Looks like PDS is in sad condition too:

We had a secured loan with TPL for $950,00 for which PDS was jointly liable. We received payment from PDS for the secured loan (plus interest) but due to TPL’s inability to pay, it is now recorded as an uncollectable receivable on PDS’ statement of operations.

As if this wasn’t enough, PDS in June 2010 then advances over $400,000 to Alliacense to cover rent and payroll. Due to non payment this is now recorded as an uncollectable receivable on PDS’ statement of operations.

As of August 31, 2010 we received 0 from PDS and PDS has received 0 in licensing fees.

Phoenix Digital Solutions, LLC

On June 7, 2005, we entered into a Master Agreement (the “Master Agreement”) with TPL, and Charles H. Moore (“Moore”), the co-inventor of the technology which is the subject of the MMP Portfolio of microprocessor patents, pursuant to which the parties resolved all legal disputes between them. Pursuant to the Master Agreement, we and TPL entered into the Limited Liability Company Operating Agreement of PDS (the “LLC Agreement”) into which we and Moore contributed our rights to certain of our technologies.

We and TPL each own 50% of the membership interests of PDS, and each of us has the right to appoint one member of the three member management committee. The two appointees are required to select a mutually acceptable third member of the management committee. Pursuant to the LLC Agreement, we and TPL agreed to establish a working capital fund for PDS of $4,000,000, of which our contribution was $2,000,000. The working capital fund increases to a maximum of $8,000,000 as license revenues are achieved. We and TPL are obligated to fund future working capital requirements at the discretion of the management committee of PDS in order to maintain working capital of not more than $8,000,000. Neither we nor TPL are required to contribute more than $2,000,000 in any fiscal year. Distributable cash and allocation of profits and losses will be allocated to the members in the priority defined in the LLC Agreement. PDS has committed to pay a quarterly amount ranging between $500,000 and $1,000,000 (based upon a percentage of the working capital fund balance of PDS) for supporting efforts to secure licensing agreements by TPL on behalf of PDS. During the three months ended August 31, 2010 and 2009, PDS expensed $0 and $500,000, respectively, pursuant to this commitment (see Note 11).

PDS reimburses TPL for payment of all legal and third-party expert fees and other related third-party costs and other expenses. During the three months ended August 31, 2010 and 2009, PDS expensed $615,585 and $2,295,208, respectively, pursuant to the agreement. These expenses are recorded in the accompanying statements of operations presented below.

On August 17, 2009, the management committee of PDS resolved to pay TPL $500,000 per quarter beginning on June 1, 2009 and continuing through May 31, 2010 relating to TPL’s special work and effort regarding the MMP litigation and U.S. Patent Office re-examinations. On June 1, 2009, TPL received $500,000 from PDS pursuant to this agreement, this amount is included in the legal and third-party expert fees listed above.

During April 2010, we filed two separate actions against TPL in the Superior Courts of San Diego and Santa Clara counties. We and TPL had been in negotiations to restructure our relationship, however those negotiations failed and the litigation is proceeding (see Note 11).

On July 15, 2010, we received payment from PDS of $1,003,095 consisting of principal and interest through July 15, 2010 on our $950,000 secured note with TPL for which PDS was jointly and severally liable. This amount has been recorded as a note receivable from TPL on PDS’ balance sheet on July 15, 2010. Due to TPL’s inability to pay the note, it has been fully reserved for at July 15, 2010 and the allowance has been recorded as “Reserve for loan loss and uncollectable receivable” on PDS’ statement of operations for the three months ended August 31, 2010.

During June 2010, PDS advanced Alliacense $410,000 to fund payroll and rent obligations. Due to non-payment by Alliacense, this amount has been fully reserved for at August 31, 2010 and the allowance has been recorded as “Reserve for loan loss and uncollectable receivable” on PDS’ statement of operations for the three months ended August 31, 2010.

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We are accounting for our investment in PDS under the equity method of accounting, and accordingly have recorded our share of PDS’ net loss during the three months ended August 31, 2010 and 2009 of $1,159,703 and $242,851, respectively, as a decrease in our investment. Cash distributions received from PDS during the three months ended August 31, 2010 and 2009 of $0 and $3,666,828, respectively were recorded as reductions in our investment.

During the three months ended August 31, 2010, our share of loss in PDS exceeds our investment in PDS by $652,074. Such amount has been recorded as “Distributions in excess of investment in affiliated company” on our condensed consolidated balance sheet at August 31, 2010, due to our and TPL’s obligation to fund the working capital of PDS at the discretion of PDS’ management committee. We have recorded our share of PDS’ net loss for the three months ended August 31, 2010 and 2009 as “Equity in loss of affiliated companies” in the accompanying condensed consolidated statements of operations.

During the three months ended August 31, 2010 and 2009, TPL entered into licensing agreements with third parties, pursuant to which PDS received aggregate proceeds of $0 and $2,327,655, respectively.

At August 31, 2010, PDS had accounts payable balances of approximately $2,039,000 and $38,000 to TPL and PTSC, respectively. At May 31, 2010, PDS had accounts payable balances of approximately $1,724,000 and $7,000 to TPL and PTSC, respectively.

Variable Interest Entity Disclosures

At October 1, 2010, PDS’ cash and cash equivalents balance was $342,481. Management has concluded that PDS’ equity investment at risk is insufficient to finance its activities as the volume of license revenue has not supported litigation costs independent of additional working capital funding. As of the date of this filing, PDS is a variable interest entity (“VIE”) of which we are not the primary beneficiary and therefore will not consolidate PDS’ financials with our own as we cannot direct the licensing activity of TPL on behalf of PDS.

We have not provided financial support to PDS other than required capital contributions and we are not contractually obligated to provide financial support to PDS other than to fund the working capital account at the discretion of PDS’ management committee. In the event we, and not TPL, provide working capital funding to PDS we would consolidate PDS’ financials with our own as our ownership in PDS would be greater than 50%.

Our variable interest in PDS consists of 50% of PDS’ Members Deficit or ($652,074) at August 31, 2010. We are unable to quantify our maximum exposure to loss associated with this VIE as we may incur future capital funding requirements.