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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 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
 o þ
  o þ




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SEDONA CORPORATION AND SUBSIDIARIES
  
 INDEXPAGEPART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets  March 31, 2007 (Unaudited)
and December 31, 2006
    
    
    4Consolidated Statements of Operations  (Unaudited)
three months ended March 31, 2007 and 2006
    
    
    5Consolidated Statements of Cash Flow  (Unaudited)
three months ended March 31, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements  March 31, 2007
    
    
    7-15Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    15-19Item 3. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1 through Item 6.
    
    
    21SIGNATURE PAGE
    
    
    22EXHIBIT INDEX
    
    
    23CERTIFICATIONS
    
    
    24-27Common Stock and Warrant Purchase AgreementRegistration Rights AgreementStock Purchase WarrantCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive Officer pursuant to Section 906Certification of Principal Financial Officer pursuant to Section 906
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NOTE ON FORWARD-LOOKING STATEMENTS
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SEDONA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    23
    
    
    $
    7Accounts receivable
    
    
    321
    
    
    
    300Prepaid expenses and other current assets
    
    
    88
    
    
    
    117Total current assets
    
    
    432
    
    
    
    424Accounts receivable, non-current
    
    
    253
    
    
    
    270Property and equipment, net of accumulated depreciation and amortization
    
    
    17
    
    
    
    19Non-current assets  other
    
    
    3
    
    
    
    3Total non-current assets
    
    
    273
    
    
    
    292Total assets
    
    $
    705
    
    
    $
    716Liabilities and stockholders deficitCurrent liabilities:Accounts payable
    
    $
    642
    
    
    $
    531Accrued expenses and other current liabilities
    
    
    952
    
    
    
    649Deferred and unearned revenue
    
    
    578
    
    
    
    675Current maturities of long-term debt
    
    
    1,258
    
    
    
    1,258Short-term debt  notes
    
    
    1,469
    
    
    
    1,439Total current liabilities
    
    
    4,899
    
    
    
    4,552Long-term debt, less current maturities, net of debt discount
    
    
    3,996
    
    
    
    3,982Deferred revenue
    
    
    253
    
    
    
    270Total long-term liabilities
    
    
    4,249
    
    
    
    4,252Total liabilities
    
    
    9,148
    
    
    
    8,804Stockholders (deficit):Class A convertible preferred stock : liquidation preference $1,000
Authorized shares  1,000,000
Series A, par value $2.00, Issued and outstanding shares  500,000
    
    
    1,000
    
    
    
    1,000Common stock, par value $0.001
Authorized shares -175,000,000, Issued and outstanding shares 91,877,250
and 90,153,534 in 2007 and 2006, respectively
    
    
    92
    
    
    
    90Additional paid-in-capital
    
    
    63,601
    
    
    
    63,290Accumulated deficit
    
    
    (73,136
    )
    
    
    (72,468
    )Total stockholders deficit
    
    
    (8,443
    )
    
    
    (8,088
    )Total liabilities and stockholders deficit
    
    $
    705
    
    
    $
    716
 See accompanying notes.
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SEDONA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share data)
  Three Months EndedMarch 31,2007
    
    
    2006Revenues:Product licenses-unrelated parties
    
    $
    116
    
    
    $
    162Services-unrelated parties
    
    
    208
    
    
    
    114Services-related parties
    
    
    
    
    
    
    192Total revenues
    
    
    324
    
    
    
    468Cost of revenues:Product licenses
    
    
    
    
    
    
    5Services
    
    
    107
    
    
    
    59Total cost of revenues
    
    
    107
    
    
    
    64Gross profit
    
    
    217
    
    
    
    404Expenses:General and administrative
    
    
    434
    
    
    
    439Sales, marketing and customer services
    
    
    105
    
    
    
    66Research and development
    
    
    190
    
    
    
    214Total operating expenses
    
    
    729
    
    
    
    719Loss from operations
    
    
    (512
    )
    
    
    (315
    )Other (expense):Interest expense
    
    
    (142
    )
    
    
    (105
    )Debenture expense
    
    
    (14
    )
    
    
    Total other expense
    
    
    (156
    )
    
    
    (105
    )Net loss
    
    
    (668
    )
    
    
    (420
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (698
    )
    
    $
    (450
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    90,768,470
    
    
    
    88,934,673
 See accompanying notes.
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SEDONA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 (In thousands, except share and per share data)
  Three Months EndedMarch 31,2007
    
    
    2006Operating activities:Net loss
    
    $
    (668
    )
    
    $
    (420
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation
    
    
    2
    
    
    
    1Charge for option and warrant based compensation
    
    
    4
    
    
    
    42Charge for legal and consulting services
    
    
    5
    
    
    
    23Charge for 401K contribution
    
    
    19
    
    
    
    Charge for debt discount amortization
    
    
    14
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (4
    )
    
    
    13Prepaid expenses and other current assets
    
    
    29
    
    
    
    18Accounts payable and accrued expenses
    
    
    414
    
    
    
    145Deferred revenue
    
    
    (114
    )
    
    
    132Net cash used in operating activities
    
    
    (299
    )
    
    
    (46
    )Financing activities:Issuance of convertible notes
    
    
    
    
    
    
    600Proceeds from line of credit
    
    
    30
    
    
    
    Proceeds from sale of common stock, net
    
    
    285
    
    
    
    Repayments of long-term obligations
    
    
    
    
    
    
    (400
    )Net cash provided by financing activities
    
    
    315
    
    
    
    200Net increase in cash and cash equivalents
    
    
    16
    
    
    
    154Cash and cash equivalents, beginning of period
    
    
    7
    
    
    
    51Cash and cash equivalents, end of period
    
    $
    23
    
    
    $
    205
 See accompanying notes.
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General
      Property and Equipment (In thousands)
  Three months ended
    
    
    Year EndingMarch 31,
    
    
    December 31,2007
    
    
    2006Machinery and equipment
    
    $
    76
    
    
    $
    76Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    31
    
    
    
    31122
    
    
    
    122Less accumulated depreciation and amortization
    
    
    105
    
    
    
    103$
    17
    
    
    $
    19
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Stockholders Equity and Other Financing Activities
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Major Customers
   Supplemental Disclosures of Cash Flow Information
 Three months endedMarch 31,2007
    
    2006Cash paid during period for interest
    
    $
    5,477
    
    
    $
    589Conversion of accrued interest into common stock
    
    $
    
    
    
    $
    309,324
 CIMS Transaction
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Litigation
   10




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Related Party Transaction
   11




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Stock Options & Warrants
     12




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WeightedAverage Value ofWeighted
    
    remaining
    
    Aggregate intrinsicAverage
    
    contractual terms
    
    value of in-the-Shares
    
    Exercise Price
    
    (years)
    
    money optionsStock Options:Outstanding at December 31, 2006
    
    
    4,313,049
    
    
    $
    0.59Canceled or expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    4,313,049
    
    
    $
    0.59
    
    
    
    4.03
    
    
    $
    144,150Exercisable at March 31, 2007
    
    
    4,152,590
    
    
    $
    0.61
    
    
    
    4.03
    
    
    $
    141,481
 
 Ranges
    
    TotalRange of exercise prices
    
    $0.15 to $1.16
    
    $1.35 to $2.25
    
    $2.50 to $5.13
    
    $0.15 to $5.13Options outstanding
    
    
    3,758,049
    
    
    
    417,000
    
    
    
    138,000
    
    
    
    4,313,049Weighted average
remaining contractual
life (years)
    
    
    5.5
    
    
    
    2.49
    
    
    
    2.29
    
    
    
    4.03Weighted average
exercise price
    
    
    0.37
    
    
    
    1.86
    
    
    
    2.98
    
    
    
    0.59Exercisable
    
    
    3,597,590
    
    
    
    417,000
    
    
    
    138,000
    
    
    
    4,152,590Weighted average
exercise price
    
    
    0.37
    
    
    
    1.86
    
    
    
    2.98
    
    
    
    0.61
   WeightedAverage Value ofWeighted
    
    remaining
    
    Aggregate intrinsicAverage
    
    contractual terms
    
    value of in-the-Shares
    
    Exercise Price
    
    (years)
    
    money warrantsWarrants:Outstanding at December 31, 2006
    
    
    7,587,881
    
    
    $
    1.09Canceled or expired
    
    
    1,510,000
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    6,077,881
    
    
    $
    1.26
    
    
    
    1.74
    
    
    $
    0Exercisable at March 31, 2007
    
    
    5,853,830
    
    
    $
    1.25
    
    
    
    1.74
    
    
    $
    0
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Ranges
    
    TotalRange of exercise prices
    
    $0.35 to $1.13
    
    $1.21 to $2.25
    
    $2.50 to $3.75
    
    $0.35 to $3.75Outstanding
    
    
    3,972,881
    
    
    
    1,413,000
    
    
    
    692,000
    
    
    
    6,077,881Weighted average remaining
contractual life (years)
    
    
    2.06
    
    
    
    2.07
    
    
    
    0.96
    
    
    
    1.74Weighted average exercise
price
    
    
    0.67
    
    
    
    2.08
    
    
    
    2.99
    
    
    
    1.26Exercisable
    
    
    3,847,680
    
    
    
    1,413,000
    
    
    
    593,150
    
    
    
    5,853,830Weighted average exercise
price
    
    
    0.66
    
    
    
    2.08
    
    
    
    3.07
    
    
    
    1.25
   For the period endedMarch 31, 2007
    
    March 31, 2006Stock options and warrants
    
    $
    
    
    
    $
    0.28
  Segment Information
 Recent Accounting Pronouncements
 Accounting for Certain
Hybrid Instruments.
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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
    15




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Revenues
  16




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Revenue Recognition
  Product License Revenue
    
    
    Persuasive evidence of an arrangement exists, provided only by a contract
signed by both parties
    
    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
  Services Revenue
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
    
    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.
    
    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
        18




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Liquidity and Capital Resources
       19




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Item 3. Controls and Procedures
    20




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PART II  OTHER INFORMATION
 
      Effective May 9, 2007, the Board of Directors appointed Scott C.
Edelman as Co-Chairman of the Board of Directors. Mr. Edelman
will share the responsibility of Chairman of the Board of
Directors with the current Chairman, David R. Vey.
  10.92*
    
    Form of Common Stock and Warrants Purchase Agreements used in connection with the
March 2, 2007 private placement by and among the Company and the investor signatory
thereto10.93*
    
    Form of Registration Rights Agreements used in March 2, 2007 private placement by and
among the Company and the investor signatory thereto10.94*
    
    Form of Warrants issued to investor used in March 2, 2007 private sale of common stockExhibit 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 21




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SIGNATURES
   SEDONA CORPORATIONDATE:   May 17, 2007
    
    /S/ Marco A. EmrichMarco A. EmrichPresident and Chief Executive OfficerDATE:   May 17, 2007
    
    /S/ Anita M. PrimoAnita M. PrimoVice President and Chief Financial Officer
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EXHIBIT INDEX
 Exhibit No.
    
    Description10.92*
    
    Form of Common Stock and Warrants Purchase Agreements used in connection with the
March 2, 2007 private placement by and among the Company and the investor signatory
thereto10.93*
    
    Form of Registration Rights Agreements used in March 2, 2007 private placement by and
among the Company and the investor signatory thereto10.94*
    
    Form of Warrants issued to investor used in March 2, 2007 private sale of common stockExhibit 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 23