS 123R
    
    
    1,013,308
    
    
    
    Acquisition of property and equipment under terms of capital leases
    
    
    50,817
    
    
    
    
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



INNUITY, INC.
AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 March 31, 2006
 (Unaudited)
 1.
    
    BASIS OF PRESENTATIONThe accompanying unaudited condensed consolidated financial statements of Innuity, Inc.
(the Company) have been prepared in accordance with the instructions to Form 10-QSB and do
not include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring entries) considered necessary for a fair
presentation have been included.Operating results for the three-month period ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the full fiscal year. The unaudited
condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes thereto included in the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2005, filed with the Securities and
Exchange Commission on March 23, 2006.On November 9, 2005, the Company completed a stock-for-stock merger with Vista.com,
Inc., a Washington corporation (Vista) pursuant to an Agreement and Plan of Merger, dated
as of October 21, 2005, by and among the Company, Vista Acquisition Corp., a wholly-owned
subsidiary of the Company (the Merger Sub) and Vista, providing for the merger of Merger
Sub with and into Vista (the Merger). Upon completion of the Merger, Vista became a
wholly-owned subsidiary of the Company.In the Merger, the Company issued an aggregate of 15,466,838 shares of Company common
stock to the shareholders of Vista in exchange for Vista common shares, on a one-for-one
share exchange basis. The Companys current directors and executive officers and greater
than 5% shareholders received in exchange for their Vista stock in the Merger a controlling
interest in the Company. In addition, options to purchase Vista stock held by the Companys
current directors and executive officers at the time of the Merger became options to
purchase common stock of the Company.The Companys operations are carried out through its Merchant Services business line
and by its three wholly-owned subsidiaries, Vista, Jadeon, Inc. (a Nevada corporation), and
10x Marketing LLC (a Utah limited liability corporation). The Companys operations are
located in California, Utah and Washington.2.
    
    SHARE BASED PAYMENTSPrior to January 1, 2006, the Company accounted for its stock option plan using the
intrinsic value method of accounting provided under APB Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) and related interpretations, as permitted by FASB Statement
No. 123, Accounting for Stock-Based Compensation,(SFAS123). Under this method no
compensation expense was recognized for stock option grants, with the exception of options
accounted for under variable accounting that were determined to have an exercise price below
the fair value of the Companys underlying common stock as of the date of grant.
Accordingly, share-based compensation was included as a pro forma disclosure in the
financial statement footnotes and continues to be presented as a pro forma disclosure for
periods prior to the three-month period ended March 31, 2006.Effective January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123 (R), Share-Based Payment, (SFAS 123R) using the modified-prospective
transition method. Under this transition method, compensation cost recognized during the
three-month period ended
 6




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2006Dividend yield
    
    
    0.0
    %Expected Volatility
    
    
    142
    %Risk-free interest rate
    
    
    4.6
    %Expected term
    
    5 years
   Weighted
    
    
    WeightedShares
    
    
    Average
    
    
    Average
    
    
    Aggregateunder
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOption
    
    
    Price
    
    
    Contract Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    1,980,885
    
    
    $
    0.38Granted
    
    
    100,000
    
    
    $
    4.01Exercised
    
    
    (17,668
    )
    
    $
    0.23Forfeited or expired
    
    
    (22,830
    )
    
    $
    0.47Outstanding at March 31, 2006
    
    
    2,040,387
    
    
    $
    0.56
    
    
    8.8 Years
    
    $
    5,998,738Exercisable at March 31, 2006
    
    
    924,215
    
    
    $
    0.36
    
    
    8.3 Years
    
    $
    2,902,035
  7




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##### Table of Contents



Three Months EndedMarch 31, 2005Net loss attributable to common stockholders:
    
    $
    (3,377,166
    )Add stock-based compensation expense included in net loss
    
    
    65,906Deduct stock-based compensation expense determined under
fair value basis method
    
    
    (132,054
    )Pro forma net loss
    
    $
    (3,443,314
    )Reported basic and diluted loss per share
    
    $
    (0.82
    )Pro forma basic and diluted loss per share
    
    $
    (0.84
    )
       March 31,
    
    
    December 31,Long-term debt
    
    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 $254,087
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
 8




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##### Table of Contents



March 31,
    
    
    December 31,Related Party Notes Payable
    
    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 $24,968 and $25,644 unsecured
    
    
    574,409
    
    
    
    573,733Note payable to related parties, interest at 8%, matures
December 2009, monthly payments of $13,468 beginning
September 2005, in default, unsecured
    
    
    280,806
    
    
    
    280,806Total related party notes payable
    
    $
    1,055,215
    
    
    $
    2,128,973Less current maturities
    
    
    (658,106
    )
    
    
    (658,106
    )Long-term related party notes payable
    
    $
    397,109
    
    
    $
    1,470,867
   Three months ended March 31, 2006
   Earnings Per Share
   9




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Three Months EndedMarch 31, 2005Revenue
    
    $
    4,208,325Net loss
    
    $
    (3,267,942
    )Net loss per share
    
    $
    (0.80
    )
      For The Three Months ended March 31, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    883,753
    
    
    $
    4,074,118
    
    
    $
    
    
    
    $
    4,957,871Depreciation and amortization
    
    
    100,170
    
    
    
    207,499
    
    
    
    
    
    
    
    307,669Interest expense
    
    
    170,264
    
    
    
    169,578
    
    
    
    
    
    
    
    339,842Segment loss
    
    
    1,110,574
    
    
    
    1,345,783
    
    
    
    
    
    
    
    2,456,357Segment assets
    
    
    5,428,314
    
    
    
    7,586,242
    
    
    
    (3,339,916
    )
    
    
    9,674,640
 10




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##### Table of Contents



For the Three Months ended March 31, 2005Promotion
    
    
    Commerce
    
    
    Intercompany
    
    
    TotalRevenue from external customers
    
    $
    636,681
    
    
    $
    565,902
    
    
    $
    
    
    
    $
    1,202,583Depreciation and amortization
    
    
    5,456
    
    
    
    71,230
    
    
    
    
    
    
    
    76,686Interest expense
    
    
    28,588
    
    
    
    
    
    
    
    
    
    
    
    28,588Segment loss
    
    
    1,673,316
    
    
    
    1,703,850
    
    
    
    
    
    
    
    3,377,166Segment assets
    
    
    1,389,530
    
    
    
    2,857,998
    
    
    
    (2,256,158
    )
    
    
    1,991,370
  11




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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
   12




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##### Table of Contents



Significant Events
  Source Energy Corporation
  10x Marketing, LLC
   Jadeon, Inc.
  13




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##### Table of Contents



Application of Critical Accounting Policies
  Basis of Presentation and Consolidation
  Revenue Recognition
    Subscriptions and Maintenance Support
 Transaction Processing and Affiliate (Reseller) Programs
 14




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Professional Services
 Systems Sales
 Allowance for Doubtful Accounts
  Long-Lived Assets
  Goodwill
    15




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment Accounting for Stock Based Compensation
  Accounting for Stock
Issued to Employees
 16




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##### Table of Contents



Operations Review
 Analysis of Consolidated Statements of Operations
 Three Months Ended March 31,2006
    
    
    2005
    
    
    % ChangeRevenuesProduct sales
    
    $
    1,899,841
    
    
    $
    
    
    
    
    *Services
    
    
    3,058,030
    
    
    
    1,202,583
    
    
    
    154
    %Total revenues
    
    
    4,957,871
    
    
    
    1,202,583
    
    
    
    312
    %Operating expensesCost of product sales
    
    
    1,560,053
    
    
    
    
    
    
    
    *Cost of services
    
    
    1,711,945
    
    
    
    342,211
    
    
    
    400
    %General and administrative
    
    
    1,483,060
    
    
    
    2,961,395
    
    
    
    -50
    %Selling and marketing
    
    
    1,352,186
    
    
    
    498,023
    
    
    
    172
    %Research and development
    
    
    364,445
    
    
    
    296,165
    
    
    
    23
    %Royalty expense
    
    
    415,748
    
    
    
    415,749
    
    
    
    0
    %Amortization expense
    
    
    254,336
    
    
    
    37,618
    
    
    
    576
    %Loss from operations
    
    
    (2,183,902
    )
    
    
    (3,348,578
    )Other income/expenseInterest expense
    
    
    (339,842
    )
    
    
    (28,588
    )
    
    
    1089
    %Other income
    
    
    67,387
    
    
    
    
    
    
    
    *Net Loss
    
    $
    (2,456,357
    )
    
    $
    (3,377,166
    )
    
    
    -27
    %
 *
    
    Calculation is not meaningful Note 
    
    Refer to the above Analysis of Consolidated Statements of
Operations while
reading the operations review discussion below.
 Revenues
  Expenses
 Cost of product sales
 Cost
of services.
 General and administrative.
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Selling
and marketing.
 Research and development.
 Royalty.
 Amortization.
 Interest.
 Liquidity and Capital Resources
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Three Months Ended March 31,2006
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (2,456,357
    )
    
    $
    (3,377,166
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    307,669
    
    
    
    76,686Accretion of discount on notes payable
    
    
    254,764
    
    
    
    21,408Share-based
compensation expense
    
    
    380,743
    
    
    
    2,523,729Bad debt provision
    
    
    3,000
    
    
    
    3,000Changes in assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    (582,348
    )
    
    
    78,739Prepaid royalty
    
    
    415,748
    
    
    
    415,749Merchant settlement payable
    
    
    467,952
    
    
    
    6,286Deferred revenues
    
    
    338,254
    
    
    
    80,097Other
    
    
    271,089
    
    
    
    (387,858
    )Total adjustments
    
    
    1,856,871
    
    
    
    2,817,836Net cash used in operating activities
    
    
    (599,486
    )
    
    
    (559,330
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (4,400
    )
    
    
    (25,218
    )Change in restricted cash
    
    
    
    
    
    
    274,902Net cash provided by (used in) investing activities
    
    
    (4,400
    )
    
    
    249,684Cash flows from financing activitiesIncrease in line of credit
    
    
    110,000
    
    
    
    389,515Payments on long-term debt and capital lease obligations
    
    
    (28,361
    )
    
    
    Proceeds from issuance of Series A preferred stock
    
    
    
    
    
    
    25,000Proceeds from exercise of options and warrants
    
    
    6,067
    
    
    
    Common stock issued for cash
    
    
    
    
    
    
    9,318Net cash provided by financing activities
    
    
    87,706
    
    
    
    423,833Net increase in cash and cash equivalents
    
    
    (516,180
    )
    
    
    114,187Cash and cash equivalents at beginning of period
    
    
    696,997
    
    
    
    187,444Cash and cash equivalents at end of period
    
    $
    180,817
    
    
    $
    301,631
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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.
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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.
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
    
    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;
    
    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.
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
    
    identify and anticipate emerging technological and market trends
affecting the small business segment in which we do business;
    
    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, Interland, 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online companies such as Versign, Authorize.net,
PayPal, Heartland Payment Systems, iPayment, CyberSource, Global Payments, Verus
(The Sage Group), and Innovative Merchant Services (Intuit), as well as offline
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.
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Our future revenues may be uncertain because of reliance on third parties for marketing and
distribution.
  We plan to expand our business 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.
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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.
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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 manipulate 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 implement new, anti-manipulation controls; 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.
  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.
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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.
  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.
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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.
  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.
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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.
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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.
  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.
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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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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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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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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.
  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 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.
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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.
  
   
  
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Exhibit 10.1
    
    
    
    Lease agreement with Kelly L. Sapp TrustExhibit 10.2
    
    -
    
    Asset Purchase Agreement dated March 9, 2006, by and among Innuity, Inc. and
Hello Metro Incorporated, Superfly Advertising, Inc., Treefrog Commerce, Inc. and Clark
Scott (incorporated by reference to Exhibit 10.20 of the Companys 10-KSB for the year
ended December 31, 2005, filed with the Securities and Exchange Commission on March 23,
2006)
 
  
   INNUITY, INC.
(Registrant)By:
    /s/ JOHN R. WALLJohn R. WallChief Executive Officer, Treasurer
and Secretary
(Principal executive officer) By:
    /s/ ROBERT K. BENCHRobert K. BenchChief Financial Officer
(Principal financial and accounting officer)  38