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 June 30, 2009
 
 OR
 
 o
              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACTOF 1934
  For the
transition period from ___________ to ___________
 
 Commission
File Number: 333-116255
 
 VIVID
LEARNING SYSTEMS, INC.
 (Exact
name of Registrant as specified in its charter)
 
 Washington
                (State
      or other jurisdiction of
                incorporation
      or organization)
              91-1694268
                (I.R.S.
      Employer Identification No.)
  5728
Bedford Street
 Pasco,
WA  99301
 (Address
of principal executive offices, including zip code)
 
 (509)
545-1800
 (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.
 Yes 
x No o
 
 Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data file required to be
submitted and posted pursuant to Rule 401 of Regulation S-T during the preceding
12 months (or for such shorter period that the Registrant was required to submit
and post such files).
 Yes o No o
 
 Indicate
by check mark whether the Registrant is a large accelerated file, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.
  Large
accelerated filer o   Accelerated
filer o   Non-accelerated
filer o   Smaller
reporting company x
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes
o No x
 
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
  Common Stock, no par
      value
              13,272,165(Class)
              Outstanding as of
      August 14, 2009
  
 
  VIVID LEARNING SYSTEMS, INC.
 INDEX
 
 PagePART
      I – FINANCIAL INFORMATIONItem
      1
                Financial
      Statements
                
                
                3Consolidated
      Balance Sheets as of June 30, 2009 (unaudited) and September 30,
      2008
                
                
                4Consolidated
      Statements of Income for the three months and nine months ended June 30,
      2009  and June 30, 2008 (unaudited)
                
                
                5Consolidated
      Statements of Cash Flows for the nine months ended June 30,
      2009  and June 30, 2008 (unaudited)
                
                
                6Condensed
      Notes to Unaudited Consolidated Financial Statements
                
                
                7Item
      2
                Management’s
      Discussion And Analysis Of Financial Condition And Results Of
      Operations
                
                
                19Item
      3
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                
                *Item
      4T
                Controls
      and Procedures
                
                
                23PART
      II – OTHER INFORMATIONItem
      1
                Legal
      Proceedings
                
                
                *Item
      1A
                Risk
      Factors
                
                
                *Item
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                
                *Item
      3
                Defaults
      Upon Senior Securities
                
                
                *Item
      4
                Submission
      of Matters to a Vote of Security Holders
                
                
                *Item
      5
                Other
      Information
                
                
                *Item
      6
                Exhibits
                
                
                24SIGNATURES
                
                
                
                24
 *  No
information provided due to inapplicability of the item.
  2
 PART
I – FINANCIAL INFORMATION / ITEM 1 – FINANCIAL STATEMENTS
  3
  VIVID
LEARNING SYSTEMS, INC. - CONSOLIDATED BALANCE SHEETS
 June
      30,
                
                
                September
      30,2009
                
                
                2008(unaudited)ASSETSCURRENT
      ASSETSCash
                
                $
                675,166
                
                
                $
                132,391Accounts
      and contracts receivable
                
                
                877,190
                
                
                
                972,151Accounts
      and contracts receivable, Fluor Hanford
                
                
                16,933
                
                
                
                24,994Prepaid
      expenses
                
                
                93,960
                
                
                
                185,793Other
      current assets
                
                
                204,541
                
                
                
                138,214TOTAL
      CURRENT ASSETS
                
                
                1,867,790
                
                
                
                1,453,543PROPERTY,
      PLANT AND EQUIPMENTProperty
      and equipment
                
                
                1,780,147
                
                
                
                1,583,630Less:
      Accumulated depreciation
                
                
                (1,348,158
                )
                
                
                (1,247,676
                )TOTAL
      PROPERTY, PLANT AND EQUIPMENT
                
                
                431,989
                
                
                
                335,954OTHER
      ASSETSSoftware,
      net of amortization
                
                
                1,274,312
                
                
                
                1,229,722Goodwill
                
                
                375,000
                
                
                
                375,000Long-term
      contracts receivable
                
                
                -
                
                
                
                1,321Deferred
      tax asset
                
                
                539,919
                
                
                
                665,596TOTAL
      OTHER ASSETS
                
                
                2,189,231
                
                
                
                2,271,639TOTAL
      ASSETS
                
                $
                4,489,010
                
                
                $
                4,061,136LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                150,415
                
                
                $
                120,807Accrued
      contract labor
                
                
                153,946
                
                
                
                100,933Other
      current liabilities
                
                
                67,967
                
                
                
                46,811Unearned
      revenue
                
                
                44,427
                
                
                
                100,518Notes
      payable, related parties
                
                
                -
                
                
                
                25,000Current
      portion of long-term liabilities
                
                
                212,646
                
                
                
                108,341TOTAL
      CURRENT LIABILITIES
                
                
                629,401
                
                
                
                502,410LONG-TERM
      LIABILITIESLong-term
      debt
                
                
                198,057
                
                
                
                134,095Other
      long-term liabilities
                
                
                95,854
                
                
                
                116,709TOTAL
      LONG-TERM LIABILITIES
                
                
                293,911
                
                
                
                250,804TOTAL
      LIABILITIES
                
                
                923,312
                
                
                
                753,214COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -STOCKHOLDERS'
      EQUITYPreferred
      stock, $0.0001 par value;5,000,000
      shares authorized, no shares issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, $0.0001 par value;200,000,000
      shares authorized, 13,272,165 and 13,372,203shares
      issued and outstanding, respectively
                
                
                1,327
                
                
                
                1,337Additional
      paid-in capital
                
                
                4,422,396
                
                
                
                4,408,564Accumulated
      deficit
                
                
                (858,025
                )
                
                
                (1,101,979
                )TOTAL
      STOCKHOLDERS'  EQUITY
                
                
                3,565,698
                
                
                
                3,307,922TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                4,489,010
                
                
                $
                4,061,136
  The
accompanying condensed notes are an integral part of these interim consolidated
financial statements.
 4
 VIVID
LEARNING SYSTEMS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Three
      Months Ended
                      
                      
                      Nine
      Months EndedJune
      30, 2009
                      
                      
                      June
      30, 2008
                      
                      
                      June
      30, 2009
                      
                      
                      June
      30, 2008(Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)REVENUESTraining
      subscriptions
                      
                      $
                      579,102
                      
                      
                      $
                      574,232
                      
                      
                      $
                      2,169,878
                      
                      
                      $
                      2,099,242Training
      subscriptions, Fluor Hanford
                      
                      
                      196,769
                      
                      
                      
                      138,907
                      
                      
                      
                      477,516
                      
                      
                      
                      415,291Custom
      products and services
                      
                      
                      556,111
                      
                      
                      
                      540,564
                      
                      
                      
                      1,839,015
                      
                      
                      
                      1,339,593Custom
      products and services, Fluor Hanford
                      
                      
                      15,926
                      
                      
                      
                      21,798
                      
                      
                      
                      39,527
                      
                      
                      
                      58,4271,347,908
                      
                      
                      
                      1,275,501
                      
                      
                      
                      4,525,936
                      
                      
                      
                      3,912,553COST
      OF REVENUESTraining
      subscriptions
                      
                      
                      302,159
                      
                      
                      
                      223,229
                      
                      
                      
                      750,467
                      
                      
                      
                      709,085Custom
      products and services
                      
                      
                      371,020
                      
                      
                      
                      343,617
                      
                      
                      
                      1,151,451
                      
                      
                      
                      955,318673,179
                      
                      
                      
                      566,846
                      
                      
                      
                      1,901,918
                      
                      
                      
                      1,664,403GROSS
      PROFIT
                      
                      
                      674,729
                      
                      
                      
                      708,655
                      
                      
                      
                      2,624,018
                      
                      
                      
                      2,248,150EXPENSESMarketing
      and related labor expenses
                      
                      
                      375,964
                      
                      
                      
                      366,154
                      
                      
                      
                      1,017,837
                      
                      
                      
                      989,292Bad
      debt expense
                      
                      
                      1,761
                      
                      
                      
                      685
                      
                      
                      
                      1,761
                      
                      
                      
                      2,724Reseller
      commissions
                      
                      
                      101,835
                      
                      
                      
                      76,821
                      
                      
                      
                      383,334
                      
                      
                      
                      261,906Depreciation
      and amortization
                      
                      
                      38,968
                      
                      
                      
                      25,037
                      
                      
                      
                      100,482
                      
                      
                      
                      74,227Wages
      and contract labor
                      
                      
                      107,289
                      
                      
                      
                      89,680
                      
                      
                      
                      327,146
                      
                      
                      
                      304,950Other
      operating expenses
                      
                      
                      110,081
                      
                      
                      
                      86,877
                      
                      
                      
                      389,740
                      
                      
                      
                      250,097TOTAL
      OPERATING EXPENSES
                      
                      
                      735,898
                      
                      
                      
                      645,254
                      
                      
                      
                      2,220,300
                      
                      
                      
                      1,883,196INCOME
      (LOSS) FROM OPERATIONS
                      
                      
                      (61,169
                      )
                      
                      
                      63,401
                      
                      
                      
                      403,718
                      
                      
                      
                      364,954OTHER
      INCOME (EXPENSE)Gain(loss)
      on sale of equipment and intangible assets
                      
                      
                      -
                      
                      
                      
                      175
                      
                      
                      
                      -
                      
                      
                      
                      275Interest
      income
                      
                      
                      203
                      
                      
                      
                      1,236
                      
                      
                      
                      563
                      
                      
                      
                      3,391Interest
      expense
                      
                      
                      (11,617
                      )
                      
                      
                      (9,596
                      )
                      
                      
                      (34,649
                      )
                      
                      
                      (26,570
                      )TOTAL
      OTHER INCOME (EXPENSE)
                      
                      
                      (11,414
                      )
                      
                      
                      (8,185
                      )
                      
                      
                      (34,086
                      )
                      
                      
                      (22,904
                      )INCOME
      (LOSS) BEFORE INCOME TAXES
                      
                      
                      (72,583
                      )
                      
                      
                      55,216
                      
                      
                      
                      369,632
                      
                      
                      
                      342,050INCOME
      TAX EXPENSE (BENEFIT)
                      
                      
                      (24,675
                      )
                      
                      
                      (18,564
                      )
                      
                      
                      125,678
                      
                      
                      
                      (116,297
                      )NET
      INCOME (LOSS)
                      
                      $
                      (47,908
                      )
                      
                      $
                      36,652
                      
                      
                      $
                      243,954
                      
                      
                      $
                      225,753BASIC
      AND DILUTED NET INCOME (LOSS) PER SHARE
                      
                      $
                      -
                      
                      
                      $nil
                      
                      
                      $
                      0.02
                      
                      
                      $
                      0.02BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
                      
                      
                      13,372,165
                      
                      
                      
                      13,372,165
                      
                      
                      
                      13,372,165
                      
                      
                      
                      13,372,165
 The
accompanying condensed notes are an integral part of these interim consolidated
financial statements.
  5
 VIVID LEARNING SYSTEMS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Nine
      Months
                    Ended
                    June
      30, 2009
                    (unaudited)
                  
                  
                  Nine
      Months
                    Ended
                    June
      30, 2008
                    (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                  
                  $
                  243,954
                  
                  
                  $
                  225,753Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  100,482
                  
                  
                  
                  74,227Amortization
      of capitalized software
                  
                  
                  210,019
                  
                  
                  
                  200,570Bad
      debt expense
                  
                  
                  1,761
                  
                  
                  
                  2,724Options
      issued for compensation
                  
                  
                  38,822
                  
                  
                  
                  13,732Changes
      in assets and liabilities:Accounts
      and contracts receivable
                  
                  
                  103,022
                  
                  
                  
                  305,156Prepaid
      expenses
                  
                  
                  91,833
                  
                  
                  
                  (65,561
                  )Other
      current assets
                  
                  
                  (66,327
                  )
                  
                  
                  29,825Deferred
      tax asset
                  
                  
                  125,678
                  
                  
                  
                  116,297Accounts
      payable
                  
                  
                  29,608
                  
                  
                  
                  (161,047
                  )Accrued
      contract labor and related expenses
                  
                  
                  53,013
                  
                  
                  
                  (114,198
                  )Long-term
      receivable contracts
                  
                  
                  1,321
                  
                  
                  
                  85,202Other
      current liabilities
                  
                  
                  21,156
                  
                  
                  
                  (69,738
                  )Unearned
      revenue
                  
                  
                  (56,091
                  )
                  
                  
                  (69,183
                  )Net
      cash provided by operating activities
                  
                  
                  898,251
                  
                  
                  
                  573,759CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property, equipment and intangible assets
                  
                  
                  (164,227
                  )
                  
                  
                  (55,411
                  )Acquisition
      of software
                  
                  
                  (254,609
                  )
                  
                  
                  (77,231
                  )Net
      cash used by investing activities
                  
                  
                  (418,836
                  )
                  
                  
                  (132,642
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable, related party
                  
                  
                  (25,000
                  )
                  
                  
                  (175,000
                  )Treasury
      stock
                  
                  
                  (25,000
                  )
                  
                  
                  -Payments
      on line of credit payable
                  
                  
                  -
                  
                  
                  
                  (57,072
                  )Proceeds
      from term loan
                  
                  
                  250,000
                  
                  
                  
                  -Payments
      on long-term debt
                  
                  
                  (90,249
                  )
                  
                  
                  (38,798
                  )Payments
      on long-term liabilities
                  
                  
                  (46,391
                  )
                  
                  
                  (34,489
                  )Net
      cash provided (used) by financing activities
                  
                  
                  63,360
                  
                  
                  
                  (305,359
                  )Net
      increase (decrease) in cash
                  
                  
                  542,775
                  
                  
                  
                  135,758Cash
      at beginning of period
                  
                  
                  132,391
                  
                  
                  
                  80,331Cash
      at end of period
                  
                  $
                  675,166
                  
                  
                  $
                  216,089SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
                  
                  $
                  34,826
                  
                  
                  $
                  26,570Income
      taxes paid
                  
                  $
                  -
                  
                  
                  $
                  -NON-CASH
      TRANSACTIONS:Acquisition
      of fixed assets via capital lease
                  
                  $
                  32,290
                  
                  
                  $
                  -
 The
accompanying condensed notes are an integral part of these interim consolidated
financial statements.
  6
  VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
  NOTE 1– BUSINESS
ORGANIZATION
 
 Nature of
Operations
  Vivid
Learning Systems, Inc. (hereinafter “Vivid Washington”) was incorporated in 1995
in the State of Washington under the name of Applied Tecknowledgey, Inc. and then
later known as Vivid Concepts, Inc.  Prior to December 23, 2003, Vivid
Washington was a wholly owned subsidiary of Nuvotec, Inc., a technology
commercialization corporation based in Washington State.  On December
23, 2003, Nuvotec, Inc. exchanged all of its 7,000,000 common stock shares in
Vivid Washington for 8,100,000 shares of common stock with a par value of
$0.0001 in a newly formed Delaware corporation also named Vivid Learning
Systems, Inc.  The Delaware Company served as the holding company and
parent and sole shareholder of the operating entity Vivid
Washington.  An additional 1,987,996 shares of the Company’s common
stock was issued in a private placement to approximately seventy individual
shareholders at September 30, 2004.  Effective February 11, 2009 Vivid
Delaware was merged into Vivid Washington which became the parent and sole
shareholder of ImageWorks Media Group, Inc.
 
 Vivid
Washington develops and provides computer-based training products and services,
which are marketed nationally.  Vivid Washington (the “Company”) and
its subsidiary, ImageWorks Digital Media, Inc., have a year end of September
30.
 
 Nuvotec
prior to June 13, 2007 held approximately 83% of the Company.  On June
13, 2007, Nuvotec closed on an acquisition transaction wherein one of the
conditions to closing was that the shares of the Company were to be distributed
on a pro-rata basis to the Nuvotec shareholders according to the Agreement and
Plan of Distribution.  Due to rounding, 38 shares that had been held
by Nuvotec were retired as treasury shares. The shares in common stock of
the Company were distributed to approximately 300 individuals.  The
effective date of the transaction, June 13, 2007, resulted in the change of
control of the Company.  No individual who received the distribution
from Nuvotec was given a controlling interest in the Company.  There
was no consideration as this was a Nuvotec shareholder tax-free
distribution.
 
 Basis of
Presentation
  The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.  Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.  These unaudited interim
financial statements should be read in conjunction with the audited financial
statements for the period ended September 30, 2008 included in the Company’s
annual report on Form 10-KSB/A which was filed with the SEC on December 30,
2008.  In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of
interim results have been included.  Operating results for the nine
months ended June 30, 2009 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2009.  For
further information, refer to the Company’s consolidated audited financial
statements at September 30, 2008 and footnotes thereto.
  7
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 The
Company formerly leased all of its employees, via a professional employer
organization (PEO) from HRnovations, Inc., which was formerly co-owned and
managed by a member of Vivid’s Board of Directors.  HRnovations, Inc.
provided payroll processing services and benefits administration for the
Company.  The Company was also part of a multi-employer 401K plan,
which was administered by HRnovations, Inc.
 
 Effective
January 1, 2009, the Company no longer utilizes a PEO for leased employee
services, and employs its own contractors to assist in the processing of payroll
and administration of benefits for its employees.  The Company also
sponsors its own 401K plan, which utilizes the same investment advisor, Benefits
Acceptance Corporation of Bellevue, Washington.  Effective January 1,
2009, plan assets were transferred to the Company plan with the identical
features and services of the previous plan.
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 This
summary of significant accounting policies is presented to assist in
understanding the financial statements.  The financial statements and
notes are representations of the Company’s management, which is responsible for
their integrity and objectivity.  These accounting policies conform to
accounting principles generally accepted in the United States and have been
consistently applied in the preparation of the financial
statements.
 
 Recent
Pronouncements
 
 The FASB Accounting
Standards CodificationTMand the Hierarchy of
Generally Accepted Accounting Principles – a replacement of FASB Statement No.
162
 
 In June
2009, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 168, “The FASB Accounting Standards
CodificationTMand the Hierarchy of
Generally Accepted Accounting Principles – a replacement of FASB Statement No.
162” (SFAS No. 168).  Effective for financial statements issued for
interim and annual periods ending after September 15, 2009, the FASB Accounting Standards
CodificationTM(Codification) will
become the source of authoritative U.S. generally accepted accounting principles
to be applied by nongovernmental entities.  On the effective date,
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All non-grandfathered non-SEC accounting literature not included in
the Codification will become non-authoritative.  The adoption of this
Statement will have no material effect on the Company’s financial condition or
results of operations.
 
 Amendments to FASB
Interpretation No. 46(R)
 
 In June
2009, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”
(SFAS No. 167).  The purpose of this Statement is to improve financial
reporting by enterprises involved with variable interest entities.  As
the Company is not involved with variable interest entities, the adoption of
this Statement will have no material effect on the Company’s financial condition
or results of operations.
  8
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140
 
 In June
2009, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an
amendments of FASB Statement No. 140” (SFAS No. 166).  This Statement
is applicable to transfers occurring on or after the effective date of November
15, 2009.  This Statement requires practices that will improve the
relevance, representational faithfulness, and comparability of:  a)
the information that a reporting entity provides in its financial statement
about a transfer of financial assets; b) the effects of a transfer
on  its financial position, financial performance, and cash flows;
and, c) a transferor’s continuing involvement, if any, in transferred financial
assets.  The Company does not anticipate that the adoption of this
Statement will have any material effect on the Company’s financial condition or
results of operations.
 
 Subsequent
Events
 
 In May
2009, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 165, “Subsequent Events” (SFAS No.
165).  This Statement is applicable to interim or annual financial
periods ending after June 15, 2009.  This Statement establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued.  Specifically, this Statement sets forth: a)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; b) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statement; and, c) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date.  The adoption of this Statement will have no
material effect on the Company’s financial condition or results of
operations.
 
 Hierarchy of Generally
Accepted Accounting Principles
 In May,
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (SFAS No. 162). This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The sources of accounting principles
that are generally accepted are categorized in descending order of authority as
follows:
 
 a. FASB
Statements of Financial Accounting Standards and Interpretations, FASB Statement
133 Implementation Issues, FASB Staff Positions, and American Institute of
Certified Public Accountants (AICPA) Accounting Research Bulletins and
Accounting Principles Board Opinions that are not superseded by actions of the
FASB;
 
 b. FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of Position;
  9
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 c. AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force
(EITF), and the Topics discussed in Appendix D of EITF Abstracts(EITF
D-Topics); and,
 
 d.
Implementation guides (Q&As) published by the FASB staff, AICPA Accounting
Interpretations, AICPA Industry Audit and Accounting Guides and Statements of
Position not cleared by the FASB, and practices that are widely recognized and
prevalent either generally or in the industry.
 
 The
adoption of this Statement will have no material effect on the Company’s
financial condition or results of operations.
 
 Accounting Methods and
Consolidation
  The
Company’s financial statements are prepared using the accrual method of
accounting.  The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, after elimination of
inter-company accounts and transactions.  The wholly owned subsidiary
of the Company is ImageWorks Media Group, Inc.
 
 Earnings Per
Share
  The
Company has adopted Statement of Financial Accounting Standards No. 128, which
provides for calculation of "basic" and "diluted" earnings per
share.  Basic earnings per share for Vivid includes no dilution and is
computed by dividing net income (loss) available to common shareholders by the
weighted average common shares outstanding for the period.
 
 Fair Value
Measurement
  On April
1, 2008, the Company adopted the provisions of SFAS No. 157 related to its
financial assets and liabilities measured at fair value on a recurring
basis.  SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurement) and the lowest priority to
unobservable inputs (Level 3 measurement).
  The three
levels of the fair value hierarchy defined by SFAS No. 157 are as
follows:
  Level 1 – Quoted prices are
available in active markets for identical assets or liabilities. Active markets
are those in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.
  Level 2 – Pricing inputs are
other than quoted prices in active markets included in Level 1, which are either
directly or indirectly observable as of the reporting date. Level 2 includes
those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for commodities, time
value, volatility factors, and current market and contractual prices for the
underlying instruments, as well as other relevant economic measures.
Substantially all of these assumptions are observable in the marketplace
throughout the full term of the instrument, can be derived from observable data
or are supported by observable levels at which transactions are executed in the
marketplace.
  10
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 Level 3 – Pricing inputs
include significant inputs that are generally unobservable from objective
sources. These inputs may be used with internally developed methodologies that
result in management’s best estimate of fair value. Level 3 instruments include
those that may be more structured or otherwise tailored to the Company’s
needs.
  As
required by SFAS No. 157, financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the
fair value measurement.  The Company’s assessment of the significance
of a particular input to the fair value measurement requires judgment, and may
affect the valuation of fair value assets and liabilities and their placement
within the fair value hierarchy levels.
 
 There
were no money market accounts or investments in equity securities requiring
disclosure by level within the fair value of Company assets and liabilities
measured and reported on the Consolidated Balance Sheet as of March 31, 2009 at
fair value on a recurring basis.
 
 On
December 14, 2007 the FASB issued a proposed FASB staff position ("FSP")
that would amend SFAS 157 to delay its effective date for all non-financial
assets and non-financial liabilities, except for those that are recognized or
disclosed at fair value in the financial statements on a recurring basis, that
is, at least annually.  For items within the scope of the proposed FSP
the effective date of SFAS 157 would be delayed to fiscal years beginning
after November 15, 2008 (fiscal 2010 for the Company) and interim periods
within those fiscal years. During February 2008, the FASB confirmed and made
effective the FSP.  The Company has chosen not to implement SFAS 157
for non-financial assets and non-financial liabilities at this
time.
 
 Provision for
Taxes
  Income
taxes are provided based upon the liability method of accounting pursuant to
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes.”  Under this approach, deferred income taxes are recorded to
reflect the tax consequences in future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts at each
year end.  A valuation allowance is recorded against deferred tax
assets if management does not believe the Company has met the “more likely than
not” standard imposed by Statement of Financial Accounting Standard No. 109 to
allow recognition of such an asset.
 
 Reclassifications
  Certain
prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal year 2009 presentation.  The
reclassifications have no effect on net assets, net revenues, or net
earnings.
 
 Reseller Commissions and
Royalty Expenses
  Reseller
commissions are recorded as an expense if the cumulative affirmative impact
of indicators of gross revenue reporting, as outlined in EITF
99-19, Indicators 7-14, are met by the Company in the
transaction.The
Company pays each of the channel partners a commission or a referral fee of
between five and fifty percent of net revenue depending upon their annual sales
levels and other criteria, which is recorded as a selling expense, strictly on a
success basis as a result of selling the Company’s products and services to
third party customers.  The Company has contractual arrangements with
each of these partners that range from one to two years.
  11
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 Expenses
paid to resellers are recorded as a reduction of the underlying selling price if
the cumulative affirmative impact of indicators of net revenue reporting, as
outlined in EITF 99-19, Indicators 15-17 are present in the transaction. The
Company does not provide any consideration to the resellers’ end-users other
than negotiated price discounts for subscriptions based on the size of the
contract.  Contract size is defined by the number of employees
(seats), number of lessons, and length of the contract.
 
 Royalty
payments are recorded as an expense if the ownership of the training content
does not reside with the Company.
 
 Software Development
Costs
  Costs
incurred for the internal development of software products and enhancements,
after technological feasibility has been established for the related product,
are capitalized and stated at the lower of cost or net realizable
value.  Amortization is provided based on the greater of the amount
computed using: (a) the ratio that current gross revenues for a product bears to
the total of current and anticipated future gross revenues for that product, or;
(b) the straight-line method over the remaining estimated economic life of the
product, not to exceed five years.
 
 Production
costs incurred subsequent to the establishment of technological feasibility are
capitalized.  Also capitalized are the component costs incurred
associated with the development of product templates in accordance with
Statement of Financial Accounting Standard No. 86, which consist primarily of
labor related costs.  As revenue generation commences on specific
training content, additional costs incurred are classified as maintenance
expense, or customer marketing expense, in the period they are incurred. Hours
expended and costs incurred by production personnel on lesson content
development on a per lesson basis are maintained so that cost efficiency in
software content development can be analyzed on lesson content by lesson content
basis.  Net realizable value of each course is determined by comparing
the unamortized cost of each developed software course and the remaining
available market (quantified by dollars) for that content in the industry in
which Vivid Washington is selling the content.  This unamortized
software development cost is then aggregated by course and a grand total is
compared to the total remaining available aggregate market for the content to
determine if a write-down is required.
 
 Software
development costs consist of the following at the dates shown:
  June
      30,
                2009
              
              
              September
      30,
                2008Software
      development costs
              
              $
              4,009,174
              
              
              $
              3,754,564Accumulated
      amortization
              
              
              (2,734,862
              )
              
              
              (2,524,842
              )$
              1,274,312
              
              
              $
              1,229,722
 
 12
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
  The
amount of software costs written down to net realizable value was zero during
the nine months ended June 30, 2009 and 2008, respectively.
 
 Use of
Estimates
  The
process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses.  Such estimates primarily relate to unsettled
transactions and events as of the date of the financial
statements.  Accordingly, upon settlement, actual results may differ
from estimated amounts.
 
 Revenue and Cost
Recognition
  The
Company’s custom products and services contracts are contracted primarily on a
fixed unit rate basis, with underlying hourly billing rates negotiated with the
customer.  The contract revenues are earned as hours are expended and
reimbursable costs are incurred.
 
 Training
revenues are recognized at the time of shipment of products or performance of
contracted services.  Products are shipped FOB shipping
point.  Training contracts may contain elements of both custom
contract work (contracted services) and subscription arrangements (delivery of
training products). Training subscription revenues are recorded when collection
of the subscription is highly probable and no significant Company obligations
remain after the product has been delivered. The Company defers revenue
recognition on training contracts related to payments received during the
current period for the portion of the subscription contract that extends into
future periods.  During the three months ending June 30, 2009,
subscription contracts in the amount of $59,038 were paid in
advance.  In accordance with EITF 01-14, the Company’s reimbursable
costs are recorded as gross revenue, with the actual costs recorded as a direct
cost.
 
 The
Company’s internet sales are less than 0.5% of total
revenue.  Internet transactions are recorded as training
subscriptions, with training delivered via the hosted web sites of Vivid
Washington.  Revenue is recorded when the training is delivered, when
evidence of a persuasive arrangement exists, and when collection is reasonably
assured.
 
 The
Company does not offer warranties or returns.
 
 NOTE
3 – RELATED PARTY TRANSACTIONS
 
 At June
30, 2009 and September 30, 2008, the current related party payables consisted of
$0 and $25,000, respectively, of current amounts due to the former owners of
ImageWorks.
 
 NOTE
4 – STOCKHOLDERS’ EQUITY
 
 Preferred
Stock
  The
Company has authorized 5,000,000 shares of no par value par value preferred
stock, which may be issued in one or more series.  The Company’s Board
of Directors is also authorized to determine or alter the rights, preferences,
privileges, and restrictions granted to or imposed upon any series of preferred
stock.  At June 30, 2009 and September 30, 2008, no preferred stock
has been issued by the Company.
  13
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 On May 1,
2004, the Company acquired ImageWorks Media Group, Inc. (ImageWorks) through a
share exchange agreement with the former owners. The Company issued as part of
the original acquisition 100,000 shares of the Company’s common stock to the
former owners of ImageWorks.  The share exchange agreement provided
that if said shares did not achieve a certain public market value as of May 24,
2008, the former owners would have the option to request a buyback of the shares
from the Company.  At the request of the former owners the share
certificates were returned to the Company on October 24, 2008 as reacquired
stock in exchange for full payment of the buyback amount.
 
 NOTE
5 – STOCK-BASED COMPENSATION
 
 During
the year ended September 30, 2007, 225,250 options vested which had been issued
in 2004 and had a fair value of $36,040.  During the year ended
September 30, 2008, 34,564 options vested which had been issued in 2004 and had
a fair value of $5,743.
 
 Options
issued in 2004 and 2005 were originally valued at approximately $0.16 per option
using the Black-Scholes Option Price Calculation.  As of September 30,
2008 a total of 323,511 of these options had vested and had a fair value of
$51,762.  During the year ended September 30, 2008, 44,069 options
vested which had been issued in 2005 and had a fair value of
$7,051.  The following assumptions were made in estimating the fair
value:  risk-free interest is 3%, volatility is 0.3, and expected life
is seven years.
 
 During
the year ended September 30, 2006, additional options totaling 153,606 were
issued of which 65,939 vested and had a fair value of $32,777.  During
the year ended September 30, 2007, 10,939 of these options vested and had a fair
value of $4,525.  During the year ended September 30, 2008, a total of
10,939 of these options vested and had a fair value of $4,525. The fair value of
each option granted is estimated on the grant date using the Black-Scholes
Option Price Calculation.  The following assumptions were made in
estimating the fair value:  risk-free interest is 4.75%; volatility is
101.36%; expected life is three to six years, and with no effective dividend
yield.
 
 During
the year ended September 30, 2007, additional options totaling 89,500 were
issued and had a fair value of $19,730.  During the year ended
September 30, 2008, a total of 29,333 of these options vested and had a fair
value of $6,770.  The assumptions made in estimating the fair value
included an annual risk-free interest rate of 4.75%, volatility of 101.11%,
expected life of six years, and with no effective dividend yield.
 
 During
the year ended September 30, 2008, additional options totaling 69,740 were
issued and had a fair value of $6,734.  During the year ended
September 30, 2008, none of these options vested.  The assumptions
made in estimating the fair value included an annual risk-free interest rate of
4.75%, volatility of 39.32%, expected life of six years, and with no effective
dividend yield.
  14
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 During
the nine months ended June 30, 2009, additional options totaling 454,396 were
issued and had a fair value of $29,364.  During the nine months ended
June 30, 2009, 384,396 of these options vested, which had a value of
$23,064.  The assumptions made in estimating fair value included an
annual risk-free interest rate of 3.03%, volatility of 126.25%, expected life of
seven years, and with no effective dividend yield.
 
 The
following is a summary of stock option activity:
 
 Equity
      compensation plans approved by shareholders
              
              Number
      of shares to be issued upon exercise of outstanding
      options
              
              Weighted-average
      exercise price of outstanding options
              
              Number
      of shares remaining available for future issuance under
      equity compensation plans2003
      Stock Option Plan
              
              1,011,034
              
              $
      0.25
              
              1,305,466
 
 Number
      of Shares
              
              
              Weighted
      Average Exercise PriceOutstanding
      at October 1, 2007
              
              
              515,898
              
              
              $
              0.34Granted
              
              
              69,740
              
              
              
              0.23Exercised
              
              
              -
              
              
              
              -Expired
      or terminated
              
              
              (4,000
              )
              
              
              0.29Outstanding
      at September 30, 2008
              
              
              581,638
              
              
              $
              0.33Options
      exercisable at September 30, 2008
              
              
              382,128
              
              
              $
              0.31
  Outstanding
      at October 1, 2008
              
              
              581,638
              
              
              $
              0.33Granted
              
              
              454,396
              
              
              
              0.19Exercised
              
              
              -
              
              
              
              -Expired
      or terminated
              
              
              (25,000
              )
              
              
              1.00Outstanding
      at June 30, 2009
              
              
              1,011,034
              
              
              $
              0.25Options
      exercisable at June 30, 2009
              
              
              855,374
              
              
              $
              0.22
 
 NOTE
6 – ECONOMIC DEPENDENCY
  The
Company provides services in Washington State to a dozen large corporate
contractors within the framework of a diverse set of programs and
tasks.  Most of the funding for these services originates from the
Department of Energy / Federal Government.  During the nine months
ended June 30, 2009 and 2008, services provided to these contractors aggregated
$729,763 and $778,092, representing 17% and 20% of total revenue,
respectively.
 
 At June
30, 2009 and 2008, amounts due from these contractors are included in accounts
receivable in the amounts of $48,506 and $105,308, respectively.
  15
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 The
Company’s concentration risks for customer revenues and accounts receivable
greater than 10% of the total account balances for the respective periods are as
follows:
  Nine
      Months EndingJune
      302009
              
              
              2008Revenues—Fluor
                Hanford
              
              $
              517,043
              
              
              $
              473,717Accounts
      Receivable
                Fluor
      Hanford
              
              $
              16,933
              
              
              $
              7,288Revenues—Key
                Technology
              
              $
              343,713
              
              
              $
              -Accounts
      Receivable
                Key
      Technology
              
              $
              36,833
              
              
              $
              -
 
 NOTE
7 – COMMITMENTS AND CONTINGENCIES
 
 Commitments
  The
Company is obligated, under separate agreements, to make royalty payments based
on varying percentages (8% to 25%) of cash collections from the sale of specific
software applications. For the nine months ending June 30, 2009 and 2008, the
Company incurred $72,709 and $97,145 in royalty obligations, respectively, which
are recorded in marketing expense.  At June 30, 2009 and 2008, there
were no incurred royalty obligations to be accrued and recorded in other current
liabilities on the balance sheet.
 
 NOTE
8 – BANK FINANCING
 
 The
Company secured a line of credit facility on December 22, 2008 with Wells Fargo
Bank, N.A.  The line has a maximum credit facility of $250,000 and an
initial annual interest rate of 4.25%.  The rate is a variable rate
tied to the bank’s prime rate plus one, and is subject to an annual pricing
adjustment.  The availability period is subject to renewal on January
10, 2010.  The previous line of credit facility with Bank of the West
has been paid in full and is no longer in effect.  The Company offers
its assets as collateral as described in an executed commercial security
agreement.
 
 The
Company secured a $250,000 promissory note on December 22, 2008 with Wells Fargo
Bank, N.A.  The term of the note is two years payable monthly at
$11,079 starting February 10, 2009 including annual interest of 5.9%.The final payment on the
note is January 10, 2011.  The Company offers its assets as collateral
as described in an executed commercial security agreement.
 
 NOTE
9 – SEGMENT INFORMATION
 
 The
Company has two operating segments at June 30, 2009:  training
subscriptions and custom products and services.
  16
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 Separate
management of each segment is required because each business unit is subject to
different marketing, production, and technology strategies.  Training
subscriptions derives revenues from the sale of computer-based safety training
products and services throughout the United States.  The custom
products and services segment derives its revenues from custom products and
services designed specifically for the end user.
 
 Segment
information (after inter-company eliminations) for the nine months ended June 30,
2009 and 2008 is as follows:
  June
      30,
              
              
              June
      30,2009
              
              
              2008Revenues:Training
      subscriptions
              
              $
              2,647,394
              
              
              $
              2,514,533Custom
      products and services
              
              
              1,878,542
              
              
              
              1,398,020Total
      Revenues
              
              $
              4,525,936
              
              
              $
              3,912,553Cost
      of Revenues:Training
      subscriptions
              
              $
              750,467
              
              
              $
              709,085Custom
      products and services
              
              
              1,151,451
              
              
              
              955,318Total
      Cost of Revenues
              
              $
              1,901,918
              
              
              $
              1,664,403Gross
      Profit:Training
      subscriptions
              
              $
              1,896,927
              
              
              $
              1,805,448Custom
      products and services
              
              
              727,091
              
              
              
              442,702Total
      Gross Profit
              
              $
              2,624,018
              
              
              $
              2,248,150Operating
      Expenses:Training
      subscriptions
              
              $
              1,256,281
              
              
              $
              1,018,394.Custom
      products and services
              
              
              314,070
              
              
              
              254,598Corporate
              
              
              684,035
              
              
              
              633,108Total
      Operating Expenses
              
              $
              2,254,386
              
              
              $
              1,906,100Income
      (Loss) before Income TaxesTraining
      subscriptions
              
              $
              627,753
              
              
              $
              787,054Custom
      products and services
              
              
              425,914
              
              
              
              188,104Corporate
              
              
              (684,035
              )
              
              
              (633,108
              )Total
      Income before Income Taxes
              
              $
              369,632
              
              
              $
              342,050
  17
 VIVID
LEARNING SYSTEMS, INC.
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
 
 June
      30,
              
              
              June
      30,2009
              
              
              2008Identifiable
      assets:Training
      subscriptions
              
              $
              1,274,312
              
              
              $
              1,205,085Custom
      products and services
              
              
              461,091
              
              
              
              457,058Corporate
              
              
              2,753,607
              
              
              
              2,423,664Total
      Identifiable Assets
              
              $
              4,489,010
              
              
              $
              4,085,807Depreciation
      and amortization:Training
      subscriptions
              
              $
              210,019
              
              
              $
              200,570Custom
      products and services
              
              
              30,718
              
              
              
              22,994Corporate
              
              
              69,764
              
              
              
              51,233Total
      Depreciationand
      Amortization
              
              $
              310,501
              
              
              $
              274,797
 
 NOTE
10 – INCOME TAXES
 
 During
the nine months ended June 30, 2009, the Company realized a profit before income
taxes of $369,632.  As a result, the Company has recognized $125,678
of federal income tax expense, calculated at a rate of approximately 34%, and a
decrease in its deferred tax asset for this same amount.   The
Company’s deferred tax asset at June 30, 2009 principally consists of the
prospective income tax benefit (at 34%) of net operating losses in 2005, 2006,
and 2007.
  18
  ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Results
of Operations:
 
 RESULTS
OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2009 COMPARED WITH THREE MONTHS
ENDED JUNE 30, 2008
 
 Revenues
  Overall
revenues increased 6% to $1,347,908 in the third quarter of fiscal year 2009
from $1,275,501 in the third quarter of fiscal year 2008. The increase was due
to the acquisition of new contracts within the Custom Products and Services
segment and an increase in revenue volume within the Training Subscriptions
segment in the fiscal quarter ending June 30, 2009 compared to the fiscal
quarter ending June 30, 2008.
 
 Training
subscription revenues increased by 9% to $775,871 in the third quarter of fiscal
year 2009 from $713,139 in the third quarter of fiscal year 2008 due to the
addition of new subscription customers offset by a reduction in year over year
subscription renewals.
 
 Custom
Products and Services revenues increased by 2% to $572,037 during the third
quarter of fiscal year 2009 from $562,362 during the third quarter of fiscal
year 2008.  The slight increase is attributable to the acquisition of
new custom contracts combined with the timely completion of custom projects and
related revenues generated within this business segment.
 
 Operating
Expenses
 
 Cost
of Revenues:
  Overall,
cost of revenues increased to $673,179 in the third quarter of fiscal year 2009
from $566,846 in the third quarter of fiscal year 2008.  The increase
is due to increasing revenue volumes in the custom products and services
business segment in the quarter ending June 30, 2009 compared to the quarter
ending June 30, 2008.  The gross profit margin achieved on total
revenues decreased to 50% from 56% in comparing the third quarter of fiscal year
2009 to the third quarter of fiscal year 2008.  The slight decrease
reflects a lower gross profit realized on increasing custom products and
services revenue volumes which require excess cost coverage.
 
 Training
subscription cost of revenues increased by 36% to $302,159 in the third quarter
of fiscal year 2009 from $223,229 in the third quarter of fiscal year
2008.  This increase is attributable to a higher revenue volume in
relation to similar levels of fixed indirect costs within this business segment
in the quarter ending June 30, 2009 compared to the quarter ending June 30,
2008.
 
 Custom
products and services cost of revenues increased by 8% to $371,020 in the third
quarter of fiscal year 2009 from $343,617 in the third quarter of fiscal year
2008.  The increase is due to slightly higher revenue volumes and
related direct costs from new custom contracts in the Custom Products and
Services business segment in the third quarter of fiscal year 2009 compared to
the third quarter of fiscal year 2008.
  19
  Marketing
and Related Labor Expenses:
  Marketing
and related labor expenses increased by 3% to $375,964 in the third quarter of
fiscal year 2009 from $366,154 in the third quarter of fiscal year
2008.  The reasons for the increase are due to a slight increase in
marketing related activity expenses in the current fiscal quarter compared to
the same quarter one year ago.
 
 Reseller
Commissions:
  Reseller
commissions increased by 33% to $101,835 in the third quarter of fiscal year
2009 from $76,821 in the third quarter of fiscal year 2008.  The
increase is attributable directly to the timing of training subscription
revenues generated from external sales resources during the fiscal quarter as
compared to the same quarter in the previous fiscal year.
 
 Depreciation
and Amortization:
  Depreciation
and Amortization increased to $38,968 in the third quarter of fiscal year 2009
compared to $25,037 in the third quarter of fiscal year 2008.  The
increase in depreciation is attributable to an increase in fixed assets
purchased in the comparison of the two fiscal quarters.
 
 General
and Administrative Expenses:
  General
and Administrative expenses increased to $217,370 in the third quarter of fiscal
year 2009 from $176,557 in the third quarter of fiscal year
2008.  Labor related expenses increased to $107,289 during the fiscal
quarter from $89,680 in the same fiscal quarter of one year ago.  The
increase is attributable to increased G&A labor allocations within
administrative staff.  Non-labor related administrative expenses
increased to $110,081 during the fiscal quarter from $86,877 in the same fiscal
quarter of one year ago.  The increase is primarily attributable to
fees and rent expenses attributable to administration.
 
 Income
from Operations:
  Income
from Operations decreased by $124,570 to ($61,169) in the third quarter of
fiscal year 2009 from $63,401 in the third quarter of fiscal year
2008.  The decrease is due principally to an increase in training
subscriptions cost of revenues and other related operating expenses during the
quarter ending June 30, 2009 as compared to the quarter ending June 30,
2008.
 
 Other
Income (Expense):
  The
increase in Other Expenses is attributable to a slight increase in interest
expense in the third quarter of the current fiscal year resulting from the
increase in capital equipment financing.  Interest expense on debt was
$11,617 in the quarter ended June 30, 2009 compared to $9,596 in the quarter
ended June 30, 2008.
 
 Net
Income
  The
operation generated Net Loss of ($47,908) in the third quarter of fiscal year
2009 compared to $36,652 in the third quarter of fiscal year 2008. The decrease
in net income of ($84,560) is due to a higher percentage increase in cost of
revenues with a modest  percentage increase in revenues during the
third fiscal quarter in the current year compared to the same period in the
previous year.
 
 Seasonality
and Other Factors Affecting Quarterly Results
  We expect
quarterly fluctuations in operating results due to many factors including
acquisitions and roll-out of new product offerings. The operating results for
any quarter are not necessarily indicative of the results for any future
period.
  20
  Liquidity
and Capital Resources
  As of
June 30, 2009 the Company had cash of $675,166 compared to $216,089 as of June
30, 2008.  The Company’s current ratio is 2.97 as of June 30, 2009
compared to 2.89 at the audit date of September 30, 2008.
 
 Cash
flows provided by operating activities amounted to $140,999 in the third quarter
of fiscal year 2009 compared to cash flows provided by operating activities of
$87,690 in the third quarter of fiscal year 2008.  The increase is
attributable to collections realized from reductions in accounts receivable
during the fiscal quarter.
 
 Cash
flows used in investing activities amounted to $95,233 in the third quarter of
fiscal year 2009 compared to $54,689 in the third quarter of fiscal year
2008.  The increase is attributable to increased cost expenditures for
software development and acquisitions of property and equipment.
 
 Cash
flows used in financing activities amounted to $59,940 in the third quarter of
fiscal year 2009 compared to cash flows used in financing activities of $126,856
in the third quarter of fiscal year 2008.  The decrease in cash flows
used in financing activities is attributable to a reduction in requirements for
notes payable related party indebtedness.
 
 RESULTS
OF OPERATIONS – NINE MONTHS ENDED JUNE 30, 2009 COMPARED WITH NINE SIX MONTHS
ENDED JUNE 30, 2008
 
 Revenues:
  Overall revenues increased 16% to
$4,525,936 in the nine months year to date of fiscal year 2009 from $3,912,553
in the nine months year to date of fiscal year 2008.The increase was due to the acquisition
of substantial new contracts within the Custom Products and Services segment and
a slight increase in revenue volume within the Training Subscriptions segment in
the nine months year to date ending June 30, 2009 compared to the nine months
year to date ending June 30, 2008.
 
 Training
subscription revenues increased by 5% to $2,647,394 in the nine months year to
date of fiscal year 2009 from $2,514,533 in the nine months year to date of
fiscal year 2008 due to new subscription based sales.
 
 Custom
products and services revenues increased overall by 34% to $1,878,542 in the
nine months year to date of fiscal year 2009 from $1,398,020 in the nine months
year to date of fiscal year 2008.  The large increase is attributable
to the acquisition of large new custom contracts combined with the timely
completion of custom projects and related revenues generated within this
business segment.
 
 Operating
Expenses
 
 Cost
of Revenues:
  Overall,
cost of revenues for the current nine months year to date increased by 14% to
$1,901,918 from $1,664,403 for the same period one year ago.  The
increase is due to increasing revenue volumes in the Custom Products and
Services business segment in the nine months year to date ending June 30, 2009
compared to the nine months year to date ending June 30, 2008.  The
gross profit margin achieved on total revenues remained at 58% in comparing the
two nine month year to date reporting periods.
  21
  Training
subscription cost of revenues increased by 6% to $750,467 in the nine months
year to date of fiscal year 2009 from $709,085 in the nine months ended June 30,
2008.  This increase is attributable to the 36% increase in cost of
revenues in the nine months year to date ending June 30, 2009 compared to the
nine months year to date ending June 30, 2008.
 
 Custom
products and services cost of revenues increased by 21% to $1,151,451 in the
nine months year to date of fiscal year 2009 from $955,318 in the nine months
ended June 30, 2008.  The increase is due to significantly higher
revenue volumes and related direct costs from new custom contracts in the Custom
Products and Services business segment in the nine months year to date ending
June 30, 2009 compared to the nine months year to date ending June 30,
2008.
 
 Marketing
and Related Labor Expenses:
  Marketing
and related labor expenses increased by 3% to $1,017,837 in the nine months year
to date of fiscal year 2009 from $989,292 in the nine months year to date of
fiscal year 2008.  The reason for the increase is due to increased
marketing labor costs related to higher revenue volume.
 
 Reseller
Commissions:
  Reseller
commissions increased by 46% to $383,334 in the nine months year to date of
fiscal year 2009 from $261,906 in the nine months year to date of fiscal year
2008.  The increase is attributable directly to the timing of training
subscription revenues generated from external sales resources during the first
nine months of the fiscal year as compared to the comparable period in the
previous fiscal year.
 
 Depreciation
and Amortization:
  Depreciation
and Amortization increased to $100,482 in the nine months to date of fiscal year
2009 from $74,227 in the comparable period of fiscal year 2008.  The
increase in depreciation is attributable to an increase in fixed assets
purchased in the comparison of the two fiscal year nine month reporting
periods.
 
 General
and Administrative Expenses:
  General
and Administrative expenses increased by 29% to $716,886 in the nine months year
to date of fiscal year 2009 from $555,047 in the nine months year to date of
fiscal year 2008.  Labor related expenses increased by 7% to $327,146
during the nine months year to date of fiscal year 2009 from $304,950 in the
same year to date period of one year ago.  The increase is
attributable to increased G&A labor allocations within administrative
staff.  Non-labor related administrative expenses increased by 56% to
$389,740 during the nine months year to date of fiscal year 2008 from $250,097
in the same year to date period of one year ago.  The increase is
primarily attributable to fees, merger expenses, and changes in the
classification of certain indirect expenses.
 
 Income
from Operations:
  Income
from Operations increased by $38,764 to $403,718 in the nine months year to date
of fiscal year 2009 from $364,954 in the nine months year to date of fiscal year
2008.  The increase is due principally to an increase in the gross
profit margin partially offset by increases in operating expenses incurred
during the nine months year to date ending June 30, 2009 as compared to the nine
months year to date ending June 30, 2008.
 
 Other
Income (Expense):
  The
increase in Other Expenses is attributable to the increase in interest expense
in the nine months ending of the current fiscal year resulting from the increase
in capital equipment financing.  Interest expense on debt was $34,649
in the nine months year to date ended June 30, 2009 compared to $26,570 in the
nine months year to date ended June 30, 2008.
  22
  Net
Income:
  The
operation generated Net Income of $243,954 in the nine months ending June
30th
 of fiscal
year 2009 compared to a Net Income of $225,753 in the nine months ending June
30th
of fiscal year 2008. The increase in net income of $18,201 is primarily due to
higher custom products and services revenues partially offset by an increase in
overall operating and income tax expenses during the nine months ending June
30th
in the current fiscal year compared to the same period in the previous fiscal
year.
 
 Liquidity
and Capital Resources
  As of
June 30, 2009, the Company had cash and cash equivalents of $675,166 as compared
to $132,391 at the audit date of September 30, 2008.
 
 Cash
flows provided by operating activities amounted to $898,251 in the nine months
year to date of fiscal year 2009 compared to $573,759 in the nine months year to
date of fiscal year 2008.  The main reasons for the increase in cash
flows provided by operations are attributable to generated net income and
reductions through collections in receivable accounts and
contracts.
 
 Cash
flows used in investing activities amounted to $418,836 in the nine months year
to date of fiscal year 2009 compared to $132,642 in the nine months year to date
of fiscal year 2008. The increase is attributable to increased expenditures for
internal software development and expenditures for property and
equipment.
 
 Cash
flows provided (used) by financing activities amounted to $63,360 in the nine
months year to date of fiscal year 2009 compared to ($305,359) in the nine
months year to date of fiscal year 2008.  The increase in cash flows
provided by financing activities is attributable to proceeds from term loan
financing partially offset by payment requirements for notes payable related
party indebtedness and by debt service payments for long-term
liabilities.
 
 ITEM
4T – CONTROLS AND PROCEDURES
 
 Our Chief
Executive Officer/Interim Chief Financial Officer evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934) as of the end of the nine month period ended
June 30, 2009. Based on this evaluation, our Chief Executive Officer/Interim
Chief Financial Officer has concluded that our controls and procedures are
effective in providing reasonable assurance that the information required to be
disclosed in this report is accurate and complete and has been recorded,
processed, summarized, and reported within the time period required for the
filing of this report. Subsequent to the date of this evaluation, there have not
been any significant changes in our internal controls or, to our knowledge, in
other factors that could significantly affect our internal
controls.
  23
  PART
II – OTHER INFORMATION
 
 ITEM 6 – EXHIBITS
 
 Exhibit
      No.
                
                Description31.1
                
                302
      Certification of Matthew J. Hammer, Chief Executive
  Officer31.2
                
                302
      Certification of Matthew J. Hammer, Interim Chief Financial
      Officer32.1
                
                906
      Certification of Matthew J. Hammer, Chief Executive
  Officer32.2
                
                906
      Certification of Matthew J. Hammer, Interim Chief Financial
      Officer
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  Vivid
      Learning Systems, Inc.Date:
      August 14, 2009
                  By:
                  /s/ Matthew
      J. HammerMatthew
      J. HammerChief
      Executive Officer(Principal
      Executive Officer and duly authorized to sign on behalf of the
      Registrant)
 24