##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from         to
 Commission file number 0-15864
 SEDONA Corporation
 (Exact name of small business issuer as specified in its charter)
 PENNSYLVANIA
    
    95-4091769(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)1003 W. 9th Avenue, Second Floor, King of Prussia, PA
    
    19406(Address of principal executive offices)
    
    (Zip Code)
  o þ
 o þ
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



SEDONA CORPORATION AND SUBSIDIARIES
  
 INDEXPAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets  March 31, 2009 (Unaudited)
and December 31, 2008
    
    4Condensed Consolidated Statements of Operations  (Unaudited)
three months ended March 31, 2009 and 2008
    
    5Condensed Consolidated Statements of Cash Flows  (Unaudited)
three months ended March 31, 2009 and 2008
    
    6Notes to the Condensed Consolidated Financial Statements March 31, 2009
    
    7-19Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    20-27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    28Item 4. Controls and Procedures
    
    28PART II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    29Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 3  Default Upon Senior Securities
    
    29Item 4  Submission of Matters to a Vote of Security Holders
    
    29Item 5  Other Information
    
    29Item 6  Exhibits
    
    30SIGNATURE PAGE
    
    31EXHIBIT INDEX
    
    32CERTIFICATIONS
    
    33-36EX-31.1EX-31.2EX-32.1EX-32.2
  2




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NOTE ON FORWARD-LOOKING STATEMENTS
 ®
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands, except share and per share data)
 March 31,
    
    December 31,2009
    
    2008(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    13
    
    
    $
    34Accounts receivable, net
    
    
    354
    
    
    
    410Prepaid expenses and other current assets
    
    
    47
    
    
    
    62Total current assets
    
    
    414
    
    
    
    506Accounts receivable, non-current
    
    
    441
    
    
    
    474Property and equipment, net
    
    
    12
    
    
    
    13Other non-current assets
    
    
    3
    
    
    
    3Total non-current assets
    
    
    456
    
    
    
    490Total assets
    
    $
    870
    
    
    $
    996Liabilities and stockholders deficitCurrent liabilities:Current maturities of long-term debt, net of discount
    
     $
   4,536
    
    
    $
    2,008Accounts payable
    
    
    760
    
    
    
    663Accrued litigation expenses
    
    
    615
    
    
    
    622Accrued expenses and other current liabilities
    
    
    1,966
    
    
    
    2,053Deferred and unearned revenue
    
    
    737
    
    
    
    882Total current liabilities
    
    
    8,614
    
    
    
    6,228Long-term debt, less current maturities
    
    
    640
    
    
    
    2,280Deferred and unearned revenue
    
    
    441
    
    
    
    474Total long-term liabilities
    
    
    1,081
    
    
    
    2,754Total liabilities
    
    
    9,695
    
    
    
    8,982Stockholders (deficit):Class A convertible preferred stock (liquidation preference $1,000)Authorized shares  1,000,000Series A, par value $2.00, Issued and outstanding shares  500,000
    
    
    1,000
    
    
    
    1,000Common stock, par value $0.001Authorized shares -175,000,000, Issued and outstanding shares 
102,047,472 and 101,004,818 in 2009 and 2008, respectively
    
    
    102
    
    
    
    101Additional paid-in-capital
    
    
    71,711
    
    
    
    71,274Accumulated deficit
    
    
    (81,638
    )
    
    
    (80,361
    )Total stockholders deficit
    
    
    (8,825
    )
    
    
    (7,986
    )Total liabilities and stockholders deficit
    
    $
    870
    
    
    $
    996
 See accompanying notes to condensed consolidated financial statements
 4




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SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except share and per share data)
 Three Months EndedMarch 31,2009
    
    2008Revenues:Product licenses
    
    $
    98
    
    
    $
    85Services
    
    
    206
    
    
    
    219Total revenues
    
    
    304
    
    
    
    304Cost of revenues:Services
    
    
    96
    
    
    
    48Total cost of revenues
    
    
    96
    
    
    
    48Gross profit
    
    
    208
    
    
    
    256Expenses:General and administrative
    
    
    327
    
    
    
    336Litigation expenses
    
    
    5
    
    
    
    185Sales, marketing and customer services
    
    
    263
    
    
    
    151Research and development
    
    
    75
    
    
    
    164Total operating expenses
    
    
    670
    
    
    
    836Loss from operations
    
    
    (462
    )
    
    
    (580
    )Other expense:Interest expense
    
    
    (815
    )
    
    
    (164
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (247
    )Total other expense
    
    
    (815
    )
    
    
    (411
    )Net loss
    
    
    (1,277
    )
    
    
    (991
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (1,307
    )
    
    $
    (1,021
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    101,344,804
    
    
    
    98,563,468
 See accompanying notes to condensed consolidated financial statements
 5




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SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW  (In thousands, except share and per share data)
 Three Months EndedMarch 31,2009
    
    2008Net cash used in operating activities
    
    $
    (621
    )
    
    $
    (49
    )Investing activities:Purchase of equipment
    
    
    (
    )
    
    
    (2
    )Net cash used in investing activities
    
    
    (
    )
    
    
    (2
    )Financing activities:Proceeds from other non-current liabilities
    
    
    
    
    
    
    17Proceeds from sale of common stock, net
    
    
    
    
    
    
    7Proceeds
from issuance of short-term convertible note
    
    
    600
    
    
    
    Net cash provided by financing activities
    
    
    600
    
    
    
    24Net increase/(decrease) in cash and cash equivalents
    
    
    (21
    )
    
    
    (27
    )Cash and cash equivalents, beginning of period
    
    
    34
    
    
    
    49Cash and cash equivalents, end of period
    
    $
    13
    
    
    $
    22See accompanying notes to condensed consolidated financial statementsSupplemental Disclosures of Cash Flow InformationCash paid during period for interest
    
    $
    1
    
    
    $
    3Supplemental Disclosures of Non-Cash Financing ActivitiesBeneficial conversion on debt issuance
    
    $
    360
    
    
    $
    
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SEDONA CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 General
        7




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Property and Equipment
  Three Months Ending
    
    Year EndingMarch 31,
    
    December 31,2009
    
    2008Machinery and equipment
    
    $
    78
    
    
    $
    78Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    35
    
    
    
    35128
    
    
    
    128Less accumulated depreciation and amortization
    
    
    116
    
    
    
    115$
    12
    
    
    $
    13
 Stockholders Equity and Other Financing Activities
 Issuance of Stock for Professional Services:
    Major Customer Transactions and Geographic Information
  8




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March 31, 2009
    
    March 31, 2008OEM distribution partner A
    
    27%
    
    33%OEM distribution partner B
    
    11%
    
    
  March 31, 2009
    
    December 31, 2008OEM distribution partner A
    
    48%
    
    28%OEM distribution partner B
    
    49%
    
    45%
  Earnings Per Share
  Litigation
  9




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Debt Obligations
  March 31, 2009
    
    December 31, 2008Oak Harbor note
    
    $
    1,040
    
    
    $
    1,040Consolidated
convertible note with David Vey, dated December 31, 2008, net
of discount of $1,873 and $2,460,
respectively
    
    
    2,227
    
    
    
    1,640Convertible note with David Vey, dated
December 31, 2008, net of discount of
$299
    
    
    301
    
    
    
    Convertible note with William Rucks
    
    
    1,000
    
    
    
    1,000Convertibles notes with Rucks & Mitchell
    
    
    600
    
    
    
    600Capital lease obligations
    
    
    8
    
    
    
    8Total debt obligations
    
    
    5,176
    
    
    
    4,288Less current maturities
    
    
    4,536
    
    
    
    2,008Long-term debt
    
    $
    640
    
    
    $
    2,280
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##### Table of Contents



David Vey and Oak Harbor
 Oak Harbor Note
  Convertible Note with David Vey
  Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments
  11




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Convertible Note with Vey Associates
              12




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Amended and Restated Intercreditor Agreement
  Security Agreement
  Cross Default Provisions of the Notes
  Approval for Additional Shares
  13




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Rucks and Mitchell
    Interest
Expense
  March 31, 2009
    
    March 31, 2008Interest expense on principal
    
    $
    167
    
    
    $
    150Non-cash
accretion of debt discount, convertible notes
    
    
    648
    
    
    
    14Total
    
    $
    815
    
    
    $
    164
 14




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Related Party Transaction
 David Vey and OSI Litigation
    David Vey and Oak Harbor
  Stock Options & Warrants
  Stock
Option Plan
  15




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##### Table of Contents



WeightedAverage Value ofWeighted
    
    remaining
    
    Aggregate intrinsicAverage
    
    contractual terms
    
    value of in-the-Shares
    
    Exercise Price
    
    (years)
    
    money optionsStock Options:Outstanding at December 31, 2008
    
    
    3,260,452
    
    
    $
    0.46
    
    
    
    3.11
    
    
    
    Canceled or expired
    
    
    (140,854
    )
    
    
    0.73
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2009
    
    
    3,119,598
    
    
    
    0.44
    
    
    
    2.98
    
    
    $
    29,224Exercisable at March 31, 2009
    
    
    3,049,598
    
    
    
    0.45
    
    
    
    2.96
    
    
    $
    29,224
  Ranges
    
    TotalRange of exercise prices
    
    $0.15 to $1.03
    
    $1.35 to $1.72
    
    $3.16 to $5.13
    
    $0.15 to $5.13Options outstanding
    
    
    2,851,598
    
    
    
    215,000
    
    
    
    53,000
    
    
    
    3,119,598Weighted average remaining
contractual life (years)
    
    
    4.24
    
    
    
    0.59
    
    
    
    1.02
    
    
    
    2.98Weighted average exercise price
    
    $
    0.31
    
    
    $
    1.49
    
    
    $
    3.33
    
    
    $
    0.44Exercisable
    
    
    2,781,598
    
    
    
    215,000
    
    
    
    53,000
    
    
    
    3,049,598Weighted average exercise price
    
    $
    0.31
    
    
    $
    1.49
    
    
    $
    3.33
    
    
    $
    0.45
 16




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Warrants
  WeightedAverage Value ofWeighted
    
    remaining
    
    Aggregate intrinsicAverage
    
    contractual terms
    
    value of in-the-Shares
    
    Exercise Price
    
    (years)
    
    money warrantsWarrants:Outstanding at December 31, 2008
    
    
    22,679,690
    
    
    $
    0.19
    
    
    
    2.25
    
    
    $
    126,274Canceled or expired
    
    
    (57,000
    )
    
    
    1.61
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2009
    
    
    22,622,690
    
    
    
    0.19
    
    
    
    2.04
    
    
    $
    1,522,351Exercisable at March 31, 2009
    
    
    22,434,875
    
    
    
    0.18
    
    
    
    2.40
    
    
    $
    1,522,351
  Ranges
    
    TotalRange of exercise prices
    
    $0.07 to $1.21
    
    $1.53 to $2.25
    
    $2.50
    $0.07 to $2.50Outstanding
    
    
    22,472,690
    
    
    
    48,000
    
    
    
    102,000
    
    
    
    22,622,690Weighted average remaining
contractual life (years)
    
    
    2.22
    
    
    
    0.57
    
    
    
    0.47
    
    
    
    2.04Weighted average exercise price
    
    $
    0.18
    
    
    $
    1.69
    
    
    $
    2.50
    
    
    $
    0.19Exercisable
    
    
    22,383,725
    
    
    
    48,000
    
    
    
    3,150
    
    
    
    22,434,875Weighted average exercise price
    
    $
    0.17
    
    
    $
    1.69
    
    
    $
    2.50
    
    
    $
    0.18
  Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys
Own Stock
 Recent Accounting Pronouncements
 SFAS 141(R)
 Business Combinations
 17




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SFAS 157
 Fair Value Measurements
 SFAS 159
 The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115
 SFAS 160
 Non-controlling Interests in Consolidated Financial
Statements  an amendment of Accounting Research Bulletin No. 51
 SFAS 161
 , Disclosures about Derivative Instruments and Hedging
Activities
 SFAS 162
 The Hierarchy of Generally Accepted Accounting
Principles
 18




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##### Table of Contents



FSP FAS 141(R)-1
 Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies Accounting
for Contingencies
 FSP FAS 107-1 and APB 28-1
 Interim Disclosures about Fair Value of
Financial Instruments. 
 Lease Commitments
  Subsequent Events
 Funding:
   (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.
   Departure of Directors or Principal Officer:
   19




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 Item 1. Financial Statements
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Business Overview
    Revenues
   
    
    license fees from direct sales by either the Company or its distribution
partners
    
    monthly subscription fees from ASP/ SAAS sales by our distribution partners
  
    
    professional services fees including set-up and installation fees, training and
mapping fees
    
    annual maintenance fees
  20




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##### Table of Contents



Critical
Accounting Policies and Estimates
 Principles of Consolidation
 â
 Use of Estimates
  Cash and Cash Equivalents
  Accounts Receivable
  Property and Equipment
  Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 21




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##### Table of Contents



Revenue Recognition
  Product License Revenue
    
    
    Persuasive evidence of an arrangement exists, generally by receipt of a signed
contract
    
    Delivery and acceptance of the software has been received
    
    The fee to be paid by the customer is fixed or determinable
    
    Collection of the fee is reasonably assured (Our contracts do not contain
general rights of return)
  Services Revenue
   
    
    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.
 22




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##### Table of Contents




    
    Annual 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.
 Recent Accounting Pronouncements
 SFAS 141(R)
 Business Combinations
 SFAS 157
 Fair Value Measurements
 SFAS 159
 The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115
 SFAS 160
 Non-controlling Interests in Consolidated Financial
Statements  an amendment of Accounting Research Bulletin No. 51
 SFAS 161
 , Disclosures about Derivative Instruments and Hedging
Activities
 SFAS 162
 The Hierarchy of Generally Accepted Accounting
Principles
 23




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##### Table of Contents



FSP FAS 141(R)-1
 Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies Accounting
for Contingencies
 FSP FAS 107-1 and APB 28-1
 Interim Disclosures about Fair Value of
Financial Instruments. 
 Results of Operations
  Total Revenues
    Cost of Revenues; Gross Profit
   Operations
  24




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Other Expenses
  Liquidity and Capital Resources
      25




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26




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##### Table of Contents



(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.
       27




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Item 3. Quantitative and Qualitative Disclosures About Market Risks
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial
Reporting
    28




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PART II  OTHER INFORMATION
 
 Item 1 
    
    Legal Proceedings  None not previously reported.
 
 Item 2 
    
    Unregistered Sale of Equity Securities and Use of Proceeds  None not previously
reported.
 
 Item 3 
    
    Default Upon Senior Securities  None
 
 Item 4 
    
    Submission of Matters to a Vote of Security Holders  None
 
 Item 5 
    
    Other Information
 Change in a Definitive Material Agreement
   (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.
   Departure of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers
   29




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Exhibit 31.1*
    
    
    
    Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2*
    
    
    
    Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1*
    
    
    
    Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2*
    
    
    
    Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 30




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SIGNATURES
   SEDONA CORPORATIONDATE:  May 15, 2009

/s/ David R. VeyDavid R. VeyChief Executive OfficerDATE:  May 15, 2009

/s/ Anita M. PrimoAnita M. PrimoVice President and Chief Financial Officer 31




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EXHIBIT INDEX
 Exhibit No.
    
    DescriptionExhibit 31.1*
    
    Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2*
    
    Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1*
    
    Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2*
    
    Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 32