##### 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 September 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
 Utah
(State or other Jurisdiction of 
Incorporation or Organization)
    
    Innuity, Inc.
Exact Name of Small Business Issuer as
Specified in its Charter
    
    87-0370820
(I.R.S. Employer
Identification No.)
 8644 154 th Avenue NE
   þ o
  o þ
  Class
    
    Outstanding at October 31, 2006Common capital stock
$.00025 par value
    
    20,062,534
  o þ




---



##### 



Innuity, Inc.
  PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of
September 30, 2006 (Unaudited) and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2006 (Unaudited) and
September 30, 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2006 (Unaudited) and September 30,
2005 (Unaudited)
    
    
    4Supplemental Disclosures of Cash Flow Information for the nine
months ended September 30, 2006 (Unaudited) and September 30,
2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis or Plan of Operations
    
    
    14Item 3.
    
    Controls and Procedures
    
    
    37PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    37Item 2.
    
    Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    37Item 6.
    
    Exhibits
    
    
    37SIGNATURES
    
    
    38EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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INNUITY, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    260,955
    
    
    $
    696,997Settlement deposits
    
    
    436,138
    
    
    
    529,900Settlement receivable, net of allowance for doubtful
accounts of $47,594 and $47,939, respectively
    
    
    205,695
    
    
    
    254,499Trade accounts receivable, net of allowance for
doubtful
accounts of $251,975 and $254,106, respectively
    
    
    1,132,818
    
    
    
    1,848,819Inventories, net of allowance for obsolete
inventory of $214,072 and $115,141,
respectively
    
    
    676,883
    
    
    
    522,600Prepaid royalty
    
    
    
    
    
    
    1,247,246Other current assets
    
    
    222,907
    
    
    
    209,813Total Current Assets
    
    
    2,935,396
    
    
    
    5,309,874Property and equipment, net
    
    
    639,485
    
    
    
    347,724Intangible assets, net
    
    
    1,641,763
    
    
    
    2,370,714Goodwill
    
    
    1,833,220
    
    
    
    1,833,220Total Assets
    
    $
    7,049,864
    
    
    $
    9,861,532LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesTrade accounts payable
    
    $
    2,176,928
    
    
    $
    1,595,272Accrued salaries and wages
    
    
    548,079
    
    
    
    406,036Merchant settlement payable
    
    
    557,682
    
    
    
    774,975Accrued liabilities
    
    
    1,401,334
    
    
    
    777,190Deferred revenues
    
    
    1,633,510
    
    
    
    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
    
    
    130,729
    
    
    
    36,420Total Current Liabilities
    
    
    8,905,883
    
    
    
    7,527,956Long-Term LiabilitiesRelated party notes payable, net of discount
of $290,561 and $22,944, respectively
    
    
    354,800
    
    
    
    1,470,867Long-term debt, net of discount of $0 and $254,087,
respectively
    
    
    
    
    
    
    3,397,563Capital lease obligations
    
    
    205,501
    
    
    
    52,102Total Long-Term Liabilities
    
    
    560,301
    
    
    
    4,920,532Total Liabilities
    
    
    9,466,184
    
    
    
    12,448,488Commitments and ContingenciesStockholders 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
    
    
    32,240,969
    
    
    
    26,430,420Deferred compensation
    
    
    
    
    
    
    (1,013,308
    )Accumulated deficit
    
    
    (34,662,305
    )
    
    
    (28,008,161
    )Total Stockholders Deficit
    
    
    (2,416,320
    )
    
    
    (2,586,956
    )Total Liabilities and Stockholders Deficit
    
    $
    7,049,864
    
    
    $
    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 September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    2006
    
    2005RevenuesProduct sales
    
    $
    2,111,811
    
    
    $
    1,857,385
    
    
    $
    6,368,229
    
    
    $
    2,100,457Services
    
    
    3,336,763
    
    
    
    2,865,475
    
    
    
    9,595,902
    
    
    
    5,669,782Total revenues
    
    
    5,448,574
    
    
    
    4,722,860
    
    
    
    15,964,131
    
    
    
    7,770,239Operating expensesCost of product sales
    
    
    1,618,566
    
    
    
    1,307,771
    
    
    
    4,833,039
    
    
    
    1,466,432Cost of services
    
    
    1,808,884
    
    
    
    1,532,413
    
    
    
    5,366,951
    
    
    
    2,443,701General and administrative
    
    
    1,463,318
    
    
    
    2,075,708
    
    
    
    4,930,355
    
    
    
    5,976,945Selling and marketing
    
    
    1,172,029
    
    
    
    1,130,164
    
    
    
    4,061,682
    
    
    
    2,419,213Research and development
    
    
    318,239
    
    
    
    317,359
    
    
    
    1,020,869
    
    
    
    916,715Royalty expense
    
    
    415,749
    
    
    
    415,748
    
    
    
    1,247,246
    
    
    
    1,247,245Amortization expense
    
    
    229,095
    
    
    
    216,480
    
    
    
    728,950
    
    
    
    261,944Loss from operations
    
    
    (1,577,306
    )
    
    
    (2,272,783
    )
    
    
    (6,224,961
    )
    
    
    (6,961,956
    )Other income (expense)Interest expense
    
    
    (91,706
    )
    
    
    (81,509
    )
    
    
    (499,574
    )
    
    
    (144,796
    )Other income
    
    
    682
    
    
    
    2,057
    
    
    
    70,391
    
    
    
    2,707Total other expense
    
    
    (91,024
    )
    
    
    (79,452
    )
    
    
    (429,183
    )
    
    
    (142,089
    )Net Loss
    
    $
    (1,668,330
    )
    
    $
    (2,352,235
    )
    
    $
    (6,654,144
    )
    
    $
    (7,104,045
    )Basic and Diluted Loss
Per Common Share
    
    $
    (0.08
    )
    
    $
    (0.22
    )
    
    $
    (0.35
    )
    
    $
    (0.94
    )Basic and Diluted
Weighted-Average
Common Shares Outstanding
    
    
    20,062,534
    
    
    
    10,487,203
    
    
    
    19,262,108
    
    
    
    7,575,271
 See accompanying notes to condensed consolidated financial statements.
 3




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INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine months ended September 30,
    
    2006
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (6,654,144
    )
    
    $
    (7,104,045
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    921,821
    
    
    
    533,529Accretion of discount on notes payable
    
    
    318,703
    
    
    
    66,027Non-cash share based compensation expense
    
    
    1,063,897
    
    
    
    352,590Common stock issued for services
    
    
    497,744
    
    
    
    3,028,318Bad debt provision
    
    
    260,782
    
    
    
    30,041Expense for prepaid royalties
    
    
    1,247,246
    
    
    
    1,247,246Changes in assets and liabilities, net of acquisitions:Settlement deposits
    
    
    93,762
    
    
    
    (279,415
    )Trade accounts receivable
    
    
    492,291
    
    
    
    (91,884
    )Settlement receivable
    
    
    11,732
    
    
    
    (326,428
    )Inventories
    
    
    (154,283
    )
    
    
    (221,719
    )Other current assets
    
    
    (13,094
    )
    
    
    (99,915
    )Trade accounts payable
    
    
    581,656
    
    
    
    377,315Merchant settlement payable
    
    
    (217,293
    )
    
    
    265,644Accrued salaries and wages
    
    
    142,042
    
    
    
    (13,371
    )Deferred revenues
    
    
    58,068
    
    
    
    (152,432
    )Accrued liabilities
    
    
    822,871
    
    
    
    (91,479
    )Total adjustments
    
    
    6,127,945
    
    
    
    4,624,067Net cash used in operating activities
    
    
    (526,199
    )
    
    
    (2,479,978
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (170,975
    )
    
    
    (62,935
    )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
    
    
    (170,975
    )
    
    
    681,038Cash flows from financing activitiesProceeds from related party notes payable
    
    
    345,000
    
    
    
    Proceeds from convertible note
    
    
    
    
    
    
    3,514,007Increase in line of credit
    
    
    110,000
    
    
    
    489,515Payments on related party notes payable
    
    
    (119,016
    )
    
    
    (595,232
    )Payments on long-term debt
    
    
    (15,000
    )
    
    
    (68,356
    )Payments on capital lease obligations
    
    
    (65,949
    )
    
    
    (7,532
    )Proceeds from issuance of Series A preferred stock
    
    
    
    
    
    
    25,000Proceeds from exercise of options and warrants
    
    
    6,097
    
    
    
    29,552Common stock issued for cash
    
    
    
    
    
    
    223,627Net cash provided by financing activities
    
    
    261,132
    
    
    
    3,610,581Net increase (decrease) in cash and cash equivalents
    
    
    (436,042
    )
    
    
    1,811,641Cash and cash equivalents at beginning of period
    
    
    696,997
    
    
    
    187,444Cash and cash equivalents at end of period
    
    $
    260,955
    
    
    $
    1,999,085
 See accompanying notes to condensed consolidated financial statements.
 4




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INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine months ended September 30,2006
    
    2005Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    33,079
    
    
    $
    30,875Noncash investing and financing activitiesIssuance of options and warrants
    
    $
    
    
    
    $
    310,719Stock options forfeited
    
    
    
    
    
    
    454,985Exercise of warrants for settlement of liabilities
    
    
    
    
    
    
    8,231Issuance 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
    
    
    
    
    
    
    230,727Discount on notes payable
    
    
    332,232
    
    
    
    273,497Conversion of old note and accrued interest to new convertible note
    
    
    
    
    
    
    137,644Conversion of old related party note payable to convertible note
    
    
    
    
    
    
    1,074,434Convertible 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
    
    
    313,656
    
    
    
    87,865Write off of accounts receivable
    
    
    263,258
    
    
    
    51,862Purchase 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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INNUITY, INC.
AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
          6




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Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation,
 Share-Based Payment
   2006Dividend yield
    
    0.0%Expected Volatility
    
    142%Risk-free interest rate
    
    4.66%Expected term
    
    5 years
  7




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##### Table of Contents



Weighted AverageWeighted Average
    
    
    Remaining Contract
    
    
    Aggregate IntrinsicShares under Option
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    1,980,885
    
    
    $
    0.38Granted
    
    
    377,000
    
    
    $
    2.81Exercised
    
    
    (245,906
    )
    
    $
    0.24Forfeited or expired
    
    
    (214,668
    )
    
    $
    0.48Outstanding at September 30, 2006
    
    
    1,897,311
    
    
    $
    0.87
    
    
    8.46 Years
    
    $
    459,180Exercisable at September 30, 2006
    
    
    1,009,956
    
    
    $
    0.47
    
    
    7.92 Years
    
    $
    172,949
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss attributable to common stockholders:
    
    $
    (2,352,235
    )
    
    $
    (7,104,045
    )Add stock-based compensation expense
included in net loss
    
    
    190,390
    
    
    
    352,594Deduct stock-based compensation expense
determined under fair value basis method
    
    
    (276,246
    )
    
    
    (790,560
    )Pro forma net loss
    
    $
    (2,438,091
    )
    
    $
    (7,542,011
    )Reported basic and diluted loss per share
    
    $
    (0.22
    )
    
    $
    (0.94
    )Pro forma basic and diluted loss per share
    
    $
    (0.23
    )
    
    $
    (1.00
    )
      8




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September 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
 9




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September 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 shareholder,
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
$23,620 and $25,644, unsecured
    
    
    456,741
    
    
    
    573,733Notes payable to an officer and director,
and two associated parties,
interest at 12%, 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 $269,641 and $0, secured by
assets of the Company
    
    
    75,359
    
    
    
    Total related party notes payable
    
    $
    1,012,906
    
    
    $
    2,128,973Less current maturities
    
    
    (658,106
    )
    
    
    (658,106
    )Long-term related party notes payable
    
    $
    354,800
    
    
    $
    1,470,867
        10




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Earnings Per Share
     Nine Months EndedSeptember 30, 2005Revenue
    
    $
    13,447,173Net loss
    
    $
    (6,974,690
    )Net loss per share
    
    $
    (0.92
    )
    11




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For The Three Months Ended September 30, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    880,730
    
    
    $
    4,567,844
    
    
    $
    
    
    
    $
    5,448,574Depreciation and amortization
    
    
    92,152
    
    
    
    214,111
    
    
    
    
    
    
    
    306,263Interest expense
    
    
    45,823
    
    
    
    45,883
    
    
    
    
    
    
    
    91,706Segment loss
    
    
    (841,723
    )
    
    
    (826,607
    )
    
    
    
    
    
    
    (1,668,330
    )Segment assets
    
    
    2,907,499
    
    
    
    7,130,998
    
    
    
    (2,988,633
    )
    
    
    7,049,864
 For the Nine Months Ended September 30, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    2,640,646
    
    
    $
    13,323,485
    
    
    $
    
    
    
    $
    15,964,131Depreciation and amortization
    
    
    290,496
    
    
    
    631,325
    
    
    
    
    
    
    
    921,821Interest expense
    
    
    250,037
    
    
    
    249,537
    
    
    
    
    
    
    
    499,574Segment loss
    
    
    (3,294,905
    )
    
    
    (3,359,239
    )
    
    
    
    
    
    
    (6,654,144
    )Segment assets
    
    
    2,907,499
    
    
    
    7,130,998
    
    
    
    (2,988,633
    )
    
    
    7,049,864
  For The Three Months Ended September 30, 2005Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    790,158
    
    
    $
    3,932,702
    
    
    $
    
    
    
    $
    4,722,860Depreciation and amortization
    
    
    87,769
    
    
    
    240,058
    
    
    
    
    
    
    
    327,827Interest expense
    
    
    45,702
    
    
    
    35,807
    
    
    
    
    
    
    
    81,509Segment income (loss)
    
    
    (1,227,564
    )
    
    
    (1,124,671
    )
    
    
    
    
    
    
    (2,352,235
    )Segment assets
    
    
    8,141,341
    
    
    
    7,211,419
    
    
    
    (3,675,147
    )
    
    
    11,677,613
 For the Nine Months Ended September 30, 2005Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    2,090,623
    
    
    $
    5,679,616
    
    
    $
    
    
    
    $
    7,770,239Depreciation and amortization
    
    
    123,211
    
    
    
    410,318
    
    
    
    
    
    
    
    533,529Interest expense
    
    
    108,941
    
    
    
    35,855
    
    
    
    
    
    
    
    144,796Segment loss
    
    
    (3,700,453
    )
    
    
    (3,403,592
    )
    
    
    
    
    
    
    (7,104,045
    )Segment assets
    
    
    8,141,341
    
    
    
    7,211,419
    
    
    
    (3,675,147
    )
    
    
    11,677,613
 12




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13




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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-Risk Factors..
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,, Innuity 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.
    
    Critical Accounting Policies  a discussion of accounting policies that require
critical judgments and estimates.
    
    Operations Review  an analysis of our consolidated results of operations.
    
    Liquidity and Capital Resources  an analysis of our cash flows, sources and uses of cash.
    
    Risk Factors  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
     Critical Accounting Policies
  15




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Operations Review
  Analysis of Consolidated Statements of Operations
 Three months ended September 30,
    
    Nine months ended September 30,%
    
    
    
    
    
    
    
    
    
    %2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeRevenuesProduct sales
    
    $
    2,111,811
    
    
    $
    1,857,385
    
    
    
    14
    %
    
    $
    6,368,229
    
    
    $
    2,100,457
    
    
    
    203
    %Services
    
    
    3,336,763
    
    
    
    2,865,475
    
    
    
    16
    %
    
    
    9,595,902
    
    
    
    5,669,782
    
    
    
    69
    %Total revenues
    
    
    5,448,574
    
    
    
    4,722,860
    
    
    
    15
    %
    
    
    15,964,131
    
    
    
    7,770,239
    
    
    
    105
    %Operating expensesCost of product sales
    
    
    1,618,566
    
    
    
    1,307,771
    
    
    
    24
    %
    
    
    4,833,039
    
    
    
    1,466,432
    
    
    
    230
    %Cost of services
    
    
    1,808,884
    
    
    
    1,532,413
    
    
    
    18
    %
    
    
    5,366,951
    
    
    
    2,443,701
    
    
    
    120
    %General and administrative
    
    
    1,463,318
    
    
    
    2,075,708
    
    
    
    -30
    %
    
    
    4,930,355
    
    
    
    5,976,945
    
    
    
    -18
    %Selling and marketing
    
    
    1,172,029
    
    
    
    1,130,164
    
    
    
    4
    %
    
    
    4,061,682
    
    
    
    2,419,213
    
    
    
    68
    %Research and development
    
    
    318,239
    
    
    
    317,359
    
    
    
    0
    %
    
    
    1,020,869
    
    
    
    916,715
    
    
    
    11
    %Royalty expense
    
    
    415,749
    
    
    
    415,748
    
    
    
    0
    %
    
    
    1,247,246
    
    
    
    1,247,245
    
    
    
    0
    %Amortization expense
    
    
    229,095
    
    
    
    216,480
    
    
    
    6
    %
    
    
    728,950
    
    
    
    261,944
    
    
    
    178
    %Loss from operations
    
    
    (1,577,306
    )
    
    
    (2,272,783
    )
    
    
    -31
    %
    
    
    (6,224,961
    )
    
    
    (6,961,956
    )
    
    
    -11
    %Other income (expense)Interest expense
    
    
    (91,706
    )
    
    
    (81,509
    )
    
    
    13
    %
    
    
    (499,574
    )
    
    
    (144,796
    )
    
    
    245
    %Other expense, net
    
    
    682
    
    
    
    2,057
    
    
    
    *
    
    
    
    70,391
    
    
    
    2,707
    
    
    
    *Total other expense
    
    
    (91,024
    )
    
    
    (79,452
    )
    
    
    15
    %
    
    
    (429,183
    )
    
    
    (142,089
    )
    
    
    202
    %Net Loss
    
    $
    (1,668,330
    )
    
    $
    (2,352,235
    )
    
    
    -29
    %
    
    $
    (6,654,144
    )
    
    $
    (7,104,045
    )
    
    
    -6
    %
 *
    
    Calculation is not meaningfulNote
    -
    Refer to the above Analysis of Consolidated Statements of Operations while
reading the operations review discussion below.
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Revenues
   Expenses
 Cost of product sales
  Cost of services.
  General and administrative.
  17




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Selling and marketing.
  Research and development.
  Royalty.
 Amortization.
  Interest.
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Liquidity and Capital Resources
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Nine months ended September 30,
    
    2006
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (6,654,144
    )
    
    $
    (7,104,045
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    921,821
    
    
    
    533,529Accretion of discount on notes payable
    
    
    318,703
    
    
    
    66,027Non-cash share based compensation expense
    
    
    1,063,897
    
    
    
    352,590Common stock issued for services
    
    
    497,744
    
    
    
    3,028,318Bad debt provision
    
    
    260,782
    
    
    
    30,041Expense for prepaid royalties
    
    
    1,247,246
    
    
    
    1,247,246Changes in assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    492,291
    
    
    
    (91,884
    )Trade accounts payable
    
    
    581,656
    
    
    
    377,315Deferred revenues
    
    
    58,068
    
    
    
    (152,432
    )Accrued liabilities
    
    
    822,871
    
    
    
    (91,479
    )Other
    
    
    (137,134
    )
    
    
    (675,204
    )Total adjustments
    
    
    6,127,945
    
    
    
    4,624,067Net cash used in operating activities
    
    
    (526,199
    )
    
    
    (2,479,978
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (170,975
    )
    
    
    (62,935
    )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
    
    
    (170,975
    )
    
    
    681,038Cash flows from financing activitiesProceeds from related party notes payable
    
    
    345,000
    
    
    
    Proceeds from convertible note
    
    
    
    
    
    
    3,514,007Increase in line of credit
    
    
    110,000
    
    
    
    489,515Payments on related parties notes payable
    
    
    (119,016
    )
    
    
    (595,232
    )Payments on long-term debt
    
    
    (15,000
    )
    
    
    (68,356
    )Payments on capital lease obligations
    
    
    (65,949
    )
    
    
    (7,532
    )Proceeds from issuance of Series A preferred stock
    
    
    
    
    
    
    25,000Proceeds from exercise of options and warrants
    
    
    6,097
    
    
    
    29,552Common stock issued for cash
    
    
    
    
    
    
    223,627Net cash provided by financing activities
    
    
    261,132
    
    
    
    3,610,581Net increase (decrease) in cash and cash equivalents
    
    
    (436,042
    )
    
    
    1,811,641Cash and cash equivalents at beginning of period
    
    
    696,997
    
    
    
    187,444Cash and cash equivalents at end of period
    
    $
    260,955
    
    
    $
    1,999,085
  20




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Risks Factors
  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.
  Our limited operating history makes evaluation of our business difficult.
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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.
    
    Search Engine Marketing companies such as Yahoo Small Business, Google,
Microsoft, iCrossing, iProspect, SEO.com, R. H. Donnelley (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.
  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
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could lose confidence in our financial reporting, which could harm our business and the
trading price of our common stock.
  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.
  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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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.
   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.
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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.
  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 could 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 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 influence;
    
    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.
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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.
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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.
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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.
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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
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
    
    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.
   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.
  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;
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
    
    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 our merger with 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
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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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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