##### 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, 2008
 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 
incorporation or organization)
    
    (IRS Employer
Identification No.)1003 W. 9th Avenue, Second Floor, King of Prussia, PA
    
    19406(Address of principal executive offices)
    
    (Zip Code)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



SEDONA CORPORATION AND SUBSIDIARIES
 INDEXPAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Interim Balance Sheets  March 31, 2008 (Unaudited) and December 31, 2007
    
    4Condensed Consolidated Interim Statements of Operations  (Unaudited) three months ended March 31, 2008 and 2007
    
    5Condensed Consolidated Interim Statements of Cash Flow  (Unaudited) three months ended March 31, 2008 and 2007
    
    6Notes to Condensed Consolidated Financial Statements  March 31, 2008
    
    7-18Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19-23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    23Item 4. Controls and Procedures
    
    23PART II. OTHER INFORMATIONItem 1 through Item 6.
    
    24SIGNATURE PAGE
    
    25EXHIBIT INDEX
    
    26CERTIFICATIONS
    
    27-30Certification of Principal Executive Officer, pursuant to Section 302Certification of Principal Financial Officer, pursuant to Section 302Certification of Principal Executive Officer, pursuant to Section 906Certification of Principal Financial Officer, pursuant to Section 906
  2




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NOTE ON FORWARD-LOOKING STATEMENTS
 ®
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##### Table of Contents



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 312008
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    22
    
    
    $
    49Accounts receivable, net
    
    
    404
    
    
    
    560Prepaid expenses and other current assets
    
    
    49
    
    
    
    68Total current assets
    
    
    475
    
    
    
    677Accounts receivable, non-current
    
    
    323
    
    
    
    325Property and equipment, net
    
    
    14
    
    
    
    13Non-current assets  other
    
    
    3
    
    
    
    3Total non-current assets
    
    
    340
    
    
    
    341Total assets
    
    $
    815
    
    
    $
    1,018Liabilities and stockholders deficitCurrent liabilities:Line of credit
    
    $
    405
    
    
    $
    Current
maturities of long-term debt, net
    
    
    4,882
    
    
    
    8Accounts payable
    
    
    1,055
    
    
    
    593Accrued expenses and other current liabilities
    
    
    1,540
    
    
    
    1,393Deferred and unearned revenue
    
    
    672
    
    
    
    789Total current liabilities
    
    
    8,554
    
    
    
    2,783Line of credit
    
    
    
    
    
    
    405Long-term debt, less current maturities
    
    
    1,640
    
    
    
    6,501Other non-current liabilities
    
    
    87
    
    
    
    74Deferred and unearned revenue
    
    
    323
    
    
    
    325Total long-term liabilities
    
    
    2,050
    
    
    
    7,305Total liabilities
    
    
    10,604
    
    
    
    10,088Stockholders (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 99,623,850 and 97,649,350 in 2008 and 2007, respectively
    
    
    99
    
    
    
    98Additional paid-in-capital
    
    
    65,151
    
    
    
    64,880Accumulated deficit
    
    
    (76,039
    )
    
    
    (75,048
    )Total stockholders deficit
    
    
    (9,789
    )
    
    
    (9,070
    )Total liabilities and stockholders deficit
    
    $
    815
    
    
    $
    1,018
 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)
 Three Months EndedMarch 31,2008
    
    2007Revenues:Product licenses
    
    $
    85
    
    
    $
    116Services
    
    
    219
    
    
    
    208Total revenues
    
    
    304
    
    
    
    324Cost of revenues:Services
    
    
    48
    
    
    
    107Total cost of revenues
    
    
    48
    
    
    
    107Gross profit
    
    
    256
    
    
    
    217Expenses:General and administrative
    
    
    521
    
    
    
    434Sales, marketing and customer services
    
    
    151
    
    
    
    105Research and development
    
    
    164
    
    
    
    190Total operating expenses
    
    
    836
    
    
    
    729Loss from operations
    
    
    (580
    )
    
    
    (512
    )Other expense:Interest expense
    
    
    (164
    )
    
    
    (156
    )Loss from extinguishment of debt
    
    
    (247
    )
    
    
    Total other expense
    
    
    (411
    )
    
    
    (156
    )Net loss
    
    
    (991
    )
    
    
    (668
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (1,021
    )
    
    $
    (698
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    98,563,468
    
    
    
    90,768,470
 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)
 Three Months EndedMarch 31,2008
    
    2007Net cash used in operating activities
    
    
    (49
    )
    
    
    (299
    )Investing activities:Purchase of equipment
    
    
    (2
    )
    
    
    Net cash used in investing activities
    
    
    (2
    )
    
    
    Financing activities:Proceeds from line of credit
    
    
    
    
    
    
    30Proceeds from other non-current liabilities
    
    
    17
    
    
    
    Proceeds from sale of common stock, net
    
    
    7
    
    
    
    285Net cash provided by financing activities
    
    
    24
    
    
    
    315Net increase/(decrease) in cash and cash equivalents
    
    
    (27
    )
    
    
    16Cash and cash equivalents, beginning of period
    
    
    49
    
    
    
    7Cash and cash equivalents, end of period
    
    $
    22
    
    
    $
    23
 See accompanying notes to condensed consolidated financial statements
 Supplemental Disclosures of Cash Flow Information
 Cash paid during period for interest
    
    $
    3
    
    
    $
    5
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General
        7




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Property and Equipment (In thousands)
  Three months ended
    
    Year EndingMarch 31,
    
    December 31,2008
    
    2007Machinery and equipment
    
    $
    78
    
    
    $
    76Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    31
    
    
    
    31124
    
    
    
    122Less accumulated depreciation and amortization
    
    
    110
    
    
    
    109$
    14
    
    
    $
    13
 Stockholders Equity and Other Financing Activities
 Issuance of Stock for Professional Services:
  Issuance of Stock Pursuant to Employee Stock Purchase Plan:
  Private Placements of Common Stock:
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Major Customers
    March 31, 2008
    
    March 31, 2007Company A
    
    
    33
    %
    
    
    39
    %Company B
    
    
    
    
    
    
    15
    %
  March 31, 2008
    
    December 31, 2007Company A
    
    
    71
    %
    
    
    52
    %Company B
    
    
    
    
    
    
    Company C
    
    
    17
    %
    
    
    14
    %
  Earnings Per Share
  9




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Litigation
    Revolving Line of Credit
  10




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Long-Term Debt
  March 31,
    
    December 31,2008
    
    2007Oak Harbor note
    
    $
    1,040
    
    
    $
    1,040Bridge loan with David Vey
    
    
    1,214
    
    
    
    1,214Convertible note with David Vey, net of
discount of $32 and $45 at March 31, 2008 and
December 31, 2007.
    
    
    2,660
    
    
    
    2,647Convertible note with Rucks & Mitchell
    
    
    1,600
    
    
    
    1,600Capital lease obligations
    
    
    8
    
    
    
    86,522
    
    
    
    6,509Less current maturities
    
    
    4,882
    
    
    
    8Long-term debt
    
    $
    1,640
    
    
    $
    6,501
  David Vey and Oak Harbor
 Oak Harbor Note
  Bridge Loan with David Vey
  Convertible Note with David Vey
  11




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Intercreditor Agreement
  Interest Expense Related to David Vey and Oak Harbor
  12




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Security Agreement
   Cross Default Provisions of the Notes
   Principal sum
    
    Accrued interestInstrument
    
    Payee
    
    Maturity Date
    
    due
    
    at March 31, 2008Promissory Note dated as of August 17, 2006
    
    Oak HarborInvestmentProperties, LLC
    
    May 1, 2009
    
    $
    1,040,402
    
    
    $
    136,871Secured Convertible Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    2,691,263
    
    
    $
    313,981Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    1,213,952
    
    
    $
    141,628Revolving Promissory Note
(Line of Credit) dated as
of September 27, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    405,000
    
    
    $
    38,979
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Rucks and Mitchell
    Related Party Transaction
 David Vey and OSI Litigation
  14




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Stock Options & Warrants
     15




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Weighted Average
    
    Aggregate intrinsicValue of remaining
    
    value ofWeighted Average
    
    contractual terms
    
    in-the-moneyShares
    
    Exercise Price
    
    (years)
    
    optionsStock Options:Outstanding at December 31, 2007
    
    
    4,317,743
    
    
    $
    0.54
    
    
    
    3.56
    
    
    
    Canceled or expired
    
    
    (28,500
    )
    
    
    1.90
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2008
    
    
    4,289,243
    
    
    
    0.53
    
    
    
    3.40
    
    
    
    Exercisable at March 31, 2008
    
    
    3,710,075
    
    
    
    0.58
    
    
    
    3.13
    
    
    
    
  Ranges
    
    TotalRange of exercise prices
    
    $0.15 to $1.05
    
    $1.35 to $2.25
    
    $2.50 to $5.13
    
    $0.15 to $5.13Options outstanding
    
    
    3,796,243
    
    
    
    415,000
    
    
    
    78,000
    
    
    
    4,289,243Weighted average
remaining contractual
life (years)
    
    
    4.89
    
    
    
    1.49
    
    
    
    1.78
    
    
    
    3.40Weighted average
exercise price
    
    
    0.33
    
    
    
    1.86
    
    
    
    3.15
    
    
    
    0.53Exercisable
    
    
    3,217,075
    
    
    
    415,000
    
    
    
    78,000
    
    
    
    3,710,075Weighted average
exercise price
    
    
    0.36
    
    
    
    1.86
    
    
    
    3.15
    
    
    
    0.58
   Weighted Average
    
    Aggregate intrinsicValue of remaining
    
    value ofWeighted Average
    
    contractual terms
    
    in-the-moneyShares
    
    Exercise Price
    
    (years)
    
    warrantsWarrants:Outstanding at December 31, 2007
    
    
    9,796,845
    
    
    $
    0.76
    
    
    
    1.51
    
    
    
    Canceled or expired
    
    
    (331,000
    )
    
    
    2.30
    
    
    
    
    
    
    
    Granted
    
    
    2,777,777
    
    
    
    0.30
    
    
    
    4.00
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2008
    
    
    12,243,622
    
    
    
    0.62
    
    
    
    1.59
    
    
    
    Exercisable at March 31, 2008
    
    
    12,055,807
    
    
    
    0.60
    
    
    
    1.59
    
    
    
    
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Ranges
    
    TotalRange of exercise prices
    
    $0.1896 to $1.21
    
    $1.53 to $2.25
    
    $2.50
    
    $0.1896 to $2.50Outstanding
    
    
    10,766,622
    
    
    
    1,303,000
    
    
    
    174,000
    
    
    
    12,243,622Weighted average remaining
contractual life (years)
    
    
    2.01
    
    
    
    1.02
    
    
    
    0.74
    
    
    
    1.59Weighted average exercise
price
    
    
    0.40
    
    
    
    2.15
    
    
    
    2.50
    
    
    
    0.62Exercisable
    
    
    10,677,657
    
    
    
    1,303,000
    
    
    
    75,150
    
    
    
    12,055,807Weighted average exercise
price
    
    
    0.57
    
    
    
    2.15
    
    
    
    2.50
    
    
    
    0.60
   Recent Accounting Pronouncements
 SFAS 157
 Fair Value Measurement
 SFAS 159
 The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115
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SFAS 141(R)
 Business Combinations
 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
 18




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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
  Marketing on Demand Marketing on Demand
 Revenues
   
    
    license fees from direct sales by either the Company or its distribution
partners
    
    monthly subscription fees from SaaS sales by our distribution partners
  
    
    professional services fees including set-up and installation fees, training and
mapping fees
    
    annual maintenance fees
 19




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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.
 
    
    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.
 20




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Results of Operations
  Total Revenues
     Cost of Revenues; Gross Profit
    Operating Expenses
  21




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Other Expenses
   Liquidity and Capital Resources
     22




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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
    23




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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 Subsequent to March 31, 2008, the Company entered into agreements to sell 408,189
shares of its common stock to accredited investors in private placements
transactions in exchange for $50,000 of working capital at prices ranging from
approximately $0.11 to $0.15 per share.Item 3 
    
    Default Upon Senior Securities  NoneItem 4 
    
    Submission of Matters to a Vote of Security Holders  NoneItem 5 
    
    Other InformationItem 6 
    
    ExhibitsExhibit 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 24




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SIGNATURES
   SEDONA CORPORATIONDATE:  May 15, 2008
    /S/ Marco A. EmrichMarco A. EmrichPresident and Chief Executive OfficerDATE:  May 15, 2008
    /S/ Anita M. PrimoAnita M. PrimoVice President and Chief Financial Officer 25




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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 26