Influence Not control of PDS?

10Q for period ending Nov 30, 2011

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

I have to admit, I am not sure if any of this is significant or not. It made me question if this accounting adjustment was to prevent PTSC from funding PDS and thereby taking CONTROL? It states that PTSC is under no contractual obligation to fund PDS....but what if it did?