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3. Investment in Affiliated Company
9 Months Ended
Feb. 29, 2012
Investments in and Advances to Affiliates, Schedule of Investments [Text Block]
3.  Investment in Affiliated Company

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. There has not been a third management committee member since May 2010, nor are there any current attempts to seek a replacement member. 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. If the management committee determines that additional capital is required, neither we nor TPL are required to contribute more than $2,000,000 in any fiscal year. Since there is currently not a third member of the management committee, working capital contributions made to PDS require the approval of both management committee members. On December 14, 2011 we contributed $200,000 and TPL forfeited rights to $200,000 of special litigation support payments due it pursuant to the October 6, 2011 settlement agreement for an in-kind capital contribution of $200,000 in order to fund a portion of a retainer due to newly engaged counsel (see Note 1, Liquidity and Management’s Plans).  On March 23, 2012 and April 13, 2012 we and TPL each contributed $150,000 and $150,000 to PDS to fund a portion of a retainer due to such counsel.  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 nine months ended February 29, 2012 and February 28, 2011, PDS expensed $1,500,000 and $2,000,000, respectively, pursuant to this commitment.  This expense is recorded in the accompanying statements of operations presented below.

PDS reimburses TPL for payment of all legal and third-party expert fees and other related third-party costs and other expenses.  During the nine months ended February 29, 2012 and February 28, 2011, PDS expensed $5,412,451 and $4,780,936, respectively, pursuant to the agreement.  These expenses are recorded in the accompanying PDS statements of operations presented below.

On April 12, 2010, we filed an action against TPL in the San Diego Superior Court.  On January 19, 2011, pursuant to our settlement agreement with TPL, PDS agreed to pay TPL $67,000 per month from September 1, 2010 to April 30, 2011 relating to TPL’s special work and effort regarding internal costs related to litigation support and patent re-examinations.

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.  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, PDS has recognized $860,000 through February 29, 2012 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 nine months ended February 29, 2012 of $632,551 as a decrease in our investment.  We have recorded our share of PDS’ net income during the nine months ended February 28, 2011 of $825,074 as an increase in our investment.  We received no cash distributions from PDS during the nine months ended February 29, 2012.  Cash distributions received from PDS during the nine months ended February 28, 2011 of $807,806 were recorded as a reduction in our investment.  During the three months ended November 30, 2011 we accounted for $227,268 previously advanced by us for legal services which are reimbursable by PDS, under the equity method of accounting given that this amount remains unreimbursed at November 30, 2011.  During the three months ended February 29, 2012 we advanced PDS $5,000 for legal services and received $100,000 in payment on previous advances.

Accordingly, our investment in, and advances to PDS, are $0 and $132,268, respectively.  During the nine months ended February 29, 2012 our entire share of PDS’ net loss is $2,175,788 and at May 31, 2011 our investment in PDS was $300,283.  For the nine months ended February 29, 2012 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.  We will not record our excess loss in PDS unless we guarantee the obligations of PDS or are otherwise committed to provide further financial support for PDS.  Accordingly, our investment in PDS is $0 on our February 29, 2012 balance sheet.  We have recorded our share of PDS’ net income for the nine months ended February 28, 2011 as “Equity in earnings of affiliated company” in the accompanying condensed consolidated statements of operations.

During the three months ended February 29, 2012 and February 28, 2011, TPL entered into licensing agreements with third parties, pursuant to which PDS received aggregate proceeds of $2,452,000 and $7,441,000, respectively.

During the nine months ended February 29, 2012 and February 28, 2011, TPL entered into licensing agreements with third parties, pursuant to which PDS received aggregate proceeds of $3,009,300 and $8,850,000, respectively.

At February 29, 2012, PDS had accounts payable balances of approximately $1,902,000 and $132,000 to TPL and PTSC, respectively.  At May 31, 2011, PDS had accounts payable balances of approximately $1,754,000 and $129,000 to TPL and PTSC, respectively.

Variable Interest Entity Disclosures

On April 9, 2012, PDS’ cash and cash equivalents balance was $45,904.  Management has concluded that our equity investment at risk in PDS is insufficient to finance its activities as the volume of license revenue has not supported litigation costs independent of additional working capital funding.

We have not provided material financial support to PDS other than required capital contributions, the $200,000 contribution we agreed to make in December 2011 and the March 2012 and April 2012 contributions of $150,000 and $150,000 as described above, 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’ financial statements with our own as our ownership in PDS would be greater than 50%.

Our variable interest in PDS consists of 50% of PDS’ Members Equity (Deficit) in addition to the accounts payable balance due us for a total of $(1,807,773) at February 29, 2012.  We are unable to quantify our maximum exposure to loss associated with this VIE.  We do not have any contractual commitments and do not presently intend to fund any cash requirements of PDS, however we may determine that it is in the best interests of the MMP licensing program that we provide our 50% share of capital to provide for legal retainer payments in the event license revenues received by PDS are insufficient to meet these needs.

PDS’ balance sheets at February 29, 2012 and May 31, 2011 and statements of operations for the three and nine months ended February 29, 2012 and February 28, 2011 are as follows:

Balance Sheets

ASSETS:

   
February 29, 2012
(Unaudited)
    May 31, 2011
(Audited)
 
Cash and cash equivalents
  $ 96,590     $ 1,895,653  
Prepaid expenses
    -       600,000  
Total assets
  $ 96,590     $ 2,495,653  

LIABILITIES AND MEMBERS’ EQUITY (DEFICIT):

   
February 29, 2012
(Unaudited)
   
May 31, 2011
(Audited)
 
Related party payables and accrued expenses
  $ 3,447,600     $ 1,883,296  
LLC tax payable
    -       11,790  
Members’ equity (deficit)
    (3,351,010     600,567  
Total liabilities and members’ equity
  $ 96,590     $ 2,495,653  

Statements of Operations

   
Three Months Ended
   
Nine Months Ended
 
   
February 29, 2012
   
February 28, 2011
   
February 29, 2012
   
February 28, 2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues
  $ 2,452,000     $ 7,441,000     $ 3,009,300     $ 8,850,000  
Operating expenses
    2,621,953       4,298,078       7,360,877       7,245,943  
Operating loss
    (169,953 )     3,142,922       (4,351,577 )     1,604,057  
Reserve for loan loss and uncollectable receivable
    -       1,413,095       -       -  
Interest income
    -       45,808       -       46,090  
Net loss
  $ (169,953 )   $ 4,601,825     $ (4,351,577 )   $ 1,650,147