** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 
| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2009**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom      to      **

 

**Commission file number 000-15864**

 

**SEDONA CORPORATION**

(Exact name of Registrant as specified in its charter)

 
| **Pennsylvania**                                              | **95-4091769**       |
|---------------------------------------------------------------|----------------------|
| (State  or other jurisdiction of                              | (IRS  Employer       |
| incorporation  or organization)                               | Identification  No.) |
|                                                          |                 |
| **1003 West Ninth Avenue, Second Floor, King of Prussia, PA** | **19406**            |
| (Address  of principal executive offices)                     | (Zip  Code)          |

 

Registrant’s telephone number, including area code:  **610-337-8400**

 

Securities registered pursuant to Section 12 (b) of the Act:  **None**

 

Securities registered pursuant to Section 12 (g) of the Act:

 

**Common Stock, par value $.001 per share**

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x.

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o.

 

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  Large accelerated filer o, Accelerated filer o, Non-accelerated filer o, Smaller reporting company x.

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing price as reported on OTCBB system as of June 30, 2009 was $9,705,486.

 

The number of shares of the Registrant’s common stock, $.001 par value per share (“common stock”) issued and outstanding as of March 26, 2010 was 127,364,064 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

NOTE ON FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “may”, “will”, “should”, “could”, “would”, “plan”, “estimates”, “projects”, “predicts”, “potential”, “believes”, “anticipates”, “intends”, “expects” or similar expressions. These forward-looking statements relate to the plans, objectives, and expectations of SEDONA® Corporation (the “Company”, “SEDONA Corp.”, “SEDONA”, “we”, “us” or “our”) for future operations. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Annual Report on Form 10-K should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company’s operating expectations will be realized. The Company’s revenues and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained herein as a result of certain factors including, but not limited to, dependence on strategic relationships, ability to raise additional capital, ability to attract and retain qualified personnel, customer acquisition and retention and rapid technological change. These factors should not be considered exhaustive; the Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

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**ITEM1.  DESCRIPTION OF BUSINESS**

 

**Overview**

 

SEDONA®Corporation (OTC: SDNA) (“SEDONA” or the “Company”) delivers Customer andMember Relationship Management (CRM and MRM) solutions that help to improve thefinancial performance of banks and credit unions.  The Company develops and distributes theSEDONA CRMTM and SEDONA MRMTM software applications (formerly known as SEDONAIntarsia®).  SEDONA also deliversservices which, combined with its software, help to improve bank and creditunion growth, stability, and service.

 

The Company hasstrategically targeted financial services organizations such as community andregional banks, credit unions, and savings and loans to market our leadingCRM/MRM solutions.  Our customers arefinancial institutions with whom we sell solutions to directly or strategicchannel partners who are providers of software applications and service solutionsto banks and credit unions.

 

With itsstate-of-the-art technology and flexible licensing options, SEDONA solutionsare designed to be installed directly on client premises or offered through ahosting center as a SaaS (Software as a Service) solution.  Our channel partners offer a SaaS solutionthrough secure, world-class facilities which provide core processing and otherapplications to the banking and credit union industry.  The SaaS solution is especially attractivefor small to mid-sized financial services organizations that lack the financialresources and IT infrastructure to deploy an in-house enterprise businessapplication such as CRM/MRM.

 

SEDONA CRM/MRMis designed to enable financial institutions to increase the profitability oftheir customer and member portfolios. SEDONA CRM can help increase overall sales and client retention whilereducing expenses often incurred with having to purchase multiple solutions inorder to gain a complete CRM solution set. SEDONA solutions can be implemented within weeks, not months, to assistin delivering a rapid return on investment which helps enhance overallshareholder value to both the financial services institution and channelpartner solution providers.

 

SEDONA believesthat the key to selling CRM/MRM successfully is presenting a solution that notonly meets the organization’s unique industry, business, and budgetrequirements, but also provides the organization with proven technology andservices that can be cost effectively integrated into its business.

 

The currenteconomic climate brings a growing opportunity for CRM solutions as banks andcredit unions place increasing emphasis on effectively managing therelationship of, and interaction with, their clients.  Financial services organizations haveidentified CRM as a strategic initiative to improve customer retention andprofitability rates.  These organizationssee CRM as a competitive weapon in an industry dominated by large national andinternational companies with greater resources, services and advertising power.

 

Unlike mosttraditional, general-purpose CRM applications, SEDONA CRM/MRM is a customerrelationship management application solution specifically designed and pricedto meet the needs of financial institutions with multiple lines-of-businessacross several vertical industries. SEDONA CRM/MRM provides financial services organizations with a completeview of their customers’ relationships and interactions.  This information enables them to gainknowledge about their customers’ preferences, needs and characteristics, andbuild the appropriate strategies to more effectively target the right products,to the right people, at the right time. SEDONA CRM/MRM assists those organizations to effectively identify,acquire, foster and maintain loyal, profitable customers.

 

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In addition tothe financial services market, the Company’s products have also been tailoredto support Property, Casualty, Life Insurance and Continuing Education verticalmarkets.  Although available for sale,the Company is not actively marketing these product lines at this time in orderto focus on delivering CRM/MRM to the financial services industry.

 

In 2008, thecompany expanded its product offerings to include SEDONA Profit Pro.  This additional offering enables thefinancial institution to determine the most accurate customer and memberaccount profitability.  Profit Proprovides general ledger reconciliation, along with a continually updatedhistorical funds transfer pricing database, organization and customer portfolio“What If” capabilities, along with an expanded folder of profitabilityreporting that enables drilling down into every component of a branch,household, customer and account profit contribution.

 

In addition,the Company’s services have been expanded to provide a complete Incentive andCall Tracking offering.  Thisfunctionality includes specialized workflows to ensure lead follow-up, customgoal and incentive table generation, complex, yet flexible, goal calculationalgorithms, and comprehensive reporting enabled at any level from theindividual, or rolled up to the organization dashboard.

 

The Company’sprincipal office is located at 1003 West Ninth Avenue, Second Floor, King ofPrussia, Pennsylvania, 19406.  TheCompany has a software delivery facility in Plymouth, MN.  The Company’s principal website address is *www.sedonacorp.com*.

 

The Company wasincorporated in 1992 as Scan Graphics, Inc., a manufacturer of peripheralscanning equipment and geographical information systems software.  In late1999, the Company changed its name to SEDONA Corporation and ceased engaging inits original business.  Instead, theCompany focused its efforts on the development of SEDONA CRM/MRM and therelated services business.

 

In February 2009,the Company elected to change the name of its CRM/MRM product from Intarsia toSEDONA CRM/MRM.  The Company believesthat SEDONA CRM/MRM provides greater brand recognition.

 

*Additional Information*

 

Copies of the Company’s Form 10-K, 10-Q, 8-K reports, proxy andinformation statements, and other information with the SEC, and all amendmentsto these filings, may be obtained free of charge from the Company’s website at *www.sedonacorp.com*, as soon as reasonably practicablefollowing the filing of any of these reports with the SEC.  Copies may also be obtained free of charge bycontacting the Company at *investorinfo@sedonacorp.com**.*  Inaddition, copies may be obtained via the SEC’s internet website, *www.sec.gov*.  Thepublic may read and copy any materials the Company files with the SEC at theSEC’s Public Reference Room at 100 F. Street, NE, Washington, D.C.20549.  The public may obtain informationon the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330.

 

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**Description of Business Strategy**

 

SEDONAis a software application and services provider that develops and marketsweb-based, vertical CRM/MRM.  The Companyhas strategically targeted financial services organizations as the primaryvertical market to deliver its leading CRM/MRM application solution including,but not limited to, community and regional banks, credit unions, savings andloans. The Company’s CRM/MRM application solution enables financial servicesorganizations to improve key performance metrics to strengthen their positionin the market and obtain a greater share of the customer’s wallet.

 

SEDONAhas signed Original Equipment Manufacturer (OEM) and reseller agreements withseveral leading software and services providers for the financial servicesmarket, including, but not limited to: Fiserv; Connecticut Online ComputerCenter, Inc.; Profit Technologies; Bradford-Scott; CU ink; Share One andEPL.  In addition, the Company also sellsits software application solutions directly to banks, credit unions, andsavings and loans.

 

For2010, SEDONA has decided to capitalize on its strength as a highly specialized,nimble company to focus on increasing direct sales, channel sales, services andnew capabilities.  The Company plans toundertake a number of initiatives to accomplish this including enhancing itsproduct suite to enable rapid deployment and development of newcapabilities.  Included are solutions forcontact management, demographic and psychographic information services,performance assessment, profitability management and sales referraltracking.  These new product platformswill fully exploit the Company’s unique capabilities in data warehousing, datamining, business intelligence and predictive analytics.

 

In2009, SEDONA engaged the services of Archemedae Management, a consulting firmspecializing in technology startups, turnarounds, strategic planning, andventure financing. The firm conducted a thorough review of the Company’sbusiness model, its product and services, and technology trends in the CRMmarket. The firm supplied a managing director, David H. Tobey, to implement anumber of new strategies intended to advance the success of the Company and itsproducts.

 

Asa result of the recommendations from this engagement, the Company’s new visionis to provide advanced technology solutions throughout the entire life cycle ofthe financial institution.  The newarchitecture facilitates financial institution performance by supporting thetransition from processing agent to trusted advisor.  The Company plans on releasing a series ofnew products and services that will expand the Company’s market presence fromthe small community bank and credit union to the largest global financialinstitution-improving risk management, customer retention, growth andprofitability from teller to bank president to banking conglomerate CEO.

 

TheCompany’s product strategy includes offering two licensing versions for SEDONACRM and MRM:  SEDONA Enterprise andSEDONA Lite.  Customers who select theLite option are opting for personalized portals with back office analysis,reports, and front-line capability, at a lower cost of entry. Customersselecting the Enterprise option add robust campaign management, sales andservice process management and predictive analytics to the Lite option.  Customers of a Lite application can upgradeto an Enterprise license whenever their financial institution is ready toexpand its use of CRM or MRM.

 

SEDONAhas also engaged in an effort of systematic lead generation and qualificationwithin its target market, using a variety of sources to compile vitalinformation to qualify prospects.  Thisenhances the effectiveness of SEDONA’s sales efforts for both direct andchannel sales.  Some statistics on thebank and credit union market are provided below.  From this total prospect population, SEDONAcarefully chooses the most applicable prospects to pursue with sales resources.The Company targets financial institutions with assets below $10 billion, however,our products are easily implemented by financial institutions of any size.

 

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| **TOTAL  ASSET  VALUE**                 | ** ** | **<  $100M** | ** ** | **$100M  - $300M** | ** ** | **$300M  - $500M** | ** ** | **$500M  - $1B** | ** ** | **$1B  - $3B** | ** ** | **$3B  - $10B** | ** ** | **>  $10B** | ** ** |
|-----------------------------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|------------------|------------|----------------|------------|-----------------|------------|----------------|------------|
| **COMMUNITY & REGIONAL BANKS** |       | 3,131           |       | 2,921              |       | 856                |       | 721              |       | 410            |       | 151             |       | 115            |       |
| **CREDIT UNIONS**                       |       | 8,688           |       | 729                |       | 192                |       | 182              |       | 113            |       | 24              |       | 7              |       |
| **TOTAL NUMBER OF INSTITUTIONS**        |       | 11,819          |       | 3,650              |       | 1,048              |       | 903              |       | 523            |       | 175             |       | 122            |       |

* *

*Source:FDIC & National Credit Union Association — February 2009*

* *

SEDONAhas also enhanced its customer care system to ensure that all employees haveready access to information on the Company’s direct clients and can providesuperior service for incoming calls. With these enhancements, the Company seesa strong potential for more responsive delivery of client services to itscustomer base, increased cross-selling and up-selling, and improved customerretention.

 

Thenew initiatives for prospecting, selling, service delivery, and customer carehave been implemented using SEDONA’s own CRM technology, providing anoutstanding example of how a smaller organization such as a community bank orcredit union can quickly configure and design improvements in its CRM system —making ongoing incremental changes — and reap the rewards within weeks, notmonths or years.  At SEDONA, the SEDONACRM system supports customer-facing processes that include all criticalfunctions from marketing through delivery and payment.

 

**The Advantages of SEDONA Solutions**

 

SEDONAsolutions offer a number of advantages that are particularly important to theCompany’s target market.

 

·                  **Flexible Installation and Pricing**— customers can choose to host the system themselves with a perpetual licenseor to have the system hosted by one of SEDONA’s partners along with SaaSpricing. The hosting and SaaS pricing options appeal to community banks andcredit unions, which have relatively small technology budgets and limited ITsupport.

 

·                  **Speed** — communitybanks and credit unions can deploy SEDONA CRM or MRM within weeks, not months,and begin to see results — increased retention rates, more effectivecross-selling, improved profitability — not in the next year but in the nextquarter.

 

·                  **Simplicity** — communitybanks and credit unions aspire to the same CRM and MRM capabilities as the bigfinancial institutions, but do not have the resources for specialized staff orsignificant system training and support. Therefore they need a solution such asSEDONA’s which is intuitive for the non-technical employees who need to use itwith minimal training.

 

·                  **Flexibility and Configurability**— national banks use painstaking custom programming to build systems that fittheir existing or desired processes and culture.  SEDONA solutions have built-in flexibilityand configurability so that a community bank or credit union can designreports, departmental portals, and sales and service processes to suit how theywork.

 

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·                  **Engineering** — SEDONAtechnology is web-based and database agnostic, with a meticulously engineereddata integration engine capable of handling significant quantities and types ofdata coming from the core processor, third party applications, spreadsheets andtext files.  This means that SEDONAsolutions can fit into the widely varying technology environments encounteredat today’s varied financial institutions.

 

·                  **Data Integration Services**— SEDONA’s client services professionals together have vast experienceintegrating data for banks and credit unions to create a complete and highquality picture of customers, members, and households.

 

**SEDONA’s Target Market**

 

Banks andcredit unions need to foster and retain loyal, profitable customers and membersby understanding individuals and households as well as the profitability ofdifferent products and product mixes. SEDONA and its channel partners need to offer CRM and MRM capabilitiesthat differentiate them from their competitors.

 

·                  Banksdeal with a highly unusual business situation compared to companies in otherindustries.  In most industries, when acustomer purchases a product or service, the seller realizes a profit, howeversmall, with the possible exception of promotions and limited timediscounts.  However, for banks, some ofthe products they offer are profitable while others are not.  In addition, a given financial product maysee its profitability vary from customer to customer depending upon theinterest rate, term, and fees.  Thereforeit is possible for a bank customer to use one or more financial products, suchas a checking account and savings account, while costing the bank money everymonth.  Unprofitable customers orhouseholds can continue driving down the overall returns for banks.

 

·                  Bankcustomers generally use a mix of accounts and services, from checking andsavings accounts, to certificates of deposit, loans, debit cards and internetbanking.  This product mix includes bothprofitable and unprofitable accounts.  Itis imperative for a bank to create a unified picture of all of a customer’saccounts to determine how profitable that customer is overall in order to usethe bank’s limited resources to retain highly profitable customers and moreeffectively promote products which are appropriate and appealing to a customeror household.

 

·                  Buildinga unified picture of a customer and a household becomes even more challengingwhen you consider that banks often have additional lines of business such astrust accounts, wealth management, and insurance, operating not on the coreprocessing system but on third party applications.  This information must also be unified withbank account data in order to fully understand the customer and householdrelationship with the bank. *The ability to thoroughlyand efficiently unify data from the core processor and third party applicationsis a principal strength of SEDONA solutions.*

 

·                  Creditunions are similar to banks, except that as member-owned financial institutionswhere profits are shared by members, considerations of profitability aresecondary to the mission of the organization. Credit unions are generallysmaller than banks, with over 85% having less than $100 million in assetscompared to 38% of banks, and so have fewer resources in terms of money andpeople to devote to retaining their members and promoting to them.  Consequently credit unions must be highlyjudicious in their promotion and retention efforts.

 

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·                  Thesechallenges, true for banks and credit unions even in the best economic times,are all the more daunting during turbulent times.  During 2009, financial institutions saw theircustomer base and membership changing unpredictably.  To begin with, high unemployment andunderemployment have changed which customers are profitable as deposit balancesdrop dramatically and loans go into delinquency and default.  Furthermore, households are changing theirfinancial product mix as they seek to build secure savings with insureddeposits and shy away from credit and investments.  All of this requires banks and credit unionsto understand changing trends and demands in order to offer suitable productsand services.

 

·                  Thechallenges described here lead banks and credit unions to seek out vendors whospecialize in their industry because products designed for other industries arenot readily applicable to the banking environment.  Banks and credit unions look for solutionsdesigned not only for financial services, but for banks or credit unionsspecifically. *This vertical specialization is another ofSEDONA’s key strengths.*

 

·                  SEDONA’schannel partners are solution providers to banks and credit unions. Themajority of them provide core processing systems, which financial institutionsuse for day-to-day account deposits and withdrawals.  Once a bank or credit union adopts a coreprocessor, it becomes very difficult to move to a competitor due to the effortinvolved in changing such a critical system. Each year, the core processing providers compete fiercely to convince asmall percentage of financial institutions to switch systems.  When the Company’s channel partners licenseSEDONA technology, they offer value-added services which provide addedincentives for institutions to switch core processors.  They also provide leading edge capabilitiesto their current base of customers, for whom new features are even moreimportant due to their resistance to changing core processors.  *SEDONA’s tight integrationwith core processors, while developing as an independent and standaloneproduct, is yet another of the Company’s critical competitive advantages.*

 

**How SEDONA Solutions Help Financial Institutions**

 

The Company’scustomers utilize SEDONA solutions in a variety of ways in order to bettermanage the relationship with their customers and members. A bank or creditunion may embark on any combination of the initiatives described below.

 

·                  **Retention** — by retainingvaluable customers and members, banks and credit unions can enjoy more stabledeposits and long term loyalty, both of which indirectly boost financialstability and profitability.  Typically,10% of households contribute 90% of profits; banks and credit unions can useSEDONA to identify those households and track efforts to retain them.  SEDONA’s Retention Risk Predictor providesready-made advanced analytics capabilities not normally accessible to smallerfinancial institutions, calculating a score that helps banks and credit unionsidentify those individuals most at risk of leaving, *before*theyleave.

 

·                  **Cross-selling** — SEDONAprovides the ability to identify the best prospects in a customer base ormembership for additional products. Marketers and front line staff can utilizethe information to develop more effective and targeted direct marketingcampaigns. The next best product recommendations apply advanced analytics todeliver suggestions which are designed not just to appeal to the specificindividual, but also to improve individual or household profitability.  Additionally, banks and credit unions useSEDONA to track referrals and incentives, increasing the number of qualifiedprospects for their cross-selling efforts.

 

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·                  **Profit Pro**— SEDONA ProfitPro provides the ability for a financial institution to determine the mostaccurate account and customer profit contribution.  Through the use of a continually updatedhistorical funds transfer pricing database, along with automatic download offinancial reporting, Profit Pro provides the most accurate picture ofindividual and household contribution to organizational profit.

 

·                  **Acquisition** — SEDONA helpsprofile the characteristics of loyal and profitable households, usually a combinationof location, age range, household size, lifestyle, and product mix which isspecific to each financial institution. Banks and credit unions use this profile to select prospect lists tosolicit new customers and members.  Inaddition, by using SEDONA for on-boarding, a custom designed service where newcustomers or members are automatically moved through a standard process towelcome them and to offer suitable additional financial products, banks andcredit unions can improve their retention rates for new customers.

 

·                  **Marketing ROI** — thecommunity banks, regional banks, and credit unions in SEDONA’s target marketgenerally have limited resources for marketing. It has long been difficult to justify marketing expenses because of thedifficulty in measuring the return. SEDONA solutions lets financial institutions track individuals orhouseholds in a promotion and measure the return on mailing, calling, or otherpromotion efforts in terms of new accounts opened, total new balances or loanamounts, and additional monthly profit. Armed with this information, SEDONA’s customers can shift theirresources to those initiatives which yield the best return.

 

·                  **Front Line Effectiveness**— financial institutions use SEDONA to provide customer-facing andmember-facing employees with a snapshot of information on an individual’s andhousehold’s accounts and history.  SEDONAis also a single online platform to deliver prospect lists for direct mail andcalling campaigns along with marketing brochures, talking points, and salesscripts. Banks and credit unions can use SEDONA to track their sales pipelinesand create consistent processes for prompt and effective sales and service,with reminders and escalation of delays.

 

·                  **Loyal, Profitable Relationships**— banks and credit unions use SEDONA’s unified data and analytical capabilitiesto identify and track the growth of loyal, profitable relationships, and tounderstand their impact on retention, market penetration, and profitability.

 

·                  **SEDONA Services**— can rangeanywhere from solution recommendations, to follow on or advanced training,through complete functionality design and custom implementation using SEDONACRM.

 

The flexibilityof SEDONA’s software means that financial institutions can select thoseinitiatives that are most in line with their culture, their priorities, andtheir limited resources.  Over time,institutions can grow into their use of the product for increasing return ontheir CRM and MRM investment.  Some banksand credit unions begin their adoption of CRM with centralized, back-officemarketing initiatives, expanding later to front line cross-selling and otherinteractions as resources permitted. Other financial institutions deploy SEDONAin the back office and across the front line simultaneously.

 

**The Role of SEDONA’s Channel Partners**

 

SEDONA’schannel sales strategy is an important complement to its direct salesactivities.  SEDONA has signedOriginal Equipment Manufacturer (OEM) and reseller agreements with severalleading software and services providers for the financial services market,including, but not limited to: Fiserv; Connecticut Online Computer Center, Inc.;Profit Technologies; Bradford-Scott; CU ink; Share One; and EPL Inc.

 

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When thechannel partner is a core processing system provider, the SEDONA offering hasthe added advantage of data integration which is tightly coordinated betweenthe core system and the SEDONA solution. In many cases, the CRM or MRM system delivered as a SaaS based offeringis hosted in the same secure facilities as the core system.

 

Many coreprocessing providers have made attempts to provide CRM or MRM to theircustomers by developing capabilities as part of their core system.  These capabilities run up against limitationsbecause the provider must favor development of core system capabilities overCRM.  In contrast, SEDONA’s sole focus isdeveloping CRM and MRM capabilities and services, and therefore its solutionsmaintain their competitive position at the forefront of the market.  As a consequence, our channel partners’ bankand credit union customers enjoy the best of both worlds — a solution that isboth tightly integrated with the core processor and also leading-edge. *This is another key advantage for SEDONA.*

 

**The Value of SEDONA’s SaaS Offering**

 

The SaaS modelis especially attractive for small to mid-sized financial servicesorganizations that lack the financial resources and IT infrastructure to deployan in-house enterprise business application such as CRM and MRM. *The SaaS model is another principal advantage of SEDONA solutions.*

 

Just asattractive as the hosting of the system, is the pricing, calculated as acost-effective monthly price charged as long as the customer uses the system.SaaS pricing does not involve the significant up-front charges of a perpetuallicense and does not come out of the capital expenditures budget. SEDONA alsooffers a SaaS pricing option for those customers who choose to host thesoftware on their own premises but wish to benefit from subscription pricing.

 

**Staying in the Forefront of CRM/MRM Technology**

 

SEDONA CRMprovides banks and credit unions with a comprehensive customer relationshipmanagement solution that is tightly integrated with their business processes andback-end systems.  It enables them tooptimize their return on customer relationships by personalizing the managementand interaction with their customers and ensuring that the sales and marketingefforts are strategically aligned toward increasing company profitability.

 

Exploiting theubiquity of the internet, SEDONA CRM’s comprehensive set of components providefinancial institutions with a robust set of marketing analytics and operationalCRM capabilities necessary to:

 

·                  Have a 360° view of the customer by integrating thefront, back and mobile offices into one comprehensive database of informationabout customers and prospects.

 

·                  Analyze customer and prospect data, enabling financialservices organizations to manage critical business performance such asprofitability of customers, (accounts, members and policy holders), personnel,households and products.

 

·                  Measure the effectiveness of the organization’s leadgeneration and marketing campaigns and ensure timely follow-up of referrals,customer requests and sales leads.

 

·                  Improve coordination and communication betweenfinancial services organizations and their customers, enhancing the ability todeliver effective service and improve organizational productivity.

 

·                  Automate business processes that may be critical forthe effective management and monitoring of the relationships and interactionswith customers at the financial services organizations.

 

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SEDONA CRM seamlessly enhances the bank or creditunion customer and prospect data with user demographics, behaviors, interestsand preference information provided by third-party content management suppliersor personal interactions.  This enhanceddata is then analyzed to create timely and precise information on demand.  This information is used by all of SEDONA CRM’scomponents in order to enable the organization to:

 

·                  Create “look-a-like” models to effectively identifyprospects that share the same characteristics as their organization’s bestcustomers, increasing the institution’s ability to acquire new customers.

 

·                  Help predict customer retention and make profitablecross-sell (next best product) recommendations.

 

·                  Generate alerts and automated processes to deal withcritical changes in customer status or other business indicators.

 

·                  Develop personalized sales, marketing and servicesprograms aimed at retaining the financial services organization’s mostprofitable customers and turning unprofitable customers into profitable ones.

 

SEDONA believes that the key to selling CRM/MRMsuccessfully is finding a solution that not only meets the organization’sunique industry, business, and budget requirements, but also provides theorganization with proven technology and services that can be cost effectivelyintegrated into its business.  When theseneeds are met, our Customer’s should achieve a positive return on their CRM/MRMinvestment (ROI).

 

*Research & Development*

 

The mainstrategy of SEDONA’s research and development activities is to providehigh-quality, high-value products and support services in a consistent andpredictable manner, as follows:

 

·                  *Promote and cultivate a culture of team-baseddevelopment:*

 

The Company’s research anddevelopment organization is structured into small teams of developers,responsible for the design, development and unit testing of each component ofthe SEDONA CRM/MRM application solution. Each project team also provides technical assistance to the systemsintegration group.

 

·                  *Createefficient and predictable software development life cycle:*

 

SEDONA utilizes an industry-proven software development process thatencourages component reusability and enhances the predictability, timelinessand quality of the overall software process.

 

SEDONA has adopted the Base Level Integration Plan software developmentmethodology, which has been designed to promote an interactive and predictableprocess for the development, unit and system integration testing and deliveryof products.  This methodology dividesthe development of sophisticated products into specified, pre-definedcycles.  It also allows the Company toreact quickly to business and technical changes generated by the marketplaceand/or new customer requirements.

 

Base levels serve as the fundamental planning and execution processthat drives the engineering activities for that time period, including themaintenance of existing products and releases, training and educationrequirements, as well as new product development. This process operates

 

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in the context of a development organization where there is a set ofsmall project teams cooperating to build a large, complex software productunder the guidance of the Chief Technology Officer.

 

In addition, SEDONA’s research and development effortsare focused on enhancing the features and functionality of our products.  We only provide support to our customers onthe then-current version of our software and one prior release.  As a result, we do not have to maintainmultiple versions of our software which helps to keep our costs for maintenanceand support low.

 

Research and development expenses were $338,000 and$526,000 for the years ended December 31, 2009 and 2008,respectively.  The decrease in expensesof $188,000 was the result of a reduction in outside staffing costs used tosupplement product development.  Inaddition, in 2009, the research and development team dedicated more time tocompleting custom development projects for clients and upgrading and supportingthe release of a new version of our software application; these expenses areincluded in cost of sales.

 

*Trademarksand Copyrights*

 

SEDONA hasobtained copyright and trademark protection for certain of its products andservices.  The Company has a service markfor a logo design, which was registered with the United States Patent andTrademark Office (USPTO) on July 23, 2002 (Registration No. 2,598,107),a service mark for the word mark, “SEDONA”, which was registered with the USPTOon March 24, 2003 (Registration No. 2,700,294), and a trademark andservice mark for the word mark “INTARSIA” which was registered with the USPTOon July 12, 2005 (Registration No. 2,967,355).  The Company shares the word mark “INTARSIA”with Intarsia Corporation, who since 2002, has accepted a co-existenceagreement with the Company.  SEDONA hasthe exclusive right to use the “Intarsia®” trademark in connection with itsCRM/MRM services.

 

The Companyclaims and possesses rights in various other trademarks and services marks, andintends to file various additional trademark and service mark applications toregister such trademarks and service marks with the USPTO as management deemsadvisable.

 

*Major Customers*

 

Since one of the Company’sprimary sales strategies is to utilize an indirect sales model, i.e., theCompany distributes its products through its channel partners, the Company’srevenues are derived from a limited number of partners.  Consequently, any partner may account formore than 10% of the total revenue derived during any given year.

 

License and service revenues fluctuate as they are dependent upon many variables including the delivery requirements, size and complexity of the transaction with our customers.

 

As of December 31,2009 and 2008, the Company had obtained net revenues from significantcustomers/and distribution partners as follows:

 

 

| ** **         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Channel  Partner A |       | 27       | %          | 29       | %          |
| Channel  Partner B |       | 13       | %          | —   |       |

 

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As of December 31,2009 and 2008, the Company had accounts receivable from significantcustomers/partner accounts as follows:

 

| ** **         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Channel  Partner A |       | 31       | %          | 28       | %          |
| Channel  Partner B |       | 69       | %          | 45       | %          |

 

Substantially, all of the Company’s revenues are earned from customers in the United States.

 

*Backlog*

 

Revenue backlogconsists of unfulfilled purchase contracts, service contracts entered into withpartners for SaaS services and deferred revenues, primarily for advanceroyalties and maintenance contracts where revenues are recognized ratably overthe life of the contract which typically ranges from 36 to 60 months.  As of December 31, 2009, the Company hada deferred revenue backlog of approximately $677,000, substantially all ofwhich is expected to be recognized as revenue in 2010.  In addition, as of December 31, 2009,the Company had recorded a total of approximately $918,000 in current andnon-current accounts receivable and associated deferred revenue for monthlysubscription fees that will be recognized ratably over the contract terms.

 

*Competition*

 

SEDONA believesthat the most important competitive factor, which enables the Company todifferentiate itself from the competition, is its focus on delivering aspecifically tailored CRM/MRM solution to the financial services market througha sales force with extensive financial services industry knowledge and bypartnering with a number of leading core processor providers.

 

Since coreprocessor providers are responsible for mission-critical business applicationsand solutions, they have the information required to make the implementation ofa CRM/MRM solution viable.  Using thecore processor providers as a sales, marketing and distribution channel,improves SEDONA’s opportunity to establish itself as a leading provider ofCRM/MRM application software and services, as those organizations create aformidable barrier for other CRM/MRM providers to enter the market.

 

There areadditional core processing providers with whom SEDONA is seeking to establishpartnerships; the Company anticipates expanding its market presence in this way.  (See Item6.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.)

 

The Companyfurther believes its competitive advantage in the market is based on thefollowing factors:

 

·                  Marketingand Sales - The Company has an entrenched marketing and sales distributionchannel through worldwide OEM partnerships with leading core services providersfor the financial services market.

 

·                  Technology— The Company’s proven CRM/MRM solution is specifically designed and priced forthe financial services market. It is fully integrated with the financialservices organization’s core processing systems and designed tosupport the business processes and data requirements of the multiple lines ofbusiness of those organizations

 

SEDONA CRM uniquely supports multiple lines of business on a singleplatform.  It allows organizations toaccurately manage, report, analyze and interact with customers who haveportfolios that cross lines of business such as insurance and banking, withouta need for multiple servers, separate databases or additional applicationtraining.  SEDONA CRM includes highlytailorable components such as process management, campaign management, point ofservice,

 

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web-based reporting and a personalized portal for each user.  Once installed, SEDONA CRM can be fullyconfigured for each user reflecting his/her own system preferences, portal anddashboard contents, and security access.

 

The CRM/MRM markethas offerings from a variety of providers that focus on sales force automation,call center management, contact management, marketing customer information filesystems (MCIF) and other marketing solutions that address certain aspects ofthe management of customer relationships. The Company’s software solution is unique in that it combines a CRM/MRMapplication solution tailored for the financial services market with aknowledgeable and experienced sales and marketing distribution channel providedby the Company.  SEDONA’s OEM andreseller agreements with leading software and services providers enable theCompany to leverage their marketing strengths, broad distribution channels andstrong reputations.  SEDONA’s directsales channels coupled with these strategic partnerships provide SEDONA withrevenue opportunities and strengthen its competitive position.

 

SEDONA’sprimary competitors are Harland Clarke Holdings Corp. (Harland), Harte-HanksInc. (Harte-Hanks), and Marquis Software Solutions (Marquis).

 

·                  Harlandprovides software solutions for financial institutions, including, but notlimited to, bank core systems, deposit and loan origination, teller, mortgage,call center, document solution and customer relationship management.

 

·                  Harte-Hanksprovides direct and target marketing services, including, but not limited to,sales lead management, inbound/outbound telemarketing and web-based databasemarketing, to consumers and business-to-business marketers across multiplevertical markets.

 

·                  Marquisis a privately-held company primarily focused on low cost Marketing CustomerInformation File (MCIF), sales and services and referral tracking solutions forthe financial services market.

 

The Companyanticipates additional competition from other established and new companies asthe markets for CRM/MRM applications continue to develop.  In addition, current and potentialcompetitors have established, or may in the future establish, cooperativerelationships among themselves or with third parties.  Large software companies may acquire orestablish alliances with SEDONA’s competitors. The Company expects that the software industry will continue toconsolidate.  It is possible that newcompetitors or alliances among competitors may emerge and rapidly acquire asignificant market share.  The resultsof increased competition and possible reduction of the Company’s potentialmarket share could materially and adversely affect its business, operatingresults and financial condition.

 

*Employees*

 

Asof March 31, 2010, the Company had 13 employees.  In addition, the Company hires consultantswhere applicable to augment its staffing requirements.  None of the company’s employees are coveredby a collective bargaining agreement. The Company believes that its employee relationships are good.

 

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*Appointment of Interim President and CEO*

 

Effective September 18, 2008, theCompany appointed Scott C. Edelman as the interim Chief Executive Officer andPresident of the Company.  Mr. Edelmanhad served as the Co-Chairman of the Board since May 2007 and as aDirector of the Company since August 2004. Mr. Edelman served as Interim Chief Executive Officer until May 2009when David R. Vey was appointed Chief Executive Officer.

 

*Dependence Upon Key Personnel*

 

TheCompany is dependent upon certain key members of its management team for thesuccessful operation and development of its business.  The loss of the services of one or more ofthe Company’s management personnel could materially and adversely affect theoperation of the Company.

 

TheCompany does not carry key man insurance on its executives.

 

Inaddition, in order to continue its operations, the Company must attract andretain additional technically qualified personnel with backgrounds in businessdevelopment, consulting, engineering and finance.  There is keen competition for suchhighly-qualified personnel and consequently there can be no assurance that theCompany will be successful in recruiting or retaining personnel of the requisitecaliber or in the numbers necessary to enable the Company to continue toconduct its business.

 

**ITEM 2. DESCRIPTION OF PROPERTY**

 

TheCompany’s principal offices are located in King of Prussia, PA.  In December 2005, the Company enteredinto a lease for a 4,270 square foot facility to serve as its principaloffices.  The five (5) year lease commenced on January 1,2006 and expires December 31, 2010. The initial annual base rent was $68,320 or $16.00 per sq. ft. and hasincreased $0.50 per sq. ft. in each of the remaining years of the lease.  Annual base rent expense for the PA office isprojected to be approximately $77,000 in 2010.

 

The Company has the option to terminate thelease after January 1, 2009, by giving one hundred eighty (180) days priorwritten notice to the Landlord and paying a sum equal to the unamortizedtransaction costs incurred in connection with the lease amendment, plus three (3) monthsrent on the term expiration date.

 

TheCompany also has a software delivery and customer care office located inMinnesota.  Effective May 2009, theCompany entered into a lease for an 894 square foot facility in Plymouth,Minnesota.  The lease commenced May 1,2009 and expires April 30, 2011. The initial base annual rent is $7,020 per year or $7.85 per sq. ft.plus an escalation charge of 3.4% annually. The Company has the option to renew its lease for two (2) years byproviding nine (9) months written notice to the Landlord, prior to thelease expiration.  Annual base rent forthe Minnesota office is projected to be approximately $7,000 in 2010.

 

TheCompany believes its leased properties are adequately insured for any losses.

 

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**ITEM 3. LEGAL PROCEEDINGS**

 

OnMay 5, 2003, SEDONA filed a civil action lawsuit against numerousdefendants in the United States District Court for the Southern District of NewYork.  The Company sought damages fromthe defendants named, and other defendants yet to be named, in the complaintfor allegedly participating in the manipulation of its common stock, fraud,misrepresentation, failure to exercise fiduciary responsibility, and/or failureto adhere to SEC trading rules and regulations, tortuous interference,conspiracy and other actions set forth in the complaint.

 

OnMarch 27, 2009, the Honorable Judge Laura Swain, a federal judge in theUnited States District Court for the Southern District of New York, issued anopinion dismissing several of the defendants from the civil action lawsuitfiled by SEDONA on May 5, 2003.  SEDONAwas granted the right and has filed a third amended petition against theremaining defendants and is aggressively pursuing these claims.  On May 1, 2009, Amro International,S.A., Rhino Advisors, Inc., Roseworth Group., LTD., and Cambois Finance, Inc.,all defendants in the May 5, 2003 action, filed suit against SEDONA andseveral of its former directors in Federal Court in the Southern District ofNew York alleging breach of a settlement agreement seeking unspecified damagesand attorney’s fees and expenses.  Thesuit is being vigorously defended by SEDONA and its former directors.  The outcome of litigation proceedings isinherently uncertain and there is no assurance that the Company will prevail ineither of these matters.

 

On September 28, 2006, SEDONA filed a civil action lawsuit against Open Solutions Inc. (OSI), in Montgomery County Court in Pennsylvania for breach of a software license agreement entered into between the parties in May, 2002.  In the lawsuit, the Company alleges that since September 2004, OSI has failed to pay royalty payments required under the parties’ master software license and services agreement for licensed products and services sold by OSI to its customers.  OSI removed the case to federal court and successfully moved for a change in venue from the United States District Court for the District of Pennsylvania to the United States District Court for the District of Connecticut.  SEDONA filed an amended complaint after the case was transferred to the District of Connecticut, case no. 3:07-cv-171.  In its amended complaint, SEDONA seeks a declaration and damages relating to OSI’s failure to pay royalties under the agreement for its sales of the cView product operating on the .NET platform and for breach of the agreement’s confidentiality provision.  OSI served an amended answer with counterclaims asserted against SEDONA for declaratory relief and breach of contract.  Discovery was completed and each party has moved for summary judgment. The parties participated in oral argument before the Court concerning the summary judgment motions on September 19, 2008.

 

In a ruling filed August 19, 2009, the court denied SEDONA’s motion for summary judgment on claims that OSI was required to pay royalties on the sale of the cView product and that failure to pay such royalties and disclosure of confidential information to the offshore development company constituted a breach of contract. Further, the court denied OSI’s motion for summary judgment on claims that SEDONA was in breach of contract for demanding royalty payments, while accepting OSI’s claim that cView was a license enhancement not subject to royalties.

 

Noactions other than the matters set forth above or matters involved in theordinary course of business are currently known by Management and such othermatters are believed by Management not to have material significance.

 

**ITEM 4.  RESERVED**

 

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**PART II**

 
| **ITEM 5.** | **MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES** |
|-------------|-------------------------------------------------------------------------------------------------------------------------|

 

*Market Price of and Dividends of the Company’sCommon Stock*

 

Thefollowing table sets forth, for the periods indicated, the high and low closingprices of SEDONA’s common stock.  Thecommon stock has been available for trading on the OTC Bulletin Board underSDNA.OB.  The last reported sale price ofSEDONA common stock on March 26, 2010 was $0.06 per share.  At that time, there were approximately 3,375holders of record of SEDONA common stock.

 

Thefollowing table reflects high and low bid information for SEDONA’s common stockfor the periods specified, as reported by the OTC Bulletin Board.  These quotations reflect inter-dealer prices,without retail mark-up, mark-down or commission and may not represent actualtransactions.

 

| ** **                              | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
|                                    |       |     |       |    |       |
| **Year ended December 31,  2008**: |       |     |       |    |       |
| Quarter ended March 31, 2008       |       | $        | 0.17       |    | $          | 0.10 |   |
| Quarter ended June 30, 2008        |       | $        | 0.25       |    | $          | 0.11 |   |
| Quarter ended Sept. 30, 2008            |       | $        | 0.19       |    | $          | 0.07 |   |
| Quarter ended December 31, 2008    |       | $        | 0.13       |    | $          | 0.02 |   |
|                                    |       |     |       |    |       |
| **Year ended December 31,  2009**: |       |     |       |    |       |
| Quarter ended March 31, 2009       |       | $        | 0.19       |    | $          | 0.06 |   |
| Quarter ended June 30, 2009        |       | $        | 0.20       |    | $          | 0.12 |   |
| Quarter ended Sept. 30, 2009            |       | $        | 0.15       |    | $          | 0.05 |   |
| Quarter ended December 31, 2009    |       | $        | 0.12       |    | $          | 0.06 |   |

* *

*Dividends*

 

TheCompany has never declared or paid any cash dividends on its common stock anddoes not anticipate declaration or payment of cash dividends on its commonstock in the foreseeable future.  It isthe current intent of the Company to continue to retain future earnings, ifany, to finance the expansion, development and growth of its business.  Payment of future dividends, if any, will beat the discretion of the Board of Directors after taking into account variousfactors, including the Company’s financial condition, operating results,current and anticipated cash needs and plans for expansion.

 

In addition, SEDONA’s outstanding Series A Preferred Stock has apreference on the payment of any dividends. SEDONA must pay all accrued and unpaid dividends, if any, on its outstandingpreferred stock before it can pay dividends on its common stock.

 

The Company ceased to declare preferred stock dividends as of January 1, 2001 on the issued and outstanding series of the Class A Convertible Preferred Stock.  Cumulative but undeclared dividends on the Series A Preferred Stock at December 31, 2009, equaled $1,080,000 or $2.16 per share compared to at December 31, 2008 which equaled $960,000 or $1.92 per share.

 

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*Equity Compensation Plans as of December 31,2009:*

 

**Equity Compensation Plan Information**

 
| **Plan Category**                                               | ** ** | **Number of Securities  to be  Issued Upon Exercise  of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-  Average  Exercise Price of  Outstanding  Options,  Warrants and  Rights** | ** ** | **Number of   Securities  Remaining   Available  for Future Issuance  under Equity  Compensation Plans** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
|                                                            |       |                                                                                                 |       |                                                                                   |       |                                                                                                     |       |
| Equity compensation plans approved by security  holders (1)     |       | 25,084,288                                                                                           |       | $                                                                                      | 0.23       |                                                                                                     | 22,726,215 |   |
| Equity compensation plans not approved by security  holders (2) |       | —                                                                                               |       | —                                                                                 |       | —                                                                                                   |       |
| Total                                                           |       | 25,084,288                                                                                           |       | $                                                                                      | 0.23       |                                                                                                     | 22,726,215 |   |

 

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| (1) | These  plans consist of the 1992 Plan and 2000 Plan which replaced the 1992 plan.  The current plan includes a formula that automatically increases the number  of securities available for issuance equal to 20% of the number of shares  issued and outstanding. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The  Company does not maintain any equity compensation plans that have not been  approved by the stockholders.                                                                                                                                                     |

 

*Recent Sales of Unregistered Securities*

 

TheCompany has effected sales of unregistered securities from time to time duringthe past three years.  Each of these sales has previously been reported inthe Company’s periodic filings on Form 10-K, Form 10-KSB, Form 10Q,Form 10-QSB or on Form 8-K.

 

**ITEM 6.  SELECTEDFINANCIAL DATA**

 

Thisitem is not required to be furnished by smaller reporting companies.

 

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| **ITEM 7.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

SEDONAis a software application and services provider that develops and marketsweb-based, vertical Customer and Member Relationship Management solutions.  The Company has strategically targetedfinancial services organizations such as community and regional banks, creditunions, and savings and loans to market our leading CRM/MRM solutions.  The Company targets financial institutionswith assets below $10 million, however, our products are easily implemented byfinancial institutions of any size.  TheCompany’s CRM/MRM application solution enables financial services organizationsto improve key performance metrics to strengthen their position in the marketand obtain greater share of the customer’s wallet.

 

TheCompany licenses its CRM/MRM applications to software and services providers,who market, sell, distribute and support SEDONA’s technology either as acomponent of their total solution or as a stand-alone offering.  The Company is not an application serviceprovider (SaaS), however, SEDONA CRM/MRM can be deployed in a SaaS environmentthrough the Company’s channel distribution partners.

 

SEDONAhas signed Original Equipment Manufacturer (OEM) and reseller agreements withseveral leading software and services providers for the financial servicesmarket, including, but not limited to: Fiserv; Connecticut Online ComputerCenter, Inc.; Profit Technologies; Bradford-Scott, CU ink, Share One andEPL.

 

*Revenues*

 

The Company’s revenues currently consist of product license revenue and service license revenue.

 

Product license revenue includes:

 

·       license fees from direct sales by either the Company or its distribution partners

·       monthly subscription fees from SaaS sales by our channel distribution partners

 

Service license revenue includes:

 

·       professional services fees including set-up and installation fees, training and mapping fees

·       annual maintenance fees

 

The following is a discussion and analysis of the Company’sresults of operations and financial condition for the years ended December 31,2009 and December 31, 2008 and should be read in conjunction with theCompany’s audited financial statements as of December 31, 2009 and 2008along with the notes to those financial statements.

 

The discussion and analysis of financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingencies.  We evaluate, on an on-going basis, our estimates and judgments, including those related to bad debts, income taxes, contingencies and litigation.  Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

19

 

**Critical Accounting Policies**

 

*Principles of Consolidation*

 

The Company’s consolidated financial statements include the accounts of its wholly owned subsidiary, SEDONAâGeoServices, Inc.  ****All significant inter-company accounts and transactions have been****eliminated in consolidation.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosures in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

 

*Cash and Cash Equivalents*

 

The Company considers all unencumbered highly liquid investments with original maturities of three (3) months or less when purchased to be cash equivalents.  Cash and cash equivalents, which primarily consist of cash on deposit and money market funds, are stated at cost, and approximate fair value.

 

*Accounts Receivable*

 

Trade receivables are generated primarily from the Company’s customers and channel distribution partners.  Receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  A valuation allowance is provided for known and anticipated credit losses, as determined by Management in the course of regularly evaluating individual customer receivables.  Receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded when received.

 

*Property and Equipment*

 

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets, which range from three (3) to seven (7) years.

 

*Impairment of Long-Lived Assets*

 

The Company evaluates the recoverability of its long-lived assets in accordance with ASC Topic 360, Property, Plant and Equipment.  Assets are periodically reviewed for possible impairment whenever circumstances or events indicate that the carrying amount of such assets may not be recoverable.  If such review indicates that the carrying amount of the asset is not recoverable, the carrying amount of such asset will be reduced to fair value.

 

*Revenue Recognition*

 

The Company’s revenues from software arrangements currently consist oflicense fees, fees for installation services and maintenance.  The Company has established vendor specificobjective evidence of fair value for its maintenance contracts based on theprice of renewals of existing maintenance contracts.  The remaining value of the softwarearrangement is allocated to license fees and professional

 

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services based on contractual terms agreed upon by the customer andbased on Company-maintained list prices.

 

*Product License Revenue*

 

TheCompany utilizes both a direct sales model and an indirect sales model wherebyit distributes its product through its channel distribution partners, for whichthe Company receives royalty payments based on percentages of the license feescharged by the distribution partners. Under the direct sales model, revenue is not recognized until thesoftware is installed.  The Companyeither receives written acceptance from its clients that the software has beeninstalled and has been accepted or provides receipts for the electronicdelivery of the software.  Under theindirect sales model, royalty fees are recognized by SEDONA when the Companyreceives written acknowledgement from the distribution partners that a contracthas been signed with an end-user and monies are owed to SEDONA from thedistribution partner.

 

Revenues from the sale of product licenses are recognized as follows:

 

·                                          Persuasiveevidence of an arrangement exists, generally by receipt of a signed contract

·                                          Delivery andacceptance of the software has been received

·                                          The fee tobe paid by the customer is fixed or determinable

·                                          Collectionof the fee is reasonably assured. (Our contracts do not contain general rightsof return)

 

SinceSEDONA CRM/MRM solutions can be implemented on the Company’s customers’ systemswithout significant alterations to the features and the functionality of thesoftware, and without significant interfacing, the Company’s license agreementsare written so that formal written acceptance of the product is received wheninstallation is complete. Therefore, the timing of license fee revenuerecognition coincides with the completion of the installation and acceptance ofthe software by the customer.

 

During2009, 11% of SEDONA’s license revenues were derived from in-house licensing and89% were derived from subscription fees on SaaS deployments.  Comparatively, during 2008, 57% of theCompany’s license revenues were derived from in-house license sales and 43%were derived from subscription fees on SaaS deployments.

 

*Services Revenue*

 

Servicesrevenue includes revenue from professional services (primarily installation andtraining services) and maintenance revenue. Installation service revenue is earned from implementation planning,hardware and software set-up, data integration including data aggregation,conversion, cleansing and analysis, and testing and quality assurance.  Installation service revenue is accounted foras a separate element of a software arrangement.

 

TheCompany recognizes service revenue as follows:

 

Installation revenue is recognized upon completed installation andcustomer acceptance and is based on a contractual hourly rate.  Training revenue is not a material element ofa contract and related revenue is recognized as training services are provided.

 

Annual maintenance revenue is recognized ratably over the life of therelated contract.  The Companyestablishes the value of maintenance revenue based on the price quoted andreceived for renewals of existing maintenance contracts.

 

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*Software Development Costs*

 

Softwaredevelopment costs are accounted for in accordance ASC 985, Software.  All costs incurred in the research anddevelopment of new software products are expensed as incurred untiltechnological feasibility has been established.

 

Thecosts incurred for testing and coding of the new software products arecapitalized.  Amortization of such costsis the greater of the amount capitalized using: (a) the ratio in whichcurrent gross revenues for a product bear to the total of current andanticipated future gross revenues of that product or (b) the straight-linemethod over the remaining estimated economic life of the product not to exceedthree years.  Amortization commences whenthe product is available for general release to customers.  The Company capitalizes costs related topurchased software used for developmental purposes and amortizes such valueover three years consistent with the amortization and capitalization policydiscussed above related to capitalized software costs.  During 2009 and 2008, the Company expensedits software development costs related to the Company’s SEDONA CRM/MRMenterprise business application software because the recoverability of thesecosts in future periods is uncertain.

 

TheCompany periodically reviews the carrying value of both internally developedand purchased software costs for impairment. The Company will record an impairment charge in its operating results ifthe carrying value exceeds the future estimated undiscounted cash flows of therelated assets.

 

Asof December 31, 2004, all software development costs have been fullyamortized and the Company has not capitalized any additional costs since thattime.

 

*Income Taxes*

 

TheCompany is taxed as a domestic U.S. Corporation under the Internal RevenueCode.  Deferred income tax assets andliabilities are recognized for the expected future tax consequences of eventsthat have been included in the consolidated financial statements or taxreturns.  Deferred income tax assets andliabilities are determined based upon the differences between the financialstatements and tax basis of assets and liabilities using currently enacted taxrates in effect for the years in which the differences are expected toreverse.  Deferred tax assets areevaluated and a valuation allowance is established if it is more likely thannot that all or a portion of the tax assets will not be utilized.  The Company utilizes a two-step approach torecognizing and measuring uncertain tax positions (tax contingencies).  The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes.  The second step is to measure the tax benefitas the largest amount which is more than 50% likely of being realized uponultimate settlement.  The Company includesinterest and penalties related to its tax contingencies as operating expensesin its consolidated statement of operations. For additional information, see Note 12 to the Consolidated FinancialStatements.

 

*Stock-Based Compensation*

 

The Company accounts for stock-based compensation inaccordance with the recognition and measurement provisions of AccountingStandards Codification (ASC) Topic 718, “Compensation — Stock Compensation”.

 

ASC Topic 718 requires all share based payments toemployees, including grants of employee stock options or warrants, to berecognized as expenses in the statement of operations based on their fairvalues and vesting periods.

 

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**The Company estimates the fair value of options andwarrants at the grant date using the Black-Scholes option pricing model.  The model takes into consideration weightedaverage assumptions related to the following: risk-free interest rates;expected term; expected volatility; and expected dividend rates.**

 

*Recent AccountingPronouncements*

 

In September 2009,the Company adopted ASC 105-10-05, which provides for the FASB AccountingStandards CodificationTM (the “Codification”) to become the single officialsource of authoritative, nongovernmental U.S. generally accepted accountingprinciples (“GAAP”) to be applied by nongovernmental entities in thepreparation of financial statements in conformity with GAAP. The Codificationdoes not change GAAP, but combines all authoritative standards into acomprehensive, topically organized online database. ASC 105-10-05 explicitlyrecognizes rules and interpretative releases of the Securities andExchange Commission under federal securities laws as authoritative GAAP for SECregistrants. Subsequent revisions to GAAP will be incorporated into the ASCthrough Accounting Standards Updates (ASU).  ASC 105-10-05 iseffective for interim and annual periods ending after September 15, 2009,and was effective for the Company in the third quarter of 2009. The adoption ofASC 105-10-05 impacted the Company’s financial statement disclosures, as allreferences to authoritative accounting literature were updated to and inaccordance with the Codification. The adoption of ASC 105-10-05 did not have amaterial impact on the Company’s consolidated results of operations andfinancial condition.

 

InJune 2008, the FASB issued new guidance regarding the classification offinancial instruments that are indexed to a company’s own stock.  The new guidance revised the criteria fordetermining whether an instrument is indexed to a company’s own stock and theresultant accounting treatment of those instruments.  The new guidance is effective for annualperiods beginning after December 15, 2008. The adoption of this new guidance on January 1, 2009 did not have amaterial impact on the Company’s consolidated financial statements.

 

In December 2007,the FASB issued an accounting standard codified within ASC 805, “BusinessCombinations” which changed the accounting for businessacquisitions.  Under this standard, business combinations continue tobe required to be accounted for at fair value under the acquisition method ofaccounting, but the standard changed the method of applying the acquisitionmethod in a number of significant aspects. Acquisition costs will generally beexpensed as incurred; noncontrolling interests will be valued at fair value atthe acquisition date; in-process research and development will be recorded atfair value as an indefinite-lived intangible asset at the acquisition date,until either abandoned or completed, at which point the useful lives will bedetermined; and restructuring costs associated with a business combination willgenerally be expensed subsequent to the acquisition date. The standard iseffective on a prospective basis for all business combinations for which the acquisitiondate is on or after the beginning of the first annual period subsequent to December 15,2008. Adoption of the standard did not have a significant impact on the Company’sfinancial position and results of operations; however, any business combinationentered into after the adoption may significantly impact the Company’sfinancial position and results of operations when compared to acquisitionsaccounted for under prior GAAP and result in more earnings volatility andgenerally lower earnings due to the expensing of deal costs and restructuringcosts of acquired companies.

 

In February 2009,the FASB issued an accounting standard codified within ASC 805, “BusinessCombinations” which amends the provisions related to the initial recognitionand measurement, subsequent measurement, and disclosure of assets andliabilities arising from contingencies in a business combination. The standardapplies to all assets acquired and liabilities assumed in a businesscombination that arise from contingencies that would be within the scope of ASC450, “Contingencies”, if not acquired or assumed in a business combination,except for assets or liabilities arising from contingencies that are subject tospecific guidance in ASC 805. The standard applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Theadoption of the standard effective January 1, 2009 did not have an impacton the Company’s financial position and results of operations.

 

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In March 2008, theFASB issued an accounting standard related to disclosures about derivativeinstruments and hedging activities, codified within ASC 815, “Derivatives andHedging”.  Provisions of this standard change the disclosurerequirements for derivative instruments and hedging activities includingenhanced disclosures about (a) how and why derivative instruments areused, (b) how derivative instruments and related hedged items areaccounted for under ASC 815 and its related interpretations, and (c) howderivative instruments and related hedged items affect our financial position,financial performance, and cash flows. This statement was effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. The Company adopted the standard on January 1, 2009.

 

In April 2008, theFASB issued an accounting standard codified within ASC 350, “Intangibles -Goodwill and Other” which amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset  Under this standard, entitiesestimating the useful life of a recognized intangible asset must consider theirhistorical experience in renewing or extending similar arrangements or, in theabsence of historical experience, must consider assumptions that marketparticipants would use about renewal or extension.  The intent of thestandard is to improve the consistency between the useful life of a recognizedintangible asset and the period of expected cash flows used to measure the fairvalue of the asset. Adoption of the standard was effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. The Company adopted the standard on January 1,2009. The Company does not expect the standard to have a material impact on itsaccounting for future acquisitions of intangible assets.

 

In November 2008,the FASB issued an accounting standard codified within ASC 350, “Intangibles -Goodwill and Other” that applies to defensive assets which are acquiredintangible assets which the acquirer does not intend to actively use, butintends to hold to prevent its competitors from obtaining access to the asset.The standard clarifies that defensive intangible assets are separatelyidentifiable and should be accounted for as a separate unit of accounting inaccordance with guidance provided within ASC 805, “Business Combinations” andASC 820, “Fair Value Measurements and Disclosures”.  The standard waseffective for intangible assets acquired in fiscal years beginning on or after December 15,2008.  The Company adopted this standardeffective January 1, 2009 and will apply the provisions of this guidanceto intangible assets acquired on or after that date. The Company does notexpect the standard to have a material impact on its accounting for futureacquisitions of intangible assets.

 

In April 2009, theFASB issued an accounting standard codified within ASC 825, “FinancialInstruments” that requires disclosures about the fair value of financialinstruments that are not reflected in the consolidated balance sheets at fairvalue whenever summarized financial information for interim reporting periodsis presented. Entities are required to disclose the methods and significantassumptions used to estimate the fair value of financial instruments anddescribe changes in methods and significant assumptions, if any, during theperiod. The standard was effective for interim reporting periods ending after June 15,2009 and was adopted by the Company in the second quarter of 2009.

 

In April 2009, theFASB issued an accounting standard codified within ASC 820, “Fair ValueMeasurements and Disclosures,” which provides guidance on determining fairvalue when there is no active market or where the price inputs being usedrepresent distressed sales.  The standard reaffirms the objective offair value measurement, which is to reflect how much an asset would be sold forin an orderly transaction. It also reaffirms the need to use judgment todetermine if a formerly active market has become inactive, as well as todetermine fair values when markets have become inactive. The standard iseffective for interim and annual periods ending after June 15, 2009 andwas adopted by the Company in the second quarter of 2009. The adoption of thisaccounting pronouncement did not have a material impact on the Company’s consolidatedresults of operations and financial condition.

 

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In May 2009, the FASB issued an accountingstandard codified within ASC 855 “Subsequent Events,” which sets forth generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  It requires the disclosure of the date through whichan entity has evaluated subsequent events and the basis for that date, that is,whether that date represents the date the financial statements were issued orwere available to be issued.  The standard was effective for interimor annual periods ending after June 15, 2009 and was adopted by theCompany in the second quarter of 2009.   In February 2010, theFASB issued Accounting Standards Update No. 2010-09 (“ASC Update 2010-09”)“Subsequent Events (Topic 855):Amendments to Certain Recognition and Disclosure Requirements*.”*This ASU amends FASBCodification topic 855. The amendments in ASU 2010-09 remove the requirement inASC 855-10 for a SEC filer to disclose a date through which subsequent eventshave been evaluated in both issued and revised financial statements. This ASUwas effective upon issuance and the Company adopted this ASU as of December 31,2009. Except for the removal of disclosure requirements in ASC 855-10, theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

In August 2009, theFASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures —Measuring Liabilities at Fair Value.” The ASU provides additional guidance forthe fair value measurement of liabilities under ASC 820 “Fair ValueMeasurements and Disclosures”.  The ASU provides clarification thatin circumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using certain techniques. The ASU also clarifies that when estimating thefair value of a liability, a reporting entity is not required to include aseparate input or adjustment to other inputs relating to the existence of arestriction that prevents the transfer of a liability. It also clarifies thatboth a quoted price in an active market for the identical liability at themeasurement date and the quoted price for the identical liability when tradedas an asset in an active market when no adjustments to the quoted price of theasset are required are Level 1 fair value measurements.  The Companyadopted the ASU in the fourth fiscal quarter of 2009.  The adoptionof the ASU did not have a material impact on the Company’s consolidated resultsof operations and financial condition.

 

StandardsIssued But Not Yet Adopted

 

InJune 2009, the FASB issued an accounting standard codified within ASC 860,“Transfers and Servicing.” This standard amends the existing guidance ontransfers of financial assets. The amendments include: (1) eliminating thequalifying special-purpose entity concept, (2) a new unit of account definitionthat must be met for transfers of portions of financial assets to be eligiblefor sale accounting, (3) clarifications and changes to the derecognitioncriteria for a transfer to be accounted for as a sale, (4) a change to theamount of recognized gain or loss on a transfer of financial assets accountedfor as a sale when beneficial interests are received by the transferor, and (5)extensive new disclosures. This standard is effective for new transfers offinancial assets occurring on or after January 1, 2010. The adoption of thisstandard is not expected to have a material impact on the Company’sconsolidated financial statements; however, it could impact future transactionsentered into by the Company.

 

InJune 2009, the FASB issued an accounting standard codified within ASC 810, “Consolidation.”This standard amends the consolidation guidance for variable-interest entitiesunder FIN 46(R), “Consolidation of Variable Interest Entities - aninterpretation of ARB No. 51.” The amendments include: (1) the elimination ofthe exemption for qualifying special purpose entities, (2) a new approach fordetermining who should consolidate a variable-interest entity, and (3) changesto when it is necessary to reassess who should consolidate a variable-interestentity. This standard is effective January 1, 2010. The Company is currentlyevaluating the impact of this standard on its consolidated financialstatements.

 

In October 2009, theFASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements,(amendments to ASC Topic 605, Revenue Recognition)” (ASU 2009-13) and ASU2009-14, “Certain Arrangements That Include Software Elements, (amendments toASC Topic 985, Software)” (ASU 2009-14). ASU 2009-13 requires entities toallocate revenue in an arrangement using estimated selling prices of thedelivered goods and services based on a selling price hierarchy. The amendmentseliminate the residual method of revenue allocation and require revenue to beallocated using the relative selling price method. ASU 2009-14 removestangible products from the scope of software revenue guidance and providesguidance on determining whether software deliverables in an arrangement thatincludes a tangible product are covered by the scope of the software revenueguidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospectivebasis for revenue arrangements entered into or materially modified in fiscalyears beginning on or after June 15, 2010, with early adoption permitted.The Company is currently evaluating the impact of the adoption of these ASUs onits consolidated results of operations or financial condition.

 

In December 2009,the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities” which amends ASC 810, “Consolidation”to address the elimination of the concept of a qualifying special purposeentity.  The standard also replaces the quantitative-based risks andrewards calculation for determining which enterprise has a controllingfinancial interest in a variable interest entity with an approach focused onidentifying which enterprise has the power to direct the activities of avariable interest entity and the obligation to absorb losses of the entity orthe right to receive benefits from the entity. This standard also requirescontinuous reassessments of whether an enterprise is the primary beneficiary ofa VIE whereas previous accounting

 

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guidance requiredreconsideration of whether an enterprise was the primary beneficiary of a VIEonly when specific events had occurred.  The standard provides moretimely and useful information about an enterprise’s involvement with a variableinterest entity and will be effective as of the beginning of interim and annualreporting periods that begin after November 15, 2009, which for theCompany would be January 1, 2009.  The Company does not expectthe adoption of this standard to have a material effect on its consolidatedresults of operations and financial condition.

 

In January 2010, theFASB issued ASU No. 2010-6, “Improving Disclosures About Fair ValueMeasurements,” which provides amendments to ASC 820 “Fair Value Measurementsand Disclosures,” including requiring reporting entities to make more robustdisclosures about (1) the different classes of assets and liabilitiesmeasured at fair value, (2) the valuation techniques and inputs used, (3) theactivity in Level 3 fair value measurements including information on purchases,sales, issuances, and settlements on a gross basis and (4) the transfersbetween Levels 1, 2, and 3.  The standard is effective for annualreporting periods beginning after December 15, 2009, except for Level 3reconciliation disclosures which are effective for annual periods beginningafter December 15, 2010. The Company does not expect the adoption of thisstandard to have a material impact on its consolidated financial statements.

 

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**Results of Operations**

 

Totalrevenues from operations for the years ended December 31, 2009 and 2008were $1,250,000 and $1,395,000, respectively. The decrease of 10% or $145,000 in total revenues is explained below.

 

Overthe last year, the turmoil and uncertainty of the economy, specifically thefinancial services industry has had an impact the Company’s license sales.  For the year ended December 31, 2009,revenues from product licenses decreased by 25% or $137,000 to $401,000compared to product license revenues of $538,000 reported for 2008.  License fee revenue from the sale of in-housesoftware applications decreased 86% in the year ended December 31, 2009,however this decrease was offset by a 55% increase in license fee revenue fromthe sale of SaaS based license (Software as a Service) revenues for the yearended December 31, 2009, as compared to the 2008.  The Company expects that the SaaS basedlicensing model will continue to show strong results through 2010 as this modelprovides financial institutions with an immediately available, fully integratedsystem, including all of the software, hardware and services required for thedeployment of a comprehensive, web-based enterprise business application, foran affordable, fixed monthly subscription fee. SaaS based pricing is especially attractive to financial institutionswho lack the resources and IT infrastructure to deploy an in-house enterprisebusiness application.  In addition, itdoes not involve the significant up-front charges of a perpetual license anddoes not come out of an organization’s capital expenditures budget.  SaaS based licensing helps the Company builda predictable, recurring revenue stream because the subscription fee isreceived monthly over a three to five year period.

 

Asof December 31, 2009, the Company has recorded a total of approximately$918,000 in current and non-current accounts receivable and associated deferredrevenue for SaaS based subscription fees. This represents a 22% increase overthe approximately $751,000 reported as of December 31, 2008.

 

TheCompany also believes that the demand for in-house software applications willincrease in 2010 as financial institutions seek solutions to help themeffectively promote the specific products that will increase theirprofitability and retain their loyal customers.

 

Servicefee revenues changed by less than 1% to $849,000 compared to $857,000 for theyears ended December 31, 2009 and 2008, respectively.  During the last fiscal quarter of 2009, theCompany noted an increased interest from its clients for customized servicesand profitability analysis.  Weanticipate that this trend will continue in 2010 as we continue to expand ourservice offerings specifically tailored to the needs of financial institutions.

 

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*Cost of Revenues*

 

Costof revenues includes the cost associated with providing professional servicessuch as data mapping, programming services, training, customer support,installation and consulting services. These services are typically billed on a time and materials basis.

 

Asa percentage of service revenue, cost of sales related to services was 44% ofrevenue or $374,000 for the year ended December 31, 2009.  In comparison, cost of sales equaled 28% ofrevenues or $241,000 in 2008.  Theincrease in cost of sales was a result of a change in the mix of services whichwere delivered to our clients.  During2009, a major portion of services revenues were generated from complex projectswhich required the expert resources of our most senior development staff.  In addition, cost of sales increased due toupgrade and support costs associated with the release of a new version of oursoftware application.

 

*Gross Profit*

 

Forthe year ended December 31, 2009, the Company reported a gross profit of$876,000 or 70% of revenue compared to the year ended December 31, 2008,in which the Company reported a gross profit of $1,154,000, or 83% of revenuedue to the changes in revenues and cost of revenues explained above.

 

*Operating Expenses*

 

Operating expenses generally consists of thefollowing:

 

*Sales, marketing and product support*

 

Sales, marketing and product support expensesgenerally consist of salaries, employee benefits and related expenses forbusiness development activities.  Weanticipate that our expenditures in this area will grow in future years as weincrease our market penetration with new direct sales opportunities and expandthe opportunities within our indirect channel through the addition of newpartners and resellers.

 

Sales, marketing and product support costincreased by $322,000 or 63% to $835,000 in 2009, compared to $513,000 in2008.  The increase in expenses is mainlyattributable labor and employee benefit costs associated with the expansion ofthe Company’s direct sales initiatives beginning in December 2008.

 

*Research and Development*

 

Research and development expenses generallyconsist of salaries, employee benefits and related overhead expenses forproduct development of our CRM/MRM application solutions.  Research and development costs relate tofuture products as well as the redesign and maintenance of currentproducts.  We charge all research anddevelopment expenses to operations as incurred. We anticipate that our expenditures in this area will increasesignificantly in the future as we continue to upgrade and improve ourtechnology to compete effectively with other providers of CRM/MRM applications.

 

Research and development expenses were$338,000 and $526,000 for the years ended December 31, 2009 and 2008,respectively.  The decrease in expensesof $188,000 is the result of a reduction in outside staffing costs used tosupplement product development. In addition in 2009, the research anddevelopment team dedicated more time to completing complex custom developmentprojects for clients and upgrading and supporting the release of a new versionof our software application; these expenses are included in cost of sales andreduced research and development expenses.

 

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*General and Administrative*

 

General and administrative expenses generallyconsist of salaries, employee benefits and related overhead expenses forexecutive, financing, accounting and human resource personnel.  In addition, major components of theseexpenses include other corporate expenses such legal, accounting, professionalservices, insurance and facilities expenses.

 

General and administrative expenses were$1,112,000 and $1,281,000 for the years ended December 31, 2009 and 2008,respectively.  The decreasein expenses of $169,000 or 13% was generally attributable to the Company’scontinuing efforts to monitor its expenses and attain savings, wheneverpossible.  During 2009, the Companyachieved savings by reducing its professional services fees for legal andinvestor relation services.  The savingswere also offset by an increase in travel cost. In the fourth quarter of 2009, the Company launched an initiative foron-site visits with our clients to gain a complete understanding of thechallenges they face and determine ways in which the Company can help themovercome the challenges and achieve their future goals and objectives.

 

*Litigation Expenses*

 

Litigation expenses related to the OSI legalcase were $131,000 and $1,010,000 for the years ended December 31, 2009and 2008, respectively.  Litigationexpenses relate to a civil action lawsuit filed by the Companyagainst Open Solutions Inc. (OSI) for breach of a software license agreemententered into between the parties in May, 2002 (See Item 3. Legal Proceedingsfor additional information).  Litigationexpenses have decreased from the prior year as the matter was settled in August 2009.

 

*Non-operating Expenses:*

 

*Interest Expense:*

 

In2009, interest expense increased to $4,100,000 compared to $682,000 reported in2008.  The increase in interest expensemainly reflects $3,402,000 of non-cash interest charges related to theaccretion of debt discount on convertible notes as fully explained in Item 13.

 

*Inducement loss on debt conversion*

 

For the year ended December 31, 2008, the Company recorded an inducement loss on debt conversion of $1,299,000 related to the conversion of a portion of the outstanding principal and interest on the debt obligations with David Vey.

 

*As part of David Vey’s debt refinancing transactionon December 31, 2008, Mr. Vey converted principal and accruedinterest of his existing outstanding convertible debt in the amount of$1,262,738 into shares of the Company’s common stock at the rate of $0.05 pershare, for a total of 25,254,781 shares of common stock.  Due to the reduction of the conversion pricefrom $0.14 per share under the existing debt arrangement to $0.05 per share,the Company recorded a charge of $1,299,000 as an inducement loss uponconversion of the principal and interest on December 31, 2008.*

* *

*Loss on extinguishment of debt*

 

For the year ended December 31, 2008, the Company recorded a loss on debt extinguishment of $1,156,000 related to the refinancings of its debt obligations with David Vey and William Rucks.

 

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Effective December 31, 2008, the Company modified the terms of its existing debt obligations with David Vey. Under the revised agreement, Mr. Vey was granted one four-year warrant to purchase 12,637,390 shares of the Company’s common stock at an exercise price of $0.05 per share. The modification was accounted for as a debt extinguishment and the fair value of the stock purchase warrant was included in determining the debt extinguishment loss to be recognized. The fair value of the warrant in the amount of $909,000 was determined using the Black-Scholes option pricing model and was recorded as a loss on extinguishment of debt.

 

Effective March 6, 2008, the Company modified the terms of the $1,000,000 in convertible notes payable with William Rucks. Under the revised agreement, Mr. Rucks was granted one four-year warrant to purchase 2,777,777 shares of the Company’s common stock at an exercise price of $0.30 per share. The modification was accounted for as a debt extinguishment and the fair value of the stock purchase warrant was included in determining the debt extinguishment loss to be recognized. The fair value of the warrant in the amount of $247,000 was determined using the Black-Scholes option pricing model and was recorded as a loss on extinguishment of debt.

 

*Liquidity and Capital Resources*

 

SEDONA’soperations have been financed through the issuance of short-term convertiblenotes.   For the fiscal year ended December 31,2009, SEDONA received net proceeds of approximately $1,625,000 from borrowingsunder convertible notes.

 

Forthe year ended December 31, 2009, the Company used net cash of $1,620,000for operating activities compared to $1,097,000 in 2008, an increase of$523,000 or 48%.  The increase in netcash used in operating activities was primarily the result of increased salesand marketing activities engaged in by the Company as it entered the directsales market as well as a reduction in the Company’s accrued expensesspecifically related to salary, benefits and severance.

 

Forthe year ended December 31, 2009, net cash used in investing activities forthe acquisition of property and equipment decreased by $1,000 to $5,000compared to $6,000 in 2008.

 

Netcash provided by financing activities increased to $1,628,000 in 2009, comparedto $1,088,000 in 2008. In 2009, the proceeds were derived from the issuance of$1,625,000 in short-term convertible notes. In addition, the Company received proceeds of $3,000 from the sale ofcommon stock through its employee stock purchase plan.

 

In2008, the proceeds were derived from $686,000 in payments advanced by DavidVey, related to the OSI litigation, plus $285,000 in proceeds from the line ofcredit and $117,000 from the sale of common stock and exercise of stockoptions.

 

Charles F. Mitchell (“Mitchell”)extended a loan to the Company, which was evidenced by a convertible promissorynote dated May 31, 2006, in the principal amount of $300,000, with aconversion price of $0.20 per share (the “Mitchell Convertible Note”).  William Rucks (“Rucks”) extended severalloans to the Company which were evidenced by the following convertiblepromissory notes: (i) note dated July 1, 2005 in the principal sum of$250,000; (ii) note dated August 2, 2005 in the principal sum of$250,000; and (iii) $500,000 note dated September 29, 2005 and (iv) anote in the amount of $300,000 dated May 31, 2006 (collectively the “RucksNotes”). The Notes designated as (i), (ii), and (iii) each had aconversion price of $0.18 per share, while the note designated as (iv) hada conversion price of $0.20 per share. The Notes designated as (i), (ii), and (iii), in the total sum of$1,000,000 mature and are payable on May 31, 2010, unless theretoforeconverted. The two $300,000 convertible notes mature and are payable on

 

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May 31, 2010.  The convertible notes bear interest on theprincipal outstanding at a rate of 8% per year, annually in arrears, from thedate of the convertible notes until the earlier of maturity or the date uponwhich the unpaid balance is paid in full or is converted into shares of commonstock.  

 

As more fully describedin Item 13, the Company refinanced its existing debt obligations with David Veyon December 31, 2008.  As part ofthe refinancing, the Company issued Mr. Vey a consolidated securedconvertible promissory note, dated as of December 31, 2008, in theprincipal amount $4,100,000.  The NewConvertible Note has a maturity date of May 31, 2010, unless theretoforeconverted, and bears interest at the rate of eight percent (8%) per year, whichinterest will be due upon maturity. Mr. Vey has the option to convert, atany time, all or part of the unpaid principal and accrued but unpaid interestof the New Convertible Note into shares of Company common stock at a conversionprice of $0.05 per share.  The number ofshares which would be issuable upon the conversion of the $4,100,000 principalbalance of the New Convertible Note is presently 82,000,000.

 

In addition, the Company has entered into a financing agreement with Vey Associates to borrow up to $2,250,000.  The loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Once $1,750,000 of the loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is 45,000,000.  As of December 31, 2009, the Company has borrowed $1,625,000 of the $2,250,000.  The number of shares which would be issuable upon conversion of the $1,625,000 principal balance is presently 32,500,000.

 

Thefinancial statements of the Company have been prepared assuming the Companywill continue as a going concern, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business.  Accordingly, the financial statements do notinclude any adjustment that might be necessary should the Company be unable tocontinue in existence.

 

For2009, the Company reported a net loss of $5,640,000 which includes non-cash interestcharges of $3,402,000 related to the restructuring of its debtobligations.  In addition, the Companyhad negative working capital of $11,733,000 and a stockholders’ deficit of$11,718,000 as of December 31, 2009. These factors raise substantial doubt about our ability to continue as agoing concern.

 

Presently,our revenues are not sufficient to meet our operating and capital expenses andas explained above, we have approximately $8,332,000 of convertible andnon-convertible debt obligations which become due in 2010, unless converted toPreferred Stock, (See Note 13).  Asstated above, there is substantial doubt about our ability to continue as agoing concern since the continuation of our business is dependent upon successfullynegotiating with existing lenders to refinance or extend the maturity dates ofexisting debt, obtaining additional financing (both short and long-term),successful and sufficient market acceptance of our products and achieving aprofitable level of operations.

 

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TheCompany will use any additional financing to: (i) increase our researchand development efforts; (ii) expand our marketing and sales activities; (iii) hireadditional personnel across all disciplines to support our revenue growth andcontinued market acceptance of our services. Any additional financing mayresult in the issuance of additional equity securities by the Company whichcould cause significant dilution in the equity interests of our currentstockholders.

 

*Financial RiskManagement*

 

Fromtime to time, the Company has issued fixed-rate debt and preferred stock, whichis convertible into its common stock at a predetermined conversion price.Convertible debt has characteristics that give rise to both interest-rate riskand market risk because the fair value of the convertible security is affectedby both the current interest-rate environment and the price of the underlyingcommon stock.  For the years ended December 31,2009 and 2008, the Company’s convertible debt, on an if-converted basis, wasnot dilutive and, as a result, had no impact on the Company’s net loss pershare assuming dilution.  In futureperiods, the debt may be converted, which may be dilutive and net income pershare (assuming dilution) may be reduced.

 

SeeNotes 4 and 5 to the accompanying financial statements for additional informationwith respect to the Company’s long-term debt and convertible preferred stock.

 

*Off-Balance Sheet Arrangements*

 

SEDONAhad no off-balance sheet arrangements during 2009 or 2008.

 

*Inflation*

 

Althoughthere can be no assurance that SEDONA’s business will not be affected byinflation in the future, Management believes inflation did not have a materialeffect on the Company’s results of operations or financial condition during theperiods presented herein.

 

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****ITEM 8.********                            ********FINANCIAL STATEMENTS****

 

****The Company’s financial statements, and the report of Asher & Company, Ltd, our independent registered public accounting firm, referred to in the Index to Financial Statements appear elsewhere in this Form 10-K on the pages set forth below.****

 
| Report of Independent Registered Public Accounting  Firm                                                                    |   | F-2    |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                        |   |   |
| Consolidated Financial  Statements                                                                                          |   |   |
|                                                                                                                        |   |   |
| Consolidated Balance Sheets as of December 31,  2009 and December 31, 2008                                        |   | F-3    |
| Consolidated Statements of Operations for each of the  two years in the period ended December 31, 2009                 |   | F-4    |
| Consolidated Statements of Stockholders’ Deficit for  each of the two years in the period ended December 31, 2009 |   | F-5    |
| Consolidated Statements of Cash Flows for each of the  two years in the period ended December 31, 2009                 |   | F-7    |
| Notes to Consolidated Financial Statements                                                                                  |   | F-8    |

 
| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES** |
|-------------|-------------------------------------------------------------------------------------------|

 

None.

 

**ITEM 9A(T).   CONTROLSAND PROCEDURES**

 

**Evaluation of Effectiveness ofDisclosure Controls and Procedures**

 

Our disclosure controlsand procedures (as defined in Rules13a-15(e) and 15d-15(e) under theExchange Act) are designed to ensure that information we are required todisclose in our reports filed under the Exchange Act, such as this AnnualReport on Form 10-K, is recorded, processed, summarized and reportedwithin the time periods specified in the rules of the Securities andExchange Commission. Our disclosure controls and procedures also are designedto ensure that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures.

 

In order to monitorcompliance with this system of controls, our Board of Directors, which performsthe audit committee function for the company, oversees management’s dischargeof its financial reporting responsibilities. The Board of Directors meetsregularly with SEDONA’s independent registered public accounting firm, Asher &Company, Ltd., and representatives of management to review accounting,auditing, internal control, and financial reporting matters. The Board ofDirectors is responsible for the engagement of our independent registeredpublic accounting firm.  The consolidated financial statements inthis Annual Report on Form 10-K have been audited by Asher &Company, Ltd., for the purpose of determining that the consolidated financialstatements are presented fairly, in all material respects, in conformity withaccounting principles generally accepted in the United States ofAmerica.  Asher & Company, Ltd.’s, report on the financialstatements is set forth in “Financial Statements and Schedule” of this AnnualReport on Form 10-K.

 

Our Management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures in effect as of December 31, 2009. Based on this evaluation,our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,2009, our disclosure controls and procedures were effective to providereasonable assurance that material information relating to SEDONA and itsconsolidated subsidiaries required to be included in our Exchange Act reports,including this Annual Report on Form 10-K, is

 

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recorded, processed,summarized, and reported as required, and is made known to Management,including the Chief Executive Officer and Chief Financial Officer, on a timelybasis.

 

**Internal Control Over FinancialReporting**

 

***Management’sAnnual Report on Internal Control Over Financial Reporting***

 

The Management of SEDONAis responsible for the preparation of the financial statements and relatedfinancial information appearing in this Annual Report on Form 10-K. Thefinancial statements and notes have been prepared in conformity with accountingprinciples generally accepted in the United States of America.

 

The Management of SEDONAalso is responsible for establishing and maintaining adequate internal controlover financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act. A company’s internal control over financial reporting isdefined as a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Our internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of SEDONA; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles and thatreceipts and expenditures of the issuer are being made only in accordance withauthorizations of management and directors of SEDONA; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of SEDONA’s assets that could have a materialeffect on the financial statements.

 

Management, including theChief Executive Officer and Chief Financial Officer, does not expect thatSEDONA’s disclosure controls and internal controls will prevent all error andall fraud. Because of its inherent limitations, a system of internal controlover financial reporting can provide only reasonable, not absolute, assurancethat the objectives of the control system are met and may not prevent or detectmisstatements.  Further, over time, controls may become inadequatebecause of changes in conditions or the degree of compliance with the policiesor procedures may deteriorate.

 

With the participation ofthe Chief Executive Officer and Chief Financial Officer, our Managementevaluated the effectiveness of SEDONA’s internal control over financialreporting as of December 31, 2009. In making this evaluation, Management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control — Integrated Framework*.Based on that evaluation, our management has concluded that, as of December 31,2009, SEDONA’s internal control over financial reporting was effective.

 

This annual report doesnot include an attestation report of SEDONA’s registered public accounting firmregarding internal control over financial reporting.  Management’sreport was not subject to attestation by SEDONA’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit us to provide only management’s report in this Annual Report on Form 10-K.

 

***Changes inInternal Control Over Financial Reporting***

 

There were no changes inour internal control over financial reporting that occurred during the quarterended December 31, 2009, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**ITEM9B.  OTHER INFORMATION**

 

None.

 

34

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**PART III**

 

****ITEM 10.********                     ********DIRECTORS, EXECUTIVE OFFICERS AND CORPOR********ATE GOVERNANCE****

 

TheBy-laws provide that the Company have a Board of Directors of not less thanthree or more than nine directors, with the number of directors to be fixed bythe Board from time to time.  The numberof directors is presently fixed at seven. The Board of Directors currently consists of five directors due to thevacancies created upon the resignation of Victoria V. Looney in February 2008and March A. Emrich in September 2008.

 

TheCompany is currently evaluating whether it is going to fill the vacanciescreated on the Board of Directors following the resignations.

 

Thefollowing table presents the names and positions of the persons who serve asSEDONA’s directors, executive officers and key employees, their ages as of March 31,2010, and the length of time they have served in such positions:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                              | ** ** | **Since** | ** ** |
|-----------------------|------------|---------|------------|-----------------------------------------------------------|------------|-----------|------------|
| David  R. Vey         |       | 57      |       | Chairman  of the Board                                    |       | 2003      |       |
| David  C. Bluestone   |       | 54      |       | Director                                                  |       | 2005      |       |
| Jack  A. Pellicci     |       | 71      |       | Director                                                  |       | 1996      |       |
| Roger  W. Scearce     |       | 60      |       | Director                                                  |       | 2004      |       |
| Anita  M. Primo       |       | 42      |       | Executive  Officer, Chief Financial Officer and Secretary |       | 2003      |       |
| Timothy  A. Rimlinger |       | 46      |       | Executive  Officer, Chief Technology Officer              |       | 2003      |       |
| Kimberly  M. Thomas   |       | 52      |       | Executive  Officer, Sr. Development Engineer              |       | 2010      |       |

 

Alldirectors hold office until the next Annual Meeting of the Shareholders of theCompany and until their successors are elected and qualified.

 

Allofficers serve at the discretion of the Board of Directors, subject to theterms of their employment agreements.

 

**Directors, Executive Officers and ControlPersons**

 

Thebusiness experience, principal occupation and employment of the Company’sDirectors, executive officers and Key Employees are as follows:

 

*David R. Vey*has servedas Chairman of the Board since May 2003 and has been a Director of theCompany since March 2003.  Mr. Veyalso serves as the Company’s Chief Executive Officer effective May 2009.  Mr. Vey founded Vey Development, Inc.,a privately held residential and commercial real estate development company, withprimary real estate holdings in Louisiana and has served as President since1983. Mr. Vey is a managing member in Oak Harbor Investments. Mr. Veyholds a Bachelor of Arts, Landscape Architecture and a Bachelor of Science,Forest Management from Louisiana State University.

 

35

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*David C. Bluestone*was elected to the Board of Directors in August 2005.  Mr. Bluestone had been with Keybank, N.A. since October 1996, where he was a Senior Real Estate Credit Officer with responsibility for structuring and approval of credit exposure for commercial real estate relationships, maintaining asset quality and portfolio management, and has held the position of Team Leader, Chicago Real Estate Loan Production Officer.  Prior to Keybank, Mr. Bluestone served as Senior Relationship Manager with Mellon Bank N.A.’s Real Estate Department and Section Manager, Credit Review Department from September 1986 to October 1996 with emphasis on new and restructuring of existing multi-million dollar real estate transactions, new business development, as well as underwriting, credit, financial, market and valuation analysis.  From September 1982 to August 1986, he was a Real Estate Representative and Project Manager for The Southland Corporation.  Mr. Bluestone holds a Masters of Business Administration from the University of California, Berkley and a Bachelors of Landscape Architecture from Louisiana State University.

 

*Jack A.Pellicci*has served as a Director since 1996. JackPellicci joined Intergraph Corporation in September 2006 as the SeniorVice President Security, Government and Infrastructure and General Manager,Federal Solutions and Intelligence Business Units. Prior to this he spent over14 years at Oracle Corporation where his most recent position was as GroupVice President, North America Public Sector. In this position he led theBusiness Development and Program Management Group where he was responsible forpositioning Oracle’s products and solutions with customers and partners togenerate and then capture new business in the Federal/State andLocal/Provincial Government markets in the US and Canada. Mr. Pelliccijoined Oracle in 1992 after retiring from the U.S. Army as a Brigadier Generalwith 30 years experience leading and training people, managing technologyand improving productivity in command and staff assignments in both peace andwar. He is a graduate of the U.S. Military Academy at West Point with aBachelor of Engineering degree, and received a Master of Mechanical Engineeringdegree from Georgia Institute of Technology.

 

*RogerW. Scearce*has servedas a Director of the Company since August 2004.  Mr. Scearce is a senior partner withVanguard Advisors, LLC.  Vanguard’smission is to provide world-class advisory and consulting services to businessand government leaders.  He is a foundingmember and has been with Vanguard Advisors, LLC since May 2003.  Prior to forming Vanguard Advisors, Mr. Scearcewas a Senior Vice President with American Management Systems (AMS), from April 1999to April 2003, where he led their Department of Defense (DoD) StrategicAccount Group.  While at AMS, Mr. Scearcealso served as the Deputy Program Manager, DoD Financial Management EnterpriseArchitecture as a key executive member of “Team IBM” in support of the DoD’sBusiness Management Modernization Program. Before joining AMS, Mr. Scearce was a career military officer,rising to the rank of Brigadier General, U.S. Army.  His last active duty assignment was DeputyDirector of the Defense Finance and Accounting Service.  Mr. Scearce managed the day-to-dayfinance and accounting operations and activities of the Defense Departmentworldwide.  Earlier leadership roles andassignments included serving as Commandant of the U.S. Army Finance School andChief of the U.S. Army Finance Corps; and Commander 266th Theater FinanceCommand, U.S. Army, Europe.

 

*Anita M. Primo* has servedas Vice President and Chief Financial Officer since December 2003. Ms. Primois charged with leading the Company’s finance and administrative departments.She was appointed Secretary of the Company in July 2003.  Ms. Primo previously served as theCompany’s Controller since December 2000. Prior to joining SEDONA, Ms. Primo was Vice President of Financeand Administration for the Zoological Society of Philadelphia from 1998 to2000.  She also served as Controller andTreasurer for Action Manufacturing, a major manufacturer of precision ordnanceproducts for the U.S. government, U.S. approved foreign governments andnumerous domestic and international commercial firms from 1989 to 1998.  Ms. Primo received a B.S. Degree inAccounting and a B.S. Degree in Business Law from Temple University inPhiladelphia, PA.

 

36

 

*Timothy A. Rimlinger* has servedas Vice President of Engineering since July 2000 and Chief TechnologyOfficer since December 2003.  Mr. Rimlingeris responsible for the design, implementation and delivery of all components ofthe Company’s CRM application strategy. Previously, he served as Director of Technology Development sincejoining the Company in January 1996. Before joining SEDONA, he was Senior Development Engineer at GEAerospace and Lockheed Martin from 1985 to 1996.  Mr. Rimlinger received his B.S. Degreein Electrical Engineering from Pennsylvania State University and his M.S. inElectrical Engineering from Villanova University.  Mr. Rimlinger is the spouse of KimberlyThomas.

 

*Kimberly M. Thomas*was promoted to an Executive Officer ofSEDONA effective February 2010.  Shehas been with the Company since 1996 serving as a Senior Software Engineer.Prior to joining SEDONA, Ms. Thomas served as a Senior Software Engineerfor Lockheed-Martin from 1989-1996 and as a Software Developer for GeneralElectric from 1980-1989.  Ms. Thomasreceived her B.S. Degree in Management Science/Operations Research andMarketing from Shippensburg University and her MBA in Finance from TempleUniversity.  Ms. Thomas is thespouse of Timothy Rimlinger.

 

**Section 16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires the Company’s Directors andOfficers, and persons who beneficially own more than 10% of its common stock,to file reports on their ownership and changes in ownership with the Securitiesand Exchange Commission and to furnish the Company with copies of any reportsthat they file.  Based solely on reviewof the copies of these reports received or written representations that noreports on Form 5 were required, the Company believes that, for the yearended December 31, 2009 all reporting persons, except David R. Vey,complied on a timely basis with the filing requirements applicable to them.

 

**Code of Ethics**

 

OnJune 1, 2004, the Board of Directors adopted a Code of Conduct andBusiness Ethics****pursuant to Section 406of the Sarbanes-Oxley Act that applies to the Company’s principal executiveofficer, principal financial officer, principal accounting officer orcontroller, and any other persons performing similar functions.  The Code is posted on the Company’s internetwebsite at www.sedonacorp.com.  Copiesmay be obtained by following the instructions in Item 1. Available Information.

 

**Corporate Governance**

 

**Director Independence**

 

TheBoard of Directors annually determines the independence of directors.  No director is considered independent unlessthe Board has determined that he or she has no material relationship with theCompany, either directly or as a partner, shareholder, or officer of anorganization that has a material relationship with the Company orotherwise.  Material relationships caninclude commercial, banking, consulting, legal, accounting, charitable, andfamilial relationships, among others.

 

Independent directors are directorswho, in the view of the Board of Directors, are free of any relationship thatwould interfere with the exercise of independent judgment.   TheBoard of Directors has adopted the standards for “independent directors”defined under Rule 5605(a)(2) of NASDAQ.

 

***Audit Committee***

* *

TheBoard of Directors has an Audit Committee consisting of:  Roger W. Scearce (Chair), David C. Bluestoneand Jack A. Pellicci.  The Board ofDirectors has determined that Roger W. Scearce qualifies as

 

37

 

an“audit committee financial expert” under SEC rules.   The function of the Audit Committee isguided by its charter to assist the Board of Directors in preserving theintegrity of the financial information published by the Company through thereview of financial and accounting controls and policies, financial reportingsystems, alternative accounting principles that could be applied and thequality and effectiveness of the independent public accountants.  In addition, the function of the AuditCommittee includes recommending to the Board of Directors, the engagement ordischarge of the independent auditors, discussing with the auditors theirreview of the Company’s quarterly results and their annual audit of thefinancial statements. The Board has made a determination that Messrs. Scearce,Bluestone and Pellicci qualify as independent directors under the independencerequirements of NASDAQ.

 

***Nominations & Corporate Governance Committee***

* *

TheBoard of Directors has a Nominating & Corporate Governance Committee,consisting of Jack A. Pellicci (Chair) and David C. Bluestone.  The Board has made a determination that Mr. Pellicciand Mr. Bluestone qualify as independent directors under the independencerequirements of NASDAQ.  The function ofthe Nominations & Corporate Governance Committee is: (i) toestablish criteria for selecting candidates for nomination to the Board ofDirectors; seeking candidates to meet those criteria; and makingrecommendations to the Board of Directors of nominees to fill vacancies on, oras additions to, the Board of Directors; (ii) serve as an independent and objective component of the Boardto facilitate Board stewardship of its responsibilities to shareholders and allother constituencies consistent with best corporate governance practices; and (iii) monitor,review and appraise the corporate governance systems of checks and balances,including the Company’s code of ethics and standards of conduct.

 

TheNominations & Corporate Governance Committee will consider directorcandidates who have relevant business experience, are accomplished in theirrespective fields and who possess the skills and expertise to make asignificant contribution to the Board of Directors, the Company and itsShareholders.  Director nominees shouldhave high-leadership business experience, knowledge about issues affecting theCompany and the ability and willingness to apply sound and independent businessjudgment.  The Nominations &Corporate Governance Committee applies the same criteria to nomineesrecommended by the shareholders.

 

***Compensation Committee***

* *

TheBoard of Directors also has a Compensation Committee, consisting of Jack A.Pellicci and David Bluestone (Chair). The Board has made a determination that Mr. Pellicci and Mr. Bluestonequalify as independent directors under the independence requirements of theNASDAQ.  The Compensation Committee isresponsible for developing and executing plans for the compensation of theCompany’s executive officers, including the Chief Executive Officer of theCompany.  Additionally, the CompensationCommittee administers the 1992 Plan and the SEDONA Corporation 2000 IncentiveStock Option Plan (the “2000 Plan”), including the determination, subject tothe 2000 Plan’s provisions, of the individuals eligible to receive awards, theindividuals to whom awards should be granted, the nature of the awards to begranted, the number of awards to be granted, the exercise price, vestingschedule, term and all other conditions and terms of the awards to be granted.

 

***Executive Committee***

* *

Thefunction of the committee is to exercise the powers of the Board betweenmeetings to the extent permitted by law. The committee members consist of David R. Vey (Chair) and Roger W.Scearce.  Mr. Scearce qualifies asan independent director under the independence requirements of applicable lawand

 

38

 

ofthe NASDAQ but Mr. Vey does not qualify as an independent director underthe independence requirements (See “Certain Relationship and RelatedTransaction”).  In addition, Mr. Veycurrently serves as the Company’s Principal Executive Officer and Chairman ofthe Board.

 

****ITEM 11.********                     ********EXECUTIVECOMPENSATION****

 

**Employment and Separation Agreements**

 

*Appointment of Interim President and CEO*

 

Effective September 18, 2008, theCompany appointed Scott C. Edelman as the interim Chief Executive Officer andPresident of the Company.  Mr. Edelmanserved as the interim Chief Executive Officer of the Company until theappointment of David R. Vey as Chief Executive Officer in May 2009.  Mr. Edelman replaced Marco A. Emrich whoresigned from his position as Chief Executive Officer, President, and Directorof the Company effective September 17, 2008.

 

Mr. Edelman and the Company entered intoa three month consulting agreement effective September 18, 2008 andexpiring December 18, 2008.  Underthe agreement, Mr. Edelman’s duties included but were not limited to: (1) directingthe day to day management of the Company; (2) formulating and executingthe Company’s business strategy; (3) providing senior level counsel as tothe business and operations of the Company; (4) representing the Companyin relationships and business dealings within the financial services industryand other markets pursued by the Company; and (5) supporting theactivities of the Board of Directors.

 

Mr. Edelman received compensation of$60,000 under the three month consulting agreement.  Upon extension of the agreement, Mr. Edelmanreceived compensation equal to $20,000 per month.  In addition, the Company providedreimbursement to Mr. Edelman for COBRA health insurance premiums, not toexceed $1,200 per month, during the term of the consulting engagement.

 

SeparationAgreement

 

EffectiveJanuary 31, 2009, the Company entered into a separation agreement withMarco Emrich, the Company’s former President, Chief Executive Officer andDirector of the Company.  Marco Emrichresigned his positions at the Company effective September 17, 2008.  Under the terms of the separation agreement, Mr. Emrichreceived a total of $63,176 for services to the Company through and including September 17,2008.  The Company also paid Mr. Emrichseverance based on three month’s salary, totaling $56,250.  The wages and severance amounts were paid to Mr. Emrichon a biweekly basis over a one year period.

 

Inaddition, in lieu of cash compensation for accrued vacation, the Companygranted Mr. Emrich 450,000 shares of unrestricted common stock under theCompany’s 2000 Plan.  These shares wereissued in March 2009.  The Companyalso paid for the cost of six months of medical, dental and vision coverage forMr. Emrich and his spouse.

 

Mr. Emrichagreed to act as a consultant to the Company, on a limited basis, should theCompany require his services, through December 31, 2009.

 

Underthe terms of his Separation Agreement, Mr. Emrich is subject to certaincovenants, including a non-disclosure covenant with respect to the Company’sconfidential information, non-competition and non-solicitation covenants, anon-disparagement covenant, and certain other covenants.

**** ****

****39****

********

****

**** ****

**2009 DIRECTOR COMPENSATION**

**** ****
| **Name**           | ** ** | **Fees  Earned or  Paid in Cash** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  Earned** | ** ** | **Non-  Equity  Incentive  Plan  Comp.** | ** ** | **Nonqualified  Deferred  Comp.  Earnings** | ** ** | **All  Other  Comp.** | ** ** | **Total  Cash  Comp.** | ** ** |
|--------------------|------------|-----------------------------------|------------|-------------------|------------|----------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| David C. Bluestone |       | $                                 | 1,500      |              | $          | —                     |       | $                                        | —     |                                        | $          | —                |       | $                      | —     |   | $ | — |   | $ | 1,500 |   |
| Scott C. Edelman   |       | $                                 | 400        |              | $          | —                     |       | $                                        | —     |                                        | $          | —                |       | $                      | —     |   | $ | — |   | $ | 400 |   |
| Jack Pellicci      |       | $                                 | 2,000      |              | $          | —                     |       | $                                        | —     |                                        | $          | —                |       | $                      | —     |   | $ | — |   | $ | 2,000 |   |
| Roger W. Scearce   |       | $                                 | 1,500      |              | $          | —                     |       | $                                        | —     |                                        | $          | —                |       | $                      | —     |   | $ | — |   | $ | 1,500 |   |
| David R. Vey       |       | $                                 | 500        |              | $          | —                     |       | $                                        | —     |                                        | $          | —                |       | $                      | —     |   | $ | — |   | $ | 500 |   |

 

The Directors ofthe Company elected to defer the issuance of a total of 300,000 non-qualifiedstock options each, which were earned in 2007, 2008 and 2009.  When the incentive stock options are issued,the value of the award is calculated based upon the fair value of each commonstock option issued on the date of grant, in accordance with Statement ofFinancial Accounting Standards (SFAS) 123R. The fair value estimate is calculated using the Black-Scholes model.  

 

The followingtable sets forth certain compensation information awarded to, earned by, orpaid for services rendered to the Company in all capacities, for the fullfiscal year two years ended December 31, 2009 and 2008 for the Company’sPresident and Chief Executive Officer and the top three most highly compensatedCompany Vice Presidents, whose aggregate salary for such years exceeded$100,000, (no bonus was paid to the named executive officers in such years):

 

**Summary Compensation Table**

 
| **Name and Principal Position**         | ** ** | **Fiscal  Year** | ** ** | **Salary** | ** ** | **All  Other  Compensation** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------------|------------|------------|------------|------------------------------|------------|-----------|------------|
| Scott C. Edelman*                       |       | 2009             |       | $          | 240,000    |                         | $          | 7,200     |       | $ | 247,200 |   |
| Former Interim Pres. & CEO     |       | 2008+            |       | $          | 240,000    |                         | $          | 7,200     |       | $ | 247,200 |   |
|                                    |       |             |       |       |       |                         |       |      |       |
| Marco A. Emrich*                        |       | 2009             |       | —     |       | —                       |       | $         | —     |   |
| Former President and CEO                |       | 2008+            |       | $          | 225,000    |                         | $          | 6,750     |       | $ | 231,750 |   |
|                                    |       |             |       |       |       |                         |       |      |       |
| Dean V. Bobrowski *                     |       | 2009             |       | —     |       | —                       |       | $         | —     |   |
| Vice President of Sales                 |       | 2008+            |       | $          | 170,000    |                         | $          | 5,100     |       | $ | 175,100 |   |
|                                    |       |             |       |       |       |                         |       |      |       |
| Anita M. Primo                          |       | 2009             |       | $          | 125,000    |                         | $          | 3,750     |       | $ | 128,750 |   |
| V.P. & Chief Financial Officer |       | 2008             |       | $          | 114,000    |                         | $          | 3,420     |       | $ | 117,420 |   |
|                                    |       |             |       |       |       |                         |       |      |       |
| Timothy A. Rimlinger                    |       | 2009             |       | $          | 130,000    |                         | $          | 3,900     |       | $ | 133,900 |   |
| V.P. & Chief Technical Officer |       | 2008             |       | $          | 130,000    |                         | $          | 3,900     |       | $ | 133,900 |   |

 

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* S. Edelman terminated 05-09

* M. Emrich terminated 09-08

* D. Bobrowski terminated 06-08

 

+If an executive served in a capacity during anypart of a fiscal year with respect to the information required, information isprovided as to all compensation for the full fiscal year.

 

40

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*Base Salary*

 

Basesalaries for all executive officers, including the Company’s Chief ExecutiveOfficer, are reviewed by the Compensation Committee on an annual basis. Indetermining appropriate base salaries, the Compensation Committee considersexternal competitiveness, the roles and responsibilities of the individual, theinternal equity of compensation relationships and the contributions of theindividual to the Company’s success.

 

*Annual CashIncentive Opportunities*

 

TheCompensation Committee believes that executive officers should be rewarded fortheir contributions to the success and profitability of SEDONA and as such,approves the annual cash incentive awards. Incentive awards are linked to theachievement of revenue and net income goals by SEDONA and/or specific businessunits and the achievement by the executive officers of certain assignedobjectives. The individual objectives set for the Company’s executive officersare generally objective in nature and include such goals as revenue, profit andbudget objectives, and increased business unit productivity. The CompensationCommittee believes that these arrangements tie the Executive’s performanceclosely to key measures of the success of SEDONA or the executive officer’sbusiness unit. All executive officers, including the Chief Executive Officer,are eligible to participate in this program.

 

*Long-TermStock-Based Incentives*

 

TheCompensation Committee also believes that it is essential to align theinterests of executive officers and the shareholders of the Company.  The Compensation Committee grants options asa component of executive compensation. As such, from time to time, the Compensation Committee grants stockoptions to executive officers and other employees under the 2000 Plan.  In determining actual awards, theCompensation Committee considers the externally competitive market, thecontributions of the individual to the Company’s success and the need to retainthe individual over time.  All executiveofficers, including the Chief Executive Officer, are eligible to participate inthis program.  The exercise price of anylong-term stock-based incentives granted is equal to the fair market value onthe date of grant.

 

TheCompany did not issue any long-term stock based incentives during 2009.

 

41

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2009

 
| ** **        | ** ** | ** **                                                                 | ** ** | ** **                                                                   | ** ** | ** **                                                                                                 | ** ** | ** **                  | ** ** | ** **                   | ** ** | **Stock Awards**                                                     | ** ** |
|-------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|----------------------------------------------------------------------|------------|
| **Name**          | ** ** | **Number of  Securities  Underlying  Unexercised  Options #  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options #  Unexercisable** | ** ** | **Equity  Incentive Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested ($)** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Unearned  Shares, Units  or Other  Rights That  Not Vested  (#)** | ** ** | **Equity  Incentive  Plan Awards:  Market or  payout Value  of Unearned  Shares, Units  or Other  Rights That  Have Not  Vested ($)** | ** ** |
| Scott Edelman     |       | 15,000                                                                     |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.32       |                         | 12/30/15   |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 30,000                                                                     |       | 20,000                                                                       |       | —                                                                                                     |       | $                           | 0.27       |                         | 12/30/15   |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 100,000                                                                    |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.21       |                         | 8/11/15    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 100,000                                                                    |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.21       |                         | 8/17/16    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       |                                                                       |       |                                                                         |       |                                                                                                       |       |                        |       |                         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |
| Anita Primo       |       | 25,000                                                                     |       | —                                                                       |       | —                                                                                                     |       | $                           | 1.72       |                         | 11/6/10    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 7,500                                                                      |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.78       |                         | 3/29/11    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 25,000                                                                     |       | —                                                                       |       | —                                                                                                     |       | $                           | 1.03       |                         | 11/6/10    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 7,500                                                                      |       | —                                                                       |       | —                                                                                                     |       | $                           | 1.03       |                         | 3/29/11    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 50,000                                                                     |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.19       |                         | 12/1/13    |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       | 86,227                                                                     |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.15       |                         | 12/30/15   |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |
|              |       |                                                                       |       |                                                                         |       |                                                                                                       |       |                        |       |                         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |
| Timothy Rimlinger |       | 101,905                                                                    |       | —                                                                       |       | —                                                                                                     |       | $                           | 0.15       |                         | 12/30/15   |                                                                 | —     |   | $ | 0.00 |   | — |   | $ | 0.00 |   |

 

**Compensation of Directors**

 

*Cash Compensation*

 

Anyboard member participating on a board committee will be reimbursed $500 peryear for their participation, with the exception of the members of the AuditCommittee who will be reimbursed $1,000 per year for their participation inthat committee.  The reimbursement will bemade at the end of the twelve-month period following participation in thevarious board committees administered from the annual shareholders’ meetingdate each year.

 

Asof December 31, 2009, there was a total of $146,351 in accruedcompensation due to current and past members of the Board of Directors forprior service.  As of December 31,2008, there was a total of $140,434 accrued compensation due to current andpast members of the Board of Directors for prior service.  Since 2007, the Directors of the Companyelected to defer the issuance of 300,000 non-qualified stock options each,which were earned in 2009, 2008 and 2007.

 

*Equity Compensation*

 

Asof the date of each annual shareholder meeting, each existing board member, whois not an employee of the Company, will be granted the option to purchase100,000 incentive stock options under the Company’s 2000 Incentive Stock OptionPlan at the fair market value on the date of grant, as determined in accordancewith the Plan.  The options will vest andbecome fully exercisable upon grant.

 

Inaddition, any new Director elected to the Company’s Board of Directors, who isnot an employee of the Company, will be granted an option to purchase 50,000shares of common stock, at the then current fair market value.  The shares underlying these options will vestat the rate of 10,000 shares per year for five years, on the anniversary dateof the new Director’s election to the Company’s Board of Directors.

 

42

----

 

Ifunexercised, each option shall expire on the tenth (10th) anniversary of the date of grant.  Once vested, options shall remain fullyexercisable until the earlier of: (i) the expiration of their term; (ii) threeyears following the optionee’s separation from Board of Directors service forany reason, other than death; or (iii) one year following the death of theoptionee.

 
| ****ITEM 12.**** | ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**** |
|------------------|---------------------------------------------------------------------------------------------------------|

 

*Equity Compensation Plans as of December 31,2009:*

 

**Equity Compensation Plan Information**

 
| **Plan Category**                                               | ** ** | **Number of Securities  to be  Issued Upon Exercise  of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-  Average  Exercise Price of  Outstanding  Options,  Warrants and  Rights** | ** ** | **Number of   Securities  Remaining  Available  for Future Issuance  under Equity  Compensation Plans** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders (1)     |       | 25,084,288                                                                                           |       | $                                                                                      | 0.23       |                                                                                                    | 22,726,215 |   |
| Equity compensation plans not approved by security  holders (2) |       | —                                                                                               |       | —                                                                                 |       | —                                                                                                  |       |
| Total                                                           |       | 25,084,288                                                                                           |       | $                                                                                      | 0.23       |                                                                                                    | 22,726,215 |   |

 

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(1)          These plans consist of the1992 Plan and 2000 Plan which replaced the 1992 plan. The current plan includesa formula that automatically increases the number of securities available forissuance equal to 20% of the number of shares issued and outstanding.

(2)          The Company doesnot maintain any equity compensation plans that have not been approved by thestockholders.

 

Thefollowing table sets forth information regarding the beneficial ownership ofthe common stock as of March 26, 2010 with respect to:

 

Each person or group known to the Company who beneficially owns five(5%) percent or more of the outstanding shares of the Company’s common stock;

 

Each Director and named executive officer; and

 

The Company’s executive officers and members of its Board of Directorsas a group.

 

Exceptas indicated in the footnotes to the table, the persons named in the table havesole voting and investment power with respect to all shares beneficially owned.The business address of each person named in the table below is c/o SEDONACorporation, 1003 West Ninth Avenue, Second Floor, King of Prussia,Pennsylvania 19406.

 

43

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Beneficialownership is determined in accordance with SEC rules and generallyincludes voting or investment power with respect to securities. Shares ofcommon stock subject to options that are currently exercisable or exercisablewithin 60 days of the date of this annual report, are deemed outstanding forthe purpose of computing the percentage ownership of any person. These shares,however, are not considered outstanding when computing the percentage ownershipof any other person.

 
| **Name  of Beneficial Owner**                                 | ** ** | **Amount and Nature of Beneficial  Ownership** | ** ** | **Percent of Class** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------|------------|
| David C. Bluestone                                            |       | 240,000                                        |       | (1)                  |       | * |   |
| Jack Pellicci                                                 |       | 417,824                                        |       | (1)                  |       | * |   |
| Anita M. Primo                                                |       | 272,966                                        |       | (1)                  |       | * |   |
| Timothy A. Rimlinger                                          |       | 227,836                                        |       | (1)                  |       | * |   |
| Roger W. Scearce                                              |       | 270,700                                        |       | (1)                  |       | * |   |
| David R. Vey                                                  |       | 185,231,860                                    |       | (1,2)                |       | 72.70 | % |
| All executive officers and Directors as a group,  (6 persons) |       | 186,661,186                                    |       |                 |       | 72.36 | % |

 

----

*                                         Owner holdsless than 1% of the class.

 

(1)                                  Unless otherwise indicated,each person possesses sole voting and investment power with respect to theshares identified in the table as beneficially owned. The table includes shareswhich the following directors and executive officers have a right to acquirewithin 60 days from March 26, 2010, upon the exercise of outstandingoptions and warrants:

 

Mr. Bluestone — 250,000 options, none of which are in the money asof 12-31-09

Mr. Pellicci — 396,500 options, none of which are in the money asof 12-31-09

Ms. Primo — 201,227 options, none of which are in the money as of12-31-09

Mr. Rimlinger — 101,905 options, none of which are in the money asof 12-31-09

Mr. Scearce — 245,000 options, none of which are in the money asof 12-31-09

Mr. Vey — 310,000 options, none of which are in the money as of12-31-09; 12,627,390 warrants

 

(2)                               Mr. Vey has a right toacquire 82,000,000 shares within 60 days upon a notice of conversion related toa $4,100,000 convertible note due January 4, 2010 and an additional32,500,000 shares upon notice of conversion related to a $1,625,000 convertiblenote due January 4, 2010.  TheCompany and Mr. Vey have agreed that Mr. Vey shall not be permittedto convert any portion of this convertible note until such time as the Companyhas adequate authorized shares.

 

44

 

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

 

The Company has entered into the following financing agreements to provide working capital with Mr. David R. Vey, Chairman of the Board of Directors and currently its Chief Executive Officer.  Mr. Vey is a shareholder who directly or indirectly owns approximately 38% of the Company’s outstanding common stock at March 26, 2010.

 

***David Vey andOak Harbor***

 

***Oak Harbor Note***

 

As part of a refinancing of certainobligations to Oak Harbor Investment Properties LLC (“Oak Harbor”), the Companyissued a promissory note to Oak Harbor dated as of August 17, 2006 in theprincipal amount of $1,040,402 (the “Oak Harbor Note”).  Oak Harbor is a limited liability company inwhich David Vey and Richard T. Hartley are managing members. The Oak HarborNote has a maturity date of May 31, 2010, at which time all outstanding principaland interest was due.  The Oak HarborNote bears interest at a rate of eight percent (8%) per year.

 

***Convertible Notewith David Vey***

 

On December 31, 2008, the Independent Committee of the Company’s Board of Directors recommended to the Board of Directors that the Company consolidate, amend, and extend the term of three existing promissory notes previously issued to David Vey into a single secured convertible promissory note in the principal amount of $4,100,000. On December 31, 2008, the Board of Directors approved such consolidation, amendment and extension and the parties executed a Loan and Refinancing Agreement setting forth the terms of the Refinancing Transaction (the “Refinancing Agreement”).

 

***The Old Notes***

 

Pursuant to the terms of the Refinancing Agreement, the following old notes, issued by the Company to Mr. Vey, having a total principal amount of $4,595,216, immediately prior to the Refinancing Transaction, were consolidated, amended and extended:

 

1. A convertible promissory note, dated as of October 23, 2006, in the principal amount $2,691,263 (the “Old Convertible Note”), which had a maturity date, as previously extended, of January 1, 2009, unless theretofore converted, and bore interest at the rate of eight percent (8%) per year, which interest was due upon maturity.  Pursuant to the Old Convertible Note, Mr. Vey had the option to convert all or part of the unpaid principal and accrued but unpaid interest thereunder into shares at a conversion price of $0.14 per share.  The number of shares which would have been issuable upon the conversion of the $2,691,263 principal balance of the Old Convertible Note was 19,223,309.

 

2. A promissory note, dated as of October 23, 2006, in the principal amount of $1,213,953 (the “Bridge Note”), which had a maturity date, as previously extended, of January 1, 2009 and bore interest at a rate of eight percent (8%) per year.

 

3. A secured revolving promissory note dated as of September 27, 2006, in the principal amount of $690,000 (the “Revolving Note”).  The Revolving Note was payable by application of the proceeds of the receivables of the Company, together with accrued interest at the rate of eight percent (8%) per year.  The Revolving Note, as previously extended, had a maturity date of January 1, 2009.

 

The Old Convertible Note, the Bridge Note and the Revolving Note are collectively referred to below as the “Old Notes.”

 

45

 

***Partial Conversion ofInterest and Principal***

 

In connection with the Refinancing Transaction, Mr. Vey converted principal and accrued interest under the Existing Notes in the amount of $1,262,739 into shares of the Company’s common stock at the rate of $0.05 per share, for a total of 25,254,781 shares (the “Conversion”). After the Conversion, as described below, the Company issued to Mr. Vey a new convertible note in the amount of $4,100,000, which represented the total balance of the principal currently due and owing to Mr. Vey by the Company under the Old Notes.  Due to the fact that the original conversion price on the existing convertible note was $0.14 per share and interest and principal were converted at $0.05 per share, the Company recorded an inducement loss of $1,298,817 on December 31, 2008.

 

*Warrants*

 

Inconsideration for Mr. Vey’s agreement to refinance the Existing Notes andto effect the Conversion, the Company granted Mr. Vey one warrant topurchase 12,627,390 shares of Company common stock at a price of $0.07 pershare.  The warrant expires in December 2012.  This modification was accounted for as a debtextinguishment and the fair value of the stock purchase warrant was included indetermining the debt extinguishment loss to be recognized.  The fair value of warrant in the amount of$909,172 was determined using the Black-Scholes option pricing model and wasrecorded as a loss on extinguishment of debt.

 

The warrants have anti-dilution and other additional terms consistent with other warrants previously issued by the Company to Mr. Vey.

 

*The New Convertible Note*

 

In exchange for the Old Notes, the Company issued to Mr. Vey a consolidated secured convertible promissory note, dated as of December 31, 2008, in the principal amount $4,100,000 (the “New Convertible Note”).  The New Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Mr. Vey has the option to convert, at any time, all or part of the unpaid principal and accrued but unpaid interest of the New Convertible Note into shares of Company common stock at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $4,100,000 principal balance of the New Convertible Note is presently 82,000,000. The New Convertible Note is secured by substantially all of the assets of the Company pursuant to the terms of a Security Agreement between Mr. Vey and the Company, dated as of October 23, 2006.

 

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $2,460,000.  The Company is accreting this debt discount to interest expense over the one year term of the New Convertible Note, beginning with the funding of the first installment on January 5, 2009. For the year ended December 31, 2009, the Company recorded accretion of the debt discount of approximately $2,440.  For the year ended December 31, 2008, there was no accretion of the debt discount.

 

The New Convertible Note contains certain mandatory prepayment provisions.  In the event that the Company receives total net proceeds from (i) sales of the Company’s securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceeding $1,000,000; or in the event that the Company maintains current cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Mr. Vey as a mandatory prepayment.

 

46

 

The New Convertible Note contains customary anti-dilution provisions and the Company has agreed that it will use its best efforts to register for resale with the Securities and Exchange Commission all shares to be issued under the New Convertible Note.

 

*Financing with Vey Associates*

 

On December 31, 2008, the Independent Committee recommended to the Board of Directors that the Company enter into a new agreement to borrow up to $2,250,000 from Vey Associates (the “New Loan”). Vey Associates has agreed to fund the New Loan in five (5) installments as follows:

 
| (i)   | the  first installment on or before December 31, 2008, in the amount of  $100,000;   |
|-------|-------------------------------------------------------------------------------------------|
| (ii)  | the  second installment on or before January 15, 2009, in the amount of  $350,000;   |
| (iii) | the  third installment on or before February 15, 2009, in the amount of  $550,000;   |
| (iv)  | the  fourth installment on or before April 15, 2009, in the amount of  $750,000; and |
| (v)   | the fifth installment on or before September 30, 2009, in the amount of $500,000.    |

 

On March 11, 2009, the funding schedule was amended as follows:

 
| (i)   | the  first installment on or before December 31, 2008, in the amount of  $100,000; |
|-------|-----------------------------------------------------------------------------------------|
| (ii)  | the  second installment on or before January 15, 2009, in the amount of  $300,000; |
| (iii) | the  third installment on or before March 18, 2009, in the amount of  $600,000;    |
| (iv)  | the  fourth installment on or before May 1, 2009, in the amount of $750,000;  and  |
| (v)   | the fifth installment on or before September 30, 2009, in the amount of $500,000.  |

 

Payment of the fifth installment was subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal year 2009, which was not achieved.

 

The first installment of this financing agreement was not received until January 2009.  As of December 31, 2009, the outstanding balance on this loan was $1,625,000.  Subsequent to December 31, 2009 the Company received an additional $225,000 in proceeds bringing the outstanding balance on this loan to $1,850,000 as of April 15, 2010.

 

The New Loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Once $1,750,000 of the New Loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is presently 45,000,000.

 

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $.03 per share.  The Company is accreting this debt discount to interest expense over the one year term of the New Convertible Note, beginning on the date each respective tranche was funded to the Company.  For the year ended December 31, 2009, the Company recorded accretion of the debt discount of approximately $962,000.  For the year ended December 31, 2008, there was no accretion of the debt discount.

 

The Vey Associates Convertible Note contains certain mandatory prepayment provisions.  In the event that total net proceeds received by the Company from (i) sales of Company securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceed $1,000,000; or the Company maintains current 

 

47

 

cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Vey Associates as a mandatory prepayment.

 

The Vey Associates Convertible Note is secured by substantially all of the assets of the Company pursuant to a Security Agreement dated as of December 31, 2008 between the Company and Vey Associates (the “Vey Associates Security Agreement”).

 

The Vey Associates Convertible Note contains customary anti-dilution provisions and the Company has agreed that it will use its best efforts to register for resale the shares with the Securities and Exchange Commission all shares to be issued under the Vey Associates Convertible Note.

 

On December 31, 2008, the Board of Directors approved the terms of the New Loan and the parties executed the Refinancing Agreement.

 

***SecurityAgreement***

 

The New Oak Harbor Note is securedby substantially all of the assets of the Company pursuant to an Amended andRestated Security Agreement dated as of August 17, 2006 between theCompany and Oak Harbor (the “Amended Security Agreement”).  The Amended Security Agreement amends andrestates the Security Agreement between Oak Harbor and the Company effective asof January 13, 2003 which granted to Oak Harbor a lien and securityinterest in the assets of the Company (the “Oak Harbor Security Agreement”).  The changes to the Security Agreement wereeffected by the Amended and Restated Security Agreement which include: (i) themodification of the term “Obligations” to mean all of the obligations,indebtedness, and liabilities of the Company to Oak Harbor and Vey; (ii) theacknowledgement and consent of Oak Harbor to the grant of a subordinatesecurity interest in the assets of the Company set forth in the Amended SecurityAgreement (the “Collateral”) to Vey; and (iii) the modification ofAppendix A to the Security Agreement to reflect the current outstandingpermitted liens in the Collateral and references the subordinate securityinterest to the Collateral granted to Vey pursuant to the Security Agreementbetween the Company and Vey dated as of October 23, 2006 (the “VeySecurity Agreement”).

 

***Amended andRestated Intercreditor Agreement***

 

Mr. Vey, Vey Associates, the Company and Oak Harbor, a company in which Mr. Vey is a managing member and 35% owner, entered into an Amended and Restated Intercreditor Agreement, dated as of December 31, 2008 (the “Intercreditor Agreement”).  The Intercreditor Agreement provides (i) that Oak Harbor shall have a first priority interest in substantially all of the assets of the Company with regard to the obligations of Sedona to Oak Harbor under an existing promissory note and related security agreement, and (ii) that the security interests of Vey Associates under the Vey Associates Convertible Note shall be junior to those of Oak Harbor but senior to those of Mr. Vey.

 

***Cross DefaultProvisions of the Notes***

 

The New Consolidated Notes contain cross default provisions.  Consequently an event of default under any of the Notes would constitute an event of default under each of the Notes.  An event of default under the Notes will also have occurred if a default occurs under any other loan, extension of credit, security right, instrument, document, agreement or obligation from the Company to Vey or Oak Harbor.

 

48

 

***Approval forAdditional Shares***

 

The Articles of Incorporation of the Company provides for 175,000,000 of which 127,364,064 were issued and outstanding as of March 26, 2010.  At the present time, the Company does not have sufficient authorized shares to issue all of the shares to Mr. Vey and Vey Associates as required upon full conversion of notes and exercise of options and warrants.  The Company intends to seek approval of its shareholders for an amendment to its Articles of Incorporation to increase its authorized shares by at least an amount necessary to cover its share issuance obligations at its next annual shareholders’ meeting.  Mr. Vey and Vey Associates have agreed to refrain from converting any notes or exercising any options or warrants which they respectively hold until the Company has a sufficient number of authorized shares in exchange for an agreement by the Company to allow Vey Associates to pledge the Vey Associates Convertible Note or Mr. Vey to pledge the New Convertible Note in the future.

 

The table below details the totaloutstanding principal balance and accrued interest expense owed to David Veyand Oak Harbor as of December 31, 2009.

 
| ** **                                                              | ** ** | ** **                           | ** ** | ** **         | ** ** | **Principal** | ** ** | **Accrued  interest**          | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------|------------|---------------|------------|--------------------------------|------------|
| **Instrument**                                                          | ** ** | **Payee**                            | ** ** | **Maturity  Date** | ** ** | **due**       | ** ** | **at  December 31, 2009** | ** ** |
| Promissory Note dated as of  August 17, 2006                       |       | Oak Harbor Investment Properties LLC |       | May 31,  2010 |       | $             | 1,040,402  |                           | $          | 283,683 |   |
|                                                                    |       |                                 |       |               |       |          |       |                           |       |
| Secured Convertible Promissory  Note dated as of December 31, 2008 |       | David Vey                            |       | May 31, 2010  |       | $             | 4,100,000  |                           | $          | 328,000 |   |
|                                                                    |       |                                 |       |               |       |          |       |                           |       |
| Secured Convertible Promissory  Note dated as of December 31, 2008 |       | Vey & Associates            |       | May 31, 2010  |       | $             | 1,625,000  |                           | $          | 88,575 |   |

 

***David Vey andOSI Litigation***

 

On September 4, 2007, SEDONAentered into an agreement with Vey Associates, Inc. in which VeyAssociates agreed to provide funding to assist SEDONA in the payment of certainfees and expenses related to the lawsuit captioned Sedona Corp. v. OpenSolutions, Inc., Action No. 3:07-CV-00171-VLB (the “litigation”), inthe United States District Court for the District of Connecticut. David Vey,the Chairman, CEO and a shareholder of SEDONA, is an officer, director andmajority shareholder of Vey Associates, Inc.

 

Under the agreement, Vey Associatesagreed to advance up to $750,000 to SEDONA to pay fees and expenses inconnection with the litigation. Any proceeds received from the settlement,verdict or other conclusion of the litigation will to be first applied to repayVey Associates and SEDONA for expenses incurred. Thereafter, SEDONA wouldreceive twenty-five (25%) percent of any proceeds and Vey Associates willreceive seventy-five (75%) percent of the proceeds. In the event that SEDONA isunsuccessful in the litigation and does not receive any litigation proceeds, itwill have no obligation to repay any sums to Vey Associates.

 

In a ruling filed August 19,2009, the court denied SEDONA’s motion for summary judgment. In accordance withthe terms of the litigation support agreement, the Company had no obligation torepay any sums to Vey Associates and reclassified approximately $846,000 ofprincipal and accrued interest to additional paid in capital.

 

49

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****ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES****

**** ****
| ****Type of Service****     | **** **** | ****2009****   | **** ****  | ****2008****   | **** **** |
|-----------------------------|----------------|----------------|-----------------|----------------|----------------|
| ****Audit  Fees****         | **** **** | ****$****      | ****106,500**** | **** **** | ****$****      | ****105,000**** | **** **** |
| ****Audit-Related  Fees**** | **** **** | ****—**** | **** ****  | ****—**** | **** **** |
| ****Tax  Fees****           | **** **** | ****—**** | **** ****  | ****—**** | **** **** |
| ****All  Other Fees****     | **** **** | ****—**** | **** ****  | ****—**** | **** **** |
|                             |                |                |                 |                |                |  |  |

 

*Audit Fees. *This category includes: the audit of theCompany’s annual financial statements included in the Company’s reports on10-K; the timely review of the interim financial statements included in theCompany’s quarterly reports on Form 10-Q for the periods ended March 31,June 30 and September 30, 2009 and 2008; and services that arenormally provided by the independent auditors in connection with engagementsfor those fiscal periods.  This categorymay also include advice on audit and accounting matters that arose during, oras a result of, the audit or review of interim financial statements.  This category also includes services inconnection with statutory and regulatory filings or engagements.

 

*Audit-Related Fees. *Thiscategory consists of assurance and related services by the independent auditorsthat are reasonably related to the performance of the audit or review of theCompany’s financial statements and are not reported above under “Audit Fees”.  The services for the fees disclosed underthis category include financial information systems design and implementationservices rendered by the independent auditor.

 

*****Tax Fees. *********This category consistsof professional services rendered by the independent auditors for taxcompliance and tax advice.  The servicesfor the fees disclosed under this category include tax return preparation andtechnical tax advice.  The independentauditors do not assist the Company with the preparation of its corporate taxes;the Company retains another firm for tax compliance and advice.****

 

*****All Other Fees.*********  This category includes servicesrendered by the independent auditors other than for services reported above.****

 

Theonly fees paid to Asher & Company, Ltd. were audit fees.

 

****Pre-Approvalof Audit and Non-Audit Services****

 

****All audit and non-audit services provided by independent accountants tothe Company are pre-approved by the Audit Committee.  The Audit Committee utilizes the followingprocedures in pre-approving all audit and non-audit services.  At or before the first meeting of the AuditCommittee each year, the Audit Committee is presented with a proposal of thecost for audit and non-audit services expected to be performed by the principalaccountant during the year.  Quarterly,the Audit Committee is presented with the total fees assessed for such servicesduring the quarter with a comparison to the amounts previously presented.  An explanation of any variances is presented,if necessary.  The Audit Committee isalso presented with an update of any new audit or non-audit services to beperformed.  The Audit Committee reviewsthe update and approves the services outlined therein if such services areacceptable to the Audit Committee.****

 

****To ensure the prompt response of any unexpected matters, the AuditCommittee may delegate to a designated member or members of the AuditCommittee, the authority to amend or modify the audit and non-audit servicesand fees; provided however, that such additional or amended services may notaffect the independence under applicable SEC rules.  The member or members of the Audit Committeemust report any such action taken to the Audit Committee at its next scheduledmeeting.****

 

****All audit fees in fiscal year 2009 and 2008 were pre-approved by theAudit Committee.****

 

50

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**PART IV**

 

****ITEM 15.********          ********EXHIBITS****

 

The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where indicated by footnote, exhibits, which have been previously filed, are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parenthesis.

 
| 3.1    | Articles  of Incorporation (2) (Exhibit 3.1)                                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                          |
| 3.2    | Bylaws  (2) (Exhibit 3.2)                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                          |
| 3.3    | Amendment  to Articles of Incorporation (3)                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                          |
| 3.4    | Amendment  to Articles of Incorporation (25)                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                          |
| 4.1    | Statement  of Designation of Class A, Series F Convertible Preferred Stock  (4) (Exhibit 4.0)                                                                                                             |
|   |                                                                                                                                                                                                                          |
| 4.2    | Certificate  of Designations, Preferences and Rights of Class A, Series H  Preferred Stock (5) (Exhibit 4.1)                                                                                              |
|   |                                                                                                                                                                                                                          |
| 10.1#  | Separation  Agreement dated as of January 31, 2009, between Marco Emrich and the  Company (36)                                                                                                                           |
|   |                                                                                                                                                                                                                          |
| 10.25# | 2000  Incentive Stock Plan (10) (Appendix A)                                                                                                                                                                             |
|   |                                                                                                                                                                                                                          |
| 10.26# | 2000  Employee Stock Purchase Plan (10) (Appendix B)                                                                                                                                                                     |
|   |                                                                                                                                                                                                                          |
| 10.27# | Employment  Agreement, dated September 15, 1999, between the Company and Marco A.  Emrich (11) (Exhibit 10.1)                                                                                                       |
|   |                                                                                                                                                                                                                          |
| 10.35  | Warrant  issued to Acxiom Corporation Dated April 4, 2001  (8) (Exhibit 10.35)                                                                                                                                 |
|   |                                                                                                                                                                                                                          |
| 10.36  | Form of  Common Stock and Warrants Purchase Agreements used in August 2001 to  September 2002 private placements by and among the Company and the  investors signatory thereto  (12)  (Exhibit 10.1) |
|   |                                                                                                                                                                                                                          |
| 10.37  | Form of Registration  Rights Agreements used in August 2001 to September 2002 private  placements by and among the Company and the investors signatory thereto (12)  (Exhibit 10.2)                       |
|   |                                                                                                                                                                                                                          |
| 10.38  | Form of Notes dated  September and October 2001 by and among the Company and investors  signatory thereto (12) (Exhibit 10.3)                                                                             |
|   |                                                                                                                                                                                                                          |
| 10.38  | Form of Warrants  issued to investors used in August 2001 to September 2002  private sales of common stock and notes. (12) (Exhibit 10.4)                                                                 |
|   |                                                                                                                                                                                                                          |
| 10.39  | Agreement  and related Promissory Note dated February 14, 2002 related to  retirement of November 2000 Convertible Notes and Warrants (13)                                                                          |
|   |                                                                                                                                                                                                                          |
| 10.42  | Convertible  note dated December 6, 2002 (14)                                                                                                                                                                            |
|   |                                                                                                                                                                                                                          |
| 10.43  | Convertible note dated January 03, 2003 (14)                                                                                                                                                                             |

 

51

----

 
| 10.44  | Convertible  note dated January 10, 2003 (14)                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                          |
| 10.45  | Promissory  note dated January 10, 2003 (14)                                                                                                             |
|   |                                                                                                                                                          |
| 10.46  | Convertible  note dated March 13, 2003 (14)                                                                                                              |
|   |                                                                                                                                                          |
| 10.47  | Promissory  note dated March 13, 2003 (14)                                                                                                               |
|   |                                                                                                                                                          |
| 10.48  | Addendum  dated March 31, 2004 to Master Software License Agreement by and between  the Company and Fiserv Solutions Inc. dated March 28, 2002 (15) |
|   |                                                                                                                                                          |
| 10.49  | Office  lease agreement dated 12-24-02                                                                                                                        |
|   |                                                                                                                                                          |
| 10.47  | Convertible  note dated June 4, 2004 (16)                                                                                                                |
|   |                                                                                                                                                          |
| 10.54  | Convertible  note by the Company in favor of David R. Vey dated June 4, 2004 (16)                                                                        |
|   |                                                                                                                                                          |
| 10.55  | Convertible  note by the Company in favor of David R. Vey dated July 7, 2004 (17)                                                                        |
|   |                                                                                                                                                          |
| 10.56  | Convertible  note by the Company in favor of David R. Vey dated September 15, 2004  (17)                                                                 |
|   |                                                                                                                                                          |
| 10.57  | Convertible  note by the Company in favor of David R. Vey dated October 8, 2004 (17)                                                                     |
|   |                                                                                                                                                          |
| 10.58  | Convertible  note by the Company in favor of David R. Vey dated November 18, 2004  (18)                                                                  |
|   |                                                                                                                                                          |
| 10.59  | Convertible  note by the Company in favor of David R. Vey dated January 13, 2005 (19)                                                                    |
|   |                                                                                                                                                          |
| 10.60  | Convertible  note by the Company in favor of David R. Vey dated January 31, 2005 (19)                                                                    |
|   |                                                                                                                                                          |
| 10.61  | Convertible  note by the Company in favor of David R. Vey dated March 16, 2005 (19)                                                                      |
|   |                                                                                                                                                          |
| 10.62# | Employment  Agreement dated June 25, 2004 between Company and Marco A. Emrich (20)                                                                       |
|   |                                                                                                                                                          |
| 10.64# | Employment  Agreement dated July 20, 2004 between Company and Anita M. Primo (20)                                                                        |
|   |                                                                                                                                                          |
| 10.65# | Employment  Agreement dated July 20, 2004 between Company and Timothy Rimlinger (20)                                                                     |
|   |                                                                                                                                                          |
| 10.66  | Convertible  note by the Company in favor of David R. Vey dated March 25, 2005 (21)                                                                      |
|   |                                                                                                                                                          |
| 10.67  | Convertible  note by the Company in favor of David R. Vey dated March 30, 2005 (21)                                                                      |
|   |                                                                                                                                                          |
| 10.68  | Convertible  note by the Company in favor of David R. Vey dated April 14, 2005 (21)                                                                      |
|   |                                                                                                                                                          |
| 10.69  | Convertible  note by the Company in favor of David R. Vey dated April 22, 2005 (22)                                                                      |
|   |                                                                                                                                                          |
| 10.70  | Amended  Facility Lease for King of Prussia, PA dated January 1, 2005 (24)                                                                               |
|   |                                                                                                                                                          |
| 10.71  | Amended  Facility Lease for Plymouth, MN dated January 1, 2005 (24)                                                                                      |
|   |                                                                                                                                                          |
| 10.72  | Convertible  note by the Company in favor of David R. Vey dated December 6, 2005 (24)                                                                    |
|   |                                                                                                                                                          |
| 10.73  | Convertible note by the Company in favor of David R. Vey dated December 6, 2005 (24)                                                                     |

 

52

----

 
| 10.74  | Convertible  note by the Company in favor of David R. Vey dated December 6, 2005 (24)                                                                                                                              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                    |
| 10.75  | Convertible  note by the Company in favor of David R. Vey dated December 6, 2005 (24)                                                                                                                              |
|   |                                                                                                                                                                                                                    |
| 10.76  | Convertible  note and related documents by the Company in favor of William J. Rucks dated  July 1, 2005, August 1, 2005 and September 30, 2005 (23)(24)                                                  |
|   |                                                                                                                                                                                                                    |
| 10.77  | Promissory  Note dated August 17, 2006 in the principal amount of $1,040,402.22 from  SEDONA to Oak Harbor (26)                                                                                                    |
|   |                                                                                                                                                                                                                    |
| 10.78  | Amended  and Restated Security Agreement dated August 17, 2006 between SEDONA and  Oak Harbor (26)                                                                                                                 |
|   |                                                                                                                                                                                                                    |
| 10.79  | Exchange  Agreement dated August 17, 2006 between SEDONA and Oak Harbor (26)                                                                                                                                       |
|   |                                                                                                                                                                                                                    |
| 10.80  | Secured  Convertible Promissory Note dated October 23, 2006 in the principal  amount of $2,691,263 from Sedona to Vey (26)                                                                                         |
|   |                                                                                                                                                                                                                    |
| 10.81  | Registration  Rights Agreement dated August 17, 2006 between Vey and SEDONA (26)                                                                                                                                   |
|   |                                                                                                                                                                                                                    |
| 10.82  | Exchange  Agreement dated October 23, 2006 between SEDONA and Vey (26)                                                                                                                                             |
|   |                                                                                                                                                                                                                    |
| 10.83  | Promissory  Note dated October 23, 2006 in the principal amount of $1,213,952 from  SEDONA to Vey (26)                                                                                                             |
|   |                                                                                                                                                                                                                    |
| 10.84  | Security  Agreement dated October 23, 2006 between Vey and SEDONA (26)                                                                                                                                             |
|   |                                                                                                                                                                                                                    |
| 10.85  | Revolving  promissory note dated September 27, 2006 in the principal amount of  $500,000 from SEDONA to Vey (26)                                                                                                   |
|   |                                                                                                                                                                                                                    |
| 10.86  | Intercreditor  Agreement dated October 23, 2006 between Vey and Oak Harbor (26)                                                                                                                                    |
|   |                                                                                                                                                                                                                    |
| 10.87  | Terms  and Conditions Agreement dated September 27, 2006 (26)                                                                                                                                                      |
|   |                                                                                                                                                                                                                    |
| 10.88  | Acknowledgment  and Receipt among SEDONA, Vey and Oak Harbor (26)                                                                                                                                                       |
|   |                                                                                                                                                                                                                    |
| 10.89  | Assignment  of ACEncrypt receivable by SEDONA to Vey (26)                                                                                                                                                               |
|   |                                                                                                                                                                                                                    |
| 10.90  | Waiver  dated as of October 23, 2006 from Rucks (26)                                                                                                                                                               |
|   |                                                                                                                                                                                                                    |
| 10.91  | Waiver  dated as of October 23, 2006 from Mitchell (26)                                                                                                                                                            |
|   |                                                                                                                                                                                                                    |
| 10.92  | Form of  Common Stock and Warrants Purchase Agreement used in connection with the  March 2, 2007 private placement by and among the Company and the  investor signatory thereto (28)                          |
|   |                                                                                                                                                                                                                    |
| 10.93  | Form of  Registration Rights Agreements used in March 2, 2007 private placement  by and among the Company and the investor signatory thereto (28)                                                             |
|   |                                                                                                                                                                                                                    |
| 10.94  | Form of  Warrants issued to investor used in March 2, 2007 private sale of common  stock (28)                                                                                                                 |
|   |                                                                                                                                                                                                                    |
| 10.95  | Amendment  to promissory note dated September 27, 2006 between SEDONA Corporation  and David Vey in the principal amount of $500,000 (29)                                                                          |
|   |                                                                                                                                                                                                                    |
| 10.96  | Amendment  to promissory note dated October 23, 2006 between SEDONA Corporation and  David Vey in the principal amount of   $1,213,952 (29)                                                                   |
|   |                                                                                                                                                                                                                    |
| 10.97  | Amendment  to promissory note dated August 17, 2006 between SEDONA Corporation and  Oak Harbor Investment Properties, L.L.C. in the principal amount of  $1,040,402 (29)                                           |
|   |                                                                                                                                                                                                                    |
| 10.98  | Form of Common Stock and Warrants Purchase Agreements used in connection with private placement transactions entered into during fiscal year 2007 by and among the Company and the investor signatory thereto (29) |

 

53

----

 
| 10.99   | Form of  Registration Rights Agreements used in connection with private placement  transactions entered into during fiscal year 2007 by and among the Company  and the investor signatory thereto (29) |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                        |
| 10.100  | Form of  Warrants issued to Investors used in connection with private placement  transactions entered into in fiscal year 2007 by and among the Company and  the investor signatory thereto (29)       |
|    |                                                                                                                                                                                                        |
| 10.101  | Agreement  between the Company and Vey Associates, Inc. dated as of  September 4, 2007 (30)                                                                                                       |
|    |                                                                                                                                                                                                        |
| 10.102  | Amendment  to promissory note dated August 17, 2006 between SEDONA Corporation and  Oak Harbor Investment Properties, L.L.C. in the principal amount of  $1,040,402  (33)                         |
|    |                                                                                                                                                                                                        |
| 10.103  | Amendment  to promissory note dated September 27, 2006 between SEDONA Corporation  and David Vey in the principal amount of $500,000  (33)                                                        |
|    |                                                                                                                                                                                                        |
| 10.104  | Amendment  to promissory note dated October 23, 2006 between SEDONA Corporation and  David Vey in the principal amount of   $1,213,952  (33)                                                 |
|    |                                                                                                                                                                                                        |
| 10.105  | Amendment  to secured convertible note dated October 23, 2006 between SEDONA  Corporation and David Vey in the principal amount of $2,691,263 (33)                                                     |
|    |                                                                                                                                                                                                        |
| 10.106  | Amendment  to loan agreement dated July 5, 2005 between SEDONA Corporation and  William W. Rucks (33)                                                                                                  |
|    |                                                                                                                                                                                                        |
| 10.107  | Amendment  to promissory note dated July 1, 2005 between SEDONA Corporation and  William W. Rucks in the principal amount of $250,000 (33)                                                             |
|    |                                                                                                                                                                                                        |
| 10.108  | Amendment  to promissory note dated August 1, 2005 between SEDONA Corporation and  William W. Rucks in the principal amount of $250,000 (33)                                                           |
|    |                                                                                                                                                                                                        |
| 10.109  | Amendment  to promissory note dated September 29, 2005 between SEDONA Corporation  and William W. Rucks in the principal amount of $500,000 (33)                                                       |
|    |                                                                                                                                                                                                        |
| 10.110  | Amendment  to promissory note dated May 31, 2006 between SEDONA Corporation and  William W. Rucks in the principal amount of $300,000 (33)                                                             |
|    |                                                                                                                                                                                                        |
| 10.111  | Amendment  to convertible note dated May 31, 2006 between SEDONA Corporation and  Charles Mitchell in the principal amount of $300,000 (33)                                                            |
|    |                                                                                                                                                                                                        |
| 10.112# | Consulting  Agreement between the Company and Scott Edelman (34)                                                                                                                                            |
|    |                                                                                                                                                                                                        |
| 10.113  | Loan  and Refinancing Agreement between Sedona Corporation and Vey Associates,  Incorporated, dated as of December 31, 2008 (35)                                                                       |
|    |                                                                                                                                                                                                        |
| 10.114  | Consolidated  and Restated Convertible Promissory Note in the principal amount of  $4,100,000 between David R. Vey and Sedona Corporation, dated as of  December 31, 2008 (35)                         |
|    |                                                                                                                                                                                                        |
| 10.115  | Secured  Convertible Note in the principal amount of $2,250,000.00 from Sedona  Corporation to Vey Associates Incorporated, dated as of December 31,  2008 (35)                                        |
|    |                                                                                                                                                                                                        |
| 10.116  | Security  Agreement from Sedona Corporation to Vey Associates Incorporated, dated as of  December 31, 2008 (35)                                                                                        |
|    |                                                                                                                                                                                                        |
| 10.117  | Intercreditor  Agreement among Oak Harbor Investment Properties, L.L.C., David R. Vey, Vey  Associates Incorporated and Sedona Corporation, dated as of December 31,  2008 (35)                        |
|    |                                                                                                                                                                                                        |
| 10.118  | Amendment  No. 2 to Facility Lease for Plymouth, MN dated February 27, 2009  (38)                                                                                                                 |
|    |                                                                                                                                                                                                        |
| 14.1    | Code  of Conduct and Business Ethics, adopted by Board of Directors, June 21,  2004 (20)                                                                                                               |
|    |                                                                                                                                                                                                        |
| 16.1    | Letter from McGladrey and Pullen, LLP, dated April 13, 2007 agreeing to the statement of the Company under 4.01 of its Form 8-K, filed April 19, 2007 (31)                                   |

 

54

----

 
| 16.2   | Letter  from McGladrey and Pullen, LLP, dated June 20, 2007, agreeing to the  statements of the Company under Item 4.01 of its 8-KA filed on May 21,  2007 and June 20, 2007 (32) |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                             |
| 23.1*  | Consent  of Asher & Company, Ltd.                                                                                                                                                       |
|   |                                                                                                                                                                                             |
| 31.1*  | Statement  Under Oath of Principal Executive Officer of the Company Pursuant to  Section 302 of Sarbanes-Oxley Act of 2002                                                                  |
|   |                                                                                                                                                                                             |
| 31.2*  | Statement  Under Oath of Principal Financial Officer of the Company Pursuant to  Section 302 of Sarbanes-Oxley Act of 2002                                                                  |
|   |                                                                                                                                                                                             |
| 32.1*  | Statement  Under Oath of Principal Executive Officer of the Company Pursuant to  Section 906 of Sarbanes-Oxley Act of 2002                                                                  |
|   |                                                                                                                                                                                             |
| 32.2*  | Statement  Under Oath of Principal Financial Officer of the Company Pursuant to  Section 906 of Sarbanes-Oxley Act of 2002                                                                  |
|   |                                                                                                                                                                                             |
| 99.1   | Amendment  to Compensation Plan for Directors                                                                                                                                                    |
|   |                                                                                                                                                                                             |
| 99.1   | Surety  Agreement dated as of November 2, 2006 from Vey (26)                                                                                                                                |
|   |                                                                                                                                                                                             |
| 99.1   | Amended  and Restated Surety Agreement dated as of November 2, 2006 from Vey (27)                                                                                                           |
|   |                                                                                                                                                                                             |
| 99.1   | Second Amended and  Restated Surety Agreement dated as of March 11, 2009 (37)                                                                                                               |

 

----

| *      | Filed  herewith.                                                                                                                             |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                         |
| #      | Executive  Compensation Plans and Arrangements.                                                                                              |
|   |                                                                                                                                         |
| (1)    | Filed  as an Exhibit to the Registration Statement on Form S-3, filed  May 23, 2000 (File No. 333-37678).                |
|   |                                                                                                                                         |
| (2)    | Filed  as an Exhibit to the Company’s Current report on Form 8-K, dated  June 15, 1992.                                  |
|   |                                                                                                                                         |
| (3)    | Filed  as an Exhibit to the Annual Report on Form 10-K for the fiscal year  ended December 31, 1995.                          |
|   |                                                                                                                                         |
| (4)    | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended March 31, 1999.                       |
|   |                                                                                                                                         |
| (5)    | Filed  as an Exhibit to the Registration Statement on Form S-3 filed  June 5, 2000 (File No. 333-38578).                 |
|   |                                                                                                                                         |
| (6)    | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended June 30, 1999.                        |
|   |                                                                                                                                         |
| (7)    | Filed  as an Exhibit to the Current Report on Form 8-K filed  November 28, 2000.                                              |
|   |                                                                                                                                         |
| (8)    | Filed  as an Exhibit to the Annual Report on Form 10-K for the fiscal year  ended December 31, 2000.                          |
|   |                                                                                                                                         |
| (9)    | Filed  as an Exhibit to the Current Report on Form 8-K filed  August 31, 2000.                                                |
|   |                                                                                                                                         |
| (10)   | Filed  as an Appendix to the Company’s Definitive Proxy Statement for the 2000  Annual Meeting of Shareholders filed May 17, 2000. |
|   |                                                                                                                                         |
| (11)   | Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999.                     |

 

55

----

 
| (12)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended September 30, 2001. |
|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                       |
| (13)   | Filed  as an Exhibit to the Annual Report on Form 10-K for fiscal year  ended December 31, 2001.            |
|   |                                                                                                                       |
| (14)   | Filed  as an Exhibit to the Annual Report on Form 10-K/A for the fiscal  year ended December 31, 2002.      |
|   |                                                                                                                       |
| (15)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended March31, 2004.           |
|   |                                                                                                                       |
| (16)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended June 30, 2004.      |
|   |                                                                                                                       |
| (17)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended September 30, 2004. |
|   |                                                                                                                       |
| (18)   | Filed  as an Exhibit to the 8-K on November 24, 2005.                                                            |
|   |                                                                                                                       |
| (19)   | Filed  as an Exhibit to the 8-K on March 17, 2005.                                                               |
|   |                                                                                                                       |
| (20)   | Filed  as an Exhibit to the Annual Report on Form 10-K for the fiscal year  ended December 31, 2004.        |
|   |                                                                                                                       |
| (21)   | Filed  as an Exhibit to the 8-K on April 19, 2005.                                                               |
|   |                                                                                                                       |
| (22)   | Filed  as an Exhibit to the 8-K on April 27, 2005.                                                               |
|   |                                                                                                                       |
| (23)   | Filed  as an Exhibit to the 8-K on July 11, 2005.                                                                |
|   |                                                                                                                       |
| (24)   | Filed  as an Exhibit to the Annual Report on Form 10-K for the fiscal year  ended December 31, 2005.        |
|   |                                                                                                                       |
| (25)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter  ended September 30, 2006. |
|   |                                                                                                                       |
| (26)   | Filed  as an Exhibit to the 8-K on November 8, 2006.                                                             |
|   |                                                                                                                       |
| (27)   | Filed  as an Exhibit to the 8-K on December 21, 2006.                                                            |
|   |                                                                                                                       |
| (28)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended March 31, 2007.     |
|   |                                                                                                                       |
| (29)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended September 30, 2007. |
|   |                                                                                                                       |
| (30)   | Filed  as an Exhibit to the 8-K on September 10, 2007.                                                           |
|   |                                                                                                                       |
| (31)   | Filed  as an Exhibit to the 8-K on April 19, 2007.                                                               |
|   |                                                                                                                       |
| (32)   | Filed  as an Exhibit to the 8-K on June 20, 2007.                                                                |
|   |                                                                                                                       |
| (33)   | Filed  as an Exhibit to the Annual Report on Form 10-K for the fiscal year  ended December 31, 2007.        |
|   |                                                                                                                       |
| (34)   | Filed  as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal  quarter ended September 30, 2008. |
|   |                                                                                                                       |
| (35)   | Filed  as an Exhibit to the 8-K on January 7, 2009.                                                              |
|   |                                                                                                                       |
| (36)   | Filed  as an Exhibit to the 8-K on February 6, 2009.                                                             |
|   |                                                                                                                       |
| (37)   | Filed  as an Exhibit to the 8-K on March 17, 2009.                                                               |
|   |                                                                                                                       |
| (38)   | Filed as an Exhibit to  the Annual Report on Form 10-K for the fiscal year ended  December 31, 2008         |

 

56

----

 

**SIGNATURES**

 

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

 
|           | SEDONA CORPORATION                                 |
|----------------|----------------------------------------------------|
|           |                                               |
|           |                                               |
| April 15, 2010 |                                               | /S/ David R. Vey |
| DATE           | David R. Vey                                       |
|           | Chairman of the Board and  Chief Executive Officer |
|                |                                                    |  |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant, in thecapacities and on the dates indicated.

 

Signatures

 
| BY     | /S/  David R. Vey                          |   | Date:  April 15, 2010 |
|--------|--------------------------------------------|--------|-----------------------|
|   | David R. Vey                               |   |                  |
|   | Chairman of the Board and Chief            |   |                  |
|   | Executive Officer                          |   |                  |
|   |                                       |   |                  |
| BY     | /S/  David C. Bluestone                    |   | Date:  April 15, 2010 |
|   | David C. Bluestone                         |   |                  |
|   | Director                                   |   |                  |
|   |                                       |   |                  |
| BY     | /S/  Jack A. Pellicci                      |   | Date:  April 15, 2010 |
|   | Jack A. Pellicci                           |   |                  |
|   | Director                                   |   |                  |
|   |                                       |   |                  |
| BY     | /S/  Anita M. Primo                        |   | Date:  April 15, 2010 |
|   | Anita M. Primo                             |   |                  |
|   | Chief Financial Officer and Vice President |   |                  |
|   | Principal Financial and Accounting Officer |   |                  |
|   |                                       |   |                  |
| BY     | /S/  Roger W. Scearce                      |   | Date:  April 15, 2010 |
|   | Roger W. Scearce                           |   |                  |
|   | Director                                   |   |                  |

 

57

 

Index to Financial Statements and Schedule

 

Contents

 
| Report  of Independent Registered Public Accounting Firm                                                                     | F-2    |
|------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                         |   |
| Consolidated Financial Statements                                                                                            |   |
|                                                                                                                         |   |
| Consolidated  Balance Sheets as of December 31, 2009 and December 31, 2008                                         | F-3    |
| Consolidated  Statements of Operations for each of the two years in the period ended  December 31, 2009                 | F-4    |
| Consolidated  Statements of Stockholders’ Deficit for each of the two years in the period  ended December 31, 2009 | F-5    |
| Consolidated  Statements of Cash Flows for each of the two years in the period ended  December 31, 2009                 | F-7    |
| Notes to Consolidated Financial Statements                                                                                   | F-8    |

 

F-1

 

Report of Independent Registered Public AccountingFirm

 

TheBoard of Directors and StockholdersSEDONA Corporation

Kingof Prussia, Pennsylvania

 

We have audited the accompanying consolidatedbalance sheets of SEDONA Corporation and its subsidiary (the “Company”) as of December 31,2009 and 2008, and the related consolidated statements of operations,stockholders’ deficit and cash flows for the years then ended. The Company’smanagement is responsible for these consolidated financial statements. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of thecompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

                In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of SEDONACorporation and its subsidiary as of December 31, 2009 and 2008, and theconsolidated results of its operations and its cash flows for the years thenended in conformity with accounting principles generally accepted in the UnitedStates of America.

 

                Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1 to theconsolidated financial statements, the Company has incurred substantialoperating losses, has negative working capital and a stockholders’ deficit andanticipates that it will require additional debt and/or equity financing in2010, which may not be readily available. These matters raise substantial doubt about the Company’s ability tocontinue as a going concern.  Management’splans relating to these matters are also described in Note 1.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 
|   | /s/  ASHER & COMPANY, Ltd. |
|--------|-------------------------------------|

 

April 15,2010

 

Philadelphia, Pennsylvania

 

F-2

 

**SEDONA Corporation and Subsidiary**

**Consolidated Balance Sheets**

*(Inthousands)*

 
| ** **                                                                                                                                                                               | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Assets**                                                                                                                                                                               |       |                  |       |   |   |
| Current assets:                                                                                                                                                                          |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                |       | $                     | 37         |   | $ | 34 |   |
| Accounts receivable                                                                                                                                                                      |       | 345                   |       | 410 |   |
| Prepaid expenses and other current assets                                                                                                                                                |       | 74                    |       | 62 |   |
| Total current assets                                                                                                                                                                     |       | 456                   |       | 506 |   |
| Accounts receivable, non-current                                                                                                                                                         |       | 638                   |       | 474 |   |
| Property and equipment, net                                                                                                                                                              |       | 12                    |       | 13 |   |
| Other non-current assets                                                                                                                                                                 |       | 3                     |       | 3 |   |
| Total non-current assets                                                                                                                                                                 |       | 653                   |       | 490 |   |
| Total assets                                                                                                                                                                             |       | $                     | 1,109      |   | $ | 996 |   |
|                                                                                                                                                                                     | ** ** | ** **            |       | ** ** | ** ** |
| **Liabilities and stockholders’  deficit**                                                                                                                                          | ** ** | ** **            |       | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                     | ** ** | ** **            |       | ** ** | ** ** |
| Current maturities of long-term debt, net of  discount                                                                                                                                   |       | $                     | 8,332      |   | $ | 2,008 |   |
| Accounts payable                                                                                                                                                                         |       | 622                   |       | 663 |   |
| Accrued litigation expenses                                                                                                                                                              |       | 699                   |       | 622 |   |
| Accrued expenses and other current liabilities                                                                                                                                           |       | 1,622                 |       | 2,053 |   |
| Deferred and unearned revenue                                                                                                                                                            |       | 914                   |       | 882 |   |
| Total current liabilities                                                                                                                                                                |       | 12,189                |       | 6,228 |   |
| Long-term debt, less current maturities, net of  discount                                                                                                                                |       | —                |       | 2,280 |   |
| Deferred and unearned revenue                                                                                                                                                            |       | 638                   |       | 474 |   |
| Total long-term liabilities                                                                                                                                                              |       | 638                   |       | 2,754 |   |
| Total liabilities                                                                                                                                                                        |       | 12,827                |       | 8,982 |   |
|                                                                                                                                                                                     |       |                  |       |   |   |
| Stockholders’ (deficit):                                                                                                                                                            |       |                  |       |   |   |
| Class A convertible preferred stock  (liquidation preference $1,000)Authorized shares – 1,000,000 Series A, par  value $2.00, Issued and outstanding shares– 500,000 |       | 1,000                 |       | 1,000 |   |
| Common stock, par value $0.001Authorized shares –175,000,000, Issued and  outstanding shares – 127,364,064 and 101,004,818 in 2009 and 2008,  respectively                     |       | 127                   |       | 101 |   |
| Additional paid-in-capital                                                                                                                                                               |       | 73,156                |       | 71,274 |   |
| Accumulated deficit                                                                                                                                                                      |       | (86,001               | )          | (80,361 | ) |
| Total stockholders’ deficit                                                                                                                                                         |       | (11,718               | )          | (7,986 | ) |
| Total liabilities and stockholders’ deficit                                                                                                                                         |       | $                     | 1,109      |   | $ | 996 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-3

----

 

**SEDONA Corporation and Subsidiary**

**Consolidated Statements ofOperations**

*(In thousands)*

 
| ** **                                                        | ** ** | **For years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Revenues:**                                                     |       |                                  |       |   |   |
| Product licenses                                                  |       | $                                     | 401        |   | $ | 538 |   |
| Services                                                          |       | 849                                   |       | 857 |   |
| *Total revenues*                                                  |       | 1,250                                 |       | 1,395 |   |
| **Cost of revenues:**                                             |       |                                  |       |   |   |
| Services                                                          |       | 374                                   |       | 241 |   |
| *Total cost of revenues*                                          |       | 374                                   |       | 241 |   |
| *Gross profit*                                                    |       | 876                                   |       | 1,154 |   |
| **Expenses:**                                                     |       |                                  |       |   |   |
| General and administrative                                        |       | 1,112                                 |       | 1,281 |   |
| Litigation expenses                                               |       | 131                                   |       | 1,010 |   |
| Sales, marketing and customer services                            |       | 835                                   |       | 513 |   |
| Research and development                                          |       | 338                                   |       | 526 |   |
| *Total operating expenses*                                        |       | 2,416                                 |       | 3,330 |   |
| ***Loss from  operations***                                       |       | (1,540                                | )          | (2,176 | ) |
| **Other expenses:**                                               |       |                                  |       |   |   |
| Interest expense                                                  |       | (4,100                                | )          | (682 | ) |
| Inducement loss on debt  conversion                               |       | —                                |       | (1,299 | ) |
| Loss on extinguishment of debt                                    |       | —                                |       | (1,156 | ) |
| *Total other expenses*                                            |       | (4,100                                | )          | (3,137 | ) |
| Net loss                                                          |       | (5,640                                | )          | (5,313 | ) |
| Deemed  dividends applicable to preferred stockholders            |       | (120                                  | )          | (120 | ) |
| Loss applicable to Common Stockholders                            |       | $                                     | (5,760     | ) | $ | (5,433 | ) |
|                                                              |       |                                  |       |   |   |
| Basic and diluted net loss per share applicable to  common shares |       | $                                     | (0.05      | ) | $ | (0.05 | ) |
|                                                              |       |                                  |       |   |   |
| Basic and diluted weighted average common shares  outstanding     |       | 118,924,121                           |       | 99,942,670 |   |

 

*See accompanying notes toconsolidated financial statements.*

 

F-4

----

 

**SEDONA Corporation and Subsidiary**

**Consolidated Statements ofStockholders’ Deficit**

*(In thousands, except share data)*

 
| ** **                                                               | ** ** | **Stock Series A** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                               | ** ** | **Shares**              | ** ** | **Amount** | ** ** |
|                                                                     |       |                    |       |   |   |
| Balance, December 31, 2007                                          | ** ** | **500,000**             | ** ** | **$** | **1,000** | ** ** |
|                                                                     |       |                    |       |   |   |
| Common stock issued for consulting services                              |       | —                  | ** ** | **—** | ** ** |
| Common stock issued in private placement  transactions                   |       | —                  | ** ** | **—** | ** ** |
| Common stock issued from the exercise of stock  options                  |       | —                  |       | — |   |
| Common stock issued to employee 401(k) savings  plan                |       | —                  |       | — |   |
| Common stock issued for employee stock purchase  plan                    |       | —                  |       | — |   |
| Common stock issued for conversion of debt and  related accrued interest |       | —                  |       | — |   |
| Warrants issued in conjunction with debt  extinguishments                |       | —                  |       | — |   |
| Beneficial conversion feature on convertible debt  issuance              |       | —                  |       | — |   |
| Stock-based compensation                                                 |       | —                  |       | — |   |
| Net loss, year ended December 31, 2008                              |       | —                  |       | — |   |
| Balance, December 31, 2008                                          | ** ** | **500,000**             | ** ** | **1,000** | ** ** |
|                                                                     |       |                    |       |   |   |
| Common stock issued for consulting services                              |       | —                  | ** ** | **—** | ** ** |
| Common stock issued in conjunction with severance  arrangement           |       | —                  | ** ** | **—** | ** ** |
| Common stock issued for employee stock purchase  plan                    |       | —                  |       | — |   |
| Common stock issued in conjunction with debt  extinguishments            |       | —                  |       | — |   |
| Beneficial conversion feature on convertible debt  issuance              |       | —                  |       | — |   |
| Stock-based compensation                                                 |       | —                  |       | — |   |
| Forgiveness of litigation debt obligation                                |       | —                  |       | — |   |
| Net loss, year ended December 31, 2009                              |       | —                  |       | — |   |
| Balance, December 31, 2009                                          | ** ** | **500,000**             | ** ** | **$** | **1,000** | ** ** |

 

*See accompanying notes toconsolidated financial statements*

 

F-5

 

**SEDONA Corporation and Subsidiary**

**Consolidated Statements ofStockholders’ Deficit**

*(Inthousands, except share data)*

 
| ** **                                                               | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-------------|------------|
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** |
| ** **                                                               | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** |
|                                                                     |       |             |       |        |       |            |       |        |       |
| Balance, December 31, 2007                                          |       | 97,649,350       |       | $           | 98         |            | $          | 64,880      |       | $ | (75,048 | ) |
|                                                                     |       |             |       |        |       |            |       |        |       |
| Common stock issued for consulting services                              |       | 325,436          |       | 1           |       | 48              |       | —      |       |
| Common stock issued in private placement  transactions                   |       | 2,660,668        |       | 1           |       | 99              |       | —      |       |
| Common stock issued from the exercise of stock  options                  |       | 58,791           |       | —      |       | 9               |       | —      |       |
| Common stock issued to employee 401(k) savings  plan                |       | 258,363          |       | —      |       | 44              |       | —      |       |
| Common stock issued for employee stock purchase  plan                    |       | 52,210           |       | 1           |       | 7               |       | —      |       |
| Common stock issued for conversion of debt and  related accrued interest |       | —           |       | —      |       | 2,562           |       | —      |       |
| Warrants issued in conjunction with debt  extinguishments                |       | —           |       | —      |       | 1,156           |       | —      |       |
| Beneficial conversion feature on convertible debt  issuance              |       | —           |       | —      |       | 2,460           |       | —      |       |
| Stock-based compensation                                                 |       | —           |       | —      |       | 9               |       | —      |       |
| Net loss, year ended December 31, 2008                              |       | —           |       | —      |       | —          |       | (5,313      | )          |
| Balance, December 31, 2008                                          |       | 101,004,818      |       | 101         |       | 71,274          |       | (80,361     | )          |
|                                                                     |       |             |       |        |       |            |       |        |       |
| Common stock issued for consulting services                              |       | 629,419          |       | 1           |       | 47              |       |        |       |
| Common stock issued in conjunction with severance  arrangement           |       | 450,000          |       | —      |       | 31              |       |        |       |
| Common stock issued for employee stock purchase  plan                    |       | 25,046           |       | —      |       | 3               |       |        |       |
| Common stock issued in conjunction with debt  extinguishments            |       | 25,254,781       |       | 25          |       | (25             | )          |        |       |
| Beneficial conversion feature on convertible debt  issuance              |       | —           |       | —      |       | 975             |       |        |       |
| Stock-based compensation                                                 |       | —           |       | —      |       | 5               |       |        |       |
| Forgiveness of litigation debt obligation                                |       | —           |       | —      |       | 846             |       |        |       |
| Net loss, year ended December 31, 2009                              |       | —           |       | —      |       | —          |       | (5,640      | )          |
| Balance, December 31, 2009                                          |       | 127,364,064      |       | $           | 127        |            | $          | 73,156      |       | $ | (86,001 | ) |

 

*See accompanying notes to consolidated financial statements.*

 

F-6

----

 

**SEDONA Corporation and Subsidiary**

**Consolidated Statements of CashFlows**

*(In thousands)*

 
| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Operating activities:**                                                    |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (5,640     | ) | $ | (5,313 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                             |       |   |   |
| Depreciation                                                                 |       | 6                                |       | 5 |   |
| Charge for employer 401(K) stock contribution                           |       | —                           |       | 44 |   |
| Common stock issued for legal, consulting services  and placement agent      |       | 47                               |       | 49 |   |
| Stock-based compensation                                                     |       | 5                                |       | 9 |   |
| Accretion of debt discount                                                   |       | 3,402                            |       | 45 |   |
| Loss on extinguishment of debt                                               |       | —                           |       | 1,156 |   |
| Inducement loss on debt conversion                                           |       | —                           |       | 1,299 |   |
| Loss on the sale of assets                                                   |       | —                           |       | 1 |   |
| Changes in operating assets and liabilities:                                 |       |                             |       |   |   |
| Accounts receivable                                                          |       | (99                              | )          | 1 |   |
| Prepaid expenses and other current assets                                    |       | (12                              | )          | 6 |   |
| Accounts payable and accrued expenses                                        |       | 475                              |       | 1,359 |   |
| Deferred revenue                                                             |       | 196                              |       | 242 |   |
| Net cash used in operating activities                                        |       | (1,620                           | )          | (1,097 | ) |
|                                                                         |       |                             |       |   |   |
| **Investing activities:**                                                    |       |                             |       |   |   |
| Purchase of property  and equipment                                          |       | (5                               | )          | (6 | ) |
| Net cash used in  investing activities                                       |       | (5                               | )          | (6 | ) |
|                                                                         |       |                             |       |   |   |
| **Financing activities:**                                                    |       |                             |       |   |   |
| Proceeds  from line of credit                                                |       | —                           |       | 285 |   |
| Proceeds  from other non-current liabilities                                 |       | —                           |       | 686 |   |
| Proceeds  from sale of common stock                                          |       | 3                                |       | 108 |   |
| Proceeds  from the exercise of stock options                                 |       | —                           |       | 9 |   |
| Proceeds  from the issuance of short-term note                               |       | 1,625                            |       | — |   |
| Net cash provided by financing activities                                    |       | 1,628                            |       | 1,088 |   |
| Net increase/(decrease) in cash and cash  equivalents                        |       | 3                                |       | (15 | ) |
| Cash and cash equivalents, beginning of year                                 |       | 34                               |       | 49 |   |
| Cash and cash equivalents, end of year                                       |       | $                                | 37         |   | $ | 34 |   |
|                                                                         |       |                             |       |   |   |
| Supplemental Disclosures of Cash Flow Information                            |       |                             |       |   |   |
|   Cash paid during the year for  interest                          |       | $                                | 1          |   | $ | 2 |   |
| * *                                                                     |       |                             |       |   |   |
| Supplemental Disclosures of Non-Cash Financing  Activities                   |       |                             |       |   |   |
| Conversion of debt into common stock                                         |       | $                                | —     |   | $ | 495 |   |
| Conversion of accrued interest into common stock                             |       | $                                | —     |   | $ | 768 |   |
| Beneficial conversion on debt refinancing                                    |       | $                                | 975        |   | $ | 2,460 |   |
| Forgiveness of OSI litigation liability                                      |       | $                                | 846        |   | $ | — |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

F-7

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

Years ended December 31, 2009 and 2008

 

****1. Accounting Policies****

 

Description of Business

 

SEDONACorporation (“SEDONA” or the “Company”) develops and markets Customer andMember Relationship Management (CRM/MRM) solutions to community banks, regionalbanks, and credit unions.  SEDONAsolutions combine software and services. The Company’s CRM/MRM application solutions enable financial servicesorganizations to improve key performance metrics to strengthen their positionin the market and obtain a greater share of the customer’s wallet.  The Company develops, distributes andsupports application software and delivers services for data integration,training and custom development.  TheCompany also offers a range of consulting services involving hands-on designand configuration of the Company’s software application, structured inengagements which are focused on a specific goal such as customer and memberretention, marketing and sales portal development, marketing campaigns, or newcustomer and member on-boarding.

 

Thecurrent target market for SEDONA is banks and credit unions with under $10billion in assets.  In order to appeal tothis market, SEDONA prices its solutions based on the asset size of thefinancial institution, making it cost-effective for both smaller and largerbanks and credit unions to adopt CRM and MRM.

 

SEDONAhas signed Original Equipment Manufacturer (OEM) and reseller agreements withseveral leading software and services providers for the financial servicesmarket, including, but not limited to: Fiserv; Connecticut Online ComputerCenter, Inc.; Profit Technologies; Bradford-Scott, CU ink, Share One Incand EPL, Inc.

 

SEDONA continues to work to broaden its direct and indirectdistribution channels and expand its market penetration within financialservices.  The Company’s plans include: (i) pursuingdirect sales opportunities by focusing on its target market; (ii) enhancingits indirect sales channel by aligning OEM agreements with new core systemsproviders; (iii) fostering the existing OEM partnerships with leading coresystem providers by promoting corporate-wide adoption of its CRM/MRM technologywith its current providers; (iv) developing and introducing new technologiesto enhance our CRM/MRM solutions such as our leading profitability tool, ProfitPro; and (v) increasing our service offerings such as data integration,marketing services and consulting.

 

Going Concern

 

Thefinancial statements of the Company have been prepared assuming the Companywill continue as a going concern, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business.  Accordingly, the financial statements do notinclude any adjustment that might be necessary should the Company be unable tocontinue in existence.  For 2009, theCompany reported a net loss of $5,640,000 which includes non-cash interest chargesof $3,402,000 related to the restructuring of the debt obligations.  In addition, the Company has negative workingcapital of $11,733,000 and a stockholders’ deficit of $11,718,000 as of December 31,2009.  These factors raise substantialdoubt about our ability to continue as a going concern.

 

TheCompany plans to pursue additional fundraising activities with existing andpotential new investors.  Our plansinclude negotiating with existing lenders to refinance or extend the maturitydates of existing debt, raising additional capital through public or privatesale of equity or debt securities, debt financing, short-term loans, or acombination of the foregoing and possibly other collaborative agreements withour distribution partners.  There can beno assurances that the Company will succeed in its plan to obtain any suchfinancing or that additional financing will be available when needed or that,if available, financing will be obtained on terms acceptable to the Company andour stockholders.  In addition, if weraise additional funds through the issuance of equity securities, dilution toour existing shareholders would likely result.

 

F-8

----

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

1.     Accounting Policies *(continued)*

 

The Company will require additional workingcapital over the next twelve months and beyond as we continue: (i) ourresearch and development efforts; (ii) expand our marketing and salesactivities; and (iii) hire additional personnel across all disciplines tosupport our revenue growth and continued market acceptance of our services.

 

Principles of Consolidation

 

The Company’s consolidated financial statements include the accounts of its wholly owned subsidiary, SEDONAâGeoServices, Inc.  ****All significant inter-company accounts and transactions have been****eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and disclosures in the consolidated financial statements and accompanying notes.  We evaluate, on an on-going basis, our estimates and judgments, including those related to bad debts, income taxes, contingencies and litigation.  Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

Cash and Cash Equivalents

 

The Company considers all unencumbered highly liquid investments with original maturities of three (3) months or less when purchased to be cash equivalents.  Cash and cash equivalents, which primarily consist of cash on deposit and money market funds, are stated at cost, and approximate fair value.

 

Accounts Receivable

 

Trade receivables are generated primarily from the Company’s customers and distribution partners.  Receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  A valuation allowance is provided for known and anticipated credit losses, as determined by Management in the course of regularly evaluating individual customer receivables.  Receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded when received.  As of December 31, 2009 and 2008, the current portion of net accounts receivable includes $1,090 and $34,790, respectively for maintenance services which will be amortized over the maintenance period and recognized as revenue on a monthly basis in the upcoming year.  As of December 31, 2009 and 2008, no allowance for doubtful accounts was required.

 

F-9

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets, which range from three (3) to seven (7) years.

 

Impairment of Long-Lived Assets

 

The Company evaluates the recoverability of its long-lived assets in accordance with ASC Topic 360, Property, Plant and Equipment.  Assets are periodically reviewed for possible impairment whenever circumstances or events indicate that the carrying amount of such assets may not be recoverable.  If such review indicates that the carrying amount of the asset is not recoverable, the carrying amount of such asset will be reduced to fair value.  There were no impairment charges for 2009 or 2008.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to credit risk, consist of cash equivalents, accounts receivable and notes receivable.  The Company’s policy is to limit the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as being creditworthy.  Concentration of credit risk, with respect to accounts and notes receivable, is limited due to the Company’s credit evaluation process.  The Company does not generally require collateral from its customers.  The Company’s customers consist primarily of corporate entities.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and short-term debt approximate fair value as a result of the immediate or short-term maturity of these financial instruments.  The carrying amounts of the Company’s long-term debt are also estimated to approximate fair value due to the effective interest rate being charged.

 

Software Development and Purchased Software Costs

 

Software development costs are accounted for in accordance with ASC Topic 985, Software*.*  All costs incurred in the research and development of new software products are expensed as incurred until technological feasibility has been established. The costs incurred for testing and coding of the new software products are capitalized. Amortization of such costs is the greater of the amount capitalized using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (b) the straight-line method over the remaining estimated economic life of the product not to exceed three (3) years.  Amortization commences when the product is available for general release to customers.  The Company capitalizes costs related to purchased software used for developmental purposes and amortizes such value over three (3) years consistent with the amortization and capitalization policy discussed above related to capitalized software costs.

 

F-10

----

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

Asof December 31, 2004, all software development costs had been fullyamortized and the Company has not capitalized any additional costs since thattime because recoverability of the costs in future periods is uncertain.

 

*Revenue Recognition*

 

TheCompany’s revenues from software arrangements currently consist of licensefees, installation services and maintenance. The Company has established vendor specific objective evidence of fairvalue for its maintenance contracts based on the price of renewals of existingmaintenance contracts. The remaining value of the software arrangement isallocated to license fee and professional services based on contractual termsagreed upon by the customer and based on Company-maintained list prices.

 

*Product License Revenue*

 

Revenuesfrom the sale of product licenses are recognized upon delivery and acceptanceof the software when persuasive evidence of an arrangement exists, collectionis probable and the fee is fixed or determinable.  Since the Company’s software product can beimplemented on the Company’s customers’ systems without significant alterationsto the features and the functionality of the software, and without significantinterfacing, the Company’s license agreements are written so that formalwritten acceptance of the product is received when installation is complete.Therefore, the timing of license fee revenue recognition coincides with thecompletion of the installation and acceptance of the software by the customer.

 

TheCompany utilizes an indirect sales model by distributing its product throughits distribution partners, for which the Company receives a royalty paymentbased on percentages of the license fee charged by the distributionpartners.  The royalty fee is recognizedby SEDONA when the Company receives written acknowledgement from thedistribution partners that a contract has been signed with an end-user andmonies are owed to SEDONA from the distribution partner.

 

Inaddition, the Company also sells directly to banks and credit unions.  The related license fee is recognized bySEDONA in the same manner as the indirect sales model, whereby license feerevenue is recognized when the Company receives written acknowledgement fromtheir customer that the license fee has been earned and monies are owed toSEDONA.  For the years ended December 31,2009 and 2008, product license revenue was recognized in the amount of $401,000and $538,000, respectively.

 

*Services Revenue*

 

Services revenue includes revenue from professionalservices (primarily installation and training services) and maintenanceservices over periods not exceeding one (1) year.  Installation service revenue, which consistsof revenue from implementation planning, hardware and software set-up, dataintegration including data aggregation, conversion, cleansing, analysis, andtesting and quality assurance, is accounted for as a separate element of asoftware arrangement.  Additionally, incertain circumstances, the Company may partner with third parties to implementits software.  In those instances, thecontractual fee for professional services may be paid directly from thecustomer to the third party, and the Company recognizes the license fee revenuecomponent upon installation and acceptance by the customer.

 

F-11

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

Installation revenue is recognized upon completed installation and customer acceptance and is based on a contractual hourly rate. Training revenue is not a material element of a contract and revenue is recognized as training services are provided.

 

Maintenance revenue is recognized ratably over the life of the related contract.   The Company establishes the value of maintenance revenue based on the price quoted and received for renewals of existing maintenance contracts.  Typically, maintenance contracts are entered into for initial three (3) year terms and are renewable annually thereafter.

 

For the years ended December 31, 2009, and 2008, the Company recognized services revenue in the amount of $849,000 and $857,000, respectively.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.”  Under ASC Topic 740, deferred tax liabilities are recognized for taxable temporary differences and deferred tax assets are recognized for deductible temporary differences and tax loss and credit carryforwards.  A valuation allowance is established to reduce deferred tax assets if some, or all, of such deferred tax assets are not likely to be realized.

 

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies).  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes.  The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.  The Company includes interest and penalties related to its tax contingencies as operating expenses in its consolidated statement of operations.

 

Earnings/Loss Per Share

 

Earnings/Loss Per Share requires a dual presentation of basic and diluted earnings/loss per common share.  Basic earnings/loss per common share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year.  Diluted loss per common share is computed assuming the conversion of common stock equivalents when dilutive.   For the year ended December 31, 2009, the Company’s common stock equivalents, consisting of warrants to purchase 22,337,690 shares of common stock, preferred stock and debt convertible into 134,725,538 common shares, and options to purchase 2,746,598 shares of common stock issued under the 2000 Incentive Stock Option Plan, were not included in computing diluted loss per share because their effects were anti-dilutive.  For the year ended December 31, 2008, the Company’s common stock equivalents, consisting of warrants to purchase 22,679,690 shares of common stock, preferred stock and debt convertible into 118,465,389 common shares, and options to purchase 3,260,452 shares of common stock issued under the 2000 Incentive Stock Option Plan, were not included in computing diluted loss per share because their effects were anti-dilutive.  Basic and diluted loss per share were the same for the year ended December 31, 2009 and 2008, respectively, as there were no potentially dilutive securities outstanding.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation inaccordance with the recognition and measurement provisions of ASC Topic 718, “Compensation— Stock Compensation”.

 

ASC Topic 718 requires all share based payments toemployees, including grants of employee stock options or warrants, to berecognized as expenses in the statement of operations based on their fair valuesand vesting periods.

 

F-12

----

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

The Company estimates the fair value of stock options andwarrants at the grant date using the Black-Scholes option pricing model.  The model takes into consideration weightedaverage assumptions related to the following: risk-free interest rates;expected term; expected volatility; and expected dividend rates.  The consolidated statement of operationsreflects share-based compensation of approximately $5,000 and $9,000 for theyears ended December 31, 2009 and 2008, respectively.  As of December 31, 2009, the totalexpense impact of the non-vested awards is approximately $4,000 and will berecognized over a weighted average period of 0.85 years.

 

Recent Accounting Pronouncements

 

In September 2009,the Company adopted ASC 105-10-05, which provides for the FASB AccountingStandards CodificationTM (the “Codification”) to become the single officialsource of authoritative, nongovernmental U.S. generally accepted accountingprinciples (“GAAP”) to be applied by nongovernmental entities in thepreparation of financial statements in conformity with GAAP. The Codificationdoes not change GAAP, but combines all authoritative standards into acomprehensive, topically organized online database. ASC 105-10-05 explicitlyrecognizes rules and interpretative releases of the Securities andExchange Commission under federal securities laws as authoritative GAAP for SECregistrants. Subsequent revisions to GAAP will be incorporated into the ASCthrough Accounting Standards Updates (ASU).  ASC 105-10-05 iseffective for interim and annual periods ending after September 15, 2009,and was effective for the Company in the third quarter of 2009. The adoption ofASC 105-10-05 impacted the Company’s financial statement disclosures, as allreferences to authoritative accounting literature were updated to and inaccordance with the Codification. The adoption of ASC 105-10-05 did not have amaterial impact on the Company’s consolidated results of operations andfinancial condition.

 

In June 2008, the FASB issued new guidanceregarding the classification of financial instruments that are indexed to acompany’s own stock.  The new guidancerevised the criteria for determining whether an instrument is indexed to acompany’s own stock and the resultant accounting treatment of thoseinstruments.  The new guidance iseffective for annual periods beginning after December 15, 2008.  The adoption of this new guidance on January1, 2009 did not have a material impact on the Company’s consolidated financialstatements.

 

In December 2007,the FASB issued an accounting standard codified within ASC 805, “BusinessCombinations” which changed the accounting for businessacquisitions.  Under this standard, business combinations continue tobe required to be accounted for at fair value under the acquisition method ofaccounting, but the standard changed the method of applying the acquisitionmethod in a number of significant aspects. Acquisition costs will generally beexpensed as incurred; noncontrolling interests will be valued at fair value atthe acquisition date; in-process research and development will be recorded atfair value as an indefinite-lived intangible asset at the acquisition date,until either abandoned or completed, at which point the useful lives will bedetermined; and restructuring costs associated with a business combination willgenerally be expensed subsequent to the acquisition date. The standard iseffective on a prospective basis for all business combinations for which theacquisition date is on or after the beginning of the first annual periodsubsequent to December 15, 2008. Adoption of the standard did not have asignificant impact on the Company’s financial position and results ofoperations; however, any business combination entered into after the adoptionmay significantly impact the Company’s financial position and results ofoperations when compared to acquisitions accounted for under priorGAAP and result in more earnings volatility and generally lower earningsdue to the expensing of deal costs and restructuring costs of acquiredcompanies.

 

In February 2009,the FASB issued an accounting standard codified within ASC 805, “BusinessCombinations” which amends the provisions related to the initial recognitionand measurement, subsequent measurement, and disclosure of assets andliabilities arising from contingencies in a business combination. The standardapplies to all assets acquired and liabilities assumed in a businesscombination that arise from contingencies that would be within the scope of ASC450, “Contingencies”, if not acquired or assumed in a business combination,except for assets or liabilities arising from

 

F-13

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

contingencies that aresubject to specific guidance in ASC 805. The standard applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. The adoption of the standard effective January 1, 2009 did not havean impact on the Company’s financial position and results of operations.

 

In March 2008, theFASB issued an accounting standard related to disclosures about derivativeinstruments and hedging activities, codified within ASC 815, “Derivatives andHedging”.  Provisions of this standard change the disclosurerequirements for derivative instruments and hedging activities includingenhanced disclosures about (a) how and why derivative instruments areused, (b) how derivative instruments and related hedged items areaccounted for under ASC 815 and its related interpretations, and (c) howderivative instruments and related hedged items affect our financial position,financial performance, and cash flows. This statement was effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company adopted the standard on January 1,2009.

 

In April 2008, theFASB issued an accounting standard codified within ASC 350, “Intangibles -Goodwill and Other” which amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset  Under this standard, entitiesestimating the useful life of a recognized intangible asset must consider theirhistorical experience in renewing or extending similar arrangements or, in theabsence of historical experience, must consider assumptions that marketparticipants would use about renewal or extension.  The intent of thestandard is to improve the consistency between the useful life of a recognizedintangible asset and the period of expected cash flows used to measure the fairvalue of the asset. Adoption of the standard was effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. The Company adopted the standard on January 1,2009. The Company does not expect the standard to have a material impact on itsaccounting for future acquisitions of intangible assets.

 

In November 2008,the FASB issued an accounting standard codified within ASC 350, “Intangibles -Goodwill and Other” that applies to defensive assets which are acquiredintangible assets which the acquirer does not intend to actively use, butintends to hold to prevent its competitors from obtaining access to the asset.The standard clarifies that defensive intangible assets are separatelyidentifiable and should be accounted for as a separate unit of accounting inaccordance with guidance provided within ASC 805, “Business Combinations” andASC 820, “Fair Value Measurements and Disclosures”.  The standard waseffective for intangible assets acquired in fiscal years beginning on or after December 15,2008.  The Company adopted this standardeffective January 1, 2009 and will apply the provisions of this guidanceto intangible assets acquired on or after that date. The Company does notexpect the standard to have a material impact on its accounting for futureacquisitions of intangible assets.

 

In April 2009, theFASB issued an accounting standard codified within ASC 825, “FinancialInstruments” that requires disclosures about the fair value of financialinstruments that are not reflected in the consolidated balance sheets at fairvalue whenever summarized financial information for interim reporting periodsis presented. Entities are required to disclose the methods and significantassumptions used to estimate the fair value of financial instruments anddescribe changes in methods and significant assumptions, if any, during theperiod. The standard was effective for interim reporting periods ending after June 15,2009 and was adopted by the Company in the second quarter of 2009.

 

F-14

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

In April 2009, theFASB issued an accounting standard codified within ASC 820, “Fair ValueMeasurements and Disclosures,” which provides guidance on determining fairvalue when there is no active market or where the price inputs being usedrepresent distressed sales.  The standard reaffirms the objective offair value measurement, which is to reflect how much an asset would be sold forin an orderly transaction. It also reaffirms the need to use judgment todetermine if a formerly active market has become inactive, as well as todetermine fair values when markets have become inactive. The standard iseffective for interim and annual periods ending after June 15, 2009 andwas adopted by the Company in the second quarter of 2009. The adoption of thisaccounting pronouncement did not have a material impact on the Company’sconsolidated results of operations and financial condition.

 

In May 2009, the FASB issued an accountingstandard codified within ASC 855 “Subsequent Events,” which sets forth generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  It requires the disclosure of the date through whichan entity has evaluated subsequent events and the basis for that date, that is,whether that date represents the date the financial statements were issued orwere available to be issued.  The standard was effective for interimor annual periods ending after June 15, 2009 and was adopted by theCompany in the second quarter of 2009.   In February 2010, theFASB issued Accounting Standards Update No. 2010-09 (“ASC Update 2010-09”)“Subsequent Events (Topic 855):Amendments to Certain Recognition and Disclosure Requirements*.”*This ASU amends FASBCodification topic 855. The amendments in ASU 2010-09 remove the requirement inASC 855-10 for a SEC filer to disclose a date through which subsequent eventshave been evaluated in both issued and revised financial statements. This ASUwas effective upon issuance and the Company adopted this ASU as of December 31,2009. Except for the removal of disclosure requirements in ASC 855-10, theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

In August 2009, theFASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures —Measuring Liabilities at Fair Value.” The ASU provides additional guidance forthe fair value measurement of liabilities under ASC 820 “Fair ValueMeasurements and Disclosures”.  The ASU provides clarification thatin circumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using certain techniques. The ASU also clarifies that when estimating thefair value of a liability, a reporting entity is not required to include aseparate input or adjustment to other inputs relating to the existence of arestriction that prevents the transfer of a liability. It also clarifies thatboth a quoted price in an active market for the identical liability at themeasurement date and the quoted price for the identical liability when traded asan asset in an active market when no adjustments to the quoted price of theasset are required are Level 1 fair value measurements.  The Companyadopted the ASU in the fourth fiscal quarter of 2009.  The adoptionof the ASU did not have a material impact on the Company’s consolidated resultsof operations and financial condition.

 

Standards Issued But Not Yet Adopted

 

In June 2009, the FASB issued an accountingstandard codified within ASC 860, “Transfers and Servicing.” This standardamends the existing guidance on transfers of financial assets. The amendmentsinclude: (1) eliminating the qualifying special-purpose entity concept, (2) anew unit of account definition that must be met for transfers of portions offinancial assets to be eligible for sale accounting, (3) clarifications andchanges to the derecognition criteria for a transfer to be accounted for as asale, (4) a change to the amount of recognized gain or loss on a transfer offinancial assets accounted for as a sale when beneficial interests are receivedby the transferor, and (5) extensive new disclosures. This standard iseffective for new transfers of financial assets occurring on or after January1, 2010. The adoption of this standard is not expected to have a materialimpact on the Company’s consolidated financial statements; however, it couldimpact future transactions entered into by the Company.

 

In June 2009, the FASB issued an accountingstandard codified within ASC 810, “Consolidation.” This standard amends theconsolidation guidance for variable-interest entities under FIN 46(R),“Consolidation of Variable Interest Entities - an interpretation of ARB No.51.” The amendments include: (1) the elimination of the exemption forqualifying special purpose entities, (2) a new approach for determining whoshould consolidate a variable-interest entity, and (3) changes to when it isnecessary to reassess who should consolidate a variable-interest entity. Thisstandard is effective January 1, 2010. The Company is currently evaluating theimpact of this standard on its consolidated financial statements.

 

In October 2009, theFASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements,(amendments to ASC Topic 605, Revenue Recognition)” (ASU 2009-13) and ASU2009-14, “Certain Arrangements That Include Software Elements, (amendments toASC Topic 985, Software)” (ASU 2009-14). ASU 2009-13 requires entities toallocate revenue in an arrangement using estimated selling prices of thedelivered goods and services based on a selling price hierarchy. The amendmentseliminate the residual method of revenue allocation and require revenue to beallocated using the relative selling price method. ASU 2009-14 removestangible products from the scope of software revenue guidance and providesguidance on determining whether software deliverables in an arrangement thatincludes a

 

F-15

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

tangible product arecovered by the scope of the software revenue guidance. ASU 2009-13 and ASU2009-14 should be applied on a prospective basis for revenue arrangementsentered into or materially modified in fiscal years beginning on or after June 15,2010, with early adoption permitted. The Company is currently evaluating theimpact of the adoption of these ASUs on its consolidated results of operationsor financial condition.

 

In December 2009,the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities” which amends ASC 810, “Consolidation”to address the elimination of the concept of a qualifying special purposeentity.  The standard also replaces the quantitative-based risks andrewards calculation for determining which enterprise has a controllingfinancial interest in a variable interest entity with an approach focused onidentifying which enterprise has the power to direct the activities of avariable interest entity and the obligation to absorb losses of the entity orthe right to receive benefits from the entity. This standard also requirescontinuous reassessments of whether an enterprise is the primary beneficiary ofa VIE whereas previous accounting guidance required reconsideration of whether anenterprise was the primary beneficiary of a VIE only when specific events hadoccurred.  The standard provides more timely and useful informationabout an enterprise’s involvement with a variable interest entity and will beeffective as of the beginning of interim and annual reporting periods thatbegin after November 15, 2009, which for the Company would be January 1,2009.  The Company does not expect the adoption of this standard tohave a material effect on its consolidated results of operations and financialcondition.

 

In January 2010, theFASB issued ASU No. 2010-6, “Improving Disclosures About Fair ValueMeasurements,” which provides amendments to ASC 820 “Fair Value Measurementsand Disclosures,” including requiring reporting entities to make more robustdisclosures about (1) the different classes of assets and liabilitiesmeasured at fair value, (2) the valuation techniques and inputs used, (3) theactivity in Level 3 fair value measurements including information on purchases,sales, issuances, and settlements on a gross basis and (4) the transfersbetween Levels 1, 2, and 3.  The standard is effective for annualreporting periods beginning after December 15, 2009, except for Level 3reconciliation disclosures which are effective for annual periods beginningafter December 15, 2010. The Company does not expect the adoption of thisstandard to have a material impact on its consolidated financial statements.

 

F-16

----

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

****1.     Accounting Policies *(continued)*****

 

*Off-Balance Sheet Arrangements*

 

Exceptfor operating leases, SEDONA had no off-balance sheet arrangements during 2009or 2008.

 

Segment Information

 

The Company is organized and operates as one operating segment wherein it develops and markets web-based, vertical customer relationship management (CRM)/ (MRM) solutions for small and medium sized businesses and uses one measure of profitability to manage its business.  In accordance with ASC Topic 280, Segment Reporting, the chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company.  Since the Company operates in one segment and provides one group of similar products and services, all financial segment and product line information required by ASC Topic 280 can be found in the consolidated financial statements.  Major customer and geographic area revenue disclosures are presented in Note 13.

 

F-17

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

2.  Property and Equipment

 

Property and equipment consist of the following (in thousands):

**** ****
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Machinery  and equipment                        |       | $                     | 83         |   | $ | 78 |   |
| Leasehold  improvements                         |       | 15                    |       | 15 |   |
| Purchased  software for internal use            |       | 35                    |       | 35 |   |
|                                            |       | 133                   |       | 128 |   |
| Less  accumulated depreciation and amortization |       | 121                   |       | 115 |   |
|                                            |       | $                     | 12         |   | $ | 13 |   |

 

Depreciation expense was $6,000 and $5,000 for the years ended December 31, 2009 and 2008, respectively.

 

3.  Revolving Line of Credit

 

On September 27, 2006, theCompany entered into a revolving line of credit with David Vey, the Company’sChairman of the Board of Directors, and currently its Chief Executive Officer,with a maximum borrowing of $500,000.  Advanceson the line of credit were subject to the approval of David Vey. During 2008, Mr. Veyinformally increased the maximum borrowing under the line of credit to$690,000.  The line accrued interest at8% per year. Interest only payments were due quarterly until the maturity date,January 1, 2009.

 

In conjunction with the December 31,2008 refinancing, the outstanding line of credit of $690,000 and relatedaccrued interest of $73,262 were consolidated as part of a refinancingtransaction into a single convertible note payable to David Vey, see Note 4 foradditional details.

 

4. Debt Obligations

 

Long-term debt consists of the following (in thousands):

**** ****
| ** **                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Oak Harbor note                                                                                                                                                  |       | $                     | 1,040      |   | $ | 1,040 |   |
| Consolidated convertible note with David Vey, dated  December 31, 2008, net of discount of $20 and $2,460, at  December 31, 2009 and 2008 respectively |       | 4,080                 |       | 1,640 |   |
| Convertible notes with William Rucks                                                                                                                             |       | 1,000                 |       | 1,000 |   |
| Convertible note with Vey & Associates,  net of discount of $13 at December 31, 2009                                                               |       | 1,612                 |       | — |   |
| Convertibles notes with Rucks & Mitchell                                                                                                                |       | 600                   |       | 600 |   |
| Capital lease obligations                                                                                                                                        |       | —                |       | 8 |   |
| Total  debt obligations                                                                                                                                          |       | 8,332                 |       | 4,288 |   |
| Less current maturities                                                                                                                                          |       | (8,332                | )          | (2,008 | ) |
| Long-term debt                                                                                                                                                   |       | $                     | —     |   | $ | 2,280 |   |

 

F-18

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

4. Debt Obligations *(continued)*

 

The Company has entered into the following financing agreements to provide working capital with Mr. David R. Vey, Chairman of the Board of Directors and Chief Executive Officer of the Company.

 

***David Vey andOak Harbor***

 

***Oak Harbor Note***

 

As part of a refinancing of certainobligations to Oak Harbor Investment Properties LLC (“Oak Harbor”), the Companyissued a promissory note to Oak Harbor dated as of August 17, 2006 in theprincipal amount of $1,040,402 (the “Oak Harbor Note”).  Oak Harbor is a limited liability company inwhich David Vey and Richard T. Hartley are managing members. The Oak HarborNote has a maturity date of May 31, 2010, at which time all outstandingprincipal and interest was due.  The OakHarbor Note bears interest at a rate of eight percent (8%) per year.

 

***Convertible Notewith David Vey***

 

On December 31, 2008, the Independent Committee of the Company’s Board of Directors recommended to the Board of Directors that the Company consolidate, amend, and extend the term of three existing promissory notes previously issued to David Vey into a single secured convertible promissory note in the principal amount of $4,100,000. On December 31, 2008, the Board of Directors approved such consolidation, amendment and extension and the parties executed a Loan and Refinancing Agreement setting forth the terms of the Refinancing Transaction (the “Refinancing Agreement”).

 

***The Old Notes***

 

Pursuant to the terms of the Refinancing Agreement, the following old notes, issued by the Company to Mr. Vey, having a total principal amount of $4,595,216, immediately prior to the Refinancing Transaction, were consolidated, amended and extended:

 

1. A convertible promissory note, dated as of October 23, 2006, in the principal amount $2,691,263 (the “Old Convertible Note”), which had a maturity date, as previously extended, of January 1, 2009, unless theretofore converted, and bore interest at the rate of eight percent (8%) per year, which interest was due upon maturity.  Pursuant to the Old Convertible Note, Mr. Vey had the option to convert all or part of the unpaid principal and accrued but unpaid interest thereunder into shares at a conversion price of $0.14 per share.  The number of shares which would have been issuable upon the conversion of the $2,691,263 principal balance of the Old Convertible Note was 19,223,309.

 

2. A promissory note, dated as of October 23, 2006, in the principal amount of $1,213,953 (the “Bridge Note”), which had a maturity date, as previously extended, of January 1, 2009 and bore interest at a rate of eight percent (8%) per year.

 

3. A secured revolving promissory note dated as of September 27, 2006, in the principal amount of $690,000 (the “Revolving Note”).  The Revolving Note was payable by application of the proceeds of the receivables of the Company, together with accrued interest at the rate of eight percent (8%) per year.  The Revolving Note, as previously extended, had a maturity date of January 1, 2009.

 

F-19

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

4. Debt Obligations *(continued)*

 

The Old Convertible Note, the Bridge Note and the Revolving Note are collectively referred to below as the “Old Notes.”

 

***Partial Conversion ofInterest and Principal***

 

In connection with the Refinancing Transaction, Mr. Vey converted principal and accrued interest under the Existing Notes in the amount of $1,262,739 into shares of the Company’s common stock at the rate of $0.05 per share, for a total of 25,254,781 shares (the “Conversion”). After the Conversion, as described below, the Company issued to Mr. Vey a new convertible note in the amount of $4,100,000, which represented the total balance of the principal currently due and owing to Mr. Vey by the Company under the Old Notes.  Due to the fact that the original conversion price on the existing convertible note was $0.14 per share and interest and principal were converted at $0.05 per share, the Company recorded an inducement loss of $1,298,817 on December 31, 2008.

 

*Warrants*

 

Inconsideration for Mr. Vey’s agreement to refinance the Existing Notes andto effect the Conversion, the Company granted Mr. Vey one warrant topurchase 12,627,390 shares of Company common stock at a price of $0.07 pershare.  The warrant expires in December 2012.  This modification was accounted for as a debtextinguishment and the fair value of the stock purchase warrant was included indetermining the debt extinguishment loss to be recognized.  The fair value of warrant in the amount of$909,172 was determined using the Black-Scholes option pricing model and wasrecorded as a loss on extinguishment of debt.

 

The warrants have anti-dilution and other additional terms consistent with other warrants previously issued by the Company to Mr. Vey.

 

*The New Convertible Note*

 

In exchange for the Old Notes, the Company issued to Mr. Vey a consolidated secured convertible promissory note, dated as of December 31, 2008, in the principal amount $4,100,000 (the “New Convertible Note”).  The New Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity. Mr. Vey has the option to convert, at any time, all or part of the unpaid principal and accrued but unpaid interest of the New Convertible Note into shares of Company common stock at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $4,100,000 principal balance of the New Convertible Note is presently 82,000,000. The New Convertible Note is secured by substantially all of the assets of the Company pursuant to the terms of a Security Agreement between Mr. Vey and the Company, dated as of October 23, 2006.

 

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $2,460,000.  The Company is accreting this debt discount to interest expense over the one year term of the New Convertible Note, beginning with the funding of the first installment on January 5, 2009. For the year ended December 31, 2009, the Company recorded accretion of the debt discount of approximately $2,440.  For the year ended December 31, 2008, there was no accretion of the debt discount.

 

F-20

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

4. Debt Obligations *(continued)*

 

The New Convertible Note contains certain mandatory prepayment provisions.  In the event that the Company receives total net proceeds from (i) sales of the Company’s securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceeding $1,000,000; or in the event that the Company maintains current cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Mr. Vey as a mandatory prepayment.

 

The New Convertible Note contains customary anti-dilution provisions and the Company has agreed that it will use its best efforts to register for resale with the Securities and Exchange Commission all shares to be issued under the New Convertible Note.

 

*Financing with Vey Associates*

 

On December 31, 2008, the Independent Committee recommended to the Board of Directors that the Company enter into a new agreement to borrow up to $2,250,000 from Vey Associates (the “New Loan”). Vey Associates has agreed to fund the New Loan in five (5) installments as follows:

 
| (i)   | the  first installment on or before December 31, 2008, in the amount of  $100,000;   |
|-------|-------------------------------------------------------------------------------------------|
| (ii)  | the  second installment on or before January 15, 2009, in the amount of  $350,000;   |
| (iii) | the  third installment on or before February 15, 2009, in the amount of  $550,000;   |
| (iv)  | the  fourth installment on or before April 15, 2009, in the amount of  $750,000; and |
| (v)   | the fifth installment on or before September 30, 2009, in the amount of $500,000.    |

 

Payment of the fifth installment was subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal year 2009.

 

On March 11, 2009, the funding schedule was amended as follows:

 
| (i)   | the  first installment on or before December 31, 2008, in the amount of  $100,000; |
|-------|-----------------------------------------------------------------------------------------|
| (ii)  | the  second installment on or before January 15, 2009, in the amount of  $300,000; |
| (iii) | the  third installment on or before March 18, 2009, in the amount of  $600,000;    |
| (iv)  | the  fourth installment on or before May 1, 2009, in the amount of $750,000;  and  |
| (v)   | the fifth installment on or before September 30, 2009, in the amount of $500,000.  |

 

Payment of the fifth installment was subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal year 2009, which was not achieved.

 

The first installment of this financing agreement was not received until January 2009.  As of December 31, 2009, the outstanding balance on this loan was $1,625,000. 

 

The New Loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of May 31, 2010 unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Once $1,750,000 of the New Loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per

 

F-21

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

4. Debt Obligations *(continued)*

 

share.  The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is presently 45,000,000.

 

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $.03 per share.  The Company is accreting this debt discount to interest expense over the one year term of the New Convertible Note, beginning on the date each respective tranche was funded to the Company.  For the year ended December 31, 2009, the Company recorded accretion of the debt discount of approximately $962,000.  For the year ended December 31, 2008, there was no accretion of the debt discount.

 

The Vey Associates Convertible Note contains certain mandatory prepayment provisions.  In the event that total net proceeds received by the Company from (i) sales of Company securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceed $1,000,000; or the Company maintains current cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Vey Associates as a mandatory prepayment.

 

The Vey Associates Convertible Note is secured by substantially all of the assets of the Company pursuant to a Security Agreement dated as of December 31, 2008 between the Company and Vey Associates (the “Vey Associates Security Agreement”).

 

The Vey Associates Convertible Note contains customary anti-dilution provisions and the Company has agreed that it will use its best efforts to register for resale the shares with the Securities and Exchange Commission all shares to be issued under the Vey Associates Convertible Note.

 

On December 31, 2008, the Board of Directors approved the terms of the New Loan and the parties executed the Refinancing Agreement.

 

***SecurityAgreement***

 

The New Oak Harbor Note is securedby substantially all of the assets of the Company pursuant to an Amended andRestated Security Agreement dated as of August 17, 2006 between theCompany and Oak Harbor (the “Amended Security Agreement”).  The Amended Security Agreement amends andrestates the Security Agreement between Oak Harbor and the Company effective asof January 13, 2003 which granted to Oak Harbor a lien and securityinterest in the assets of the Company (the “Oak Harbor Security Agreement”).  The changes to the Security Agreement wereeffected by the Amended and Restated Security Agreement which include: (i) themodification of the term “Obligations” to mean all of the obligations,indebtedness, and liabilities of the Company to Oak Harbor and Vey; (ii) theacknowledgement and consent of Oak Harbor to the grant of a subordinatesecurity interest in the assets of the Company set forth in the AmendedSecurity Agreement (the “Collateral”) to Vey; and (iii) the modificationof Appendix A to the Security Agreement to reflect the current outstandingpermitted liens in the Collateral and references the subordinate securityinterest to the Collateral granted to Vey pursuant to the Security Agreementbetween the Company and Vey dated as of October 23, 2006 (the “VeySecurity Agreement”).

 

F-22

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

4. Debt Obligations *(continued)*

 

***Amended andRestated Intercreditor Agreement***

 

Mr. Vey, Vey Associates, the Company and Oak Harbor, a company in which Mr. Vey is a managing member and 35% owner, entered into an Amended and Restated Intercreditor Agreement, dated as of December 31, 2008 (the “Intercreditor Agreement”).  The Intercreditor Agreement provides (i) that Oak Harbor shall have a first priority interest in substantially all of the assets of the Company with regard to the obligations of Sedona to Oak Harbor under an existing promissory note and related security agreement, and (ii) that the security interests of Vey Associates under the Vey Associates Convertible Note shall be junior to those of Oak Harbor but senior to those of Mr. Vey.

 

***Cross DefaultProvisions of the Notes***

 

The New Consolidated Notes contain cross default provisions.  Consequently an event of default under any of the Notes would constitute an event of default under each of the Notes.  An event of default under the Notes will also have occurred if a default occurs under any other loan, extension of credit, security right, instrument, document, agreement or obligation from the Company to Vey or Oak Harbor.

 

***Approval forAdditional Shares***

 

The Articles of Incorporation of the Company provides for 175,000,000 of which 127,364,064 were issued and outstanding as of December 31, 2009.  At the present time, the Company does not have sufficient authorized shares to issue all of the shares to Mr. Vey and Vey Associates as required upon full conversion of notes and exercise of options and warrants.  The Company intends to seek approval of its shareholders for an amendment to its Articles of Incorporation to increase its authorized shares by at least an amount necessary to cover its share issuance obligations at its next annual shareholders’ meeting.  Mr. Vey and Vey Associates have agreed to refrain from converting any notes or exercising any options or warrants which they respectively hold until the Company has a sufficient number of authorized shares in exchange for an agreement by the Company to allow Vey Associates to pledge the Vey Associates Convertible Note or Mr. Vey to pledge the New Convertible Note in the future.

 

Rucks and Mitchell

 

Charles F. Mitchell (“Mitchell”) extended a loan to the Company, which was evidenced by a convertible promissory note dated May 31, 2006, in the principal amount of $300,000, with a conversion price of $0.20 per share (the “Mitchell Convertible Note”).  William Rucks (“Rucks”) extended several loans to the Company which were evidenced by the following convertible promissory notes: (i) note dated July 1, 2005 in the principal sum of $250,000; (ii) note dated August 2, 2005 in the principal sum of $250,000; and (iii) $500,000 note dated September 29, 2005 and (iv) a note in the amount of $300,000 dated May 31, 2006 (collectively the “Rucks Notes”). The Notes designated as (i), (ii), and (iii) each had a conversion price of $0.18 per share, while the note designated as (iv) had a conversion price of $0.20 per share.  The Notes designated as (i), (ii), and (iii), in the total sum of $1,000,000 mature on and are payable on May 31, 2010. The two $300,000 convertible notes mature on and are payable on May 31, 2010. The convertible notes bear interest on the principal outstanding at a rate of 8% per year, annually in arrears, from the date of the convertible notes until the earlier of maturity or the date upon which the unpaid balance is paid in full or is converted into shares of

 

F-23

----

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

4. Debt Obligations *(continued)*

 

common stock.  The investors may, at their option, at any time after each loan, elect in writing to convert all or a designated part of the unpaid principal balance, together with the accrued and unpaid interest, of each convertible note into shares. The conversion price for principal is protected by full-ratchet anti-dilution, with the exemption of stock and stock options issued to the Company’s employees and directors only.  As additional consideration, the investors shall be granted one (1) four-year warrant for every two (2) shares able to be converted. The exercise prices of the warrants range from $0.30 to $0.35 per share.

 

Pursuant to the Rucks Convertible Note and the Mitchell Convertible Note, Rucks and Mitchell were granted the option to convert the unpaid principal balance and accrued unpaid interest on their notes into Shares of the Company. The respective conversion prices are subject to adjustment under certain circumstances.  The issuance of the New Vey Convertible Note triggered such an adjustment. At the request of the Company, Rucks and Mitchell have agreed to waive their rights to have the conversion price set forth in their respective convertible notes adjusted effective for periods from October 23, 2006 to June 30, 2010.

 

Effective March 6, 2008, the Companymodified the terms of the Convertible Promissory Notes dated July 1, 2005,August 1, 2005 and September 29, 2005, respectively in favor ofWilliam Rucks.  Under the revisedagreements, Williams Rucks (“the Investor”) was granted one (1) warrant topurchase 2,777,777 shares of the Company’s Common Stock at an exercise price of$0.30 per share.  The warrant expires in March 2012.  This modification replaced the embeddedderivative instrument contained in the original agreement that granted Rucksone (1) four-year warrant for every two (2) shares able to beconverted. The modification was accounted for as a debt extinguishment and thefair value of the stock purchase warrants was included in determining the debtextinguishment loss to be recognized. The fair value of the warrant in the amount of $247,000 was determinedusing the Black-Scholes option pricing model and was recorded as a loss onextinguishment of debt.

 

*Interest Expense*

 

Interest expense consists of the following (in thousands):

 
| ** **                                                 | ** ** | **Year  ending**            | ** ** | **Year  ending**            | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| Interest  expense on principal                             |       | $                           | 698        |                        | $          | 637 |   |
| Non-cash  amortization of debt discount, convertible notes |       | 3,402                       |       | 45                          |       |
| Total                                                      |       | $                           | 4,100      |                        | $          | 682 |   |

 

F-24

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

5. Stockholders’ Equity

 

Class A Convertible Preferred Stock

 

Series A and H

 

Class A preferred stock is issuable in various series and is convertible in accordance with the terms of the issued series.  The Board of Directors has the authority to fix by resolution all other rights.  The Class A, Series A, preferred shares pay quarterly dividends, when declared, at the rate of twelve percent (12%) per annum, have cumulative rights, and have a liquidation preference at the par value of the preferred shares. Each share is convertible at the election of the holder into one share of common stock at any time.  Each holder has the same right to vote each share on all corporate matters as the holder of one share of common stock.

 

The Company ceased to declare preferred stock dividends as of January 1, 2001 on the issued and outstanding series of the Class A Convertible Preferred Stock. Cumulative but undeclared dividends on the Series A Preferred Stock at December 31, 2009, equaled $1,080,000 or $2.16 per share compared to at December 31, 2008 which equaled $960,000 or $1.92 per share.  To the extent such dividends are declared and paid, they will then be reflected appropriately in the Company’s financial statements.

 

*Common Stock Issuances*

 

Issuance of Stock forProfessional Services:

 

During 2009, the Companyissued 629,419 shares of its common stock to a consultant in lieu ofapproximately $47,000 cash compensation for professional services renderedduring 2009 and 2008.

 

In addition, the Companyissued 450,000 shares of its common stock to Marco A. Emrich, the Company’sformer President and CEO, who resigned his positions at the Company effective September 17,2008.  Under the terms of the separationagreement dated January 31, 2009, Mr. Emrich was entitled to receive,in addition to certain cash compensation, 450,000 shares of unrestricted commonstock at a fair market value of $0.07 per share or $31,500.  The shares were grantedeffective December 31, 2008 and were issued in 2009.

 

The Company also issued25,254,781 shares of its common stock to David R. Vey.  On December 31, 2008, Mr. Veyelected to convert $495,216 of principal due on a convertible note and $767,523of related accrued interest into shares of common stock at a rate of $0.05 pershare.

 

During 2008,the Company issued 325,436 shares of its Common Stock to a consultant in lieuof approximately $49,000 cash compensation for investor relation servicesrendered during the period.

 

Issuance of StockPursuant to Employee Stock Purchase Plan:

 

During 2009, the Company issueda total of 25,046 shares of its common stock to employees for common stockpurchased through its Employee Stock Purchase Plan.  The purchase was valued at approximately$2,700.  The plan provides employees theoption to purchase common stock at a 15% discount to its fair marketvalue.  The Company recorded $470 ofcompensation expense related to the common stock purchases.  The Company has temporarily suspended theemployee stock purchase plan as it searches for a new plan administrator tooversee the program.

 

F-25

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

5. Stockholders’ Equity *(continued)*

 

During 2008, the Companyissued a total of 52,210 shares of its common stock to employees for commonshares purchased through its Employee Stock Purchase Plan. The purchase wasvalued at approximately $8,400. The plan provides employees the option topurchase common stock at a 15% discount to its fair market value. The Company recorded$1,486 of compensation expense related to the common stock purchases.

 

Grant of Stock Pursuantto Employee 401k Plan:

 

During 2008, the Companymade its fiscal 2008 matching contribution through the issuance of a total of258,363 shares of its common stock to the 401(k) benefit plan trustee forthe benefit of plan participants. The contribution was valued at approximately$44,000.

 

Stock Option Exercises:

 

During 2008, 58,791shares of the Company’s common stock were issued due to the exercise of employeecommon stock purchase options. The Company received proceeds of approximately$9,000 related to the option exercises. During 2009, there were no exercises of common stock purchase options.

 

Private Placement ofCommon Stock:

 

*First Quarter 2008*

 

During the three monthsended March 31, 2008, the Company issued 1,864,709 shares of its commonstock to accredited investors for private placement transactions entered intoduring fiscal year 2007.  The shares weresold for a total of $324,208, at an average price of $0.17 per share. The termsof the sale provide that one half of the shares shall be restricted fromtrading until the shares are registered, and the first to occur of thefollowing events: (1) the Company’s common stock trades at a market priceof $0.60 per share or greater; or (2) six (6) months from the date ofinvestment have elapsed. The remaining one half of the shares shall berestricted from trading until the shares are registered and the first to occurof the following events: (1) the Company’s common stock trades at a marketprice of $1.00 per share or greater or (2) twelve (12) months from thedate of investment have elapsed.

 

*Second Quarter 2008*

 

During the three monthsended June 30, 2008, the Company issued 408,189 shares of its common stockto accredited investors for private placement transactions.  The shares were sold for a total of $50,000,at an average price of $0.12 per share. The terms of the sale provide that one half of the shares shall berestricted from trading until the shares are registered, and the first to occurof the following events: (1) the Company’s common stock trades at a marketprice of $0.40 per share or greater; or (2) six (6) months from thedate of investment have elapsed.  Theremaining one half of the shares shall be restricted from trading until theshares are registered and the first to occur of the following events: (1) theCompany’s common stock trades at a market price of $0.50 per share or greater;or (2) twelve (12) months from the date of investment have elapsed.  In addition, the Company issued the investorsthree (3) year warrants to purchase 204,094 shares of common stock atexercise prices ranging from approximately $0.15 to $0.21 per share. The commonshares underlying these warrants shall be restricted until registration of theshares is completed and six (6) months from the closing date have elapsed.The Company shall have no call rights on these warrants.

 

F-26

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

5. Stockholders’ Equity *(continued)*

 

*Third Quarter 2008*

 

During the three monthsended September 30, 2008, the Company issued 387,770 shares of its commonstock to accredited investors for private placement transactions.  The shares were sold for a total of $50,000,and an average price of approximately $0.13 per share.  The term of the sales provide that one halfof the shares shall be restricted from trading until the shares are registered,and the first to occur of the following events: (1) the Company’s commonstock trades at a market price of $0.40 or greater or (2) six months fromthe closing date have elapsed.  Theremaining one half of the shares shall be restricted from trading until theshares are registered and the first to occur of the following events: (1) theCompany’s common stock trades at a market price of $0.50 per share or greater;or (2) twelve (12) months from the closing date have elapsed.  In addition, the Company issued the investorthree (3) year warrants to purchase 193,884 shares of common stock atexercise prices of approximately $0.18 per share.  The common shares underlying these warrantsshall be restricted until registration of the shares is completed and six (6) monthsfrom the closing date have elapsed.  TheCompany shall have no call rights on these warrants.

 

The Company did not enterinto any private placement transactions during the fourth quarter of 2008 orthe year ended December 31, 2009.

 

*Registration Rights Agreements*

 

For the 2008 privateplacements of common stock, the Company did not register the issuance of theshares of common stock to the accredited investors with the SEC under theSecurities Act of 1933, as amended (the “Securities Act”), in reliance onexemptions from the registration requirements of the Securities Act.  The Company and the accredited investorsentered into a registration rights agreements pursuant to which the Companyagreed to register for resale the shares issued to the accredited investors.Under the registration rights agreements, the Company agreed to use its bestefforts to cause the registration statement to be declared effective under theSecurities Act as soon as reasonably practicable and to keep the registrationstatement continuously effective until such time as the common stock is nolonger deemed to be registrable securities. However, there are no specificpenalty provisions in connection with the registration rights agreements andtherefore, the investors in the private placements are not entitled to receiveany additional benefit if the registration does not occur.

 

6.Stock Options and Warrants

 

Long-Term Incentive Plans

 

During 2000, the stockholders of the Company approved the 2000 Incentive Stock Option Plan (the “2000 Plan”).  The 2000 Plan has replaced the 1992 Long-Term Incentive Plan (the “1992 Plan”) under which no further options will be issued.  Significant provisions of the 2000 Plan include: reserving 20% of the outstanding shares for awards that may be outstanding at any one time, rather authorizing restricted stock, deferred stock, stock appreciation rights, performance awards settleable in cash or stock, and other types of awards based on stock or factors influencing the value of stock; adding provisions so that options and other performance-based awards will qualify for tax deductions; and specifying obligations relating to non-competition and proprietary information that may be imposed on optionees.  The term of each Award under the 2000 Plan shall be for such period as may be determined by the Compensation

 

F-27

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

6. Stock Options and Warrants *(continued)*

 

Committee of the Board of Directors which administers such plan, but generally, in no event shall the term exceed a period of ten (10) years from the date of grant.  Options issued under the 2000 Plan are considered outstanding until they are exercised and any other award is outstanding in the calendar year in which it is granted and for so long thereafter as it remains such to any vesting condition required by continuing employment.  The Compensation Committee shall determine the term of each option, the circumstances under which an award may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including without limitation, cash, stock, other awards or awards granted under other plans of the Company and any subsidiary, or other property and the methods by or forms in which stock will be delivered or deemed to be delivered to participants.

 

Options

 

Options outstanding under the 1992 Plan and the 2000 Plan have been granted to Officers, Directors, employees and others, and expire between January 2010 and August 2016.  All options were granted at or above the fair market value of the underlying common stock on the grant date.  Transactions under these Plans were as follows:

 
| **** ****                                 | **** **** | ****Shares****    | **** **** | ****Weighted  Average********Exercise  Price**** | **** **** | ****Weighted  Average  Remaining  Contractual  Term (Years)**** | **** **** | ****Aggregate  Intrinsic Value**** | **** **** |
|------------------------------------------------|----------------|-------------------|----------------|--------------------------------------------------|----------------|-----------------------------------------------------------------|----------------|------------------------------------|----------------|
| ****Outstanding  at December 31, 2007**** | **** **** | ****4,317,743**** | **** **** | ****$****                                        | ****0.54****   | **** ****                                                  | ****3.56****   | **** ****                     | ****$****      | ****0**** | **** **** |
| ****Canceled  or expired****                   | **** **** | ****(998,500****  | ****)****      | ****0.83****                                     | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Granted****                                | **** **** | ****—****    | **** **** | ****—****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Exercised****                              | **** **** | ****(58,791****   | ****)****      | ****0.15****                                     | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Outstanding  at December 31, 2008**** | **** **** | ****3,260,452**** | **** **** | ****0.46****                                     | **** **** | ****3.11****                                                    | **** **** | ****0****                          | **** **** |
| ****Canceled  or expired****                   | **** **** | ****(513,854****  | ****)****      | ****1.11****                                     | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Granted****                                | **** **** | ****—****    | **** **** | ****—****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Exercised****                              | **** **** | ****—****    | **** **** | ****—****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Outstanding  at December 31, 2009**** | **** **** | ****2,746,598**** | **** **** | ****$****                                        | ****0.33****   | **** ****                                                  | ****3.52****   | **** ****                     | ****$****      | ****0**** | **** **** |

**** ****
| **Exercisable at  Year-end** | ** ** | **Options** | ** ** | **Exercise Price  Range Per Share** | ** ** | **Weighted  Average Exercise  Price** | **** **** | ****Weighted  Average  Remaining  Contractual  Term (Years)**** | **** **** | ****Aggregate  Intrinsic Value**** | **** **** |
|------------------------------|------------|-------------|------------|-------------------------------------|------------|---------------------------------------|----------------|-----------------------------------------------------------------|----------------|------------------------------------|----------------|
|                         |       |        |       |                                |       |                                  |           |                                                            |           |                               |           |
| 2008                         |       | 3,190,452   |       | $0.15 to $5.13                      |       | $                                     | 0.46           |                                                            | 3.09           |                               | $              | 0 |   |
| 2009                         |       | 2,686,598   |       | $0.15 to $5.13                      |       | $                                     | 0.34           |                                                            | 3.51           |                               | $              | 0 |   |

 

F-28

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

6. Stock Options and Warrants *(continued)*

 

The following table summarizes information about stock options outstanding at December 31, 2009:

 
| **** ****                                               | **** **** | ****Ranges****         | **** **** | ****Total****  | **** **** |
|--------------------------------------------------------------|----------------|------------------------|----------------|----------------|----------------|
| ****Range of exercise prices****                             | **** **** | ****$0.15 to $1.03**** | **** **** | ****$1.72****  | **** **** | ****$3.16 to $5.13**** | **** **** | ****$0.15 to $5.13**** | **** **** |
| ****Options  outstanding****                                 | **** **** | ****2,668,598****      | **** **** | ****25,000**** | **** **** | ****53,000**** | **** **** | ****2,746,598**** | **** **** |
| ****Weighted  average remaining contractual life (years)**** | **** **** | ****4.51****           | **** **** | ****.85****    | **** **** | ****.27**** | **** **** | ****3.52**** | **** **** |
| ****Weighted  average exercise price****                     | **** **** | ****$****              | ****0.26****   | **** **** | ****$****      | ****1.72**** | **** **** | ****$**** | ****3.33**** | **** **** | ****$**** | ****0.33**** | **** **** |
| ****Exercisable****                                          | **** **** | ****2,608,598****      | **** **** | ****25,000**** | **** **** | ****53,000**** | **** **** | ****2,686,598**** | **** **** |
| ****Weighted  average exercise price****                     | **** **** | ****$****              | ****0.26****   | **** **** | ****$****      | ****1.72**** | **** **** | ****$**** | ****3.33**** | **** **** | ****$**** | ****0.34**** | **** **** |
|                                                              |                |                        |                |                |                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company estimates the fair value of common stock options at the grant date by using the Black-Scholes option-pricing model.

 

During 2009 and 2008, there were no common stock options or incentive options granted to employees of the Company.

 

Shares reserved for future issuance of common stock under the 2000 Incentive Stock Option Plan approximate 22,726,215 as of December 31, 2009.

 

Warrants

 

Warrants outstanding have been granted to Officers, Directors, stockholders and others to purchase common stock at prices ranging from $0.07 to $1.21 per share and expiring between February 2010 and December 2012.   The summary of warrant activity for 2009 and 2008 was as follows:

* *
| **** ****                                 | **** **** | ****Shares****     | **** **** | ****Weighted  Average********Exercise  Price**** | **** **** | ****Weighted  Average  Remaining  Contractual  Term (Years)**** | **** **** | ****Aggregate  Intrinsic Value**** | **** **** |
|------------------------------------------------|----------------|--------------------|----------------|--------------------------------------------------|----------------|-----------------------------------------------------------------|----------------|------------------------------------|----------------|
| **** ****                                 | **** **** | **** ****     | **** **** | **** ****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Outstanding  at December 31, 2007**** | **** **** | ****9,796,845****  | **** **** | ****$****                                        | ****0.76****   | **** ****                                                  | ****1.51****   | **** ****                     | ****$****      | ****0**** | **** **** |
| ****Canceled  or expired****                   | **** **** | ****(2,920,300**** | ****)****      | ****1.66****                                     | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Granted****                                | **** **** | ****15,803,145**** | **** **** | ****0.11****                                     | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Exercised****                              | **** **** | ****—****     | **** **** | ****—****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Outstanding  at December 31, 2008**** | **** **** | ****22,679,690**** | **** **** | ****0.19****                                     | **** **** | ****2.25****                                                    | **** **** | ****126,274****                    | **** **** |
| ****Canceled  or expired****                   | **** **** | ****(342,000****   | ****)****      | ****1.66****                                     | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Granted****                                | **** **** | ****—****     | **** **** | ****—****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Exercised****                              | **** **** | ****—****     | **** **** | ****—****                                   | **** **** | **** ****                                                  | **** **** | **** ****                     | **** **** |
| ****Outstanding  at December 31, 2009**** | **** **** | ****22,337,690**** | **** **** | ****$****                                        | ****0.17****   | **** ****                                                  | ****1.48****   | **** ****                     | ****$****      | ****126,274**** | **** **** |

 

F-29

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

6. Stock Options and Warrants *(continued)*

**** ****
| ****Exercisable at**********Year-end****** | ** **     | ****Warrant  Shares**** | **** **** | ****Exercise Price**********Range  Per Share****** | **** **** | ****Weighted  Average**********Exercise  Price****** | **** **** | ****Weighted  Average  Remaining  Contractual  Term (Years)**** | **** **** | ****Aggregate  Intrinsic Value**** | **** **** |
|--------------------------------------------|----------------|-------------------------|----------------|----------------------------------------------------|----------------|------------------------------------------------------|----------------|-----------------------------------------------------------------|----------------|------------------------------------|----------------|
| ****2008****                               | **** **** | ****22,491,875****      | **** **** | ****$0.07 to $2.50****                             | **** **** | ****$****                                            | ****0.18****   | **** ****                                                  | ****2.25****   | **** ****                     | ****$****      | ****126,274**** | **** **** |
| ****2009****                               | **** **** | ****22,337,690****      | **** **** | ****$0.07 to $1.21****                             | **** **** | ****$****                                            | ****0.17****   | **** ****                                                  | ****1.48****   | **** ****                     | ****$****      | ****126,274**** | **** **** |

 

The following table summarizes information about common stock warrants outstanding at December 31, 2009:

**** ****
| **** ****                                               | **** **** | ****Ranges****         | **** **** | ****Total****          | **** **** |
|--------------------------------------------------------------|----------------|------------------------|----------------|------------------------|----------------|
| ****Range of exercise prices****                             | **** **** | ****$0.07 to $0.35**** | **** **** | ****$0.51 to $0.91**** | **** **** | ****$1.03 to $1.21**** | **** **** | ****$0.07 to $1.21**** | **** **** |
| ****Outstanding****                                          | **** **** | ****21,966,720****     | **** **** | ****214,570****        | **** **** | ****156,400**** | **** **** | ****22,337,690**** | **** **** |
| ****Weighted  average remaining contractual life (years)**** | **** **** | ****1.48****           | **** **** | ****2.06****           | **** **** | ****1.11**** | **** **** | ****1.48**** | **** **** |
| ****Weighted  average exercise price****                     | **** **** | ****$****              | ****0.16****   | **** ****         | ****$****      | ****0.72**** | **** **** | ****$**** | ****1.12**** | **** **** | ****$**** | ****0.17**** | **** **** |
| ****Exercisable****                                          | **** **** | ****21,966,720****     | **** **** | ****214,570****        | **** **** | ****156,400**** | **** **** | ****22,337,690**** | **** **** |
| ****Weighted  average exercise price****                     | **** **** | ****$****              | ****0.16****   | **** ****         | ****$****      | ****0.72**** | **** **** | ****$**** | ****1.12**** | **** **** | ****$**** | ****0.17**** | **** **** |

 

The Company estimates the fair value of common stock warrants at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2008: no dividends paid for all years; average expected volatility range: 161%; risk-free interest rates of: 1.28%; contractual term of 4.00 years.

 

During 2009, the Company did not issue any warrants.

 

In 2008, the Company issued 12,627,390 warrants to purchase common stock to David Vey and 2,777,777 warrants to purchase common stock to William Rucks in conjunction with various debt refinancings as fully described in Note 4.  Additionally, during 2008, 397,978 warrants to purchase common stock were issued to investors of the common stock private placements as fully described in Note 5.

 

All warrants issued and outstanding are classified in equity.

 

7. Contingencies

 

OnMay 5, 2003, SEDONA filed a civil action lawsuit against numerousdefendants in the United States District Court for the Southern District of NewYork.  The Company sought damages fromthe defendants named, and other defendants yet to be named, in the complaintfor allegedly participating in the manipulation of its common stock, fraud,misrepresentation, failure to exercise fiduciary responsibility, and/or failureto adhere to SEC trading rules and regulations, tortuous interference,conspiracy and other actions set forth in the complaint.

 

F-30

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

7. Contingencies *(continued)*

 

OnMarch 27, 2009, the Honorable Judge Laura Swain, a federal judge in theUnited States District Court for the Southern District of New York, issued anopinion dismissing several of the defendants from the civil action lawsuitfiled by SEDONA on May 5, 2003. SEDONA was granted the right and has filed a third amended petitionagainst the remaining defendants and is aggressively pursuing theseclaims.  On May 1, 2009, AmroInternational, S.A., Rhino Advisors, Inc., Roseworth Group., LTD., andCambois Finance, Inc., all defendants in the May 5, 2003 action,filed suit against SEDONA and several of its former directors in Federal Courtin the Southern District of New York alleging breach of a settlement agreementseeking unspecified damages and attorney’s fees and expenses.  The suit is being vigorously defended bySEDONA and its former directors.  Theoutcome of litigation proceedings is inherently uncertain and there is noassurance that the Company will prevail in either of these matters.

 

On September 28, 2006, SEDONA filed a civil action lawsuit against Open Solutions Inc. (OSI), in Montgomery County Court in Pennsylvania for breach of a software license agreement entered into between the parties in May, 2002.  In the lawsuit, the Company alleges that since September 2004, OSI has failed to pay royalty payments required under the parties’ master software license and services agreement for licensed products and services sold by OSI to its customers.  OSI removed the case to federal court and successfully moved for a change in venue from the United States District Court for the District of Pennsylvania to the United States District Court for the District of Connecticut.  SEDONA filed an amended complaint after the case was transferred to the District of Connecticut, case no. 3:07-cv-171.  In its amended complaint, SEDONA seeks a declaration and damages relating to OSI’s failure to pay royalties under the agreement for its sales of the cView product operating on the .NET platform and for breach of the agreement’s confidentiality provision.  OSI served an amended answer with counterclaims asserted against SEDONA for declaratory relief and breach of contract.  Discovery was completed and each party has moved for summary judgment. The parties participated in oral argument before the Court concerning the summary judgment motions on September 19, 2008.

 

In a ruling filed August 19, 2009, the court denied SEDONA’s motion for summary judgment on claims that OSI was required to pay royalties on the sale of the cView product and that failure to pay such royalties and disclosure of confidential information to the offshore development company constituted a breach of contract. Further, the court denied OSI’s motion for summary judgment on claims that SEDONA was in breach of contract for demanding royalty payments, while accepting OSI’s claim that cView was a license enhancement not subject to royalties (see Note 8).

 

Noactions other than the matters set forth above or matters involved in theordinary course of business are currently known by Management and such othermatters are believed by Management not to have material significance.

 

F-31

----

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

8. Related Party Transactions

 

***David Vey andOSI Litigation***

 

On September 4, 2007, SEDONAentered into an agreement with Vey Associates, Inc. in which VeyAssociates agreed to provide funding to assist SEDONA in the payment of certainfees and expenses related to the lawsuit captioned Sedona Corp. v. OpenSolutions, Inc., Action No. 3:07-CV-00171-VLB (the “litigation”),currently pending in the United States District Court for the District ofConnecticut. David Vey, the Chairman and a shareholder of SEDONA, is anofficer, director and majority shareholder of Vey Associates, Inc.

 

Under the agreement, Vey Associatescommitted to advance up to $750,000 to SEDONA to pay fees and expenses inconnection with the litigation. Any proceeds received from the settlement,verdict or other conclusion of the litigation would be first applied to repayVey Associates and SEDONA for expenses incurred. Thereafter, SEDONA wouldreceive twenty-five (25%) percent of any proceeds and Vey Associates wouldreceive seventy-five (75%) percent of the proceeds. In the event that SEDONAwas unsuccessful in the litigation and did not receive any litigation proceeds,it would have no obligation to repay any sums to Vey Associates. All amountsadvanced by Vey Associates to SEDONA accrued interest at a rate of ten (10%)percent per year.

 

In a ruling filed August 19, 2009, as more fully described in Note 4, the court denied SEDONA’s motion for summary judgment.  In accordance with the terms of the litigation support agreement, the Company had no obligation to repay any sums to Vey Associates and reclassified approximately $846,000 of principal and accrued interest to additional paid in capital.

 

***David Vey andOak Harbor***

 

In addition, as more fullydescribed Note 4, the Company completed transactions with David R. Vey, theCompany’s Chairman of its Board of Directors and Oak Harbor related to theconsolidation and refinancing of certain indebtedness to David R. Vey.

 

9. Employee Benefits Plan

 

Starting in fiscal year 1999, a 401(k) Plan was made available to all eligible SEDONA employees, but there were no contribution matches by the Company.

 

During 2001, the plan was modified to allow the Board of Directors to consider, on an annual basis, a discretionary match for the Plan participants in the form of Company stock at a rate of up to 50% of employee contributions but not in excess of 3% of employee base compensation.  In 2005 the match formula was changed to comply with current safe harbor rules.  All employees receive a matching stock contribution equal to 3% of their annual salary into the plan; the match may not to exceed IRS established limits.

 

In 2009, the Company has accrued approximately $34,000 as a matching contribution for all eligible SEDONA employees.

 

In 2008, the Board approved a matching contribution, after plan forfeitures, of its common stock which was valued at approximately $44,000 or $0.17 per share and resulted in the issuance of 258,363 shares of the Company’s common stock in 2008 to the plan’s trustee for the benefit of plan participants.

 

F-32

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SEDONA Corporationand Subsidiary

Notes to Consolidated Financial Statements

 

10. Commitments

 

*Employment agreements*

 

The Company has employment agreements with certain key employees, which expire at various dates through 2006, however, the agreements have automatic renewal provisions, which allow the contracts to continue from year-to-year until either party gives notice to the other, at least six months prior to expiration. The agreements provide for minimum salary levels, plus any additional compensation as directed by the Board of Directors.  As of March 26, 2010, the agreements remained in full effect.

 

*Severance agreement*

 

Effective January 31, 2009, the Company entered into a separation agreement with Marco Emrich, the Company’s former President, Chief Executive Officer and Director of the Company.  Marco Emrich resigned his positions at the Company effective September 17, 2008.  Under the terms of the separation agreement, Mr. Emrich received a total of $63,176 for services to the Company through and including September 17, 2008.  The Company also paid Mr. Emrich severance based on three month’s salary, totaling $56,250.  The wages and severance amounts are paid to Mr. Emrich on a biweekly basis over a one year period ending in 2010.

 

Inaddition, in lieu of cash compensation for accrued vacation, the Company grantedMr. Emrich 450,000 shares of unrestricted common stock.  The fair value of these shares was determinedto be $31,500 based on the closing price of the Company’s common stock as of January 31,2009.  These shares were subsequentlyissued in March 2009.  The Company alsopaid for the cost of six months of medical, dental and vision coverage for Mr. Emrichand his spouse.  As of December 31,2009 and 2008, the Company had accrued severance expense of approximately$2,300 and $159,000, respectively, under this agreement.

 

Mr. Emrichalso agreed to act as a consultant to the Company, on a limited basis, shouldthe Company require his services through December 31, 2009, however, noservices were required.

 

Mr. Emrichis subject to certain covenants, including a non-disclosure covenant withrespect to the Company’s confidential information, non-competition andnon-solicitation covenants, a non-disparagement covenant, and certain othercovenants.

 

*Lease commitments*

 

InDecember 2005, the Company entered into a lease for a 4,270 square footfacility to serve as its principal offices. The five (5) year leasecommenced on January 1, 2006 and expires December 31, 2010.  The initial annual base rent is $68,320 or$16.00 per sq. ft. and will increase $0.50 per sq. ft. in each of the remainingyears of the lease.

 

The Company has the option to terminate thelease after January 1, 2009, with one hundred eighty (180) days priorwritten notice to the Landlord and paying a sum equal to the unamortizedtransaction costs incurred in connection with the lease amendment, plus three (3) monthsrent on the term expiration date.

 

TheCompany also has a software delivery and customer care office located inMinnesota.  Effective May 1, 2009,the Company entered into a lease for an 894 square foot facility in Plymouth,Minnesota.  The

 

F-33

----

 

SEDONA Corporationand Subsidiary

Notes to Consolidated Financial Statements

 

10. Commitments *(continued)*

 

leasecommenced on May 1, 2009 and expires April 30, 2011.  The initial base annual rent is $7,020 peryear or $7.85 per sq. ft. plus an escalation charge of 3.4%.  The Company shall have the option to renewits lease for two (2) years by providing nine (9) months writtennotice to the Landlord, prior to the lease expiration.

 

Future minimum lease payments under these lease obligations total $86,000 and are all due per the table below****(in thousands):****

**** ****

| **** ****                  | **** **** | ****2010**** | **** **** | ****2011****   | **** **** | ****2012****   | **** **** | ****Total****  | **** **** |
|---------------------------------|----------------|--------------|----------------|----------------|----------------|----------------|----------------|----------------|----------------|
| ****Corporate  Headquarters**** | **** **** | ****$****    | ****77****     | **** **** | ****—**** | **** **** | ****—**** | **** **** | ****$****      | ****77**** | **** **** |
| ****Plymouth,  MN****           | **** **** | ****$****    | ****7****      | **** **** | ****$****      | ****2****      | **** **** | ****—**** | **** **** | ****$**** | ****9**** | **** **** |
| ****Total****                   | **** **** | ****$****    | ****84****     | **** **** | ****$****      | ****2****      | **** **** | ****—**** | **** **** | ****$**** | ****86**** | **** **** |

 

Rent expense for 2009 and 2008 was $99,000 and $92,000, respectively.

 

11.  Other Accrued Liabilities

 

Other accrued liabilities comprise the following (in thousands):

 

| **** ****                                                                                      | **** **** | ****Year ending December 31,**** | **** **** |
|-----------------------------------------------------------------------------------------------------|----------------|---------------------------------------|----------------|
| **** ****                                                                                      | **** **** | ****2009****                          | **** **** | ****2008**** | **** **** |
| ****Accrued  payroll, benefits and severance****                                                    | **** **** | ****$****                             | ****78****     | **** **** | ****$**** | ****294**** | **** **** |
| ****Accrued  rent****                                                                               | **** **** | ****4****                             | **** **** | ****6**** | **** **** |
| ****Accrued  fees and other expenses to Directors for professional services and other  expenses**** | **** **** | ****228****                           | **** **** | ****260**** | **** **** |
| ****Note  payable, general insurance****                                                            | **** **** | ****48****                            | **** **** | ****53**** | **** **** |
| ****Accrued  interest on debt obligations****                                                       | **** **** | ****1,229****                         | **** **** | ****602**** | **** **** |
| ****Accrued  OSI litigation expenses, including accrued interest****                                | **** **** | ****—****                        | **** **** | ****798**** | **** **** |
| ****Miscellaneous****                                                                               | **** **** | ****35****                            | **** **** | ****40**** | **** **** |
| ****Total****                                                                                       | **** **** | ****$****                             | ****1,622****  | **** **** | ****$**** | ****2,053**** | **** **** |

 

12. Income Taxes

 

Noprovision for federal and state income taxes has been recorded as the Companyhas incurred net operating losses for the years ended December 31, 2009and 2008, and the Company has provided a valuation allowance against all netoperating loss carryforwards.

 

AtDecember 31, 2009 and 2008, the Company had a recorded net deferred taxasset of approximately $28,700,000 and $26,900,000, respectively, which isprimarily related to net operating loss carryforwards for federal and stateincome tax purposes and certain other current deferred income tax itemstotaling $223,000 and $551,000, respectively. The Company provided valuation allowances for the full amount of thedeferred tax assets as the Company believes sufficient uncertainty existsregarding its realization.  The valuationallowance increased by approximately $2,200,000 and $1,100,000 for the yearsended December 31, 2009 and 2008, respectively.

 

F-34

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

12. Income Taxes *(continued)*

 

AtDecember 31, 2009 and 2008, the Company had approximately $72,000,000 and$66,000,000, respectively, in federal net loss carryforwards that expire invarious years through 2029. Additionally, the Company has approximately $47,000,000 and $44,000,000respectively, of state net operating loss carryforward that expire in variousyears beginning in 2010 through 2017.

 

Thetiming and manner, in which the Company will utilize the net operating losscarryforwards in any year, or in total, may be limited by the Internal RevenueService Code, Section 382. Such limitations may have an impact on theultimate realization and timing of these net operating loss carryforwards.

 

ASCTopic 740 requires that the Company recognizes in its consolidated financialstatements the impact of a tax position if that position is more likely thannot to be sustained upon examination, based on the technical merits of theposition.

 

Asof December 31, 2007, the Company had accrued $37,000 for unrecognized taxbenefits. Upon adoption of the uncertain tax position guidance in ASC Topic 740,the Company did not identify any additional uncertain tax positions that theCompany did not believe met the recognition threshold under ASC Topic 740 whichis more likely than not to be sustained upon examination.  Because the uncertain tax positions had notbeen utilized and had a full valuation allowance established, the adoption of theuncertain tax position guidance in ASC Topic 740 had no net impact on theCompany’s consolidated results of operations and financial position.  All uncertain tax positions relate tounrecognized tax benefits that would not impact the effective tax rate whenrecognized.

 

TheCompany does not expect any material increase or decrease in its income taxexpense, in the next twelve months, related to examinations or changes in uncertaintax positions.

 

Changesin the Company’s uncertain tax positions for the year ended December 31,2009 were as follows:

 

| ** **                                     | ** ** | **Total**          | ** ** |
|------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **(In thousands)** | ** ** |
| Balance at January 1, 2009                |       | $                  | 2          |   |
| Settlements / lapses in statutes of limitation |       | —             |       |
| Balance at December 31, 2009              |       | $                  | 2          |   |

 

TheCompany and its subsidiaries file income tax returns in the U.S. federaljurisdiction and various states.  Taxyears 2006 and forward remain open for examination for federal tax purposes andtax years 2005 and forward remain open for examination for the Company’s moresignificant state tax jurisdictions. To the extent utilized in future years’tax returns, net operating loss and capital loss carryforwards at December 31,2009 will remain subject to examination until the respective tax year isclosed.

 

F-35

 

SEDONA Corporation and Subsidiary

Notes to Consolidated Financial Statements

 

13.  Major Customer Transactions and GeographicInformation

 

*Major Customers*

 

Since one of the Company’sprimary sales strategies is to utilize an indirect sales model, i.e., theCompany distributes its products through its channel partners, the Company’srevenues are derived from a limited number of partners.  Consequently, any partner may account for morethan 10% of the total revenue derived during any given year.

 

License and service revenues fluctuate as they are dependent upon many variables including the delivery requirements, size and complexity of the transaction with our customers.

 

As of December 31,2009 and 2008, the Company had obtained net revenues from significantcustomers/and distribution partners as follows:

 

| ** **        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Channel Partner A |       | 27       | %          | 29       | %          |
| Channel Partner B |       | 13       | %          | —   |       |

 

As of December 31,2009 and 2008, the Company had accounts receivable from significantcustomers/partner accounts as follows:

 

| ** **        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Channel Partner A |       | 31       | %          | 28       | %          |
| Channel Partner B |       | 69       | %          | 45       | %          |

 

Substantially, all of the Company’s revenues are earned from customers in the United States.

 

14.  Subsequent Events

 

*Financing with Vey Associates*

 

Subsequent to December 31, 2009, the Companyreceived an additional $225,000 in proceeds from Vey Associates increasing theoutstanding balance on this loan to $1,850,000 as of April 15, 2010.

 

*Conversion of Debt to Equity*

 

In March 2010, the Company and its currentDebt Holders have reached an agreement in principal with respect to the totaloutstanding debt obligations and accrued interest due, which approximates $9,600,000as of December 31, 2009.  The Company haspresented the Debt Holders with terms to convert the total outstanding debtobligations and accrued interest due, from debt to equity through the issuanceof Company Preferred Stock.  The Companyanticipates executing documentation related to this transaction on or beforeJune 30, 2010, however, there can be no assurances that the transaction will becompleted until documents are executed.

 

F-36