##### 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 September 30, 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
  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
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets  September 30, 2009 (Unaudited)
and December 31, 2008
    
    4Condensed Consolidated Statements of Operations  (Unaudited)
three months ended September 30, 2009 and 2008
    
    5Condensed Consolidated Statements of Operations  (Unaudited)
nine months ended September 30, 2009 and 2008
    
    6Condensed Consolidated Statements of Cash Flows  (Unaudited)
nine months ended September 30, 2009 and 2008
    
    7Notes to the Condensed Consolidated Financial Statements
    
    8-21Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    22-32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    33Item 4. Controls and Procedures
    
    33PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    34Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    34Item 3 Default Upon Senior Securities
    
    34Item 4 Submission of Matters to a Vote of Security Holders
    
    34Item 5 Other Information
    
    34Item 6 Exhibits
    
    34SIGNATURE PAGE
    
    35EXHIBIT INDEX
    
    36CERTIFICATIONS
    
    37-40EX-31.1EX-31.2EX-32.1EX-32.2
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NOTE ON FORWARD-LOOKING STATEMENTS
 ®
 3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
  ITEM 1. FINANCIAL STATEMENT
 SEDONA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands, except share and per share data)
 September 30,
    
    December 31,2009
    
    2008(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    101
    
    
    $
    34Accounts receivable
    
    
    802
    
    
    
    410Prepaid expenses and other current assets
    
    
    13
    
    
    
    62Total current assets
    
    
    916
    
    
    
    506Accounts receivable, non-current
    
    
    718
    
    
    
    474Property and equipment, net
    
    
    16
    
    
    
    13Other non-current assets
    
    
    3
    
    
    
    3Total non-current assets
    
    
    737
    
    
    
    490Total assets
    
    $
    1,653
    
    
    $
    996Liabilities and stockholders deficitCurrent liabilities:Current maturities of long-term debt, net of discount
    
    $
    7,308
    
    
    $
    2,000Accounts payable
    
    
    624
    
    
    
    663Accrued litigation expenses
    
    
    634
    
    
    
    622Accrued expenses and other current liabilities
    
    
    1,404
    
    
    
    2,061Deferred and unearned revenue
    
    
    1,119
    
    
    
    882Total current liabilities
    
    
    11,089
    
    
    
    6,228Long-term debt, less current maturities
    
    
    
    
    
    
    2,280Deferred and unearned revenue
    
    
    718
    
    
    
    474Total long-term liabilities
    
    
    718
    
    
    
    2,754Total liabilities
    
    
    11,807
    
    
    
    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 
127,364,064 and 101,004,818 in 2009 and 2008, respectively
    
    
    127
    
    
    
    101Additional paid-in-capital
    
    
    73,155
    
    
    
    71,274Accumulated deficit
    
    
    (84,436
    )
    
    
    (80,361
    )Total stockholders deficit
    
    
    (10,154
    )
    
    
    (7,986
    )Total liabilities and stockholders deficit
    
    $
    1,653
    
    
    $
    996
 See accompanying notes to condensed consolidated financial statements
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##### Table of Contents



SEDONA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except share and per share data)
 Three Months EndedSeptember 30,2009
    
    2008Revenues:Product licenses
    
    $
    106
    
    
    $
    94Services
    
    
    228
    
    
    
    213Total revenues
    
    
    334
    
    
    
    307Cost of revenues:Services
    
    
    84
    
    
    
    67Total cost of revenues
    
    
    84
    
    
    
    67Gross profit
    
    
    250
    
    
    
    240Expenses:General and administrative
    
    
    281
    
    
    
    453Litigation expenses
    
    
    10
    
    
    
    232Sales, marketing and customer services
    
    
    214
    
    
    
    100Research and development
    
    
    95
    
    
    
    115Total operating expenses
    
    
    600
    
    
    
    900Loss from operations
    
    
    (350
    )
    
    
    (660
    )Other expense:Interest expense
    
    
    (1,123
    )
    
    
    (167
    )Total other expense
    
    
    (1,123
    )
    
    
    (167
    )Net loss
    
    
    (1,473
    )
    
    
    (827
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (1,503
    )
    
    $
    (857
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    127,335,691
    
    
    
    100,441,516
 See accompanying notes to condensed consolidated financial statements
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SEDONA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except share and per share data)
 Nine Months EndedSeptember 30,2009
    
    2008Revenues:Product licenses
    
    $
    304
    
    
    $
    442Services
    
    
    643
    
    
    
    639Total revenues
    
    
    947
    
    
    
    1,081Cost of revenues:Services
    
    
    295
    
    
    
    154Total cost of revenues
    
    
    295
    
    
    
    154Gross profit
    
    
    652
    
    
    
    927Expenses:General and administrative
    
    
    889
    
    
    
    1,063Litigation expenses
    
    
    25
    
    
    
    696Sales, marketing and customer services
    
    
    668
    
    
    
    404Research and development
    
    
    240
    
    
    
    414Total operating expenses
    
    
    1,822
    
    
    
    2,577Loss from operations
    
    
    (1,170
    )
    
    
    (1,650
    )Other expense:Interest expense
    
    
    (2,905
    )
    
    
    (493
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (247
    )Total other expense
    
    
    (2,905
    )
    
    
    (740
    )Net loss
    
    
    (4,075
    )
    
    
    (2,390
    )Deemed dividends applicable to preferred stockholders
    
    
    (90
    )
    
    
    (90
    )Loss applicable to Common Stockholders
    
    $
    (4,165
    )
    
    $
    (2,480
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.04
    )
    
    $
    (0.02
    )Basic and diluted weighted average common shares outstanding
    
    
    116,079,891
    
    
    
    99,691,479
 See accompanying notes to condensed consolidated financial statements
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SEDONA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW  (In thousands, except share and per share data)
 Nine Months EndedSeptember 30,2009
    
    2008Net cash used in operating activities
    
    
    (1,554
    )
    
    $
    (815
    )Investing activities:Purchase of equipment
    
    
    (7
    )
    
    
    (6
    )Net cash used in investing activities
    
    
    (7
    )
    
    
    (6
    )Financing activities:Proceeds from other non-current liabilities
    
    
    
    
    
    
    535Proceeds from the line of credit
    
    
    
    
    
    
    160Proceeds from sale of common stock, net
    
    
    3
    
    
    
    108Proceeds from the exercise of stock options
    
    
    
    
    
    
    9Proceeds from issuance of short-term note
    
    
    1,625
    
    
    
    Net cash provided by financing activities
    
    
    1,628
    
    
    
    812Net increase/(decrease) in cash and cash equivalents
    
    
    67
    
    
    
    (9
    )Cash and cash equivalents, beginning of period
    
    
    34
    
    
    
    49Cash and cash equivalents, end of period
    
    $
    101
    
    
    $
    40See accompanying notes to condensed consolidated financial statementsSupplemental Disclosures of Cash Flow InformationCash paid during period for interest
    
    $
    1
    
    
    $
    18Supplemental Disclosures of Non-Cash Financing ActivitiesBeneficial conversion on debt issuance
    
    $
    975
    
    
    $
    Forgiveness of OSI litigation liability
    
    $
    846
    
    
    $
    
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SEDONA CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 General
       8




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Property and Equipment
  Nine Months Ending
    
    Year EndingSeptember 30,
    
    December 31,2009
    
    2008Machinery and equipment
    
    $
    86
    
    
    $
    78Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    35
    
    
    
    35136
    
    
    
    128Less accumulated depreciation and amortization
    
    
    120
    
    
    
    115$
    16
    
    
    $
    13
 Stockholders Equity and Other Financing Activities
 Issuance of Stock for Professional Services:
    9




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Issuance of Stock Pursuant to Employee Stock Purchase Plan
  Major Customer Transactions and Geographic Information
   September 30, 2009
    
    September 30, 2008OEM distribution partner A
    
    
    27
    %
    
    
    35
    %OEM distribution partner B
    
    
    13
    %
    
    
    
  September 30, 2009
    
    December 31, 2008OEM distribution partner A
    
    
    24
    %
    
    
    28
    %OEM distribution partner B
    
    
    47
    %
    
    
    45
    %
  Earnings Per Share
  Litigation
   10




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Debt Obligations
  September 30, 2009
    
    December 31, 2008Oak Harbor note
    
    $
    1,040
    
    
    $
    1,040$4,100 consolidated convertible note
with David Vey, dated December 31,
2008, net of discount of $640 and
$2,460, respectively
    
    
    3,460
    
    
    
    1,640$1,625 convertible note with David Vey,
dated December 31, 2008, net of
discount of $417
    
    
    1,208
    
    
    
    Convertible note with William Rucks
    
    
    1,000
    
    
    
    1,000Convertibles notes with Rucks & Mitchell
    
    
    600
    
    
    
    600Total debt obligations
    
    
    7,308
    
    
    
    4,280Less current maturities
    
    
    7,308
    
    
    
    2,000Long-term debt
    
    $
    
    
    
    $
    2,280
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David Vey and Oak Harbor
 Oak Harbor Note
  Convertible Note with David Vey
    12




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Convertible Note with Vey Associates
  (i)
    
    the first installment in the amount of $100,000 on or before
December 31, 2008;(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.
       13




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Amended and Restated Intercreditor Agreement
  Security Agreement
  Cross Default Provisions of the Notes
  Approval for Additional Shares
  14




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Rucks and Mitchell
    Interest Expense
  Three months ending
    
    Three months endingSeptember 30, 2009
    
    September 30, 2008Interest expense on principal
    
    $
    182
    
    
    $
    162Non-cash amortization of debt discount, convertible notes
    
    
    941
    
    
    
    5Total
    
    $
    1,123
    
    
    $
    167
 Nine months ending
    
    Nine months endingSeptember 30, 2009
    
    September 30, 2008Interest expense on principal
    
    $
    528
    
    
    $
    461Non-cash amortization of debt discount, convertible notes
    
    
    2,377
    
    
    
    32Total
    
    $
    2,905
    
    
    $
    493
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Related Party Transaction
 David Vey and OSI Litigation
    David Vey and Oak Harbor
  Stock Options & Warrants
  Stock Option Plan
  16




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Options
  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
    
    
    (277,854
    )
    
    
    0.96
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at September 30, 2009
    
    
    2,982,598
    
    
    
    0.41
    
    
    
    2.87
    
    
    Exercisable at September 30, 2009
    
    
    2,922,598
    
    
    
    0.41
    
    
    
    2.85
    
    
    
  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
    
    
    2,784,598
    
    
    
    145,000
    
    
    
    53,000
    
    
    
    2,982,598Weighted average remaining
contractual life (years)
    
    
    4.08
    
    
    
    0.32
    
    
    
    0.52
    
    
    
    2.87Weighted average exercise price
    
    $
    0.29
    
    
    $
    1.56
    
    
    $
    3.33
    
    
    $
    0.41Exercisable
    
    
    2,724,598
    
    
    
    145,000
    
    
    
    53,000
    
    
    
    2,922,598Weighted average exercise price
    
    $
    0.30
    
    
    $
    1.56
    
    
    $
    3.33
    
    
    $
    0.41
 17




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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
    
    
    (270,750
    )
    
    
    1.75
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at September 30, 2009
    
    
    22,408,940
    
    
    
    0.18
    
    
    
    1.70
    
    
    $
    126,274Exercisable at September 30, 2009
    
    
    22,408,940
    
    
    
    0.18
    
    
    
    1.70
    
    
    $
    126,274
  Ranges
    
    TotalRange of exercise prices
    
    $
    0.07 to $0.35
    
    
    $
    0.51 to $0.91
    
    
    $
    1.03 to $1.53
    
    
    $
    0.07 to $1.53Outstanding
    
    
    21,966,720
    
    
    
    214,570
    
    
    
    227,650
    
    
    
    22,408,940Weighted average remaining
contractual life (years)
    
    
    1.73
    
    
    
    2.31
    
    
    
    0.94
    
    
    
    1.70Weighted average exercise price
    
    $
    0.16
    
    
    $
    0.72
    
    
    $
    1.18
    
    
    $
    0.18Exercisable
    
    
    21,966,720
    
    
    
    214,570
    
    
    
    227,650
    
    
    
    22,408,940Weighted average exercise price
    
    $
    0.16
    
    
    $
    0.72
    
    
    $
    1.18
    
    
    $
    0.18
   Recent Accounting Pronouncements
  18




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19




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Standards Issued But Not Yet Adopted
   20




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21




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Part I. FINANCIAL INFORMATION
 Item 1. Financial Statements
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Business Overview
    Recent Business Developments
   22




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Revenues
   
    
    license fees from direct sales by either the Company or its distribution partners
    
    monthly subscription fees from ASP/SAAS sales through direct sales and by our
distribution partners
  
    
    professional services fees including set-up and installation fees, training and
mapping fees
    
    annual maintenance fees
  Critical Accounting Policies
 Principles of Consolidation
 â
 Use of Estimates
  Cash and Cash Equivalents
  Accounts Receivable
  23




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Property and Equipment
  Impairment of Long-Lived Assets
  Revenue Recognition
  Product License Revenue
    24




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
    
    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.
    
    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
   25




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26




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Standards Issued But Not Yet Adopted
    27




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Results of Operations
  Total Revenues
    28




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Cost of Revenues; Gross Profit
    Operations
      29




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Other Expenses
   Liquidity and Capital Resources
    30




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31




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(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.
       32




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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
    33




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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
   Name
    
    
    For
    
    
    WithheldDavid R. Vey
    
    
    103,739,985
    
    
    
    2,269,163Jack A. Pellicci
    
    
    103,633,185
    
    
    
    2,375,963Roger W. Scearce
    
    
    103,661,827
    
    
    
    2,347,321David C. Bluestone
    
    
    103,661,194
    
    
    
    2,347,954
 
 Item 5 
    
    Other Information
 
 Item 6 
    
    Exhibits
 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 34




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SIGNATURES
   SEDONA CORPORATIONDATE: November 16, 2009
    
    /s/ David R. Vey

David R. VeyChief Executive OfficerDATE: November 16, 2009
    
    /s/ Anita M. Primo
Anita M. PrimoVice President and Chief Financial Officer
 35




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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 36