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10-K - FORM 10-K ANNUAL REPORT - HK BATTERY TECHNOLOGY INCannualreport_10k.htm
v2.4.0.6
COMMITMENTS AND CONTINGENCIES
12 Months Ended
Dec. 31, 2011
COMMITMENTS AND CONTINGENCIES  
COMMITMENTS AND CONTINGENCIES

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

The Company is party to various legal actions arising in the ordinary course of business. Matters that are probable of unfavorable outcomes to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, the Company’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters.

 

As of the date of this report, except as described below, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject, nor are there any such proceedings known to be contemplated by governmental authorities.

 

Viewpoint Securities LLC (“Viewpoint”) filed a complaint on January 6, 2011, against the Company, its directors, and affiliates (including Far East Golden Resources Investment Ltd. and Hybrid Kinetic Group Ltd.) in San Diego County Superior Court alleging breach of contract, interference with contract, and interference with prospective business relations.  The complaint is based on a claim that Viewpoint was not paid a commission/finder’s fee under a Placement Agent Agreement with the Company. Viewpoint demands a commission of $302,000 and warrants to purchase approximately 3,002,000 shares of common stock with an exercise price of $0.10 per share, related to the October 29, 2010, private placement offering of units of the Company’s securities.

 

The Placement Agent Agreement requires the Company to (i) pay Viewpoint a cash fee equal to 10% of the gross proceeds raised and actually received by the Company in a convertible note offering from investors first introduced by Viewpoint to the Company during the term of the Agreement; and (ii) issue Viewpoint warrants to purchase shares of common stock (the “Warrants”) equal to 10% of the number of shares of common stock  into which convertible notes purchased in an offering by investors first introduced by Viewpoint to the Company during the term of the Agreement are initially convertible, with an exercise price of $0.10 per share of and a maturity five years after the final closing date of the offering.

 

The Company has denied that Viewpoint is entitled to any commission or compensation under the Placement Agent Agreement or otherwise.  In March 2011, the Company obtained a stay of Viewpoint’s Superior Court lawsuit, and the matter was transferred to arbitration with the American Arbitration Association per the terms of the Placement Agent Agreement.  An arbitration demand or petition has not yet been filed.  The parties are scheduling a mediation to discuss potential settlement and expect to conduct the initial mediation session by the end of May 2011.

 

While there can be no assurance as to the ultimate outcome of this claim, based on information currently available, the Company believes the amount, or range, of reasonably possible losses (if any) in connection with this matter could be material to the Company’s consolidated financial condition, consolidated operating results or cash flows as of or for any particular period. 

 

Mining Lease

 

The Company is required under the terms of our property lease to make annual lease payments. The Company is also required to make annual claim maintenance payments to Federal Bureau of Land Management and to the county in which its property is located in order to maintain its rights to explore and, if warranted, to develop its property. If the Company fails to meet these obligations, it will lose the right to explore for gold on its property.

 

The Company’s property lease is for an initial period of ten years from May 2007 and may be extended in five year increments for up to a total term of 99 years. The Company may terminate this lease at any time. Until production is achieved, the Company’s lease payments (deemed “advance minimum royalties”) consist of an initial payment of $5,000, which was made upon the effectiveness of the lease, followed by annual payments according to the following schedule:

 

Due Date of Advance

Minimum Royalty Payment

  

Amount of Advance

Minimum Royalty Payment

  

January 15, 2008 (paid)

  

$

10,000

  

January 15, 2009 (paid)

  

$

15,000

  

January 15, 2010 (paid)

  

$

30,000

  

January 15, 2011(paid)

  

$

45,000

  

January 15, 2012 and annually thereafter

during the term of the lease

  

The greater of $60,000 or the dollar equivalent of 90 ounces of gold.

  

 

 

In the event that the Company produces gold or other minerals from the leased Tempo claims, the Company’s lease payments will be the greater of (i) the advance minimum royalty payments according to the table above, or (ii) a production royalty equal to 4% of the gross sales price of any gold, silver, platinum or palladium that we recover plus 2% of the gross sales price of any other minerals that the Company recovers. The Company’s lease expressly states that we have no rights to any oil, gas, hydrocarbons and geothermal resources that may be found on the property. Under certain conditions, the lessor may elect to take its production royalty in cash rather than in kind. In the event that the Company produces gold or other minerals from Tempo and pay the lessor a production royalty, then, within any one calendar year, the Company may use 100% of that year’s advance royalty payment as a credit against the Company’s royalties payable for that year. If the Company’s royalty payments payable for that year are greater than the Company’s advance royalty payment paid for that year, then the Company can credit all advance minimum royalty payments made in previous years against 50% of the production royalty payable for that year.

 

In the event that the Company pays the lessor a production royalty, the Company has the option to repurchase up to two points of the royalty payable on gold, silver, platinum or palladium, which would have the effect of thereafter permanently reducing the lessor’s production royalty on gold, silver, platinum or palladium from 4% to 2% of the Company’s gross sales price for those minerals. The purchase price for each royalty “point” shall be according to the following schedule:

 

Royalty Point Purchased

  

Price

  

First 1%

  

$

1,500,000

  

Second 1%

  

$

3,000,000

  

 

The Company cannot purchase the remaining 2% production royalty on gold, silver, platinum or palladium or the 2% production royalty applicable to all other minerals.

 

The Company’s lease required us to perform $50,000 worth of physical work on the property for 2009. Starting in 2010 and thereafter, the Company must perform a minimum of $50,000 worth of work annually on the property, of which at least $25,000 is physical work.  Work performed in any year in excess of these amounts is carried forward to offset the obligation in future years.  The Company met its commitment for 2010 but did not do so for 2011.

 

The Company is required to make annual claim maintenance payments to the Bureau of Land Management and to the counties in which its property is located. If the Company fails to make these payments, it will lose its rights to the property. As of the date of this Report, the annual maintenance payments are approximately $155 per claim, consisting of payments to the Bureau of Land Management and to the counties in which the Company’s properties are located. The Company’s property consists of an aggregate of 206 lode claims. The aggregate annual claim maintenance costs are currently approximately $32,000.