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, 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

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


PENNSYLVANIA		95-4091769

(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

1003 W. 9^th Avenue, Second Floor, King of Prussia, PA		19406

(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number, including area code (610) 337-8400.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES o NO þ.

As of May 5, 2009, there were 127,302,253 shares outstanding of the registrant’s common stock, par value $0.001 per share.

SEDONA CORPORATION AND SUBSIDIARIES


		INDEX
		PAGE
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets — March 31, 2009 (Unaudited) and December 31, 2008		4

Condensed Consolidated Statements of Operations — (Unaudited) three months ended March 31, 2009 and 2008		5

Condensed Consolidated Statements of Cash Flows — (Unaudited) three months ended March 31, 2009 and 2008		6

Notes to the Condensed Consolidated Financial Statements —March 31, 2009		7-19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-27

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		28

PART II. OTHER INFORMATION

Item 1 — Legal Proceedings		29

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 3 — Default Upon Senior Securities		29

Item 4 — Submission of Matters to a Vote of Security Holders		29

Item 5 — Other Information		29

Item 6 — Exhibits		30

SIGNATURE PAGE		31

EXHIBIT INDEX		32

CERTIFICATIONS		33-36
EX-31.1
EX-31.2
EX-32.1
EX-32.2

NOTE ON FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “may”, “will”, “should”, “could”, “would”, “plan”, “estimates”, “projects”, “predicts”, “potential” “believes”, “anticipates”, “intends”, “expects” or similar expressions. These forward-looking statements relate to the plans, objectives, and expectations of SEDONA^® Corporation (the “Company”, “SEDONA Corp.”, “SEDONA”, “we”, “us” or “our”) for future operations. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Form 10-Q should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company’s operating expectations will be realized. The Company’s revenues and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained herein as a result of certain factors including, but not limited to, dependence on strategic relationships, ability to raise additional capital, ability to attract and retain qualified personnel, customer acquisition and retention and rapid technological change. These factors should not be considered exhaustive; the Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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 31,
	2009			2008
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	13		$	34
Accounts receivable, net		354			410
Prepaid expenses and other current assets		47			62

Total current assets		414			506

Accounts receivable, non-current		441			474
Property and equipment, net		12			13
Other non-current assets		3			3

Total non-current assets		456			490

Total assets	$	870		$	996


Liabilities and stockholders’ deficit
Current liabilities:
Current maturities of long-term debt, net of discount	$	4,536		$	2,008
Accounts payable		760			663
Accrued litigation expenses		615			622
Accrued expenses and other current liabilities		1,966			2,053
Deferred and unearned revenue		737			882

Total current liabilities		8,614			6,228

Long-term debt, less current maturities		640			2,280
Deferred and unearned revenue		441			474

Total long-term liabilities		1,081			2,754

Total liabilities		9,695			8,982


Stockholders’ (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			1,000
Common stock, par value $0.001
Authorized shares -175,000,000, Issued and outstanding shares — 102,047,472 and 101,004,818 in 2009 and 2008, respectively		102			101
Additional paid-in-capital		71,711			71,274
Accumulated deficit		(81,638	)		(80,361	)

Total stockholders’ deficit		(8,825	)		(7,986	)

Total liabilities and stockholders’ deficit	$	870		$	996

See accompanying notes to condensed consolidated financial statements

SEDONA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)


	Three Months Ended
	March 31,
	2009			2008

Revenues:
Product licenses	$	98		$	85
Services		206			219

Total revenues		304			304

Cost of revenues:
Services		96			48

Total cost of revenues		96			48

Gross profit		208			256

Expenses:
General and administrative		327			336
Litigation expenses		5			185
Sales, marketing and customer services		263			151
Research and development		75			164

Total operating expenses		670			836

Loss from operations		(462	)		(580	)


Other expense:
Interest expense		(815	)		(164	)
Loss on extinguishment of debt		—			(247	)

Total other expense		(815	)		(411	)

Net loss		(1,277	)		(991	)
Deemed dividends applicable to preferred stockholders		(30	)		(30	)

Loss applicable to Common Stockholders	$	(1,307	)	$	(1,021	)


Basic and diluted net loss per share applicable to common shares	$	(0.01	)	$	(0.01	)


Basic and diluted weighted average common shares outstanding		101,344,804			98,563,468

See accompanying notes to condensed consolidated financial statements

SEDONA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands, except share and per share data)
(Unaudited)


	Three Months Ended
	March 31,
	2009			2008

Net cash used in operating activities	$	(621	)	$	(49	)

Investing activities:
Purchase of equipment		(—	)		(2	)

Net cash used in investing activities		(—	)		(2	)

Financing activities:
Proceeds from other non-current liabilities		—			17
Proceeds from sale of common stock, net		—			7
Proceeds from issuance of short-term convertible note		600			—

Net cash provided by financing activities		600			24

Net increase/(decrease) in cash and cash equivalents		(21	)		(27	)
Cash and cash equivalents, beginning of period		34			49

Cash and cash equivalents, end of period	$	13		$	22

See accompanying notes to condensed consolidated financial statements

Supplemental Disclosures of Cash Flow Information

Cash paid during period for interest	$	1		$	3

Supplemental Disclosures of Non-Cash Financing Activities

Beneficial conversion on debt issuance	$	360		$	—

SEDONA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note #1: General

The accompanying consolidated financial statements are unaudited and include the accounts of SEDONA Corporation and subsidiaries (“SEDONA” or the “Company”). All significant intercompany transactions and balances have been eliminated.

The consolidated financial statements included herein for the three months ended March 31, 2009 and 2008 are unaudited. In the opinion of Management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company in accordance with accounting principles generally accepted in the United States. The results of operations experienced for the three month period ended March 31, 2009 are not necessarily indicative of the results to be experienced for the year ending December 31, 2009.

The financial statements of the Company have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustment that might be necessary should the Company be unable to continue in existence. In addition to the loss of $1,277,000 realized during the three months ended March 31, 2009, the Company incurred substantial losses from operations for the year ended December 31, 2008 of approximately $5,313,000 which includes non-cash charges of $2,455,000 related to the restructuring of debt obligations and $1,010,000 for litigation expenses related to a contract dispute with Open Solutions, Inc. The Company also has negative working capital of $8,200,000 and stockholders’ deficit of $8,825,000 as of March 31, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company will require additional working capital over the next twelve months and beyond as we continue (i) our research and development efforts; (ii) expand our marketing and sales activities; and (iii) hire additional personnel across all disciplines to support our revenue growth and continued market acceptance of our services.

The Company’s plans include: (i) leveraging existing industry-specific associations’ sponsorship and sales distribution partnerships to acquire new customers as well as pursuing targeted direct sales opportunities; (ii) expanding our indirect sales channel by formalizing new OEM agreements with core systems providers; (iii) expanding our sales distribution agreements with service organizations for the financial services market; and (iv) fostering the existing OEM partnerships with leading core system providers by promoting corporate-wide adoption of CRM/MRM technology.

The Company plans to pursue additional fundraising activities with existing and potential new investors. Our plans include raising additional capital through public or private sale of equity or debt securities, debt financing, short-term loans, or a combination of the foregoing and possibly other collaborative agreements with our distribution partners. There can be no assurances that the Company will succeed in its plan to obtain any such financing or that additional financing will be available when needed or that, if available, financing will be obtained on terms acceptable to the Company and our stockholders. In addition, if we raise additional funds through the issuance of equity securities, dilution to our existing shareholders would likely result.

The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations. The accompanying notes should therefore be read in conjunction with the Company’s December 31, 2008 annual financial statements included in the Company’s Annual Report on Form 10-K filed on April 16, 2009.

Certain amounts from the prior year financial statements have been reclassified to conform to the current year presentation. General and administrative expenses in the amount of $185,000 were reclassified to litigation expenses for the three months ended March 31, 2008. These reclassifications had no effect on the Company’s consolidated net loss or stockholders’ deficit.

Note #2: Property and Equipment

Property and equipment consists of:


	Three Months Ending		Year Ending
	March 31,		December 31,
	2009		2008
Machinery and equipment	$	78	$	78
Leasehold improvements		15		15
Purchased software for internal use		35		35

		128		128
Less accumulated depreciation and amortization		116		115

	$	12	$	13

Note #3: Stockholders’ Equity and Other Financing Activities

Issuance of Stock for Professional Services:

During the three months ended March 31, 2009, the Company issued 592,654 shares of its common stock to a consultant in lieu of approximately $45,000 cash compensation for professional services rendered during 2008 and 2009.

The Company issued 450,000 shares of its common stock to Marco A. Emrich, the Company’s former President and CEO, who resigned his positions at the Company effective September 17, 2008. Under the terms of the separation agreement dated January 31, 2009, Mr. Emrich was entitled to receive, in addition to certain cash compensation, 450,000 shares of unrestricted common stock at a fair market value of $0.07 per share or $31,500.

Subsequent to March 31, 2009, the Company issued 25,254,781 shares of its common stock to David R. Vey related to his election on December 31, 2008 to convert $495,216 of principal due on a convertible note and $767,523 of related accrued interest into shares of common stock at a rate of $0.05 per share.

Note #4: Major Customer Transactions and Geographic Information

Since the Company’s primary sales strategy is focused on an indirect sales model, the Company’s accounts receivable and revenues are derived from a limited number of customers or OEM partners. Consequently, the Company’s trade accounts receivables and revenues are generally concentrated and any customer/partner may account for more than 10% of the total accounts receivable or revenue derived during any given quarter.

For the three months ended March 31, 2009 and 2008, the Company had obtained net revenues from significant customers/OEM distribution partners as follows:


	March 31, 2009	March 31, 2008
OEM distribution partner A	27%	33%
OEM distribution partner B	11%	—

As of March 31, 2009 and December 31, 2008, the Company had accounts receivable from significant customers/OEM accounts as follows:


	March 31, 2009	December 31, 2008
OEM distribution partner A	48%	28%
OEM distribution partner B	49%	45%

Substantially, all of the Company’s revenues are from customers in the United States and all long-lived assets are located in the United States.

Note # 5: Earnings Per Share

Earnings Per Share requires a dual presentation of basic and diluted earnings/loss per common share. Basic earnings/loss per common share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted loss per common share is computed assuming the conversion of common stock equivalents when dilutive. For the quarter ended March 31, 2009, the Company’s common stock equivalents, consisting of warrants to purchase 22,622,690 shares of common stock, preferred stock and debt convertible into 132,404,529 common shares, and options to 3,119,598 shares of common stock issued under the 2000 Incentive Stock Option Plan, were not included in computing diluted loss per share because their effects were anti-dilutive. For the quarter ended March 31, 2008, the Company’s common stock equivalents, consisting of warrants to purchase 12,243,622 shares of common stock, preferred stock and debt convertible into 32,159,926 common shares, and options to purchase 4,289,243 shares of common stock issued under the 2000 Incentive Stock Option Plan, were not included in computing diluted loss per share because their effects were anti-dilutive.

Note # 6: Litigation

On May 5, 2003, SEDONA filed a civil action lawsuit against numerous defendants in the United States District Court for the Southern District of New York. The Company seeks damages from the defendants named, and other defendants yet to be named, in the complaint for allegedly participating in the manipulation of its common stock, fraud, misrepresentation, failure to exercise fiduciary responsibility, and/or failure to adhere to SEC trading rules and regulations, tortuous interference, conspiracy and other actions set forth in the complaint. The parties are still engaged in preliminary motions and discovery has not yet commenced. As of May 7, 2009, no ruling by the United States District Court for the Southern District of New York has been made with regard to this matter. The outcome of litigation proceedings is inherently uncertain and there is no assurance that the Company will prevail in this matter.

On June 28, 2006, SEDONA filed a civil action lawsuit against Open Solutions Inc. (OSI), in Montgomery County Court in Pennsylvania for breach of a software license agreement entered into between the parties in May, 2002. The Company alleges that since September 2004, OSI has failed to pay royalty payments required under the parties’ master software license and services agreement for licensed products and services sold by OSI to its customers. OSI removed the case to federal court and successfully moved for a change in venue from the United States District Court for the District of Pennsylvania to the District Court for the District of Connecticut. SEDONA filed an amended complaint after the case was transferred to the District of Connecticut, case no. 3:07-cv-171. In its amended complaint, SEDONA seeks a declaration and damages relating to OSI’s failure to pay royalties under the agreement for its sales of the cView product operating on the .NET platform and for breach of the agreement’s confidentiality provision. OSI served an amended answer with counterclaims asserted against SEDONA for declaratory relief and breach of contract. Discovery has been completed and each party has moved for summary judgment. Those motions are currently pending. Trial will be scheduled, if necessary, after resolution of the pending motions for summary judgment. On March 24, 2009, the action was remanded to another court for a settlement conference between the parties; the parties did not reach a settlement. The outcome of litigation proceedings is inherently uncertain and there is no assurance that the Company will prevail in this matter.

No actions other than the matters set forth above or matters involved in the ordinary course of business are currently known by Management and such other matters are believed by Management not to have material significance.

Note #7: Debt Obligations

Long-term debt consists of the following (in thousands):


	March 31, 2009		December 31, 2008

Oak Harbor note	$	1,040	$	1,040
Consolidated convertible note with David Vey, dated December 31, 2008, net of discount of $1,873 and $2,460, respectively		2,227		1,640
Convertible note with David Vey, dated December 31, 2008, net of discount of $299		301		—
Convertible note with William Rucks		1,000		1,000
Convertibles notes with Rucks & Mitchell		600		600
Capital lease obligations		8		8

Total debt obligations		5,176		4,288
Less current maturities		4,536		2,008

Long-term debt	$	640	$	2,280

The Company has entered into the following financing agreements to provide working capital with Mr. David R. Vey, Chairman of the Board of Directors.

David Vey and Oak Harbor

Oak Harbor Note

As part of a refinancing of certain obligations to Oak Harbor Investment Properties, LLC (“Oak Harbor”), the Company issued a promissory note to Oak Harbor dated as of August 17, 2006 in the principal amount of $1,040,402 (the “Oak Harbor Note”). Oak Harbor is a limited liability corporation in which David Vey and Richard T. Hartley are managing members. The Oak Harbor Note had a maturity date of May 1, 2009, at which time all outstanding principal and interest were due. The Oak Harbor Note bears interest at a rate of eight percent (8%) per year. Effective March 11, 2009, the Oak Harbor Note was amended and the note is payable as follows: a) $400,000 of principal due on November 15, 2009; $640,402 of principal plus accrued interest will be due on May 15, 2010.

Convertible Note with David Vey

The Company refinanced its existing debt obligations with David Vey on December 31, 2008. As part of the refinancing, the Company issued to Mr. Vey a consolidated secured convertible promissory note, dated as of December 31, 2008, in the principal amount $4,100,000 (the “New Convertible Note”). The New Convertible Note has a maturity date of January 4, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity. Mr. Vey has the option to convert, at any time, all or part of the unpaid principal and accrued but unpaid interest of the New Convertible Note into shares of Company common stock at a conversion price of $0.05 per share. The number of shares which would be issuable upon the conversion of the $4,100,000 principal balance of the New Convertible Note is presently 82,000,000. The New Convertible Note is secured by substantially all of the assets of the Company pursuant to the terms of a Security Agreement between Mr. Vey and the Company, dated as of October 23, 2006.

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $2,460,000. The Company will accrete this debt discount to interest expense over the one year term of the New Convertible Note, beginning January 1, 2009, in accordance with EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“EITF 98-5”) and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF 00-27”). For the three months ended March 31, 2009, the Company recorded accretion of the debt discount in the amount of $587,000.

The New Convertible Note contains certain mandatory prepayment provisions. In the event that the Company receives total net proceeds from (i) sales of the Company’s securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceeding $1,000,000; or in the event that the Company maintains current cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Mr. Vey as a mandatory prepayment.

Convertible Note with Vey Associates

On December 31, 2008, the Independent Committee recommended to the Board of Directors that the Company enter into a new agreement to borrow up to $2,250,000 from Vey Associates (the “New Loan”). Vey Associates has agreed to fund the New Loan in five (5) installments as follows:

(i) the first installment in the amount of $100,000 on or before December 31, 2008;

(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.

Payment of the fifth installment is subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal year 2009.

The Company received $600,000 under the New Loan during the three months ended March 31, 2009.

As of May 8, 2009, the Company has received total proceeds of $950,000 under the Agreement. At the request of the lender, the fourth installment of $750,000, originally due, May 1, 2009, has been amended and is due no later than June 4, 2009.

The New Loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of January 4, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity. Once $1,750,000 of the New Loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per share. The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is presently 45,000,000.

The fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the commitment date. The intrinsic value of the beneficial conversion feature which is the difference between the fair value per share and the conversion price aggregated for the $600,000 of funding received under the note was $360,000. The Company will accrete this debt discount to interest expense over the term of the note depending on when the funding was received, in accordance with EITF No. 98-5, and EITF No. 00-27. For the three months ended March 31, 2009, the Company recorded accretion of the debt discount in the amount of $61,000.

The Vey Associates Convertible Note contains certain mandatory prepayment provisions. In the event that total net proceeds received by the Company from (i) sales of Company securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceed $1,000,000; or the Company maintains current cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Vey Associates as a mandatory prepayment.

The Vey Associates Convertible Note is secured by substantially all of the assets of the Company pursuant to a Security Agreement dated as of December 31, 2008 between the Company and Vey Associates (the “Vey Associates Security Agreement”).

Amended and Restated Intercreditor Agreement

Mr. Vey, Vey Associates, the Company and Oak Harbor Investment Properties, LLC (“Oak Harbor”), a company in which Mr. Vey is a managing member and 35% owner, entered into an Amended and Restated Intercreditor Agreement, dated as of December 31, 2008 (the “Intercreditor Agreement”). The Intercreditor Agreement provides (i) that Oak Harbor shall have a first priority interest in substantially all of the assets of the Company with regard to the obligations of Sedona to Oak Harbor under an existing promissory note and related security agreement, and (ii) that the security interests of Vey Associates under the Vey Associates Convertible Note shall be junior to those of Oak Harbor but senior to those of Mr. Vey.

Security Agreement

The Oak Harbor Note is secured by substantially all of the assets of the Company pursuant to an Amended and Restated Security Agreement dated as of August 17, 2006 between the Company and Oak Harbor (the “Amended Security Agreement”). The Amended Security Agreement amends and restates the Security Agreement between Oak Harbor and the Company effective as of January 13, 2003 which granted to Oak Harbor a lien and security interest in the assets of the Company (the “Oak Harbor Security Agreement”). The changes to the Security Agreement were effected by the Amended and Restated Security Agreement which include: (i) the modification of the term “Obligations” to mean all of the obligations, indebtedness, and liabilities of the Company to Oak Harbor and Vey; (ii) the acknowledgement and consent of Oak Harbor to the grant of a subordinate security interest in the assets of the Company set forth in the Amended Security Agreement (the “Collateral”) to Vey; and (iii) the modification of Appendix A to the Security Agreement to reflect the current outstanding permitted liens in the Collateral and references the subordinate security interest to the Collateral granted to Vey pursuant to the Security Agreement between the Company and Vey dated as of October 23, 2006 (the “Vey Security Agreement”).

Cross Default Provisions of the Notes

The New Consolidated Notes contain cross default provisions. Consequently an event of default under any of the Notes would constitute an event of default under each of the Notes. An event of default under the Notes will also have occurred if a default occurs under any other loan, extension of credit, security right, instrument, document, agreement or obligation from the Company to Vey or Oak Harbor.

Approval for Additional Shares

The Articles of Incorporation of the Company provides for 175,000,000 of which 102,047,472 were issued and outstanding as of March 31, 2009. At the present time, the Company does not have sufficient authorized shares to issue all of the shares to Mr. Vey required upon full conversion of notes and exercise of options and warrants. The Company intends to seek approval of its shareholders for an amendment to its Articles of Incorporation to increase its authorized shares by at least an amount necessary to cover its share issuance obligations at its next annual shareholders’ meeting. Mr. Vey and Vey Associates have agreed to refrain from converting any notes or exercising any options or warrants which they respectively hold until the Company has a sufficient number of authorized shares in exchange for an agreement by the Company to allow Vey Associates to pledge the Vey Associates Convertible Note or Mr. Vey to pledge the New Convertible Note in the future.

Rucks and Mitchell

Charles F. Mitchell (“Mitchell”) extended a loan to the Company, which was evidenced by a convertible promissory note dated May 31, 2006, in the principal amount of $300,000, with a conversion price of $0.20 per share (the “Mitchell Convertible Note”). William Rucks (“Rucks”) extended several loans to the Company which were evidenced by the following convertible promissory notes: (i) note dated July 1, 2005 in the principal sum of $250,000; (ii) note dated August 2, 2005 in the principal sum of $250,000; and (iii) $500,000 note dated September 29, 2005 and (iv) a note in the amount of $300,000 dated May 31, 2006 (collectively the “Rucks Notes”). The Notes designated as (i), (ii), and (iii) each had a conversion price of $0.18 per share, while the note designated as (iv) had a conversion price of $0.20 per share. The Notes designated as (i), (ii), and (iii), in the total sum of $1,000,000 shall mature and are payable on January 1, 2009, unless theretofore converted. The two $300,000 convertible notes shall mature and are payable on October 23, 2009, unless theretofore converted. The convertible notes bear interest on the principal outstanding at a rate of 8% per year, annually in arrears, from the date of the convertible notes until the earlier of maturity or the date upon which the unpaid balance is paid in full or is converted into shares of common stock. The investors may, at their option, at any time after each loan, elect in writing to convert all or a designated part of the unpaid principal balance, together with the accrued and unpaid interest, of each convertible note into shares. The conversion price for principal is protected by full-ratchet anti-dilution, with the exemption of stock and stock options issued to the Company’s employees and directors only. As additional consideration, the investors shall be granted one (1) four-year warrant for every two (2) shares able to be converted. The exercise prices of the warrants range from $0.30 to $0.35 per share.

Pursuant to the Rucks Convertible Note and the Mitchell Convertible Note, Rucks and Mitchell were granted the option to convert the unpaid principal balance and accrued unpaid interest on their notes into Shares of the Company. The respective conversion prices are subject to adjustment under certain circumstances. The issuance of the Vey Convertible Note triggered such an adjustment. At the request of the Company, Rucks and Mitchell have agreed to waive their rights to have the conversion price set forth in their respective convertible notes adjusted. Evidence of such waiver is contained in certain Waivers dated as of October 23, 2006 from Rucks to the Company and from Mitchell to the Company.

The Company is currently in negotiations with Mr. Rucks to modify the agreement to extend the maturity date of the $1,000,000 in notes payable and related accrued interest which was due on January 1, 2009. The Company is currently in default of its obligation. There are no specific penalty provisions related to a default event included in the convertible notes.

Interest Expense

Interest expense consists of the following (in thousands):


	March 31, 2009		March 31, 2008

Interest expense on principal	$	167	$	150
Non-cash accretion of debt discount, convertible notes		648		14

Total	$	815	$	164

Note #8: Related Party Transaction

David Vey and OSI Litigation

On September 4, 2007, SEDONA entered into an agreement with Vey Associates, Inc. in which Vey Associates agreed to provide funding to assist SEDONA in the payment of certain fees and expenses related to the lawsuit captioned Sedona Corp. v. Open Solutions, Inc., Action No. 3:07-CV-00171-VLB (the “litigation”), currently pending in the United States District Court for the District of Connecticut. David Vey, the Chairman and a shareholder of SEDONA, is an officer, director and majority shareholder of Vey Associates, Inc.

Under the agreement, Vey Associates will advance up to $750,000 to SEDONA to pay fees and expenses in connection with the litigation. Any proceeds received from the settlement, verdict or other conclusion of the litigation will be first applied to repay Vey Associates and SEDONA for expenses incurred. Thereafter, SEDONA will receive twenty-five (25%) percent of any proceeds and Vey Associates will receive seventy-five (75%) percent of the proceeds. In the event that SEDONA is unsuccessful in the litigation and does not receive any litigation proceeds, it will have no obligation to repay any sums to Vey Associates. All amounts advanced by Vey Associates to SEDONA shall accrue interest at a rate of ten (10%) percent per year. As of March 31, 2009, included in accrued expenses and other current liabilities are advances received and accrued interest in the amount of $816,000 under this agreement.

The Company anticipates that it will continue to incur litigation expenses related to the OSI matter and will exceed the $750,000 limit in the agreement with Vey Associates. The Company is currently negotiating an increase in the funding limit with Vey Associates; however, there can be no assurances that Vey Associates will agree to advance funds in excess of the $750,000 limit.

David Vey and Oak Harbor

In addition, as more fully described in Note 7, the Company completed transactions with David R. Vey, the Company’s Chairman of its Board of Directors and Oak Harbor related to the consolidation and refinancing of certain indebtedness to David R. Vey.

Note #9: Stock Options & Warrants

Beginning January 1, 2006, the Company adopted Statement No. 123(R). The Company recorded total compensation expense of $1,149 and $2,607 respectively, for share-based payments for the three months ended March 31, 2009 and 2008. As of March 31, 2009, the total expense impact of the non-vested awards is approximately $7,000 and will be recognized over a weighted-average period of 1.59 years.

Stock Option Plan

During 2000, the stockholders of the Company approved the 2000 Incentive Stock Option Plan (the “2000 Plan”). The 2000 Plan has replaced the 1992 Long-Term Incentive Plan (the “1992 Plan”) under which no further options will be issued. Significant provisions of the 2000 Plan include: reserving 20% of the outstanding shares for awards that may be outstanding at any one time, rather authorizing restricted stock, deferred stock, stock appreciation rights, performance awards settleable in cash or stock, and other types of awards based on stock or factors influencing the value of stock; adding provisions so that options and other performance-based awards will qualify for tax deductions; and, specifying obligations relating to non-competition and proprietary information that may be imposed on optionees. The term of each Award under the 2000 Plan shall be for such period as may be determined by the Compensation Committee of the Board of Directors which administers such plan, but generally, in no event shall the term exceed a period of ten (10) years from the date of grant. Options issued under the 2000 Plan are considered outstanding until they are exercised and any other award is outstanding in the calendar year in which it is granted and for so long thereafter as it remains such to any vesting condition required by

continuing employment. The Compensation Committee shall determine the term of each option, the circumstances under which an award may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including without limitation, cash, stock, other awards or awards granted under other plans of the Company and any subsidiary, or other property and the methods by or forms in which stock will be delivered or deemed to be delivered to participants.

Options outstanding under the 1992 Plan and the 2000 Plan have been granted to Officers, Directors, employees and others, and expire between April 2009 and August 2016. All options were granted at or above the fair market value of the underlying common stock on the grant date. Transactions under these Plans were as follows:


						Weighted
						Average Value of
				Weighted		remaining		Aggregate intrinsic
				Average		contractual terms		value of in-the-
	Shares			Exercise Price		(years)		money options

Stock Options:
Outstanding at December 31, 2008		3,260,452		$	0.46		3.11		—
Canceled or expired		(140,854	)		0.73		—		—
Granted		—			—		—		—
Exercised		—			—		—		—
Outstanding at March 31, 2009		3,119,598			0.44		2.98	$	29,224
Exercisable at March 31, 2009		3,049,598			0.45		2.96	$	29,224

The following table summarizes information about stock options outstanding at March 31, 2009:


	Ranges						Total
Range of exercise prices	$0.15 to $1.03		$1.35 to $1.72		$3.16 to $5.13		$0.15 to $5.13

Options outstanding		2,851,598		215,000		53,000		3,119,598
Weighted average remaining contractual life (years)		4.24		0.59		1.02		2.98
Weighted average exercise price	$	0.31	$	1.49	$	3.33	$	0.44
Exercisable		2,781,598		215,000		53,000		3,049,598
Weighted average exercise price	$	0.31	$	1.49	$	3.33	$	0.45

Warrants

Warrants outstanding have been granted to Officers, Directors, Stockholders and others to purchase common stock at prices ranging from $0.07 to $2.50 per share and expiring between August 2009 and December 2012. All warrants were granted at or above the fair market value of the underlying common stock on the grant date. Transactions under the plan were as follows:


						Weighted
						Average Value of
				Weighted		remaining		Aggregate intrinsic
				Average		contractual terms		value of in-the-
	Shares			Exercise Price		(years)		money warrants

Warrants:
Outstanding at December 31, 2008		22,679,690		$	0.19		2.25	$	126,274
Canceled or expired		(57,000	)		1.61		—		—
Granted		—			—		—		—
Outstanding at March 31, 2009		22,622,690			0.19		2.04	$	1,522,351
Exercisable at March 31, 2009		22,434,875			0.18		2.40	$	1,522,351

The following table summarizes information about common stock warrants outstanding at March 31, 2009


	Ranges							Total
Range of exercise prices	$0.07 to $1.21		$1.53 to $2.25		$2.50		$0.07 to $2.50

Outstanding		22,472,690		48,000		102,000			22,622,690
Weighted average remaining contractual life (years)		2.22		0.57		0.47			2.04
Weighted average exercise price	$	0.18	$	1.69	$	2.50		$	0.19
Exercisable		22,383,725		48,000		3,150			22,434,875
Weighted average exercise price	$	0.17	$	1.69	$	2.50		$	0.18

The Company estimates the fair value of each common stock option and warrant to purchase common stock at the grant date by using the Black-Scholes option-pricing model. No assumptions are listed for 2009, as no options or warrants have been issued during the quarter ended March 31, 2009.

All warrants issued and outstanding are classified in equity in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.

Note #10: Recent Accounting Pronouncements

SFAS 141(R)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). In SFAS No. 141(R), the FASB retained the fundamental requirements of SFAS No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires transaction costs to be expensed as incurred; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for annual periods beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) did not have an impact on the Company’s consolidated financial

statements since the Company did not consummate any acquisitions in the three months ended March 31, 2009.

SFAS 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position No. 157-2, which deferred the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. The adoption of SFAS 157 for all non-financial assets and non-financial liabilities did not have an impact on the Company’s consolidated financial statements.

SFAS 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The adoption of SFAS 159 did not have an effect on our financial condition or results of operations as we did not elect this fair value option, nor is it expected to have a material impact on future periods as the election of this option for our financial instruments is expected to be limited.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

SFAS 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. We will be required to provide enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Certain Hedging Activities (“SFAS 133”), and its related interpretations, and (c) how derivative instruments and related hedged items affects our financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

SFAS 162

the standard in the highest category must be used. This statement will be effective 60 days after the SEC approves the Public Company Accounting and Oversight Board’s related amendments. The Company believes that SFAS 162 will not have a material impact on its existing accounting methods.

FSP FAS 141(R)-1

In February 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP 141R-1”), which amends the provisions related to the initial recognition and measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS 141R. FSP 141R-1 applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of SFAS No. 5, “Accounting for Contingencies”, if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in FASB Statement No. 141R. FSP 141R-1 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP 141R-1, effective January 1, 2009, did not have an impact on the Company’s consolidated financial statements.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments”. (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 requires fair value disclosures of financial instruments for interim reporting periods for publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion no. 28-1, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods and is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt FSP FAS 107-1 and APB 28-1 in the second quarter of 2009, and its adoption is not expected to have a material impact on the Company’s consolidated financial statements.

Note #11: Lease Commitments

Effective February 27, 2009, the Company modified its lease for its Minnesota facility. Beginning May 1, 2009, the Company will lease an 894 square foot facility in Plymouth, Minnesota. The lease will commence on May 1, 2009 and expires April 30, 2011. The initial base annual rent is $7,020 per year or $7.85 per sq. ft. plus an escalation charge of 3.4%. The Company shall have the option to renew its lease for two (2) years by providing nine (9) months written notice to the Landlord, prior to the lease expiration. Annual base rent for the Minnesota office is projected to be approximately $6,400 in 2009.

Note # 12: Subsequent Events

Funding:

On December 31, 2008, Sedona Corporation (“Sedona”) entered into agreements relating to the consolidation and refinancing of certain indebtedness and the borrowing of additional funds. As part of the borrowing of additional funds, Sedona entered into a loan agreement and other related documents (the “Agreement”) to receive new funding in an aggregate maximum amount of $2,250,000.

The prior funding schedule, as amended, was as follows:

(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.

Payment of the fifth installment is subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal Year 2009.

As of May 8, 2009, the Company has received proceeds from total funding of $950,000 under the Agreement. At the request of the lender, the fourth installment of $750,000, originally due, May 1, 2009, has been amended and is due no later than June 4, 2009.

Departure of Directors or Principal Officer:

On September 17, 2008, the Board of Directors of the Company appointed Scott C. Edelman as Interim Chief Executive Officer and President of the Company. Mr. Edelman has served as the Co-Chairman of the Company since May 2007 and has served as a director of the Company since August 2004.

The Company has not been able to reach mutually agreeable terms with Mr. Edelman for full-time employment as President and Chief Executive Officer of the Company. Mr. Edelman tendered his resignation as President, Chief Executive Officer, Co-Chairman of the Board and Director of the Company on May 14, 2009. Mr. Edelman has agreed to continue in his consulting role to the Company for a period of time to ensure an orderly transition. David R. Vey, Chairman of the Board of Directors will serve as acting CEO.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

See Consolidated Financial Statements beginning on page 4.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

SEDONA is a software application and services provider that develops and markets web-based, vertical CRM/MRM solutions. The Company has strategically targeted small to mid-sized financial services organizations (SMBs) as the first vertical market to introduce its leading CRM/MRM application solution including, but not limited to, community and regional banks, credit unions, savings and loans, and brokerage firms. SEDONA defines the SMB market as any financial services institution with total asset values below $10 billion; however, SEDONA’s technology has and may be sold to institutions whose total asset values exceed $10 billion. The Company’s CRM/MRM application solution enables financial services organizations to improve key performance metrics to strengthen their position in the market and obtain greater share of the customer’s wallet.

Beginning in December 2008, SEDONA added sales and marketing staff to the organization to enhance the direct distribution of SEDONA CRM to the financial services industry. In addition, SEDONA also retained its indirect distribution channel strategy. The Company licenses its CRM/MRM technology to software and services providers, who market, sell, distribute and support SEDONA’s technology either as a component of their total solution or as stand-alone offering. The Company is not an application service provider (ASP) or software as a service provider (SAAS), however, SEDONA CRM/MRM can be deployed in an ASP/SAAS environment through the Company’s distribution partners.

SEDONA has signed Original Equipment Manufacturer (OEM) and reseller agreements with several leading software and services providers for the financial services market, including, but not limited to: Fiserv; Open Solutions Inc.; Connecticut Online Computer Center, Inc.; Profit Technologies, Bradford-Scott, CU ink and Share One.

Revenues

The Company’s revenues currently consist of product license revenue and service license revenue.

Product license revenue includes:

	•		license fees from direct sales by either the Company or its distribution partners

	•		monthly subscription fees from ASP/ SAAS sales by our distribution partners

Service license revenue includes:

	•		professional services fees including set-up and installation fees, training and mapping fees

	•		annual maintenance fees

The following is a discussion and analysis of the Company’s results of operations and financial condition for the three months ended March 31, 2009 and March 31, 2008 and should be read in conjunction with the Company’s audited financial statements as of December 31, 2008 along with the notes to those financial statements.

Critical Accounting Policies and Estimates

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly owned subsidiary, SEDONAâGeoServices, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity accounting principles generally accepted in the United States and requires management to make estimates and assumptions that affect the amounts reported and disclosures in the consolidated financial statements and accompanying notes. We evaluate, on an on-going basis, our estimates and judgments, including those related to bad debts, income taxes, contingencies and litigation. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Cash and Cash Equivalents

The Company considers all unencumbered highly liquid investments with original maturities of three (3) months or less when purchased to be cash equivalents. Cash and cash equivalents, which primarily consist of cash on deposit and money market funds, are stated at cost, and approximate fair value.

Accounts Receivable

Trade receivables are generated primarily from the Company’s customers and distribution partners. Receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. A valuation allowance is provided for known and anticipated credit losses, as determined by Management in the course of regularly evaluating individual customer receivables. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets, which range from three (3) to seven (7) years.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Assets are periodically reviewed for possible impairment whenever circumstances or events indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of the asset is not recoverable, the carrying amount of such asset will be reduced to fair value.

Revenue Recognition

The Company’s revenues from software arrangements currently consist of license fees, fees for installation services and maintenance. The Company has established vendor specific objective evidence of fair value for its maintenance contracts based on the price of renewals of existing maintenance contracts. The remaining value of the software arrangement is allocated to license fees and professional services based on contractual terms agreed upon by the customer and based on Company-maintained list prices.

Product License Revenue

The Company utilizes both a direct sales model and an indirect sales model whereby it distributes its product through its distribution partners, for which the Company receives royalty payments based on percentages of the license fees charged by the distribution partners. Under the direct sales model, revenue is not recognized until the software is delivered. The Company either receives written acceptance from its clients that the software has been installed/delivered or provides receipts for the electronic delivery of the software. Under the indirect sales model, royalty fees are recognized by SEDONA when the Company receives written acknowledgement from the distribution partners that a contract has been signed with an end-user and monies are owed to SEDONA from the distribution partner.

As of March 31, 2009, the Company had recorded a total of approximately $698,000 in current and non-current accounts receivable and associated deferred revenue for monthly subscription fees from its distribution partners’ ASP/SAAS contracts that will be recognized ratably over the contract terms. This represents a 26% annual increase over the approximately $554,000 reported as of March 31, 2008.

Revenues from the sale of product licenses are recognized as follows:

	•		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)

Since SEDONA CRM/MRM can be implemented on the Company’s customers’ systems without significant alterations to the features and the functionality of the software, or without significant interfacing, the Company’s license agreements are written so that formal written acceptance of the product is received when installation is complete. Therefore, the timing of license fee revenue recognition coincides with the completion of the installation and acceptance of the software by the customer.

Services Revenue

Services revenue includes revenue from professional services (primarily installation and training services) and maintenance revenue. Installation service revenue is earned from implementation planning, hardware and software set-up, data integration including data aggregation, conversion, cleansing and analysis, and testing and quality assurance, which are accounted for as a separate element of a software arrangement.

The Company recognizes service revenue as follows:

•

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.

Recent Accounting Pronouncements

SFAS 141(R)

SFAS 157

SFAS 159

SFAS 160

SFAS 161

SFAS 162

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The purpose of this standard is to provide a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. SFAS 162 categorizes accounting pronouncements in a descending order of authority. In the instance of potentially conflicting accounting principles, the standard in the highest category must be used. This statement will be effective 60 days after the SEC approves the Public Company Accounting and Oversight Board’s related amendments. The Company believes that SFAS 162 will not have a material impact on its existing accounting methods.

FSP FAS 141(R)-1

FSP FAS 107-1 and APB 28-1

Results of Operations

The following is a discussion and analysis of the Company’s results of operations and financial condition for the three months ended March 31, 2009 and March 31, 2008 and should be read in conjunction with the Company’s Consolidated Financial Statements and the notes related thereto for the three months ended March 31, 2009 and 2008.

Total Revenues

Total revenues from operations remained constant for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 totaling approximately $304,000 for each quarter, respectively.

During the three months ended March 31, 2009, product license revenues increased 15% or $13,000 as compared to the three months ended March 31, 2008 due to the addition of new clients and increased royalties from our software as a service (SAAS) delivery model.

During the three months ended March 31, 2009, service fee revenue decreased by 6% or $13,000 as compared to the three months ended March 31, 2008 due to a decrease in training services. During the three months ended March 31, 2009, the Company did not complete as many training sessions for clients as compared to the three months ended March 31, 2008. The Company believes this is a timing issue and not an expected trend in training services revenues.

Cost of Revenues; Gross Profit

Cost of revenues includes the direct expenses and third party cost associated with providing professional services, training, customer support and installation services. These services are typically billed on a time and materials basis.

As a percentage of services revenue, cost of sales related to services was 47% of service revenue or $96,000 for the three months ended March 31, 2009. In comparison, cost of sales equaled 22% of service revenue or $48,000, for the three months ended March 31, 2008. The increase in cost of sales is a result of upgrading a majority of our client base to a new version of our CRM/MRM application during the first quarter of 2009.

Operations

Total operating expenses decreased 20% or $166,000 to approximately $670,000 in the three months ended March 31, 2009, compared to approximately $836,000 reported in the three months ended March 31, 2008. The decrease in services was generally attributable to a decrease in litigation expenses related to the civil action lawsuit filed against OSI (Open Solutions Inc.) on September 28, 2006 alleging a violation of a software license agreement entered into between the parties (See Note #6 Litigation). Litigation expenses totaled $5,000 for the three months ended March 31, 2009, compared to $185,000 for the same three months of 2008. Litigation expenses decreased because the discovery phase of the litigation is now complete and the motion is waiting for a trial date to be scheduled. Litigation fees and expenses incurred by the Company have been funded through an agreement with Vey Associates (See Note #8, David Vey and OSI).

In addition, the Company’s sales, marketing and customer services expenses increased 74% or $112,000 during the three months ended March 31, 2009, due to the addition of two new sales and support teams, marketing director and product manager. We anticipate that our expenditures in sales, marketing and customer services will grow in future periods as we increase our marketing penetration with new direct sales opportunities and expand the opportunities within our direct channel through the addition of new partners and resellers. The Company’s research and development expenses decreased 54% or $89,000 during the three months ended March 31, 2009, as compared to the three months ended March 31, 2008 due to a $27,000 savings in salary and benefits from the departure of one staff person in early 2008 and because of a $56,000 increase in research and development expense which were shifted to cost of revenues to reflect the time spent upgrading and supporting the roll-out of a new version of the Company’s CRM/MRM application.

As of March 31, 2009, the Company had 14 full-time employees and 1 part-time employee. In addition, the Company hires consultants where applicable to augment its staffing needs. As of March 31, 2009, the Company had 1 consultant engaged in various duties throughout the organization.

Other Expenses

Total interest expense for the three months ended March 31, 2009 increased to $815,000 compared to $164,000 reported in the three months ended March 31, 2008. The increase in interest expense reflects $648,000 of non-cash interest charges related to the accretion of debt discount on convertible notes for the three months ended March 31, 2009 as fully explained in Note 7.

Liquidity and Capital Resources

At March 31, 2009 cash and cash equivalents decreased to $13,000 compared to the December 31, 2008 amount of $34,000. For the three months ended March 31, 2008, the cash flows from operating activities resulted in a net use of cash of $621,000 compared to $49,000 for the three months ended March 31, 2008. The savings in net cash used in operations for the three months ended March 31, 2008, was primarily related to a $600,000 increase in litigation related legal liability and accounts payable, as compared to 2009.

For the three months ended March 31, 2008, cash flows from investing activities resulted in a net use of cash of $2,000 related to the purchase of equipment. The Company did not have any cash flow from investing activities for the three months ended March 31, 2009.

For the three months ended March 31, 2009, the cash flows from financing activities resulted in net cash provided by financing activities of $600,000. The Company received $600,000 in proceeds from Vey Associates under the convertible note agreement. The $600,000 represents installment payments on the December 31, 2008 agreement to provide up to $2,250,000 in financing to the Company.

For the three months ended March 31, 2008, the cash flows from investing activities resulted in net cash provided by financing activities of $24,000. Net proceeds of $7,000 were derived from the sale of the Company’s common stock to employees who participated in the employee stock purchase plan. The Company also received $17,000 in advance payments from David Vey to pay OSI litigation expenses.

At March 31, 2009, the balance due to David Vey including accrued interest relating to the OSI litigation is approximately $816,000. The Company anticipates that it will continue to incur litigation expenses related to the OSI matter and further exceed the $750,000 limit in the agreement with Vey Associates. The Company is currently negotiating an increase in the funding limit with Vey Associates, however, there can be no assurances that Vey Associates will agree to advance funds in excess of the $750,000 limit.

Previously, the Company had issued a promissory note to Oak Harbor dated as of August 17, 2006 in the principal amount of $1,040,402 (the “Oak Harbor Note”). Effective March 11, 2009, the Oak Harbor Note was extended and has a maturity date of May 15, 2010. The Company will be required to make a principal payment in the amount of $400,000 on November 15, 2009, and the remaining principal of $640,402 and all accrued but unpaid interest will be due on maturity, at May 15, 2010. The Oak Harbor Note bears interest at a rate of eight percent (8%) per year.

Charles F. Mitchell (“Mitchell”) extended a loan to the Company, which was evidenced by a convertible promissory note dated May 31, 2006, in the principal amount of $300,000, with a conversion price of $0.20 per share (the “Mitchell Convertible Note”). William Rucks (“Rucks”) extended several loans to the Company which were evidenced by the following convertible promissory notes: (i) note dated July 1, 2005 in the principal sum of $250,000; (ii) note dated August 2, 2005 in the principal sum of $250,000; and (iii) $500,000 note dated September 29, 2005 and (iv) a note in the amount of $300,000 dated May 31, 2006 (collectively the “Rucks Notes”). The Notes designated as (i), (ii), and (iii) each had a conversion price of $0.18 per share, while the note designated as (iv) had a conversion price of $0.20 per share. The Notes designated as (i), (ii), and (iii), in the total sum of $1,000,000 have matured and were payable on January 1, 2009, unless theretofore converted. The two $300,000 convertible notes shall mature and are payable on October 23, 2009, unless theretofore converted. The convertible notes bear interest on the principal outstanding at a rate of 8% per year, annually in arrears, from the date of the convertible notes until the earlier of maturity or the date upon which the unpaid balance is paid in full or is converted into shares of common stock. The Company is currently in negotiations with Mr. Rucks to modify the agreement to extend the maturity date of the $1,000,000 in notes payable which was due on January 1, 2009. The Company is currently in default of this agreement. There are no penalty provisions related to a default event under this agreement.

The Company refinanced its existing debt obligations with David Vey on December 31, 2008. As part of the refinancing, the Company issued Mr. Vey a consolidated secured convertible promissory note, dated as of December 31, 2008, in the principal amount $4,100,000. The New Convertible Note has a maturity date of January 4, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity. Mr. Vey has the option to convert, at any time, all or part of the unpaid principal and accrued but unpaid interest of the New Convertible Note into shares of Company common stock at a conversion price of $0.05 per share. The number of shares which would be issuable upon the conversion of the $4,100,000 principal balance of the New Convertible Note is presently 82,000,000.

The Company will require additional financing in 2009 and has entered into a financing agreement with Vey Associates to borrow up to $2,250,000. The loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of January 4, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity. Once $1,750,000 of the loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per share. The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is presently 45,000,000.

Vey Associates had agreed, as previously amended on March 18, 2009, to fund the loan in five (5) installments as follows:

	(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.

Payment of the fifth installment is subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal year 2009.

The financial statements of the Company have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustment that might be necessary should the Company be unable to continue in existence. In addition to the loss of $1,277,000 recorded for the three months ended March 31, 2009, the Company incurred substantial losses from operations for the year ended December 31, 2008 of approximately $5,313,000 which includes non-cash charges of $2,455,000 related to the restructuring of debt obligations and $1,010,000 for litigation expenses related to a contract dispute with Open Solutions, Inc. The Company also has negative working capital of $8,200,000 and stockholders’ deficit of $8,825,000 as of March 31, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company will require additional working capital over the next twelve months and beyond as we continue (i) our research and development efforts; (ii) to expand our marketing and sales activities; and (iii) to hire additional personnel across all disciplines to support our revenue growth and continued market acceptance of our services.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

As a smaller reporting company, the Company is not required to provide Part I, Item 3 disclosure in this quarterly filing.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting

The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in its Form 10-Q, and in other reports required to be filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the rules and forms for such filings.

The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, based on their evaluation of such controls and procedures as of the end of the period covered by this report, are effective to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the first quarter of 2009, there were no significant changes in the Company’s internal controls or other factors that occurred which had significantly affected or could significantly affect these controls.

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 — None


Item 4 —		Submission of Matters to a Vote of Security Holders — None


Item 5 —		Other Information

Change in a Definitive Material Agreement

The funding schedule, as amended, was as follows:

	(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.

Payment of the fifth installment is subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal Year 2009.

Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

Item 6 — Exhibits


Exhibit 31.1*	—	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2*	—	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1*	—	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2*	—	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Filed herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Thereunto duly authorized.


	SEDONA CORPORATION
DATE: May 15, 2009	/s/ David R. Vey
	David R. Vey
	Chief Executive Officer


DATE: May 15, 2009	/s/ Anita M. Primo
	Anita M. Primo
	Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

Exhibit 31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1*		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2*		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Filed herewith

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SEDONA CORP 10-Q