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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] 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 registrant as specified in its charter)
PENNSYLVANIA 95-4091769
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
455 South Gulph Road, Suite 300, King of Prussia, PA 19406-9564
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (484) 679-2200
Indicate by the check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 and 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 [X] NO [ ]
At July 29, 2002, there were 46,630,340 shares issued and outstanding of the
Registrant's common stock, par value $0.001 per share.
SEDONA CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- June 30, 2002 (Unaudited) 4
and December 31, 2001
Consolidated Statements of Operations -- (Unaudited)
three months ended June 30, 2002 and 2001 5
Consolidated Statements of Operations -- (Unaudited)
six months ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flow -- (Unaudited)
six months ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements -
June 30, 2002 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II. OTHER INFORMATION
- ---------------------------
Item 1 through Item 6. 12-13
SIGNATURE PAGE 13
- --------------
2
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E 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 "believes",
"anticipates", "intends", or "expects". These forward-looking statements relate
to the plans, objectives, and expectations of SEDONA Corporation (the "Company"
or "SEDONA") 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
recruit and retain qualified professionals, 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.
3
SEDONA Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
June 30, December 31,
2002 2001
---------------------------------
Assets
Current assets:
Cash and cash equivalents $287 $103
Restricted cash 2 2
Accounts receivable, net of allowance for doubtful accounts of $49 and $49 275 331
Prepaid expenses and other current assets 76 165
---------------------------------
Total current assets 640 601
Property and equipment, net of accumulated depreciation and amortization 360 521
Restricted cash 287 287
Software development costs, net of accumulated amortization of $2,263 and $1,650 1,740 2,353
Non-current assets - other 26 24
---------------------------------
Total non-current assets 2,413 3,185
---------------------------------
Total assets 3,053 3,786
=================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable 788 1,099
Accrued expenses and other current liabilities 330 447
Deferred revenue 863 509
Note Payable to related party 148 148
Current maturities of long-term debt 48 55
Short-term debt - debenture - 805
Short-term promissory note 149 -
---------------------------------
Total current liabilities 2,326 3,063
Long-term debt, less current maturities 1,003 1,025
---------------------------------
Total long-term liabilities 1,003 1,025
---------------------------------
Total liabilities 3,329 4,088
Stockholders' equity/(deficit):
Class A convertible preferred stock
Authorized shares - 1,000,000 (liquidation preference $3,280)
Series A, par value $2.00, Issued and outstanding 500,000 shares 1,000 1,000
Series F, par value $2.00, Issued and outstanding 780 shares 2 2
Series H, par value $2.00, Issued and outstanding 1,500 shares 3 3
Common stock, par value $0.001
Authorized shares -100,000,000, Issued and outstanding shares - 46,444,150 and
41,362,561 in 2002 and 2001, respectively 47 41
Additional paid-in-capital 55,618 52,839
Accumulated deficit (56,946) (54,187)
---------------------------------
Total stockholders' equity/(deficit) (276) (302)
---------------------------------
Total liabilities and stockholders' equity/(deficit) $3,053 $3,786
=================================
See accompanying notes.
4
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
30-Jun
-------------------------------
2002 2001
-------------------------------
Revenues:
Product licenses $ 382 $ 248
Services 388 505
-------------------------------
Total revenues 770 753
Cost of revenues
Product licenses 314 411
Services 70 294
-------------------------------
Total cost of revenues 384 705
-------------------------------
Gross profit 386 48
Expenses:
General and administrative 789 936
Sales and marketing 368 1,018
Charge for note receivable - -
Reserve for contract dispute - 238
Research and development 253 38
-------------------------------
Total operating expenses 1,410 2,230
-------------------------------
Loss from operations (1,024) (2,182)
Other income (expense):
Interest income 1 3
Interest expense (6) (76)
Other (3) -
-------------------------------
Total other income (expense) (8) (73)
-------------------------------
Loss from operations before
provision for income taxes (1,032) (2,255)
Income taxes - -
-------------------------------
Loss from operations (1,032) (2,255)
Preferred stock dividends (76) (76)
-------------------------------
Net loss applicable to Common Stockholders $ (1,108) $ (2,331)
===============================
Basic and diluted net loss per share from
operations applicable to common shares $ (0.02) $ (0.06)
===============================
Basic and diluted weighted average common shares
outstanding 45,693,167 36,029,835
==============================
See accompanying notes.
5
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Six Months Ended
30-Jun
-----------------------------
2002 2001
-----------------------------
Revenues:
Product licenses $ 722 $ 405
Services 771 789
-----------------------------
Total revenues 1,493 1,194
Cost of revenues
Product licenses 646 798
Services 243 790
-----------------------------
Total cost of revenues 889 1,588
-----------------------------
Gross profit (loss) 604 (394)
Expenses:
General and administrative 1,940 1,923
Sales and marketing 743 2,053
Charge for note receivable - 475
Reserve for contract dispute - 475
Research and development 643 80
-----------------------------
Total operating expenses 3,326 5,006
-----------------------------
Loss from operations (2,722) (5,400)
Other income (expense):
Interest income 1 20
Interest expense (25) (769)
Other (13) (15)
-----------------------------
Total other income (expense) (37) (764)
-----------------------------
Loss from operations before
provision for income taxes (2,759) (6,164)
Income taxes - -
-----------------------------
Loss from operations (2,759) (6,164)
Preferred stock dividends (151) (151)
-----------------------------
Net loss applicable to Common Stockholders $ (2,910) $ (6,315)
=============================
Basic and diluted net loss per share from
operations applicable to common shares $ (0.07) $ (0.18)
=============================
Basic and diluted weighted average common shares
outstanding 44,328,504 34,212,377
=============================
See accompanying notes.
6
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
(Unaudited)
Six Months Ended
30-Jun
-------------------------------
Operating activities 2002 2001
-------------------------------
Net loss from operations $ (2,759) $ (6,164)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 774 970
Amortization of deferred financing fees and debt discount - 708
Increase in note receivable reserve - 475
Changes in operating assets and liabilities:
Accounts receivable 56 209
Prepaid expenses and other current assets 89 104
Other noncurrent assets (2) 26
Accounts payable and accrued expenses (353) 442
Deferred revenue and other 354 (58)
-------------------------------
Net cash used in operating activities (1,841) (3,288)
Investing activities
Purchase of property and equipment - (97)
Increase in capitalized software development costs - (772)
Partnership investment - (475)
-------------------------------
Net cash used in investing activities - (1,344)
Financing activities
Payment of preferred stock dividends - (30)
Repayments of long-term obligations (29) (26)
Payments on redemption of debenture (250) -
Proceeds from the issuance of common stock, net 1,499 2,499
Proceeds from exercise of common stock warrants, net 805 -
-------------------------------
Net cash provided by financing activities 2,025 2,443
-------------------------------
Net increase (decrease) in cash and cash equivalents 184 (2,189)
Cash and cash equivalents, beginning of period 103 2,189
-------------------------------
Cash and cash equivalents, end of period $ 287 $ -
===============================
See accompanying notes.
7
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note #1: General
The accompanying consolidated financial statements are unaudited and include the
accounts of SEDONA Corporation and subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated.
The consolidated financial statements included herein for the three and six
months ended June 30, 2002 and 2001 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 generally accepted accounting principles. The results of
operations experienced for the three and six month periods ended June 30, 2002
are not necessarily indicative of the results to be experienced for the year
ended December 31, 2002.
The statement 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 generally accepted accounting principles have been
omitted pursuant to such Rules and Regulations. The accompanying notes should
therefore be read in conjunction with the Company's December 31, 2001 Annual
Financial Statements on Form 10-K as well as the Company's Form 10-Q filed May
15, 2002. Certain reclassifications have been made to prior year numbers to
conform to the current year presentation.
Note #2: Stockholders' Equity
During the second quarter of 2002, there were a total of -0- common stock
options and warrants issued to employees, consultants and Directors of the
Company.
In the second quarter of 2002, the Company sold 1,209,352 shares of common stock
and issued four-year warrants to purchase 604,676 shares of common stock at
exercise prices ranging from $0.56-$0.63 per share to an investor in private
placements for aggregate net proceeds of $665. We paid $35 in sales commissions
and issued warrants to purchase 84,655 shares of common stock at exercise prices
of $0.70 to $1.24 per share to a finder in connection with these offerings.
Also during the second quarter of 2002, the Company realized $38 in proceeds
from issuance of 119,465 shares of common stock pursuant to employee purchases
of shares under the Employee Stock Purchase Plan, and $146 in proceeds from
exercise of 159,838 warrants and options by two investors. Additionally, 23,400
shares of Company common stock were issued to an investment bank and expensed
during the second quarter for financial advisory services on a project in lieu
of cash payments of $30.
Additionally, during July 2002, the Company sold 89,928 shares of common stock
and issued four-year warrants to purchase 44,964 shares of common stock at an
exercise price of $0.56 per share to an investor in a private placement for
aggregate net proceeds of $48. We paid $2 in sales commissions and issued
warrants to purchase 6,295 shares of common stock at an exercise price of $0.70
per share to a finder in connection with this offering.
8
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note #2: Stockholders' Equity (continued)
Also during the third quarter of 2002, the Company issued common stock pursuant
to an employee 401(k) Plan whereby certain contributions are matched by the
Company in company stock valued at $76, resulting in the issuance of 96,262
shares of common stock.
Note #3: Major Customers
The Company had sales to one customer in the quarter ended June 30, 2002, which
accounted for 47% of revenues. Company sales to two different customers in the
six months ended June 30, 2002 comprised 51% of revenues in that period.
During the second quarter, one customer accounted for more than 10% of revenues.
Note #4: Supplemental Disclosures of Cash Flow Information
Six months ended
June 30
----------------------------------------
2002 2001
----------------- -----------------
Cash paid during period for interest $ 25 $ 9
----------------- -----------------
Cash expenses incurred relative to
new equity $ 107 $ 126
----------------- -----------------
Non-cash financing activities are as follows:
Conversion of debenture interest into
common stock $ - $ 51
----------------- -----------------
Conversion of debenture and preferred
stock to common stock $ - $ 1,830
----------------- -----------------
Note #5: Alliance Agreements
In April, 2002, SEDONA announced that it has entered into an agreement with
Fiserv, Inc., a full-service provider of integrated data processing and
information management systems to the financial industry, to license, integrate
and private-label SEDONA's entire Intarsia(TM) software solution. An initial
cash payment was received at contract signing for software and certain
prepayments of royalties under this agreement and additional payments are being
made in return for certain resources being provided by SEDONA. Also, under the
agreement with Fiserv, SEDONA will receive additional funds as product is
deployed in the Fiserv customer base.
In May 2002, SEDONA announced that Open Solutions Inc. (OSI) had licensed the
technology of SEDONA's IntarsiaTM software solution. OSI is a software and
services company that provides a fully-integrated suite of relational core data
processing, financial accounting, Internet-based financial solutions, imaging
and other delivery systems for community banks and credit unions. Under the
agreement, OSI will embed the Intarsia analytic technology into their
relationship management product offering which will enable their clients to
service and predict better the needs of customers. An initial cash payment was
received by the Company at contract signing for software. Additionally,
royalties will be received by SEDONA as product is deployed in the OSI customer
base. There was no recognition of revenue from this partner in the second
quarter since the initial software acceptance was not completed by June 30,
2002.
9
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note #6: Contingencies
In June 2000, the Company entered into a contract with a software vendor to
incorporate a component of that vendor's software into SEDONA's Intarsia(TM). By
April 2001, Management determined that the project had become infeasible due to
the lack of support by the vendor and its unwillingness to meet certain contract
commitments. The Company has notified the vendor of its contract defaults and
termination and has concluded that it is not appropriate to accrue certain
minimum payments under the contract. Should the dispute end unfavorably, it
would result in minimum royalty payments of $1,350 and $1,500 in 2002 and 2003,
respectively. The Company has retained counsel to assist it in defending its
position. Management's assessment is that the Company has a meritorious defense
against any vendor claim in this regard.
SEDONA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share data)
Results of Operations
Total revenues increased to $770 for the three months ended June 30, 2002, from
$753 for the three months ended June 30, 2001. Revenues for the six months ended
June 30, 2002 and 2001 were $1,493 and $1,194, respectively. The growth in
revenues was primarily due to growth in the license revenues from the alliance
agreements as the Company has moved to an indirect sales model which more than
offset second quarter declines in service revenues related to the established
customer base. The Company had sales to one customer in the quarter ended June
30, 2002 which accounted for 47% of revenues. Company sales to two different
customers in the six months ended June 30, 2002 comprised 51% of revenues in
that period.
The increase in deferred revenues which rose to $863 at June 30, 2002 from the
level of $504 in the same period a year ago related primarily to cash received
from alliance partners for prepaid royalties. The Company expects the balance of
deferred revenue to be recognized as revenues in the coming 12 months.
Total cost of revenues decreased to $384 for the three months ended June 30,
2002 from $705 for the three months ended June 30, 2001. Total cost of revenues
decreased to $889 for the six months ended June 30, 2002 from $1,588 for the six
months ended June 30, 2001. Cost of revenues decreased in the 2002 periods
reflecting principally the reductions in force compared to the prior year.
Gross profits of $386 were earned in the three months ended June 30, 2002, up
from $48 in the same period a year ago. Gross profits in the six months ended
June 30, 2002 were $604, in contrast to a loss of $394 in the same period of
2001. The improvements in the 2002 periods were due principally to higher
revenues and lower costs as personnel reductions were implemented during the
period. Additionally, results in the second quarter of 2002 benefited from a $43
lump sum payment received from one customer in settlement of a contractual
obligation that has been completely fulfilled by the Company.
10
SEDONA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share data)
Results of Operations (continued)
Total operating expenses declined to $1,410 in the three months ended June 30,
2002, from $2,230 in the same period a year earlier. Total operating expenses in
the six months ended June 30, 2002 declined to $3,326 from a level of $5,006 in
the six months ended June 30, 2001. Expenses have decreased in the 2002 periods
compared to the same periods in 2001 reflecting principally savings from staff
reductions and lower marketing expenses.
Other income (expense) in the three months ended June 30, 2002 decreased to $(8)
compared to $(73) in the same period a year ago. For the six months ended June
30, 2002, other income (expense) decreased to $(37) compared to $(764) in the
period ended June 30, 2001. The decrease in other expenses in the 2002 periods
were principally due to lower financing costs.
Liquidity and Capital Resources
At June 30, 2002, cash and cash equivalents were $287, a $184 increase compared
to the December 31, 2001 amount of $103. For the six months ended June 30, 2002,
the cash flows from operating activities resulted in a net use of cash of
$1,841, down from the level of $3,288 in the same period of the prior year.
Lower cash uses stemmed primarily from lower operating losses.
The cash flows from investing activities during the six months ended June 30,
2002 were $-0-, versus a cash use of $1,344 in the same period of 2001. This
decrease in cash used in investing activities was due primarily to a lack of
software development costs capitalization and purchases of equipment as well as
the absence of an investment loss in 2001.
For the six months ended June 30, 2002, the cash flows from financing activities
resulted in net cash provided of $2,025, versus net cash provided of $2,443 in
the same period a year ago. The decrease in cash provided when compared to the
same period a year ago was due principally to higher payments for redemptions
and repayments of debt as well as lower proceeds from the sale of new
securities.
The Company believes that if it can generate funds from operations and
additional sales of securities, such funds will be sufficient to meet the
Company's working capital requirements over the period through the second
quarter of 2003. The Company has incurred substantial losses from operations of
approximately $10,434 and $10,682 during the years ended December 31, 2001 and
2000, respectively. Losses from operations are continuing in 2002. In the event
additional financing is required in the period through the second quarter of
2003, such funding may not be readily available. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
plans include expanding the sale and acceptance of its business solutions
through its strategic partnerships; targeting new application solutions;
continuation of aggressive marketing of its proprietary product; maintaining
leadership of its application; and seeking additional debt or equity financing.
Inflation
Although there can be no assurance that the Company's business will not be
affected adversely by inflation in the future, Management believes inflation did
not have a material adverse effect on the results of operations or financial
condition of the Company during the periods presented herein.
11
SEDONA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share data)
Financial Risk Management
The Company invests its cash in variable rate money market securities, which are
not subject to interest rate or market risk.
From time to time the Company also has issued fixed-rate debt and preferred
stock, which is convertible into its Common Stock at a predetermined or market
related conversion price. Convertible debt has characteristics that give rise to
both interest-rate risk and market risk because the fair value of the
convertible security is affected by both the current interest-rate environment
and the price of the underlying Common Stock. For the years ended December 31,
2001 and 2000, the Company's convertible debt, on an if-converted basis, was not
dilutive and, as a result, had no impact on the Company's net income per share
(assuming dilution). In future periods, the debt may be converted, or the
if-converted method may be dilutive and net income per share (assuming dilution)
would be reduced.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
No actions other than matters involved in the ordinary
course of business are currently known by Management and
none of these are believed by Management to have potential
significance.
Item 2 - Changes in Securities - None
Item 3 - Default Upon Senior Securities - None
Item 4 - Submission of Matters to a Vote of Security Holders
In the Election of Directors to Terms Expiring in 2003
FOR WITHHELD TOTAL
---------- --------- ----------
Laurence L. Osterwise 33,830,592 1,329,933 35,160,525
R. Barry Borden 33,824,836 1,335,689 35,160,525
Marco A. Emrich 33,824,722 1,335,803 35,160,525
Michael A. Mulshine 33,821,736 1,338,789 35,160,525
Jack Pellicci 33,822,141 1,338,384 35,160,525
James C. Sargent 33,824,386 1,336,139 35,160,525
Robert M. Shapiro 33,823,961 1,336,564 35,160,525
James T. Womble 33,823,691 1,336,834 35,160,525
Item 5 - Other Information - None
12
PART II - OTHER INFORMATION (continued)
Item 6 - Exhibits
Exhibit 10.1 Form of Common Stock and Warrants Purchase
Agreement by and among the Company and the
investors signatory thereto utilized in 2002 to
date (filed as Exhibit 10.1 to the quarterly
report on Form 10-Q for the fiscal quarter ended
September 30, 2001)
Exhibit 10.2 Form of Registration Rights Agreement by and among
the Company and the investors signatory thereto
utilized in 2002 to date (filed as Exhibit 10.2 to
the quarterly report on Form 10-Q for the fiscal
quarter ended September 30, 2001)
Exhibit 10.3 Form of Warrant issued to investors in sales of
common stock utilized in 2002 to date (filed as
Exhibit 10.4 to the quarterly report on Form 10-Q
for the fiscal quarter ended September 30, 2001)
Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned,
Thereunto duly authorized.
SEDONA CORPORATION
DATE: July 29, 2002 /S/ Marco A. Emrich
---------------------- ---------------------------------
Marco A. Emrich
President and Chief Executive Officer
DATE: July 29, 2002 /S/ William K. Williams
---------------------- --------------------------------------
William K. Williams
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
13