Questions:

Why would PTSC change their accounting method for PDS for the quarter ending Nov 2011? Previously they had used the equity method of accounting (see period ending Aug 31, 2011). In making this change, did PTSC relinquish its significant influence over PDS?

Shouldn’t the $86,000 being paid to TPL cease at the end of this month?

10Q filed on Oct 17, 2011 for period ending August 31, 2011

On April 22, 2010, we filed an action against TPL in the Superior Court of Santa Clara County. We and TPL had been in negotiations to restructure our relationship. On October 6, 2011, we announced that we had settled this action (see Note 11). Pursuant to this executed settlement agreement with TPL, PDS agreed to pay TPL $172,000 for June 2011, and $86,000 per month thereafter until 60 days after the Markman hearing relating to TPL’s special work and effort regarding internal costs related to litigation support. Accordingly, we have accrued $344,000 at August 31, 2011 pursuant to the executed settlement agreement and this expense is recorded in the accompanying PDS statements of operations presented below.

We are accounting for our investment in PDS under the equity method of accounting, and accordingly have recorded our reportable share of PDS’ net loss during the three months ended August 31, 2011 and 2010 of $300,283 and $1,159,703, respectively, as a decrease in our investment. We received no cash distributions from PDS during the three months ended August 31, 2011 and 2010. During the three months ended August 31, 2011 our entire share of PDS’ net loss is $1,032,570 and at May 31, 2011 our investment in PDS was $300,283. For the three months ended August 31, 2011 we have recorded our share of PDS’ net loss to the extent of our basis in the investment. The remaining loss will be carried forward until such time as it can be recovered. Accordingly, our investment in PDS is $0 on our August 31, 2011 balance sheet. We have recorded our share of PDS’ net loss for the three months ended August 31, 2011 as “Equity in loss of affiliated company” in the accompanying condensed consolidated statements of operations. (p.14)

From 10Q filed Jan 2012 )(for quarter ending Nov 30, 2011)

On January 9, 2012 PDS’ cash balance is $314,388. Management’s plans for the continued operation of PDS rely on the ability of TPL to obtain license agreements to cover the operational costs of PDS. PDS has experienced a decline in licensing revenues and has experienced an increase in legal costs due to the patent litigation actions currently in progress. In the event that TPL cannot obtain license agreements to cover the operational costs of PDS, we and TPL must decide whether to fund PDS’ legal costs on a go forward basis (p.25)

Our current liquid cash resources as of November 30, 2011, are expected to provide the funds necessary to support our operations through at least the next twelve months assuming we do not continue to fund the obligations of PDS. (p.36)

2. Investment in Affiliated Company

We have a 50% interest in Phoenix Digital Solutions, LLC (“PDS”). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the condensed consolidated statements of operations in the caption “Equity in loss of affiliated company.” and also is adjusted by contributions to and distributions from PDS.

During the six months ended November 30, 2011, our share of loss in PDS exceeds our investment in PDS by $2,017,797. We presently do not have a contractual obligation to fund any cash requirements of PDS and accordingly we have not recorded the excess loss on our consolidated financial statements, which is a change in our policy of accounting for PDS. Under the equity method of accounting, we are to continue to report losses up to our carrying amount of the investment. Once the investment balance is reduced to $0, we are to discontinue applying the equity method until such time that our share of future net income reported by PDS equals our share of net losses not recognized during the period the equity method was suspended.

We review our investment in an affiliated company to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near term prospects of the investee. If the decline in value is deemed to be other than temporary, we would recognize an impairment loss.

(emphasis by me)