Overview

In June 2005, we entered into a series of agreements with TPL and others to facilitate the pursuit of unlicensed users of our intellectual property. In October 2011, we settled litigation with TPL that was initiated by us over matters related to the management of the MMP Portfolio. In July 2012, we entered into additional agreements with TPL, PDS and the TPL affiliate Alliacense in furtherance of the management and commercialization of the MMP Portfolio. The July 2012 Agreements (“July 2012 Agreements”) paved the way for an aggressive litigation strategy subsequently initiated on July 24, 2012 whereby Alliacense filed parallel actions with the ITC and in the U.S. District Court against multiple companies alleged to be infringers of the MMP portfolio. We believe that the significant investment in legal effort and costs incurred to date at PDS, in addition to this expanded litigation strategy, is necessary for the protection of our interests in the MMP portfolio and its future success. We intend to continue our joint venture with TPL to pursue license agreements with unlicensed users of our technology. We believe that continuing to work through TPL and its affiliate Alliacense, as compared to pursuing other alternatives, including creating and using our own licensing team for those activities, avoids a competitive devaluation of our principal assets and is a prudent way to achieve the desired results as we seek to obtain fair value from users of our intellectual property.

During fiscal 2012 and through the date of this filing, we and TPL each contributed $1,747,808 to fund the working capital of PDS. To the extent MMP portfolio license proceeds are insufficient; we expect working capital contributions to PDS to continue in the future. Cash shortfalls currently experienced by PDS will have an adverse effect on our liquidity. To date, we have determined that it is in the best interests of the MMP licensing program that we contribute our 50% share of additional capital to PDS to provide for PDS litigation support payments to Alliacense, in the event license revenues received by PDS are insufficient to meet these needs.

On April 10, 2013 PDS’ cash balance was $1,093. Management’s plans for the continued operation of PDS rely on the ability of Alliacense to obtain license agreements to cover the operational costs of PDS. The November 30, 2012 fiscal quarter notwithstanding, 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 although as a result of the fee arrangement with current litigation counsel we expect the legal costs of PDS to decrease substantially from fiscal year end 2012 levels.

As the litigation with HTC Corporation, and Acer, Inc., in the U.S. District Court, and the actions with the ITC Investigation No. 337-TA-853 progress, PDS is incurring significant third-party costs for expert testimony, depositions and other related legal costs. While the costs going forward for legal representation are principally under a contingency arrangement and the need for litigation support and the associated costs from Alliacense is expected to decrease, these third-party costs remain significant. We will be required to make capital contributions to PDS for these costs in the event that PDS does not receive sufficient licensing revenues to pay these expenses.

On March 20, 2013, TPL filed a petition under Chapter 11 of the United States Bankruptcy Code (see Note 8). We have been appointed to the creditors’ committee and will be closely monitoring the progress in this matter as it relates to our interest in PDS. In the event that we provide funding to PDS that is not reciprocated by TPL, which would result in our having a larger ownership percentage in PDS, we will have a controlling financial interest in PDS, in which case, we will consolidate PDS in our consolidated financial statements. If we determine that it is appropriate to consolidate PDS, we would measure the assets, liabilities and noncontrolling interests of PDS at their fair values at the date that we have the controlling financial interest. p.23

http://www.sec.gov/Archives/edgar/data/836564/000101968713001348/patriot_10q-022813.htm

Note 8

8. Subsequent Events

On March 20, 2013, TPL, our joint venture partner in PDS, filed a petition under Chapter 11 of the United States Bankruptcy Code. A creditors’ committee has been formed and we are a member of the committee. We intend to pursue all options to protect the financial condition and operations of PTSC and PDS and have retained legal counsel to represent our interests. Due to the recent timing of the TPL bankruptcy, we are unable to estimate the outcome, if any, on its financial condition or results of operations.