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, 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
 (Exact name of small business issuer as specified in its charter)
 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




---



##### 



SEDONA CORPORATION AND SUBSIDIARIES
 INDEXPAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets  September 30, 2008 (Unaudited) and December 31, 2007
    
    
    4Condensed Consolidated Statements of Operations  (Unaudited) three months ended September 30, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Operations  (Unaudited) nine months ended September 30, 2008 and 2007
    
    
    6Condensed Consolidated Statements of Cash Flows  (Unaudited) nine months ended September 30, 2008 and 2007
    
    
    7Notes to the Condensed Consolidated Financial Statements  September 30, 2008
    
    
    8-20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21-27Item 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
    
    
    29SIGNATURE PAGE
    
    
    30EXHIBIT INDEX
    
    
    31CERTIFICATIONS
    
    
    32-35
  2




---



##### 



NOTE ON FORWARD-LOOKING STATEMENTS
 ®
 3




---



##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 September 30,
    
    December 31,2008
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    40
    
    
    $
    49Accounts receivable, net
    
    
    715
    
    
    
    560Prepaid expenses and other current assets
    
    
    5
    
    
    
    68Total current assets
    
    
    760
    
    
    
    677Accounts receivable, non-current
    
    
    439
    
    
    
    325Property and equipment, net
    
    
    15
    
    
    
    13Other non-current assets
    
    
    3
    
    
    
    3Total non-current assets
    
    
    457
    
    
    
    341Total assets
    
    $
    1,217
    
    
    
    1,018Liabilities and stockholders deficitCurrent liabilities:Line of credit
    
    $
    565
    
    
    $
    Current maturities of long-term debt, net of discount
    
    
    5,941
    
    
    
    8Accounts payable
    
    
    582
    
    
    
    433Accrued litigation expenses
    
    
    460
    
    
    
    315Accrued expenses and other current liabilities
    
    
    1,982
    
    
    
    1,238Deferred and unearned revenue
    
    
    1,089
    
    
    
    789Total current liabilities
    
    
    10,619
    
    
    
    2,783Line of credit
    
    
    
    
    
    
    405Long-term debt, less current maturities
    
    
    600
    
    
    
    6,501Other non-current liabilities
    
    
    609
    
    
    
    74Deferred and unearned revenue
    
    
    439
    
    
    
    325Total long-term liabilities
    
    
    1,648
    
    
    
    7,305Total liabilities
    
    
    12,267
    
    
    
    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 -
100,640,172 and 97,649,350 in 2008 and 2007, respectively
    
    
    101
    
    
    
    98Additional paid-in-capital
    
    
    65,287
    
    
    
    64,880Accumulated deficit
    
    
    (77,438
    )
    
    
    (75,048
    )Total stockholders deficit
    
    
    (11,050
    )
    
    
    (9,070
    )Total liabilities and stockholders deficit
    
    $
    1,217
    
    
    $
    1,018
 See accompanying notes to condensed consolidated financial statements
 4




---



##### 



SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share data)
  Three Months EndedSeptember 30,2008
    
    2007Revenues:Product licenses
    
    $
    94
    
    
    $
    167Services
    
    
    213
    
    
    
    187Total revenues
    
    
    307
    
    
    
    354Cost of revenues:Services
    
    
    67
    
    
    
    82Total cost of revenues
    
    
    67
    
    
    
    82Gross profit
    
    
    240
    
    
    
    272Expenses:General and administrative
    
    
    453
    
    
    
    290Litigation expenses
    
    
    232
    
    
    
    66Sales, marketing and customer services
    
    
    100
    
    
    
    184Research and development
    
    
    115
    
    
    
    112Total operating expenses
    
    
    900
    
    
    
    652Loss from operations
    
    
    (660
    )
    
    
    (380
    )Other expense:Interest expense
    
    
    (167
    )
    
    
    (158
    )Total other expense
    
    
    (167
    )
    
    
    (158
    )Net loss
    
    
    (827
    )
    
    
    (538
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (857
    )
    
    $
    (568
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    100,441,516
    
    
    
    95,126,930
 See
accompanying notes to condensed consolidated financial statements
 5




---



##### 



SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In Thousands, except share and per share data)
  Nine Months EndedSeptember 30,2008
    
    2007Revenues:Product licenses
    
    $
    442
    
    
    $
    390Services
    
    
    639
    
    
    
    594Total revenues
    
    
    1,081
    
    
    
    984Cost of revenues:Services
    
    
    154
    
    
    
    272Total cost of revenues
    
    
    154
    
    
    
    272Gross profit
    
    
    927
    
    
    
    712Expenses:General and administrative
    
    
    1,063
    
    
    
    965Litigation expenses
    
    
    696
    
    
    
    243Sales, marketing and customer services
    
    
    404
    
    
    
    414Research and development
    
    
    414
    
    
    
    441Total operating expenses
    
    
    2,577
    
    
    
    2,063Loss from operations
    
    
    (1,650
    )
    
    
    (1,351
    )Other expense:Interest expense
    
    
    (493
    )
    
    
    (459
    )Loss on extinguishment of debt
    
    
    (247
    )
    
    
    Total other expense
    
    
    (740
    )
    
    
    (459
    )Net loss
    
    
    (2,390
    )
    
    
    (1,810
    )Deemed dividends applicable to preferred stockholders
    
    
    (90
    )
    
    
    (90
    )Loss applicable to Common Stockholders
    
    $
    (2,480
    )
    
    $
    (1,900
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.02
    )
    
    $
    (0.02
    )Basic and diluted weighted average common shares outstanding
    
    
    99,691,479
    
    
    
    92,330,300
 See accompanying notes to condensed consolidated financial statements
 6




---



##### 



SEDONA CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
 (In thousands, except share and per share data)
  Nine Months EndedSeptember 30,2008
    
    2007Net cash used in operating activities
    
    $
    (815
    )
    
    $
    (1,566
    )Investing activities:Purchase of equipment
    
    
    (6
    )
    
    
    Net cash used in investing activities
    
    
    (6
    )
    
    
    Financing activities:Proceeds from line of credit
    
    
    160
    
    
    
    180Proceeds from other non-current liabilities
    
    
    535
    
    
    
    65Proceeds from sale of common stock, net
    
    
    108
    
    
    
    1,302Proceeds from the exercise of stock options
    
    
    9
    
    
    
    23Net cash provided by financing activities
    
    
    812
    
    
    
    1,570Net increase/(decrease) in cash and cash equivalents
    
    
    (9
    )
    
    
    4Cash and cash equivalents, beginning of period
    
    
    49
    
    
    
    7Cash and cash equivalents, end of period
    
    $
    40
    
    
    $
    11Supplemental Disclosures of Cash Flow InformationCash paid during period for interest
    
    $
    18
    
    
    $
    2
 See accompanying notes to condensed consolidated financial statements
 7




---



##### 



SEDONA CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 General
        8




---



##### 



Property and Equipment
  Nine Months Ending
    
    Year EndingSeptember 30,
    
    December 31,2008
    
    2007Machinery and equipment
    
    $
    79
    
    
    $
    76Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    34
    
    
    
    31128
    
    
    
    122Less accumulated depreciation and amortization
    
    
    113
    
    
    
    109$
    15
    
    
    $
    13
 Stockholders Equity and Other Financing Activities
 Issuance of Stock for Professional Services:
  Issuance of Stock Pursuant to Employee Stock Purchase Plan:
  Stock Option Exercises:
  Private Placements of Common Stock:
 First Quarter
  9




---



##### 



Second Quarter
  Third Quarter
     10




---



##### 



Major Customer Transactions and Geographic Information
    September 30, 2008
    
    September 30, 2007Company A
    
    
    35
    %
    
    
    23
    %Company B
    
    
    
    
    
    
    18
    %Company D
    
    
    
    
    
    
    13
    %
  September 30, 2008
    
    December 31, 2007Company A
    
    
    41
    %
    
    
    52
    %Company C
    
    
    29
    %
    
    
    14
    %
  Earnings Per Share
  Litigation
  11




---



##### 



Revolving Line of Credit
  Long-Term Debt
  September 30,
    
    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 $13 and $45 at September 30, 2008 and December 31, 2007
    
    
    2,679
    
    
    
    2,647Convertible notes with Rucks & Mitchell
    
    
    1,600
    
    
    
    1,600Capital lease obligations
    
    
    8
    
    
    
    86,541
    
    
    
    6,509Less current maturities
    
    
    5,941
    
    
    
    8Long-term debt
    
    $
    600
    
    
    $
    6,501
  12




---



##### 



David Vey and Oak Harbor
 Oak Harbor Note
  Bridge Loan with David Vey
  Convertible Note with David Vey
   13




---



##### 



Intercreditor Agreement
  Interest Expense Related to David Vey and Oak Harbor
  Security Agreement
  14




---



##### 



Cross Default Provisions of the Notes
   Principal sum
    
    Accrued interestInstrument
    
    Payee
    
    Maturity Date
    
    due
    
    at September 30, 2008Promissory Note dated as
of August 17, 2006
    
    Oak Harbor
Investment
Properties, LLC
    
    May 1, 2009
    
    $
    1,040,402
    
    
    $
    179,180Secured Convertible 
Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    2,691,263
    
    
    $
    423,426Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    1,213,952
    
    
    $
    190,995Revolving Promissory Note
(Line of Credit) dated as
of September 27, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    565,000
    
    
    $
    59,183
 Rucks and Mitchell
  15




---



##### 



Related Party Transaction
 David Vey and OSI Litigation
    Stock Options & Warrants
  16




---



##### 



WeightedAverage Value ofWeighted
    
    remaining
    
    Aggregate intrinsicAverage
    
    contractual terms
    
    value of in-the-Shares
    
    Exercise Price
    
    (years)
    
    money optionsStock Options:Outstanding at December 31, 2007
    
    
    4,317,743
    
    
    $
    0.54
    
    
    
    3.56
    
    
    
    Canceled or expired
    
    
    (503,502
    )
    
    
    0.28
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (58,791
    )
    
    
    0.15
    
    
    
    
    
    
    
    Outstanding at September 30, 2008
    
    
    3,755,450
    
    
    
    0.58
    
    
    
    2.65
    
    
    
    Exercisable at September 30, 2008
    
    
    3,665,450
    
    
    
    0.59
    
    
    
    2.62
    
    
    
    
 
 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
    
    
    3,262,450
    
    
    
    415,000
    
    
    
    78,000
    
    
    
    3,755,450Weighted average remaining
contractual life (years)
    
    
    4.05
    
    
    
    0.99
    
    
    
    1.28
    
    
    
    2.65Weighted average exercise price
    
    $
    0.35
    
    
    $
    1.86
    
    
    $
    3.15
    
    
    $
    0.58Exercisable
    
    
    3,172,450
    
    
    
    415,000
    
    
    
    78,000
    
    
    
    3,665,450Weighted average exercise price
    
    $
    0.36
    
    
    $
    1.86
    
    
    $
    3.15
    
    
    $
    0.59
 17




---



##### 



WeightedAverage Value ofWeighted
    
    remaining
    
    Aggregate intrinsicAverage
    
    contractual terms
    
    value of in-the-Shares
    
    Exercise Price
    
    (years)
    
    money warrantsWarrants:Outstanding at December 31, 2007
    
    
    9,796,845
    
    
    $
    0.76
    
    
    
    1.51
    
    
    
    Canceled or expired
    
    
    (456,000
    )
    
    
    1.77
    
    
    
    
    
    
    
    Granted
    
    
    3,175,755
    
    
    
    0.28
    
    
    
    2.37
    
    
    
    Outstanding at September 30, 2008
    
    
    12,516,600
    
    
    
    0.61
    
    
    
    1.11
    
    
    
    Exercisable at September 30, 2008
    
    
    12,328,785
    
    
    
    0.59
    
    
    
    1.12
    
    
    
    
  Ranges
    
    TotalRange of exercise prices
    
    $0.1488 to $1.21
    
    $1.53 to $2.25
    
    $2.50
    
    $0.1488 to $2.50Outstanding
    
    
    11,039,600
    
    
    
    1,303,000
    
    
    
    174,000
    
    
    
    12,516,600Weighted average remaining
contractual life (years)
    
    
    1.54
    
    
    
    0.52
    
    
    
    0.25
    
    
    
    1.11Weighted average exercise price
    
    
    0.39
    
    
    
    2.15
    
    
    
    2.50
    
    
    
    0.61Exercisable
    
    
    10,950,635
    
    
    
    1,303,000
    
    
    
    75,150
    
    
    
    12,328,785Weighted average exercise price
    
    
    0.57
    
    
    
    2.15
    
    
    
    2.50
    
    
    
    0.59
  Recent Accounting Pronouncements
 SFAS 141(R)
 Business Combinations
 18




---



##### 



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
 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
 19




---



##### 



SFAS 162
  Note # 12: Contingencies
  20




---



##### 



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 Developments:
 Appointment of Interim President and CEO
     21




---



##### 



Resignation of Marco Emrich
  Current Economic Environment
  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
 Revenue Recognition
  Product License Revenue
  22




---



##### 




    
    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.
 Results of Operations
  Total Revenues
  23




---



##### 



Cost of Revenues; Gross Profit
      Operations
  24




---



##### 



Other Expenses
  25




---



##### 



Liquidity and Capital Resources
         26




---



##### 



27




---



##### 



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




---



##### 



PART II  OTHER INFORMATION
 
  
  
  
    Name
    
    For
    
    WithheldDavid R. Vey
    
    
    82,180,288
    
    
    
    427,140Scott C. Edelman
    
    
    82,178,688
    
    
    
    428,740Marco A. Emrich**
    
    
    81,635,806
    
    
    
    971,622Jack A. Pellicci
    
    
    82,174,130
    
    
    
    433,298Roger W. Scearce
    
    
    82,153,861
    
    
    
    453,567David C. Bluestone
    
    
    82,179,588
    
    
    
    427,840
 
 **
    
    Effective September 17, 2008, Marco Emrich declined to stand for re-election to
the Board and tendered his resignation as Chief Executive Officer, President and
Director of SEDONA Corporation. The Board of Directors accepted his resignation. 
  
  Exhibit 10.112*-
    
    Consulting Agreement between the Company and Scott EdelmanExhibit 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 29




---



##### 



SIGNATURES
   SEDONA CORPORATIONDATE: November 14, 2008
    
    /s/ Scott C. EdelmanScott C. EdelmanPresident and Chief Executive OfficerDATE: November 14, 2008
    
    /s/ Anita M. PrimoAnita M. PrimoVice President and Chief Financial Officer
 30




---



##### 



EXHIBIT INDEX
 Exhibit No.
    
    DescriptionExhibit 10.112*
    
    Consulting Agreement between the Company and Scott EdelmanExhibit 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 31