10-Q 1 viking_10q-063011.htm FORM 10-Q viking_10q-063011.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011
 
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 000-49636

VIKING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
86-0913802
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

134 Flanders Road, Westborough, MA 01581
 (Address of principal executive offices) (Zip Code)
 
(508) 366-3668
(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 ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
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 Exchange Act).   Yes ¨ No x
 
The registrant had 72,382,598 shares of common stock, $0.001 par value per share, issued and outstanding as of July 31, 2011.


 
 
 
 
 
FORM 10-Q

FINANCIAL STATEMENTS AND SCHEDULES
VIKING SYSTEMS, INC.

For the Quarter ended June 30, 2011

PART I - FINANCIAL INFORMATION

   
Page No.
Item 1.
Financial Statements :
 
     
 
Balance Sheets at  June 30, 2011 (unaudited) and December 31, 2010
3
 
Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)
4
 
Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)
5
 
Notes to Financial Statements
6-9
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
10-14
     
Item 3
Quantitative and Qualitative Disclosures about Market Risk
15
     
Item 4.
Controls and Procedures
15
 
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
16
     
Item 1A
Risk Factors
16
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16
     
Item 3.
Defaults Upon Senior Securities
16
     
Item 4.
[Removed and Reserved]
16
     
Item 5.
Other Information
16
     
Item 6.
Exhibits
17-18
     
 
Signatures
19
     
 
2

 
   
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
VIKING SYSTEMS, INC.
Balance Sheets
   
   
June 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
 
$
2,939,513
   
$
950,285
 
Accounts receivable, net
   
1,200,055
     
1,008,042
 
Inventories, net
   
1,922,758
     
1,619,094
 
Prepaid expenses and other current assets
   
98,685
     
184,842
 
Total current assets
   
6,161,011
     
3,762,263
 
                 
Property and equipment, net
   
443,978
     
365,302
 
Intangible assets, net
   
35,000
     
70,000
 
Total assets
 
$
6,639,989
   
$
4,197,565
 
                 
Liabilities and Stockholders' Equity
               
                 
Current liabilities:
               
Accounts payable
 
$
1,401,502
   
$
1,408,109
 
Accrued expenses
   
970,387
     
794,633
 
Deferred revenue
   
157,514
     
55,119
 
Total current liabilities
   
2,529,403
     
2,257,861
 
                 
Commitments and contingencies
               
                 
Stockholders’ Equity:
               
Preferred Stock, $0.001 par value, 25,000,000 shares authorized; No shares outstanding at June 30, 2011 and December 31, 2010
    -       -  
Common stock, $0.001 par value, 400,000,000 shares authorized;  72,382,598 and  58,806,434  issued and outstanding at June 30, 2011 and December 31, 2010, respectively
   
72,383
     
58,806
 
Additional paid-in capital
   
34,079,645
     
30,615,957
 
Accumulated deficit
   
(30,041,442
)
   
(28,735,059
)
Total stockholders' equity
   
4,110,586
     
1,939,704
 
Total liabilities and stockholders' equity
 
$
6,639,989
   
$
4,197,565
 
   
The accompanying notes are an integral part of the interim financial statements.
  
 
3

 
 
VIKING SYSTEMS, INC.
Statements of Operations - Unaudited
   
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Sales, net
 
$
2,509,079
     
2,005,323
   
$
5,631,673
   
$
3,920,396
 
Cost of sales
   
2,124,489
     
1,458,469
     
4,595,325
     
2,872,608
 
                                 
Gross profit
   
384,590
     
546,854
     
1,036,348
     
1,047,788
 
                                 
Operating expenses:
                               
Selling and marketing
   
455,120
     
207,266
     
933,483
     
413,869
 
Research and development
   
362,670
     
411,624
     
618,633
     
618,405
 
General and administrative
   
427,272
     
379,538
     
861,137
     
762,574
 
Total operating expenses
   
1,245,062
     
998,428
     
2,413,253
     
1,794,848
 
Operating loss
   
(860,472
)
   
(451,574
)
   
(1,376,905
)
   
(747,060
)
                                 
Other income (expense):
                               
Interest income
   
344
     
724
     
570
     
937
 
Interest expense
   
-
     
-
     
-
     
(177
)
Gain on sale and license of assets
   
-
     
-
     
69,952
     
-
 
Total other income (expense)
   
344
     
724
     
70,522
     
760
 
Net loss
 
$
(860,128
)
   
(450,850
)
 
$
(1,306,383
)
 
$
(746,300
)
                                 
Net loss per share - basic and diluted
 
$
(0.01
)
   
(0.01
)
 
$
(0.02
)
 
$
(0.02
)
                                 
Weighted average shares - basic and diluted
   
66,920,426
     
50,446,414
     
62,948,738
     
48,188,537
 
 
The accompanying notes are an integral part of the interim financial statements.
  
 
4

 
 
VIKING SYSTEMS, INC.
Statements of Cash Flows – Unaudited
  
   
Six Months Ended
June 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
 
$
(1,306,383
)
 
$
(746,300
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
169,633
     
58,666
 
Stock based compensation expense
   
199,925
     
194,029
 
Gain on sale and license of assets
   
(69,952
)
    -
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(192,013
)
   
(51,942
Inventories
   
(303,663
)
   
(240,394
Prepaid expenses and other current assets
   
86,157
     
(69,674
Accounts payable
   
63,345
     
138,169
 
Accrued expenses
   
175,753
     
50,998
 
Deferred revenue
   
102,395
     
(336,979
Net cash used in operating activities
   
(1,074,803
)
   
(1,003,427
                 
Cash flows from investing activities:
               
Purchase of property and equipment
   
(213,309)
     
(28,769
Net cash used in investing activities
   
(213,309)
     
(28,769
                 
Cash flows from financing activities:
           
Proceeds from warrant exercise
   
-
     
270,370
 
Proceeds from issuance of common stock
   
3,387,601
     
1,394,086
 
Stock issuance costs
   
(110,261
)
   
(37,009
Net cash  provided by financing activities
   
3,277,340
     
1,627,447
 
Net increase in cash and cash equivalents
   
1,989,228
     
595,251
 
                 
Cash and cash equivalents at beginning of period
   
950,285
     
721,121
 
Cash and cash equivalents at end of period
 
$
2,939,513
   
$
1,316,372
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
-
   
$
177
 
Income taxes
 
$
-
   
$
1,256
 
 
The accompanying notes are an integral part of the interim financial statements.
   
 
5

 
 
1.    INTERIM FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements of Viking Systems, Inc. (“Viking” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, the interim financial statements reflect all adjustments necessary to make the financial statements presented not misleading. The balance sheet as of December 31, 2010 was derived from the Company's audited financial statements. The financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year ended December 31, 2010, included in Viking's Annual Report on Form 10-K for the year ended December 31, 2010,  which was filed on February 24, 2011 with the Securities and Exchange Commission. The results of operations and cash flows for the period ended June 30, 2011 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2011.
  
2.    LOSS PER SHARE

The computation of basic and diluted loss per common share is computed using the weighted average number of common shares outstanding during the year.

Due to the net losses for the periods ended June 30, 2011 and June 30, 2010, potentially dilutive securities have been excluded in the calculation of diluted loss per share because their inclusion would be anti-dilutive. Accordingly, basic and diluted loss per share are the same within each respective period.
 
The following potentially dilutive common shares were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive for the periods presented:
  
   
(unaudited)
June 30,
2011
   
(unaudited)
June 30,
2010
 
Warrants
   
30,072,575
     
22,904,110
 
Stock options
   
9,782,920
     
8,712,920
 
Total
   
39,855,495
     
31,617,030
 
  
3.    INVENTORIES
 
Details of our inventory account balances are as follows:
  
   
(unaudited)
June 30,
2011
   
December 31,
2010
 
Inventories:
           
Parts and supplies
 
$
1,120,704
   
$
1,362,960
 
Work-in-progress
   
694,365
     
381,475
 
Finished goods
   
498,715
     
313,981
 
Valuation allowance
   
(391,026
)
   
(439,322
)
Total
 
$
1,922,758
   
$
1,619,094
 
  
4.    ACCRUED EXPENSES

Accrued expenses consist of the following:

   
(unaudited)
June 30,
2011
   
December 31,
2010
 
Employee and director compensation
 
$
585,909
   
$
427,753
 
Registration delay fees
   
161,574
     
161,574
 
Professional and consulting fees
   
75,343
     
88,000
 
Other accrued expenses
   
147,561
     
117,306
 
Total
 
$
970,387
   
$
794,633
 
     
 
6

 
  
5.    SALE OF COMMON STOCK AND WARRANTS
 
On May 5, 2011, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Clinton Magnolia Master Fund, Ltd. and other accredited investors (the “Investors”) pursuant to which the Company agreed to issue shares of the Company’s common stock and warrants exercisable to purchase shares of common stock for an aggregate offering price of $3.0 million (the “Offering”). On May 10, 2011, the Offering closed and the Company issued and sold to the Investors an aggregate of 12,000,000 shares of common stock and warrants to purchase up to 9,000,000 shares of common stock. The warrants have an exercise price of $0.25 per share, subject to adjustment, expire five years from May 10, 2011, and are exercisable in whole or in part, at any time prior to expiration. In conjunction with the completed Offering, the Company agreed to reimburse to Clinton Group, Inc. an amount up to $50,000 for reasonable and documented out-of-pocket expenses incurred by the Investors. Total stock issuance costs incurred through June 30, 2011 were $110,261 and were recorded as a reduction in additional paid in capital.
 
Concurrent with the Offering, Clinton Magnolia Master Fund, Ltd. reached an agreement with Midsummer Investment Ltd. and purchased all common stock and warrants of the Company then held by Midsummer. The Company was not a party to this transaction.  At the time of the Offering, Midsummer owned 7,223,457 shares of the Company’s common stock, or approximately 12% of the total shares outstanding, and warrants to purchase an additional 5,551,034 shares of the Company’s common stock at an exercise price of $0.18 per share.
 
Pursuant to the terms of the Purchase Agreement, on May 10, 2011, the Company terminated its equity line of credit facility under the Investment Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) dated January 7, 2010 (the “Investment Agreement”).
 
The Company also entered into a Registration Rights Agreement dated as of May 5, 2011, as amended May 26, 2011,with the Investors (together, with the amendment, the “Registration Rights Agreement”).  Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) to register the resale by the Investors of the 12,000,000 shares of the Company’s common stock underlying the Purchase Agreement and 4,278,805 of 9,000,000 shares of common stock issuable upon exercise of the warrants, for an aggregate of 16,278,805 shares registered. The Company filed the required registration statement to register the resale of 16,278,805 shares, and the SEC declared it effective on June 30, 2011.

Pursuant to the Registration Rights Agreement, the Investors may demand registration rights in the future if the Investors reasonably believe that the Company can register additional securities with the SEC, and the Company and its counsel concur, subject to certain limitations. Notwithstanding the foregoing, the Company will not be obligated to file a registration statement for registrable securities that have a market value of less than $250,000 and the Company will not be required to file more than one registration statement every six months.

6.   INVESTMENT AGREEMENT
  
On January 7, 2010, the Company entered into an investment agreement (the “Investment Agreement”) with Dutchess Opportunity Fund II, LP (“Dutchess”).  Pursuant to the Investment Agreement, Dutchess committed to purchase up to $5,000,000 of the Company’s common stock over thirty-six months subject to certain conditions.  In connection with the financing described in Note 5, the Company terminated the Investment Agreement on May 10, 2011.

The Company was able to draw on the facility from time to time, as and when it determined appropriate in accordance with the terms and conditions of the Investment Agreement.  The purchase price was calculated as 96% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the 5 consecutive trading day period beginning on the trading day immediately following the date of delivery of the applicable put notice.  The amount that the Company was entitled to put in any one notice was any amount up to the greater of 1) 200% of the average daily volume of the common stock for the 3 trading days prior to the applicable put notice date, multiplied by the average of the 3 daily closing prices immediately preceding the date of the put or 2) $100,000.   Dutchess was not obligated to purchase shares if its total number of shares beneficially held at that time would exceed 4.99% of the number of shares of the Company’s outstanding common stock as determined in accordance with Rule 13d-1 of the Securities Exchange Act of 1934, as amended.  In addition, the Company was not permitted to draw on the facility unless there was an effective registration statement to cover the resale of the shares.

Pursuant to the terms of a Registration Rights Agreement between the Company and Dutchess, the Company was obligated to file a registration statement with the SEC to register the resale by the Investor of 15,000,000 shares of the common stock underlying the Investment Agreement on or before 21 calendar days of the date of the Registration Rights Agreement.  The Company filed the required registration statement, and it was declared effective by the SEC on February 12, 2010. On July 29, 2011, the Company executed a post-effective amendment to deregister the 2,453,768 shares of common stock not sold under the Investment Agreement and as previously registered in the Registration Statement.

During the six months ended June 30, 2011, the Company sold 1,576,164 shares under the Investment Agreement for $387,601 for an average price per share price of $0.246. During the year ended December 31, 2010, the Company sold 10,970,068 shares under this Investment Agreement for $2,842,173 for an average per share price of $0.293.
   
 
7

 

 
7.            STOCK-BASED COMPENSATION

Common Stock Options
During the quarter ended March 31, 2008, shareholders approved  the Viking Systems, Inc. 2008 Equity Incentive Plan (the “2008 Equity Plan”), and the Viking Systems, Inc. 2008 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). In December 2009, the Board of Directors approved an amendment to the 2008 Equity Plan to increase the number of shares available under such plan by 2,800,000 shares.  The maximum number of shares that may be issued pursuant to the 2008 Equity Plan is 9,520,000 shares plus such number of shares that are issuable pursuant to awards outstanding under the 2004 Plan as of the effective date and which would have otherwise reverted to the share reserve of the 2004 Plan. The Company has reserved a total of 1,500,000 shares of its common stock for issuance under the Directors’ Plan.  During the six months ended June 30, 2011, no options were granted under the 2008 Equity Plan and 600,000 options were granted under the Directors’ Plan.   At June 30, 2011, 710,000 shares remain available for grant under the 2008 Equity Plan and 516,500 shares remain available under the Directors’ Plan. 

The Company measures the cost of employee and director services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. The associated cost is recognized over the requisite service period during which an employee or director is required to provide service in exchange for the award. The Company determines the fair value of employee and director share options on the grant date using the Black-Scholes option-pricing model.  The grant date fair value of stock options granted to directors during the six months ended June 30, 2011 as determined using the Black-Scholes valuation model was approximately $111,000. The Company determines the value of equity instruments issued to non employees in exchange for services to be provided using the fair value of the services or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of stock options granted to directors during the six months ended June 30, 2011, estimated using the Black-Scholes model, incorporated the following assumptions: volatility of 84%, expected life of 7 years, risk-free interest rate of 3.3%, and expected dividend yield of 0%. Volatility is based on the historical volatility of the Company's common stock. The expected life of employee stock options is based on the average of the vesting period and contractual life. The risk free interest rate is based on U.S. Treasury constant maturity rate for the expected life of the stock option.
   
During the three months ended June 30, 2011 and 2010, the Company recorded $103,628 and $98,419 respectively, in non-cash stock-based compensation expense. During the six months ended June 30, 2011 and 2010, the Company recorded $199,925 and $194,029 respectively, in non-cash stock-based compensation expense. As of June 30, 2011, there was approximately $480,000 in total unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted average period of approximately 1.8 years.
  
The following table summarizes the stock option activity during the six months ended June 30, 2011:

   
Number of
Shares
   
Weighted - Average
Exercise
Price
   
Weighted -Average Remaining
Contractual
Life
(in years)
 
Options outstanding December 31, 2010
   
9,182,920
    $
0.29
     
7.5
 
Granted
   
600,000
     
  0.28
     
  9.9
 
Cancelled or expired
   
  -
     
  -
     
  -
 
Options outstanding June 30, 2011
   
9,782,920
   
$
0.29
     
7.5
 
                         
Options exercisable at June 30, 2011
   
5,767,488
   
$
0.37
     
7.2
 
    
 
8

 
  
8.    WARRANTS TO PURCHASE COMMON STOCK

The following table summarizes warrant activity during the six months ended June 30, 2011:
 
   
Shares
   
Range of
Exercise
Price
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (yrs)
 
Outstanding December 31, 2010
   
20,888,131
   
$
0.18-0.75
   
$
0.18
     
2.1
 
Granted
   
9,240,000
   
$
0.25
   
$
0.25
     
4.9
 
Expired
   
(55,556)
   
$
0.50-0.75
   
$
0.63
     
-
 
Exercised
   
-
     
-
     
-
     
-
 
Outstanding June 30, 2011
   
30,072,575
   
$
0.18-0.25
   
$
0.20
     
2.5
 
 
9.    LEASE COMMITMENTS

The Company leases its Westborough, MA facility under a non-cancelable operating lease agreement expiring on September 30, 2015.  Remaining future minimum lease payments are as follows:
    
Period
 
Amount
2011
 
$
122,918
2012
   
250,280
2013
   
251,445
2014
   
254,940
2015
   
191,205
Total
 
$
1,070,788
  
Rent expense was $122,917 for the both the six months ended June 30, 2011 and June 30, 2010.
   
10.   PATENT LICENSE AND SALE OF RELATED ASSETS

During the six months ended June 30, 2011, the Company recorded income of $69,952 as compensation for the grant of a license to use a certain design patent in the nonmedical markets and the sale of certain manufacturing assets related to such patent. The license is a fully paid, non royalty bearing license providing the licensee exclusive use of the patent in nonmedical applications for the remaining life of the patent. As part of the transaction, the Company also transferred ownership of certain fully depreciated manufacturing tooling used in the production of products incorporating the patented design.

11.    RECENT ACCOUNTING PRONOUNCEMENTS
 
There are currently no recently issued accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2011, as compared with the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, that are of significance, or potential significance to the Company.
        
 
9

 
  
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements
 
This Quarterly Report on Form 10-Q contains and incorporates by reference certain “forward-looking statements” with respect to the results of our operations and businesses. All statements, other than statements of historical facts, included in this report on Form 10-Q, including those regarding market trends, our financial position, business strategy, projected costs, and plans and objectives of management for future operations, are forward-looking statements. In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to, “intended,” “will,” “should,” “may,” “expects,” “expected,” “anticipates,” and “anticipated” or the negative thereof or variations thereon or similar terminology. These forward-looking statements are based on our current expectations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and our actual results could differ materially. These forward-looking statements represent our judgment as of the date of this Form 10-Q. We disclaim, however, any intent or obligation to update our forward-looking statements, except as required by law.

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Quarterly Report on Form 10-Q as of June 30, 2011 and our audited consolidated financial statements for the year ended December 31, 2010 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 2011.

Overview

We are a worldwide developer, manufacturer and marketer of visualization solutions for complex minimally invasive surgery.  We partner with medical device companies and healthcare facilities to provide surgeons with proprietary visualization systems enabling minimally invasive surgical procedures, which reduce patient trauma and recovery time.

We sell the most recent version of our proprietary visualization system, called our 3DHD Vision System, under the Viking brand inside and outside the United States through our distributor network.   Our 3DHD System is an advanced three dimensional, or 3D, vision system used by surgeons for complex minimally invasive laparoscopic surgery, with applications in urologic, gynecologic, bariatric, cardiac, neurologic and general surgery.  We released our 3DHD Vision System in the fourth quarter of 2010 and started shipments in December 2010.

We also manufacture two dimensional, or 2D, digital cameras that are sold to third-party companies who sell to end users through their Original Design Manufacturer, or ODM, programs and Original Equipment Manufacturer, or OEM, programs. Our technology and know-how center on our core technical competencies in optics, digital imaging, sensors, and image management. Our focus is to deliver advanced visualization solutions to surgical teams, enhancing their capability and performance in complex minimally invasive surgical procedures.

Liquidity and Capital Resources

We have financed our operations since inception principally through private sales of equity securities and convertible debt. From January 1, 2004 through June 30, 2011, we raised net proceeds of $17.1 million through the sale of common and preferred stock in private placements and approximately $13.6 million through the issuance of convertible notes and debentures. As of June 30, 2011, we had cash and cash equivalents of $2,939,513. We have incurred net losses and negative cash flows from operations. On May 10, 2011, we closed on agreements with accredited investors to issue an aggregate of 12,000,000 shares of common stock and warrants to purchase up to 9,000,000 shares of common stock, yielding gross proceeds of $3.0 million (the “Offering). With the receipt of the gross proceeds of $3 million from the Offering and our current projection of future orders and expenses, management believes that our cash position provides sufficient resources and operating flexibility through at least the next twelve months.
  
Net cash used in operating activities for the six months ended June 30, 2011 and 2010 was $1,074,803 and $1,003,427, respectively. This increase in cash used in operating activities was primarily attributable to a larger net loss during the six months ended June 30, 2011 partially offset by less cash consumed by the combined changes in accounts receivable, inventory and deferred revenue compared with the same period in the prior year.

During the six months ended June 30, 2011, cash used in investing activities was $213,309 compared with $28,769 for the first six months of 2010.  This increase primarily relates to the costs of new product demonstration units and manufacturing test equipment.

During the six months ended June 30, 2011, we generated net cash proceeds of $3,277,340 from financing activities compared with $1,627,447 for the same period in 2010.  This increase in cash provided by financing activities was primarily due to the Offering in which we raised gross proceeds of $3,000,000 less stock issuance costs incurred of $110,261.
     
 
10

 
  
On January 7, 2010, we entered into the Investment Agreement with Dutchess Opportunity Fund II, whereby Dutchess committed to purchase from us, from time to time, up to $5,000,000 of our common stock over the course of thirty-six months. We terminated the Investment Agreement with Dutchess on May 10, 2011. We were able to draw on the facility, as and when we determined appropriate in accordance with the terms and conditions of the Investment Agreement. In the aggregate, from the time the required registration statement was declared effective on February 12, 2010 through May 10, 2011, we sold 12,546,232 shares of our common stock to Dutchess for total net proceeds of $3,229,774, including $387,601 in proceeds received during 2011. 
 
On May 5, 2011, we entered into a Purchase Agreement with Clinton Magnolia Master Fund, Ltd. and other accredited investors pursuant to which we agreed to issue shares of our common stock and warrants exercisable to purchase shares of common stock, for an aggregate offering price of $3.0 million (the “Offering”). On May 10, 2011, the Offering closed and we issued and sold to the Investors an aggregate of 12,000,000 shares of our common stock and warrants to purchase up to 9,000,000 shares of our common stock. The warrants have an exercise price of $0.25 per share, subject to adjustment, expire five years from May 10, 2011, and are exercisable in whole or in part, at any time prior to expiration. In conjunction with the completed Offering, we agreed to reimburse to Clinton Group, Inc. an amount up to $50,000 for reasonable and documented out-of-pocket expenses incurred by the Investors. Through June 30, 2011, we incurred total stock issuance costs of $110,261, which were recorded as a reduction in additional paid in capital.
 
Concurrent with the Offering, Clinton Magnolia Master Fund, Ltd. reached an agreement with Midsummer Investment Ltd. and purchased all of our common stock and warrants then held by Midsummer. We were not a party to this transaction. At the time of the Offering, Midsummer owned 7,223,457 shares of our common stock, or approximately 12% of the total shares outstanding, and warrants to purchase an additional 5,551,034 shares of our common stock at an exercise price of $0.18 per share.
 
We also entered into a Registration Rights Agreement dated as of May 5, 2011, as amended May 26, 2011, with the Investors.  Pursuant to the Registration Rights Agreement, we agreed to file a registration statement with the U.S. Securities and Exchange Commission to register the resale by the Investors of the 12,000,000 shares of our common stock underlying the Purchase Agreement and 4,278,805 of 9,000,000 shares of common stock issuable upon exercise of the warrants, for an aggregate of 16,278,805 shares registered. We filed the required registration statement to register the resale of 16,278,805 shares, and the SEC declared it effective on June 30, 2011.

Pursuant to the Registration Rights Agreement, the Investors may demand registration rights in the future if the Investors reasonably believe that we can register additional securities with the SEC, and we and our counsel concur, subject to certain limitations. Notwithstanding the foregoing, we will not be obligated to file a registration statement for registrable securities that have a market value of less than $250,000 and we will not be required to file more than one registration statement every six months.
   
RESULTS OF OPERATIONS

Three and Six Month Periods Ended June 30, 2011 Compared with the Three and Six Month Periods Ended June 30, 2010
  
Sales. We had sales of $2,509,079 for the three months ended June 30, 2011 compared with $2,005,323 for the three months ended June 30, 2010, an increase of 25%. We had sales of $5,631,673 for the six months ended June 30, 2011 compared with $3,920,396 for the six months ended June 30, 2010, an increase of 44%. The increase in sales during both the three and six month periods ended June 30, 2011 was due to increased sales of our Viking branded 3D vision systems, primarily our new 3DHD vision system. Partially offsetting the increase in sales of Viking branded products during the quarter ended June 30, 2011 was a decrease of $474,000 in sales of our Original Equipment Manufacturer, or OEM, products.  We delayed shipments of approximately $343,000 of certain OEM product orders because of component availability issues related to the natural disaster that occurred in Japan during the first quarter 2011. We expect to ship all delayed product orders in the third quarter and then return to a normal delivery schedule.
 
Sales of our OEM and Branded products were as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
Branded products
  $ 1,023,877     $ 45,751     $ 978,126     $ 2,427,622     $ 169,306     $ 2,258,316  
OEM products and service
    1,485,202     $ 1,959,572       (474,370 )     3,204,051       3,751,090       (547,039 )
                                                 
Total sales
  $ 2,509,079     $ 2,005,323     $ 503,756     $ 5,631,673     $ 3,920,396     $ 1,711,277  
                                                 
Number of 3Di systems
    -       -       -       4       1       3  
Number of 3DHD systems
    16       -       16       33       -       33  
                                                 
Total 3D systems
    16       -       16       37       1       36  
    
 
11

 
  
Customers accounting for at least 10% of our revenues in either period:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Customer A
    30%       39%       30%       32%  
Customer B
    12%       21%       11%       29%  
Customer C
    10%       24%       10%       20%  
Total sales to customers representing more than 10% of sales
    52%       84%       51%       81%  
       
Gross Profit.  Gross profit decreased 30% and 1%, respectively, for the three and six month periods ended June 30, 2011 compared with the same periods in 2010. For the three months ended June 30, 2011, gross profit amounted to $384,590, or 15% of sales compared with $546,854, or 27% of sales, for the same period in 2010.   For the six months ended June 30, 2011, gross profit was $1,036,348, or 18 % of sales compared with $1,047,788, or 27% of sales for the same period in the prior year.
 
The decrease in gross margin percentage for the three months ended June 30, 2011 is primarily due to higher manufacturing overhead costs as we increase our production capacity,  higher unabsorbed production costs due to lower OEM production volume and investment in service programs.  When OEM volume decreases, the resulting unabsorbed overhead costs are charged directly to cost of sales. The gross margin realized on sales of 3DHD demonstration systems to our distributors also contributed to the lower gross margin. Our demonstration systems are not intended for immediate resale and are priced at a substantial discount to the distributors’ agreed upon regular purchase price for resalable systems.  Our distribution strategy requires distributors to demonstrate a financial commitment by purchasing one or more demonstration systems, depending upon, among other considerations, the size of the distributor’s territory. Purchases of demonstration systems generally have no right of return.

Selling and Marketing Expense.  Selling and marketing expenses were $455,120 for the three months ended June 30, 2011 and $207,266 for the three months ended June 30, 2010.  This represents an increase of $247,854, or 120 %.  For the six months ended June 30, 2011, selling and marketing expense increased $519,614, or 126%.   The increase in selling and marketing expenses during both periods was due to the launch of our next generation 3DHD visualization system during the fourth quarter of 2010.  These increased costs during 2011 include market research, promotional costs, and travel expenses as well as depreciation expense related to new product demonstration units retained by us.
  
Research and Development Expense.   We had research and development expenses of $362,670 for the three months ended June 30, 2011 and $411,624 for the three months ended June 30, 2010, representing a decrease of $48,954 or 12%.  For the six months ended June 30, 2010, research and development expenses were essentially flat. The decrease in research and development expenses during the three months ended June 30, 2011 was primarily due to lower project costs during the second quarter of 2011 as compared with the prior year.  Development project costs were higher in 2010 due to the costs associated with developing our 3DHD Vision System which was completed in late 2010.  The decrease in project costs were partially offset by increased patent application and filing costs.

General and Administrative Expense.  General and administrative expenses include costs for administrative personnel, legal and accounting expenses, and various public company expenses. General and administrative expenses were $427,272 for the three months ended June 30, 2011 compared with $379,538 for the three months ended June 30, 2010, representing an increase of $47,734 or 13%. General and administrative expenses were $861,137 for the six months ended June 30, 2011 compared with $762,574 for the six months ended June 30, 2010, representing an increase of $98,563 or 13%. The increase during both the three and six month periods ended June 30, 2011 was primarily due to an increase in  personnel costs, travel expense and public company related costs.

Other Income and Expense.  During the three months ended June 30, 2011, other income and expense totaled to income of $344   compared with income of $724 for the same period in 2010.  During the six months ended June 30, 2011, other income and expense totaled to income of $70,522 compared with income of $760 for the same period in 2010.  During the first quarter of 2011, we recorded income of $69,952 related to compensation for the grant of a license to use a certain patent in the nonmedical markets and the sale of certain manufacturing assets related to such patent.  No such income was recorded during 2010. 
    
 
12

 
  
Operating Loss Before Non-Cash Charges

Management assesses operational performance and improvement by measuring and reporting our operating loss before noncash charges. Management believes this non-GAAP metric is useful in understanding our ability to generate cash, before consideration of working capital or capital expenditure needs.

A reconciliation of net loss in accordance with U.S. generally accepted accounting principles, or GAAP, to the non-GAAP measure of operating loss before non-cash charges is as follows:

   
Three Months Ended
 June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net loss, as reported
 
$
(860,128
)
 
$
(450,850
)
 
$
(1,306,383
)
 
$
(746,300
)
Adjustments:
                               
Total other (income)/expense
   
(344
)
   
(724
)
   
(70,522
)
   
(760
)
Operating loss, as reported
   
(860,472
)
   
(451,574
)
   
(1,376,905
)
   
(747,060
)
Non-cash stock option expense
   
103,628
     
98,419
     
199,925
     
194,029
 
Depreciation and amortization
   
91,058
     
28,149
     
169,633
     
58,666
 
Operating loss before non-cash charges
 
$
(665,786
)
 
$
(325,006
)
 
$
(1,007,347
)
 
$
(494,365
)
  
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 
Use of Estimates and Critical Accounting Policies

This section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” discusses our financial statements, which have been prepared in accordance with GAAP.

The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions, including those related to accounts receivable, inventories, income taxes, long lived asset valuation, revenue recognition, and stock-based compensation. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
Management believes the following critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our Financial Statements.
  
Accounts Receivable. Accounts receivable are carried at the original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables, and changes in payment histories

Inventories. Parts and supply inventories are stated at the lower of cost or market. Cost is determined using the standard cost method which approximates actual cost. Work-in-process and finished goods are stated at the lower of the accumulated manufacturing costs or market. We reduce the stated value of our inventory for obsolescence or impairment in an amount equal to the difference between the cost of the inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional reductions in stated value may be required.

Income Taxes. In determining the carrying value of our net deferred tax assets, we must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, we may record a reduction in the valuation allowance, resulting in an income tax benefit in our Statements of Operations. Management evaluates the realizability of the deferred tax assets and assesses the valuation allowance quarterly.

We are primarily subject to U.S. federal and state income tax. Tax years subsequent to December 31, 2007 remain open to examination by U.S. federal and state tax authorities. In addition, our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of June 30, 2011, we had no accruals for interest or penalties related to income tax matters.
  
 
13

 
  
Impairment of Long Lived Assets and Intangible Assets with Finite Lives. Property and equipment and intangible assets with finite lives are amortized using the straight line method over their estimated useful lives.  These assets are assessed for potential impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Conditions that would indicate impairment and trigger an assessment include, but are not limited to, a significant adverse change in the legal factors or business climate that could affect the value of an asset, an adverse action or assessment by a regulator or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. If, upon assessment, the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value of the asset. 

Revenue Recognition. Our revenues are derived from the sale of surgical visualization technology products to end users, distributors and original equipment manufacturers. Revenue from the sale of products is recognized when evidence of an arrangement exists, the product has been shipped, the selling price is fixed or determinable,  collection is reasonably assured and when both title and risk of loss transfer to the customer, provided that no significant obligations remain. The significant terms of our sales arrangements typically include upfront payments or credit terms not to exceed 60 days depending upon the creditworthiness of the customer.  The arrangements do not include right of return or price concessions and our post shipment obligations typically are limited to standard warranty for product defects.

For the sale of products and services as part of a multiple-element arrangement, we allocate revenue from multiple-element arrangements to the elements based on the relative fair value of each element. For sales of extended warranties with a separate contract price, we defer revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs.

Stock Based Compensation. The measurement and recognition of compensation expense for all share-based payment awards to employees and directors is based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. We use historical data among other information to estimate the expected price volatility, the expected annual dividend, the expected option life and the expected forfeiture rate.
     
 
14

 
  
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

ITEM 4.  CONTROLS AND PROCEDURES
 
Limitations on the Effectiveness of Controls

We seek to improve and strengthen our control processes to ensure that all of our controls and procedures are adequate and effective. We believe that a control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the controls system are met. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company will be detected.  

As set forth below in further detail, our principal executive officer and our principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our management evaluated, with the participation of our principal executive officer and our principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures as of June 30, 2011 are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) are accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
 
Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the last quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
     
 
15

 
 
PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims against us or our officer and directors in their capacity as such that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

ITEM 1A.  RISK FACTORS.

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K filed on February 24, 2011 in response to Item 1A. to Part 1 of Form 10-K.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
Activity under the Investment Agreement with Dutchess Opportunity Fund II, LP from April 1, 2011 through June 30, 2011 is as follows:

Settlement Date (A)
 
Shares sold
   
Net
 Proceeds
 
April 12, 2011
   
22,550
   
$
5,112
 
April 12, 2011
   
381,900
   
$
88,297
 
April 21, 2011
   
393,580
   
$
98,162
 
April 28, 2011
   
85,659
   
$
19,908
 
May 4, 2011
   
68,365
   
$
15,649
 
Total  April 1, 2011 through June 30, 2011
   
952,054
   
$
227,128
 

(A)
Settlement date corresponds to date that we received the net proceeds from Dutchess.

With respect to the sales of our common stock described above, we relied on the Section 4(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the shares. The shares were sold to an accredited investor.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

As of June 30, 2011, we do not have any senior securities outstanding.

ITEM 4.  [REMOVED AND RESERVED]

ITEM 5.  OTHER INFORMATION.

None.
     
 
16

 
  
ITEM 6.  EXHIBITS

Exhibit
Number
Exhibit
   
3.1
Certificate of Incorporation, as amended, of the Registrant dated January 4, 2008 (included as Exhibit 3.1 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, filed on March 31, 2008 and incorporated herein by reference).
   
3.2
Bylaws of the Registrant (included as Exhibit 3.3 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, filed on March 31, 2008 and incorporated herein by reference).
   
4.1
Certificate of Preferences, Rights and Limitations of Series B Variable Dividend Convertible Preferred Stock (included as Exhibit 4.01 to the Registrant’s Current Report on Form 8-K filed May 25, 2006, and incorporated herein by reference).
   
10.1
Viking Systems, Inc.’s Stock Incentive Plan, dated March 31, 2004 (included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 1, 2004, and incorporated herein by reference).
   
10.2
Viking Systems, Inc.’s 2004 Non-Employee Director Stock Ownership Plan dated December 29, 2005 (included as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 1, 2004, and incorporated herein by reference).
   
10.3
Executive Change of Control Agreement between the Registrant and John Kennedy, dated August 6, 2008 (included as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed August 11, 2008, and incorporated herein by reference).
   
10.4
Executive Change of Control Agreement between the Registrant and Robert Mathews, dated August 6, 2008 (included as Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed August 11, 2008, and incorporated herein by reference).
   
10.5
Lease between the Registrant and Robert F. Tambone as Trustee of MAT Realty Trust, dated September 23, 2004 (included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 1, 2004, and incorporated herein by reference).
   
10.6
First Amendment to Lease between the Registrant and Robert F. Tambone as Trustee of MAT Realty Trust, dated February 5, 2007 (included as Exhibit 10.18 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, and incorporated herein by reference).
   
10.7
Recapitalization Agreement between the Registrant and Securityholders, dated December 31, 2007 (included as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed January 7, 2008, and incorporated herein by reference).
   
10.8
Securities Purchase Agreement between the Registrant and various investors, dated January 4, 2008 (included as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed January 7, 2008, and incorporated herein by reference).
   
10.9
Executive Employment Agreement between the Registrant and William C. Bopp, dated January 4, 2008 (included as Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed January 7, 2008, and incorporated herein by reference).
   
10.10
Amendment to Executive Employment Agreement between the Registrant and William C. Bopp, dated February 27, 2008 (included as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed February 29, 2008, and incorporated herein by reference).
   
10.11
Investment Agreement between Viking Systems, Inc. and Dutchess Opportunity Fund, II, LP, dated January 7, 2010 (included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 7, 2010, and incorporated herein by reference).
   
10.12
Registration Rights Agreement between Viking Systems, Inc. and Dutchess Opportunity Fund, II, LP, dated January 7, 2010 (included as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 7, 2010, and incorporated herein by reference).
   
 
17

 
 
Exhibit
Number
Exhibit
   
10.13
Viking Systems, Inc.’s Amended 2008 Equity Incentive Plan (included as Exhibit 99.1 to the Registration Statement on Form S-8 filed January 15, 2010, and incorporated herein by reference).
   
10.14
Viking Systems, Inc.’s 2008 Non-Employee Directors' Stock Option Plan, dated January 18, 2008 (included as Annex B to the Registrant’s Schedule 14-C Information Statement filed April 10, 2008, and incorporated herein by reference).
   
10.15
Second Amendment to Lease between the Registrant and the Baltic Group, LLC, dated March 8, 2010 (included as Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the period ending March 31, 2010 filed on May 5, 2010 and incorporated herein by reference.)
    
10.16
Purchase Agreement by and between Viking Systems, Inc., Clinton Group, Inc., and other accredited investors, dated May 5, 2011 (included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 11, 2011 and incorporated herein by reference).
   
10.17
Registration Rights Agreement by and between Viking Systems, Inc., Clinton Group, Inc., and other accredited investors, dated May 5, 2011 (included as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 11, 2011 and incorporated herein by reference).
   
10.18
Form of Warrant (included as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed May 11, 2011 and incorporated herein by reference).
   
10.19
Amendment No. 1 to the Registration Rights Agreement by and between Viking Systems, Inc., Clinton Magnolia Master Fund, Ltd., and other accredited investors, dated May 26, 2011 (included as Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 filed on May 31, 2011, and incorporated herein by reference).
   
31.1
Certification of Principal Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes- Oxley Act of 2002 (included herewith).
   
31.2
Certification of Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002 (included herewith).
   
32.1
Certification of Principal Executive Officer and Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 (included herewith).
    
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
   
 
18

 
 
SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  
 
VIKING SYSTEMS, INC.
 
       
Date:  August 4, 2011
By:
/s/ John Kennedy
 
   
Chief Executive Officer
(Principal Executive Officer)
 
       
       
Date:  August 4, 2011
By:
/s/ Robert Mathews
 
   
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 
 
 
 
 
 
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