10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to             

Commission file number 1-11388

PLC Systems Inc.

(Exact name of registrant as specified in its charter)

Yukon Territory, Canada	04-3153858
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
459 Fortune Boulevard, Milford, Massachusetts	01757
(Address of principal executive offices)	(Zip Code)

(508) 541-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, no par value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o  No x

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  Noo

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock on June 30, 2012, was $5,881,127.  As of March 15, 2013, 54,722,410 shares of common stock, no par value per share, were outstanding and an additional 7,000,000 shares had been paid for and reserved for issuance but not yet issued.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2013 Annual Meeting  of Shareholders, are incorporated by reference in Part III of this annual report on Form 10-K.

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Statements containing terms such as “believes”, “plans”, “expects”, “anticipates”, “intends”, “estimates” and similar expressions contain uncertainty and are forward-looking statements.  Forward-looking statements are based on current plans and expectations and involve known and unknown important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.  Such important factors and uncertainties include, but are not limited to the considerations described in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”

PART I

Item 1.       Business

Overview

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. Our key strategic growth initiative is our newest product, RenalGuard®.

RenalGuard is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to high-risk patients during certain medical imaging procedures. It is believed that allowing contrast media to dwell in the kidneys of certain higher risk patients can lead to contrast-induced nephropathy (“CIN”), a potentially deadly form of acute kidney injury. By inducing and maintaining a high urine flow rate before, during and after these medical imaging procedures, we believe the incidence rates of CIN in at-risk patients can be reduced. RenalGuard facilitates this increased urine clearance automatically, enabling the body to more rapidly void the contrast media, thereby reducing its overall resident time and toxic effects in the kidney.

The RenalGuard System consists of a proprietary, patented console and accompanying single-use sets. RenalGuard operates by first collecting and measuring patient urine outputs and then in real-time precisely matching these urine outputs with a prescribed replacement fluid by means of intravenous infusion. With its automated matched fluid replacement capability, RenalGuard is intended to promote and maintain high urine outputs and minimize the risk to patients of over- or under-hydration during image-guided catheterization procedures where contrast media are routinely administered.

We obtained a CE Mark for RenalGuard in December 2007 and began our initial commercialization efforts in the European Union (“EU”) in Italy in April 2008. Since then, we have expanded our sales efforts for RenalGuard to other countries in the EU and additional countries around the world where we have received the necessary approvals to do so. In the U.S. we must first successfully complete a pivotal clinical study assessing the safety and effectiveness of RenalGuard in reducing the rates of CIN in at-risk patients and obtain United States of America (“U.S.”) Food and Drug Administration (“FDA”) pre-market approval in order to market RenalGuard. The first patient was enrolled in the U.S. pivotal study in January 2012.

Prior to February 1, 2011, in addition to advancing our RenalGuard program, we also were engaged in the manufacture and marketing of the CO2 Heart Laser System that cardiac surgeons use to perform carbon dioxide (CO2) transmyocardial revascularization, or TMR, to alleviate symptoms of severe angina. On February 1, 2011, we completed an asset sale transaction and sold our TMR business to Novadaq Corp. (“Novadaq”), a subsidiary of Novadaq Technologies Inc. [TSX: NDQ]. Novadaq acted as our exclusive distributor in the United States for our TMR business since being appointed to that role in March 2007.

The transaction, which was announced in November 2010, was approved by our shareholders at a special meeting on January 31, 2011 and the transaction closed on February 1, 2011. Novadaq paid $1 million in cash and assumed all our TMR service-related obligations, valued at approximately $614,000, in exchange for acquiring substantially all our TMR-related assets, including all regulatory approvals for the CO2 Heart Laser System, all manufacturing rights, substantially all product inventories and all equipment, intellectual property, clinical data and documentation related to our TMR business. The sale of the TMR business and the resultant gain on the transaction was recorded in our first quarter 2011 financial results.

RenalGuard Program

Our near term focus for our RenalGuard program is to (1) establish a broader distribution network in the  EU and countries outside the EU where we have the approval to market RenalGuard, (2) assist our distributors in their ongoing efforts to sell RenalGuard and increase adoption and use of our technology, (3) continue to move our US clinical trial forward by qualifying and signing up more sites and continuing to drive enrollment, (4) leverage the positive data from the two Italian studies that have been published to drive additional RenalGuard sales, and (5) while we have recently raised equity capital in February 2013,  we will continue to focus on raising additional capital needed for late 2013 and beyond.

1

U.S. Clinical Trial

RenalGuard is currently an investigational device in the U.S.  In December 2006, we received FDA approval to conduct our first human clinical trial utilizing RenalGuard under an investigational device exemption (“IDE”). This pilot clinical trial was designed to evaluate the safety of RenalGuard and the ability of our RenalGuard System to accurately measure and balance fluid inputs and outputs on up to 40 patients undergoing a catheterization imaging procedure where contrast media would be administered.

We enrolled a total of 23 patients in this pilot study. Based upon the positive safety data collected in the study and discussions with the FDA, we stopped enrolling new patients in the pilot study in November 2007.  We submitted an IDE supplement to the FDA in February 2008 seeking approval to move from our pilot study to a pivotal clinical trial to study the safety and effectiveness of RenalGuard in the prevention of CIN. In November 2008, the FDA granted us approval to begin our pivotal study, but we deferred commencing this study until we could raise the necessary additional capital needed to conduct the study.

With the funds obtained from the sale of our TMR business and the $4 million institutional financing we secured in February 2011, we reestablished our effort to start our US clinical study.

We modified the pivotal trial protocol based upon insights learned from the clinical trials of RenalGuard in Europe as well as other clinical developments since 2008.  In October 2011, we received final approval from the U.S. Food and Drug Administration (FDA) to commence the U.S. pivotal trial to study the efficacy of the Company’s RenalGuard Therapy® and RenalGuard System(TM) in the prevention of CIN using the modified protocol.

Our U.S. trial, the CIN-RG trial is a pivotal study under the supervision of principal investigators at Northwestern University Medical School, University of Vermont College of Medicine and Mount Sinai School of Medicine. It is designed as an adaptive, randomized controlled trial at up to 30 sites in the U.S. Enrollment in the trial will include at least 326 patients and potentially up to 652 patients, depending upon the outcome of a sample size re-estimation after 163 patients. The sample size re-estimation, often used in adaptive trials, enables investigators to ensure that the trial is sufficiently powered so that the final results are statistically meaningful. The first patient was enrolled in the CIN-RG trial at Mount Sinai Hospital in New York in January 2012. On the trial’s listing on ClinicalTrials.gov (http://www.clinicaltrials.gov/ct2/show/NCT01456013), we currently list 13 sites that are enrolling patients.

Italian Clinical Studies

The first of two investigator-sponsored studies in Italy, the MYTHOS trial, is a randomized, open-label controlled clinical trial conducted at the Centro Cardiologico Monzino-University of Milan (“CCM”) in Milan, Italy. The MYTHOS trial was designed to determine the safety and effectiveness of RenalGuard in preventing CIN in at-risk patients. The trial results were published in the Journal of the American College of Cardiology JACC — Cardiovascular Interventions in January 2012.

The trial data presented is on 170 enrolled patients with chronic kidney disease (“CKD”) who underwent elective or urgent percutaneous coronary interventions (PCI). The results indicate that patients who were at higher risk for renal failure and who were treated with RenalGuard while undergoing imaging procedures developed CIN at a rate 74% lower than those who were treated with overnight hydration. Developing CIN has been found to lead to a range of serious and potentially deadly outcomes in patients who already have compromised kidney function. The trial also found that patients treated with RenalGuard had significantly fewer in-hospital adverse events than those treated with overnight hydration.

The second investigator-sponsored study, the REMEDIAL II trial, was a multi-center, randomized, open-label controlled clinical trial based at the Clinica Mediterranea in Naples, Italy and three other hospitals in Italy.

The results of REMEDIAL II were presented at the American College of Cardiology’s annual conference in April 2011 and published in September 2011 in Circulation, a peer-reviewed journal of the American Heart Association.  In this trial, the investigators reported that patients treated with RenalGuard and N-acetylcysteine (NAC) developed CIN at a much lower rate than patients in the control group who were treated with an infusion of sodium bicarbonate and NAC. A combination of sodium bicarbonate and NAC remains the current standard of care for the prevention of CIN in many healthcare institutions worldwide. The results provided strong scientific data that RenalGuard Therapy® is more effective than sodium bicarbonate and N-acetylcysteine in preventing contrast-induced acute kidney injury (CI-AKI) in high-risk patients.

2

The lead author, Dr. Carlo Briguori, reported on data from 294 patients with CKD who underwent elective catheterization procedures.  The primary end point for the study used a definition of CIN as a rise in serum creatinine (SCr) of 0.3mg/dl over the patient’s baseline reading. The RenalGuard-treated group had a CIN incidence rate 46% lower than the control group using this definition of CIN. In secondary endpoints, Dr. Briguori also reported a 60% reduction in CIN in the RenalGuard-treated group compared to the control group when defining CIN as a 0.5mg/dl absolute rise in SCr and an 80% reduction of CIN in the RenalGuard-treated group over the control group when defining CIN as a 25% rise over baseline SCr.  Notably, the trial also found that RenalGuard Therapy significantly reduced the need for in-hospital dialysis in high risk patients. In the control group, seven patients (4.8%) required some level of dialysis, compared to only one patient (0.7%), or 85% fewer, in the RenalGuard-treated group required dialysis.

We hope that the scientific data from these published papers regarding MYTHOS and REMEDIAL II, will both increase the adoption rate of our RenalGuard technology and enable us to continue to raise the additional capital we will need to advance our RenalGuard program in the future.

CIN

The diagnosis and treatment of cardiovascular disease rely heavily on cardiovascular imaging.  Interventional cardiologists and radiologists are increasingly becoming involved at earlier stages in the management and treatment of patients suffering from cardiovascular disease, as noninvasive imaging and interventional treatment techniques, such as angioplasty procedures and stent placements, increase in demand and outpace the use of invasive surgical options.

We estimate that approximately seven million cardiovascular diagnostic and interventional imaging procedures are performed worldwide each year.  These less invasive, image-guided medical procedures require the use of an iodine-based radiocontrast media, or dye, to facilitate the capture and display of x-ray images. These contrast agents are known to be toxic to the kidneys, whose main function is to filter and remove wastes and fluids, such as this dye, from the body. Patients who undergo a diagnostic or interventional imaging procedure and who present themselves with a certain level of pre-existing impaired renal (kidney) function are especially susceptible to the toxic effects of these contrast agents and to developing CIN.

We believe CIN is a major and growing problem due to the increasing number of older patients, diabetics and patients with pre-existing renal impairment requiring interventional procedures that use radiographic contrast media. CIN is the third most common cause of in-hospital acute renal failure. It is associated with increased in-hospital mortality rates, and increases in long-term mortality, major in-hospital adverse cardiac events, and risk of renal dialysis therapy.  Any of these can result in prolonged hospital stays and increased medical costs.  We believe that approximately 10% to 20% of all patients undergoing image-guided cardiology and radiology procedures are at risk of developing CIN. The one year mortality rate for patients who develop CIN may be as high as 38%.

Potential Market Size

Based upon a market research study that was performed for us as well as other sources, we estimate that there are approximately 4 million diagnostic and interventional cardiology and radiology imaging procedures requiring the use of contrast agents that are performed annually in the U.S. alone, and an estimated 7 million worldwide.  Patients with other significant risk factors besides renal insufficiency, such as congestive heart failure, anemia, peripheral vascular disease, diabetes and being over the age of 75, are also at risk for developing CIN.  This population continues to grow. Specifically, the Heart Disease and Stroke Statistics — 2013 Update, or 2013 HSSU, which was published by the American Heart Association, estimates that there were 171 million individuals with diabetes worldwide in 2000 and that number is projected to rise to 366 million by 2030.  It is estimated that more than 26 million people in the U.S. have chronic kidney disease (CKD) and another 20 million are at increased risk for CKD.

At-risk patients with renal insufficiency are easily identified with a routine blood analysis involving the level of a waste product in the blood called serum creatinine and an industry-standard calculation called a estimated glomerular filtration rate (eGFR).  eGFR can be calculated using serum creatinine concentration and some or all of the following variables: sex, age, weight and race, as suggested by the National Kidney Foundation.  A decrease in creatinine clearance is generally accepted as a good indicator of kidney disease.  CIN is usually defined as an increase in serum creatinine of 25% over baseline within four days of a procedure where contrast is administered.

Of the estimated 7 million diagnostic and interventional imaging procedures performed worldwide each year that involve the use of contrast agents, we believe that 15% of the patients in these cases, or approximately 1 million patients, could be considered at-risk for CIN and thus benefit from the use of RenalGuard.

3

RenalGuard Sales and Marketing

We obtained a CE Mark for RenalGuard in December 2007 and began our initial commercialization efforts in the EU in Italy in April 2008. Since then, we have expanded our sales efforts for RenalGuard to other countries in the EU and additional countries around the world where we have received the necessary approvals to do so.

To date we have relied exclusively on independent distributors to sell our product into international markets and we expect to continue this sales strategy for the foreseeable future. Distributors who we contract with to market our product typically also represent at least several other company product lines and have demonstrated experience selling their full spectrum of products into cardiovascular centers throughout their territory. Our distribution agreements typically set forth minimum annual purchase requirements over the term of the contract, although these annual minimums may be waived by us in our sole discretion. Typically our distribution agreements provide our distributors the exclusive right to market our products in a specific territory and generally have a duration that ranges between three and five years.

Our international distributors determine the programs, including sale, lease, rental and usage-based offerings, which they believe will be most effective in selling our products to hospitals in their territory. Our distributors’ marketing efforts are directed primarily at interventional cardiologists and nephrologists, whose influence are both believed to be critical in a hospital’s decision to acquire our products.

In the U.S., we must first successfully complete a pivotal clinical study assessing the safety and effectiveness of RenalGuard in reducing the rates of CIN in at-risk patients and obtain FDA pre-market approval in order to market RenalGuard.

RenalGuard System and Therapy

RenalGuard is designed to reduce the toxic effects that contrast media can have on the kidneys, which may lead to a reduction in the incidence of CIN in at-risk patients.  RenalGuard Therapy® is based upon existing published literature, including the industry-recognized PRINCE study, that supports the theory that inducing and maintaining high urine output through the kidneys allows the body to rapidly eliminate contrast, reducing its toxic effects.

Our RenalGuard System is a real-time automated measurement and matched fluid replacement device.  The system is comprised of a fluid balancing system and a console with a delivery mechanism for sterile replacement fluid, including detectors, monitors and alarms. It is a closed loop system where the urine produced by the patient through a standard Foley-type catheter is continuously measured. A unique sterile disposable kit is required for each procedure.

Our RenalGuard Therapy entails the use of a standard FDA-approved loop diuretic that induces the required high urine output that is measured and in real-time replaced with an equal volume of sterile solution, such as saline, by the RenalGuard System.  This matched fluid replacement is intended to minimize the risk of over- or under-hydration, which can lead to increased patient risks, including pulmonary edema — a swelling and/or fluid accumulation in the lungs that leads to impaired gas exchange and may cause respiratory failure.

Potential Benefits of RenalGuard

We are attempting to bring RenalGuard to market as the first product to address this problem.  We believe it is a safe, innovative technology capable of achieving significant market adoption due to its evidence-based therapy and straightforward integration into hospital environments where contrast agents are routinely used.

Evidence-based Therapy

The effectiveness of RenalGuard Therapy has now been demonstrated in two randomized, open-label controlled clinical trials.  Both of these studies reported that inducing very high urine outputs with precise matching of intravascular volume significantly reduced the incidence of CIN in at-risk patients.

Straightforward Hospital Integration

We believe RenalGuard can easily be integrated into hospital environments where contrast agents are routinely used.  It leverages existing hospital resources to protect at-risk patients within the current therapy window. RenalGuard is designed to be simple to operate and to have features that are similar to devices currently used by hospital staff, and because it is automated, it lessens the burden on staff to constantly monitor patients.

4

Other Potential Markets

We plan to focus our short-term marketing efforts on the interventional cardiovascular and radiology markets and the reduction of CIN in imaging procedures requiring the use of contrast. In addition, we believe that our RenalGuard Therapy and System may be attractive to hospitals as an automated fluid balancing system that could be used in certain intensive patient monitoring settings within the hospital, such as the intensive care unit, or where fluid management is critical, such as in post-kidney transplant patients where the replacement of fluid losses is necessary to avoid the risk of damage to the transplanted kidney.

Current Treatment Methods for CIN

The only clinically accepted and routinely utilized preventive measure for patients at risk for CIN is pre- and post- procedure overnight hydration, which is inconvenient, expensive and time-consuming for hospital staff. There is currently no FDA-approved device or drug for CIN prevention. Due to the attractiveness of the potential market, we believe that there are a number of other companies developing or investigating potential new CIN preventive drugs, devices and therapies.

Preventive measures being used in clinical practice today include:

Mucomyst®

N-acetylcysteine (Mucomyst®) is both a renal vasodilator and antioxidant.  It is prescribed by a doctor prior to the start of an interventional procedure and is taken by the patient in prearranged doses that may start the day before the procedure.  This therapy is employed by many physicians due to an extremely low risk profile and cost.  A team of Brazilian researchers recently published data on the largest trial of Mucomyst to date, the ACT Trial. They reported that after studying Mucomyst in 2,308 patients, the rate of CIN was identical between the group of patients who received the drug and those who did not. While additional research is continuing into this therapy, the results of the ACT trial have reduced the use of Mucomyst as a preventative therapy at many centers.

Sodium bicarbonate

Sodium bicarbonate is a pre-mixed pharmaceutical solution that is given intravenously on the same day as the procedure, prior to the start.  A small number of published studies that have evaluated utilizing sodium bicarbonate as a preventive measure.  Meta-analysis of these studies and larger studies of the therapy have failed to demonstrate a clear benefit to sodium bicarbonate.  We believe that the lack of solid clinical evidence for this therapy has led to the a tapering off of the use of sodium bicarbonate at many hospitals.

Device-Based Competition

Benephit Catheter

In January 2009, AngioDynamics Inc. acquired certain assets of FlowMedica, Inc., including its Benephit® CV Infusion System, which is a catheter designed to deliver drugs and/or fluid directly to the renal arteries during an interventional procedure.  This system is FDA 510(k)-cleared and CE-marked for the infusion of physician-specified agents in the peripheral vasculature.  We believe market challenges for this approach may include the lack of clear supporting clinical data, concerns regarding complications of direct renal intervention and the cost of the catheter.

CINCOR System

Osprey Medical Systems has announced that it has received CE Mark for its CINCOR system and is seeking to begin their Pivotal US Trial in 2013.  CINCOR is a catheter based system that is designed to be placed in the coronary sinus. The system attempts to reduce the incidence of CIN by removing a fraction of the contrast from the patient’s blood as it flows through the coronary sinus. Osprey’s public statements list the CINCOR price as between $1500-$2000. We believe market challenges for this approach may include concerns regarding complications of placing a catheter in the coronary sinus, lack of clear supporting clinical data, and the significant cost of the system.  Additionally, published reports to date only indicate that CINCOR removes on average 32% of the contrast injected, which still allows a significant volume of potentially dangerous contrast to pass to the patient’s kidney.  While RenalGuard can be used in any procedure where iodinated contrast is used, CINCOR only works for coronary interventions, so the technology cannot be used in patients undergoing peripheral catheterizations, transcatheter aortic-valve implantation (TAVI), or contrast enhanced CT, all of which represent significant markets for RenalGuard.

5

Products and Customers

RenalGuard sales accounted for approximately 100% and 82% of our revenues for the years ended December 31, 2012 and 2011, respectively.

Our distributor of RenalGuard in Italy, Artech, accounted for 35% and 46% of our total revenues in the years ended December 31, 2012 and 2011, respectively and 35% and 56% of our RenalGuard revenues in the years ended December 31, 2012 and 2011, respectively.  Discomed, our distributor in Brazil, accounted for 29% of our total revenues in the year ended December 31, 2012 and 0% of our revenues in the year ended December 31, 2011. ACIST, our distributor in France and Germany, accounted for 10% of our total revenues in the year ended December 31, 2012 and 14% of our RenalGuard revenues in the year ended December 31, 2011.

Manufacturing

In 2011 we began manufacturing our RenalGuard consoles by a contract manufacturer located in New England. Our RenalGuard sterile disposable kit continues to be manufactured for us by a separate outside contract manufacturer also located in New England.  We believe that our outside contract manufacturers will have sufficient capacity to meet market demands anticipated in the coming year for our RenalGuard product.

Our facilities and those of our outside contract manufacturers are subject to periodic inspection by regulatory authorities to ensure compliance with FDA and EU quality system regulations.

Government Regulation

RenalGuard is subject to extensive regulation by the FDA and other regulatory authorities in the U.S. and abroad.  The Federal Food, Drug, and Cosmetic Act (the “FDC Act”) and other federal and state statutes and regulations govern the research, design, development, manufacturing, preclinical and clinical testing, installation, storage, packaging, recordkeeping, servicing, labeling, distribution and promotion of medical devices in the U.S.

As a device manufacturer, we are also required to register with the FDA.  As such, we are subject to inspection on a routine basis for compliance with the FDA’s Quality Systems regulations.  These regulations require that we manufacture our products and maintain our documents in a prescribed manner with respect to manufacturing, testing and control activities.  Further, we are required to comply with various FDA requirements for reporting.  The FDC Act and medical device reporting regulations require that we provide information to the FDA on deaths or serious injuries alleged to have been caused or contributed to by the use of our products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur.  The FDA also prohibits an approved device from being marketed for unapproved uses.  Our product promotion and advertising is subject to continuing FDA regulation.  The failure to comply with the applicable regulatory requirements may subject us to a variety of administrative or judicially imposed sanctions, including the FDA’s refusal to approve pending or supplemental applications, withdrawal of an approval or clearance, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, and civil and criminal penalties against that company or its officers, directors or employees.  Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products and medical devices.  In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products.  It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

Various foreign countries in which our products are or may be sold impose additional or different regulatory and testing requirements. The international regulatory approval process varies from country to country and is subject to change in a given country as regulatory requirements change.  Thus, the time required for an approval may differ and there can be substantial delays in obtaining approval after the relevant applications are filed.  There is no assurance that foreign regulatory authorities will approve the use or sale of our products in a particular country on a timely basis, or at all.

6

Proprietary Processes, Patents, Licenses and Other Rights

It is our practice to file patent applications to protect our technology, inventions and product improvements. We also rely on trade secret protection for certain confidential and proprietary information.

We have been issued 8 U.S. patents, 1 European patent, 1 Canadian patent and 1 Japanese patent related to our RenalGuard System and its use in preventing CIN.  The US patents have terms that expire from 2026 through 2029.

In addition, we currently have six patent applications pending at the U.S. Patent Office in connection with the prevention of CIN related to RenalGuard. We have international patent applications pending on five of these RenalGuard patents, including individual patent applications pending in the EU and Japan.

Although we believe our patents to be strong, litigation by a competitor seeking to invalidate these patents could have a material adverse effect on our business, financial condition and results of operations.  No assurance can be given that the existing patents will be held valid if challenged, that any additional patents will be issued or that the scope of any patent protection will exclude competitors.  The breadth of claims in medical technology patents involves complex legal and factual issues and therefore can be highly uncertain.

We also rely upon unpatented proprietary technology and trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties.  No assurance can be given that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop or otherwise acquire substantially equivalent proprietary technology and trade secrets or disclose such technology or that we can meaningfully protect our rights in such unpatented technology.  In addition, others may hold or receive patents that contain claims covering products developed by us.

We believe our patents to be valid and enforceable.  However, there has been substantial litigation regarding patent and other intellectual property rights in the medical device industry.  Litigation, which could result in substantial cost and diversion of our efforts, may be necessary to enforce our patents, to protect our trade secrets, to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others.  Adverse determinations in litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing, selling or using our products, any of which could have a material adverse effect on our business, financial condition and results of operations.

Research and Development

Research and development expenses were approximately $2,031,000 and $1,212,000 for the years ended
December 31, 2012 and 2011, respectively.  Our current and near term development efforts will be focused exclusively on advancing our RenalGuard program.

We continue to monitor technologies that may be applicable to the market for CIN prevention.  No assurance can be given that our research and development goals will be implemented successfully.

Employees

As of March 25, 2013, we had 8 full-time employees worldwide, including our executive officers. Of these, four are in general and administrative positions, two are involved in sales and customer support, one is involved in clinical/research and development and one is involved in manufacturing/regulatory affairs.  None of our employees are represented by a union.  We consider our relationship with our employees to be good.

Company Information

We were incorporated in British Columbia, Canada on March 3, 1987.  We transferred our jurisdiction of incorporation to the Yukon Territory of Canada in March 1999.  Our principal offices are located at 459 Fortune Boulevard, Milford, Massachusetts 01757.  Our telephone number is (508) 541-8800.  Our Internet address is www.plcmed.com.  As used herein, the references to PLC, we, our and the Company mean, unless the context requires otherwise, PLC and its subsidiaries, PLC Medical Systems, Inc. and PLC Systemas Medicos Internacionais (Deutschland) GmbH.

7

Item 1A.    Risk Factors

Pursuant to the instructions to Item 1A. of Form 10-K, we are not required to provide this information because we are a smaller reporting company.

Item 1B.    Unresolved Staff Comments

Not applicable.

Item 2.       Properties

We maintain our principal executive offices and conduct our operations in 6,000 square feet of leased space in Milford, Massachusetts.  The lease on this space expires on August 31, 2014. The total base rental payments for the years ending December 31, 2013, and 2014 are $41,000 and $30,000, respectively.  We are also responsible for certain operating and maintenance costs and real estate taxes.

Item 3.       Legal Proceedings

We are not presently involved in any material litigation proceedings.

Item 4.       Mine Safety Disclosures

Not applicable.

PART II

Item 5.       Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Since November 17, 2008, our common stock has been quoted on both the Pink Sheets and the OTC Bulletin Board (the “OTCBB”) under the symbol “PLCSF”.  On March15, 2013, the last quoted sale price of our common stock was $0.21 per share.

The following table sets forth the highest and lowest of any bid price for our common stock on the Pink Sheets or the OTCBB.  Any bid price listed represents inter-dealer quotations without retail markup, markdown or commission and may not necessarily represent actual transactions.

2011	High		Low
First Quarter	$	0.17	$	0.06
Second Quarter	$	0.24	$	0.12
Third Quarter	$	0.16	$	0.07
Fourth Quarter	$	0.20	$	0.08

2012	High		Low
First Quarter	$	0.35	$	0.10
Second Quarter	$	0.34	$	0.16
Third Quarter	$	0.30	$	0.15
Fourth Quarter	$	0.24	$	0.13

As of March 15, 2013, there were 646 record holders of our common stock.  We believe that there are approximately 4,748 beneficial owners of our common stock.

Dividends

We have never paid cash dividends.  We currently intend to retain all future earnings, if any, for use in our business and we do not anticipate paying any cash dividends in the foreseeable future. The terms of our secured convertible debt financing prohibits the payment of any cash dividends without the prior written consent of the holders of a majority of

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the principal amount of the outstanding convertible notes.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2012:

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, and other rights	(b) Weighted-average exercise price of outstanding options, and other rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders(1)	5,592,350	$	0.21	1,770,467	(2)
Equity compensation plans not approved by security holders	—	—		—
Total	5,592,350	$	0.21	1,770,467

(1)Consists of the following equity compensation plans: (i) 2000 Employee Stock Purchase Plan, as amended (the “2000 ESPP”); (ii) 2000 Equity Incentive Plan; and (iii) 2005 Stock Incentive Plan.

(2)Includes 294,461 shares issuable under the 2000 ESPP, including shares issuable in connection with the current offering period, which ends on May 31, 2013.

Canadian Tax Matters

This summary is applicable to a holder or prospective purchaser of our common stock who (i) is not (and is not deemed to be) a resident in Canada, (ii) does not (and is not deemed to) use or hold the common stock in, or in the course of, carrying on a business in Canada, (iii) is not an insurer that carries on an insurance business in Canada and elsewhere, and (iv) holds the common stock as capital property.

This summary is based on the current provisions of the Income Tax Act (Canada), the regulations thereunder and the Canada — United States Income Tax Convention (1980), as amended (the “Tax Convention”).  This summary is not exhaustive of all possible Canadian federal income tax consequences and does not take into account provincial, territorial or foreign income tax considerations.  This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder of the common stock and no representation with respect to Canadian federal income tax consequences to any holder of common stock is made herein.  Accordingly, prospective purchasers and holders of the common stock should consult their own tax advisers with respect to their individual circumstances.

Sales or Other Dispositions of Shares

A capital gain realized on the disposition of common stock by a person resident in the U.S. (a “non-resident”) will not be subject to tax under the Income Tax Act (Canada) unless the shares held by the non-resident are “taxable Canadian property” at the time of disposition.  In general, common stock will be taxable Canadian property if the particular non-resident used (or in the case of a non-resident insurer, used or held) the common stock in carrying on business in Canada or where at any time during the five-year period immediately preceding the realization of the gain, not less than 25% of the issued and outstanding shares of any class or series of shares of the company, which were listed on a prescribed stock exchange, were owned by the particular non-resident, by persons with whom the particular non-resident did not deal at arms’ length, or by any combination thereof.  The AMEX, but not the OTCBB, is a prescribed stock exchange for the purposes of the Income Tax Act (Canada).  If common stock constitutes taxable Canadian property, relief nevertheless may be available under the Tax Convention.  Under the Tax Convention, gains from the alienation of common stock owned by a non-resident who has never been resident in Canada generally will be exempt from Canadian capital gains tax if the shares do not relate to a permanent establishment or fixed base which the non-resident has or had in Canada, and if not more than 50% of the value of the shares was derived from real property situated in Canada.  With regard to a non-resident qualifying for benefits under the Tax Convention, it is the Canada Revenue Agency’s published administrative position that certain entities that are treated as being fiscally transparent for U.S. federal income tax purposes (i.e., limited liability companies) will not qualify as residents of the U.S. for the purposes of the Tax Convention.

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Taxation of Dividends on Common Stock

In the event that dividends on our common stock are paid, credited or deemed to be paid or credited to a non-resident, the non-resident will be subject to Canadian withholding tax at a rate of 25% of the gross amount of the dividend.  Under the Tax Convention, the withholding tax rate is reduced to 15% of the gross amount of the dividend.  Also under the Tax Convention, dividends may be exempt from Canadian withholding tax if paid to certain non-residents (i.e., certain tax exempt organizations).  Prospective purchasers and holders of our common stock should consult their own tax advisors with regard to any possible exemption from withholding tax on dividends paid on our common stock.

Passive Foreign Investment Company Implications

Because we are incorporated outside the U.S., and our cash and investments are significant to our total assets, we must monitor rules regarding possible classification as a passive foreign investment company under U.S. Federal tax rules. While currently not classified as such, future classification as a passive foreign investment company could result in certain adverse tax consequences including, but not limited to, the allocation of a portion of our taxable income to our shareholders.

Item 6.Selected Financial Data

Pursuant to Item 301(c) of Regulation S-K, we are not required to provide this information because we are a smaller reporting company.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. Our key strategic growth initiative is our newest marketable product, RenalGuard.

RenalGuard is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. It is believed that allowing contrast media to dwell in the kidneys of certain higher risk patients can lead to CIN, a potentially deadly form of acute kidney injury. By inducing and maintaining a high urine flow rate before, during and after these medical imaging procedures, we believe the incidence rates of CIN in at-risk patients can be reduced. RenalGuard facilitates this increased urine clearance automatically, enabling the body to more rapidly void the contrast media, thereby reducing its overall resident time and toxic effects in the kidney.

The RenalGuard System consists of a proprietary console and accompanying single-use sets. RenalGuard operates by first collecting and measuring patient urine outputs and then in real-time precisely matching these urine outputs with a prescribed replacement fluid by means of intravenous infusion. With its automated matched fluid replacement capability, RenalGuard is intended to promote and maintain high urine outputs and minimize the risk to patients of over- or under-hydration during image-guided catheterization procedures where contrast media are routinely administered.

We obtained a CE Mark for RenalGuard in December 2007 and began our initial commercialization efforts in the EU in Italy in April 2008. We are now marketing RenalGuard in several additional countries around the world. In the U.S. we must first successfully complete a pivotal clinical study assessing the safety and effectiveness of RenalGuard in reducing the rates of CIN in at-risk patients and obtain FDA pre-market approval in order to market RenalGuard. The first patient was enrolled in the U.S. pivotal study in January 2012.

Our distributor of RenalGuard in Italy, Artech, accounted for 35% and 46% of our total revenues in the years ended December 31, 2012 and 2011, respectively and 35% and 56% of our RenalGuard revenues in the years ended December 31, 2012 and 2011, respectively. Discomed, our distributor in Brazil, accounted for 29% of our total revenues in the year ended December 31, 2012 and 0% of our revenues in the year ended December 31, 2011. ACIST, our distributor in France and Germany, accounted for 10% of our total revenues in the year ended December 31, 2012 and 14% of our RenalGuard revenues in the year ended December 31, 2011.

Our management reviews a number of key performance indicators to assist in determining how to allocate resources and run our day-to-day operations. These indicators include (1) actual prior quarterly sales trends, (2) projected sales for the next four quarters, (3) research and development progress as measured against internal project plan objectives,

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(4) budget to actual financial expenditure results, (5) inventory levels (both our own and our distributors’), and (6) short term and long term projected cash flows of the business.

Critical Accounting Policies and Estimates

Our financial statements are based upon the application of significant accounting policies, many of which require us to make significant estimates and assumptions (see Note 2 to the Consolidated Financial Statements).  We believe that the following are some of the more material judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Inventories

Inventories are stated at the average cost (computed on a first-in, first-out method) of market value and include allocations of labor and overhead.  We regularly review slow-moving and excess inventories, and write down inventories to net realizable value if the ultimate expected proceeds from the disposals of excess inventory are less than the carrying cost of the inventory.

Accounts Receivable

Accounts receivable are stated at the amount we expect to collect from the outstanding balances.  We continuously monitor collections from customers, and we maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that we have identified.  Historically, we have not experienced significant losses related to our accounts receivable. Collateral is not generally required. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Warranty and Preventative Maintenance Costs

We warranty our products against manufacturing defects under normal use and service during the warranty period. We obtain similar warranties from a majority of our suppliers.

We evaluate the estimated future unrecoverable costs of warranty and preventative maintenance services for our installed base of RenalGuard consoles and single-use sets on a quarterly basis and adjust our warranty reserve accordingly. We consider all available evidence, including historical experience and information obtained from supplier audits. Historically, we have not experienced significant costs related to warranty and preventative maintenance.

Valuation of Convertible Notes and Warrant Liabilities

The valuation of our convertible notes and our warrant liabilities as derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

Revenue Recognition

We recognize revenue when the following basic revenue recognition criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. We assess credit worthiness of customers based upon prior history with the customer and assessment of financial condition. Our shipping terms are customarily Free On Board (“FOB”) shipping point.

We generally record product revenue, including sales of RenalGuard consoles and single-use sets at the time of shipment, if all other revenue recognition criteria have been met.  As of December 31, 2012 and 2011, we had deferred revenue balances of $317,000 and $277,000, respectively, related to shipments to our distributor in Italy, Artech, because not all revenue recognition criteria were met.  During the years ended December 31, 2012 and 2011, we recognized $381,000 and $0, respectively, in revenue of previously deferred upon the receipt of cash.

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Results of Operations

Results for the past two years and the related percent of total revenues were as follows:

	2012			2011			Increase/(decrease) over 2011
	$			$			$			%
	(dollars in thousands)
Total revenues	$	1,080		$	671		$	409		61	%
Total cost of revenues	541			426			115			27
Gross profit	539			245			294			120
Selling, general and administrative expenses	2,633			2,445			188			8
Research and development expenses	2,031			1,212			819			68
Total operating expenses	4,664			3,657			1,007			28
Gain on the sale of assets	—			(40		)	40			100
Loss from continuing operations	(4,125		)	(3,372		)	(753		)	22
Interest expense	(555		)	(396		)	159			40
Interest income	—			10			(10		)	(100	)
Foreign currency transaction gains	14			—			14			100
Financing costs associated with convertible notes	(80		)	(530		)	450			(85	)
Change in fair value of warrant liabilities	(1,617		)	(808		)	809			100
Change in fair value of convertible notes	(2,024		)	(1,894		)	130			7
Total other expense	(4,262		)	(3,618		)	644			18
Net loss from continuing operations, before income taxes	(8,387		)	(6,990		)	1,397			20
Benefit for income taxes from continuing operations	—			492			(492		)	(100	)
Net loss from continuing operations, net of income taxes	(8,387		)	(6,498		)	1,889			29
Income from discontinued operations, net of income taxes	—			53			(53		)	(100	)
Gain on sale of discontinued operations, net of income taxes	—			687			(687		)	(100	)
Net income from discontinued operations	—			740			(740		)	(100	)
Net Loss	$	(8,387	)	$	(5,758	)	$	2,629		46	%

Product Sales

Revenues increased $409,000 or 61% in 2012 as compared to 2011. RenalGuard Console sales increased $357,000 or 92% in 2012 as compared to 2011 due to a higher volume of RenalGuard consoles sold to international distributors. RenalGuard single use set revenues increased $52,000 or 18% in 2012 as compared to 2011 due to a higher volume of RenalGuard single-use sets sold to international distributors.  As of December 31, 2012 and 2011, we had deferred revenue balances of $317,000 and $277,000, respectively, related to shipments to our distributor in Italy, Artech, because not all revenue recognition criteria were met. During 2012 we recognized revenue of $381,000, a portion of which was previously deferred in 2011 and we expect to recognize the remaining deferred revenue in 2013.

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Gross Profit

Gross profit was $539,000 or 50% of total revenues, in 2012, as compared with gross profit of $245,000, or 37% of total revenues, in 2011.  Gross margin generated from the low volume of OEM and RenalGuard revenues was sufficient to offset the fixed manufacturing costs incurred during 2012 and 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenditures increased 8% in 2012 as compared to 2011.  The increase was due to stock based compensation costs in 2012 compared to 2011 mainly due to the issuance of restricted shares of stock during the year of $464,000.  This is offset by lower compensation related costs, reflecting the decrease in headcount associated with our 2011 workforce reductions as well as lower stock based compensation expenses other than for the restricted shares which were issued during the year.

Research and Development Expenses

Research and development expenditures increased 68% in 2012 as compared to 2011 due to RenalGuard U.S. clinical trial costs.

As we continue our U.S clinical trial for our RenalGuard program, we expect our Research and development expenses to significantly increase in 2013.

Gain on Sale of Assets

We recorded a gain on the sale of assets of $0 in 2012 and $40,000 in 2011 related to the sale of our OEM surgical tube business.

Other Income (Expense)

In February 2011, the Company entered into a Securities Purchase Agreement and a 5% Senior Secured Convertible Debenture Agreement as described in Note 10 of the Consolidated Financial Statements. In July 2012, the Company entered into an Amendment to the Securities Purchase Agreement and 5% Senior Secured Convertible Debenture Agreement as described in Note 10 of the Consolidated Financial Statements.  As a result of these two transactions, interest expense on the Convertible Notes and Second Tranche Convertible Notes of $555,000 in the year ended December 31, 2012, and $396,000 in the year ended December 31, 2011, was recorded.  In addition, financing costs associated with Second Tranche Convertible Notes of $85,000 was recorded in the year ended December 31, 2012 and financing costs associated with the convertible note of $530,000 was recorded in the year ended December 31, 2011.

The Company recorded other expense of $1,617,000 in the year ended December 31, 2012 as compared to $808,000 in the year ended December 31, 2011, as a result of a fair value adjustment related to the Warrant Liabilities as well as the additional expense for the fair value adjustment for the 2012 Warrants entered into in July 2012. The Company recorded other expense of $2,024,000 in the year ended December 31, 2012 as compared to other expense of $1,894,000 in 2011 as a result of a fair value adjustment related to the Convertible Notes as well as the additional expense and fair value adjustment for the Second Tranche Convertible Notes entered into in July 2012.

Net Loss

In 2012, our net loss increased by $2,629,000 primarily due to increased clinical trial costs and other expense related to the fair value adjustments of our Convertible Notes and Warrant Liabilities.

Discontinued Operations

On November 5, 2010, we entered into an agreement to sell our TMR business to Novadaq. This transaction was approved by our shareholders at a special meeting on January 31, 2011 and the transaction closed on February 1, 2011.

As discussed in Note 9 to our consolidated financial statements, the operating results of these operations, including those related to prior periods, have been reclassified from continuing operations to discontinued operations in our consolidated financial statements for 2011.

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Liquidity and Capital Resources

We compete in the highly regulated and competitive medical device market place where products can take significant time to develop, gain regulatory approval and then introduce to distributors and end users. We have incurred recurring quarterly operating losses over the past few years as we have worked to bring our RenalGuard System through development and initial commercialization efforts outside the United States. We expect such operating losses will continue until such time, if ever, that RenalGuard product sales increase sufficiently to generate profitable results.

Under the terms of the Securities Purchase Agreement, we had the opportunity to raise up to an additional $2 million from the Holders of the Convertible Notes in two separate $1 million tranches, based upon meeting certain operational milestones within certain periods of time. The deadline for achieving the operational milestones for the first $1 million tranche expired in February 2012 without our achieving such milestones; however, the investors agreed to waive both the deadline and the achievement of these milestones as a condition for the investment of the first additional $1 million and invested such funds in July 2012.  On July 2, 2012 we entered into an Amendment and Waiver to Securities Purchase Agreement to amend our Securities Purchase Agreement to provide for the issuance of (i) an additional $1,000,000 of 5% Senior Secured Convertible Debentures maturing on July 2, 2015, (ii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.15 per share and (iii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.25 per share.  See Note 10 to our consolidated financial statements for additional disclosure surrounding this amendment.

On January 16, 2013 we entered into an Amendment and Waiver to Securities Purchase Agreement to amend our Securities Purchase Agreement to provide for the issuance of (i) an additional $250,000 of 5% Senior Secured Convertible Debentures maturing on January 16, 2016 (ii) warrants exercisable for a period of five years to purchase up to 2,500,000 shares of common stock at an exercise price of $0.15 per share and (iii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.25 per share.

On February 22, 2013, we entered into a Securities Purchase Agreement with a number of accredited investors, whereby we sold an aggregate of 26,733,333 shares of common stock and warrants to purchase an additional 26,733,333 shares of common stock (the “Warrants”) with gross proceeds of $4,010,000 to these accredited investors. We intend to utilize the proceeds of the private placement for general working capital purposes, to pay for investor relations services, for payment of fees to Palladium Capital, LLC, the exclusive placement agent, and for legal, blue sky and related expenses.  After payment of the placement agent fees and these other expenses, we anticipate net proceeds of approximately $3.5 million.

Cash and cash equivalents totaled $258,000 as of December 31, 2012, a decrease of $2,327,000 from $2,585,000 as of December 31, 2011. We have historically funded our working capital requirements through cash received from public and private offerings of our common stock and to a lesser extent, through our sales of products and services. In February 2011, we sold our TMR business for $1 million in cash plus the relief of approximately $614,000 in service contract obligations, and we issued $4 million in senior secured convertible notes to an institutional investor pursuant to a Securities Purchase Agreement. We believe that our existing resources, based on our currently projected financial results, are sufficient to fund operations through the third quarter of 2013. Based upon current and anticipated revenue projections from foreign sales of our RenalGuard product, and the anticipated costs of our U.S. clinical trial, we expect that we will need to raise additional capital during the remainder of 2013.

Our plan is to seek additional capital through the sale of equity and/or debt securities to fund operations. However, there can be no assurance that such capital will be available at all, or if available, that the terms of such financing will not be dilutive to our existing stockholders. The holders of the Convertible Notes have a right to participate in up to 50% of any subsequent financing. If we raise, additional funds through the issuance of equity or convertible debt securities, the percentage ownership of the company by our stockholders would be diluted. In addition, any debt securities would have rights, preferences and privileges senior to our common stock and we may sell equity or other convertible debt financing securities which would have rights, preferences and privileges senior to our common stock.

If we are unable to generate adequate cash flows or obtain sufficient additional funding when needed, we may have to take certain actions including, but not limited to, cutting back our operations, selling some or all of our assets, licensing potentially valuable technologies to third parties, and/or ceasing some or all of our operations.

Cash flows used in operating activities in the twelve months ended December 31, 2012 were $3,157,000 due to our net loss, partially offset by non-cash activity including 1) the change in fair value of convertible notes and warrant liabilities 2) non-cash interest expense; 3) depreciation expense; 4) stock-based compensation expense; and 5) financing costs associated with convertible notes. Cash flows from financing activities in the twelve months ended December 31, 2012

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were $920,000 from the issuance of $1 million in second tranche senior secured convertible notes to an institutional investor, net of financing costs. The effect of exchange rate changes was a $16,000 decrease in cash.

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  Statements containing terms such as “believes”, “plans”, “expects”, “anticipates”, “intends”, “estimates” and similar expressions contain uncertainty and are forward-looking statements.  Forward-looking statements are based on current plans and expectations and involve known and unknown important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.  Such important factors and uncertainties include, but are not limited to:

·We expect to incur significant net losses in future quarters;

·We have received a ‘going concern’ opinion in our consolidated financial statements indicating that our cash balance as of December 31, 2012, combined with recurring net losses and negative cash flows from operations, raises substantial doubt about our ability to continue as a going concern for the next 12 months. As noted above, we are investigating ways to raise additional capital to continue our operations;

·Our quarterly operating results have varied in the past and will continue to vary significantly in the future, causing volatility in our stock price;

·With the sale of our TMR business in February 2011, our future prospects are solely dependent upon the successful commercialization of RenalGuard. To date we have recorded only a limited amount of sales of RenalGuard, principally to a single customer in one country, Italy. Sales of RenalGuard alone are currently insufficient, and may never grow to be sufficient, to sustain our ongoing operations;

·Our ability to effectively market RenalGuard outside the U.S. is largely dependent on the reception of the results of the MYTHOS and REMEDIAL II investigator-sponsored clinical trials. We have no assurance that the results from these two trials will be viewed as clinically meaningful or that they will lead to increased sales of RenalGuard;

·We may never be successful in establishing a broad distribution channel for RenalGuard outside the U.S., and any distribution channel we may establish may never generate sufficient sales for us to attain profitability;

·If we are required to change our pricing models to compete successfully, our margins and operating results may be adversely affected;

·We commenced our U.S. pivotal clinical trial in 2012 to study RenalGuard, which is necessary to obtain FDA pre-market approval to market RenalGuard in the U.S. This study will take us a significant amount of time and money to complete and will require us to raise additional capital in the future. We can provide no assurance that we will be able to complete this study or, if we are able to complete it, that RenalGuard will be shown to be safe or effective in preventing CIN, or that the degree of any positive safety and efficacy results will be sufficient to either obtain FDA approval or otherwise successfully market our product. Furthermore, the completion of a U.S. pivotal clinical trial is dependent upon many factors, some of which are not entirely within our control, including, but not limited to, our ability to successfully recruit investigators, the availability of patients meeting the inclusion criteria of our clinical study, the competition for these particular study patients amongst other clinical trials being conducted by other companies at these same study sites, the ability of the sites participating in our study to successfully enroll patients in our trial, and proper data gathering on the part of the investigating sites. Should a U.S. pivotal clinical trial take longer than we expect, our competitive position relative to existing preventative measures, or relative to new devices, drugs or therapies that may be developed could be seriously harmed and our ability to successfully fund the completion of the trial and bring RenalGuard to market may be adversely affected;

·Our RenalGuard System has only had limited testing in a clinical setting in the United States and we may need to modify it substantially in the future for it to be commercially acceptable in the broader market;

·Any potential future modifications required to make RenalGuard commercially acceptable for the broader market may result in substantial additional costs and/or market introduction delays;

·Rapid technological change in the medical device industry could make our products obsolete and requires substantial research and development expenditures and responsiveness to customer needs.  We expect to continue to face substantial competition from different treatment modalities and if we do not compete effectively with these alternatives our market share may never grow and could decline;

·An inability to obtain third party reimbursement for RenalGuard could materially affect future demand for our product. We know of no existing Medicare coverage or other third party reimbursement that currently would be available in the U.S. to either hospitals or physicians that would help defray the additional cost that would result from the future purchase and/or use of our RenalGuard System. We also can provide no assurance that we will ever be able to obtain Medicare coverage or other third party reimbursement for the use of RenalGuard, which could materially and adversely affect the potential future demand for our product;

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·Securing patent protection over our intellectual property ideas in the field of CIN prevention is, we believe, critical to our plans to successfully differentiate and market our RenalGuard System and grow our future revenues. However, we can provide no assurance as to how strong our issued patents will prove to be. Furthermore we can provide no assurance that we will be successful in securing any additional patent protection for our intellectual property ideas in this field or that our efforts to obtain patent protection will not prove more difficult, and therefore more costly, than we are otherwise expecting. Finally, even if we are successful in securing patent protection for some of our pending patent applications, or for additional intellectual property ideas in this field, we cannot predict when in the future any such potential patents may be issued, how strong such additional patent protection will prove to be, or whether these patents will be issued in a timely enough fashion to afford us any commercially meaningful advantage in marketing our RenalGuard System against other potentially competitive devices;

·We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer needs;

·If we deliver systems with defects, our credibility may be harmed, sales and market and regulatory approvals acceptance of our systems may decrease and we may incur liabilities associated with those defects;

·If we require additional capital in the future, it may not be available, or if available, may not be on terms acceptable to us;

·We are exposed to various risks related to the regulatory environment for medical devices.  Compliance with medical device health and safety regulations may be very costly, and the failure to comply could result in liabilities, fines and cessation of our business;

·Our share price will fluctuate based upon a number of factors including, but not limited to:

·actual or anticipated fluctuations in our results of operations;

·changes in estimates of our future results of operations by us or securities analysts;

·announcements of technological innovations or new products or services by us or our competitors;

·changes affecting the medical device industry;

·announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

·additions or departures of key technical or management personnel;

·issuances of debt or equity securities;

·significant lawsuits, including patent or stockholder litigation;

·changes in the market valuations of similar companies;

·sales of our common stock by us or our stockholders in the future;

·dilution caused by the conversion of convertible debt currently outstanding or which may be issued to our current secured lender and its assignees as well as the exercise of warrants issued to this lender, as well as by the exercise of employee stock options or the issuance of shares on the vesting of restricted stock units;

·trading volume of our common stock; and

·other events or factors that may directly or indirectly affect the value or perceived value of our business and/or prospects, including the risk factors identified in this prospectus.

·We have pledged all of our assets to our secured debtholders. We are not currently permitted, nor do we currently intend, to pay any cash dividends on our common stock in the foreseeable future and therefore our shareholders may not be able to receive a return on their shares unless they sell them at an amount greater than the price paid for such shares;

·Our secured debtholders may be able to exert significant control over the company through restrictive covenants contained in such debt agreements or through the conversion to our equity securities of the convertible debt and warrants issued and/or issuable to these debtholders;

·Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.  Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our stock plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall;

·U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules; and

·Our ability to recruit and retain management and other qualified personnel is crucial to our ability to develop, market, sell and support our products.

Off-Balance Sheet Arrangements

None.

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Item 7A.Quantitative and Qualitative Disclosures about Market Risk

Pursuant to Item 305(e) of Regulation S-K, we are not required to provide this information because we are a smaller reporting company.

Item 8.Financial Statements and Supplementary Data

All financial statements and other information required to be filed hereunder are filed as Appendix A hereto, are listed under Item 15(a) and are incorporated herein by reference.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2012.  The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC’s”) rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based upon the evaluation of our disclosure controls and procedures as of December 31, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  The term “internal control over financial reporting” is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may

17

deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on this assessment, our management has concluded that, as of December 31, 2012, our internal control over financial reporting was effective based on those criteria.

This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Pursuant to Item 308(b) of Regulation S-K, we are not required to provide such an attestation report because we are a smaller reporting company.

PART III

Item 10.Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC in connection with our 2011 Annual Meeting of Shareholders (referred to as our Definitive Proxy Statement) under the captions “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

We have adopted a code of ethics that applies to all employees, including our principal executive officer, principal financial officer and principal accounting officer.  We undertake to provide a copy of our code of ethics to any person without charge, upon request to PLC Systems Inc., c/o Chief Financial Officer, 459 Fortune Boulevard, Milford, Massachusetts 01757.  We intend to disclose waivers and amendments of provisions of the code, if any, for our principal executive officer, principal financial officer and principal accounting officer and that relate to any element of the code of ethics definition enumerated in applicable SEC rules by posting such information, if any, on our Internet website, www.plcmed.com.

Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Proposal 1 - Election of Directors.”

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the captions “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management.”

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Corporate Governance.”

Item 14.Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Principal Accountant Fees and Services.”

18

PART IV

Item 15.     Exhibits and Financial Statement Schedules

(a)         Financial Statements. The following documents are filed hereto and are included as part of this annual report on Form 10-K.

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2012 and 2011	F-3
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	F-4
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012, and 2011	F-5
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012 and 2011	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	F-7
Notes to Consolidated Financial Statements	F-8

All schedules for which provision is made in the applicable accounting regulation of the SEC that are not required under the related instructions or are inapplicable have been omitted.

(b)         Exhibits.

The exhibits filed as part of this annual report on Form 10-K are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.

(c)          Financial Statement Schedules.

See Item 15(a) above.

19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		PLC SYSTEMS INC.
Date:	March 29, 2013	By:	/s/ Mark R. Tauscher
			Mark R. Tauscher
			President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Capacity	Date
/s/ Mark R. Tauscher	President, Chief Executive Officer	March 29, 2013
Mark R. Tauscher	and Director
	(Principal Executive Officer)
/s/ Gregory W. Mann	Chief Financial Officer	March 29, 2013
Gregory W. Mann	(Principal Financial and Principal
	Accounting Officer)
/s/ Edward H. Pendergast	Chairman of the Board	March 29, 2013
Edward H. Pendergast
/s/ Kevin J. Dunn	Director	March 29, 2013
Kevin J. Dunn
/s/ Benjamin L. Holmes	Director	March 29, 2013
Benjamin L. Holmes
/s/ Brent Norton, M.D.	Director	March 29, 2013
Brent Norton, M.D.

20

PLC SYSTEMS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2012 and 2011	F-3
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	F-4
Consolidated Statements of Comprehensive loss for the years ended December 31, 2012 and 2011	F-5
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012 and 2011	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	F-7
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PLC Systems Inc.:

We have audited the accompanying consolidated balance sheets of PLC Systems Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PLC Systems Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sustained recurring net losses and negative cash flows from continuing operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ McGladrey LLP

Boston, Massachusetts

March 29, 2013

F-2

PLC SYSTEMS INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2012 and 2011

(In thousands)

	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	258		$	2,585
Accounts receivable, net of allowance of $2 at December 31, 2012 and 2011, respectively	402			453
Inventories	182			238
Prepaid expenses and other current assets	178			233
Total current assets	1,020			3,509
Equipment, furniture and leasehold improvements, net	67			36
Other assets	4			4
Total assets	$	1,091		$	3,549
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	377		$	149
Accrued compensation	78			63
Accrued other	368			221
Deferred revenue	317			277
Total current liabilities	1,140			710
Convertible notes	8,098			5,327
Warrant liabilities	3,800			1,600
Commitments and Contingencies (Note 7)
Stockholders’ equity (deficit):
Common stock, no par value, unlimited shares authorized, 32,434 shares issued and outstanding at December 31, 2012 and 30,351 shares issued and outstanding at December 31, 2011	93,893			93,893
Additional paid in capital	1,540			996
Accumulated deficit	(107,114		)	(98,727		)
Accumulated other comprehensive loss	(266		)	(250		)
Total stockholders’ deficit	(11,947		)	(4,088		)
Total liabilities and stockholders’ deficit	$	1,091		$	3,549

The accompanying notes are an integral part of the consolidated financial statements.

F-3

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Years Ended December 31, 2012 and 2011

(In thousands, except per share data)

	2012			2011
Revenues	$	1,080		$	671
Cost of revenues	541			426
Gross profit	539			245
Operating expenses:
Selling, general and administrative	2,633			2,445
Research and development	2,031			1,212
Total operating expenses	4,664			3,657
Gain on the sale of assets	—			(40		)
Loss from continuing operations	(4,125		)	(3,372		)
Other income (expense):
Interest expense	(555		)	(396		)
Interest income	—			10
Foreign currency transaction gains	14			—
Financing costs associated with convertible notes	(80		)	(530		)
Change in fair value of warrant liabilities	(1,617		)	(808		)
Change in fair value of convertible notes	(2,024		)	(1,894		)
Total other expense	(4,262		)	(3,618		)
Net loss from continuing operations before income taxes	(8,387		)	(6,990		)
Benefit for income taxes from continuing operations	—			492
Net loss from continuing operations, net of income taxes	(8,387		)	(6,498		)
Discontinued operations:
Income from discontinued operations	—			53
Gain on sale of discontinued operations, net of provision for income taxes of $492	—			687
Net income from discontinued operations, net of income taxes	—			740
Net loss	$	(8,387	)	$	(5,758	)
Net loss per weighted average share, basic and diluted:
From loss on continuing operations attributable to common stockholders	$	(0.27	)	$	(0.21	)
From income on discontinued operations	0.00			0.00
From gain on sale of discontinued operations	0.00			0.02
Net loss attributable to common stockholders per weighted average share, basic and diluted	$	(0.27	)	$	(0.19	)
Weighted average shares outstanding:
Basic and diluted	31,139			30,351

The accompanying notes are an integral part of the consolidated financial statements.

F-4

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Years Ended December 31, 2012 and 2011

(In thousands)

	2012			2011
Net loss	$	(8,387	)	$	(5,758	)
Other comprehensive (loss) income:
Foreign currency translation adjustments	(16		)	88
Other comprehensive (loss) income	(16		)	88
Comprehensive loss	$	(8,403	)	$	(5,670	)

The accompanying notes are an integral part of the consolidated financial statements.

F-5

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For The Years Ended December 31, 2012 and 2011

(In thousands)

	Common Stock			Additional		Accumulated			Accumulated Other Comprehensive
	Shares	Amount		Paid in Capital		Deficit			Income (Loss)			Total
Balance, December 31, 2010	30,351	$	93,893	$	848	$	(92,969	)	$	(338	)	$	1,434
Stock based compensation	—	—		148		—			—			148
Net loss	—	—		—		(5,758		)	—			(5,758		)
Other comprehensive income	—	—		—		—			88			88
Balance, December 31, 2011	30,351	$	93,893	$	996	$	(98,727	)	$	(250	)	$	(4,088	)
Stock based compensation	—	—		80		—			—			80
Issuance of restricted stock	2,083	—		464		—			—			464
Net loss	—	—		—		(8,387		)	—			(8,387		)
Other comprehensive loss	—	—		—		—			(16		)	(16		)
Balance, December 31, 2012	32,434	$	93,893	$	1,540	$	(107,114	)	$	(266	)	$	(11,947	)

The accompanying notes are an integral part of the consolidated financial statements.

F-6

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 2012 and 2011

(In thousands)

	2012			2011
Cash flows from operating activities:
Net loss	$	(8,387	)	$	(5,758	)
Income from discontinued operations	—			(53		)
Gain on sale of discontinued operations, net of taxes	—			(687		)
Depreciation and amortization	43			9
Stock-based compensation expense	544			148
Change in fair value of warrant liabilities	1,617			808
Change in fair value of convertible notes	2,024			1,894
Financing costs associated with convertible notes	80			530
Non-cash interest expense	331			225
Deferred income taxes	—			(492		)
Change in assets and liabilities:
Accounts receivable	48			(321		)
Inventory	56			72
Prepaid expenses and other assets	58			66
Accounts payable	228			(194		)
Deferred revenue	32			186
Accrued liabilities	161			(36		)
Net cash flows used in operating activities	(3,165		)	(3,603		)
Cash flows from investing activities:
Purchase of property and equipment	(74		)	(18		)
Net cash used for investing activities	(74		)	(18		)
Cash flows from financing activities:
Net proceeds from issuance of convertible notes and warrants	920			3,605
Net cash provided by financing activities	920			3,605
Discontinued Operations:
Net cash provided by operating activities	—			210
Net cash provided by investing activities	—			1,000
Net cash provided by discontinued operations	—			1,210
Effect of exchange rate changes on cash and cash equivalents	(8		)	67
Net (decrease) increase in cash and cash equivalents	(2,327		)	1,261
Cash and cash equivalents at beginning of period	2,585			1,324
Cash and cash equivalents at end of period	$	258		$	2,585
Supplemental disclosure of cash flow information:
Cash paid for interest	$	217		$	171

The accompanying notes are an integral part of the consolidated financial statements.

F-7

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

1.Business and Liquidity

PLC Systems Inc. (“PLC” or the “Company”) is a medical device company specializing in innovative technologies for the cardiac and vascular markets. Over the past five years, the Company has begun initial commercialization outside the United States of its product, RenalGuard®, which currently represents the Company’s key strategic growth initiative and primary business focus.  The RenalGuard System consists of a proprietary console and accompanying single-use sets and is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. The Company conducts business operations as one operating segment.

For the year ended December 31, 2012, the Company incurred a net loss from continuing operations before taxes of approximately $8,387,000 and used cash in operations of approximately $3,165,000.  As of December 31, 2012, cash and cash equivalents were $258,000.  Management expects that quarterly losses and negative cash flows will continue during 2013.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Based upon the current financial condition of the Company and the expectation of continued quarterly losses during 2013, management is currently investigating ways to raise additional capital that can be completed in the next several months. The Company believes that its existing resources, based on its currently projected financial results, are sufficient to fund operations through the third quarter of 2013. Based upon current and anticipated revenue projections from foreign sales of our RenalGuard product, and the anticipated costs of its U.S. clinical trial, we expect that we will need to raise additional capital during the remainder of 2013 The Company was able to raise an additional $4,040,000 in capital on February 22, 2013, through the completion of financing with Palladium Capital Advisors LLC., (see Note 12).  The Company will continue to review its other expense areas to determine whether additional reductions in discretionary spending can be achieved.

The Company also believes that the recent publication of positive clinical results from two independent investigator-sponsored clinical trials in Italy, which show RenalGuard to be both a safe and effective product for the prevention of CIN in at-risk patients, presents a substantial opportunity for it to increase its sales and achieve profitable results in the next few years, provided the Company is able to raise the additional capital it needs in the near term to sustain its operations and expand its RenalGuard sales and marketing programs.

2.Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of PLC and its two wholly owned subsidiaries, PLC Medical Systems, Inc. and PLC Systemas Medicos Internacionais (Deutschland) GmbH.  All intercompany accounts and transactions have been eliminated.

In the first quarter of 2011, the Company sold the assets related to its TMR business to Novadaq Corp., a subsidiary of Novadaq Technologies Inc., the Company’s then exclusive distributor of TMR in the U.S., for $1,000,000 plus the relief of approximately $614,000 in service contract obligations (see Note 9).

As a result of its sale in the first quarter of 2011, the operating results of the Company’s TMR business, including those related to the prior periods, have been reclassified from continuing operations to discontinued operations in the accompanying consolidated financial statements for the year ended December 31, 2011 (see Note 8).

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses

F-8

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

during the reporting period. Significant estimates include revenue recognition, warranty, inventory valuation, accounts receivable, and convertible notes and warrant liabilities.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash at December 31, 2012 and 2011, respectively, consisted of deposits held in bank checking accounts and overnight sweep to repurchase agreements.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk include cash, cash equivalents and accounts receivable. At times, the Company possesses cash balances above federally-insured limits. The Company believes it minimizes its exposure to potential concentrations of credit risk by placing its cash equivalents in high-quality financial instruments.  At December 31, 2012 and 2011, the majority of the cash and cash equivalents balance was invested with a single financial institution.

Artech accounted for 35% and 46% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively. Discomed, the Company’s distributor in Brazil, account for 29% and 0% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively. ACIST, the Company’s distributor in France and Germany, accounted for 9% and 12% of the Company’s revenues for the year ended December 31, 2012 and 2011, respectively.  At December 31, 2012, Artech, Discomed and ACIST accounted for 73%, 0% and 13%, respectively of gross accounts receivable.

Concentration of Revenues

Approximately 100% and 82% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively, were derived from the sales of RenalGuard.

Net sales to unaffiliated customers (by origin) are summarized below (in thousands):

	South America		North America		Europe		Other		Total
2012
Net sales	$	312	$	35	$	588	$	145	$	1,080
2011
Net sales	$	—	$	124	$	547	$	—	$	671

Accounts Receivable

Accounts receivable is stated at the amount the Company expects to collect from the outstanding balances. The Company continuously monitors collections from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that the Company has identified.  Historically, the Company has not experienced significant losses related to its accounts receivable.  Collateral is generally not required. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Inventories

Inventories are stated at the average cost (computed on a first-in, first-out method) of market value and include allocations of labor and overhead.  The Company regularly reviews slow-moving and excess inventories, and writes down inventories to net realizable value if the ultimate expected proceeds from the disposals of excess inventory are less than the carrying cost of the inventory.

F-9

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Equipment, Furniture, Leasehold Improvements and Long-Lived Assets

Equipment, furniture and leasehold improvements are stated on the basis of cost. Depreciation is computed principally on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes.

Depreciation and amortization are based on the following useful lives:

Equipment	2-5 years
Office furniture and fixtures	5 years
Leasehold improvements	Shorter of life of lease or useful life

The carrying amount of long-lived assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When required, recoverability of these assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. During the years ended December 31, 2012 and 2011, the Company did not recognize any asset impairment charges.

Warranty and Preventative Maintenance Costs

The Company evaluates the estimated future unrecoverable costs of warranty and preventative maintenance services for its installed base products on a quarterly basis and adjusts its warranty reserve accordingly.  The Company considers all available evidence, including historical experience and information obtained from supplier audits.  There was no reserve for warranty and preventative maintenance costs recorded at December 31, 2012 and 2011.

Valuation of Convertible Notes and Warrant Liabilities

The valuation of our convertible notes and our warrant liabilities as derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

Revenue Recognition

The Company recognizes revenue when the following basic revenue recognition criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition. The Company’s shipping terms are customarily Free On Board (“FOB”) shipping point.

The Company typically records all product revenue at the time of shipment if all other revenue recognition criteria are met. As of December 31, 2012 and 2011, the Company had deferred revenue balances of $317,000 and $277,000, respectively, related to shipments to its distributor in Italy, Artech, because not all revenue recognition criteria were met.  During the years ended December 31, 2012 and 2011, the Company recognized $381,000, a portion of which was previously deferred in 2011, and $0, respectively, in revenue of previously deferred revenue upon the receipt of cash.  The Company had deferred cost of goods sold of $85,000 and $115,000 during the years ended December 31, 2012 and 2011, respectively, which was classified as prepaid expenses and other current assets on the Consolidated Balance Sheets due to Artech revenue recognition criteria not being met.

Foreign Currency Translation

Assets and liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at end-of-period exchange rates, while income and expense items are translated at average rates of exchange prevailing during the year. Exchange gains and losses arising from translation are accumulated as a separate component of stockholders’ equity. The Company records the impact from foreign currency transactions as a component of other income (expense).

F-10

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Income Taxes

The Company uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable.

Research and Development

Research and development costs are expensed as incurred.

Fair Value Measurements

The Company measures and reports fair value in accordance with Accounting Standards Codifications (“ASC”) 820 — Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:

Level 1

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3

Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.

Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.

The Company’s assets and liabilities measured at fair value on a recurring basis include convertible notes and warrants. See Note 10 for related fair value disclosures.

F-11

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Loss Per Share

In 2012 and 2011, basic and diluted loss per share have been computed using only the weighted average number of common shares outstanding during the period without giving effect to any potential future issuances of common stock related to stock option programs and warrants, since their inclusion would be antidilutive.

For the years ended December 31, 2012 and 2011, 47,096,000 and 46,162,000 shares, respectively, attributable to outstanding warrants, convertible notes, and stock options were excluded from the calculation of diluted loss per share because the effect would have been antidilutive.

3.Inventories

Inventories consist of the following at December 31 (in thousands):

	2012		2011
Raw materials	$	143	$	157
Finished goods	39		81
	$	182	$	238

4.Equipment, Furniture and Leasehold Improvements

Equipment, furniture and leasehold improvements consist of the following at December 31 (in thousands):

	2012		2011
Equipment	$	488	$	414
Office furniture and fixtures	218		218
Leasehold improvements	4		4
	710		636
Less accumulated depreciation and amortization	643		600
	$	67	$	36

Depreciation expense was $43,000 and $9,000 for the years ended December 31, 2012 and 2011, respectively.

5.Stockholders’ Equity

The Company has unlimited authorized shares of preferred stock. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations in the preferred stock at the time of issuance.

The Company has never declared nor paid dividends on any of its capital stock and does not expect to do so in the foreseeable future.

6.Stock Based Compensation

Stock Option Plans

In May 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”).  Incentive stock options are issuable only to employees of the Company, while non-qualified stock options may be issued to non-employee directors, consultants and others, as well as to employees.  Under the 2005 Plan, the per share exercise price of incentive stock options may not be less than the fair market value of the common stock on the date the option is granted.  The 2005 Plan provides that the Company may not grant non-qualified stock options at an exercise price less than 85% of the fair market value of the Company’s common stock.

The Company grants stock options to its non-employee directors.  New non-employee directors receive an initial grant of an option to purchase shares of the Company’s common stock that generally vest in quarterly installments over three years.  Once the initial grant has fully vested, non-employee directors (other than the Chairman of the Board) receive an annual grant of an option to purchase additional shares of the Company’s common stock that generally will vest in four

F-12

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 45,000 shares of the Company’s common stock that generally vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

As a result of employee terminations in 2011, options held by terminated employees to purchase a total of 173,000 shares of common stock with an exercise price of $0.24 per share were cancelled, but were replaced by the Company with new options, all of which were immediately vested, to purchase 173,000 shares of common stock at an exercise price of $0.24 per share. The Company recorded an additional $2,000 in stock compensation expense related to these grants during the year ended December 31, 2011.

During year ended December 31, 2011, the Company granted options to purchase 300,000 shares of the Company’s common stock to non-employees that vested immediately, and granted options to purchase 350,000 shares of the Company’s common stock to employees that vest ratably over a three year period.

During the year ended December 31, 2011, the Company granted options to purchase 565,000 shares of the Company’s common stock to employees with performance-based vesting, and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors which vest quarterly over one year. Management determined that as of June 30, 2012, it was probable that the performance conditions associated with the performance-based vesting were to be met in July 2012 with the closing of the second tranche convertible notes. Therefore, the related expense was recorded in the year ended December 31, 2012.

During the year ended December 31, 2012, the Company granted options to employees to purchase 355,000 shares of the Company’s common stock, which vest ratably over a three year period and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors that vest quarterly over one year.

During the year ended December 31, 2012, the Company issued an aggregate of 2,083,338 shares of restricted common stock to Garden State Securities, Inc. and JFS Investments, Inc. in exchange for certain investor relations and related consulting services to the Company.  These shares vested immediately but are restricted from being sold for a period of six months from the date of issuance.  The issuance of these shares resulted in $464,000 of compensation expense in the year ended December 31, 2012.

As of December 31, 2012, there were 674,156 shares of common stock available to be granted under the 2005 Plan.

The following is a summary of option activity under all plans (in thousands, except per option data):

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2010	5,529		$	0.21
Granted	1,500		0.15
Exercised	—		—
Forfeited	(1,254	)	0.23
Expired	—		—
Cancelled	(173	)	0.24
Outstanding, December 31, 2011	5,602		$	0.21
Granted	468		0.17
Exercised	—		—
Forfeited	(3	)	0.55
Expired	—		—
Cancelled	(475	)	0.24
Outstanding, December 31, 2012	5,592		$	0.21	3.21	$	6,500
Exercisable, December 31, 2012	4,948		$	0.21	2.44	$	5,500

F-13

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Stock-Based Compensation Expense

The Company recorded employee compensation expense of $80,000 and $148,000 in the years ended December 31, 2012 and 2011, respectively.  The Company also recorded non-employee compensation expense of $464,000 related to the issuance of restricted common shares during the year ended December 31, 2012,.  As of December 31, 2012, the Company had $64,000 of total unrecognized compensation cost related to its unvested options, which is expected to be recognized over a weighted average period of 1.68 years.

The weighted average fair value of options issued during the years ended December 31, 2012 and 2011 was estimated using the Black-Scholes model and was $0.16 and $0.10 respectively.

	Year Ended December 31,
	2012	2011
Expected life (years)	5.00 – 6.00	1.00 – 6.00
Interest rate	0.19 – 0.69%	0.27 – 2.65%
Volatility	204.1 – 216.2%	107.2 – 169.0%
Expected dividend yield	None	None
Value of option granted	$0.12 – 0.17	$0.01 – 0.13

The expected life was calculated in 2012 and 2011 using the simplified method. The risk-free interest rate is based upon the U.S. Treasury yield curve in effect at the time of the grant for the expected term.  Expected volatility is based exclusively on historical volatility data of the Company’s common stock.  The Company estimates an expected forfeiture rate by analyzing historical forfeiture activity and considering how future forfeitures are expected to differ from historical forfeitures.  The Company expects that all outstanding options at December 31, 2012 will fully vest over their requisite service period.  Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

Stock Purchase Plan

The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees whereby shares of the Company’s common stock may be purchased at six-month intervals at 95% of the average of the closing bid and ask prices of the Company’s common stock on the last business day of the relevant plan period.  Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations.  There was no activity in 2012 or 2011. At December 31, 2012, 294,461 shares were reserved for future issuance under the Purchase Plan.

7.Commitments

Lease Commitments

The Company leases its corporate office under an operating lease agreement that expires in August 2014. In addition to the minimum lease payments, the agreement requires payment of the Company’s pro-rata share of property taxes and building operating expenses.

As of December 31, 2012, future minimum lease payments are estimated to be as follows (in thousands):

Year		Future Minimum Lease Payments
2013		$	41
2014		30
	Total	$	71

Total rent expense was $40,000 and $148,000 in 2012 and 2011, respectively.

F-14

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

During the year ended December 31, 2011, the Company began manufacturing its RenalGuard consoles and sterile disposable kits by two separate outside contract manufacturers. The contracts with these manufacturers do not contain minimum purchase requirements or any future commitments. Purchases are made upon request to the manufacturer.  During the year ended December 31, 2012 there are still no minimum purchase requirements or any future commitments for these contracts.

During the year ended December 31, 2011, the Company hired a clinical research organization (“CRO”) to assist with managing its clinical trial.  The contract with the CRO does not contain minimum purchase requirements or any future commitments, and payments are made once services are provided.  During the year ended December 31, 2012 there are still no minimum purchase requirements or any future commitments for this contract.

8.Sale of Assets

In May 2010, the Company sold to a newly-formed corporation affiliated with its principal OEM customer certain of its OEM surgical tube assets, comprised principally of inventory, equipment, intellectual property and certain other intangible assets, as well as all necessary manufacturing documentation needed to perform contract assembly services for general purpose CO2 lasers. The total sale price for these assets was $225,000, of which approximately $154,000 was paid at the time of closing, with the balance in a note receivable totaling $71,000. At the closing of the transaction and as of December 31, 2010, the note receivable was fully reserved. Following the sale, Dr. Robert I. Rudko, who was a director and a stockholder of the Company at the time, acquired a minority interest in the corporation that purchased the OEM assets. In conjunction with this transaction, in the year ended December 31, 2010, the Company recorded an initial gain on sale of assets of $98,000. In March 2011, Dr. Rudko resigned from the Company’s board of directors. Also in March 2011, the Company reached an agreement with the acquiring company to settle the note receivable at a reduced amount of $40,000. This amount was collected in April 2011, and was recorded as a gain when the cash was received.

9. Discontinued Operations

On November 5, 2010, the Company entered into an agreement to sell its TMR business to Novadaq. This transaction was approved by the Company’s shareholders at a special meeting on January 31, 2011 and the transaction closed on February 1, 2011.

Under terms of the agreement, Novadaq acquired substantially all of the Company’s assets that were used in the TMR business including all manufacturing rights, substantially all product inventories, and all equipment, intellectual property, regulatory approvals, clinical data and documentation related to TMR, for a purchase price of $1 million in cash and the assumption of all the Company’s obligations under service contracts as of the closing date totaling $614,000. The total carrying value of the assets sold as of the transaction date was $385,000. In addition, the Company incurred transaction costs of $50,000. The Company has recorded a gain on sale of discontinued operations before income taxes of $1,179,000 in the statement of operations.

The operating results of these operations, including those related to the prior periods, have been reclassified from continuing operations to discontinued operations in the accompanying consolidated financial statements.

Revenues and net income attributable to discontinued operations for the year ended December 31, 2011 are as follows:

	Year ended December 31, 2011
	(In thousands)
Revenues:
Product sales	$	455
Service fees	68
Total	523
Income from discontinued operations	$	53

F-15

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

10.Convertible Notes and Warrant Liabilities

On February 22, 2011 (the “Original Issue Date”), the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) and a 5% Senior Secured Convertible Debenture Agreement (the “Note Agreement”) with GCP IV LLC (the “Investors” or “Holders”) pursuant to which the Company agreed to issue and sell in a private placement to the Investors an aggregate principal amount of $4,000,000 of convertible notes due February 22, 2014 (the “Convertible Notes”) and 40,000,000 warrants, which expire February 22, 2016 (the “Investor Warrants”).  Under the terms of the Securities Purchase Agreement, the Company had the opportunity to raise up to an additional $2,000,000 from the Holders of the Convertible Notes in two separate $1,000,000 tranches, based upon meeting certain operational milestones within certain periods of time.  The deadline for achieving the operational milestones for the first $1,000,000 tranche expired in February 2012 without the Company achieving such milestones; however, as discussed below, the Investors agreed to waive both the deadline and the achievement of these milestones as a condition for the investment of the first additional $1,000,000 tranche (“Second Tranche”) which was completed on July 2, 2012.

Convertible Notes

The Convertible Notes require payment of interest on the outstanding principal amount, in cash, at the rate of 5% per annum, payable quarterly on January 1, April 1, July 1, and October 1, beginning on the first such date following the Original Issue Date, on each conversion date (for the principal amount then being converted), on each optional redemption date (for the principal amount then being redeemed) and on the maturity date. Interest is calculated on the basis of a 360-day year and accrues daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts that may become due in connection with the Convertible Notes, has been made.

The Holders may convert the outstanding principal amount of the Convertible Notes into shares of the Company’s common stock at the conversion price of $0.10 per share (“Conversion Price”). The Conversion Price is subject to adjustment in the event of (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, distributions of assets or evidence of indebtedness, sales or transfers of substantially all assets, share exchanges or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then Conversion Price.

At any time after February 2012, and upon entering into a change of control transaction or Fundamental Transaction, as defined in the Debenture Agreement, the Company may deliver a notice to the Holders of its irrevocable election to redeem all of the then outstanding principal of the Convertible Notes for cash in an amount equal to the sum of (a) the greater of (i) the outstanding amount of the Convertible Notes divided by the Conversion Price on the date of the mandatory default amount, as defined in the Purchase Agreement, is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the Volume Weighted Average Price (“VWAP”) of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the Notes, plus 100% of accrued and unpaid interest, and (b) all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the Convertible Notes. Such amount would include the liquidated damages due under the default provision of the Purchase Agreement.

The Company is required to repay, in cash, any outstanding principal amount of the Convertible Notes on February 22, 2014 and is not permitted, except upon entering into a change of control transaction or fundamental transaction as noted above, to prepay any portion of the principal amount without prior written consent of the Holders.

Investor Warrants

On February 22, 2011, in connection with the issuance of the Convertible Notes, the Company issued warrants for the purchase of up to 40,000,000 shares of common stock at the exercise price of $0.15 per share and with an expiration date of February 22, 2016 (the “Warrants”). The following is a summary of the Warrants outstanding as of December 31, 2012:

F-16

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

	Warrants	Exercise Price
Beginning balance — December 31, 2011	40,000,000	$	0.15
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance — December 31, 2012	40,000,000	$	0.15

The Warrants are exercisable in cash to purchase shares of the Company’s common stock (the “Warrant Shares”). The Exercise Price may be paid pursuant to a cashless exercise provision if the Warrant Shares have not been registered within six months after the Warrants are issued. The Exercise Price of the Warrants shall be adjusted in the event of (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, distributions of assets or evidence of indebtedness, sales or transfers of substantially all assets, share exchanges or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then Exercise Price.

In connection with a Fundamental Transaction, as defined in the Purchase Agreement, that is an all-cash transaction, the Company shall have the right to purchase from the Holders all, but not less than all, of the unexercised portion of the Warrants by paying in cash to the Holders an amount equal to 30% of the Exercise Price multiplied by the number of shares of Common Stock for which the Warrants are exercisable immediately prior to such change of control transaction.

Features of the 2012 Tranche 2 Amendment

On July 2, 2012, the Company entered into an Amendment and Waiver to Securities Purchase Agreement (the “Amendment and Waiver”) to amend our Securities Purchase Agreement with the Investors.  Under the Amendment and Waiver agreement the Company agreed to issue and sell in a private placement to the Investors an aggregate principle amount of $1,000,000 (the “Second Tranche”) of 5% Senior Secured Convertible Debentures of the Company (the “Second Convertible Notes”), warrants to purchase up to 10,000,000 shares of common stock at an initial exercise price of $0.15 per share (the “$0.15 Warrants”) and warrants to purchase up to 10,000,000 shares of common stock at an initial exercise price of $0.25 per share (the “$0.25 Warrants” and together with the $0.15 Warrants, the “2012 Warrants”).

The Second Tranche Convertible Notes

The Second Tranche Convertible Notes contains the same terms as the original Convertible Notes and requires payment of interest at the rate of 5% per annum, payable quarterly and mature on July 2, 2015.  The Second Tranche Convertible Notes provide the Investors the option at any time prior to the repayment of the notes to convert any portion of the outstanding Second Tranche balance into fully-paid and non-assessable restricted shares of common stock of the Company at an initial conversion price of $0.10 per share (the “Conversion Price”).

The Convertible Notes include an adjustment close providing that if the Company issues additional shares of common stock prior to the repayment of the Second Tranche at a price per share less than the effective conversion price of the Second Tranche Convertible Notes, the conversion price will, subject to certain exceptions, be reduced to an amount equal to the price per share paid or payable for the common stock of the Company in such subsequent issuance or deemed subsequent issuance.  The Conversion price is subject to adjustments in the event of (a) stock splits, stock dividends, combinations, dividends, rights offerings and mergers of sales of assets or similar events and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then Conversion Price.

The Second Tranche Convertible Notes and the Purchase Agreement covering both are secured by a security interest in all assets of the Company and its subsidiaries and all such obligations are guaranteed jointly and severally by the Company’s Subsidiaries. The Second Tranche Convertible Notes also contain non-financial covenants which limit the Company and its subsidiaries from incurring subsequent indebtedness, incur liens, amend organizational documents, repurchasing or repaying other debt, paying cash dividends and entering into affiliate transactions.

The Second Tranche Convertible Notes may be redeemed at the option of the Company on the same terms as the Convertible Notes only in connection with a change of control or other fundamental transaction of the Company and subject to the satisfaction of other conditions including, without limitation, that the shares issuable upon conversion of the

F-17

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

debentures are freely tradable and that there is no event of default.

The 2012 Warrants

On July 2, 2012, the Company issued warrants for the purchase of up to 20,000,000 shares of common stock with five year terms.  The warrants were issued to allow the Investors to purchase up to 10,000,000 shares of common stock at an initial purchase price of $0.15 per share and the remaining 10,000,000 shares of common stock at an initial purchase price of $0.25 per share. The terms of the 2012 Warrants are identical to those of the Warrants, except that the 2012 Warrants are exercisable for a period of five years from the date of issuance and contain different exercise prices. The following is a summary of the 2012 Warrants outstanding as of December 31, 2012:

$0.15 Warrants	Warrants	Exercise  Price
Beginning balance at December 31, 2011	—	$	—
Add: Second Tranche Agreement	10,000,000	0.15
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance at December 31, 2012	10,000,000	$	0.15

$0.25 Warrants	Warrants	Exercise  Price
Beginning balance at December 31, 2011	—	$	—
Add: Second Tranche Agreement	10,000,000	0.25
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance at December 31, 2012	10,000,000	$	0.25

The 2012 Warrants are exercisable in cash to purchase shares of the Company’s common stock.  The exercise price may be paid pursuant to a cashless exercise provision if the 2012 Warrants have no effective registration statement registering the shares underlying the warrants by surrendering warrant shares having a value equal to the exercise price of the portion of the warrants being exercised.  The exercise price of the 2012 Warrants shall be adjusted in the event of (a) stock splits, stock dividends, combinations, rights offerings, mergers or sales of assets or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the exercise price.

The 2012 Warrants provide that the 2012 Warrants may be purchased at the option of the Company only in connection with a change in control of the Company that is an all-cash transaction.  The purchase price is 30% of the then effective exercise price of the warrants multiplied by the number of common shares for which the 2012 Warrants are then exercisable.

Accounting for the Convertible Notes, Tranche Two Convertible Notes, Investor Warrants and 2012 Warrants

Investor Warrants and 2012 Warrants

In June 2008, the FASB issued ASC 815-40-15 (formerly EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock), which was effective for the Company in 2009. This issued guidance requires that derivative instruments be evaluated for certain contingencies and anti-dilution provisions that would affect their equity classification as a derivative under ASC 815, Derivatives and Hedging (ASC 815) and requires the instruments to be classified as liabilities and reported at fair value.

Upon issuance, the Investor Warrants and 2012 Warrants were not considered indexed to the Company’s own stock and therefore are required to be accounted for as freestanding derivative instruments and classified as a liability. As a result, the Investor Warrants and 2012 Warrants were recorded as a liability at fair value as of December 31, 2012 with subsequent changes in fair value recorded in the consolidated statement of operations.

F-18

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Convertible Notes and Tranche Two Convertible Notes

The Company has determined that the Convertible Notes and Tranche Two Convertible Notes constitute a hybrid instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. The Company has identified all of the derivatives associated with the February 22, 2011 financing and July 2, 2012 additional financing.  As permitted under ASC 825-10-10 — Financial Instruments, as it relates to the fair value option, the Company has elected, as of February 22, 2011 and July 2, 2012, to measure the Convertible Notes and the Tranche Two Convertible Notes in their entirety at fair value with changes in fair value recognized in the Consolidated Statement of Operations as either a gain or loss until the notes are settled. As such, the Company has appropriately valued the embedded derivatives as a single hybrid contract together with the Convertible Notes and Tranche Two Convertible Notes. This election was made by the Company after determining the aggregate fair value of the Convertible Notes and Tranche Two Convertible Notes to be more meaningful in the context of the Company’s financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained in the Convertible Notes Tranche Two Convertible Notes.

Convertible Notes and Investor Warrants

Upon issuance of the Convertible Notes, the Company allocated the proceeds received to the Convertible Notes and Investor Warrants on a relative fair value basis. As a result of such allocation, the Company determined the initial carrying value of the Notes to be $3,208,000. The Notes were immediately marked to fair value, resulting in a derivative liability in the amount of $3,677,000. As of December 31, 2012 and 2011, the Convertible Notes have been marked to fair value resulting in a derivative liability of $6,510,000 and $5,327,000, respectively. The net charge to other income (expense) was expense of $918,000 and $1,894,000 in the years ended December 31, 2012 and 2011, respectively. The debt discount in the amount of $792,000 (resulting from the allocation of proceeds) is being amortized to interest expense using the effective interest method over the expected term of the Convertible Notes. The Company amortized $265,000 and $225,000 in the years ended December 31, 2012 and 2011, respectively, which is a component of interest expense.

Upon issuance, the Company allocated $792,000 of the initial proceeds to the Investor Warrants and immediately marked them to fair value resulting in a derivative liability of $908,000. As of December 31, 2012 and 2011, the Investor Warrants have been marked to fair value resulting in a derivative liability of $2,000,000 and $1,600,000, respectively. The charge to other income (expense) for the years ended December 31, 2012 and 2011 was expense of $918,104 and $808,000, respectively.

Second Tranche Convertible Notes and 2012 Warrants

Upon issuance of the Second Tranche Convertible Notes, the Company allocated the proceeds received to the Second Tranche Convertible Notes and 2012 Warrants on a relative fair value basis.  As a result of such allocation, the Company determined the initial carrying value of the Second Tranche Convertible Notes to be $417,000.  The Second Tranche Convertible Notes were immediately marked to fair value, resulting in a derivative liability in the amount of $2,073,000.  As of December 31, 2012, the Second Tranche Convertible Notes have been marked to fair value resulting in a derivative liability of $1,588,000.  The net charge to other income (expense) was a loss of $1,105,000 for the year ended December 31, 2012.  The debt discount in the amount of $583,000 (resulting from the allocation of proceeds) is being amortized to interest expense using the effective interest method over the expected term of the Convertible Notes. The Company amortized $66,000 and $0 in the years ended December 31, 2012 and 2011, respectively, which is a component of interest expense.

Upon issuance of the 2012 Warrants, the Company allocated $583,000 of the initial proceeds to the 2012 Warrants and immediately marked them to fair value resulting in a derivative liability of $2,900,000.  As of December 31, 2012, the 2012 Investor Warrants have been marked to fair value resulting in a derivative liability of $1,800,000. The charge to other income (expense) for the year ended December 31, 2012 was expense of $1,100,000.

The Company records the fair value of Convertible Notes and Investor Warrants as long term liabilities.

Financing Costs

Financing costs include costs associated with obtaining the February 22, 2011 financing.  Financing costs totaling $530,000 have been recorded in other income (expense) in the year ended December 31, 2011, $135,000 of which were

F-19

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

recorded in prepaid expenses and other current assets at December 31, 2010 and expensed upon closing of the transaction in February 2011.

The Company incurred financing costs associated with obtaining the July 2, 2012 financing which totaled $80,000 and were recorded in other income (expense) in the year ended December 31, 2012.

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2011:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Liabilities
Convertible notes	$	5,327,000	$	—	$	—	$	5,327,000
Warrant liabilities	$	1,600,000	$	—	$	—	$	1,600,000
Total Liabilities	$	6,927,000	$	—	$	—	$	6,927,000

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2012:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2012		(Level 1)		(Level 2)		(Level 3)
Liabilities
Convertible notes	$	8,098,000	$	—	$	—	$	8,098,000
Warrant liabilities	$	3,800,000	$	—	$	—	$	3,800,000
Total Liabilities	$	11,898,000	$	—	$	—	$	11,898,000

A summary of changes in the Convertible Notes, Second Tranche Convertible Notes, Investor Warrants and 2012 Warrants is as follows:

	Fair Value of Convertible Notes		Fair Value of Warrant Liabilities		Fair Value of Second Tranche Convertible Notes			Fair Value of 2012 Warrant Liabilities			Total
Allocation of initial proceeds	$	3,208,000	$	792,000	$	—		$	—		$	4,000,000
Initial fair value adjustment	$	469,000	$	116,000	$	—		$	—		$	585,000
February 22, 2011	$	3,677,000	$	908,000	$	—		$	—		$	4,585,000
Amortization of debt discount	$	225,000	$	—	$	—		$	—		$	225,000
Fair value adjustment	$	1,425,000	$	692,000	$	—		$	—		$	2,117,000
Balance December 31, 2011	$	5,327,000	$	1,600,000	$	—		$	—		$	6,927,000
Allocation of initial proceeds	$	—	$	—	$	417,000		$	583,000		$	1,000,000
Initial fair value adjustment	$	—	$	—	$	1,656,000		$	2,317,000		$	3,973,000
July 2, 2012	$	—	$	—	$	2,073,000		$	2,900,000		$	11,900,000
Amortization of debt discount	$	265,000	$	—	$	66,000		$	—		$	331,000
Fair value adjustment	$	918,000	$	400,000	$	(551,000	)	$	(1,100,000	)	$	(333,000	)
Balance December 31, 2012	$	6,510,000	$	2,000,000	$	1,588,000		$	1,800,000		$	11,898,000

F-20

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Valuation — Methodology and Significant Inputs Assumptions

Fair values for the Company’s derivatives and financial instruments are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates.  Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. The methods and significant inputs and assumptions utilized in estimating the fair value of the Warrant Liabilities and Convertible Notes are discussed below. Each of the measurements is considered a Level 3 measurement as a result of at least one significant unobservable input.

Warrant Liabilities

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the Warrant Liabilities as of February 22, 2011, December 31, 2011 and December 31, 2012. This model is widely used in estimating value of European options dependent upon a non-paying dividend stock and fixed inputs. This model is subject to the significant assumptions discussed below and requires the following key inputs with respect to the Company and/or instrument:

Input	February 22, 2011			December 31, 2011			December 31, 2012
Stock Price	$	0.0755		$	0.1075		$	0.15
Exercise Price	$	0.15		$	0.15		$	0.15
Expected Life (in years)	5.00			4.15			3.15
Stock Volatility	90		%	95		%	100		%
Risk-Free Rate	2.16		%	0.63		%	0.39		%
Dividend Rate	0		%	0		%	0		%
Outstanding Shares of Common Stock	30,351,092			30,351,092			32,434,430

2012 Warrants

$0.15 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the $0.15 Warrants as of July, 2, 2012 and December 30, 2012.

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.15		$	0.15
Expected Life (in years)	5			4.50
Stock Volatility	110		%	100		%
Risk-Free Rate	0.67		%	0.63		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430

$0.25 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the $0.25 Warrants as of July, 2, 2012 and December 31, 2012.

F-21

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.25		$	0.25
Expected Life (in years)	5			4.50
Stock Volatility	110		%	100		%
Risk-Free Rate	0.67		%	0.63		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430

Convertible Notes

A binomial lattice model was utilized to estimate the fair value of the Convertible Notes as of February 22, 2011, December 31, 2011 and December 31, 2012. The binomial model considers the key features of the Convertible Notes, as noted above, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Company’s stock price, without effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Second, a discrete simulation of the Company’s stock price, with effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Third, based upon the simulated stock price with dilution effect, an analysis of the higher position of a conversion position, redemption position, or holding position (i.e. fair value of the respective future nodes value discounted using the applicable discount rate) was conducted relative to each node until a final fair value of the instrument is conducted at the node representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:

Input	February 22, 2011			December 31, 2011			December 31, 2012
Stock Price	$	0.0755		$	0.1075		$	0.15
Strike Price	$	0.10		$	0.10		$	0.10
Expected remaining term (in years)	3.00			2.15			1.15
Stock Volatility	95		%	100		%	105		%
Risk-Free Rate	1.22		%	0.27		%	0.17		%
Dividend Rate	0		%	0		%	0		%
Outstanding Shares of Common Stock	30,351,092			30,351,092			32,434,430
Effective discount rate	20.3		%	13.2		%	13.1		%
Probability of forced redemption	20		%	20		%	20		%

Second Tranche Convertible Notes

A binomial lattice model was utilized to estimate the fair value of the Second Tranche Convertible Notes. The binomial model considers the key features of the Second Tranche Convertible Notes, as noted above, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Company’s stock price, without effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Second, a discrete simulation of the Company’s stock price, with effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Third, based upon the simulated stock price with dilution effect, an analysis of the higher position of a conversion position, redemption position, or holding position (i.e. fair value of the respective future nodes value discounted using the applicable discount rate) was conducted relative to each node until a final fair value of the instrument is conducted at the node representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:

F-22

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.10		$	0.10
Expected remaining term (in years)	3			2.50
Stock Volatility	100		%	100		%
Risk-Free Rate	0.39		%	0.31		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430
Effective discount rate	10		%	13.2		%
Probability of forced redemption	20		%	20		%

The following are significant assumptions utilized in developing the inputs:

·The Company’s common stock shares are traded on the OTC Bulletin Board and, accordingly, the stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date;

·The expected future stock prices of the Company’s stock were modeled to include the effect of dilution upon conversion of the instruments to shares of common stock;

·Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock) and (ii) the annualized daily volatility of comparable companies’ stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instrument. Historic prices of the Company and comparable companies’ common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates;

·Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying stock;

·The risk-free interest rate is based on the U.S. Treasury Yield curve in effect as of the valuation date for the expected term;

·With respect to the Convertible Notes and Second Tranche Convertible Notes, the Company is expected to pay all accrued interest due to the Holders on each Interest Payment Date;

·With respect to the Convertible Notes and Second Tranche Convertible Notes, based upon management’s expectations for a change of control or fundamental transaction to occur prior to the maturity date of the Convertible Notes and Second Tranche Convertible Notes, a low probability of a forced redemption;

·Upon a change of control redemption, the change of control redemption amount shall equal to the sum of:

I.the greater of:

(i)the outstanding amount of the debt divided by the Conversion Price on the date of the mandatory default amount is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or

(ii)130% of the outstanding principal amount of the debt, plus 100% of accrued and unpaid interest, and

II.all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the debt.

Additionally, it is assumed that no amounts are due pursuant to clause (II) above in any period and that the stock price at each respective node represents a reasonable approximation of the VWAP requirements.

F-23

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

The changes in fair value between reporting periods are related to the changes in the price of the Company’s common stock as of the measurement dates, the volatility of the Company’s common stock during the remaining term of the instrument, changes in the conversion price and effective discount rate.

11.Income Taxes

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2012			2011
Loss before income taxes:
Continuing operations
United States	$	(8,288	)	$	(6,859	)
Foreign	(99		)	(131		)
	$	(8,387	)	(6,990		)
Current income tax benefit from continuing operations:
Federal	$	—		$	492
Foreign	—			—
State	—			—
	$	—		$	492
Deferred income tax benefit/(provision) from continuing operations:
Federal	$	2,444		3,335
Foreign	(104		)	(2		)
State	(1,437		)	(4,415		)
	903			(1,082		)
Change in valuation allowance	(903		)	1,082
	$	—		$	—
Benefit for income taxes from continuing operations	$	—		$	492
Provision for income taxes from gain on sale of discontinued operations	—			(492		)
Total provision for income taxes	$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of December 31 are as follows (in thousands):

	2012			2011
Net federal and state operating loss carryforwards	$	24,689		$	23,611
Net foreign operating loss carryforwards	380			484
Accrued expenses and reserves	—			10
Tax credits	1,194			1,202
Other	295			348
Total deferred tax assets	26,558			25,655
Valuation allowance	(26,558		)	(25,655		)
Net deferred tax assets	$	—		$	—

The valuation allowance increased by $903,000 in 2012 primarily due to the Company’s net loss. The Company recorded the valuation allowance due to the uncertainty of the realizability of the related net deferred tax asset.

Total provision for income taxes computed at the federal statutory rate differs from amounts provided as follows (in thousands):

F-24

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

	2012			2011
Tax benefit at federal statutory rate	$	(2,818	)	$	(1,893	)
State income taxes, net of U.S. federal income tax benefit	(11		)	(331		)
Permanent differences	17			44
Other	1,909			3,262
Change in valuation allowance	(903		)	(1,082		)
Total expense	$	—		$	—

At December 31, 2012, the Company had federal net operating loss carryforwards available to reduce future taxable income of approximately $74,337,000 which expire at various dates through 2031.  At December 31, 2012, the Company had federal and state research and development credit carryforwards of $708,000 and $486,000, respectively, which will expire at various dates through 2031 for federal income tax purposes and through 2026 for state income tax purposes.  In addition, at December 31, 2012 the Company had foreign net operating loss carryforwards of approximately $380,000.

Under the Internal Revenue Code of 1986, as amended, certain substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that can be utilized in any one year to offset future taxable income.  Any carryforwards that will expire prior to utilization as the result of any limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of December 31, 2012 and 2011, there were no unrecognized tax benefits.  The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of its income tax provision.  As of December 31, 2012 and 2011, the Company had no accrued interest or tax penalties recorded.

The Company files income tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. For U.S. federal and state tax purposes, the tax years 2007 through 2012 remain open to examination.  In addition, the amount of the Company’s federal and state net operating loss carryforwards may be subject to examination and adjustment. The open examination periods for the Company’s foreign jurisdictions range from 2000 through 2009.

12.Subsequent Events

The Company has evaluated all events and transactions through the date of the filing. During this period the Company identified the following events for disclosure:

On January 16, 2013 the Company entered into an Amendment and Waiver to Securities Purchase Agreement to amend the Securities Purchase Agreement with GCP IV, LLC to provide for the issuance of (i) an additional $250,000 of 5% Senior Secured Convertible Debentures maturing on January 16, 2016 and (ii) warrants exercisable for a period of five years to purchase up to 2,500,000 shares of common stock at an exercise price of $0.15 per share.

On February 22, 2013, the Company entered into a Securities Purchase Agreement (the “SPA”) with a number of accredited investors, whereby the Company sold an aggregate of 26,933,333 shares of common stock and warrants to purchase an additional 26,933,333 shares of common stock with gross proceeds to the Company of $4,040,000 to these accredited investors (the “2013 Investors”) pursuant to the SPA. The Company intends to utilize the proceeds of the private placement for general working capital purposes, to pay for investor relations services as described below, for payment of fees to Palladium Capital Advisors, LLC, the exclusive placement agent, and for legal, blue sky and related expenses.  After payment of the placement agent fees and these other expenses, the Company anticipates net proceeds of approximately $3,500,000.

Each share of common stock was sold for a purchase price of $0.15 per Share.  In addition, each investor also received a five-year warrant to purchase one hundred (100%) percent of the number of shares of common stock purchased at an exercise price of $0.20 per share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends and dilutive issuances.  The 2013 Warrants may be exercised on a cashless basis if at any time there is no effective registration statement within 180 days after the closing date of the private placement covering the resale of the

F-25

PLC SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012

shares of common stock underlying the 2013 Warrants. The 2013 Warrants contains limitations on the holder’s ability to exercise the 2013 Warrant in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company’s issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days’ notice.  As part of the fee for its placement agent services, Palladium Capital Advisors also received a 2013 Warrant to purchase 1,885,333 shares of common stock on the same terms and conditions as the investors under the SPA.

The 2013 Investors have the option, for a period through November 21, 2013, to purchase for the same per share purchase price an equal number of shares of common stock and 2013 Warrants equal to up to one-half of the shares of common stock and 2013 Warrants purchased by the purchaser on the initial closing date.  The shares of common stock sold in the offering are subject to certain piggyback registration rights as well as certain other protections, including antidilution protection.

Simultaneously with the closing of the SPA, GCP IV, LLC (“GCP”), the original holder of the Company’s Convertible Notes (which have an aggregate principal balance of $5,250,000 as of January 16, 2013) entered into an Amendment and Waiver Agreement (“Amendment and Waiver Agreement”) with the Company under which GCP has agreed to (a) increase the number of shares exercisable under warrants issued to GCP in 2011 and 2012 (the “2011 and 2012 Warrants”) from 50,000,000 shares to 81,578,946 shares and to modify both the exercise price and the “VWAP price” of the 2011 and 2012  Warrants to $0.098 and $0.155, respectively, (b)  return to the Company for forfeiture the remaining warrants previously issued to GCP to purchase 12,500,000 shares of common stock, (c)  extend the due date for the $4,000,000 term debenture issued by the Company to GCP in February 2011 from February 22, 2014 to June 30, 2015, (d) until February 22, 2014, without the prior written consent from the majority of the investors under the SPA, forbear from declaring any Event of Default (as defined in the original debenture, and (e) relinquish its right to purchase up to an additional $750,000 in debentures under the terms of the original 2011 Securities Purchase Agreement.  The modifications to the 2011 and 2012 Warrants enable these warrants to be exercised on a cashless exercise basis, which, if fully exercised, would result in the issuance of 30,00,000 shares of common stock without the payment of additional cash consideration.

On February 22, 2013, the Company also entered into a consulting agreement (the “Consulting Agreement”) with ZA Capital, LLC (“ZA”) to provide investor relation services to the Company. In connection with the Consulting Agreement, the Company paid ZA $500,000 from the proceeds of a private placement described above.  The Company is obligated to pay ZA an additional $500,000 (for a total of $1.0 million in the aggregate) on the six-month anniversary of the Agreement for investor relations services during the following six-month period.The Consulting Agreement may be terminated by the Company for any reason, with or without cause, upon three (3) days written notice to ZA. In addition, the Consulting Agreement may be terminated by either party upon giving written notice to the other party if the other party is in default hereunder and such default is not cured within fifteen (15) days of receipt of written notice of such default.

F-26

EXHIBIT INDEX

Exhibit Number	Description of Document
3.1	Articles of Continuance, pursuant to the Yukon Business Corporations Act, as amended, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2004, as previously filed with the Securities and Exchange Commission.
3.2	By-Law No. 1, a By-Law relating generally to the transaction of the business and affairs of PLC Systems Inc., incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 1999, as previously filed with the Securities and Exchange Commission.
4.1	Form of Common Stock Certificate, incorporated by reference to the Registrant’s registration statement on Form S-1 (SEC File No. 33-48340) and amendments thereto, as previously filed with the Securities and Exchange Commission.
10.1#	1995 Stock Option Plan, incorporated by reference to the Registrant’s registration statement on Form S-8 (SEC File No. 33-95168), as previously filed with the Securities and Exchange Commission.
10.2#	2000 Equity Incentive Plan, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2001, as previously filed with the Securities and Exchange Commission.
10.3#	Form of Stock Option Grant Letter to Employees of the Registrant under the Registrant’s 1995 Stock Option Plan and2000 Equity Incentive Plan, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2004, as previously filed with the Securities and Exchange Commission.
10.4#	Form of Stock Option Grant Letter to Non-Employee Directors of the Registrant under the Registrant’s 1995 Stock Option Plan and 2000 Equity Incentive Plan, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2004, as previously filed with the Securities and Exchange Commission.
10.5#	2005 Stock Incentive Plan, as amended, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2008.
10.6#	Form of Stock Option Grant Letter for Employees of the Registrant under the Registrant’s 2005 Stock Incentive Plan used prior to June 18, 2008, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2005.
10.7#	Form of Stock Option Grant Letter for Employees of the Registrant under the Registrant’s 2005 Stock Incentive Plan used beginning June 18, 2008 and prior to June 3, 2009, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2008.
10.8#	Form of Stock Option Grant Letter for Employees of the Registrant under the Registrant’s 2005 Stock Incentive Plan used beginning June 3, 2009, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2009, as previously filed with the Securities and Exchange Commission.
10.9#	Form of Stock Option Grant Letter for Non-Employee Directors of the Registrant under the Registrant’s 2005 Stock Incentive Plan used prior to June 18, 2008, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2005.
10.10#	Form of Stock Option Grant Letter for Non-Employee Directors of the Registrant under the Registrant’s 2005 Stock Incentive Plan used beginning June 18, 2008 and prior to June 3, 2009, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2008.
10.11#	Form of Stock Option Grant Letter for Non-Employee Directors of the Registrant under the Registrant’s 2005 Stock Incentive Plan used beginning June 3, 2009, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2009, as previously filed with the Securities and Exchange Commission.

Exhibit Number	Description of Document
10.12#	Employment Agreement dated December 22, 1999 between PLC Medical Systems, Inc. and Mark R. Tauscher, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2000, as previously filed with the Securities and Exchange Commission.
10.13#	Amendment dated June 18, 2008 to Employment Agreement between PLC Medical Systems, Inc. and Mark R. Tauscher, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2008, as previously filed with the Securities and Exchange Commission.
10.14#	Employment letter dated September 2, 2011 between PLC Medical Systems, Inc. and Gregory W. Mann.
10.15	Securities Purchase Agreement dated February 22, 2011 by and between the Registrant and GCP IV LLC, incorporated by reference to the Registrant’s current report on Form 8-K dated February 22, 2011, as previously filed with the Securities and Exchange Commission.
10.16	Form of 5% Senior Secured Convertible Debenture issued by the Registrant, incorporated by reference to the Registrant’s current report on Form 8-K dated February 22, 2011, as previously filed with the Securities and Exchange Commission.
10.17	Form of Common Stock Purchase Warrant issued by the Registrant, incorporated by reference to the Registrant’s current report on Form 8-K dated February 22, 2011, as previously filed with the Securities and Exchange Commission.
10.18*#	Compensatory Arrangements with Non-Employee Directors.
10.19*#	Severance Arrangements with Executive Officers.
21.1*	Subsidiaries of the Registrant.
23.1*	Consent of McGladrey LLP
31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	The following materials from PLC Systems Inc. Yearly Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

*	Filed with this annual report on Form 10-K for the year ended December 31, 2012.
+	Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.
#	Management contract or compensatory plan or arrangement.

EX-10.18

EXHIBIT 10.18

Compensatory Arrangements with Non-Employee Directors

At a meeting held on June 16, 2010, the board of directors voted unanimously to reinstate director fees. Each non-employee director (other than the chairman of the board) of PLC Systems Inc. (the “Company”) receives $1,000 for each board meeting he attends in person and $500 for each board meeting he participates by means of teleconference. The chairman of the board receives $1,500 for each board meeting that he attends in person and $750 for each board meeting he participates by teleconference. The Company reimburses its directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors and committees of the board of directors.

At the board meeting held on June 16, 2010, the board of directors voted unanimously to revise the policy regarding the annual grant of stock options to non-employee directors. Non-employee directors (other than the chairman of the board) will now receive an annual grant of an option to purchase 22,500 shares of the Company’s common stock, such option to vest in four equal quarterly installments. The chairman of the board will receive an annual grant of an option to purchase 45,000 shares of the Company’s common stock, such option to vest in four equal quarterly installments. The annual grants to non-employee directors are generally made on the date of the Company’s annual meeting of shareholders.  All such options will have an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

EX-10.19

EXHIBIT 10.19

Severance Arrangements with Executive Officers

Mark R. Tauscher, the Company’s President and Chief Executive Officer, is entitled to receive severance payments pursuant to the terms of his employment agreement with the Company.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

1)            PLC Medical Systems, Inc., a Delaware corporation

2)            PLC Systemas Medicos Internacionais (Deutschland) GmbH, a German corporation

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-51547, 333-37814, 333-48706, 333-51136, 333-57752, 333-91430, 333-106100, 333-127770 and 333-153535) of PLC Systems Inc. and subsidiaries of our report (which includes an emphasis paragraph relating to an uncertainty as to the Company’s ability to continue as a going concern) dated March 29, 2013, relating to our audits of the consolidated financial statements as of and for the years ending December 31, 2012 and 2011, which appear in this Annual Report on Form 10-K of PLC Systems Inc. and subsidiaries for the year ended December 31, 2012.

/s/ McGladrey LLP

Boston, Massachusetts

March 29, 2013

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark R. Tauscher, certify that:

1. I have reviewed this annual report on Form 10-K of PLC Systems Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:	March 29, 2013	/s/ Mark R. Tauscher
		Mark R. Tauscher
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gregory W. Mann, certify that:

1. I have reviewed this annual report on Form 10-K of PLC Systems Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:	March 29, 2013	/s/ Gregory W. Mann
		Gregory W. Mann
		Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report on Form 10-K of PLC Systems Inc. (the “Company”) for the period ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark R. Tauscher, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that, to his knowledge:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	March 29, 2013	By:	/s/ Mark R. Tauscher
			Mark R. Tauscher
			President and Chief Executive Officer
			(Principal Executive Officer)

In connection with the annual report on Form 10-K of PLC Systems Inc. (the “Company”) for the period ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Gregory W. Mann, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that, to his knowledge:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	March 29, 2013	By:	/s/ Gregory W. Mann
			Gregory W. Mann
			Chief Financial Officer
			(Principal Financial Officer)

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Sale of Assets (Details) (Sale of OEM surgical tube assets, USD $)	1 Months Ended		12 Months Ended
	Mar. 31, 2011	May 31, 2010	Dec. 31, 2010
Sale of OEM surgical tube assets
Sale of Assets
Total sale price for the productive assets		$ 225,000
Sale price paid for assets sold		154,000
Note receivable		71,000
Gain on the sale of assets			98,000
Reduced amount of note receivable	$ 40,000

XML

Income Taxes (Details 4) (USD $)	Dec. 31, 2012
U.S. federal
Net operating losses carry forwards
Net operating loss carryforwards	$ 74,337,000
Foreign
Net operating losses carry forwards
Net operating loss carryforwards	$ 380,000

XML

Income Taxes (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Significant components of the Company's deferred tax assets
Net federal and state operating loss carryforwards	$ 24,689,000	$ 23,611,000
Net foreign operating loss carryforwards	380,000	484,000
Accrued expenses and reserves		10,000
Tax credits	1,194,000	1,202,000
Other	295,000	348,000
Total deferred tax assets	26,558,000	25,655,000
Valuation allowance	(26,558,000)	(25,655,000)
Increase in valuation allowance	$ 903,000

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Significant Accounting Policies (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Concentration of Revenues
Net sales	$ 1,080	$ 671
South America
Concentration of Revenues
Net sales	312
North America
Concentration of Revenues
Net sales	35	124
Europe
Concentration of Revenues
Net sales	588	547
Other
Concentration of Revenues
Net sales	$ 145

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Stock Based Compensation (Tables)

12 Months Ended

Dec. 31, 2012

Stock Based Compensation

Summary of option activity under all plans

The following is a summary of option activity under all plans (in thousands, except per option data):

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2010	5,529		$	0.21
Granted	1,500		0.15
Exercised	—		—
Forfeited	(1,254	)	0.23
Expired	—		—
Cancelled	(173	)	0.24
Outstanding, December 31, 2011	5,602		$	0.21
Granted	468		0.17
Exercised	—		—
Forfeited	(3	)	0.55
Expired	—		—
Cancelled	(475	)	0.24
Outstanding, December 31, 2012	5,592		$	0.21	3.21	$	6,500
Exercisable, December 31, 2012	4,948		$	0.21	2.44	$	5,500

Summary of assumptions used for weighted average fair value of options issued

	Year Ended December 31,
	2012	2011
Expected life (years)	5.00 – 6.00	1.00 – 6.00
Interest rate	0.19 – 0.69%	0.27 – 2.65%
Volatility	204.1 – 216.2%	107.2 – 169.0%
Expected dividend yield	None	None
Value of option granted	$0.12 – 0.17	$0.01 – 0.13

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Subsequent Event (Details) (USD $)	0 Months Ended						12 Months Ended				0 Months Ended					0 Months Ended			0 Months Ended
	Feb. 22, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Common Stock	Dec. 31, 2011 Common Stock	Dec. 31, 2010 Common Stock	Dec. 31, 2012 2011 and 2012 Warrants	Feb. 22, 2013 Convertible Notes	Jan. 16, 2013 Convertible Notes	Feb. 22, 2011 Convertible Notes	Feb. 22, 2013 Subsequent Event 2013 Investors	Feb. 22, 2013 Subsequent Event 2013 Investors Common Stock	Jan. 16, 2013 Subsequent Event 2013 Warrants	Feb. 22, 2013 Subsequent Event 2013 Warrants 2013 Investors	Feb. 22, 2013 Subsequent Event 2013 Warrants 2013 Investors Maximum	Feb. 22, 2013 Subsequent Event 2011 and 2012 Warrants	Jan. 16, 2013 Subsequent Event Convertible Notes	Feb. 22, 2013 Subsequent Event Convertible Notes	Feb. 22, 2013 Subsequent Event Forecast 2013 Investors Common Stock
Subsequent Event
Interest rate (as a percent)								5.00%		5.00%							5.00%
Issuance of secured convertible debt																	$ 250,000
Term of warrants													5 years	5 years
Warrants issued for purchase of shares of common stock (in shares)													2,500,000	26,933,333
Number of shares exercisable under warrants issued							50,000,000									81,578,946
Exercise price of warrants (in dollars per share)													$ 0.15	$ 0.20		$ 0.098
Shares of common stock sold		32,434,000	30,351,000	32,434,000	30,351,000	30,351,000						26,933,333
Gross proceeds from sale of common stock	4,040,000											4,040,000
Net proceeds from sale of common stock																			3,500,000
Common stock, share price (in dollars per share)												$ 0.15
Common stock called by warrants (as a percent)														100.00%
Period for presenting effective registration statement for avoiding cashless exercise of warrants														180 days
Limitation of beneficial ownership of common stock for exercise of warrants (as a percent)															4.99%
Discretionary increase in limitation of beneficial ownership of common stock for exercise of warrants (as a percent)															9.99%
Notice period for discretionary increase in limitation of beneficial ownership of common stock for exercise of warrants														61 days
Common stock called by warrants as a part of placement agent service fee (in shares)														1,885,333
Portion of shares of common stock and warrants available for same per share purchase price (as a percent)											0.5
Aggregate principal balance									5,250,000	3,208,000
Amount of term debenture										4,000,000
VWAP price (in dollars per share)																$ 0.155
Number of securities called by outstanding warrants returned to the Company for forfeiture (in shares)																12,500,000
Amount of debentures subject to relinquishment of right to purchase																		$ 750,000
Issuance of additional shares of common stock, on modification, without payment of additional cash consideration																30,000,000

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Convertible Notes and Warrant Liabilities (Details 2) (USD $)	0 Months Ended	6 Months Ended		10 Months Ended	12 Months Ended			0 Months Ended	10 Months Ended	12 Months Ended		6 Months Ended		12 Months Ended	0 Months Ended	6 Months Ended	10 Months Ended	12 Months Ended			6 Months Ended		12 Months Ended
	Feb. 22, 2011	Dec. 31, 2012	Jul. 02, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Feb. 22, 2011 Investor Warrants	Dec. 31, 2011 Investor Warrants	Dec. 31, 2012 Investor Warrants	Dec. 31, 2011 Investor Warrants	Dec. 31, 2012 2012 Warrant Liabilities	Jul. 02, 2012 2012 Warrant Liabilities	Dec. 31, 2012 2012 Warrant Liabilities	Feb. 22, 2011 Convertible Notes	Dec. 31, 2012 Convertible Notes	Dec. 31, 2011 Convertible Notes	Dec. 31, 2012 Convertible Notes	Dec. 31, 2011 Convertible Notes	Jan. 16, 2013 Convertible Notes	Dec. 31, 2012 Convertible Notes Second Tranche	Jul. 02, 2012 Convertible Notes Second Tranche	Dec. 31, 2012 Convertible Notes Second Tranche	Dec. 31, 2011 Convertible Notes Second Tranche
Convertible Notes and Warrant Liabilities
Initial carrying value															$ 3,208,000					$ 5,250,000		$ 417,000
Derivative liability								908,000	1,600,000	2,400,000	1,600,000	1,800,000	2,900,000	1,800,000	3,677,000	6,510,000	5,327,000	6,510,000	5,327,000		1,588,000	2,073,000	1,588,000
Net charge to other income (expense)					2,024,000	1,894,000												918,000	1,894,000				1,105,000
Net charge to other income (expense)					1,617,000	808,000				918,104	808,000			1,100,000
Debt discount to be amortized															792,000						583,000		583,000
Interest expense amortized					265,000	225,000																	66,000	0
Changes in the Convertible Notes and Investor Warrants
Allocation of initial proceeds	4,000,000		1,000,000					792,000					583,000		3,208,000							417,000
Amortization of debt discount		331,000		225,000	331,000	225,000										265,000	225,000				66,000
Fair value adjustment	585,000	(333,000)	3,973,000	2,117,000				116,000	692,000			(1,100,000)	2,317,000		469,000	918,000	1,425,000				(551,000)	1,656,000
Total Liabilities	4,585,000	11,898,000	11,900,000	6,927,000	11,898,000	6,927,000		908,000	1,600,000	2,000,000	1,600,000	1,800,000	2,900,000	1,800,000	3,677,000	6,510,000	5,327,000	6,510,000	5,327,000		1,588,000	2,073,000	1,588,000
Financing costs
Financing costs associated with convertible notes					80,000	530,000
Financing costs recorded in prepaid expenses and other current assets							$ 135,000

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Stock Based Compensation (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stock options
Stock Based Compensation
Stock compensation expense	$ 80,000	$ 148,000
Number of Options
Outstanding at the beginning of the period (in shares)	5,602,000	5,529,000
Granted (in shares)	468,000	1,500,000
Forfeited (in shares)	(3,000)	(1,254,000)
Cancelled (in shares)	(475,000)	(173,000)
Outstanding at the end of the period (in shares)	5,592,000	5,602,000
Exercisable at the end of the period (in shares)	4,948,000
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 0.21	$ 0.21
Granted (in dollars per share)	$ 0.17	$ 0.15
Forfeited (in dollars per share)	$ 0.55	$ 0.23
Cancelled (in dollars per share)	$ 0.24	$ 0.24
Outstanding at the end of the period (in dollars per share)	$ 0.21	$ 0.21
Exercisable at the end of the period (in dollars per share)	$ 0.21
Average Remaining Contractual Life (Years)
Outstanding at the end of a period, Average Remaining Contractual Life	3 years 2 months 16 days
Exercisable at the end of a period, Average Remaining Contractual Life	2 years 5 months 8 days
Aggregate Intrinsic Value
Outstanding at the end of a period, Aggregate Intrinsic Value	6,500,000
Exercisable at the end of a period, Aggregate Intrinsic Value	5,500,000
Total unrecognized compensation cost related to unvested options	64,000
Weighted average period for recognition of unrecognized compensation cost	1 year 8 months 5 days
Weighted average fair value of options issued (in dollars per share)	$ 0.16	$ 0.10
Assumptions used
Interest rate, minimum (as a percent)	0.19%	0.27%
Interest rate, maximum (as a percent)	0.69%	2.65%
Volatility, minimum (as a percent)	204.10%	107.20%
Volatility, maximum (as a percent)	216.20%	169.00%
Expected dividend yield (as a percent)	0.00%	0.00%
Value of options granted (in dollars per share)	$ 0.16	$ 0.10
Stock options | High end of range
Aggregate Intrinsic Value
Weighted average fair value of options issued (in dollars per share)	$ 0.17	$ 0.13
Assumptions used
Expected life	6 years	6 years
Value of options granted (in dollars per share)	$ 0.17	$ 0.13
Stock options | Low end of range
Aggregate Intrinsic Value
Weighted average fair value of options issued (in dollars per share)	$ 0.12	$ 0.01
Assumptions used
Expected life	5 years	1 year
Value of options granted (in dollars per share)	$ 0.12	$ 0.01
2005 Plan | Stock options
Stock Based Compensation
Number of shares of common stock available to be granted	674,156
2005 Plan | Stock options | Non-employee directors
Stock Based Compensation
Vesting period	3 years
Number of equal quarterly installments	4
Vesting period	1 year	1 year
Number of Options
Granted (in shares)	112,500	112,500
2005 Plan | Stock options | Chairman of the Board
Stock Based Compensation
Number of equal quarterly installments	4
Number of Options
Granted (in shares)	45,000
2005 Plan | Stock options | Terminated employees
Stock Based Compensation
Stock compensation expense		2,000
Number of Options
Granted (in shares)		173,000
Cancelled (in shares)		(173,000)
Weighted Average Exercise Price
Granted (in dollars per share)		$ 0.24
Cancelled (in dollars per share)		$ 0.24
2005 Plan | Stock options | Employees
Stock Based Compensation
Vesting period	3 years
Number of Options
Granted (in shares)	355,000	350,000
2005 Plan | Stock options | Non-employees
Number of Options
Granted (in shares)		300,000
2005 Plan | Stock options with performance-based vesting | Employees
Number of Options
Granted (in shares)		565,000
2005 Plan | Non-qualified stock options | Low end of range
Stock Based Compensation
Exercise or purchase price relative to market values (as a percent)	85.00%
2005 Plan | Restricted common stock | Garden State and JFS
Stock Based Compensation
Stock compensation expense	$ 464,000
Shares issued in exchange for certain investor relations and relating consulting services	2,083,338
Period for which shares are restricted from being sold from the date of issuance	6 months
Stock Purchase Plan
Stock Based Compensation
Exercise or purchase price relative to market values (as a percent)	95.00%
Assumptions used
Period of intervals for purchase of shares of common stock by all eligible employees	6 months
Value of shares as a percent of gross compensation	10.00%
Shares reserved for future issuance	294,461
Activity in period (in shares)	0	0

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Income Taxes (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Total provision for income taxes computed at the federal statutory rate differs from amounts as provided
Tax benefit at federal statutory rate	$ (2,818)	$ (1,893)
State income taxes, net of U.S. federal income tax benefit	(11)	(331)
Permanent differences	17	44
Other	1,909	3,262
Change in valuation allowance	$ (903)	$ (1,082)

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Business and Liquidity

12 Months Ended

Dec. 31, 2012

Business and Liquidity

Business and Liquidity

1. Business and Liquidity

PLC Systems Inc. (“PLC” or the “Company”) is a medical device company specializing in innovative technologies for the cardiac and vascular markets. Over the past five years, the Company has begun initial commercialization outside the United States of its product, RenalGuard®, which currently represents the Company’s key strategic growth initiative and primary business focus.  The RenalGuard System consists of a proprietary console and accompanying single-use sets and is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. The Company conducts business operations as one operating segment.

For the year ended December 31, 2012, the Company incurred a net loss from continuing operations before taxes of approximately $8,387,000 and used cash in operations of approximately $3,165,000.  As of December 31, 2012, cash and cash equivalents were $258,000.  Management expects that quarterly losses and negative cash flows will continue during 2013.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Based upon the current financial condition of the Company and the expectation of continued quarterly losses during 2013, management is currently investigating ways to raise additional capital that can be completed in the next several months. The Company believes that its existing resources, based on its currently projected financial results, are sufficient to fund operations through the third quarter of 2013. Based upon current and anticipated revenue projections from foreign sales of our RenalGuard product, and the anticipated costs of its U.S. clinical trial, we expect that we will need to raise additional capital during the remainder of 2013 The Company was able to raise an additional $4,040,000 in capital on February 22, 2013, through the completion of financing with Palladium Capital Advisors LLC., (see Note 12).  The Company will continue to review its other expense areas to determine whether additional reductions in discretionary spending can be achieved.

The Company also believes that the recent publication of positive clinical results from two independent investigator-sponsored clinical trials in Italy, which show RenalGuard to be both a safe and effective product for the prevention of CIN in at-risk patients, presents a substantial opportunity for it to increase its sales and achieve profitable results in the next few years, provided the Company is able to raise the additional capital it needs in the near term to sustain its operations and expand its RenalGuard sales and marketing programs.

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Convertible Notes and Warrant Liabilities (Details 3) (USD $)	Dec. 31, 2012	Jul. 02, 2012	Dec. 31, 2011	Feb. 22, 2011
Assets and liabilities measured at fair value
Convertible Notes	$ 8,098,000		$ 5,327,000
Warrant liabilities	3,800,000		1,600,000
Total Liabilities	11,898,000	11,900,000	6,927,000	4,585,000
Balance
Assets and liabilities measured at fair value
Convertible Notes	8,098,000		5,327,000
Warrant liabilities	3,800,000		1,600,000
Total Liabilities	11,898,000		6,927,000
Significant Unobservable Inputs (Level 3)
Assets and liabilities measured at fair value
Convertible Notes	8,098,000		5,327,000
Warrant liabilities	3,800,000		1,600,000
Total Liabilities	$ 11,898,000		$ 6,927,000

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes

Schedule of provision for income taxes

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2012			2011
Loss before income taxes:
Continuing operations
United States	$	(8,288	)	$	(6,859	)
Foreign	(99		)	(131		)
	$	(8,387	)	(6,990		)
Current income tax benefit from continuing operations:
Federal	$	—		$	492
Foreign	—			—
State	—			—
	$	—		$	492
Deferred income tax benefit/(provision) from continuing operations:
Federal	$	2,444		3,335
Foreign	(104		)	(2		)
State	(1,437		)	(4,415		)
	903			(1,082		)
Change in valuation allowance	(903		)	1,082
	$	—		$	—
Benefit for income taxes from continuing operations	$	—		$	492
Provision for income taxes from gain on sale of discontinued operations	—			(492		)
Total provision for income taxes	$	—		$	—

Schedule of significant components of deferred tax assets

Significant components of the Company’s deferred tax assets as of December 31 are as follows (in thousands):

	2012			2011
Net federal and state operating loss carryforwards	$	24,689		$	23,611
Net foreign operating loss carryforwards	380			484
Accrued expenses and reserves	—			10
Tax credits	1,194			1,202
Other	295			348
Total deferred tax assets	26,558			25,655
Valuation allowance	(26,558		)	(25,655		)
Net deferred tax assets	$	—		$	—

Schedule of total provision for income taxes computed at the federal statutory rate differs from amounts as provided

Total provision for income taxes computed at the federal statutory rate differs from amounts provided as follows (in thousands):

	2012			2011
Tax benefit at federal statutory rate	$	(2,818	)	$	(1,893	)
State income taxes, net of U.S. federal income tax benefit	(11		)	(331		)
Permanent differences	17			44
Other	1,909			3,262
Change in valuation allowance	(903		)	(1,082		)
Total expense	$	—		$	—

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Convertible Notes and Warrant Liabilities (Tables)

12 Months Ended

Dec. 31, 2012

Convertible Notes and Warrant Liabilities

Summary of assets and liabilities measured at fair value

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2011:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Liabilities
Convertible notes	$	5,327,000	$	—	$	—	$	5,327,000
Warrant liabilities	$	1,600,000	$	—	$	—	$	1,600,000
Total Liabilities	$	6,927,000	$	—	$	—	$	6,927,000

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2012:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2012		(Level 1)		(Level 2)		(Level 3)
Liabilities
Convertible notes	$	8,098,000	$	—	$	—	$	8,098,000
Warrant liabilities	$	3,800,000	$	—	$	—	$	3,800,000
Total Liabilities	$	11,898,000	$	—	$	—	$	11,898,000

Schedule of changes in the Convertible Notes, Second Tranche Convertible Notes, Investor Warrants and 2012 Warrants

	Fair Value of Convertible Notes		Fair Value of Warrant Liabilities		Fair Value of Second Tranche Convertible Notes			Fair Value of 2012 Warrant Liabilities			Total
Allocation of initial proceeds	$	3,208,000	$	792,000	$	—		$	—		$	4,000,000
Initial fair value adjustment	$	469,000	$	116,000	$	—		$	—		$	585,000
February 22, 2011	$	3,677,000	$	908,000	$	—		$	—		$	4,585,000
Amortization of debt discount	$	225,000	$	—	$	—		$	—		$	225,000
Fair value adjustment	$	1,425,000	$	692,000	$	—		$	—		$	2,117,000
Balance December 31, 2011	$	5,327,000	$	1,600,000	$	—		$	—		$	6,927,000
Allocation of initial proceeds	$	—	$	—	$	417,000		$	583,000		$	1,000,000
Initial fair value adjustment	$	—	$	—	$	1,656,000		$	2,317,000		$	3,973,000
July 2, 2012	$	—	$	—	$	2,073,000		$	2,900,000		$	11,900,000
Amortization of debt discount	$	265,000	$	—	$	66,000		$	—		$	331,000
Fair value adjustment	$	918,000	$	400,000	$	(551,000	)	$	(1,100,000	)	$	(333,000	)
Balance December 31, 2012	$	6,510,000	$	2,000,000	$	1,588,000		$	1,800,000		$	11,898,000

Convertible Notes and Warrant Liabilities

Summary of Warrants outstanding

	Warrants	Exercise Price
Beginning balance — December 31, 2011	40,000,000	$	0.15
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance — December 31, 2012	40,000,000	$	0.15

Convertible Notes

Convertible Notes and Warrant Liabilities

Schedule of key inputs required to estimate fair value

Input	February 22, 2011			December 31, 2011			December 31, 2012
Stock Price	$	0.0755		$	0.1075		$	0.15
Strike Price	$	0.10		$	0.10		$	0.10
Expected remaining term (in years)	3.00			2.15			1.15
Stock Volatility	95		%	100		%	105		%
Risk-Free Rate	1.22		%	0.27		%	0.17		%
Dividend Rate	0		%	0		%	0		%
Outstanding Shares of Common Stock	30,351,092			30,351,092			32,434,430
Effective discount rate	20.3		%	13.2		%	13.1		%
Probability of forced redemption	20		%	20		%	20		%

Convertible Notes | Second Tranche

Convertible Notes and Warrant Liabilities

Schedule of key inputs required to estimate fair value

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.10		$	0.10
Expected remaining term (in years)	3			2.50
Stock Volatility	100		%	100		%
Risk-Free Rate	0.39		%	0.31		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430
Effective discount rate	10		%	13.2		%
Probability of forced redemption	20		%	20		%

Warrant Liabilities

Convertible Notes and Warrant Liabilities

Schedule of key inputs required to estimate fair value

Input	February 22, 2011			December 31, 2011			December 31, 2012
Stock Price	$	0.0755		$	0.1075		$	0.15
Exercise Price	$	0.15		$	0.15		$	0.15
Expected Life (in years)	5.00			4.15			3.15
Stock Volatility	90		%	95		%	100		%
Risk-Free Rate	2.16		%	0.63		%	0.39		%
Dividend Rate	0		%	0		%	0		%
Outstanding Shares of Common Stock	30,351,092			30,351,092			32,434,430

$0.15 Warrants

Convertible Notes and Warrant Liabilities

Summary of Warrants outstanding

$0.15 Warrants	Warrants	Exercise  Price
Beginning balance at December 31, 2011	—	$	—
Add: Second Tranche Agreement	10,000,000	0.15
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance at December 31, 2012	10,000,000	$	0.15

Schedule of key inputs required to estimate fair value

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.15		$	0.15
Expected Life (in years)	5			4.50
Stock Volatility	110		%	100		%
Risk-Free Rate	0.67		%	0.63		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430

$0.25 Warrants

Convertible Notes and Warrant Liabilities

Summary of Warrants outstanding

$0.25 Warrants	Warrants	Exercise  Price
Beginning balance at December 31, 2011	—	$	—
Add: Second Tranche Agreement	10,000,000	0.25
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance at December 31, 2012	10,000,000	$	0.25

Schedule of key inputs required to estimate fair value

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.25		$	0.25
Expected Life (in years)	5			4.50
Stock Volatility	110		%	100		%
Risk-Free Rate	0.67		%	0.63		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430

XML

Convertible Notes and Warrant Liabilities (Details 4) (USD $)	12 Months Ended		1 Months Ended	12 Months Ended			0 Months Ended	12 Months Ended	0 Months Ended	12 Months Ended	1 Months Ended	12 Months Ended			1 Months Ended	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Feb. 28, 2011 Warrant Liabilities	Dec. 31, 2012 Warrant Liabilities	Dec. 31, 2011 Warrant Liabilities	Feb. 22, 2011 Warrant Liabilities	Jul. 02, 2012 $0.15 Warrants	Dec. 31, 2012 $0.15 Warrants	Jul. 02, 2012 $0.25 Warrants	Dec. 31, 2012 $0.25 Warrants	Feb. 28, 2011 Convertible Notes	Dec. 31, 2012 Convertible Notes	Dec. 31, 2011 Convertible Notes	Feb. 22, 2011 Convertible Notes	Jul. 31, 2012 Convertible Notes Second Tranche	Dec. 31, 2012 Convertible Notes Second Tranche	Jul. 02, 2012 Convertible Notes Second Tranche
Input
Stock Price (in dollars per share)				$ 0.15	$ 0.1075	$ 0.0755	$ 0.20	$ 0.15	$ 0.20	$ 0.15		$ 0.15	$ 0.1075	$ 0.0755		$ 0.15	$ 0.20
Exercise Price (in dollars per share)				$ 0.15	$ 0.15	$ 0.15	$ 0.15	$ 0.15	$ 0.25	$ 0.25		$ 0.10	$ 0.10	$ 0.10		$ 0.10	$ 0.10
Expected Life			5 years	3 years 1 month 24 days	4 years 1 month 24 days		5 years	4 years 6 months	5 years	4 years 6 months	3 years	1 year 1 month 24 days	2 years 1 month 24 days		3 years	2 years 6 months
Stock Volatility (as a percent)			90.00%	100.00%	95.00%		110.00%	100.00%	110.00%	100.00%	95.00%	105.00%	100.00%		100.00%	100.00%
Risk-Free Rate (as a percent)			2.16%	0.39%	0.63%		0.67%	0.63%	0.67%	0.63%	1.22%	0.17%	0.27%		0.39%	0.31%
Dividend Rate (as a percent)			0.00%	0.00%	0.00%		0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%		0.00%	0.00%
Outstanding Shares of Common Stock	31,139	30,351	30,351,092	32,434,430	30,351,092		30,976,092	32,434,430	30,976,092	32,434,430	30,351,092	32,434,430	30,351,092		30,976,092	32,434,430
Effective discount rate (as a percent)											20.30%	13.10%	13.20%		10.00%	13.20%
Probability of forced redemption (as a percent)											20.00%	20.00%	20.00%		20.00%	20.00%
Redemption amount due pursuant to clause (II)	$ 0

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Business and Liquidity (Details) (USD $)	0 Months Ended	12 Months Ended
	Feb. 22, 2013	Dec. 31, 2012 item	Dec. 31, 2011	Dec. 31, 2010
Business and Liquidity
Period since the entity has begun commercialization outside the United States of its newest product, RenalGuard		5 years
Number of operating segments		1
Loss from continuing operations		$ 8,387,000	$ 6,990,000
Cash used in operations		3,165,000	3,603,000
Cash and cash equivalents		258,000	2,585,000	1,324,000
Number of independent investigator-sponsored clinical trials		2
Additional capital	$ 4,040,000

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Significant Accounting Policies (Details) (USD $)	Dec. 31, 2012 item	Mar. 31, 2011 TMR business	Feb. 02, 2011 TMR business
Significant Accounting Policies
Number of wholly owned subsidiaries	2
Discontinued Operations
Purchase price received in cash		$ 1,000,000	$ 1,000,000
Company's obligations under service contracts assumed		$ 614,000	$ 614,000

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities:
Net loss	$ (8,387,000)	$ (5,758,000)
Income from discontinued operations		(53,000)
Gain on sale of discontinued operations, net of taxes		(687,000)
Depreciation and amortization	43,000	9,000
Stock-based compensation expense	544,000	148,000
Change in fair value of warrant liabilities	1,617,000	808,000
Change in fair value of convertible notes	2,024,000	1,894,000
Financing costs associated with convertible notes	80,000	530,000
Non-cash interest expense	331,000	225,000
Deferred income taxes		(492,000)
Change in assets and liabilities:
Accounts receivable	48,000	(321,000)
Inventory	56,000	72,000
Prepaid expenses and other assets	58,000	66,000
Accounts payable	228,000	(194,000)
Deferred revenue	32,000	186,000
Accrued liabilities	161,000	(36,000)
Net cash flows used in operating activities	(3,165,000)	(3,603,000)
Cash flows from investing activities:
Purchase of property and equipment	(74,000)	(18,000)
Net cash used for investing activities	(74,000)	(18,000)
Cash flows from financing activities:
Net proceeds from issuance of convertible notes and warrants	920,000	3,605,000
Net cash provided by financing activities	920,000	3,605,000
Discontinued Operations:
Net cash provided by operating activities		210,000
Net cash provided by investing activities		1,000,000
Net cash provided by discontinued operations		1,210,000
Effect of exchange rate changes on cash and cash equivalents	(8,000)	67,000
Net (decrease) increase in cash and cash equivalents	(2,327,000)	1,261,000
Cash and cash equivalents at beginning of period	2,585,000	1,324,000
Cash and cash equivalents at end of period	258,000	2,585,000
Supplemental disclosure of cash flow information:
Cash paid for interest	$ 217,000	$ 171,000

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Significant Accounting Policies (Details 2)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Revenues | Concentrations of credit risk | Artech
Concentrations of Credit Risk
Percentage of concentration risk	35.00%	46.00%
Revenues | Concentrations of credit risk | Discomed
Concentrations of Credit Risk
Percentage of concentration risk	29.00%	0.00%
Revenues | Concentrations of credit risk | ACIST
Concentrations of Credit Risk
Percentage of concentration risk	9.00%	12.00%
Revenues | RenalGuard
Concentrations of Credit Risk
Percentage of concentration risk	100.00%	82.00%
Gross accounts receivable | Concentrations of credit risk | Artech
Concentrations of Credit Risk
Percentage of concentration risk	73.00%
Gross accounts receivable | Concentrations of credit risk | Discomed
Concentrations of Credit Risk
Percentage of concentration risk	0.00%
Gross accounts receivable | Concentrations of credit risk | ACIST
Concentrations of Credit Risk
Percentage of concentration risk	13.00%

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Discontinued Operations (Details) (USD $)	12 Months Ended	1 Months Ended
	Dec. 31, 2011	Feb. 28, 2011 TMR business	Mar. 31, 2011 TMR business	Feb. 02, 2011 TMR business
Discontinued Operations
Purchase price in cash			$ 1,000,000	$ 1,000,000
Company's obligations under service contracts assumed			614,000	614,000
Total carrying value of the assets sold				385,000
Transaction costs		50,000
Gain on sale of discontinued operations before income taxes		1,179,000
Revenues:
Product sales	455,000
Service fees	68,000
Total	523,000
Income from discontinued operations	$ 53,000

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 258	$ 2,585
Accounts receivable, net of allowance of $2 at December 31, 2012 and 2011, respectively	402	453
Inventories	182	238
Prepaid expenses and other current assets	178	233
Total current assets	1,020	3,509
Equipment, furniture and leasehold improvements, net	67	36
Other assets	4	4
Total assets	1,091	3,549
Current liabilities:
Accounts payable	377	149
Accrued compensation	78	63
Accrued other	368	221
Deferred revenue	317	277
Total current liabilities	1,140	710
Convertible notes	8,098	5,327
Warrant liabilities	3,800	1,600
Commitments and Contingencies (Note 7)
Stockholders' equity (deficit):
Common stock, no par value, unlimited shares authorized, 32,434 shares issued and outstanding at December 31, 2012 and 30,351 shares issued and outstanding at December 31, 2011	93,893	93,893
Additional paid in capital	1,540	996
Accumulated deficit	(107,114)	(98,727)
Accumulated other comprehensive loss	(266)	(250)
Total stockholders' deficit	(11,947)	(4,088)
Total liabilities and stockholders' deficit	$ 1,091	$ 3,549

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Loss from continuing operations before income taxes:
United States	$ (8,288)	$ (6,859)
Foreign	(99)	(131)
Net loss from continuing operations before income taxes	(8,387)	(6,990)
Current income tax benefit from continuing operations:
Federal		492
Current income tax benefit from continuing operations		492
Deferred income tax benefit/(provision) from continuing operations:
Federal	2,444	3,335
Foreign	(104)	(2)
State	(1,437)	(4,415)
Deferred income tax benefit/(provision) from continuing operations	903	(1,082)
Change in valuation allowance	(903)	(1,082)
Benefit for income taxes from continuing operations		492
Provision for income taxes from gain on sale of discontinued operations		$ (492)

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss	$ (8,387)	$ (5,758)
Other comprehensive (loss) income:
Foreign currency translation adjustments	(16)	88
Other comprehensive (loss) income	(16)	88
Comprehensive loss	$ (8,403)	$ (5,670)

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Inventories (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Inventories
Raw materials	$ 143	$ 157
Finished goods	39	81
Total	$ 182	$ 238

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Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2012

Significant Accounting Policies

Schedule of net sales to unaffiliated customers (by origin)

Net sales to unaffiliated customers (by origin) are summarized below (in thousands):

	South America		North America		Europe		Other		Total
2012
Net sales	$	312	$	35	$	588	$	145	$	1,080
2011
Net sales	$	—	$	124	$	547	$	—	$	671

Schedule of useful lives of equipment, furniture, leasehold improvements and long-lived assets

Equipment	2-5 years
Office furniture and fixtures	5 years
Leasehold improvements	Shorter of life of lease or useful life

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Equipment, Furniture and Leasehold Improvements (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements, gross	$ 710,000	$ 636,000
Less accumulated depreciation and amortization	643,000	600,000
Equipment, furniture and leasehold improvements, net	67,000	36,000
Depreciation expense	43,000	9,000
Equipment
Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements, gross	488,000	414,000
Office furniture and fixtures
Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements, gross	218,000	218,000
Leasehold improvements
Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements, gross	$ 4,000	$ 4,000

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Equipment, Furniture and Leasehold Improvements (Tables)

12 Months Ended

Dec. 31, 2012

Equipment, Furniture and Leasehold Improvements

Schedule of equipment, furniture and leasehold improvements

Equipment, furniture and leasehold improvements consist of the following at December 31 (in thousands):

	2012		2011
Equipment	$	488	$	414
Office furniture and fixtures	218		218
Leasehold improvements	4		4
	710		636
Less accumulated depreciation and amortization	643		600
	$	67	$	36

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock	Additional Paid in Capital	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)
Balance at Dec. 31, 2010	$ 1,434	$ 93,893	$ 848	$ (92,969)	$ (338)
Balance (in shares) at Dec. 31, 2010		30,351,000
Increase (Decrease) in Stockholders' Equity
Stock based compensation	148		148
Net loss	(5,758)			(5,758)
Other comprehensive income (loss)	88				88
Balance at Dec. 31, 2011	(4,088)	93,893	996	(98,727)	(250)
Balance (in shares) at Dec. 31, 2011	30,351,000	30,351,000
Increase (Decrease) in Stockholders' Equity
Stock based compensation	80		80
Issuance of restricted stock	464		464
Issuance of restricted stock (in shares)		2,083,000
Net loss	(8,387)			(8,387)
Other comprehensive income (loss)	(16)				(16)
Balance at Dec. 31, 2012	$ (11,947)	$ 93,893	$ 1,540	$ (107,114)	$ (266)
Balance (in shares) at Dec. 31, 2012	32,434,000	32,434,000

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
CONSOLIDATED BALANCE SHEETS
Accounts receivable, allowance (in dollars)	$ 2	$ 2
Par value (in dollars per share)	$ 0	$ 0
Common stock, shares issued	32,434	30,351
Common stock, shares outstanding	32,434	30,351

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Discontinued Operations

12 Months Ended

Dec. 31, 2012

Discontinued Operations

Discontinued Operations

9. Discontinued Operations

On November 5, 2010, the Company entered into an agreement to sell its TMR business to Novadaq. This transaction was approved by the Company’s shareholders at a special meeting on January 31, 2011 and the transaction closed on February 1, 2011.

Under terms of the agreement, Novadaq acquired substantially all of the Company’s assets that were used in the TMR business including all manufacturing rights, substantially all product inventories, and all equipment, intellectual property, regulatory approvals, clinical data and documentation related to TMR, for a purchase price of $1 million in cash and the assumption of all the Company’s obligations under service contracts as of the closing date totaling $614,000. The total carrying value of the assets sold as of the transaction date was $385,000. In addition, the Company incurred transaction costs of $50,000. The Company has recorded a gain on sale of discontinued operations before income taxes of $1,179,000 in the statement of operations.

The operating results of these operations, including those related to the prior periods, have been reclassified from continuing operations to discontinued operations in the accompanying consolidated financial statements.

Revenues and net income attributable to discontinued operations for the year ended December 31, 2011 are as follows:

	Year ended December 31, 2011
	(In thousands)
Revenues:
Product sales	$	455
Service fees	68
Total	523
Income from discontinued operations	$	53

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Mar. 15, 2013	Jun. 30, 2012
Document and Entity Information
Entity Registrant Name	PLC SYSTEMS INC
Entity Central Index Key	0000879682
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 5,881,127
Entity Common Stock, Shares Outstanding		54,722,410
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY

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Convertible Notes and Warrant Liabilities

12 Months Ended

Dec. 31, 2012

Convertible Notes and Warrant Liabilities

Convertible Notes and Warrant Liabilities

10. Convertible Notes and Warrant Liabilities

On February 22, 2011 (the “Original Issue Date”), the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) and a 5% Senior Secured Convertible Debenture Agreement (the “Note Agreement”) with GCP IV LLC (the “Investors” or “Holders”) pursuant to which the Company agreed to issue and sell in a private placement to the Investors an aggregate principal amount of $4,000,000 of convertible notes due February 22, 2014 (the “Convertible Notes”) and 40,000,000 warrants, which expire February 22, 2016 (the “Investor Warrants”).  Under the terms of the Securities Purchase Agreement, the Company had the opportunity to raise up to an additional $2,000,000 from the Holders of the Convertible Notes in two separate $1,000,000 tranches, based upon meeting certain operational milestones within certain periods of time.  The deadline for achieving the operational milestones for the first $1,000,000 tranche expired in February 2012 without the Company achieving such milestones; however, as discussed below, the Investors agreed to waive both the deadline and the achievement of these milestones as a condition for the investment of the first additional $1,000,000 tranche (“Second Tranche”) which was completed on July 2, 2012.

Convertible Notes

The Convertible Notes require payment of interest on the outstanding principal amount, in cash, at the rate of 5% per annum, payable quarterly on January 1, April 1, July 1, and October 1, beginning on the first such date following the Original Issue Date, on each conversion date (for the principal amount then being converted), on each optional redemption date (for the principal amount then being redeemed) and on the maturity date. Interest is calculated on the basis of a 360-day year and accrues daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts that may become due in connection with the Convertible Notes, has been made.

The Holders may convert the outstanding principal amount of the Convertible Notes into shares of the Company’s common stock at the conversion price of $0.10 per share (“Conversion Price”). The Conversion Price is subject to adjustment in the event of (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, distributions of assets or evidence of indebtedness, sales or transfers of substantially all assets, share exchanges or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then Conversion Price.

At any time after February 2012, and upon entering into a change of control transaction or Fundamental Transaction, as defined in the Debenture Agreement, the Company may deliver a notice to the Holders of its irrevocable election to redeem all of the then outstanding principal of the Convertible Notes for cash in an amount equal to the sum of (a) the greater of (i) the outstanding amount of the Convertible Notes divided by the Conversion Price on the date of the mandatory default amount, as defined in the Purchase Agreement, is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the Volume Weighted Average Price (“VWAP”) of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the Notes, plus 100% of accrued and unpaid interest, and (b) all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the Convertible Notes. Such amount would include the liquidated damages due under the default provision of the Purchase Agreement.

The Company is required to repay, in cash, any outstanding principal amount of the Convertible Notes on February 22, 2014 and is not permitted, except upon entering into a change of control transaction or fundamental transaction as noted above, to prepay any portion of the principal amount without prior written consent of the Holders.

Investor Warrants

On February 22, 2011, in connection with the issuance of the Convertible Notes, the Company issued warrants for the purchase of up to 40,000,000 shares of common stock at the exercise price of $0.15 per share and with an expiration date of February 22, 2016 (the “Warrants”). The following is a summary of the Warrants outstanding as of December 31, 2012:

	Warrants	Exercise Price
Beginning balance — December 31, 2011	40,000,000	$	0.15
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance — December 31, 2012	40,000,000	$	0.15

The Warrants are exercisable in cash to purchase shares of the Company’s common stock (the “Warrant Shares”). The Exercise Price may be paid pursuant to a cashless exercise provision if the Warrant Shares have not been registered within six months after the Warrants are issued. The Exercise Price of the Warrants shall be adjusted in the event of (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, distributions of assets or evidence of indebtedness, sales or transfers of substantially all assets, share exchanges or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then Exercise Price.

In connection with a Fundamental Transaction, as defined in the Purchase Agreement, that is an all-cash transaction, the Company shall have the right to purchase from the Holders all, but not less than all, of the unexercised portion of the Warrants by paying in cash to the Holders an amount equal to 30% of the Exercise Price multiplied by the number of shares of Common Stock for which the Warrants are exercisable immediately prior to such change of control transaction.

Features of the 2012 Tranche 2 Amendment

On July 2, 2012, the Company entered into an Amendment and Waiver to Securities Purchase Agreement (the “Amendment and Waiver”) to amend our Securities Purchase Agreement with the Investors.  Under the Amendment and Waiver agreement the Company agreed to issue and sell in a private placement to the Investors an aggregate principle amount of $1,000,000 (the “Second Tranche”) of 5% Senior Secured Convertible Debentures of the Company (the “Second Convertible Notes”), warrants to purchase up to 10,000,000 shares of common stock at an initial exercise price of $0.15 per share (the “$0.15 Warrants”) and warrants to purchase up to 10,000,000 shares of common stock at an initial exercise price of $0.25 per share (the “$0.25 Warrants” and together with the $0.15 Warrants, the “2012 Warrants”).

The Second Tranche Convertible Notes

The Second Tranche Convertible Notes contains the same terms as the original Convertible Notes and requires payment of interest at the rate of 5% per annum, payable quarterly and mature on July 2, 2015.  The Second Tranche Convertible Notes provide the Investors the option at any time prior to the repayment of the notes to convert any portion of the outstanding Second Tranche balance into fully-paid and non-assessable restricted shares of common stock of the Company at an initial conversion price of $0.10 per share (the “Conversion Price”).

The Convertible Notes include an adjustment close providing that if the Company issues additional shares of common stock prior to the repayment of the Second Tranche at a price per share less than the effective conversion price of the Second Tranche Convertible Notes, the conversion price will, subject to certain exceptions, be reduced to an amount equal to the price per share paid or payable for the common stock of the Company in such subsequent issuance or deemed subsequent issuance.  The Conversion price is subject to adjustments in the event of (a) stock splits, stock dividends, combinations, dividends, rights offerings and mergers of sales of assets or similar events and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then Conversion Price.

The Second Tranche Convertible Notes and the Purchase Agreement covering both are secured by a security interest in all assets of the Company and its subsidiaries and all such obligations are guaranteed jointly and severally by the Company’s Subsidiaries. The Second Tranche Convertible Notes also contain non-financial covenants which limit the Company and its subsidiaries from incurring subsequent indebtedness, incur liens, amend organizational documents, repurchasing or repaying other debt, paying cash dividends and entering into affiliate transactions.

The Second Tranche Convertible Notes may be redeemed at the option of the Company on the same terms as the Convertible Notes only in connection with a change of control or other fundamental transaction of the Company and subject to the satisfaction of other conditions including, without limitation, that the shares issuable upon conversion of the debentures are freely tradable and that there is no event of default.

The 2012 Warrants

On July 2, 2012, the Company issued warrants for the purchase of up to 20,000,000 shares of common stock with five year terms.  The warrants were issued to allow the Investors to purchase up to 10,000,000 shares of common stock at an initial purchase price of $0.15 per share and the remaining 10,000,000 shares of common stock at an initial purchase price of $0.25 per share. The terms of the 2012 Warrants are identical to those of the Warrants, except that the 2012 Warrants are exercisable for a period of five years from the date of issuance and contain different exercise prices. The following is a summary of the 2012 Warrants outstanding as of December 31, 2012:

$0.15 Warrants	Warrants	Exercise  Price
Beginning balance at December 31, 2011	—	$	—
Add: Second Tranche Agreement	10,000,000	0.15
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance at December 31, 2012	10,000,000	$	0.15

$0.25 Warrants	Warrants	Exercise  Price
Beginning balance at December 31, 2011	—	$	—
Add: Second Tranche Agreement	10,000,000	0.25
Add: Adjustments (pursuant to warrants agreement)	—	n/a
Less: Exercised	—	n/a
Ending balance at December 31, 2012	10,000,000	$	0.25

The 2012 Warrants are exercisable in cash to purchase shares of the Company’s common stock.  The exercise price may be paid pursuant to a cashless exercise provision if the 2012 Warrants have no effective registration statement registering the shares underlying the warrants by surrendering warrant shares having a value equal to the exercise price of the portion of the warrants being exercised.  The exercise price of the 2012 Warrants shall be adjusted in the event of (a) stock splits, stock dividends, combinations, rights offerings, mergers or sales of assets or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the exercise price.

The 2012 Warrants provide that the 2012 Warrants may be purchased at the option of the Company only in connection with a change in control of the Company that is an all-cash transaction.  The purchase price is 30% of the then effective exercise price of the warrants multiplied by the number of common shares for which the 2012 Warrants are then exercisable.

Accounting for the Convertible Notes, Tranche Two Convertible Notes, Investor Warrants and 2012 Warrants

Investor Warrants and 2012 Warrants

In June 2008, the FASB issued ASC 815-40-15 (formerly EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock), which was effective for the Company in 2009. This issued guidance requires that derivative instruments be evaluated for certain contingencies and anti-dilution provisions that would affect their equity classification as a derivative under ASC 815, Derivatives and Hedging (ASC 815) and requires the instruments to be classified as liabilities and reported at fair value.

Upon issuance, the Investor Warrants and 2012 Warrants were not considered indexed to the Company’s own stock and therefore are required to be accounted for as freestanding derivative instruments and classified as a liability. As a result, the Investor Warrants and 2012 Warrants were recorded as a liability at fair value as of December 31, 2012 with subsequent changes in fair value recorded in the consolidated statement of operations.

Convertible Notes and Tranche Two Convertible Notes

The Company has determined that the Convertible Notes and Tranche Two Convertible Notes constitute a hybrid instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. The Company has identified all of the derivatives associated with the February 22, 2011 financing and July 2, 2012 additional financing.  As permitted under ASC 825-10-10 — Financial Instruments, as it relates to the fair value option, the Company has elected, as of February 22, 2011 and July 2, 2012, to measure the Convertible Notes and the Tranche Two Convertible Notes in their entirety at fair value with changes in fair value recognized in the Consolidated Statement of Operations as either a gain or loss until the notes are settled. As such, the Company has appropriately valued the embedded derivatives as a single hybrid contract together with the Convertible Notes and Tranche Two Convertible Notes. This election was made by the Company after determining the aggregate fair value of the Convertible Notes and Tranche Two Convertible Notes to be more meaningful in the context of the Company’s financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained in the Convertible Notes Tranche Two Convertible Notes.

Convertible Notes and Investor Warrants

Upon issuance of the Convertible Notes, the Company allocated the proceeds received to the Convertible Notes and Investor Warrants on a relative fair value basis. As a result of such allocation, the Company determined the initial carrying value of the Notes to be $3,208,000. The Notes were immediately marked to fair value, resulting in a derivative liability in the amount of $3,677,000. As of December 31, 2012 and 2011, the Convertible Notes have been marked to fair value resulting in a derivative liability of $6,510,000 and $5,327,000, respectively. The net charge to other income (expense) was expense of $918,000 and $1,894,000 in the years ended December 31, 2012 and 2011, respectively. The debt discount in the amount of $792,000 (resulting from the allocation of proceeds) is being amortized to interest expense using the effective interest method over the expected term of the Convertible Notes. The Company amortized $265,000 and $225,000 in the years ended December 31, 2012 and 2011, respectively, which is a component of interest expense.

Upon issuance, the Company allocated $792,000 of the initial proceeds to the Investor Warrants and immediately marked them to fair value resulting in a derivative liability of $908,000. As of December 31, 2012 and 2011, the Investor Warrants have been marked to fair value resulting in a derivative liability of $2,000,000 and $1,600,000, respectively. The charge to other income (expense) for the years ended December 31, 2012 and 2011 was expense of $918,104 and $808,000, respectively.

Second Tranche Convertible Notes and 2012 Warrants

Upon issuance of the Second Tranche Convertible Notes, the Company allocated the proceeds received to the Second Tranche Convertible Notes and 2012 Warrants on a relative fair value basis.  As a result of such allocation, the Company determined the initial carrying value of the Second Tranche Convertible Notes to be $417,000.  The Second Tranche Convertible Notes were immediately marked to fair value, resulting in a derivative liability in the amount of $2,073,000.  As of December 31, 2012, the Second Tranche Convertible Notes have been marked to fair value resulting in a derivative liability of $1,588,000.  The net charge to other income (expense) was a loss of $1,105,000 for the year ended December 31, 2012.  The debt discount in the amount of $583,000 (resulting from the allocation of proceeds) is being amortized to interest expense using the effective interest method over the expected term of the Convertible Notes. The Company amortized $66,000 and $0 in the years ended December 31, 2012 and 2011, respectively, which is a component of interest expense.

Upon issuance of the 2012 Warrants, the Company allocated $583,000 of the initial proceeds to the 2012 Warrants and immediately marked them to fair value resulting in a derivative liability of $2,900,000.  As of December 31, 2012, the 2012 Investor Warrants have been marked to fair value resulting in a derivative liability of $1,800,000. The charge to other income (expense) for the year ended December 31, 2012 was expense of $1,100,000.

The Company records the fair value of Convertible Notes and Investor Warrants as long term liabilities.

Financing Costs

Financing costs include costs associated with obtaining the February 22, 2011 financing.  Financing costs totaling $530,000 have been recorded in other income (expense) in the year ended December 31, 2011, $135,000 of which were recorded in prepaid expenses and other current assets at December 31, 2010 and expensed upon closing of the transaction in February 2011.

The Company incurred financing costs associated with obtaining the July 2, 2012 financing which totaled $80,000 and were recorded in other income (expense) in the year ended December 31, 2012.

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2011:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Liabilities
Convertible notes	$	5,327,000	$	—	$	—	$	5,327,000
Warrant liabilities	$	1,600,000	$	—	$	—	$	1,600,000
Total Liabilities	$	6,927,000	$	—	$	—	$	6,927,000

The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2012:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2012		(Level 1)		(Level 2)		(Level 3)
Liabilities
Convertible notes	$	8,098,000	$	—	$	—	$	8,098,000
Warrant liabilities	$	3,800,000	$	—	$	—	$	3,800,000
Total Liabilities	$	11,898,000	$	—	$	—	$	11,898,000

A summary of changes in the Convertible Notes, Second Tranche Convertible Notes, Investor Warrants and 2012 Warrants is as follows:

	Fair Value of Convertible Notes		Fair Value of Warrant Liabilities		Fair Value of Second Tranche Convertible Notes			Fair Value of 2012 Warrant Liabilities			Total
Allocation of initial proceeds	$	3,208,000	$	792,000	$	—		$	—		$	4,000,000
Initial fair value adjustment	$	469,000	$	116,000	$	—		$	—		$	585,000
February 22, 2011	$	3,677,000	$	908,000	$	—		$	—		$	4,585,000
Amortization of debt discount	$	225,000	$	—	$	—		$	—		$	225,000
Fair value adjustment	$	1,425,000	$	692,000	$	—		$	—		$	2,117,000
Balance December 31, 2011	$	5,327,000	$	1,600,000	$	—		$	—		$	6,927,000
Allocation of initial proceeds	$	—	$	—	$	417,000		$	583,000		$	1,000,000
Initial fair value adjustment	$	—	$	—	$	1,656,000		$	2,317,000		$	3,973,000
July 2, 2012	$	—	$	—	$	2,073,000		$	2,900,000		$	11,900,000
Amortization of debt discount	$	265,000	$	—	$	66,000		$	—		$	331,000
Fair value adjustment	$	918,000	$	400,000	$	(551,000	)	$	(1,100,000	)	$	(333,000	)
Balance December 31, 2012	$	6,510,000	$	2,000,000	$	1,588,000		$	1,800,000		$	11,898,000

Valuation — Methodology and Significant Inputs Assumptions

Fair values for the Company’s derivatives and financial instruments are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates.  Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. The methods and significant inputs and assumptions utilized in estimating the fair value of the Warrant Liabilities and Convertible Notes are discussed below. Each of the measurements is considered a Level 3 measurement as a result of at least one significant unobservable input.

Warrant Liabilities

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the Warrant Liabilities as of February 22, 2011, December 31, 2011 and December 31, 2012. This model is widely used in estimating value of European options dependent upon a non-paying dividend stock and fixed inputs. This model is subject to the significant assumptions discussed below and requires the following key inputs with respect to the Company and/or instrument:

Input	February 22, 2011			December 31, 2011			December 31, 2012
Stock Price	$	0.0755		$	0.1075		$	0.15
Exercise Price	$	0.15		$	0.15		$	0.15
Expected Life (in years)	5.00			4.15			3.15
Stock Volatility	90		%	95		%	100		%
Risk-Free Rate	2.16		%	0.63		%	0.39		%
Dividend Rate	0		%	0		%	0		%
Outstanding Shares of Common Stock	30,351,092			30,351,092			32,434,430

2012 Warrants

$0.15 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the $0.15 Warrants as of July, 2, 2012 and December 30, 2012.

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.15		$	0.15
Expected Life (in years)	5			4.50
Stock Volatility	110		%	100		%
Risk-Free Rate	0.67		%	0.63		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430

$0.25 Warrants

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the $0.25 Warrants as of July, 2, 2012 and December 31, 2012.

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.25		$	0.25
Expected Life (in years)	5			4.50
Stock Volatility	110		%	100		%
Risk-Free Rate	0.67		%	0.63		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430

Convertible Notes

A binomial lattice model was utilized to estimate the fair value of the Convertible Notes as of February 22, 2011, December 31, 2011 and December 31, 2012. The binomial model considers the key features of the Convertible Notes, as noted above, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Company’s stock price, without effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Second, a discrete simulation of the Company’s stock price, with effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Third, based upon the simulated stock price with dilution effect, an analysis of the higher position of a conversion position, redemption position, or holding position (i.e. fair value of the respective future nodes value discounted using the applicable discount rate) was conducted relative to each node until a final fair value of the instrument is conducted at the node representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:

Input	February 22, 2011			December 31, 2011			December 31, 2012
Stock Price	$	0.0755		$	0.1075		$	0.15
Strike Price	$	0.10		$	0.10		$	0.10
Expected remaining term (in years)	3.00			2.15			1.15
Stock Volatility	95		%	100		%	105		%
Risk-Free Rate	1.22		%	0.27		%	0.17		%
Dividend Rate	0		%	0		%	0		%
Outstanding Shares of Common Stock	30,351,092			30,351,092			32,434,430
Effective discount rate	20.3		%	13.2		%	13.1		%
Probability of forced redemption	20		%	20		%	20		%

Second Tranche Convertible Notes

A binomial lattice model was utilized to estimate the fair value of the Second Tranche Convertible Notes. The binomial model considers the key features of the Second Tranche Convertible Notes, as noted above, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Company’s stock price, without effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Second, a discrete simulation of the Company’s stock price, with effects of dilution due to the conversion feature, was conducted at each node and throughout the expected life of the instrument. Third, based upon the simulated stock price with dilution effect, an analysis of the higher position of a conversion position, redemption position, or holding position (i.e. fair value of the respective future nodes value discounted using the applicable discount rate) was conducted relative to each node until a final fair value of the instrument is conducted at the node representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:

Input	July 2, 2012			December 31, 2012
Stock Price	$	0.20		$	0.15
Exercise Price	$	0.10		$	0.10
Expected remaining term (in years)	3			2.50
Stock Volatility	100		%	100		%
Risk-Free Rate	0.39		%	0.31		%
Dividend Rate	0		%	0		%
Outstanding Shares of Common Stock	30,976,092			32,434,430
Effective discount rate	10		%	13.2		%
Probability of forced redemption	20		%	20		%

The following are significant assumptions utilized in developing the inputs:

· The Company’s common stock shares are traded on the OTC Bulletin Board and, accordingly, the stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date;

· The expected future stock prices of the Company’s stock were modeled to include the effect of dilution upon conversion of the instruments to shares of common stock;

· Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock) and (ii) the annualized daily volatility of comparable companies’ stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instrument. Historic prices of the Company and comparable companies’ common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates;

· Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying stock;

· The risk-free interest rate is based on the U.S. Treasury Yield curve in effect as of the valuation date for the expected term;

· With respect to the Convertible Notes and Second Tranche Convertible Notes, the Company is expected to pay all accrued interest due to the Holders on each Interest Payment Date;

· With respect to the Convertible Notes and Second Tranche Convertible Notes, based upon management’s expectations for a change of control or fundamental transaction to occur prior to the maturity date of the Convertible Notes and Second Tranche Convertible Notes, a low probability of a forced redemption;

· Upon a change of control redemption, the change of control redemption amount shall equal to the sum of:

I. the greater of:

(i) the outstanding amount of the debt divided by the Conversion Price on the date of the mandatory default amount is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or

(ii) 130% of the outstanding principal amount of the debt, plus 100% of accrued and unpaid interest, and

II. all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the debt.

Additionally, it is assumed that no amounts are due pursuant to clause (II) above in any period and that the stock price at each respective node represents a reasonable approximation of the VWAP requirements.

The changes in fair value between reporting periods are related to the changes in the price of the Company’s common stock as of the measurement dates, the volatility of the Company’s common stock during the remaining term of the instrument, changes in the conversion price and effective discount rate.

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues	$ 1,080	$ 671
Cost of revenues	541	426
Gross profit	539	245
Operating expenses:
Selling, general and administrative	2,633	2,445
Research and development	2,031	1,212
Total operating expenses	4,664	3,657
Gain on the sale of assets		(40)
Loss from continuing operations	(4,125)	(3,372)
Other income (expense):
Interest expense	(555)	(396)
Interest income		10
Foreign currency transaction gains	14
Financing costs associated with convertible notes	(80)	(530)
Change in fair value of warrant liabilities	(1,617)	(808)
Change in fair value of convertible notes	(2,024)	(1,894)
Total other expense	(4,262)	(3,618)
Net loss from continuing operations before income taxes	(8,387)	(6,990)
Benefit for income taxes from continuing operations		492
Net loss from continuing operations, net of income taxes	(8,387)	(6,498)
Discontinued operations:
Income from discontinued operations		53
Gain on sale of discontinued operations, net of provision for income taxes of $492		687
Net income from discontinued operations, net of income taxes		740
Net loss	$ (8,387)	$ (5,758)
Net loss per weighted average share, basic and diluted:
From loss on continuing operations attributable to common stockholders (in dollars per share)	$ (0.27)	$ (0.21)
From income on discontinued operations (in dollars per share)	$ 0.00	$ 0.00
From gain on sale of discontinued operations (in dollars per share)	$ 0.00	$ 0.02
Net loss attributable to common stockholders per weighted average share, basic and diluted (in dollars per share)	$ (0.27)	$ (0.19)
Weighted average shares outstanding:
Basic (in shares)	31,139	30,351
Diluted (in shares)	31,139	30,351

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Equipment, Furniture and Leasehold Improvements

12 Months Ended

Dec. 31, 2012

Equipment, Furniture and Leasehold Improvements

Equipment, Furniture and Leasehold Improvements

4. Equipment, Furniture and Leasehold Improvements

Equipment, furniture and leasehold improvements consist of the following at December 31 (in thousands):

	2012		2011
Equipment	$	488	$	414
Office furniture and fixtures	218		218
Leasehold improvements	4		4
	710		636
Less accumulated depreciation and amortization	643		600
	$	67	$	36

Depreciation expense was $43,000 and $9,000 for the years ended December 31, 2012 and 2011, respectively.

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Inventories

12 Months Ended

Dec. 31, 2012

Inventories

Inventories

3. Inventories

Inventories consist of the following at December 31 (in thousands):

	2012		2011
Raw materials	$	143	$	157
Finished goods	39		81
	$	182	$	238

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Inventories (Tables)

12 Months Ended

Dec. 31, 2012

Inventories

Schedule of inventories

Inventories consist of the following at December 31 (in thousands):

	2012		2011
Raw materials	$	143	$	157
Finished goods	39		81
	$	182	$	238

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Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Income Taxes

11. Income Taxes

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2012			2011
Loss before income taxes:
Continuing operations
United States	$	(8,288	)	$	(6,859	)
Foreign	(99		)	(131		)
	$	(8,387	)	(6,990		)
Current income tax benefit from continuing operations:
Federal	$	—		$	492
Foreign	—			—
State	—			—
	$	—		$	492
Deferred income tax benefit/(provision) from continuing operations:
Federal	$	2,444		3,335
Foreign	(104		)	(2		)
State	(1,437		)	(4,415		)
	903			(1,082		)
Change in valuation allowance	(903		)	1,082
	$	—		$	—
Benefit for income taxes from continuing operations	$	—		$	492
Provision for income taxes from gain on sale of discontinued operations	—			(492		)
Total provision for income taxes	$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of December 31 are as follows (in thousands):

	2012			2011
Net federal and state operating loss carryforwards	$	24,689		$	23,611
Net foreign operating loss carryforwards	380			484
Accrued expenses and reserves	—			10
Tax credits	1,194			1,202
Other	295			348
Total deferred tax assets	26,558			25,655
Valuation allowance	(26,558		)	(25,655		)
Net deferred tax assets	$	—		$	—

The valuation allowance increased by $903,000 in 2012 primarily due to the Company’s net loss. The Company recorded the valuation allowance due to the uncertainty of the realizability of the related net deferred tax asset.

Total provision for income taxes computed at the federal statutory rate differs from amounts provided as follows (in thousands):

	2012			2011
Tax benefit at federal statutory rate	$	(2,818	)	$	(1,893	)
State income taxes, net of U.S. federal income tax benefit	(11		)	(331		)
Permanent differences	17			44
Other	1,909			3,262
Change in valuation allowance	(903		)	(1,082		)
Total expense	$	—		$	—

At December 31, 2012, the Company had federal net operating loss carryforwards available to reduce future taxable income of approximately $74,337,000 which expire at various dates through 2031.  At December 31, 2012, the Company had federal and state research and development credit carryforwards of $708,000 and $486,000, respectively, which will expire at various dates through 2031 for federal income tax purposes and through 2026 for state income tax purposes.  In addition, at December 31, 2012 the Company had foreign net operating loss carryforwards of approximately $380,000.

Under the Internal Revenue Code of 1986, as amended, certain substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that can be utilized in any one year to offset future taxable income.  Any carryforwards that will expire prior to utilization as the result of any limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of December 31, 2012 and 2011, there were no unrecognized tax benefits.  The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of its income tax provision.  As of December 31, 2012 and 2011, the Company had no accrued interest or tax penalties recorded.

The Company files income tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. For U.S. federal and state tax purposes, the tax years 2007 through 2012 remain open to examination.  In addition, the amount of the Company’s federal and state net operating loss carryforwards may be subject to examination and adjustment. The open examination periods for the Company’s foreign jurisdictions range from 2000 through 2009.

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Commitments

12 Months Ended

Dec. 31, 2012

Commitments

Commitments

7. Commitments

Lease Commitments

The Company leases its corporate office under an operating lease agreement that expires in August 2014. In addition to the minimum lease payments, the agreement requires payment of the Company’s pro-rata share of property taxes and building operating expenses.

As of December 31, 2012, future minimum lease payments are estimated to be as follows (in thousands):

Year		Future Minimum Lease Payments
2013		$	41
2014		30
	Total	$	71

Total rent expense was $40,000 and $148,000 in 2012 and 2011, respectively.

During the year ended December 31, 2011, the Company began manufacturing its RenalGuard consoles and sterile disposable kits by two separate outside contract manufacturers. The contracts with these manufacturers do not contain minimum purchase requirements or any future commitments. Purchases are made upon request to the manufacturer.  During the year ended December 31, 2012 there are still no minimum purchase requirements or any future commitments for these contracts.

During the year ended December 31, 2011, the Company hired a clinical research organization (“CRO”) to assist with managing its clinical trial.  The contract with the CRO does not contain minimum purchase requirements or any future commitments, and payments are made once services are provided.  During the year ended December 31, 2012 there are still no minimum purchase requirements or any future commitments for this contract.

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Stockholders' Equity

12 Months Ended

Dec. 31, 2012

Stockholders' Equity

Stockholders' Equity

5. Stockholders’ Equity

The Company has unlimited authorized shares of preferred stock. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations in the preferred stock at the time of issuance.

The Company has never declared nor paid dividends on any of its capital stock and does not expect to do so in the foreseeable future.

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Stock Based Compensation

12 Months Ended

Dec. 31, 2012

Stock Based Compensation

Stock Based Compensation

6. Stock Based Compensation

Stock Option Plans

In May 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”).  Incentive stock options are issuable only to employees of the Company, while non-qualified stock options may be issued to non-employee directors, consultants and others, as well as to employees.  Under the 2005 Plan, the per share exercise price of incentive stock options may not be less than the fair market value of the common stock on the date the option is granted.  The 2005 Plan provides that the Company may not grant non-qualified stock options at an exercise price less than 85% of the fair market value of the Company’s common stock.

The Company grants stock options to its non-employee directors.  New non-employee directors receive an initial grant of an option to purchase shares of the Company’s common stock that generally vest in quarterly installments over three years.  Once the initial grant has fully vested, non-employee directors (other than the Chairman of the Board) receive an annual grant of an option to purchase additional shares of the Company’s common stock that generally will vest in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 45,000 shares of the Company’s common stock that generally vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

As a result of employee terminations in 2011, options held by terminated employees to purchase a total of 173,000 shares of common stock with an exercise price of $0.24 per share were cancelled, but were replaced by the Company with new options, all of which were immediately vested, to purchase 173,000 shares of common stock at an exercise price of $0.24 per share. The Company recorded an additional $2,000 in stock compensation expense related to these grants during the year ended December 31, 2011.

During year ended December 31, 2011, the Company granted options to purchase 300,000 shares of the Company’s common stock to non-employees that vested immediately, and granted options to purchase 350,000 shares of the Company’s common stock to employees that vest ratably over a three year period.

During the year ended December 31, 2011, the Company granted options to purchase 565,000 shares of the Company’s common stock to employees with performance-based vesting, and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors which vest quarterly over one year. Management determined that as of June 30, 2012, it was probable that the performance conditions associated with the performance-based vesting were to be met in July 2012 with the closing of the second tranche convertible notes. Therefore, the related expense was recorded in the year ended December 31, 2012.

During the year ended December 31, 2012, the Company granted options to employees to purchase 355,000 shares of the Company’s common stock, which vest ratably over a three year period and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors that vest quarterly over one year.

During the year ended December 31, 2012, the Company issued an aggregate of 2,083,338 shares of restricted common stock to Garden State Securities, Inc. and JFS Investments, Inc. in exchange for certain investor relations and related consulting services to the Company.  These shares vested immediately but are restricted from being sold for a period of six months from the date of issuance.  The issuance of these shares resulted in $464,000 of compensation expense in the year ended December 31, 2012.

As of December 31, 2012, there were 674,156 shares of common stock available to be granted under the 2005 Plan.

The following is a summary of option activity under all plans (in thousands, except per option data):

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2010	5,529		$	0.21
Granted	1,500		0.15
Exercised	—		—
Forfeited	(1,254	)	0.23
Expired	—		—
Cancelled	(173	)	0.24
Outstanding, December 31, 2011	5,602		$	0.21
Granted	468		0.17
Exercised	—		—
Forfeited	(3	)	0.55
Expired	—		—
Cancelled	(475	)	0.24
Outstanding, December 31, 2012	5,592		$	0.21	3.21	$	6,500
Exercisable, December 31, 2012	4,948		$	0.21	2.44	$	5,500

Stock-Based Compensation Expense

The Company recorded employee compensation expense of $80,000 and $148,000 in the years ended December 31, 2012 and 2011, respectively.  The Company also recorded non-employee compensation expense of $464,000 related to the issuance of restricted common shares during the year ended December 31, 2012,.  As of December 31, 2012, the Company had $64,000 of total unrecognized compensation cost related to its unvested options, which is expected to be recognized over a weighted average period of 1.68 years.

The weighted average fair value of options issued during the years ended December 31, 2012 and 2011 was estimated using the Black-Scholes model and was $0.16 and $0.10 respectively.

	Year Ended December 31,
	2012	2011
Expected life (years)	5.00 – 6.00	1.00 – 6.00
Interest rate	0.19 – 0.69%	0.27 – 2.65%
Volatility	204.1 – 216.2%	107.2 – 169.0%
Expected dividend yield	None	None
Value of option granted	$0.12 – 0.17	$0.01 – 0.13

The expected life was calculated in 2012 and 2011 using the simplified method. The risk-free interest rate is based upon the U.S. Treasury yield curve in effect at the time of the grant for the expected term.  Expected volatility is based exclusively on historical volatility data of the Company’s common stock.  The Company estimates an expected forfeiture rate by analyzing historical forfeiture activity and considering how future forfeitures are expected to differ from historical forfeitures.  The Company expects that all outstanding options at December 31, 2012 will fully vest over their requisite service period.  Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

Stock Purchase Plan

The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees whereby shares of the Company’s common stock may be purchased at six-month intervals at 95% of the average of the closing bid and ask prices of the Company’s common stock on the last business day of the relevant plan period.  Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations.  There was no activity in 2012 or 2011. At December 31, 2012, 294,461 shares were reserved for future issuance under the Purchase Plan.

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Sale of Assets

12 Months Ended

Dec. 31, 2012

Sale of Assets

Sale of Assets

8. Sale of Assets

In May 2010, the Company sold to a newly-formed corporation affiliated with its principal OEM customer certain of its OEM surgical tube assets, comprised principally of inventory, equipment, intellectual property and certain other intangible assets, as well as all necessary manufacturing documentation needed to perform contract assembly services for general purpose CO2 lasers. The total sale price for these assets was $225,000, of which approximately $154,000 was paid at the time of closing, with the balance in a note receivable totaling $71,000. At the closing of the transaction and as of December 31, 2010, the note receivable was fully reserved. Following the sale, Dr. Robert I. Rudko, who was a director and a stockholder of the Company at the time, acquired a minority interest in the corporation that purchased the OEM assets. In conjunction with this transaction, in the year ended December 31, 2010, the Company recorded an initial gain on sale of assets of $98,000. In March 2011, Dr. Rudko resigned from the Company’s board of directors. Also in March 2011, the Company reached an agreement with the acquiring company to settle the note receivable at a reduced amount of $40,000. This amount was collected in April 2011, and was recorded as a gain when the cash was received.

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Significant Accounting Policies (Details 4) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Equipment, Furniture, Leasehold Improvements and Long-Lived Assets
Reserve for warranty and preventative maintenance costs	$ 0	$ 0
Revenue Recognition
Deferred revenue	317,000	277,000
Deferred revenue recognized	381,000	0
Deferred cost of goods sold	$ 85,000	$ 115,000
Loss Per Share
Outstanding warrants, convertible notes, and stock options excluded from the calculation of diluted loss per share because the effect would have been antidilutive (in shares)	47,096,000	46,162,000
Equipment | Minimum
Equipment, Furniture, Leasehold Improvements and Long-Lived Assets
Useful lives	2 years
Equipment | Maximum
Equipment, Furniture, Leasehold Improvements and Long-Lived Assets
Useful lives	5 years
Office furniture and fixtures
Equipment, Furniture, Leasehold Improvements and Long-Lived Assets
Useful lives	5 years

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Subsequent Event (Details 2) (Subsequent Event, USD $)	0 Months Ended
	Feb. 22, 2013
Subsequent Event
Subsequent Event
Fees paid for investor relation services under Consulting Agreement	$ 500,000
Fees payable for investor relation services under Consulting Agreement	500,000
Aggregate fees for investor relation services under the Consulting Agreement	$ 1,000,000
Period of anniversary for payment of installment of investor relation services fee	6 months
Period over which investor relation services will be provided subsequent to the Consulting Agreement	6 months
Notice period for termination of the Consulting Agreement	3 days
Period for curing default committed by either of the parties to the Consulting Agreement	15 days

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Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The consolidated financial statements include the accounts of PLC and its two wholly owned subsidiaries, PLC Medical Systems, Inc. and PLC Systemas Medicos Internacionais (Deutschland) GmbH.  All intercompany accounts and transactions have been eliminated.

In the first quarter of 2011, the Company sold the assets related to its TMR business to Novadaq Corp., a subsidiary of Novadaq Technologies Inc., the Company’s then exclusive distributor of TMR in the U.S., for $1,000,000 plus the relief of approximately $614,000 in service contract obligations (see Note 9).

As a result of its sale in the first quarter of 2011, the operating results of the Company’s TMR business, including those related to the prior periods, have been reclassified from continuing operations to discontinued operations in the accompanying consolidated financial statements for the year ended December 31, 2011 (see Note 8).

Use of Estimates

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Significant estimates include revenue recognition, warranty, inventory valuation, accounts receivable, and convertible notes and warrant liabilities.  Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash at December 31, 2012 and 2011, respectively, consisted of deposits held in bank checking accounts and overnight sweep to repurchase agreements.

Concentrations of Credit Risk

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk include cash, cash equivalents and accounts receivable. At times, the Company possesses cash balances above federally-insured limits. The Company believes it minimizes its exposure to potential concentrations of credit risk by placing its cash equivalents in high-quality financial instruments.  At December 31, 2012 and 2011, the majority of the cash and cash equivalents balance was invested with a single financial institution.

Artech accounted for 35% and 46% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively. Discomed, the Company’s distributor in Brazil, account for 29% and 0% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively. ACIST, the Company’s distributor in France and Germany, accounted for 9% and 12% of the Company’s revenues for the year ended December 31, 2012 and 2011, respectively.  At December 31, 2012, Artech, Discomed and ACIST accounted for 73%, 0% and 13%, respectively of gross accounts receivable.

Concentration of Revenues

Concentration of Revenues

Approximately 100% and 82% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively, were derived from the sales of RenalGuard.

Net sales to unaffiliated customers (by origin) are summarized below (in thousands):

	South America		North America		Europe		Other		Total
2012
Net sales	$	312	$	35	$	588	$	145	$	1,080
2011
Net sales	$	—	$	124	$	547	$	—	$	671

Accounts Receivable

Accounts Receivable

Accounts receivable is stated at the amount the Company expects to collect from the outstanding balances. The Company continuously monitors collections from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that the Company has identified.  Historically, the Company has not experienced significant losses related to its accounts receivable.  Collateral is generally not required. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Inventories

Inventories

Inventories are stated at the average cost (computed on a first-in, first-out method) of market value and include allocations of labor and overhead.  The Company regularly reviews slow-moving and excess inventories, and writes down inventories to net realizable value if the ultimate expected proceeds from the disposals of excess inventory are less than the carrying cost of the inventory.

Equipment, Furniture, Leasehold Improvements and Long-Lived Assets

Equipment, Furniture, Leasehold Improvements and Long-Lived Assets

Equipment, furniture and leasehold improvements are stated on the basis of cost. Depreciation is computed principally on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes.

Depreciation and amortization are based on the following useful lives:

Equipment	2-5 years
Office furniture and fixtures	5 years
Leasehold improvements	Shorter of life of lease or useful life

The carrying amount of long-lived assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When required, recoverability of these assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. During the years ended December 31, 2012 and 2011, the Company did not recognize any asset impairment charges.

Warranty and Preventative Maintenance Costs

Warranty and Preventative Maintenance Costs

The Company evaluates the estimated future unrecoverable costs of warranty and preventative maintenance services for its installed base products on a quarterly basis and adjusts its warranty reserve accordingly.  The Company considers all available evidence, including historical experience and information obtained from supplier audits.  There was no reserve for warranty and preventative maintenance costs recorded at December 31, 2012 and 2011.

Valuation of Convertible Notes and Warrant Liabilities

Valuation of Convertible Notes and Warrant Liabilities

The valuation of our convertible notes and our warrant liabilities as derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue when the following basic revenue recognition criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition. The Company’s shipping terms are customarily Free On Board (“FOB”) shipping point.

The Company typically records all product revenue at the time of shipment if all other revenue recognition criteria are met. As of December 31, 2012 and 2011, the Company had deferred revenue balances of $317,000 and $277,000, respectively, related to shipments to its distributor in Italy, Artech, because not all revenue recognition criteria were met.  During the years ended December 31, 2012 and 2011, the Company recognized $381,000, a portion of which was previously deferred in 2011, and $0, respectively, in revenue of previously deferred revenue upon the receipt of cash.  The Company had deferred cost of goods sold of $85,000 and $115,000 during the years ended December 31, 2012 and 2011, respectively, which was classified as prepaid expenses and other current assets on the Consolidated Balance Sheets due to Artech revenue recognition criteria not being met.

Foreign Currency Translation

Foreign Currency Translation

Assets and liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at end-of-period exchange rates, while income and expense items are translated at average rates of exchange prevailing during the year. Exchange gains and losses arising from translation are accumulated as a separate component of stockholders’ equity. The Company records the impact from foreign currency transactions as a component of other income (expense).

Income Taxes

Income Taxes

The Company uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable.

Research and Development

Research and Development

Research and development costs are expensed as incurred.

Fair Value Measurements

Fair Value Measurements

The Company measures and reports fair value in accordance with Accounting Standards Codifications (“ASC”) 820 — Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:

Level 1

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3

Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.

Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.

The Company’s assets and liabilities measured at fair value on a recurring basis include convertible notes and warrants. See Note 10 for related fair value disclosures.

Loss Per Share

Loss Per Share

In 2012 and 2011, basic and diluted loss per share have been computed using only the weighted average number of common shares outstanding during the period without giving effect to any potential future issuances of common stock related to stock option programs and warrants, since their inclusion would be antidilutive.

For the years ended December 31, 2012 and 2011, 47,096,000 and 46,162,000 shares, respectively, attributable to outstanding warrants, convertible notes, and stock options were excluded from the calculation of diluted loss per share because the effect would have been antidilutive.

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Commitments (Tables)

12 Months Ended

Dec. 31, 2012

Commitments

Schedule of estimated future minimum lease payments

As of December 31, 2012, future minimum lease payments are estimated to be as follows (in thousands):

Year		Future Minimum Lease Payments
2013		$	41
2014		30
	Total	$	71

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Income Taxes (Details 5) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Tax credit carry-forward
Unrecognized tax benefits	$ 0	$ 0
Accrued interest and tax penalties recorded	0	0
U.S. federal | Research and development
Tax credit carry-forward
Federal credit carryforwards	708,000
State | Research and development
Tax credit carry-forward
Federal credit carryforwards	$ 486,000

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Convertible Notes and Warrant Liabilities (Details) (USD $)	0 Months Ended	12 Months Ended		0 Months Ended		12 Months Ended	0 Months Ended	12 Months Ended
	Feb. 22, 2011 Investor Warrants	Dec. 31, 2012 Investor Warrants	Dec. 31, 2011 Investor Warrants	Jul. 02, 2012 2012 Warrants	Jul. 02, 2012 $0.15 Warrants	Dec. 31, 2012 $0.15 Warrants	Jul. 02, 2012 $0.25 Warrants	Dec. 31, 2012 $0.25 Warrants	Dec. 31, 2012 Convertible Notes	Feb. 22, 2013 Convertible Notes	Feb. 22, 2011 Convertible Notes item	Jul. 02, 2012 Convertible Notes Second Tranche	Feb. 22, 2011 Convertible Notes Second Tranche	Feb. 22, 2011 Convertible Notes First Tranche
Convertible Notes and Warrant Liabilities
Interest rate (as a percent)										5.00%	5.00%	5.00%
Additional secured convertible debt funding from the investors may be secured											$ 2,000,000		$ 1,000,000	$ 1,000,000
Aggregate principal amount											$ 4,000,000
Number of tranches											2
Period considered in a year for calculation of interest									360 days
Conversion Price (in dollars per share)									$ 0.10			$ 0.10
Percentage of outstanding principal redeemed under a change of control									130.00%
Percentage of accrued and unpaid interest									100.00%
Exercise price of warrants (in dollars per share)	$ 0.15	$ 0.15	$ 0.15		$ 0.15	$ 0.15	$ 0.25	$ 0.25
Warrants issued for purchase of shares of common stock (in shares)	40,000,000			20,000,000	10,000,000	10,000,000	10,000,000	10,000,000
Warrants
Beginning balance (in shares)		40,000,000
Warrants issued (in shares)	40,000,000			20,000,000	10,000,000	10,000,000	10,000,000	10,000,000
Ending balance (in shares)		40,000,000				10,000,000		10,000,000
Exercise price of warrants (in dollars per share)	$ 0.15	$ 0.15	$ 0.15		$ 0.15	$ 0.15	$ 0.25	$ 0.25
Period of registration of warrant shares for non payment of exercise price pursuant to a cashless exercise provision		6 months
Purchase price as a percentage of exercise price of warrants		30.00%		30.00%
Term of warrants				5 years

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CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS
Provision for incomes taxes from gain on sale of discontinued operations	$ 492

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Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Significant Accounting Policies

Significant Accounting Policies

2. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of PLC and its two wholly owned subsidiaries, PLC Medical Systems, Inc. and PLC Systemas Medicos Internacionais (Deutschland) GmbH.  All intercompany accounts and transactions have been eliminated.

In the first quarter of 2011, the Company sold the assets related to its TMR business to Novadaq Corp., a subsidiary of Novadaq Technologies Inc., the Company’s then exclusive distributor of TMR in the U.S., for $1,000,000 plus the relief of approximately $614,000 in service contract obligations (see Note 9).

As a result of its sale in the first quarter of 2011, the operating results of the Company’s TMR business, including those related to the prior periods, have been reclassified from continuing operations to discontinued operations in the accompanying consolidated financial statements for the year ended December 31, 2011 (see Note 8).

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Significant estimates include revenue recognition, warranty, inventory valuation, accounts receivable, and convertible notes and warrant liabilities.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash at December 31, 2012 and 2011, respectively, consisted of deposits held in bank checking accounts and overnight sweep to repurchase agreements.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk include cash, cash equivalents and accounts receivable. At times, the Company possesses cash balances above federally-insured limits. The Company believes it minimizes its exposure to potential concentrations of credit risk by placing its cash equivalents in high-quality financial instruments.  At December 31, 2012 and 2011, the majority of the cash and cash equivalents balance was invested with a single financial institution.

Artech accounted for 35% and 46% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively. Discomed, the Company’s distributor in Brazil, account for 29% and 0% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively. ACIST, the Company’s distributor in France and Germany, accounted for 9% and 12% of the Company’s revenues for the year ended December 31, 2012 and 2011, respectively.  At December 31, 2012, Artech, Discomed and ACIST accounted for 73%, 0% and 13%, respectively of gross accounts receivable.

Concentration of Revenues

Approximately 100% and 82% of the Company’s revenues for the years ended December 31, 2012 and 2011, respectively, were derived from the sales of RenalGuard.

Net sales to unaffiliated customers (by origin) are summarized below (in thousands):

	South America		North America		Europe		Other		Total
2012
Net sales	$	312	$	35	$	588	$	145	$	1,080
2011
Net sales	$	—	$	124	$	547	$	—	$	671

Accounts Receivable

Accounts receivable is stated at the amount the Company expects to collect from the outstanding balances. The Company continuously monitors collections from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that the Company has identified.  Historically, the Company has not experienced significant losses related to its accounts receivable.  Collateral is generally not required. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Inventories

Inventories are stated at the average cost (computed on a first-in, first-out method) of market value and include allocations of labor and overhead.  The Company regularly reviews slow-moving and excess inventories, and writes down inventories to net realizable value if the ultimate expected proceeds from the disposals of excess inventory are less than the carrying cost of the inventory.

Equipment, Furniture, Leasehold Improvements and Long-Lived Assets

Equipment, furniture and leasehold improvements are stated on the basis of cost. Depreciation is computed principally on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes.

Depreciation and amortization are based on the following useful lives:

Equipment	2-5 years
Office furniture and fixtures	5 years
Leasehold improvements	Shorter of life of lease or useful life

The carrying amount of long-lived assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When required, recoverability of these assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. During the years ended December 31, 2012 and 2011, the Company did not recognize any asset impairment charges.

Warranty and Preventative Maintenance Costs

The Company evaluates the estimated future unrecoverable costs of warranty and preventative maintenance services for its installed base products on a quarterly basis and adjusts its warranty reserve accordingly.  The Company considers all available evidence, including historical experience and information obtained from supplier audits.  There was no reserve for warranty and preventative maintenance costs recorded at December 31, 2012 and 2011.

Valuation of Convertible Notes and Warrant Liabilities

The valuation of our convertible notes and our warrant liabilities as derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

Revenue Recognition

The Company recognizes revenue when the following basic revenue recognition criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition. The Company’s shipping terms are customarily Free On Board (“FOB”) shipping point.

The Company typically records all product revenue at the time of shipment if all other revenue recognition criteria are met. As of December 31, 2012 and 2011, the Company had deferred revenue balances of $317,000 and $277,000, respectively, related to shipments to its distributor in Italy, Artech, because not all revenue recognition criteria were met.  During the years ended December 31, 2012 and 2011, the Company recognized $381,000, a portion of which was previously deferred in 2011, and $0, respectively, in revenue of previously deferred revenue upon the receipt of cash.  The Company had deferred cost of goods sold of $85,000 and $115,000 during the years ended December 31, 2012 and 2011, respectively, which was classified as prepaid expenses and other current assets on the Consolidated Balance Sheets due to Artech revenue recognition criteria not being met.

Foreign Currency Translation

Assets and liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at end-of-period exchange rates, while income and expense items are translated at average rates of exchange prevailing during the year. Exchange gains and losses arising from translation are accumulated as a separate component of stockholders’ equity. The Company records the impact from foreign currency transactions as a component of other income (expense).

Income Taxes

The Company uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable.

Research and Development

Research and development costs are expensed as incurred.

Fair Value Measurements

The Company measures and reports fair value in accordance with Accounting Standards Codifications (“ASC”) 820 — Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:

Level 1

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3

Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.

Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.

The Company’s assets and liabilities measured at fair value on a recurring basis include convertible notes and warrants. See Note 10 for related fair value disclosures.

Loss Per Share

In 2012 and 2011, basic and diluted loss per share have been computed using only the weighted average number of common shares outstanding during the period without giving effect to any potential future issuances of common stock related to stock option programs and warrants, since their inclusion would be antidilutive.

For the years ended December 31, 2012 and 2011, 47,096,000 and 46,162,000 shares, respectively, attributable to outstanding warrants, convertible notes, and stock options were excluded from the calculation of diluted loss per share because the effect would have been antidilutive.

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Discontinued Operations (Tables)

12 Months Ended

Dec. 31, 2012

Discontinued Operations

Schedule of revenues and net income and a summary of discontinued operations on the consolidated balance sheets at the end of respective periods

	Year ended December 31, 2011
	(In thousands)
Revenues:
Product sales	$	455
Service fees	68
Total	523
Income from discontinued operations	$	53

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Commitments (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011 item
Estimated future minimum lease payments
2013	$ 41,000
2014	30,000
Total	71,000
Total rent expense	40,000	148,000
Number of separate outside contract manufacturers		2
Minimum purchase requirements for separate outside manufacturing contract	0
Minimum purchase requirements for contract with clinical research organization	$ 0

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Subsequent Events

12 Months Ended

Dec. 31, 2012

Subsequent Events

Subsequent Events

12. Subsequent Events

The Company has evaluated all events and transactions through the date of the filing. During this period the Company identified the following events for disclosure:

On January 16, 2013 the Company entered into an Amendment and Waiver to Securities Purchase Agreement to amend the Securities Purchase Agreement with GCP IV, LLC to provide for the issuance of (i) an additional $250,000 of 5% Senior Secured Convertible Debentures maturing on January 16, 2016 and (ii) warrants exercisable for a period of five years to purchase up to 2,500,000 shares of common stock at an exercise price of $0.15 per share.

On February 22, 2013, the Company entered into a Securities Purchase Agreement (the “SPA”) with a number of accredited investors, whereby the Company sold an aggregate of 26,933,333 shares of common stock and warrants to purchase an additional 26,933,333 shares of common stock with gross proceeds to the Company of $4,040,000 to these accredited investors (the “2013 Investors”) pursuant to the SPA. The Company intends to utilize the proceeds of the private placement for general working capital purposes, to pay for investor relations services as described below, for payment of fees to Palladium Capital Advisors, LLC, the exclusive placement agent, and for legal, blue sky and related expenses.  After payment of the placement agent fees and these other expenses, the Company anticipates net proceeds of approximately $3,500,000.

Each share of common stock was sold for a purchase price of $0.15 per Share.  In addition, each investor also received a five-year warrant to purchase one hundred (100%) percent of the number of shares of common stock purchased at an exercise price of $0.20 per share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends and dilutive issuances.  The 2013 Warrants may be exercised on a cashless basis if at any time there is no effective registration statement within 180 days after the closing date of the private placement covering the resale of the shares of common stock underlying the 2013 Warrants. The 2013 Warrants contains limitations on the holder’s ability to exercise the 2013 Warrant in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company’s issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days’ notice.  As part of the fee for its placement agent services, Palladium Capital Advisors also received a 2013 Warrant to purchase 1,885,333 shares of common stock on the same terms and conditions as the investors under the SPA.

The 2013 Investors have the option, for a period through November 21, 2013, to purchase for the same per share purchase price an equal number of shares of common stock and 2013 Warrants equal to up to one-half of the shares of common stock and 2013 Warrants purchased by the purchaser on the initial closing date.  The shares of common stock sold in the offering are subject to certain piggyback registration rights as well as certain other protections, including antidilution protection.

Simultaneously with the closing of the SPA, GCP IV, LLC (“GCP”), the original holder of the Company’s Convertible Notes (which have an aggregate principal balance of $5,250,000 as of January 16, 2013) entered into an Amendment and Waiver Agreement (“Amendment and Waiver Agreement”) with the Company under which GCP has agreed to (a) increase the number of shares exercisable under warrants issued to GCP in 2011 and 2012 (the “2011 and 2012 Warrants”) from 50,000,000 shares to 81,578,946 shares and to modify both the exercise price and the “VWAP price” of the 2011 and 2012  Warrants to $0.098 and $0.155, respectively, (b)  return to the Company for forfeiture the remaining warrants previously issued to GCP to purchase 12,500,000 shares of common stock, (c)  extend the due date for the $4,000,000 term debenture issued by the Company to GCP in February 2011 from February 22, 2014 to June 30, 2015, (d) until February 22, 2014, without the prior written consent from the majority of the investors under the SPA, forbear from declaring any Event of Default (as defined in the original debenture, and (e) relinquish its right to purchase up to an additional $750,000 in debentures under the terms of the original 2011 Securities Purchase Agreement.  The modifications to the 2011 and 2012 Warrants enable these warrants to be exercised on a cashless exercise basis, which, if fully exercised, would result in the issuance of 30,00,000 shares of common stock without the payment of additional cash consideration.

On February 22, 2013, the Company also entered into a consulting agreement (the “Consulting Agreement”) with ZA Capital, LLC (“ZA”) to provide investor relation services to the Company. In connection with the Consulting Agreement, the Company paid ZA $500,000 from the proceeds of a private placement described above.  The Company is obligated to pay ZA an additional $500,000 (for a total of $1.0 million in the aggregate) on the six-month anniversary of the Agreement for investor relations services during the following six-month period.The Consulting Agreement may be terminated by the Company for any reason, with or without cause, upon three (3) days written notice to ZA. In addition, the Consulting Agreement may be terminated by either party upon giving written notice to the other party if the other party is in default hereunder and such default is not cured within fifteen (15) days of receipt of written notice of such default.