##### Table of Contents



United States
Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2007
 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 July 31, 2007Common stock$.00025 par value
    
    21,919,665
  o þ




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##### 



Innuity, Inc.
  PagePART I FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Controls and Procedures
    
    
    33PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 June 30,
    
    December 31,2007
    
    2006ASSETSCurrent AssetsCash and cash
equivalents
    
    $
    423,829
    
    
    $
    307,483Settlement deposits
    
    
    266,617
    
    
    
    467,078Settlement receivable, net of allowance for
doubtful
accounts of
$18,864 and $12,864, respectively
    
    
    183,693
    
    
    
    173,098Trade accounts receivable, net of allowance
for doubtful
accounts of $103,136 and $115,693,
respectively
    
    
    1,035,845
    
    
    
    1,318,773Inventories, net of allowance for obsolete inventory of $196,125
and $226,656, respectively
    
    
    348,919
    
    
    
    486,736Other current
assets
    
    
    179,959
    
    
    
    184,891Total Current Assets
    
    
    2,438,862
    
    
    
    2,938,059Property and equipment,
net
    
    
    724,354
    
    
    
    901,318Intangible assets, net
    
    
    1,165,127
    
    
    
    1,670,582Goodwill
    
    
    1,833,220
    
    
    
    1,833,220Total Assets
    
    $
    6,161,563
    
    
    $
    7,343,179LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesTrade accounts
payable
    
    $
    2,701,390
    
    
    $
    2,587,227Accrued salaries
and wages
    
    
    466,186
    
    
    
    612,745Merchant
settlement payable
    
    
    404,832
    
    
    
    453,596Accrued liabilities
    
    
    1,076,988
    
    
    
    1,229,872Deferred revenues
    
    
    3,040,240
    
    
    
    2,543,397Line of credit
    
    
    
    
    
    
    699,365Related party notes payable, current portion, net of discount of
$167,415 and $2,700, respectively
    
    
    654,994
    
    
    
    658,105Long-term debt, current portion, net of
discount of $438,385 and $0 , respectively
    
    
    1,706,144
    
    
    
    1,294,529Capital lease obligations, current portion
    
    
    148,787
    
    
    
    142,972Total Current Liabilities
    
    
    10,199,561
    
    
    
    10,221,808Long-Term LiabilitiesRelated party notes payable, net of discount of $0 and $248,357,
respectively
    
    
    
    
    
    
    330,832Long-term debt
    
    
    133,156
    
    
    
    180,126Capital lease
obligations
    
    
    114,187
    
    
    
    190,024Total Long-Term
Liabilities
    
    
    247,343
    
    
    
    700,982Total Liabilities
    
    
    10,446,904
    
    
    
    10,922,790Commitments and
ContingenciesStockholders DeficitCommon stock; 200,000,000 shares authorized; par value $0.00025 per
share;
21,919,669 shares and 20,741,538 shares issued and outstanding,
respectively
    
    
    5,480
    
    
    
    5,185Additional paid-in
capital
    
    
    34,262,509
    
    
    
    32,897,053Accumulated deficit
    
    
    (38,553,330
    )
    
    
    (36,481,849
    )Total Stockholders
Deficit
    
    
    (4,285,341
    )
    
    
    (3,579,611
    )Total Liabilities and Stockholders Deficit
    
    $
    6,161,563
    
    
    $
    7,343,179
 See accompanying notes to condensed consolidated financial statements.
 2




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three months ended June 30,
    
    Six months ended June 30,2007
    
    2006
    
    2007
    
    2006RevenuesProduct sales
    
    $
    2,277,666
    
    
    $
    2,348,069
    
    
    $
    4,390,537
    
    
    $
    4,247,910Services
    
    
    3,240,644
    
    
    
    3,210,626
    
    
    
    6,414,514
    
    
    
    6,268,656Total revenues
    
    
    5,518,310
    
    
    
    5,558,695
    
    
    
    10,805,051
    
    
    
    10,516,566Operating expensesCost of product sales
    
    
    1,744,245
    
    
    
    1,688,520
    
    
    
    3,388,218
    
    
    
    3,248,572Cost of services
    
    
    1,771,838
    
    
    
    1,820,444
    
    
    
    3,586,559
    
    
    
    3,532,389General and administrative
    
    
    1,088,598
    
    
    
    2,000,961
    
    
    
    2,418,472
    
    
    
    3,484,021Selling and marketing
    
    
    1,172,423
    
    
    
    1,509,988
    
    
    
    2,415,594
    
    
    
    2,862,174Research and development
    
    
    348,769
    
    
    
    341,027
    
    
    
    809,934
    
    
    
    705,472Royalty expense
    
    
    
    
    
    
    415,749
    
    
    
    
    
    
    
    831,497Amortization expense
    
    
    254,868
    
    
    
    245,761
    
    
    
    505,455
    
    
    
    500,097Loss from operations
    
    
    (862,431
    )
    
    
    (2,463,755
    )
    
    
    (2,319,181
    )
    
    
    (4,647,656
    )Other income (expense)Gain from settlement of debt
    
    
    577,434
    
    
    
    
    
    
    
    577,434
    
    
    
    Other income
    
    
    
    
    
    
    2,323
    
    
    
    
    
    
    
    69,710Interest expense
    
    
    (231,656
    )
    
    
    (68,026
    )
    
    
    (329,611
    )
    
    
    (407,868
    )Total other income (expense)
    
    
    345,778
    
    
    
    (65,703
    )
    
    
    247,823
    
    
    
    (338,158
    )Net loss before income taxes
    
    
    (516,653
    )
    
    
    (2,529,458
    )
    
    
    (2,071,358
    )
    
    
    (4,985,814
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (516,653
    )
    
    $
    (2,529,458
    )
    
    $
    (2,071,358
    )
    
    $
    (4,985,814
    )Basic and Diluted Loss Per Common
Share
    
    $
    (0.02
    )
    
    $
    (0.13
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )Basic and Diluted Weighted-Average
Common Shares Outstanding
    
    
    21,904,776
    
    
    
    19,820,623
    
    
    
    21,675,482
    
    
    
    18,852,999
 See accompanying notes to condensed consolidated financial statements.
 3




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 For the Six Months Ended June 30,
    
    2007
    
    2006Cash flows from operating activitiesNet loss
    
    $
    (2,071,358
    )
    
    $
    (4,985,814
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    702,515
    
    
    
    615,558Accretion of discount on notes payable
    
    
    173,095
    
    
    
    277,251Non-cash share based compensation
    
    
    467,528
    
    
    
    721,937Common stock issued for services
    
    
    198,202
    
    
    
    473,600Bad debt provision
    
    
    113,623
    
    
    
    246,963Gain from retirement of debt
    
    
    (577,434
    )
    
    
    Expense for prepaid royalties
    
    
    
    
    
    
    831,497Changes in assets and liabilities, net of acquisitions:Settlement deposits
    
    
    200,461
    
    
    
    (24,164
    )Trade accounts receivable
    
    
    175,305
    
    
    
    (455,605
    )Settlement receivable
    
    
    (16,595
    )
    
    
    (2,695
    )Inventories
    
    
    137,817
    
    
    
    52,734Other current assets
    
    
    4,932
    
    
    
    (85,876
    )Trade accounts payable
    
    
    154,781
    
    
    
    466,287Merchant settlement payable
    
    
    (48,764
    )
    
    
    (44,013
    )Accrued salaries and wages
    
    
    (146,559
    )
    
    
    127,785Deferred revenues
    
    
    496,843
    
    
    
    391,938Accrued liabilities
    
    
    (77,124
    )
    
    
    604,917Total adjustments
    
    
    1,958,626
    
    
    
    4,198,114Net cash used in operating activities
    
    
    (112,732
    )
    
    
    (787,700
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (20,096
    )
    
    
    (166,120
    )Net cash used in investing activities
    
    
    (20,096
    )
    
    
    (166,120
    )Cash flows from financing activitiesProceeds from related party notes payable
    
    
    
    
    
    
    325,000Proceeds from issuance of long-term debt
    
    
    1,825,000
    
    
    
    Increase in line of credit
    
    
    
    
    
    
    110,000Payments on related party notes payable
    
    
    (136,780
    )
    
    
    (35,683
    )Payments on long-term debt
    
    
    (669,659
    )
    
    
    (15,000
    )Payments on capital lease obligations
    
    
    (70,022
    )
    
    
    (38,969
    )Payments on line of credit
    
    
    (699,365
    )
    
    
    Proceeds from exercise of options and warrants
    
    
    
    
    
    
    6,097Net cash provided by financing activities
    
    
    249,174
    
    
    
    351,445Net increase (decrease) in cash and cash equivalents
    
    
    116,346
    
    
    
    (602,375
    )Cash and cash equivalents at beginning of period
    
    
    307,483
    
    
    
    696,997Cash and cash equivalents at end of period
    
    $
    423,829
    
    
    $
    94,622
 See accompanying notes to condensed consolidated financial statements.
 4




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INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
 For the Six Months Ended June 30,
    
    2007
    
    2006Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    14,989
    
    
    $
    1,047Noncash investing and financing activitiesDiscount on notes payable
    
    
    303,115
    
    
    
    314,173Convertible debt converted to common stock
    
    
    
    
    
    
    4,726,085Accrued interest converted to common stock
    
    
    
    
    
    
    198,727Reclassification of deferrred compensation to aditional paid-in capital
in accordance with SFAS No. 123R
    
    
    
    
    
    
    1,013,308Acquistion of property and equipment under terms of capital lease
agreements
    
    
    
    
    
    
    243,434Conversion of long term debt to common stock
    
    
    280,405
    
    
    
    Conversion of accounts payable to common stock
    
    
    40,618
    
    
    
    Conversion of accrued interest to common stock
    
    
    75,760
    
    
    
    
 See accompanying notes to condensed consolidated financial statements.
 5




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INNUITY, INC.
AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
 1.
    
    BASIS OF PRESENTATION
       2.
    
    SHARE BASED PAYMENTS
 Share-Based Payment,
 6




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Three MonthsEnded June 30,
    
    Six Months Ended June 30,2006
    
    2007
    
    2006Estimated values
    
    $
    2.46
    
    
    $
    0.56
    
    
    $
    2.84Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected Volatility
    
    
    140
    %
    
    
    197
    %
    
    
    142
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    4.6
    %
    
    
    4.6
    %Expected term (years)
    
    
    5
    
    
    
    5
    
    
    
    5
   WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    Aggregateunder
    
    
    Exercise
    
    
    Contract
    
    
    IntrinsicOption
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31,
2006
    
    
    2,159,911
    
    
    $
    0.83Granted
    
    
    557,500
    
    
    $
    0.54Exercised
    
    
    
    
    
    $
    Forfeited or expired
    
    
    (233,106
    )
    
    $
    0.59Cancelled
    
    
    (15,000
    )
    
    $
    0.50Outstanding at June 30, 2007
    
    
    2,469,305
    
    
    $
    0.80
    
    
    8.25 Years
    
    $
    37,383Exercisable at June 30, 2007
    
    
    1,277,081
    
    
    $
    0.67
    
    
    7.47 Years
    
    $
    44,025
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    

2006Cost of services
    
    $
    2,657
    
    
    $
    13,707
    
    
    $
    7,430
    
    
    $
    37,358General and administrative
expense
    
    
    89,961
    
    
    
    156,476
    
    
    
    198,718
    
    
    
    368,390Sales and marketing expense
    
    
    123,320
    
    
    
    155,149
    
    
    
    247,642
    
    
    
    271,075Research and development
expense
    
    
    5,578
    
    
    
    15,862
    
    
    
    13,738
    
    
    
    45,114Total share-based payment
expense
    
    $
    221,516
    
    
    $
    341,194
    
    
    $
    467,528
    
    
    $
    721,937
 7




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##### Table of Contents



3.
    
    INVENTORIES
  4.
    
    LONG-TERM DEBT
      8




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##### Table of Contents



June 30,
    
    December 31,2007
    
    2006Non-interest bearing note payable to
an unrelated party,
interest imputed at 8%, settled
with cash payment of $522,566
    
    $
    
    
    
    $
    1,200,000Note payabable to an unrelated party,
interest at 15%,
net of discount
of $438,385,
matures May
2008
    
    
    1,611,615
    
    
    
    Note payable to an unrelated party, interest
imputed at 2.49%,
matures October
2008, monthly
payments of $8,357
    
    
    227,685
    
    
    
    274,655Total debt
    
    $
    1,839,300
    
    
    $
    1,474,655Less current maturities
    
    
    (1,706,144
    )
    
    
    (1,294,529
    )Long-term debt
    
    $
    133,156
    
    
    $
    180,126
  June 30,
    
    December 31,2007
    
    2006Notes payable to a shareholder, interest
at 12%,
due on demand, in default, unsecured
    
    $
    200,000
    
    
    $
    200,000Note payable to former owner of Jadeon,
interest at 5%,
net of discount of $22,270 and
$22,944, unsecured
    
    
    255,138
    
    
    
    391,244Note payable to a related party, interest
at 8%,
Settled by issuing shares of common
stock in January 2007
    
    
    
    
    
    
    280,805Convertible note payable to related
parties, interest at 15%,
matures beginning April 2008, net
of discount
of $145,144 and $228,112, secured
    
    
    199,856
    
    
    
    116,888Total related party notes payable
    
    $
    654,994
    
    
    $
    988,937Less current maturities
    
    
    (654,994
    )
    
    
    (658,105
    )Long-term related party notes payable
    
    $
    
    
    
    $
    330,832
  9




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5.
    
    COMMON STOCK
       6.
    
    LOSS PER SHARE
 Earnings Per Share
 7.
    
    SEGMENT INFORMATION
   10




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For the Three Months Ended June 30, 2007Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    561,122
    
    
    $
    4,957,188
    
    
    $
    
    
    
    $
    5,518,310Depreciation and amortization
    
    
    124,757
    
    
    
    226,490
    
    
    
    
    
    
    
    351,247Interest expense
    
    
    2,946
    
    
    
    6,759
    
    
    
    221,951
    
    
    
    231,656Segment income (loss)
    
    
    380,775
    
    
    
    125,288
    
    
    
    (1,022,716
    )
    
    
    (516,653
    )Segment assets
    
    
    907,915
    
    
    
    5,226,590
    
    
    
    27,058
    
    
    
    6,161,563
  For The Six Months Ended June 30, 2007Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    1,179,237
    
    
    $
    9,625,814
    
    
    $
    
    
    
    $
    10,805,051Depreciation and
amortization
    
    
    249,383
    
    
    
    453,132
    
    
    
    
    
    
    
    702,515Interest expense
    
    
    2,946
    
    
    
    6,759
    
    
    
    319,906
    
    
    
    329,611Segment income (loss)
    
    
    37,000
    
    
    
    (137,517
    )
    
    
    (1,970,841
    )
    
    
    (2,071,358
    )Segment assets
    
    
    907,915
    
    
    
    5,226,590
    
    
    
    27,058
    
    
    
    6,161,563
  For the Three Months Ended June 30, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    877,486
    
    
    $
    4,681,209
    
    
    $
    
    
    
    $
    5,558,695Depreciation and amortization
    
    
    98,173
    
    
    
    209,715
    
    
    
    
    
    
    
    307,888Interest expense
    
    
    
    
    
    
    
    
    
    
    68,026
    
    
    
    68,026Segment loss
    
    
    (476,167
    )
    
    
    (453,337
    )
    
    
    (1,599,954
    )
    
    
    (2,529,458
    )Segment assets
    
    
    1,645,059
    
    
    
    6,817,244
    
    
    
    27,996
    
    
    
    8,490,299
 11




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##### Table of Contents



For The Six Months Ended June 30, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    1,761,238
    
    
    $
    8,755,328
    
    
    $
    
    
    
    $
    10,516,566Depreciation and amortization
    
    
    198,343
    
    
    
    417,215
    
    
    
    
    
    
    
    615,558Interest expense
    
    
    
    
    
    
    
    
    
    
    407,868
    
    
    
    407,868Segment loss
    
    
    (855,835
    )
    
    
    (1,178,792
    )
    
    
    (2,951,187
    )
    
    
    (4,985,814
    )Segment assets
    
    
    1,645,059
    
    
    
    6,817,244
    
    
    
    27,996
    
    
    
    8,490,299
  For the Three Months Ended June 30,
    
    For the Six Months Ended June, 302007
    
    2006
    
    2007
    
    2006Segment income (loss)
    
    $
    506,063
    
    
    $
    (929,504
    )
    
    $
    (100,517
    )
    
    $
    (2,034,627
    )Unallocated items:Interest expense
    
    
    (221,951
    )
    
    
    (68,026
    )
    
    
    (319,906
    )
    
    
    (407,868
    )Share-based payments
    
    
    (308,517
    )
    
    
    (814,794
    )
    
    
    (665,730
    )
    
    
    (1,195,537
    )Professional services
    
    
    (185,399
    )
    
    
    (369,038
    )
    
    
    (388,622
    )
    
    
    (805,492
    )Executive and
administrative
expenses
    
    
    (306,849
    )
    
    
    (350,419
    )
    
    
    (596,583
    )
    
    
    (612,000
    )Other income
    
    
    
    
    
    
    2,323
    
    
    
    
    
    
    
    69,710Consolidated net loss
    
    $
    (516,653
    )
    
    $
    (2,529,458
    )
    
    $
    (2,071,358
    )
    
    $
    (4,985,814
    )
  12




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 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 of Financial Condition and Results of
Operations 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 of Financial Condition and Results of
Operations -Risk Factors, and those found elsewhere in this report. 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.
    
    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.
    
    Off-Balance Sheet Arrangements  a discussion of any off-balance sheet arrangements
that may have a future effect on our operations and financial condition.
    
    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
   13




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Critical Accounting Policies
  Operations Review
  Analysis of Condensed Consolidated Statements of Operations
 Three months ended June 30,
    
    
    Six months ended June 30,%
    
    
    
    
    
    
    
    
    
    
    %2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeRevenuesProduct sales
    
    $
    2,277,666
    
    
    $
    2,348,069
    
    
    
    -3
    %
    
    $
    4,390,537
    
    
    $
    4,247,910
    
    
    
    3
    %Services
    
    
    3,240,644
    
    
    
    3,210,626
    
    
    
    1
    %
    
    
    6,414,514
    
    
    
    6,268,656
    
    
    
    2
    %Total revenues
    
    
    5,518,310
    
    
    
    5,558,695
    
    
    
    -1
    %
    
    
    10,805,051
    
    
    
    10,516,566
    
    
    
    3
    %Operating expensesCost of product sales
    
    
    1,744,245
    
    
    
    1,688,520
    
    
    
    3
    %
    
    
    3,388,218
    
    
    
    3,248,572
    
    
    
    4
    %Cost of services
    
    
    1,771,838
    
    
    
    1,820,444
    
    
    
    -3
    %
    
    
    3,586,559
    
    
    
    3,532,389
    
    
    
    2
    %General and administrative
    
    
    1,088,598
    
    
    
    2,000,961
    
    
    
    -46
    %
    
    
    2,418,472
    
    
    
    3,484,021
    
    
    
    -31
    %Selling and marketing
    
    
    1,172,423
    
    
    
    1,509,988
    
    
    
    -22
    %
    
    
    2,415,594
    
    
    
    2,862,174
    
    
    
    -16
    %Research and development
    
    
    348,769
    
    
    
    341,027
    
    
    
    2
    %
    
    
    809,934
    
    
    
    705,472
    
    
    
    15
    %Royalty expense
    
    
    
    
    
    
    415,749
    
    
    
    -100
    %
    
    
    
    
    
    
    831,497
    
    
    
    -100
    %Amortization expense
    
    
    254,868
    
    
    
    245,761
    
    
    
    4
    %
    
    
    505,455
    
    
    
    500,097
    
    
    
    1
    %Loss from operations
    
    
    (862,431
    )
    
    
    (2,463,755
    )
    
    
    -65
    %
    
    
    (2,319,181
    )
    
    
    (4,647,656
    )
    
    
    -50
    %Other income (expense)Gain from settlement of debt
    
    
    577,434
    
    
    
    
    
    
    
    *
    
    
    
    577,434
    
    
    
    
    
    
    
    *Other income
    
    
    
    
    
    
    2,323
    
    
    
    *
    
    
    
    
    
    
    
    69,710
    
    
    
    *Interest expense
    
    
    (231,656
    )
    
    
    (68,026
    )
    
    
    241
    %
    
    
    (329,611
    )
    
    
    (407,868
    )
    
    
    -19
    %Total other income (expense)
    
    
    345,778
    
    
    
    (65,703
    )
    
    
    -626
    %
    
    
    247,823
    
    
    
    (338,158
    )
    
    
    -173
    %Net Loss
    
    $
    (516,653
    )
    
    $
    (2,529,458
    )
    
    
    -80
    %
    
    $
    (2,071,358
    )
    
    $
    (4,985,814
    )
    
    
    -58
    %
 
 *
    
    Calculation is not meaningful 14




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Revenues
    Expenses
 Cost of product sales
 Cost of services.
  15




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General and administrative.
  Selling and marketing.
 Research and development.
  Royalty.
 Amortization.
 Gain on settlement of debt.
 Interest.
 16




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Liquidity and Capital Resources
      17




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Off-Balance Sheet Arrangements
  Risk Factors
  We have incurred losses since our inception, and we may not achieve or maintain profitability.
  If we fail to obtain additional funding to support our operations and capital expenditures, we
may be required to reduce the cope of our business.
  The loss of key customers could negatively affect our revenues and profitability.
  18




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We may not be able to meet our obligations under our substantial indebtedness, some of which
is past due and in default.
    Our limited operating history makes evaluation of our business difficult.
  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.
  19




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Our future revenues may be uncertain because of reliance on third parties for marketing and
distribution.
  If we are unable to sell additional services to our existing customers, or if our renewal
rates decline for any reason, our revenues may decrease and our business will be harmed.
  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.
  20




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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.
  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.
   21




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We may find that it is difficult to identify, or license or acquire additional Internet
technology solutions 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.
   If we are unable to expand or appropriately enhance or modify our Internet technology
solutions offerings quickly and efficiently, our business and operating results will be adversely
affected.
  
    
    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;
    
    continue to integrate sales and services from all of our business lines; and
    
    create and maintain interfaces to changing customer and third party systems and services.
 22




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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.
   Our systems and our third-party providers systems may fail due to factors beyond our control,
which could interrupt our service, causing us to lose business and increase our costs.
  
    
    loss of revenues;
    
    loss of customers;
    
    loss of customers credit card data;
    
    harm to our business or reputation;
    
    exposure to fraud losses or other liabilities;
    
    negative publicity;
    
    additional operating and development costs; and/or
    
    diversion of technical and other resources.
 23




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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.
  24




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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 business.
  
    
    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.
  25




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##### Table of Contents



Hackers or black-hat search engine optimization companies may negatively impact the publics
perception of the search engine optimization industry, which could impair our ability to maintain
our current customers and attract new customers.
  We have grown quickly and if we fail to manage our growth, our business could suffer.
  The loss of any members of our senior management could harm our current and future operations
and prospects.
 ,
 We face significant competition for a limited supply of qualified software engineers,
consultants and sales and marketing personnel.
  26




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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.
  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.
  We may become a party to intellectual property infringement claims, which could harm our
business.
   27




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##### Table of Contents



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 business could be harmed if there is a breach of privacy.
   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 service interruptions by cyber-terrorists or fraudulent or illegal use
of our services.
    28




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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.
   Our business may be harmed if we experience 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.
 29




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##### Table of Contents



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.
  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;
 30




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##### Table of Contents




    
    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.
   We may be subject to lawsuits for information displayed on our small business customers
websites, which may affect our business.
  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;
 31




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##### Table of Contents




    
    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.
 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.
   Future sales of shares of our common stock may decrease the price for such shares.
  32




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##### Table of Contents



Our stock may be subject to regulation as a penny stock, which could severely limit the
liquidity of your securities.
  
   
  
   
   33




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##### Table of Contents



1.
    
    The shareholders considered whether to elect the following persons as
directors, each to serve until the next annual meeting of shareholders and until his
respective successor shall have been duly elected and qualified:
 John R. Wall
    
    John R. Dennis
    
    Marvin A. Mall
    
    Keith A. CannonHarold H. Kawaguchi
    
    Greg M. Stevenson
  2.
    
    The shareholders considered whether to appoint Hansen Barnett &
Maxwell P.C. as our independent public accountants. There were 12,305,137 votes cast
in favor, 1,015 votes cast against and 200,017 votes withheld, which vote tally was
sufficient for approval.
 
  Exhibit
    
    
    
    Filed
    
    
    
    ExhibitNo.
    
    Description
    
    Herewith
    
    Form
    
    No.
    
    Filing Date4.1
    
    15% Senior Secured Note
    
    
    
    8-K
    
    
    4.1
    
    
    05/09/074.2
    
    15% Senior Secured Note
    
    
    
    8-K
    
    
    4.1
    
    
    05/24/074.3
    
    Form of Warrant
    
    
    
    8-K
    
    
    4.2
    
    
    05/09/0710.1
    
    Securities Purchase
Agreement, dated as of
May 3, 2007, between
Innuity, Inc. and
Imperium Master Fund,
Ltd.
    
    
    
    8-K
    
    
    10.1
    
    
    05/09/0710.2
    
    Registration Rights
Agreement, dated May
3, 2007, between
Innuity, Inc. and
Imperium Master Fund,
Ltd.
    
    
    
    8-K
    
    
    10.2
    
    
    05/09/0710.3
    
    Additional Note
Purchase and Global
Amendment Agreement,
dated as of May 18,
2007, between Innuity,
Inc. and Imperium
Master Fund, Ltd.
    
    
    
    8-K
    
    
    10.1
    
    
    05/24/0731.1
    
    Certification of Chief
Executive Officer
pursuant to Section
302 of the
Sarbanes-Oxley Act of
2002
    
    X31.2
    
    Certification of Chief
Financial Officer
pursuant to Section
302 of the
Sarbanes-Oxley Act of
2002
    
    X32.1
    
    Certification of Chief
Executive Officer
pursuant to Section
906 of the
Sarbanes-Oxley Act of
2002
    
    X32.2
    
    Certification of Chief
Financial Officer
pursuant to Section
906 of the
Sarbanes-Oxley Act of
2002
    
    X
 34




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##### Table of Contents



INNUITY, INC.
(Registrant)By:
    /s/ JOHN R. WALLJohn R. WallChief Executive Officer, Treasurer and Secretary
(Principal executive officer)By:
    /s/ LINDEN N BARNEYLinden N BarneyChief Financial Officer
(Principal financial and accounting officer)  35