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 June 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 
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)
  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
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SEDONA CORPORATION AND SUBSIDIARIES
 INDEXPAGEPART
I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets  June 30, 2009 (Unaudited) and December 31, 2008
    
    
    4Condensed Consolidated Statements of Operations  (Unaudited) three months ended June 30, 2009 and 2008
    
    
    5Condensed Consolidated Statements of Operations  (Unaudited) six months ended June 30, 2009 and 2008
    
    
    6Condensed Consolidated Statements of Cash Flows  (Unaudited) six months ended June 30, 2009 and 2008
    
    
    7Notes to the
Condensed Consolidated Financial Statements  June 30, 2009
    
    
    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
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1    Legal Proceedings
    
    
    33Item 2    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3    Default Upon Senior Securities
    
    
    33Item 4    Submission of Matters to a Vote of Security Holders
    
    
    33Item 5   Other Information
    
    
    33Item 6   Exhibits
    
    
    33SIGNATURE PAGE
    
    
    34EXHIBIT INDEX
    
    
    35CERTIFICATIONS
 2




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NOTE ON FORWARD-LOOKING STATEMENTS
 ®
 3




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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)
 June 30,
    
    December 31,2009
    
    2008(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    20
    
    
    $
    34Accounts
receivable
    
    
    371
    
    
    
    410Prepaid expenses and other current assets
    
    
    33
    
    
    
    62Total current assets
    
    
    424
    
    
    
    506Accounts receivable, non-current
    
    
    363
    
    
    
    474Property and equipment, net
    
    
    16
    
    
    
    13Other non-current assets
    
    
    3
    
    
    
    3Total non-current assets
    
    
    382
    
    
    
    490Total assets
    
    $
    806
    
    
    $
    996Liabilities and stockholders deficitCurrent liabilities:Current maturities of long-term debt, net of discount
    
    $
    6,217
    
    
    $
    2,000Accounts payable
    
    
    657
    
    
    
    663Accrued litigation expenses
    
    
    612
    
    
    
    622Accrued expenses and other current liabilities
    
    
    2,061
    
    
    
    2,061Deferred and unearned revenue
    
    
    652
    
    
    
    882Total current liabilities
    
    
    10,199
    
    
    
    6,228Long-term debt, less current maturities
    
    
    
    
    
    
    2,280Deferred and unearned revenue
    
    
    363
    
    
    
    474Total long-term liabilities
    
    
    363
    
    
    
    2,754Total liabilities
    
    
    10,562
    
    
    
    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 
127,327,299 and 101,004,818 in 2009 and 2008, respectively
    
    
    127
    
    
    
    101Additional paid-in-capital
    
    
    72,080
    
    
    
    71,274Accumulated deficit
    
    
    (82,963
    )
    
    
    (80,361
    )Total stockholders deficit
    
    
    (9,756
    )
    
    
    (7,986
    )Total liabilities and stockholders deficit
    
    $
    806
    
    
    $
    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 EndedJune 30,2009
    
    2008Revenues:Product licenses
    
    $
    100
    
    
    $
    263Services
    
    
    209
    
    
    
    207Total revenues
    
    
    309
    
    
    
    470Cost of revenues:Services
    
    
    115
    
    
    
    39Total cost of revenues
    
    
    115
    
    
    
    39Gross profit
    
    
    194
    
    
    
    431Expenses:General and administrative
    
    
    281
    
    
    
    274Litigation expenses
    
    
    10
    
    
    
    279Sales, marketing and customer services
    
    
    191
    
    
    
    153Research and development
    
    
    70
    
    
    
    135Total operating expenses
    
    
    552
    
    
    
    841Loss from operations
    
    
    (358
    )
    
    
    (410
    )Other expense:Interest expense
    
    
    (967
    )
    
    
    (162
    )Total other expense
    
    
    (967
    )
    
    
    (162
    )Net loss
    
    
    (1,325
    )
    
    
    (572
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (1,355
    )
    
    $
    (602
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    119,273,567
    
    
    
    100,038,769
 See accompanying notes to condensed consolidated financial statements
 5




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SEDONA
CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except share and per share data)
 Six Months EndedJune 30,2009
    
    2008Revenues:Product licenses
    
    $
    198
    
    
    $
    348Services
    
    
    415
    
    
    
    426Total revenues
    
    
    613
    
    
    
    774Cost of revenues:Services
    
    
    211
    
    
    
    87Total cost of revenues
    
    
    211
    
    
    
    87Gross profit
    
    
    402
    
    
    
    687Expenses:General and administrative
    
    
    608
    
    
    
    610Litigation expenses
    
    
    15
    
    
    
    464Sales, marketing and customer services
    
    
    454
    
    
    
    304Research and development
    
    
    145
    
    
    
    299Total operating expenses
    
    
    1,222
    
    
    
    1,677Loss from operations
    
    
    (820
    )
    
    
    (990
    )Other expense:Interest expense
    
    
    (1,782
    )
    
    
    (326
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (247
    )Total other expense
    
    
    (1782
    )
    
    
    (573
    )Net loss
    
    
    (2,602
    )
    
    
    (1,563
    )Deemed dividends applicable to preferred stockholders
    
    
    (60
    )
    
    
    (60
    )Loss applicable to Common Stockholders
    
    $
    (2,662
    )
    
    $
    (1,623
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.02
    )
    
    $
    (0.02
    )Basic and diluted weighted average common shares outstanding
    
    
    110,358,713
    
    
    
    99,301,118
 See accompanying notes to condensed consolidated financial statements
 6




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SEDONA
CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW  (In thousands, except share and per share data)
 Six Months EndedJune 30,2009
    
    2008Net cash used in operating activities
    
    
    (1,262
    )
    
    $
    (238
    )Investing activities:Purchase of equipment
    
    
    (5
    )
    
    
    (6
    )Net cash used in investing activities
    
    
    (5
    )
    
    
    (6
    )Financing activities:Proceeds from other non-current liabilities
    
    
    
    
    
    
    113Proceeds from the line of credit
    
    
    
    
    
    
    85Proceeds from sale of common stock, net
    
    
    3
    
    
    
    57Proceeds from the exercise of stock options
    
    
    
    
    
    
    9Proceeds from issuance of short-term note
    
    
    1,250
    
    
    
    Net cash provided by financing activities
    
    
    1,253
    
    
    
    264Net increase/(decrease) in cash and cash equivalents
    
    
    (14
    )
    
    
    20Cash and cash equivalents, beginning of period
    
    
    34
    
    
    
    49Cash and cash equivalents, end of period
    
    $
    20
    
    
    $
    69
 See accompanying notes to condensed consolidated financial statements
 Supplemental Disclosures of Cash Flow Information
 Cash paid during period for interest
    
    $
    1
    
    
    $
    12
 Supplemental Disclosures of Non-Cash Financing Activities
 Beneficial conversion on debt issuance
    
    $
    750
    
    
    $
    
 7




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




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Property and Equipment
  Six Months Ending
    
    Year EndingJune 30,
    
    December 31,2009
    
    2008Machinery and equipment
    
    $
    84
    
    
    $
    78Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    35
    
    
    
    35134
    
    
    
    128Less accumulated depreciation and amortization
    
    
    118
    
    
    
    115$
    16
    
    
    $
    13
 Stockholders Equity and Other Financing Activities
 Issuance of Stock for Professional Services:
    Issuance of Stock Pursuant to Employee Stock Purchase Plan
  Major Customer Transactions and Geographic Information
  9




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##### 



June 30, 2009
    
    June 30, 2008OEM distribution partner A
    
    
    26
    %
    
    
    19
    %OEM distribution partner B
    
    
    15
    %
    
    
    Customer
    
    
    
    
    
    
    47
    %
  June 30, 2009
    
    December 31, 2008OEM distribution partner A
    
    
    45
    %
    
    
    28
    %OEM distribution partner B
    
    
    44
    %
    
    
    45
    %
  Earnings Per Share
  Litigation
    10




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##### 



Debt Obligations
  June 30, 2009
    
    December 31, 2008Oak Harbor note
    
    $
    1,040
    
    
    $
    1,040Consolidated convertible note with
David Vey, dated December 31, 2008, net
of discount of $1,260 and $2,460,
respectively
    
    
    2,840
    
    
    
    1,640Convertible
note with David Vey, dated December 31, 2008, net of discount of
$513
    
    
    737
    
    
    
    Convertible note with William Rucks
    
    
    1,000
    
    
    
    1,000Convertibles notes with Rucks & Mitchell
    
    
    600
    
    
    
    600Total debt obligations
    
    
    6,217
    
    
    
    4,280Less current maturities
    
    
    6,217
    
    
    
    2,000Long-term debt
    
    $
    
    
    
    $
    2,280
  David Vey and Oak Harbor
 Oak Harbor Note
  11




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##### 



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
  Convertible Note with Vey Associates
          12




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##### 



Amended and Restated Intercreditor Agreement
  Security Agreement
  13




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##### 



Cross Default Provisions of the Notes
  Approval for Additional Shares
  Rucks and Mitchell
    14




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##### 



Interest Expense
  Three months ending
    
    Three months endingJune 30, 2009
    
    June 30, 2008Interest expense on principal
    
    $
    179
    
    
    $
    149Non-cash amortization of debt discount, convertible notes
    
    
    788
    
    
    
    13Total
    
    $
    967
    
    
    $
    162
 Six months ending
    
    Six months endingJune 30, 2009
    
    June 30, 2008Interest expense on principal
    
    $
    346
    
    
    $
    299Non-cash amortization of debt discount, convertible notes
    
    
    1,436
    
    
    
    27Total
    
    $
    1,782
    
    
    $
    326
 Related Party Transaction
 David Vey and OSI Litigation
    David Vey and Oak Harbor
  Stock Options & Warrants
  15




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##### 



Stock Option Plan
  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 June 30, 2009
    
    
    2,982,598
    
    
    
    0.41
    
    
    
    3.13
    
    
    
    Exercisable at June 30, 2009
    
    
    2,912,598
    
    
    
    0.42
    
    
    
    3.10
    
    
    
    
 16




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##### 



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)
    
    
    4.34
    
    
    
    0.57
    
    
    
    0.77
    
    
    
    3.12Weighted average exercise price
    
    $
    0.29
    
    
    $
    1.56
    
    
    $
    3.33
    
    
    $
    0.41Exercisable
    
    
    2,714,598
    
    
    
    145,000
    
    
    
    53,000
    
    
    
    2,912,598Weighted average exercise price
    
    $
    0.30
    
    
    $
    1.56
    
    
    $
    3.33
    
    
    $
    0.42
 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 June 30, 2009
    
    
    22,622,690
    
    
    
    0.19
    
    
    
    1.80
    
    
    $
    883,917Exercisable at June 30, 2009
    
    
    22,434,875
    
    
    
    0.18
    
    
    
    1.93
    
    
    $
    883,917
  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)
    
    
    1.97
    
    
    
    0.33
    
    
    
    0.22
    
    
    
    1.80Weighted 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
 17




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##### 



Recent Accounting Pronouncements
 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 141(R)
 Business Combinations
 SFAS 160
 Non-controlling Interests in Consolidated Financial
Statements  an amendment of Accounting Research Bulletin No. 51
 18




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##### 



SFAS 161
 , Disclosures about Derivative Instruments and Hedging
Activities
 FSP FAS 157-3
 Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active
 FSP FAS 157-4
 Determining Whether a Market Is Not Active and a
Transaction Is Not Distressed
 FSP FAS 107-1 and APB 28-1
 Interim Disclosures about Fair Value of
Financial Instruments
 FSP FAS 115-2 and FAS 124-2
 Recognition and Presentation of
Other-Than-Temporary Impairments
 19




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SFAS 165
 Subsequent Events
 FSP FAS 141(R)-1
 Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies Accounting for Contingencies Reasonable
Estimation of the Amount of a Loss - an interpretation
of FASB Statement No. 5
 SFAS 166
 Accounting for Transfers of Financial Assets - an
amendment of FASB Statement No. 140
 SFAS 167
 Amendments to FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities an interpretation of ARB No. 51
 SFAS 168
 The FASB Accounting Standards Codification
(Codification) and the Hierarchy of GAAP The Hierarchy
of GAAP
 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
   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
  22




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##### 



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
 23




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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.
 24




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##### 




    
    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 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 141(R)
 Business Combinations
 SFAS 160
 Non-controlling Interests in Consolidated Financial
Statements  an amendment of Accounting Research Bulletin No. 51
 25




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##### 



SFAS 161
 , Disclosures about Derivative Instruments and Hedging
Activities
 FSP FAS 157-3
 Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active
 FSP FAS 157-4
 Determining Whether a Market Is Not Active and a
Transaction Is Not Distressed
 FSP FAS 107-1 and APB 28-1
 Interim Disclosures about Fair Value of
Financial Instruments
 FSP FAS 115-2 and FAS 124-2
 Recognition and Presentation of
Other-Than-Temporary Impairments
 26




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##### 



SFAS 165
 Subsequent Events
 FSP FAS 141(R)-1
 Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies Accounting for Contingencies Reasonable
Estimation of the Amount of a Loss - an interpretation
of FASB Statement No. 5
 SFAS 166
 Accounting for Transfers of Financial Assets - an
amendment of FASB Statement No. 140
 SFAS 167
 Amendments to FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities an interpretation of ARB No. 51
 27




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##### 



SFAS 168
 The FASB Accounting Standards Codification
(Codification) and the Hierarchy of GAAP The Hierarchy
of GAAP
 Results of Operations
  Total Revenues
   Cost of Revenues; Gross Profit
    28




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##### 



Operations
        Other Expenses
   29




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##### 



Liquidity and Capital Resources
        30




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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.
     31




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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
    32




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##### 



PART II - OTHER INFORMATION
       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 33




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##### 



SIGNATURES
   SEDONA CORPORATIONDATE:  August 14, 2009
    

/S/ David R. VeyDavid R. VeyChief Executive OfficerDATE:  August 14, 2009
    

/S/ Anita M. PrimoAnita M. PrimoVice President and Chief Financial Officer 34




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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 35