Business Overview
Silver Bull, incorporated in Nevada, is an exploration stage company, engaged in
the business of mineral exploration. Our primary objective is to define
sufficient mineral reserves on the Sierra Mojada Property to justify the
development of a mechanized mining operation. We conduct our operations in
Mexico through our wholly-owned Mexican subsidiaries, Minera Metalin,
Contratistas, and Minas. However, as noted above, we have not established any
reserves at the Sierra Mojada Property, are in the exploration stage and may
never enter the development or production stage.
Our principal office is located at 777 Dunsmuir Street, Suite 1610, Vancouver,
BC, Canada V7Y 1K4, and our telephone number is 604-687-5800.
Current Year Developments
South32 Earn-In Option Agreement
On June 1, 2018, we and our subsidiaries Minera Metalin and Contratistas entered
into the Option Agreement with South32, whereby South32 is able to obtain the
Option to purchase 70% of the shares of Minera Metalin and Contratistas. Minera
Metalin owns the Sierra Mojada Property located in Coahuila, Mexico, and
Contratistas supplies labor for the Sierra Mojada Project. Under the Option
Agreement, South32 earns into the Option by funding a collaborative exploration
program on the Sierra Mojada Project. Upon the terms and subject to the
conditions set forth in the Option Agreement, in order for South32 to earn and
maintain its four-year Option, South32 must have contributed to Minera Metalin
for exploration of the Sierra Mojada Project at least $3 million by the end of
Year 1, $6 million by the end of Year 2, $8 million by the end of Year 3 and $10
million by the end of Year 4. Funding is made on a quarterly basis based on the
following quarter's exploration budget. South32 may exercise the Option by
contributing $100 million to Minera Metalin, less the amount of Initial Funding
previously contributed by South32. The issuance of shares upon notice of
exercise of the Option by South32 is subject to antitrust approval by the
Mexican government. If the full amount of the Subscription Payment is advanced
by South32 and the Option becomes exercisable and is exercised, we and South32
will be obligated to contribute funding to Minera Metalin on a 30/70 pro rata
basis. If South32 elects not to continue with the Option during the four-year
option period, the Sierra Mojada Project will remain 100% owned by us. The
exploration program will be initially managed by us with South32 being able to
approve the exploration program funded by it. We received funding of $3,144,163
from South32 for Year 1 of the Option Agreement. In April 2019, we received a
notice from South32 to maintain the Option Agreement for Year 2 by providing
cumulative funding of $6 million by the end of such period. In May 2019, we
received the initial payment of $319,430 for Year 2 of the Option Agreement from
South32. Cumulative funding received under the Option Agreement from South32 as
of October 31, 2019 was $3,463,593. Cumulative exploration expenditures under
the Option Agreement as of October 31, 2019 was $3,904,263. In November and
December 2019, we received the second and third payments for Year 2 of the
Option Agreement of $666,336 and $228,836, respectively, from South32. If the
Option Agreement is terminated by South32 without cause or if South32 is unable
to obtain antitrust authorization from the Mexican government, we are under no
obligation to reimburse South32 for amounts contributed under the Option
Agreement.
Upon exercise of the Option, Minera Metalin and Contratistas are required to
issue common shares to South32. Pursuant to the Option Agreement, following
exercise and until a decision has been made by the board of directors of Minera
Metalin to develop and construct a mine on the Sierra Mojada Project, each
shareholder holding greater than or equal to 10% of the shares may withdraw as
an owner in exchange for a 2% net smelter royalty on products produced and sold
from the Sierra Mojada Project. Any shareholder whose holdings are reduced to
less than 10% must surrender its interest in exchange for a 2% net smelter
royalty.
We have determined that Minera Metalin and Contratistas are variable interest
entities and that the Option Agreement has not resulted in the transfer of
control of the Sierra Mojada Project to South32. We have also determined that
the Option Agreement represents non-employee share-based compensation associated
with the collaborative exploration program undertaken by the parties. The
compensation cost is expensed when the associated exploration activity occurs.
The share-based payments have been classified as equity instruments and valued
based on the fair value of consideration received, as it is more reliably
measurable than the fair value of the equity interest. If the Option is
exercised and shares are issued prior to a decision to develop a mine, such
shares would be classified as temporary equity as they would be contingently
redeemable in exchange for a net smelter royalty under circumstances not wholly
in control of us or South32 and which are not currently probable.
On October 11, 2019, we and our subsidiary Minera Metalin issued a notice of
force majeure to South32 pursuant to the Option Agreement. Due to a blockade by
Mineros Norteños, we have temporarily halted all work on the Sierra Mojada
Property. The notice of force majeure was issued because of the blockade's
impact on the ability of us and our subsidiary Minera Metalin to perform their
obligations under the Option Agreement. Pursuant to the Option Agreement, any
time period provided for in the Option Agreement will generally be extended by a
period equal to the period of delay caused by the event of force majeure.
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2019 Warrants Exercised
During the year ended October 31, 2019, we raised net proceeds of approximately
$143,000 from the exercise of share purchase warrants as described in the
"Material Changes in Financial Condition; Liquidity and Capital Resources"
section.
Sierra Mojada Property
In January 2019, our board of directors approved an exploration budget for the
Sierra Mojada Property of $1.8 million for the period from January 2019 through
May 2019 and $1.1 million for general and administrative expenses for calendar
year 2019. In June 2019, our board of directors approved an exploration budget
for the Sierra Mojada Property of $3.5 million for the period from June 2019
through May 2020. Due to the blockade by Mineros Norteños previously mentioned
under "Current Year Developments - South32 Earn-in Option Agreement" of this
Form 10-K, we have temporarily halted all exploration work at the Sierra Mojada
Property.
Drilling
In April 2019, we commenced an 8,000-meter drilling program, which was
subsequently increased to 12,000 meters. During the year ended October 31, 2019,
we completed 8,314 meters of drilling before we halted the drilling program due
to the blockade.
Airborne Geophysics
Between September 2018 and November 2018, we completed a 5,297 line kilometer
helicopter-borne Versatile Time Domain Electro Magnetic (VTEM) and Magnetic
Geophysical Survey over the Sierra Mojada Property. The results of this survey
aided in refining the design of the drilling program.
2020 Exploration Program
The focus of our 2020 calendar year exploration program will be to resolve the
blockade and to maintain our property concessions. If the blockade is resolved,
we will work with South32 to approve an updated exploration program.
Results of Operations
Fiscal Year Ended October 31, 2019 Compared to Fiscal Year Ended October 31,
2018
For the fiscal year ended October 31, 2019, we reported a consolidated net loss
of $3,939,000 or approximately $0.02 per share, compared to a consolidated net
loss of $3,520,000 or approximately $0.02 per share during the fiscal year ended
October 31, 2018. The $419,000 increase in the consolidated net loss was due to
a $1,312,000 increase in exploration and property holding costs, a $47,000
increase in general and administrative expenses and $428,000 in other income in
the 2019 fiscal year compared to $514,000 in other expenses in the 2018 fiscal
year as described below.
Exploration and Property Holding Costs
Exploration and property holding costs increased $1,312,000 to $2,553,000 in the
2019 fiscal year from $1,241,000 in the 2018 fiscal year. This increase was
mainly due to an increase in exploration activities under the Option Agreement,
including our drilling program in the 2019 fiscal year.
General and Administrative Costs
General and administrative expenses increased $47,000 to $1,808,000 in the 2019
fiscal year from $1,761,000 in the 2018 fiscal year as described below.
Personnel costs decreased $10,000 to $692,000 in the 2019 fiscal year from
$702,000 in the 2018 fiscal year. This decrease was mainly due to a special
bonus payment due to the closing of the Option Agreement in the 2018 fiscal year
and a $6,000 decrease in stock-based compensation expense as a result of stock
options vesting in the 2019 fiscal year having a lower fair value than stock
options vesting in the 2018 fiscal year, which was partially offset by an
increase in employees' salaries.
Office and administrative expenses decreased $124,000 to $447,000 in the 2019
fiscal year from $571,000 in the 2018 fiscal year. This decrease was mainly due
to a decrease in investor relations activities and travel costs.
Professional services increased $21,000 to $246,000 in the 2019 fiscal year from
$225,000 in the 2018 fiscal year. This increase was mainly due to an increase in
accounting and legal fees.
Directors' fees decreased $25,000 to $201,000 in the 2019 fiscal year as
compared to $226,000 for the 2018 fiscal year. This decrease was primarily due
to a bonus payment during the 2018 fiscal year and a $3,000 decrease in
stock-based compensation as a result of stock options vesting in the 2019 fiscal
year having a lower fair value than stock options vesting in the 2018 fiscal
year.
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We recorded a $222,000 provision for uncollectible VAT for the 2019 fiscal year
as compared to a $37,000 provision for uncollectible VAT in the 2018 fiscal
year. The increase was mainly due to increased exploration activity at the
Sierra Mojada Property and a reduction in the probability of collecting
outstanding VAT. The allowance for uncollectible taxes in Mexico was estimated
by management based upon a number of factors, including the length of time the
returns have been outstanding, responses received from tax authorities, general
economic conditions in Mexico and estimated net recovery after commissions.
Other Income (Expenses)
We recorded other income of $428,000 in the 2019 fiscal year as compared to
other expense of $514,000 in the 2018 fiscal year. The significant factor
contributing to other income in the 2019 fiscal year was $393,000 in income from
a change in the fair value of the warrant derivative liability that was due to a
decrease in the fair value of warrants with $CDN exercise prices from October
31, 2018 to October 31, 2019.The significant factor contributing to other
expenses in the 2018 fiscal year was a $511,000 expense from a change in the
fair value of the warrant derivative liability that was due to an increase in
the fair value of warrants with $CDN exercise prices from October 31, 2017 to
October 31, 2018.
Material Changes in Financial Condition; Liquidity and Capital Resources
2019 Warrants Exercised
During the year ended October 31, 2019, 1,460,000 warrants to acquire 1,460,000
shares of common stock were exercised at an exercise price of $CDN 0.13 per
share of common stock for aggregate gross proceeds of $143,000 ($CDN
190,000). We incurred costs of $210 related to these warrant exercises.
Cash Flows
During the 2019 fiscal year, we primarily utilized cash and cash equivalents to
fund exploration activities at the Sierra Mojada Property and for general and
administrative expenses. In addition, we received $2,541,000 from South32 and
net proceeds of $143,000 from warrants exercised. As a result of the exploration
activities and general and administrative expenses, which was partially offset
by net cash proceeds received from warrants exercised and funding from South32,
cash and cash equivalents decreased from $3,026,000 at October 31, 2018 to
$1,432,000 at October 31, 2019.
Cash flows used in operations for the 2019 fiscal year was $4,209,000 as
compared to $2,647,000 in the 2018 fiscal year. This increase was mainly due to
increased exploration work at the Sierra Mojada Property and general and
administrative expenses.
Cash flows used in investing activities for the 2019 fiscal year was $69,000 for
the acquisition of property concessions and purchase of equipment. Cash flows
used in investing activities in the 2018 fiscal year was $35,000 for the
acquisition of property concessions and purchase of equipment.
Cash flows provided by financing activities for the 2019 fiscal year was
$2,684,000 as compared to $5,026,000 in the 2018 fiscal year. The cash flows
provided by financing activities in the 2019 fiscal year was due to warrant
exercises and funding from South32, and the cash flows provided by financing
activities in the 2018 fiscal year was due to a private placement, warrant
exercises and funding from South32.
Capital Resources
As of October 31, 2019, we had cash and cash equivalents of $1,432,000 as
compared to cash and cash equivalents of $3,026,000 as of October 31, 2018. The
decrease in our liquidity was primarily the result of the exploration activities
at the Sierra Mojada Property and general and administrative expenses, which was
partially offset by warrant exercises and funding from South32.
Since our inception in November 1993, we have not generated revenue and have
incurred an accumulated deficit of $129,794,000. Accordingly, we have not
generated cash flows from operations, and since inception we have relied
primarily upon proceeds from private placements and registered direct offerings
of our equity securities, warrant exercises and funding from South32 as the
primary sources of financing to fund our operations. We anticipate that we will
continue to rely on sales of our securities in order to continue to fund our
business operations. The issuance of additional shares will result in dilution
to our existing stockholders. There is no assurance that we will be able to
complete any additional sales of our equity securities or that we will be able
to arrange for other financing to fund our planned business activities.
Any future additional financing in the near term will likely be in the form of
payments from South32 or an issuance of equity interests, which will result in
dilution to our existing shareholders. Moreover, we may incur significant fees
and expenses in the pursuit of a financing or other strategic transaction, which
will increase the rate at which our cash and cash equivalents are depleted.
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Capital Requirements and Liquidity; Need for Additional Funding
Our management and board of directors monitor our overall costs, expenses, and
financial resources and, if necessary, will adjust our planned operational
expenditures in an attempt to ensure that we have sufficient operating capital.
We continue to evaluate our costs and planned expenditures, including for our
Sierra Mojada Property as discussed below.
The continued exploration of the Sierra Mojada Property will require significant
amounts of additional capital. In January 2020, our board of directors approved
an exploration budget for the Sierra Mojada Property of $0.2 million for the
period from January 2020 through May 2020 and $1.1 million for general and
administrative expenses for calendar year 2020. As of December 31, 2019, we had
approximately $2 million in cash and cash equivalents of which $0.3 million are
unspent funds from South32. The continued exploration of the Sierra Mojada
Property ultimately will require us to raise additional capital, identify other
sources of funding or identify another strategic partner. For information about
our current strategic partnership with South32, see Note 3 - Earn-In Option
Agreement in our financial statements. If South32 exercises its option to
purchase 70% of the equity of Minera Metalin and Contratistas, under the terms
of the Option Agreement, we will retain a 30% ownership in Minera Metalin and
Contratistas, and be obligated to contribute 30% of subsequent funding toward
the development of the Sierra Mojada Project. If we fail to satisfy our funding
commitment, our interest in Minera Metalin and Contratistas will be diluted. We
do not currently have sufficient funds with which to satisfy this future funding
commitment, and there is no certainty that we will be able to obtain sufficient
future funds on acceptable terms or at all. If South32 terminates the Option
Agreement, our funding obligations for the Sierra Mojada Property would
increase, likely resulting in a reduction in exploration work on the Sierra
Mojada Property. Debt or equity financing may not be available to us on
acceptable terms, if at all. Equity financing, if available, may result in
substantial dilution to existing stockholders. If we are unable to fund future
operations by way of financings, including public or private offerings of equity
or debt securities, our business, financial condition and results of operations
will be adversely impacted.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to our shareholders.
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Recent Accounting Pronouncements Adopted in the Fiscal Year Ended October 31,
2019
Effective November 1, 2018, we adopted the Financial Accounting Standards
Board's (the "FASB's") Accounting Standards Update ("ASU") 2017-05, "Other
Income - Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic 610-20), Clarifying the Scope of Asset Derecognition Guidance and
Accounting for Partial Sales of Nonfinancial Assets," which addresses the
transfer to noncustomers of nonfinancial assets or ownership interests in
consolidated subsidiaries that do not constitute a business and the contribution
of nonfinancial assets that are not a business to a joint venture or other
noncontrolled investee. The adoption of this update did not have a material
impact on our financial position, results of operations or cash flows and
disclosures.
Effective November 1, 2018, we adopted the FASB's ASU 2017-01, "Business
Combinations (Topic 805): Clarifying the Definition of a Business," which
clarifies the definition of a business to assist entities in the evaluation of
acquisitions and disposals of assets or businesses. The adoption of this update
did not have a material impact on our financial position, results of operations
or cash flows and disclosures.
Effective November 1, 2018, we adopted the FASB's ASU 2016-18, "Statement of
Cash Flows (Topic 230): Restricted Cash," which requires entities to show the
changes in the total of cash, cash equivalents, restricted cash and restricted
cash equivalents in the statement of cash flows. The adoption of this update did
not have a material impact on our financial position, results of operations or
cash flows and disclosures.
Effective November 1, 2018, we adopted the FASB's ASU 2016-15, "Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments," which provides guidance on the presentation and classification of
certain cash receipts and payments in the statement of cash flows. The adoption
of this update did not have a material impact on our financial position, results
of operations or cash flows and disclosures.
Effective November 1, 2018, we adopted the FASB's ASU 2016-01, "Financial
Instruments - Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities," which (i) requires equity investments (except those
accounted for under the equity method of accounting, or those that result in
consolidation of the investee) to be measured at fair value with changes in fair
value recognized in net income, (ii) requires public business entities to use
the exit price notion when measuring the fair value of financial instruments for
disclosure purposes, (iii) requires separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset,
and (iv) eliminates the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at amortized cost.
The adoption of this update did not have a material impact on our financial
position, results of operations or cash flows and disclosures. Additionally,
there were no changes in classification of the financial instruments as a result
of the adoption.
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Recent Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," to
include share-based payment transactions for acquiring goods and services from
nonemployees. ASU 2018-07 simplifies the accounting for nonemployee share-based
payments, aligning it more closely with the accounting for employee awards.
These changes became effective for our fiscal year beginning November 1, 2019.
At this time, we do not expect that this update will have a material impact on
the Company's financial position, results of operations or cash flows and
disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases," which will require
lessees to recognize assets and liabilities for the rights and obligations
created by most leases on the balance sheet. These changes became effective for
our fiscal year beginning November 1, 2019. Modified retrospective adoption for
all leases existing at, or entered into after, the date of initial application
is required with an option to use certain transition relief. At this time, we do
not expect that this update will have a material impact on the Company's
financial position, results of operations or cash flows and disclosures.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force) and the SEC did not or are not expected to have a
material impact on our present or future consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires us to
establish accounting policies and make estimates and assumptions that affect our
reported amounts of assets and liabilities at the date of the consolidated
financial statements. These consolidated financial statements include some
estimates and assumptions that are based on informed judgments and estimates of
management. We evaluate our policies and estimates on an ongoing basis and
discuss the development, selection and disclosure of critical accounting
policies with the Audit Committee of the Board of Directors. Predicting future
events is inherently an imprecise activity and as such requires the use of
judgment. Our consolidated financial statements may differ based upon different
estimates and assumptions.
We discuss our significant accounting policies in Note 2, Summary of Significant
Accounting Policies, to our consolidated financial statements. Our significant
accounting policies are subject to judgments and uncertainties that affect the
application of such policies. We believe that these consolidated financial
statements include the most likely outcomes with regard to amounts that are
based on our judgment and estimates. Our consolidated financial position and
results of operations may be materially different when reported under different
conditions or when using different assumptions in the application of such
policies. If estimates or assumptions prove to be different from the actual
amounts, adjustments are made in subsequent periods to reflect more current
information. We believe that the following accounting policies are critical to
the preparation of our consolidated financial statements due to the estimation
process and business judgment involved in their application:
Principles of Consolidation - South32 Option Agreement
We consolidate entities in which we have a controlling financial interest based
on either the variable interest entity (VIE) or voting interest model.
Generally, the primary beneficiary of a VIE is a reporting entity that has (a)
the power to direct the activities that most significantly impact the VIE's
economic performance, and (b) the obligation to absorb losses of, or the right
to receive benefits from, the VIE that could potentially be significant to the
VIE. Currently, we manage the mineral exploration program in the property
concessions in Mexico through our wholly-owned subsidiary corporations Minera
Metalin and Contratistas.
We have determined Minera Metalin and Contratistas are variable interest
entities and we are the primary beneficiary.
We have applied judgment in reaching our conclusion with respect to accounting
for the Option Agreement with South32, described in Note 3 to the consolidated
financial statements. Under the Option Agreement, South32 is able to obtain an
option to purchase 70% of the shares of Minera Metalin and Contratistas (the
"Option"). We have determined that the Option Agreement has not resulted in the
transfer of control of the Sierra Mojada Project to South32 and that the Option
Arrangement represents non-employee share-based compensation associated with the
collaborative exploration program undertaken by the parties. The compensation
cost is expensed when the associated exploration activity occurs. The
share-based payments have been classified as equity instruments and valued based
on the fair value of consideration received, as it is more reliably measurable
than the fair value of the equity interest. In the event the option is exercised
and shares are issued prior to a decision to develop a mine, such shares would
be classified as temporary equity as they would be contingently redeemable in
exchange for a net smelter royalty under circumstances not wholly in control of
us or South32 and which are not currently probable. No portion of the equity
value has been classified as temporary equity as the option has no intrinsic
value.
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Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates based on assumptions about future events
that affect the amounts reported in the consolidated financial statements and
related notes to the consolidated financial statements. Actual results could
differ from those estimates. Estimates and assumptions are reviewed on an
ongoing basis based on historical experience and other factors that are
considered to be relevant under the circumstances. Revisions to estimates and
assumptions are accounted for prospectively.
Significant areas involving the use of estimates include determining the
allowance for uncollectible taxes, evaluating recoverability of property
concessions, evaluating impairment of long-lived assets, evaluating impairment
of goodwill, establishing a valuation allowance on future use of deferred tax
assets, calculating a valuation for stock option liability, calculating a
valuation for warrant derivative liability and calculating stock-based
compensation.
Property Concessions
Property concession acquisition costs are capitalized when incurred and will be
amortized using the units of production method following the commencement of
production. If a property concession is subsequently abandoned or impaired, any
capitalized costs will be expensed in the period of abandonment or impairment.
To date, no property concessions have reached the production stage.
Acquisition costs include cash consideration and the fair market value of shares
issued on the acquisition of property concessions.
Exploration Costs
Exploration costs incurred are expensed to the date of establishing that costs
incurred are economically recoverable. Exploration expenditures incurred
subsequent to the establishment of economic recoverability are capitalized and
included in the carrying amount of the related property. To date, we have not
established the economic recoverability of our exploration prospects; therefore,
all exploration costs are being expensed.
Impairment of Long-Lived Assets
We review and evaluate our long-lived assets for impairment when events and
changes in circumstances indicate that the related carrying amounts of our
assets may not be recoverable. Impairment is considered to exist if the future
cash flows on an undiscounted basis are less than the carrying amount of the
long-lived asset. An impairment loss is measured and recorded based on the
difference between book value and fair value of the asset group. In estimating
future cash flows, assets are grouped at the lowest level for which there is
identifiable cash flows that are largely independent of cash flows from other
asset groups. In estimating future cash flows, we estimate the price that would
be received to sell an asset group in an orderly transaction between market
participants at the measurement date. Significant factors that impact this price
include the price of silver and zinc, and general market conditions for
exploration companies, among other factors.
Goodwill
Goodwill is the purchase premium after adjusting for the fair value of net
assets acquired. We test goodwill for impairment at the reporting unit level at
least annually, or more frequently if events or changes in circumstances
indicate that the assets may be impaired. Goodwill impairment tests require
judgment, including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting units,
and determination of the fair value of each reporting unit. We perform our
annual goodwill impairment tests on April 30th of each fiscal year.
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Income Taxes
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. The
law includes significant changes to the U.S. corporate income tax system,
including a federal corporate rate reduction from 35% to 21%, limitations on the
deductibility of interest expense and executive compensation, and the transition
of U.S. international taxation from a worldwide tax system to a territorial tax
system. The law did not have a material impact on our financial position,
results of operations or cash flows and disclosures.
We follow the asset and liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
temporary differences between the tax basis and accounting basis of the assets
and liabilities measured using tax rates enacted at the balance sheet date. We
recognize the tax benefit from uncertain tax positions only if it is at least
"more likely than not" that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon settlement with the taxing authorities. This accounting
standard also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods and disclosure.
A valuation allowance is recorded against deferred tax assets if management does
not believe that we have met the "more likely than not" standard imposed by this
guidance to allow recognition of such an asset. Management recorded a full
valuation allowance at October 31, 2019 and October 31, 2018 against the
deferred tax assets as it determined that future realization would not meet the
"more likely than not" criteria.
Warrant Derivative Liability
We classified warrants with a $CDN exercise price on our balance sheet as a
derivative liability that is fair valued at each reporting period subsequent to
the initial issuance as our functional currency is the U.S. dollar and the
exercise price of the warrants is the $CDN. We have used the Black-Scholes
pricing model to value the warrants that do not have an acceleration feature and
have used the Monte Carlo valuation model to value the warrants that do have an
acceleration feature. Determining the appropriate fair-value model and
calculating the fair value of warrants requires considerable judgment. Any
change in the estimates used may cause the value to be higher or lower than that
reported. The estimated volatility of our common stock at the date of issuance,
and at each subsequent reporting period, is based on our historical volatility
adjusted to reflect the implicit discount to historical volatilities observed in
the prices of traded warrants. The risk-free interest rate is based on rates
published by the government for bonds with a maturity similar to the expected
remaining life of the warrants at the valuation date. The expected life of the
warrants is assumed to be equivalent to their remaining contractual term. The
dividend yield is expected to be none as we have not paid dividends nor do we
anticipate paying any dividend in the foreseeable future.
The derivatives warrants are not traded in an active market and the fair value
is determined using valuation techniques. The estimates may be significantly
different from those recorded in the consolidated financial statements because
of the use of judgment and the inherent uncertainty in estimating the fair value
of these instruments that are not quoted in an active market. All changes in the
fair value are recorded in the consolidated statement of operations and
comprehensive loss each reporting period.
Stock-Based Compensation
We use the Black-Scholes pricing model as a method for determining the estimated
fair value for all stock options awarded to employees, officers, directors and
consultants. The expected term of the options is based upon an evaluation of
historical and expected future exercise behavior. The risk-free interest rate is
based on rates published by the government for bonds with a maturity similar to
the expected remaining life of the options at the valuation date. Volatility is
determined based upon historical volatility of our stock and adjusted if future
volatility is expected to vary from historical experience. The dividend yield is
assumed to be none as we have not paid dividends nor do we anticipate paying any
dividends in the foreseeable future. We use the graded vesting attribution
method to recognize compensation costs over the requisite service period. Stock
options granted to consultants when the exercise price is in $CDN are classified
as stock option liability on our consolidated balance sheets upon vesting.
We classify cumulative compensation cost associated with options on subsidiary
equity as additional paid-in capital until exercise.
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Foreign Currency Translation
During the fiscal years ended October 31, 2019 and October 31, 2018, the
functional currency of Silver Bull Resources, Inc. and our subsidiaries was the
U.S. dollar.
During the fiscal years ended October 31, 2019 and October 31, 2018, our Mexican
operations' monetary assets and liabilities were translated into U.S. dollars at
the period-end exchange rate, and non-monetary assets and liabilities were
translated using the historical exchange rate. Our Mexican operations' revenue
and expenses were translated at the average exchange rate during the period
except for depreciation of office and mining equipment, costs of office and
mining equipment sold and impairment of property concessions, all of which are
translated using the historical exchange rate. Foreign currency translation
gains and losses of our Mexican operations are included in the consolidated
statements of operations.
Accounting for Loss Contingencies and Legal Costs
From time to time, we are named as a defendant in legal actions arising from our
normal business activities. We record an accrual for the estimated loss from a
loss contingency when information available prior to issuance of our financial
statements indicates that it is probable that a liability has been incurred at
the date of the financial statements and the amount of the loss can be
reasonably estimated. Disclosure of a loss contingency is made by Silver Bull
Resources, Inc. if there is at least a reasonable possibility that a loss has
been incurred, and either an accrual has not been made or an exposure to loss
exists in excess of the amount accrued. In cases where only disclosure of the
loss contingency is required, either the estimated loss or a range of estimated
loss is disclosed or it is stated that an estimate cannot be made. Legal costs
incurred in connection with loss contingencies are considered period costs and
accordingly are expensed in the period services are provided.
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SILVER BULL RESOURCES, INC. 
