Back to GetFilings.com
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 September 30, 2003
[ ] 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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1003 W. 9th Avenue, Second Floor, King of Prussia, PA 19406
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 337-8400.
Indicate by the check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12(b)(2) of the Exchange Act.
YES [ ] NO [X]
At November 10, 2003, there were 56,488,471 shares 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 -- September 30, 2003 (Unaudited)
and December 31, 2002.......................................................................4
Consolidated Statements of Operations -- (Unaudited)
three months ended September 30, 2003 and 2002..............................................5
Consolidated Statements of Operations -- (Unaudited)
nine months ended September 30, 2003 and 2002...............................................5
Consolidated Statements of Cash Flow -- (Unaudited)
nine months ended September 30, 2003 and 2002...............................................6
Notes to Consolidated Financial Statements -
September 30, 2003..........................................................................7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................................15-16
Item 3. Quantitative and Qualitative Disclosure about Market Risk...................................16-17
Item 4. Controls and Procedures.....................................................................17
PART II. OTHER INFORMATION
Item 1 through Item 6.......................................................................18
SIGNATURE PAGE.......................................................................................19
CERTIFICATIONS.......................................................................................20-23
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 and Per Share Data)
(unaudited)
September 30, December 31,
2003 2002
------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 45 $ -
Restricted cash - 238
Accounts receivable, net of allowance for doubtful accounts of $13
and $16 at September 30, 2003 and December 31, 2002, respectively 108 53
Accounts receivable, related party 500 -
Prepaid expenses and other current assets 65 186
------------------------------------------
Total current assets 718 477
Property and equipment, net of accumulated depreciation and
amortization 115 238
Software development costs, net of accumulated amortization
of $3,392 and $2,834 at September 30, 2003 and
December 31, 2002, respectively 491 1,048
Other 28 7
------------------------------------------
Total non-current assets 634 1,293
------------------------------------------
Total assets $ 1,352 $ 1,770
==========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 541 $ 820
Accrued expenses and other current liabilities 255 1,226
Deferred revenue 321 394
Note payable to related party 86 148
Short-term debt- debentures 1,390 7
Current maturities of long-term debt 26 1,010
------------------------------------------
Total current liabilities 2,619 3,605
Long-term debt, less current maturities 953 12
Interest payable 27 -
------------------------------------------
Total long-term liabilities 980 12
------------------------------------------
Total liabilities 3,599 3,617
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 shares - 780 2 2
Series H, par value $2.00, Issued and outstanding shares - 1,500 3 3
Common stock, par value $0.001
Authorized shares -125,000,000, Issued and outstanding shares - 56,247,466 and
51,301,197 in 2003 and 2002, respectively 56 51
Additional paid-in-capital 59,652 57,285
Accumulated deficit (62,960) (60,188)
------------------------------------------
Total stockholders' equity/(deficit) (2,247) (1,847)
------------------------------------------
Total liabilities and stockholders' equity/(deficit) $ 1,352 $ 1,770
==========================================
See accompanying notes.
4
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------------
Revenues:
Product licenses (including related party fees of $475
in 2003) $ 555 $ 32 $ 948 $ 754
Services 67 484 439 1,255
-----------------------------------------------------------------
Total revenues 622 516 1,387 2,009
Cost of revenues
Product licenses 187 282 558 928
Services 23 92 91 335
-----------------------------------------------------------------
Total cost of revenues 210 374 649 1,263
-----------------------------------------------------------------
Gross profit 412 142 738 746
Expenses:
General and administrative 573 808 1,542 2,748
Sales and marketing 114 242 262 985
Research and development 228 317 631 960
Reserve for litigation - 469 - 469
-----------------------------------------------------------------
Total operating expenses 915 1,836 2,435 5,162
-----------------------------------------------------------------
Loss from operations (503) (1,694) (1,697) (4,416)
Other expenses:
Debenture interest expense (358) - (938) -
Interest expense (56) (9) (137) (46)
-----------------------------------------------------------------
Total other (expense) (414) (9) (1,075) (46)
-----------------------------------------------------------------
Loss from operations before provision for income taxes (917) (1,703) (2,772) (4,462)
Income taxes - - -
-----------------------------------------------------------------
Net loss (917) (1,703) (2,772) (4,462)
Preferred stock dividends (76) (76) (227) (227)
-----------------------------------------------------------------
Net loss applicable to Common Stockholders $ (993) $ (1,779) $ (2,999) $ (4,689)
=================================================================
Basic and diluted net loss per share applicable
to common shares $ (0.02) $ (0.04) $ (0.06) $ (0.10)
=================================================================
Basic and diluted weighted average common shares
outstanding 55,329,012 47,600,831 53,852,859 46,086,565
=================================================================
See accompanying notes.
5
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands, except share and per share data)
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
Operating activities 2003 2002
---------------------------------
Net loss from operations $ (2,772) $ (4,462)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 137 220
Gain on the sale of property and equipment (4) -
Software amortization 558 896
Accretion of discount on convertible note 938 -
Option and warrant based compensation 23 -
Charge for employer 401(k) stock contribution 82 97
Changes in operating assets and liabilities:
Accounts receivable (555) 197
Decrease in restricted cash 238 -
Prepaid expenses and other current assets 121 131
Other non-current assets (21) (2)
Accounts payable and accrued expenses (1,223) (494)
Deferred revenue and other (73) 226
Legal contingency - 469
--------------------------------
Net cash used in operating activities (2,551) (2,722)
Investing activities
Purchase of property and equipment (21) -
Proceeds from the sale of property and equipment 11 -
---------------------------------
Net cash used in investing activities (10) -
Financing activities
Issuance of convertible note 1,765 -
Repayments of long-term obligations (43) (44)
Payments on redemption of debenture - (399)
Proceeds from the issuance of common stock, net 756 1,927
Proceeds from exercise of common stock warrants, net 190 1,206
Repayment of note payable-related party (62) -
---------------------------------
Net cash provided by financing activities 2,606 2,690
---------------------------------
Net increase (decrease) in cash and cash equivalents 45 (32)
Cash and cash equivalents, beginning of period - 103
---------------------------------
Cash and cash equivalents, end of period $ 45 $ 71
=================================
See accompanying notes.
6
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
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 nine months ended
September 30, 2003 and 2002 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 nine month period ended September 30, 2003 are
not necessarily indicative of the results to be experienced for the year ended
December 31, 2003.
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 third quarter
of 2004. In addition to the loss of ($2,772) realized during the nine month
period ended September 30, 2003, the Company incurred substantial losses from
operations of approximately ($6,001) and ($10,434) during the years ended
December 31, 2002 and 2001, respectively. If additional financing is required in
the period through the third quarter of 2004, 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 current and future strategic alliance partnerships; targeting
new application solutions; and seeking additional debt or equity financing in
addition to aggressive cost containment measures.
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, 2002 annual financial statements on Form 10-K and Form 10K/A filed
April 15 and April 16, 2003, respectively, as well as the Company's Forms 10-Q,
filed May 13, 2003, August 18, 2003 with amendment filed October 3, 2003.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations to account for its stock
option plans. The Company grants options for common stock at an option price
equal to the fair market value of the stock at the date of grant. Accordingly,
the Company does not record stock-based compensation expense for these options.
The Company's stock option plans are more fully described in the Company's
fiscal 2002 Annual Report on Form 10-K.
7
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
The following table illustrates the effect on net earnings, net earnings per
basic common share and net earnings per diluted common share, as if compensation
cost for all options had been determined based on the fair market value
recognition provision of a Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation":
Nine months ended September 30,
2003 2002
--------------------------------------
Net income/loss applicable to common stockholders $ (2,999) $ (4,689)
Deduct: Total stock-based employee expense
determined under the fair value based method
for all awards, net of related tax benefits (707) (1,155)
-------------- ---------------
Pro-forma net income/loss
applicable to common stockholders $ (3,706) $ (5,844)
============== ===============
Diluted earnings per common share $ (0.06) $ (0.10)
Pro-forma diluted earnings per common share $ (0.07) $ (0.13)
Note #2: Restricted Cash
---------------
In December 2002, the Company negotiated a cancellation of its executive office
lease for facilities at 455 South Gulph Road, Suite 300, King of Prussia, PA
19406 and entered into a new lease for smaller space at 1003 West Ninth Avenue,
Second Floor, King of Prussia, PA 19406. In January 2003 the Company paid $104
of accrued rent and a $134 termination charge from restricted cash to settle the
obligation at its former leased facility. The balance of restricted cash at
September 30, 2003 is $0.
Note #3: Property and Equipment
----------------------
Property and equipment consists of:
September 30 December 31,
2003 2002
--------------------------------------
Machinery and equipment $ 1,006 $ 1,003
Equipment under capital lease 203 227
Furniture and fixtures 155 152
Leasehold improvements 77 62
Purchased software for internal use 193 193
--------------------------------------
1,634 1,637
Less accumulated depreciation and amortization (1,519) (1,399)
--------------------------------------
$ 115 $ 238
======================================
8
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note #4: Stockholders' Equity and Other Financing Activities
---------------------------------------------------
During the first quarter of 2003, there were a total of 305,000 Common Stock
options with exercise prices ranging from $0.17 to $0.24 granted to Directors of
the Company.
During January 2003 an agreement was reached with certain Directors of the
Company to satisfy a $211 liability for previously rendered services with
1,320,854 shares of Common Stock, of which 568,906 were issued as of September
30, 2003. Also during January 2003, the Company issued 37,500 shares of Common
Stock to a vendor in lieu of a $6 cash payment.
In January 2003, the Company issued an 8% convertible debenture to Mr. David R.
Vey and received proceeds of $120. The debenture matures on January 5, 2004 and
is convertible at any time at the option of the holder into 2,000,000 share of
Common Stock until that date. Also during January 2003, the Company received
$700 in exchange for the Company's issuance of a $100 convertible debenture and
a $600 promissory note, each bearing interest at a rate of 7%, and which both
mature on January 15, 2004. The Company may extend the maturity of each
instrument for up to three additional years subject to required pay downs. The
convertible debenture can be converted at the option of the holder into
10,000,000 shares of Common Stock. Additionally, in March 2003, the Company
received an additional $500 from Mr. Vey in exchange for a $400 promissory note
and a $100 convertible debenture maturing in March 2004, bearing interest at a
rate of 7%, subject to the Company's option to extend for three additional years
by making required pay downs. The March 2003 convertible debenture is
convertible at the option of the holder into 10,000,000 shares of Common Stock.
The Company has accounted for the value of the conversion feature of these
instruments, which was limited to the amount of aggregate proceeds received of
$1,320, as additional paid in capital and debt discount. This amount will be
accreted over the life of the notes as additional interest expense.
In addition the Company issued to a third party as a finder's fee in lieu of
cash fees, 1,610,000 warrants at a price of $0.40 per share for the above equity
transactions and repriced a prior warrant to purchase 150,000 shares from $1.50
per share to $0.10 per share.
In March 2003, the Company received $9 proceeds from the exercise of 90,000
warrants at $0.10 per share.
During the first quarter of 2003 the Company issued 134,461 shares of Common
Stock to third parties for services rendered in the amount of $25; 107,369 of
these shares were issued to a Director of the Company.
During the second quarter of 2003 the Company issued 198,836 shares of Common
Stock to third parties for services rendered in the amount of $51; 53,770 of
these shares were issued to a Director of the Company who retired in July 2003.
9
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Also during the second quarter of 2003, the Company recognized $181 from the
exercise of 560,000 Common Stock Warrants.
During the second quarter of 2003, the Company issued Common Stock pursuant to
an Employee 401(k) Plan, whereby certain contributions are matched by the
Company in Company common stock valued at $82, resulting in the issuance of
514,713 shares of Common Stock.
In June 2003, the Company entered into an agreement with Mr. David Vey to issue
462,962 shares of its Common Stock and to issue 125,000 Common Stock Warrants in
exchange for $125. This agreement was modified in September 2003 to change the
transaction from the issuance of equity securities to debt. The Company entered
into a $125 convertible debenture with Mr. Vey that bears interest at 8% per
annum and is due July 10, 2004. The debenture is convertible at the option of
the holder at any time into 446,429 shares of common stock.
In July 2003, the Company entered into a $160 convertible debenture with Mr.
David Vey that bears interest at 8% per annum and is due July 31, 2004. The
debenture is convertible at the option of the holder at any time into 640,000
shares of Common Stock.
In August 2003, the Company issued 1,250,000 shares of its Common Stock in a
private placement and issued two-year warrants to purchase 625,000 shares of its
Common Stock at an exercise price of $0.35 per share to investors for an
aggregate purchase price of $250.
In September 2003, the Company also entered into a $160 convertible debenture
with Mr. David Vey that bears interest at 8% per annum and is due September 25,
2004. The debenture is convertible at the option of the holder at any time into
888,889 shares of Common Stock.
During the third quarter of 2003 the Company issued 248,229 shares of its Common
Stock to third parties for services rendered in the amount of $55. The Company
also issued 591,676 shares of its Common Stock in lieu of $158 in fees related
to the litigation entered into by the Company as fully explained in Note 12.
Subsequent to September 30, 2003, the Company issued an additional 85,729 shares
of its Common Stock to third parties for services rendered in the amount of $15.
The Company also issued 155,277 shares of its Common Stock in lieu of $28 in
fees related to the litigation entered into by the Company as fully explained in
Note 12.
All of the securities issued in the preceding transactions were sold in reliance
upon Rule 506 of Regulation D involving only accredited investors.
The Company ceased to declare preferred stock dividends as of January 1, 2001 on
the outstanding series of its Class A Convertible Preferred Stock. Cumulative
but undeclared dividends at September 30, 2003 equaled $961 or $1.91 per share.
To the extent such dividends are declared and paid they will then be reflected
appropriately in the Company's financial statements.
10
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note #5: Major Customers
---------------
Revenues generated from five major alliance partners in the quarter ended
September 30, 2003 accounted for 96% of total revenues.
Note #6: Alliance Agreements
-------------------
In January 2003, SEDONA announced that American International Technology
Enterprises, Inc. (AITE), a member company of American International Group, Inc.
had signed an agreement to resell SEDONA's CRM solution.
In February 2003, SEDONA announced that Connecticut Online Computer Center, Inc.
(COCC) had licensed SEDONA's Intarsia application software solution. Consistent
with its other partner alliances, under the agreement, COCC paid an initial fee
for the software license and SEDONA will be paid a royalty fee for every sale of
its technology whether as a component of its total solution or as a standalone
offering. SEDONA also collects additional royalties for every customer order
maintenance contract using its technology, as a component of its partner's total
solution or as a standalone offering.
In August 2003, SEDONA announced that it had signed an agreement to resell
Intarsia with WorldNet Consulting, S.A. The agreement provides WorldNet with the
exclusive rights to market, sell and distribute Intarsia in Spain and Portugal.
The agreement marks the first international distribution for SEDONA and provides
the Company with an opportunity to expand its marketshare into the European
market.
Also in August 2003, the Company announced it had signed an agreement with
Pinkerton Computer Consultants, Inc. to resell Intarsia to the property and
casualty insurance market. The agreement with Pinkerton is the second
significant reseller agreement, targeting the insurance market, signed by the
Company this year. In January of 2003, the Company announced that American
International Technology Enterprises, Inc. (AITE), a member company of American
International Group (AIG) also signed an agreement to resell SEDONA's CRM
solution.
In September 2003, the Company announced it had signed a licensing agreement
with ACEncrypt Solutions, LLC. The agreement gives ACEncrypt Solutions a
perpetual, non-exclusive license for Intarsia in the financial services market,
including community and regional banks, credit unions and insurance companies.
ACEncrypt was also granted by SEDONA, a two- year exclusive license for
development of derivative products from Intarsia for the healthcare market, to
assist healthcare providers in securing and managing digital patient
information. This transaction is a related party transaction as discussed in
Note 7 to these financial statements.
Note #7: Related Party Transactions
--------------------------
In September 2003, the Company sold a licensing agreement to ACEncrypt
Solutions, LLC. The President of ACEncrypt Solutions LLC, Victoria Looney, is a
member of the Board of Directors of SEDONA Corporation. David R. Vey, Chairman
of the Board of Directors of SEDONA Corporation also has a financial interest in
ACEncrypt Solutions. The total fee for the license agreement is $1,000, which
includes delivery of the current version of Intarsia plus the cost of
11
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
other contract defined milestones related to the development of derivative
products for the healthcare market. The Company has recognized $475 of revenue
from this transaction in the third quarter of 2003 related to sale of Intarsia,
the balance of the contract has been deferred until delivery of the remaining
milestones in accordance with SOP 97-2. At September 30, 2003 accounts
receivable reflects $500 related to this transaction, and the balance is due in
monthly installments of $100 starting from the effective date of the agreement.
In March 2002, the Company entered into an agreement to purchase substantially
all of the assets of Lead Factory, Inc. for a combination of stock warrants and
cash. The Company's Chief Marketing Officer, Alyssa Dver, founded Lead Factory.
The terms of the sale included issuance of 100,000, ten-year warrants, at an
exercise price of $0.72 per share upon the signing of the agreement. The Company
also accrued $50 in royalties earned under the terms of this agreement during
the third quarter of 2003. Lead Factory, a Boston-based company which designs,
builds, and markets computer software and services to aid sales and marketing
persons with customer prospecting, initially became a partner in 2000 when the
Company acquired a 10% equity interest, which interest the Company has
subsequently fully reserved. This purchase agreement supercedes all earlier
agreements with Lead Factory.
Note #8: Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
Nine months ended September 30
----------------------------------------
2003 2002
----------------- -----------------
Cash paid during period for interest $ 13 $ 34
================= =================
Conversion of Director liability to equity $ 211 $ -
================= =================
Cash expenses incurred relative to new equity $ - $ 130
================= =================
Conversion of debenture and preferred stock to common stock $ - $ 400
----------------- -----------------
Note #9: 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 the vendor's unwillingness to meet certain
contract commitments. The Company notified the vendor of its concerns on several
occasions and ultimately delivered a notice of breach to the vendor, as required
for the termination of the underlying contract. As the vendor failed to respond
or cure the breach within the time permitted under the agreement, the Company
considers the contract to be terminated in accordance with its terms and has
concluded that it is not appropriate to continue to accrue certain minimum
royalty payments under the contract. Should the dispute end unfavorably, it
would result in minimum royalty payments of $1,350 due in 2002 and $1,500 due in
2003, owed to the software vendor.
12
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note #10: Recent Accounting Developments
------------------------------
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"). SFAS 143 addresses financial
accounting and reporting for legal obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and normal operation of a long-lived asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset and subsequently allocated
to expense over the asset's useful life. Adoption of SFAS No. 143 had no effect
on the Company's consolidated financial position, consolidated results of
operations, or liquidity.
Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 addresses the accounting for costs associated with disposal activities
covered by SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," and with exit and restructuring activities previously
covered by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS No. 146 supercedes EITF No. 94-3 in its entirety and requires
that a liability for all costs be recognized when the liability is incurred.
SFAS No. 146 also establishes a fair value objective for initial measurement of
the liability. SFAS No. 146 will be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
Effective July 1, 2003, the Company adopted SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 addresses the standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity that have been presented either entirely as equity or between the
liabilities section and equity section of the statement of financial position.
Adoption of SFAS No. 150 had no effect on the Company's financial statement
presentation for the quarter ended September 30, 2003.
Note #11: CIMS Transaction
----------------
In April 2000, the Company consummated a transaction to purchase the Customer
Information Management Systems (CIMS) business unit of Acxiom Corporation for
total potential consideration of up to $4,350. $550 in five-year warrants were
issued, $1,300 (with face value of $1,500) was paid in preferred stock, a
minimum of $1,000 due in October 2003 (the "Required Payment"), or earlier, if
certain performance hurdles were met, and the remaining $1,500 will be paid
contingent on performance of the business unit acquired (the "Contingent
Payment"). Through June 30, 2003, the Company had paid approximately $50 related
to the Required Payment. There is no contingent payment due. The performance
period for both the Required Payment and the Contingent Payment expired in April
2003. In November 2003, the Company has restructured the agreement with Acxiom.
The Company has issued a promissory note for the $953 required payment, at an
interest rate of 8% per annum. All unpaid principal and interest are due no
later than May 26, 2006. The restructured terms also include: 1.) Extension of
the conversion date of the Series H Preferred Stock by thirty-six months, until
April 1, 2006; 2.) Payment of trade payables due totaling $132, which are
accrued net of a credit due back to the Company of $78; and 3.) Agreement to
provide $262 worth of services to Acxiom, if requested by Acxiom. Company
Management believes that there is a remote possibility of having to provide any
future services related to this agreement.
13
SEDONA CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note #12: Litigation
----------
On May 5, 2003, the Company 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, tortious interference, conspiracy and other actions set forth in
the complaint, but not limited to enforcement of settlement date and affirmative
determination. As this is an on-going action, no adjustments have been made to
the financial statements related to this matter.
14
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
(In thousands, except share and per share data)
Results of Operations
- ---------------------
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes related thereto for
the three and nine months ended September 30, 2003 and 2002.
Revenues for the three months ended September 30, 2003 and 2002 were $622 and
$516, respectively. Year-to-date revenues for the nine months ended September
30, 2003 and 2002 were $1,387 and $2,009, respectively. Revenues for 2003 were
lower than the same period a year ago due to a change in the Company's business
model to an indirect sales approach where the Company distributes its product
through third party alliance partners (TPAP). Through its TPAP, the Company
receives a royalty payment based on a percentage of the license fee charged by
the strategic partner and on maintenance charged to customers by the TPAP. The
royalty fee is recognized by SEDONA when the Company receives written
acknowledgement from the TPAP that royalties have been earned and monies are
owed to SEDONA.
On January 2, 2003 the Company changed its sales distribution strategy and
focused on an indirect sales channel model, under which the Company licenses or
resells it technology to financial services' solution providers. In order to
achieve this objective, during the first quarter of 2003 the Company transferred
its customer base to Fiserv, Inc. for $120 payment and will receive
thirty-percent of the annual maintenance related to the transferred contracts
during the term of the agreement. The $120 contract price was recognized as
service fee revenue in the first quarter of 2003.
Gross profit/loss in the third quarter of 2003 was $412 compared to $142 in the
same period a year earlier and $738 and $746 for the nine months ended September
30, 2003 and 2002, respectively. Total cost of revenues decreased to $210 for
the three months ended September 30, 2003 from $374 for the three months ended
September 30, 2002, reflecting principally savings due to a reduction in force
in December 2002 which reduced the full time employee count to 15 at the end of
2002. Other items included in costs of revenues are amortization of capitalized
software and costs associated with implementation services. Cost of revenues for
the nine months ended September 30, 2003 and 2002 were $649 and $1,263,
respectively.
Total operating expenses decreased to $915 in the third quarter of 2003, from
$1,836 in the year earlier period, reflecting principally additional savings
from the reduction in force, reduced sales and marketing expense as a result of
changing to an indirect sales model during 2002, as well as overall cost control
measures. For the nine months ended September 30, 2003, operating expenses
totaled $2,435 compared to $5,162 for the nine months ended September 30, 2002.
Other expenses in the three months ended September 30, 2003 increased to $414
from $9 in the three months ended September 30 2002, reflecting principally
non-cash convertible note discount accretion associated with the convertible
notes issued in 2003. For the nine months ended September 30, 2003, other
expenses totaled $1,075 compared to $46 for the nine months ended September 30,
2002, principally reflecting interest expense on the outstanding debenture
obligations and notes payable to related parties.
15
Liquidity and Capital Resources
- -------------------------------
At September 30, 2003, cash and cash equivalents increased to $45, compared to
the December 31, 2002 amount of $-0-. For the nine months ended September 30,
2003, the cash flows from operating activities resulted in a net use of cash of
$2,551 compared to $2,722 for the nine months ended September 30, 2002. This use
of cash was primarily due to payments of accounts payable and accrued expenses.
The cash flows from investing activities during the nine month period ended
September 30, 2003 resulted in a use of cash of $10 to fund the purchase of
equipment, net of proceeds from the sale of equipment. There were no investing
activities in the nine months ended September 30, 2002.
For the nine months ended September 30, 2003, the cash flows from financing
activities resulted in net cash provided by financing activities of $2,606. The
principal increase in cash was due to proceeds from the issuance of common stock
and convertible notes and the exercise of common stock warrants. For the nine
months ended September 30, 2002, the cash flows provided by financing activities
were principally due to proceeds from the issuance of common stock and exercise
of common stock warrants, net of payments made to retire a debenture.
Information with respect to sales of Company securities are included as part of
the Company's financing activities during this period and is incorporated by
reference to Note #4 of the Notes to Consolidated Financial Statements included
herein.
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 third quarter
of 2004. In addition to the loss of ($2,772) realized during the nine month
period ended September 30, 2003, the Company incurred substantial losses from
operations of approximately ($6,001) and ($10,434) during the years ended
December 31, 2002 and 2001, respectively. If additional financing is required in
the period through the second quarter of 2004, 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 current and future strategic alliance partnerships; targeting
new application solutions; and seeking additional debt or equity financing in
addition to aggressive cost containment measures.
Inflation
- ---------
Although there can be no assurance that the Company's business will not be
affected 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- -----------------------------------------------------------------
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 conversion
price. Convertible debt has characteristics that give rise to both interest-rate
risk and market risk because the fair value of the
16
convertible security is affected by both the current interest-rate environment
and the price of the underlying Common Stock. For the nine month period ended
September 30, 2003 and the year ended December 31, 2002, 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.
Item 4. Controls and Procedures
-----------------------
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
this 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.
Management of the Company, under the direction of the Company's Chief Executive
Officer and Interim Chief Financial Officer, reviewed and performed an
evaluation of the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this Report. Based on that
review and evaluation, the Chief Executive Officer and Interim Chief Financial
Officer, along with other key Management personnel of the Company, have
determined that the disclosure controls and procedures were and are effectively
designed to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them on a timely basis.
17
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 be material to
the Company's financial condition or results of
operations.
Item 2 - Changes in Securities and Use of Proceeds - None
Item 3 - Default Upon Senior Securities - None
Item 4 - Submission of Matters to a Vote of Security Holders
Proposal #1: In the Election of Directors to Terms Expiring in 2004
------------------------------------------------------------------------------------
FOR WITHHELD TOTAL
------------------------------------------------------------------------------------
Marco A. Emrich 39,537,651 2,832,166 42,369,817
------------------------------------------------------------------------------------
Victoria V. Looney 41,709,211 660,606 42,369,817
------------------------------------------------------------------------------------
Jack A. Pellicci 41,368,180 1,001,637 42,369,817
------------------------------------------------------------------------------------
James C. Sargent 40,809,380 1,560,437 42,369,817
------------------------------------------------------------------------------------
Robert M. Shapiro 41,213,380 1,156,437 42,369,817
------------------------------------------------------------------------------------
David R. Vey 41,685,596 684,221 42,369,817
------------------------------------------------------------------------------------
James T. Womble 41,313,422 1,056,395 42,369,817
------------------------------------------------------------------------------------
Proposal #2: Increase the Authorized Number of Shares of Common Stock
------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------------------------------------------
Beneficial Common 33,114,603 3,067,524 77,700
------------------------------------------------------------------------------------
Registered Common 4,326,006 1,422,984 361,000
------------------------------------------------------------------------------------
Total Shares Voted 37,440,609 4,490,508 438,700
------------------------------------------------------------------------------------
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 31.1 Statement Under Oath of Principal
Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated October 2, 2003.
Exhibit 31.2 Statement Under Oath of Principal
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated October 2, 2003.
Exhibit 32.1 Statement Under Oath of Principal
Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated October 2, 2003.
Exhibit 32.2 Statement Under Oath of Principal
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated October 2, 2003.
Reports on Form 8-K - Change in Registrant's Auditors,
August 29, 2003.
Results of Election of Board of
Directors
18
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: November 14, 2003 /s/Marco A. Emrich
------------------------ -------------------------------
Marco A. Emrich
President/Chief Executive Officer
DATE: November 14, 2003 /s/Anita M. Primo
------------------------ -------------------------------
Anita M. Primo
Controller and Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
19