UNITED
STATES
 SECURITIES
      AND EXCHANGE COMMISSION
 Washington,
D.C.  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, 2008
 
 or
 
 [  ]
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: 1-3952
 
 SIBONEY
      CORPORATION
 (Exact name of
registrant as specified in its charter)
 
 
 Maryland
              
              73-0629975(State or
      other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)325
      N Kirkwood Rd, Ste 300, St Louis, MO
              
              63122(Address of
      principal executive offices)
              
              (Zip
      Code)314-822-3163(Registrant’s
      telephone number, including area
code)
 
 
 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.[X] Yes
[  ] No
 
 
 Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer, or a smaller reporting company.  See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer [  ]
              Accelerated
      filer [  ]Non-accelerated
      filer []
      (Do not check if a smaller reporting company)
              Smaller
      reporting company [X]
 
 
 Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).  [  ] Yes [X] No
 
 
 As
of November 7, 2008, the registrant had 16,920,419 outstanding shares of Common
Stock.
 
  
  SIBONEY
CORPORATION
 FORM
10-Q
 INDEX
 
 PagePART I  FINANCIAL
      INFORMATIONItem 1.  Unaudited Financial
      StatementsConsolidated Balance Sheets, September 30, 2008 and
      December 31, 2007
              3Consolidated Statements of Operations, Three and Nine
      Months Ended
                September 30, 2008 and
      2007
              4Consolidated Statements of Stockholders’ Equity,
      Nine Months Ended
                September 30, 2008 and 2007
              5Consolidated Statements of Cash Flows, Nine Months Ended
                September 30, 2008 and
      2007
              6Notes to Unaudited Consolidated Financial
      Statements
              7Item 2.  Management’s Discussion and Analysis of
      Financial Condition and
                Results of
      Operations
              13Item 4.  Controls and
    Procedures
              18PART II  OTHER INFORMATIONItem 3.  Defaults Upon Senior
      Securities
              18Item 6.  Exhibits
              18SIGNATURES
              19INDEX TO EXHIBITS
              20
 
  2
 PART I  FINANCIAL
INFORMATION
 Item
1.  Unaudited Financial Statements
 
 
 SIBONEY
      CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Unaudited)September
      30,
                
                
                December
      31,2008
                
                
                2007AssetsCurrent
      AssetsCash
                
                $
                631,383
                
                
                $
                217,843Accounts receivable, net
                
                
                552,496
                
                
                
                557,388Inventories, net
                
                
                189,196
                
                
                
                209,420Prepaid expenses
                
                
                60,962
                
                
                
                77,551Total current assets
                
                
                1,434,037
                
                
                
                1,062,202Property
      and Equipment, Net
                
                
                58,901
                
                
                
                95,151Long-term
      Note Receivable
                
                
                148,576
                
                
                
                151,908Capitalized
      Software, Net
                
                
                1,899,190
                
                
                
                2,133,048Goodwill
                
                
                1,045,015
                
                
                
                1,045,015Other
      Assets
                
                
                11,002
                
                
                
                20,720Total
      assets
                
                $
                4,596,721
                
                
                $
                4,508,044Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesCurrent portion of term loan
                
                $
                662,323
                
                
                $
                103,125Line
      of credit
                
                
                1,425,000
                
                
                
                —Current portion of subordinated debt (related party)
                
                
                227,808
                
                
                
                —Accounts payable
                
                
                258,546
                
                
                
                235,637Accrued expenses
                
                
                168,506
                
                
                
                266,634Deferred revenue
                
                
                204,755
                
                
                
                106,330Interest payable
                
                
                8,697
                
                
                
                15,068Total current liabilities
                
                
                2,955,635
                
                
                
                726,794Long-Term
      LiabilitiesLine
      of credit
                
                
                —
                
                
                
                1,075,000Long-term portion of term loan
                
                
                —
                
                
                
                652,784Subordinated debt (related party)
                
                
                —
                
                
                
                202,391Other
      long-term liabilities
                
                
                54,400
                
                
                
                54,400Total long-term liabilities
                
                
                54,400
                
                
                
                1,984,575Commitments
      and ContingenciesStockholders'
      EquityCommon
      stock:Authorized 100,000,000 shares at $0.10 par value; issued
    andoutstanding 16,920,419 at September 30, 2008 and December 31,
      2007
                
                
                1,692,042
                
                
                
                1,692,042Additional
      paid-in capital
                
                
                82,653
                
                
                
                77,600Retained earnings (deficit)
                
                
                (188,009
                )
                
                
                27,033Total
      stockholders' equity
                
                
                1,586,686
                
                
                
                1,796,675Total
      liabilities and stockholders' equity
                
                $
                4,596,721
                
                
                $
                4,508,044Note: The
      balance sheet at December 31, 2007 has been derived from the audited
      consolidated financial statements at that date.See
      accompanying notes to unaudited consolidated financial
    statements.
  3
  SIBONEY
      CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OF
      OPERATIONSFor
      the Three Months Ended September 30,
                
                
                For
      the Nine Months Ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Revenues
                
                $
                1,244,892
                
                
                $
                1,486,094
                
                
                $
                4,135,961
                
                
                $
                4,604,254Cost
      of Product Sales
                
                
                403,305
                
                
                
                404,611
                
                
                
                1,262,599
                
                
                
                1,274,684Gross
      profit
                
                
                841,587
                
                
                
                1,081,483
                
                
                
                2,873,362
                
                
                
                3,329,570Selling,
      General andAdministrative
      Expenses
                
                
                821,249
                
                
                
                1,073,228
                
                
                
                2,980,014
                
                
                
                3,359,845Income
      (loss) from operations
                
                
                20,338
                
                
                
                8,255
                
                
                
                (106,652
                )
                
                
                (30,275
                )Other
      ExpenseInterest
      expense, net
                
                
                (32,677
                )
                
                
                (58,882
                )
                
                
                (104,037
                )
                
                
                (169,381
                )Gain
      (loss) on sale of assets
                
                
                —
                
                
                
                250
                
                
                
                (506
                )
                
                
                250Total
      other expense
                
                
                (32,677
                )
                
                
                (58,632
                )
                
                
                (104,543
                )
                
                
                (169,131
                )Loss
      before income taxes
                
                
                (12,339
                )
                
                
                (50,377
                )
                
                
                (211,195
                )
                
                
                (199,406
                )Income
      Tax Expense
                
                
                (3,847
                )
                
                
                (1,136,099
                )
                
                
                (3,847
                )
                
                
                (1,099,099
                )Net
      loss
                
                $
                (16,186
                )
                
                $
                (1,186,476
                )
                
                $
                (215,042
                )
                
                $
                (1,298,505
                )Loss
      per share, basic and diluted
                
                $
                —
                
                
                $
                (0.07
                )
                
                $
                (0.01
                )
                
                $
                (0.08
                )Weighted
      average number of shares, basic and diluted
                
                
                16,920,419
                
                
                
                16,920,419
                
                
                
                16,920,419
                
                
                
                16,920,419Note: Basic
      loss per share is computed using the weighted average number of common
      shares outstanding during the period.For the three
      and nine months ended September 30, 2008 and 2007, all stock options and
      warrants were excluded from thecomputations
      of diluted loss per share and totaled 1,882,700 and 2,518,060,
      respectively, as their effect would be anti-dilutive.See
      accompanying notes to unaudited consolidated financial
      statements.
  4
 SIBONEY
      CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
      EQUITYFor
      the Nine Months EndedSeptember
      30,2008
                  
                  
                  2007COMMON
      STOCKBalance at the beginning of the period
                  
                  $
                  1,692,042
                  
                  
                  $
                  1,692,042Balance at the end of the period
                  
                  $
                  1,692,042
                  
                  
                  $
                  1,692,042ADDITIONAL
      PAID-IN CAPITALBalance at the beginning of the period
                  
                  $
                  77,600
                  
                  
                  $
                  38,296Stock-based compensation expense
                  
                  
                  5,053
                  
                  
                  
                  12,489Issuance of warrants to related parties
                  
                  
                  —
                  
                  
                  
                  22,741Balance at the end of the period
                  
                  $
                  82,653
                  
                  
                  $
                  73,526RETAINED
      EARNINGS (DEFICIT)Balance at the beginning of the period
                  
                  $
                  27,033
                  
                  
                  $
                  945,709Cumulative effect of adoption of FIN 48
                  
                  
                  —
                  
                  
                  
                  (65,000
                  )Net
      loss
                  
                  
                  (215,042
                  )
                  
                  
                  (1,298,505
                  )Balance at the end of the period
                  
                  $
                  (188,009
                  )
                  
                  $
                  (417,796
                  )STOCKHOLDERS'
      EQUITY AT END OF PERIOD
                  
                  $
                  1,586,686
                  
                  
                  $
                  1,347,772See
      accompanying notes to unaudited consolidated financial
      statements.
  5
  SIBONEY
      CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OF CASH
      FLOWSFor
      the Nine Months EndedSeptember
      30,2008
                  
                  
                  2007Cash
      Flows From Operating ActivitiesNet
      loss
                  
                  $
                  (215,042
                  )
                  
                  $
                  (1,298,505
                  )Adjustments to reconcile net loss to net cashprovided by operating activities:Depreciation
                  
                  
                  37,186
                  
                  
                  
                  72,422Amortization
                  
                  
                  651,257
                  
                  
                  
                  576,818Interest paid "in-kind" related to subordinated debt
                  
                  
                  16,881
                  
                  
                  
                  10,866Amortization of subordinated debt costs
                  
                  
                  10,938
                  
                  
                  
                  7,704Deferred income taxes
                  
                  
                  —
                  
                  
                  
                  1,105,000Stock-based compensation expense
                  
                  
                  5,053
                  
                  
                  
                  12,489Loss (gain) on sale of assets
                  
                  
                  506
                  
                  
                  
                  (250
                  )Abandonment of software development in process
                  
                  
                  —
                  
                  
                  
                  11,404Allowance for doubtful accounts, sales credits and returns
                  
                  
                  48,775
                  
                  
                  
                  (14,725
                  )Reserve for obsolescence of inventory
                  
                  
                  15,497
                  
                  
                  
                  11,860Change in assets and liabilities:Accounts and note receivable
                  
                  
                  (40,551
                  )
                  
                  
                  83,821Inventories
                  
                  
                  4,727
                  
                  
                  
                  5,665Prepaid expenses and other assets
                  
                  
                  23,905
                  
                  
                  
                  24,044Accounts payable, accrued expensesand deferred revenue
                  
                  
                  16,835
                  
                  
                  
                  (91,297
                  )Net
      cash provided by operating activities
                  
                  
                  575,967
                  
                  
                  
                  517,316Cash
      Flows From Investing ActivitiesPayments for equipment
                  
                  
                  (3,383
                  )
                  
                  
                  (52,541
                  )Proceeds from sale of assets
                  
                  
                  1,941
                  
                  
                  
                  250Payments for software development costs
                  
                  
                  (417,399
                  )
                  
                  
                  (534,631
                  )Net
      cash used in investing activities
                  
                  
                  (418,841
                  )
                  
                  
                  (586,922
                  )Cash
      Flows From Financing ActivitiesProceeds from (payments on) line of credit
                  
                  
                  350,000
                  
                  
                  
                  (100,000
                  )Principal payments on term loan
                  
                  
                  (93,586
                  )
                  
                  
                  (34,253
                  )Proceeds from issuance of related partysubordinated debt and warrants
                  
                  
                  —
                  
                  
                  
                  193,600Net
      cash provided by financing activities
                  
                  
                  256,414
                  
                  
                  
                  59,347Change
      in cash
                  
                  
                  413,540
                  
                  
                  
                  (10,259
                  )Cash
      - Beginning of period
                  
                  
                  217,843
                  
                  
                  
                  226,486Cash
      - End of period
                  
                  $
                  631,383
                  
                  
                  $
                  216,227See
      accompanying notes to unaudited consolidated financial
      statements.
  6
 SIBONEY
CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.  BASIS
OF PRESENTATION AND CONSOLIDATION
 
 Basis
of Presentation
 
 The accompanying
unaudited consolidated financial statements have been prepared by Siboney
Corporation (“Siboney,” the “Company,” “we” or “us”) in accordance with the
rules and regulations of the Securities and Exchange Commission
(“SEC”).  Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States of America have
been condensed or omitted in accordance with such rules and
regulations.  In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial position
of the Company, and its results of operations and cash flows.  These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2007, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 28, 2008.
 
 The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries.  All significant intercompany accounts and transactions
have been eliminated in consolidation.
 
 The results of
operations for the three and nine months ended September 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008, or any other future period, and we make no representations
related thereto.
 
 The accompanying
consolidated financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  We have taken, or are currently
taking, the following actions to allow us to continue as a going
concern:
 
 ·
              Eliminated
      significant operating costs to better align our expenses with our
      revenues.·
              Developed and
      released PracticePlanet® in August 2007 which we believe is positioned to
      generate a recurring revenue stream as well as open opportunities to
      cross-sell our Orchard Software®.·
              Aggressively
      pursuing complementary new sales channels which can fill gaps in our
      current distribution network.
 
 2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 Our significant
accounting policies were described in Note 1 to our audited consolidated
financial statements for the year ended December 31, 2007, included in our
Annual Report on Form 10-K.  These accounting policies have not
significantly changed with the exception of those discussed below.
 
 Changes
in Accounting Principles
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS 157”), which clarifies that fair value is the amount
that would be exchanged to sell an asset or transfer a liability in an orderly
transaction between market participants.  Further, the standard
establishes a framework for measuring fair value in generally accepted
accounting principles and expands certain disclosures about fair value
measurements.  In February 2008, the FASB issued FASB Staff Position
(“FSP”) 157-2 that delayed application of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until fiscal years
beginning after November 15, 2008.  In October 2008, the FASB issued
FSP FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, that clarified the application of SFAS 157 and was effective upon
issuance, including prior periods for which financial statements had not been
issued.  The partial adoption of SFAS 157 for financial assets and
liabilities did not have a material impact on our consolidated financial
position or results of operations.  We are currently evaluating the
potential impact of adopting the remaining provisions of SFAS 157 on our
consolidated financial position and results of operations.  See Note 3
“Fair Value Measurements”.
 
 7
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”).  SFAS 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value.  Unrealized gains and losses on items for
which the fair value option has been elected are reported in
earnings.  SFAS 159 is effective for fiscal years beginning after
November 15, 2007.  Currently, we have not expanded our eligible
items subject to the fair value option under SFAS 159.
 
 In
March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Agreements (“EITF 06-10”).  EITF
06-10 provides guidance for determining a liability for postretirement benefit
obligations as well as recognition and measurement of the associated asset on
the basis of the terms of the collateral assignment agreement.  EITF
06-10 was effective for us beginning January 1, 2008 and did not have an impact
on our consolidated financial position or results of operations.
 
 In
June 2007, the FASB ratified EITF 06-11, Accounting for the Income Tax
Benefits of Dividends on Share-Based Payment Awards (“EITF
06-11”).  EITF 06-11 provides that tax benefits associated with
dividends on share-based payment awards be recorded as a component of additional
paid-in capital.  EITF 06-11 was effective, on a prospective basis,
for us beginning January 1, 2008 and did not have an impact on our consolidated
financial position or results of operations.
 
 Recent
Accounting Pronouncements
 
 In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States.  SFAS 162 is effective 60 days following the
SEC’s approval of The Public Company Accounting Oversight Board’s related
amendments to remove the GAAP hierarchy from auditing standards.  The
adoption of this statement is not expected to have a material effect on our
consolidated financial position or results of operations.
 
 In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No.
133 (“SFAS 161”).  SFAS 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash
flows.  Entities are required to provide enhanced disclosures about:
(a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations; and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows.  It is effective for financial statements issued for
fiscal years beginning after November 15, 2008, with early adoption
encouraged.  The adoption of this statement is not expected to have a
material effect on our consolidated financial position or results of
operations.
 
 3.  FAIR
VALUE MEASUREMENTS
  SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants.  As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability.  As a basis
for considering such assumptions, SFAS 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in measuring fair value as follows:
(Level 1) observable inputs such as quoted prices in active markets; (Level 2)
inputs other than the quoted prices in active markets that are observable either
directly or indirectly; and (Level 3) unobservable inputs in which there is
little or no market data, which require us to develop our own
assumptions.  This hierarchy requires us to use observable market
data, when available, and to minimize the use of unobservable inputs when
determining fair value.  Our cash balances held in checking and money
market checking accounts are classified within Level 1 of the fair value
hierarchy.  We believe that the carrying value of our long-term note
receivable approximates fair value as its interest rate of 6.183% is reasonable
given the level of risk and nature of the receivable; this would be considered a
Level 3 fair value measurement.  The carrying value of our debt
approximates fair value based on the incremental borrowing rates currently
available to us for financing with similar terms and maturities, which would be
considered a Level 3 fair value measurement.
 
 8
 
 4.  BALANCE
SHEET DETAILS
 
 September
      30,
              
              
              December
      31,2008
              
              
              2007Accounts
      receivable:Trade
      accounts receivable
              
              $
              643,291
              
              
              $
              622,578Current
      portion of note receivable
              
              
              14,733
              
              
              
              14,545Amount
      due from coal processor
              
              
              —
              
              
              
              11,245Allowance
      for doubtful accounts, salescredits
      and returns
              
              
              (105,528
              )
              
              
              (90,980
              )$
              552,496
              
              
              $
              557,388Inventories:Finished
      goods
              
              $
              116,897
              
              
              $
              137,981Raw
      materials
              
              
              134,699
              
              
              
              147,019Reserve
      for obsolescence
              
              
              (62,400
              )
              
              
              (75,580
              )$
              189,196
              
              
              $
              209,420Property
      and equipment:Leasehold
      improvements
              
              $
              69,063
              
              
              $
              85,891Office
      equipment, furniture and fixtures
              
              
              982,712
              
              
              
              1,125,814Machinery
      and equipment
              
              
              389,180
              
              
              
              444,4771,440,955
              
              
              
              1,656,182Accumulated
      depreciation
              
              
              (1,382,054
              )
              
              
              (1,561,031
              )$
              58,901
              
              
              $
              95,151Accrued
      expenses:Compensation
      and benefits
              
              $
              110,297
              
              
              $
              190,130Royalties
              
              
              49,167
              
              
              
              59,341Deposit
      from collaborator
              
              
              —
              
              
              
              14,821Other
              
              
              9,042
              
              
              
              2,342$
              168,506
              
              
              $
              266,634
 
 Accounts
receivable, inventory and property and equipment of Siboney Corporation and
Siboney Learning Group, Inc. are pledged as collateral for debt (Notes 8 and
9).
 
 5.  CAPITALIZED
SOFTWARE DEVELOPMENT COSTS
 
 The components of
capitalized software development costs consist of:
 
 September
      30,
              
              
              December
      31,2008
              
              
              2007Software
      development in progress
              
              $
              466,027
              
              
              $
              160,121Capitalized
      software development costs
              
              
              6,157,766
              
              
              
              6,046,273Accumulated
      amortization
              
              
              (4,724,603
              )
              
              
              (4,073,346
              )$
              1,899,190
              
              
              $
              2,133,048
 
 Amortization of
software development costs charged against earnings amounted to $213,487 and
$175,871 for the three months ended September 30, 2008 and 2007,
respectively.  Amortization of software development costs charged
against earnings amounted to $651,257 and $576,818 for the nine months ended
September 30, 2008 and 2007, respectively.  During the first quarter
of 2007, we expensed to selling, general and administrative expenses $11,404 in
costs related to a title that was not released.
 
 9
  6.  COLLABORATIVE
ARRANGEMENT
 
 In
February 2007 we entered into a strategic alliance and joint development
agreement with Edumatics Corporation (“Edumatics”).  Under the
agreement we jointly developed an online test practice product which is marketed
under the name PracticePlanet®.  We share costs and
revenues generated with Edumatics, as provided in the
agreement.  During 2007 we received approximately $390,000 in cash
from Edumatics to fund its share of the costs we incurred for development
efforts and overhead related to this product.  We reduced the amount
we capitalized into software development by approximately $14,000 during the
nine months ended September 30, 2008 and $150,000 during 2007 to reflect the
portion paid by Edumatics.  Since the launch of PracticePlanet®, Edumatics is not obligated to
provide any additional funds to support further development or overhead related
to the product.  Under the agreement, we reduced the amount due to
Edumatics for PracticePlanet® sales by its portion of
overhead costs that we incurred to support PracticePlanet®.  We reduced our
selling, general and administrative expenses by approximately $21,000 and
$83,000 during the three months ended September 30, 2008 and 2007, respectively,
to reflect Edumatics’ portion of these costs.  During the nine months
ended September 30, 2008 and 2007 we reduced our selling, general and
administrative expenses by approximately $75,000 and $225,000,
respectively.
 
 In
December 2007, the FASB ratified EITF Issue 07-1, Accounting for Collaborative
Arrangements (“EITF 07-1”), which discusses how parties to a
collaborative arrangement (which does not establish a legal entity within such
arrangement) should account for various activities.  EITF 07-1
indicates that costs incurred and revenues generated from transactions with
third parties should be reported by the collaborators on the respective line
items in their income statements pursuant to EITF Issue 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent(“EITF 99-19”).  EITF 07-1
also provides that income statement characterization of payments between the
participants in a collaborative arrangement should be based upon existing
authoritative pronouncements; analogy to such pronouncements if not within their
scope; or a reasonable, rational and consistently applied accounting policy
election.  We have concluded that our agreement with Edumatics would
qualify as a collaborative arrangement and we believe that our presentation of
revenues and costs is consistent with EITF 07-1.  EITF 07-1 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years, with retrospective application to all prior
periods presented for all collaborative arrangements existing as of the
effective date.
 
 In
accordance with EITF 99-19 we report PracticePlanet® revenue on a gross basis
for the total amount billed to customers for subscriptions to the online product
because we are the primary obligor and provide the underlying
service.  The portion of revenues due to Edumatics is reported as a
cost of product sales in our consolidated statements of
operations.  This accounting policy of reporting revenue gross as a
principal, versus net as an agent has no effect on gross profit, operating
income, or net income.
 
 7.  INCOME
TAXES
 
 We
reported income tax expense of $3,847 in the three and nine months ended
September 30, 2008 and income tax expense of $1,136,099 and $1,099,099 in the
three and nine months ended September 30, 2007, respectively.  At
September 30, 2007, we were not able to establish that it was more likely than
not our deferred tax assets would be realized and we recorded a full valuation
allowance against our net deferred tax assets, in accordance with SFAS No. 109,
Accounting for Income
Taxes.
 
 8.  DEBT
 
 We have a
      $1,500,000 revolving line of credit agreement with our bank with an
      outstanding balance of $1,425,000 as of September 30, 2008.  As
      of December 31, 2007 we owed $1,075,000 on the line of
    credit.
 
 In addition,
      we owed $662,323 and $755,909 as of September 30, 2008 and December 31,
      2007, respectively under a term loan with our
  bank.
 
 10
  Both the line
      of credit and the term loan require us to pay interest monthly on the
      outstanding balance at our bank’s prime rate which was 5.0% as of
      September 30, 2008.  Accounts receivable, inventory, property
      and equipment are pledged as
collateral.
 
 We entered
      into a new debt agreement in March 2008 with our bank to extend the due
      dates from April 1, 2008 to January 1,
2009.
 
 We
renewed our bank loans in March 2008 under the following terms:
 
 ·
              The interest
      rate on the line of credit and term loan remained at our bank’s prime
      rate.·
              The quarterly
      principal payments of $28,125 on the term loan were changed to a schedule
      of monthly principal payments of $9,375 beginning May 1, 2008 with the
      remaining principal due in full January 1, 2009.  As a result,
      under the renewal we are obligated to make principal payments of $103,125
      during 2008 with the remaining balance due January 1,
  2009.·
              The
      $1,500,000 line of credit was extended through January 1,
      2009.  The outstanding balance on the line is due on January 1,
      2009.·
              We agreed to
      achieve minimum earnings before interest, taxes, depreciation and
      amortization, which is tested
quarterly.
 
 If we breach
      any term or condition in the agreements, as amended, our bank has the
      option to declare the loans due and
payable.
 
 As of
      September 30, 2008, we did not comply with the financial covenants
      specified in our bank credit agreement which are measured at the end of
      each quarter.  We were required to achieve minimum earnings
      before interest, taxes, depreciation and amortization (“EBITDA”) of
      $890,000 for the nine months ended September 30, 2008; our EBITDA was
      approximately $580,000.  We have obtained a waiver for this
      non-compliance as of September 30, 2008.  However, we can
      provide no assurance that we will be able to obtain a waiver from the bank
      of any future non-compliance with these or any other financial
      covenants.
 
 In
      conjunction with the issuance of the waiver for our non-compliance with
      the financial covenants as of March 31, 2008, we agreed with our bank in
      May 2008 to add a loan payoff fee to our bank loan.  When we
      repay in full our line of credit and term loan, we will be required to pay
      our bank a fee equal to 50 basis points on the outstanding bank debt at
      repayment.
 
 In accordance
      with SFAS No. 6, Classification of Short-Term
      Obligations Expected to Be Refinanced, at December 31, 2007, we
      classified our line of credit and a portion of our term loan as a
      long-term liability based upon the terms of the debt agreements that we
      entered into with our bank in March
2008.
 
 9.  RELATED
PARTY SUBORDINATED DEBT
 
 On
March 21, 2007, we borrowed $200,000 from two members of our Board of Directors;
one of the Directors is also an officer of the Company.  We issued to
each Director a $100,000 principal amount subordinated secured note and a
five-year warrant to buy 200,000 shares of our common stock.  The
exercise price under the warrant is $0.01 per share.  We assigned a
value of $22,741 to the warrants that were issued as original issuance discount
against the debt and recorded it as an increase to additional paid-in capital in
March 2007.
 
 The effective
interest rate on this debt is 16.9%.  The debt is due in full in March
2009; we may prepay it without penalty.  Interest is due quarterly on
this debt at a rate of 10% per annum; we can pay in cash or
in-kind.  We accrued interest of $5,809 during the three months ended
September 30, 2008, which was added to the principal balance of the subordinated
debt.  This debt is carried at $227,808 on our consolidated balance
sheets at September 30, 2008, which is the principal amount of $233,135
(including accrued interest) less the unamortized portion of the original
issuance discount of $5,327.
 
 11
 
 The following table
shows the related party expenses in our consolidated statements of operations
related to this debt:
  For
      the Three Months Ended September 30,
              
              
              For
      the Nine Months Ended September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      expense on subordinated debt
              
              $
              5,809
              
              
              $
              5,255
              
              
              $
              16,881
              
              
              $
              10,866Amortization
      of original issuance discount
              
              
              2,866
              
              
              
              2,866
              
              
              
              8,536
              
              
              
              6,012Total
      related party interest expense
              
              $
              8,675
              
              
              $
              8,121
              
              
              $
              25,417
              
              
              $
              16,878Debt issuance
      costs amortized to selling,general
      and administrative costs
              
              $
              807
              
              
              $
              807
              
              
              $
              2,402
              
              
              $
              1,692
 
 This debt is
secured by a junior lien on substantially all of Siboney Learning Group, Inc.’s
assets. Our bank required that the Directors enter into an agreement that
subordinates their loans to the amounts that we owe the bank.  See
Note 8 “Debt.”
 
 10.  STATEMENT
OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
 
 For
      the Nine Months EndedSeptember
      30,2008
              
              
              2007Interest
      paid
              
              $
              93,309
              
              
              $
              144,212Income taxes
      paid, net
              
              $
              14,143
              
              
              $
              2,255Non-cash
      financing transaction related to therelated
      party subordinated debt issuance:Warrant
      recorded as original issuance discount
              
              $
              —
              
              
              $
              22,741
 
 11.  SEGMENT
INFORMATION AND CONCENTRATION OF CREDIT RISK
 
 We
operate our business in one operating segment: the publishing and distribution
of educational software products through Siboney Learning Group, Inc., a
wholly-owned subsidiary.  Our chief operating decision-maker is our
Chief Operating Officer, who reviews financial information presented on a
consolidated basis for purposes of making operating decisions and assessing
financial performance.
 
 Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of cash, accounts receivable and our note receivable.  We
grant unsecured credit to substantially all of our customers.  We do
not believe that we are exposed to any extraordinary credit risk as a result of
this policy.  At various times and at September 30, 2008 we had cash
balances in excess of federally insured limits.  We have not
experienced any losses in such accounts.  We do not believe that we
are exposed to any significant credit risk with respect to our
cash.
 
 Sales to Brainstorm
USA represented 23% and 19% of our consolidated revenues during the three and
nine months ended September 30, 2008, respectively.  This customer
represented 15% and 14% of our consolidated revenues during the three and nine
months ended September 30, 2007, respectively.  As of September 30,
2008 and December 31, 2007, the amount that Brainstorm USA owed us represented
31% and 14%, respectively, of our net accounts receivable.
 
 12
 
 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  The
following contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).  Forward-looking statements relate to
expectations concerning matters that are not historical facts. Words such as
“projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,”
“strategy,” “continue,” “will,” “estimate,” “forecast,” and similar words and
expressions are intended to identify forward-looking statements. Although we
believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, these expectations or any of the
forward-looking statements could prove to be incorrect, and actual results could
differ materially from those projected or assumed in the forward-looking
statements.  Our future financial condition and results of operations,
as well as any forward-looking statements, are subject to risks and
uncertainties, including, but not limited to, the factors set forth in
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2007.  All forward-looking statements and reasons
why results may differ included in this Quarterly Report on Form 10-Q are made
as of the date hereof, and we assume no obligation to update any such
forward-looking statements or reasons why actual results may
differ.
 
 General- Siboney Corporation
was incorporated in the State of Maryland in 1955.  Our principal
business is the publishing of educational software products in core academic
areas, primarily for schools.
 
 Unless the context
indicates otherwise, references to us, our, we or the “Company” in this report
include Siboney Corporation and its subsidiaries.
 
 Business - General Description and
Current Developments - Our principal subsidiary,
Siboney Learning Group, Inc., publishes standards-based educational software
products for reading, language, mathematics, science, writing and English as a
Second Language, primarily for K-12 students and adult learners.
 
 We
publish four comprehensive software product lines:
 ·
              Orchard
      Software® for Your State (“Orchard”)·
              GAMCO
      Educational Software·
              Educational
      Activities Software·
              PracticePlanet®
 
 We
believe that these products position us to appeal to the different budgets and
spending patterns found in classrooms, schools, school districts and adult
learning centers.
 
 The passage and
implementation of the No Child Left Behind Act (“NCLB”) in 2002 placed higher
standards for accountability, research-based products, instructional improvement
and data-driven decision-making upon all public schools in the United
States.  As a result, we focus on upgrading and marketing our Orchard
product line.  We believe that Orchard is a cost-effective solution
for schools facing growing pressures to demonstrate Adequate Yearly Progress
(“AYP”) and instructional improvement as mandated by NCLB.
 
 Orchard integrates
the results of subject specific assessment tests which are based upon state
standards, with individualized instruction from over 160 Skill Trees (i.e.,
curriculum software titles) in K-12 reading, language, mathematics and
science.  Orchard’s assessment identifies areas of academic weakness
for each student within his/her state’s grade-specific standards of
learning.  Orchard then prescribes an individualized learning path for
each student as they interact with a wide variety of motivating instructional
approaches that appeal to different learning styles.  Orchard’s
management system tracks student progress for teachers and administrators who
are facing increasing pressure for data-driven decision making as mandated by
NCLB.  Interim assessment tools can be used to measure educational
gains and to prepare students for their high-stakes state tests.
 
 Over 8,000 schools
use Orchard in computer labs, learning centers and classrooms to supplement core
instruction.  Unlike many competitive comprehensive solutions,
Orchard’s solution is delivered as an unlimited network/site license with no
required recurring fees.  Orchard’s scalable product configurations
allow schools with limited budgets to make a modest initial investment by
purchasing individual Skill Trees and then to grow their Orchard solution with
future purchases of larger curriculum bundles.
 
 13
  Orchard continues
to win industry awards as a comprehensive software solution for
schools.  Most recently, in August 2008, Orchard was named a winner of
the 15th Annual Teachers’ Choice Awards for the Classroom in the education
software category.
 
 Orchard is sold
through a network of independent dealer representatives, direct field and inside
sales representatives who actively call on schools to sell comprehensive
curriculum- and technology-based learning solutions.  Orchard
contributed approximately 80% to our revenue for the nine months ended September
30, 2008 and 2007.  A version of Orchard (Orchard Home) appropriate
for home users is sold through a direct-to-home marketer of educational
products.  This reseller relationship provides us with access to the
home market without the costs associated with retail distribution.
 
 We
also publish two titles-based instructional software product lines:
 
 GAMCO Educational
Software (“GAMCO”) provides schools with single curriculum titles which we
believe are highly motivating and engaging.  GAMCO products are sold
through the major national and regional school software catalog dealers, our
inside sales force, direct catalogs and direct promotions.  All GAMCO
titles include management features that track student progress and allow
teachers to modify the instruction to meet individual learning
needs.  Our GAMCO product line contributed 5% of our revenue for the
nine months ended September 30, 2008 and 2007.
 
 Educational
Activities Software (“EAS”) has been a curriculum solution for the middle school
to adult learner market for more than 20 years.  Best known for its
Diascriptive Reading Series, EAS is sold to schools, community colleges, adult
learning centers and correctional facilities through a network of independent
representatives.  EAS is our primary product offering for the adult
learning market.  This product represented 5% and 7% of our revenues
for the nine months ended September 30, 2008 and 2007,
respectively.
 
 In
February 2007, Siboney Learning Group and Edumatics Corporation, a California
corporation (“Edumatics”), entered into a Strategic Alliance and Joint
Development Agreement.  The Strategic Alliance and Joint Development
Agreement calls for Siboney and Edumatics to jointly develop an online product
(named PracticePlanet®) to assist elementary and middle school students in
preparing for their annual high-stakes state tests, using intellectual property
provided by Siboney.  PracticePlanet® is an online test practice
program designed to enhance student skills and improve scores on state
assessments.  PracticePlanet® uses test items which are correlated to
state testing standards, prompt feedback and interactive games designed to keep
students engaged.  A robust management system allows educators to
track progress at the student, class and school level.  The online
delivery system allows students and teachers to have access to PracticePlanet®
wherever an Internet connection is available.  Test and practice
results are automatically aggregated and presented in a form that is concise and
easy to use.
 
 We
began offering PracticePlanet® in August 2007.  PracticePlanet® is
marketed, sold and supported using Siboney’s employees and independent sales
channels.  The terms of the agreement required Edumatics to make a
one-time payment to Siboney in the amount of $240,000 in order to equally share
in the cost of the software development.  Edumatics also agreed to
compensate Siboney for Edumatics’ share of the agreed upon value of the
intellectual property provided by Siboney.  Ongoing working capital
required to market, sell and support the product is equally contributed between
Siboney and Edumatics.  All revenues generated from the product are
equally shared between the two parties, provided that we are entitled to a
disproportionate share of the revenues until we have received $250,000 from the
preferential allocation.  As of September 30, 2008 we have sold
approximately $185,000 in subscriptions to PracticePlanet®, the majority of
which is included in deferred revenue in our consolidated financial statements,
as we recognize the related revenue over the subscription period.
 
 We
have natural resources interests, including coal, oil and gas, through Siboney
Coal Company, Inc. and other subsidiaries.  Royalties received from
these natural resources depend on coal prices and production.  We
recognized royalty revenue of $240,380 and $43,685 during the nine months ended
September 30, 2008 and 2007, respectively.
 
 14
 
 Critical
Accounting Policies, Judgments and Estimates
 
 The discussion and
analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of
America.  The preparation of these financial statements requires us to
make estimates, assumptions and judgments that can have significant impact on
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of our
financial statements.  We base our estimates, assumptions and
judgments on historical experience and various other factors that we believe to
be reasonable under the circumstances.  Actual results may differ from
these estimates under different assumptions or conditions. On a regular basis we
evaluate our estimates, assumptions and judgments and make changes
accordingly.  We also discuss our critical accounting estimates with
the Audit Committee of our Board of Directors.
 
 We
believe that the estimates, assumptions and judgments involved in revenue
recognition, allowances for doubtful accounts, returns and discounts, impairment
of goodwill, capitalized software assets and accounting for income taxes have
the greatest potential impact on our consolidated financial statements, so we
consider these to be our critical accounting policies.  Historically,
our estimates, assumptions and judgments relative to our critical accounting
policies have not differed materially from actual results.  The
critical accounting estimates associated with these policies are described in
Part II, Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” of our Annual Report on Form 10-K for the
year ended December 31, 2007.
 
 Recent
Accounting Pronouncements
 
 Our significant
accounting policies were described in Note 1 to our audited consolidated
financial statements, included in our Annual Report on Form 10-K for the year
ended December 31, 2007.  There have been no significant changes to
our accounting policies during 2008.  Recent accounting pronouncements
are discussed in Note 2 of the Notes to Unaudited Consolidated Financial
Statements in Part I, Item 1. “Financial Statements” of this
report.
 
 Results
of Operations
 
 The following is
our discussion and analysis of certain significant factors which have affected
our financial condition and operating results during the periods covered by the
accompanying unaudited consolidated financial statements.
 
 Three
and Nine Months Ended September 30, 2008 Compared to September 30,
2007
 
 Our consolidated
revenues decreased 16% to $1,244,892 from $1,486,094 during the third quarter of
2008 compared to the third quarter of 2007.  Sales of Orchard Home to
Brainstorm USA increased to $288,696 for the third quarter of 2008 compared to
$222,551 during the third quarter of 2007, and for the nine months ended
September 30, 2008 Brainstorm USA’s purchases of Orchard Home increased 16% from
purchases during the corresponding period in 2007.  Excluding the
sales to Brainstorm USA, we experienced a 26% decrease in sales of Orchard
during the third quarter of 2008 compared to 2007.  Our revenues
decreased 10% during the nine months ended September 30, 2008 compared to the
similar period of 2007.  We attribute the decreases to the impact of
school system budget cuts, resulting from anticipated lower tax revenues due to
the housing market and economic downturn and higher fuel costs.
 
 Our premium and
professional development services revenues decreased to $45,851 from $98,252
during the third quarter of 2008 compared to the third quarter of 2007; for the
nine months ended September 30, 2008 we recorded $116,558 in service revenues
compared to $307,832 during the nine months ended September 30,
2007.  The decreases in service revenues were due to fewer large
district installation and training sessions conducted during the
period.
 
 Revenues from
natural resources royalties and lease payments increased to $56,851 from
$31,720, during the third quarter of 2008 compared to the third quarter of
2007.  For the nine months ended September 30, 2008 these revenues
were $240,380 compared to $43,685 during the corresponding period in
2007.  The higher revenue was due to increased mining of coal under
leases.
 
 Cost of product
sales during the three and nine months ended September 30, 2008 were consistent
with the levels
  15
  experienced during
the comparable periods in 2007.  Lower sales volumes during the
periods reduced our royalty expense and material costs, offset by higher
software amortization related to our release of Orchard 4.3 during the fall
of 2007.
 
 Selling, general
and administrative expenses decreased 23% to $821,249 from $1,073,228 during the
third quarter of 2008 compared to the third quarter of 2007.  For the
nine months ended September 30, 2008 selling, general and administrative
expenses decreased 11% compared to the nine months ended September 30,
2007.  The decreases in expenses were due to our focus on controlling
discretionary spending, including reduction in personnel costs, in a challenging
revenue environment.
 
 In
April 2008, we implemented a cost-cutting and headcount reduction
initiative.  We estimate that this initiative will reduce operating
costs by $1,000,000 over a 12-month period.  We incurred $25,000 in
the second quarter of 2008 primarily for severance costs related to the
workforce reductions of 12 positions.  Our payroll expense was 31%
lower during the third quarter of 2008 compared to 2007 due to the headcount
reductions we implemented.  Due to lower sales and the headcount
reductions, employee commissions were 67% lower during the third quarter of 2008
compared to the third quarter of 2007.  These decreases were offset by
lower reimbursement for our PracticePlanet® overhead costs to $21,000 during the
third quarter of 2008 from $80,000 during the third quarter 2007, as Edumatics
is not obligated to provide additional funds, our reimbursement in 2008 is
limited to the amount that is due to Edumatics for its share of
sales.
 
 Our interest
expense decreased during the three and nine months ended September 30, 2008
compared to 2007 due to a combination of lower interest rates and lower
outstanding amounts due on our bank debt.  The interest rate charged
by our bank is their prime rate which has decreased from 7.75% as of
September 30, 2007 to 5.00% by September 30, 2008.  The
weighted average interest rate during the third quarter of 2008 was 5.00%
compared to 8.14% during the third quarter of 2007.  Our average bank
debt outstanding decreased to $2,100,000 during the third quarter of 2008 from
$2,600,000 during the third quarter of 2007.  The reduction in
principal was primarily due to the payment we made on our bank debt in December
2007 from the cash proceeds that we received on the extraordinary gain from the
sale of a claim related to a natural resource interest.  See further
discussion related to our debt under – “Liquidity and Capital
Resources.”
 
 We
reported income tax expense of $3,847 in the three and nine months ended
September 30, 2008 and income tax expense of $1,136,099 and $1,099,099 in the
three and nine months ended September 30, 2007, respectively.  At
September 30, 2007, we were not able to establish that it was more likely than
not our deferred tax assets would be realized and we recorded a full valuation
allowance against our net deferred tax assets, in accordance with SFAS No. 109,
Accounting for Income
Taxes.
 
 Our net loss for
the third quarter of 2008 decreased to $16,186 (or $0.00 per share) from the
third quarter of 2007 net loss of $1,186,476 (or $0.07 per share) after income
tax expense of $1,136,099.  Our net loss for the nine months ended
September 30, 2008 was $215,042 (or $0.01 per share) compared to a net loss of
$1,298,505 (or $0.08 per share) after income tax expense of
$1,099,099.
 
 Liquidity
and Capital Resources
 
 Due to losses from
operations since 2005 we have funded investment in our software development
efforts from the proceeds of our bank term loan, draws on our bank line of
credit and issuance of related party subordinated debt.  During
December 2007 Siboney Corporation sold for $1,018,725 a claim that arose out of
natural resources interests held in Cuba which were expropriated by the Cuban
government.  We used $300,000 of the proceeds to reduce our term loan
with our bank, $425,000 reduced our line of credit and the balance was used for
working capital needs.
 
 We
had a working capital deficit of $1,522,000 at September 30, 2008 which compared
to $335,000 of working capital at December 31, 2007 and ratios of current assets
to current liabilities of 0.49:1 as of September 30, 2008 and 1.46:1 as of
December 31, 2007.  The working capital decrease of approximately
$1,900,000 was primarily due to our draws on the line of credit of $350,000 to
fund operations and the classification of our bank term loan, line of credit and
related party subordinated debt to current liabilities as of September 30,
2008.
 
 In
April 2008, as a result of our cash flow situation, no availability on our bank
line of credit, sales below our targets and concern related to sales levels
during 2008, we implemented a cost-cutting and headcount reduction
initiative.
  16
  We
estimate that this initiative will reduce operating costs by $1,000,000 over a
12-month period.  The majority of the headcount reductions were in our
product development department.  We are focusing our efforts on
selling existing products.  We believe the cost reductions have and
will continue to improve our cash flows.
 
 Cash increased 190%
or $413,540 to $631,383 at September 30, 2008 from $217,843 at December 31,
2007, as a result of the net proceeds on our bank debt and reduced payroll and
related costs due to our headcount reduction implemented during April
2008.
 
 Our total debt
increased $281,831 or 14% to $2,315,131 at September 30, 2008 from $2,033,300 at
December 31, 2007 due to $350,000 in draws on our line of credit offset by
principal payments of $93,586 on our term loan and an increase of $25,417 in our
subordinated debt, reflecting the accrual of “payment-in-kind”
interest.  We had availability of $75,000 on our bank line of credit
as of September 30, 2008.  In November 2008, we made a $100,000
payment on our bank line of credit.
 
 For information
regarding steps we have taken, or are currently taking to improve our liquidity,
please see Note 1 of the Notes to Unaudited Consolidated Financial
Statements in Part I, Item 1. “Financial Statements” of this
report.
 
 Both the line of
credit and the term loan require us to pay interest monthly on the outstanding
balance at our bank’s prime rate which was 5.00% as of September 30,
2008.  Accounts receivable, inventory, property and equipment are
pledged as collateral.
 
 For information
regarding the renewal of our bank loan in March 2008 please see Note 8 of
the Notes to Unaudited Consolidated Financial Statements in Part I,
Item 1. “Financial Statements” of this report.
 
 If
we breach any term or condition in our bank credit agreements, as amended, our
bank has the option to declare the loans due and payable.
 
 As of
      September 30, 2008, we did not comply with the financial covenants
      specified in our bank credit agreement which are measured at the end of
      each quarter.  We were required to achieve minimum earnings
      before interest, taxes, depreciation and amortization (“EBITDA”) of
      $890,000 for the nine months ended September 30, 2008; our EBITDA was
      approximately $580,000.  We have obtained a waiver for this
      non-compliance as of September 30, 2008.  However, we can
      provide no assurance that we will be able to obtain a waiver from the bank
      of any future non-compliance with these or any other financial
      covenants.
 
 In
      conjunction with the issuance of the waiver for our non-compliance with
      the financial covenants as of March 31, 2008, we agreed with our bank in
      May 2008 to add a loan payoff fee to our bank loan.  When we
      repay in full our line of credit and term loan, we will be required to pay
      our bank a fee equal to 50 basis points on the outstanding bank debt at
      repayment.
 
 
 17
 
 
 ITEM 4.  CONTROLS AND PROCEDURES
 
 Our management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form
10-Q.  Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that such disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q to ensure information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.  There have been no changes that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting that have occurred during the period covered by
this report.
 
 
 PART II - OTHER INFORMATION
 
 
 ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
 For information
regarding our bank credit agreements, please see Note 8 of the Notes to
Unaudited Consolidated Financial Statements in Part I, Item 1.
“Financial Statements” of this report, which information is incorporated herein
by reference.
 
 
 ITEM 6.  EXHIBITS
 
 Exhibits required
as part of this report are listed in the index appearing on page
20.
 
 
 18
 
 
 SIGNATURES
 
 
 Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 SIBONEY
      CORPORATIONBy:/s/ William D.
      Edwards,
      Jr.William D.
      Edwards, Jr.Executive
      Vice President, Chief Operating Officer
                and Chief
      Financial Officer(Authorized
      officer and principal financial
officer)
 
 
 November 14,
2008
 
 
 
 
 19
 
 Index to Exhibits
 
 Exhibits
 
 31.1
              Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002


20