##### 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 June 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
  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 Balance Sheets  June 30, 2008 (Unaudited)
and December 31, 2007
    
    
    4Condensed Consolidated Statements of Operations  (Unaudited)
three months ended June 30, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Operations  (Unaudited)
six months ended June 30, 2008 and 2007
    
    
    6Condensed Consolidated Statements of Cash Flows  (Unaudited)
six months ended June 30, 2008 and 2007
    
    
    7Notes to the Condensed Consolidated Financial Statements  June 30, 2008
    
    
    8-19Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    20-24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1 through Item 6.
    
    
    26SIGNATURE PAGE
    
    
    27EXHIBIT INDEX
    
    
    28CERTIFICATIONS
    
    
    29-32CERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION
  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)
 June 30,
    
    December 31,2008
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    69
    
    
    $
    49Accounts receivable, net
    
    
    512
    
    
    
    560Prepaid expenses and other current assets
    
    
    27
    
    
    
    68Total current assets
    
    
    608
    
    
    
    677Accounts receivable, non-current
    
    
    419
    
    
    
    325Property and equipment, net
    
    
    16
    
    
    
    13Other non-current assets
    
    
    3
    
    
    
    3Total non-current assets
    
    
    438
    
    
    
    341Total assets
    
    $
    1,046
    
    
    
    1,018Liabilities and stockholders deficitCurrent liabilities:Line of credit
    
    $
    490
    
    
    $
    Current maturities of long-term debt, net of discount
    
    
    5,936
    
    
    
    8Accounts payable
    
    
    584
    
    
    
    433Accrued litigation expenses
    
    
    651
    
    
    
    315Accrued expenses and other current liabilities
    
    
    1,806
    
    
    
    1,238Deferred and unearned revenue
    
    
    658
    
    
    
    789Total current liabilities
    
    
    10,125
    
    
    
    2,783Line of credit
    
    
    
    
    
    
    405Long-term debt, less current maturities
    
    
    600
    
    
    
    6,501Other non-current liabilities
    
    
    187
    
    
    
    74Deferred and unearned revenue
    
    
    419
    
    
    
    325Total long-term liabilities
    
    
    1,206
    
    
    
    7,305Total liabilities
    
    
    11,331
    
    
    
    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 
100,181,900 and 97,649,350 in 2008 and 2007, respectively
    
    
    100
    
    
    
    98Additional paid-in-capital
    
    
    65,226
    
    
    
    64,880Accumulated deficit
    
    
    (76,611
    )
    
    
    (75,048
    )Total stockholders deficit
    
    
    (10,285
    )
    
    
    (9,070
    )Total liabilities and stockholders deficit
    
    $
    1,046
    
    
    $
    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 EndedJune 30,2008
    
    2007Revenues:Product licenses
    
    $
    263
    
    
    $
    107Services
    
    
    207
    
    
    
    198Total revenues
    
    
    470
    
    
    
    305Cost of revenues:Services
    
    
    39
    
    
    
    83Total cost of revenues
    
    
    39
    
    
    
    83Gross profit
    
    
    431
    
    
    
    222Expenses:General and administrative
    
    
    274
    
    
    
    323Litigation expenses
    
    
    279
    
    
    
    95Sales, marketing and customer services
    
    
    153
    
    
    
    125Research and development
    
    
    135
    
    
    
    139Total operating expenses
    
    
    841
    
    
    
    682Loss from operations
    
    
    (410
    )
    
    
    (460
    )Other expense:Interest expense
    
    
    (162
    )
    
    
    (145
    )Total other expense
    
    
    (162
    )
    
    
    (145
    )Net loss
    
    
    (572
    )
    
    
    (605
    )Deemed dividends applicable to preferred stockholders
    
    
    (30
    )
    
    
    (30
    )Loss applicable to Common Stockholders
    
    $
    (602
    )
    
    $
    (635
    )Basic and diluted net loss per share
applicable to common shares
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    100,038,769
    
    
    
    91,570,159
 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)
 Six Months EndedJune 30,2008
    
    2007Revenues:Product licenses
    
    $
    348
    
    
    $
    223Services
    
    
    426
    
    
    
    407Total revenues
    
    
    774
    
    
    
    630Cost of revenues:Services
    
    
    87
    
    
    
    190Total cost of revenues
    
    
    87
    
    
    
    190Gross profit
    
    
    687
    
    
    
    440Expenses:General and administrative
    
    
    610
    
    
    
    675Litigation expenses
    
    
    464
    
    
    
    177Sales, marketing and customer services
    
    
    304
    
    
    
    230Research and development
    
    
    299
    
    
    
    329Total operating expenses
    
    
    1,677
    
    
    
    1,411Loss from operations
    
    
    (990
    )
    
    
    (971
    )Other expense:Interest expense
    
    
    (326
    )
    
    
    (301
    )Loss on extinguishment of debt
    
    
    (247
    )
    
    
    Total other expense
    
    
    (573
    )
    
    
    (301
    )Net loss
    
    
    (1,563
    )
    
    
    (1,272
    )Deemed dividends applicable to preferred stockholders
    
    
    (60
    )
    
    
    (60
    )Loss applicable to Common Stockholders
    
    $
    (1,623
    )
    
    $
    (1,332
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.02
    )
    
    $
    (0.01
    )Basic and diluted weighted average common shares outstanding
    
    
    99,301,118
    
    
    
    90,919,348
 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)
 Six Months EndedJune 30,2008
    
    2007Net cash used in operating activities
    
    $
    (238
    )
    
    $
    (960
    )Investing activities:Purchase of equipment
    
    
    (6
    )
    
    
    Net cash used in investing activities
    
    
    (6
    )
    
    
    Financing activities:Proceeds from line of credit
    
    
    85
    
    
    
    130Proceeds from other non-current liabilities
    
    
    113
    
    
    
    Proceeds from sale of common stock, net
    
    
    57
    
    
    
    833Proceeds from the exercise of stock options
    
    
    9
    
    
    
    23Net cash provided by financing activities
    
    
    264
    
    
    
    986Net increase in cash and cash equivalents
    
    
    20
    
    
    
    26Cash and cash equivalents, beginning of period
    
    
    49
    
    
    
    7Cash and cash equivalents, end of period
    
    $
    69
    
    
    $
    33See accompanying notes to condensed
consolidated financial statementsSupplemental Disclosures of
Cash Flow InformationCash paid during period for interest
    
    $
    12
    
    
    $
    1
 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 31,2008
    
    2007Machinery and equipment
    
    $
    79
    
    
    $
    76Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    34
    
    
    
    31128
    
    
    
    122Less accumulated depreciation and amortization
    
    
    112
    
    
    
    109$
    16
    
    
    $
    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:
  9




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Major Customer Transactions and Geographic Information
   10




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June 30, 2008
    
    June 30, 2007Company A
    
    
    19
    %
    
    
    39
    %Company B
    
    
    47
    %
    
    
    
  June 30, 2008
    
    December 31, 2007Company A
    
    
    56
    %
    
    
    52
    %Company C
    
    
    28
    %
    
    
    14
    %
  Earnings Per Share
  Litigation
   11




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Revolving Line of Credit
  Long-Term Debt
  June 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 $18 and $45 at June 30,
2008 and  December 31, 2007.
    
    
    2,674
    
    
    
    2,647Convertible note with Rucks & Mitchell
    
    
    1,600
    
    
    
    1,600Capital lease obligations
    
    
    8
    
    
    
    86,536
    
    
    
    6,509Less current maturities
    
    
    5,936
    
    
    
    8Long-term debt
    
    $
    600
    
    
    $
    6,501
  David Vey and Oak Harbor
 Oak Harbor Note
  12




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Bridge Loan with David Vey
  Convertible Note with David Vey
    13




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##### Table of Contents



Intercreditor Agreement
  Interest Expense Related to David Vey and Oak Harbor
  Security Agreement
   Cross Default Provisions of the Notes
  14




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##### Table of Contents



Principal sum
    
    Accrued interestInstrument
    
    Payee
    
    Maturity Date
    
    due
    
    at June 30, 2008Promissory Note dated as
    
    Oak Harbor
    
    May 1, 2009
    
    $
    1,040,402
    
    
    $
    157,910of August 17, 2006
    
    InvestmentProperties, LLCSecured Convertible
    
    David Vey
    
    January 1, 2009
    
    $
    2,691,263
    
    
    $
    368,404Promissory Note dated as
of October 23, 2006Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    1,213,952
    
    
    $
    166,177Revolving Promissory Note
(Line of Credit) dated as
of September 27, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    490,000
    
    
    $
    47,915
 Rucks and Mitchell
    15




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




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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, 2007
    
    
    4,317,743
    
    
    $
    0.54
    
    
    
    3.56
    
    
    
    Canceled or expired
    
    
    (503,502
    )
    
    
    0.28
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (58,791
    )
    
    
    0.15
    
    
    
    
    
    
    
    Outstanding at June 30, 2008
    
    
    3,755,450
    
    
    
    0.58
    
    
    
    2.90
    
    
    $
    17,314Exercisable at June 30, 2008
    
    
    3,655,450
    
    
    
    0.59
    
    
    
    2.86
    
    
    $
    17,314
  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
    
    
    3,262,420
    
    
    
    415,000
    
    
    
    78,000
    
    
    
    3,755,450Weighted average
remaining contractual
life (years)
    
    
    4.30
    
    
    
    1.24
    
    
    
    1.53
    
    
    
    2.90Weighted average
exercise price
    
    $
    0.35
    
    
    $
    1.86
    
    
    $
    3.15
    
    
    $
    0.58Exercisable
    
    
    3,162,450
    
    
    
    415,000
    
    
    
    78,000
    
    
    
    3,655,450Weighted average
exercise price
    
    $
    0.36
    
    
    $
    1.86
    
    
    $
    3.15
    
    
    $
    0.59
   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
    
    
    2,981,871
    
    
    
    0.29
    
    
    
    2.68
    
    
    
    Outstanding at June 30, 2008
    
    
    12,322,716
    
    
    
    0.61
    
    
    
    1.35
    
    
    $
    2,514Exercisable at June 30, 2008
    
    
    12,134,901
    
    
    
    0.59
    
    
    
    1.36
    
    
    $
    2,514
 17




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Ranges
    
    TotalRange of exercise prices
    
    $0.1488 to $1.21
    
    $1.53 to $2.25
    
    $2.50
    
    $0.1488 to $2.50Outstanding
    
    
    10,845,716
    
    
    
    1,303,000
    
    
    
    174,000
    
    
    
    12,322,716Weighted average
remaining contractual
life (years)
    
    
    1.79
    
    
    
    0.77
    
    
    
    0.49
    
    
    
    1.35Weighted average
exercise price
    
    
    0.40
    
    
    
    2.15
    
    
    
    2.50
    
    
    
    0.61Exercisable
    
    
    10,756,751
    
    
    
    1,303,000
    
    
    
    75,150
    
    
    
    12,134,901Weighted average
exercise price
    
    
    0.56
    
    
    
    2.15
    
    
    
    2.50
    
    
    
    0.59
   Recent Accounting Pronouncements
 SFAS 141(R)
 Business Combinations
 SFAS 157
 Fair Value Measurement
 18




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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
 SFAS 162
  19




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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
     20




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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 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
     
    
    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)
  21




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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
   Cost of Revenues; Gross Profit
    22




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Operating Expenses
      Other Expenses
  23




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Liquidity and Capital Resources
       24




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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
    25




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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  NoneItem 4   Submission of Matters to a Vote of Security Holders  NoneItem 5   Other InformationItem 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 26




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SIGNATURES
   SEDONA CORPORATIONDATE: August 14, 2008
    
    /s/ Marco A. Emrich

      Marco A. EmrichPresident and Chief Executive OfficerDATE: August 14, 2008
    
    /s/ Anita M. Primo

     Anita M. PrimoVice President and Chief Financial Officer
 27




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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 28