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 and the Beskauga
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 [or Beskauga 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.
Recent Developments
Reverse Stock Split
On September 18, 2020, we completed a one-for-eight reverse stock split of our
shares of common stock. All share and per share information in this annual
report on Form 10-K, including references to the number of shares of common
stock, stock options and warrants, prices of issued shares, exercise prices of
stock options and warrants, and loss per share, have been adjusted to reflect
the impact of the reverse stock split.
2020 Private Placement
In October 2020, we raised gross proceeds of $1,703,000 in the initial tranche
of a two-tranche private placement (the "Private Placement"). In the initial
tranche of the Private Placement, we sold of 3,623,580 units consisting of one
share of our common stock and one half of one transferable common stock purchase
warrant. For a full description of the two-tranche Private Placement, see the
"Material Changes in Financial Condition; Liquidity and Capital Resources"
section below.
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Beskauga Option Agreement
On August 12, 2020, we entered into an option agreement (the "Beskauga Option
Agreement") with Copperbelt AG, a corporation existing under the laws of
Switzerland ("CB Parent"), and Dostyk LLP, an entity existing under the laws of
Kazakhstan and a wholly-owned subsidiary of CB Parent (the "CB Sub," and
together with CB Parent, "CB"), pursuant to which we have the exclusive right
and option (the "Beskauga Option") to acquire CB's right, title and 100%
interest in the Beskauga property located in Kazakhstan (the "Beskauga
Property"), which consists of the Beskauga Main project (the "Beskauga Main
Project") and the Beskauga South project (the "Beskauga South Project," and
together with the Beskauga Main Project, the "Beskauga Project"). Upon the
execution of the Beskauga Option Agreement, we paid CB Parent $30,000. In
addition, we paid CB Parent $40,000 after the results of our due diligence was
completed on the Beskauga Property to our satisfaction. The transactions
contemplated by the Beskauga Option Agreement closed on January 26, 2021.
The Beskauga Option Agreement provides that subject to its terms and conditions,
in order to maintain the effectiveness of the Beskauga Option, we must incur
$2,000,000 in cumulative exploration expenditures on the Beskauga Property by
the first anniversary following the closing of the transactions contemplated by
the Beskauga Option Agreement (the "Closing Date"), $5,000,000 in cumulative
expenditures on the Beskauga Property by the second anniversary following the
Closing Date, $10,000,000 in cumulative expenditures on the Beskauga Property by
the third anniversary following the Closing Date, and $15,000,000 in cumulative
expenditures on the Beskauga Property by the fourth anniversary following the
Closing Date (collectively, the "Exploration Expenditures"). The Beskauga Option
Agreement also provides that subject to its terms and conditions, after we have
incurred the Exploration Expenditures, we may exercise the Beskauga Option and
acquire (i) the Beskauga Property by paying CB $15,000,000 in cash, (ii) the
Beskauga Main Project only by paying CB $13,500,000 in cash, or (iii) the
Beskauga South Project only by paying CB $1,500,000 in cash.
In addition, the Beskauga Option Agreement provides that subject to its terms
and conditions, we may be obligated to make the following bonus payments
(collectively, the "Bonus Payments") to CB Parent if the Beskauga Main Project
or the Beskauga South Project is the subject of a bankable feasibility study in
compliance with Canadian National Instrument 43-101 indicating gold equivalent
resources in the amounts set forth below, with (i) (A) 20% of the Bonus Payments
payable after completion of the bankable feasibility study or after the mineral
resource statement is finally determined and (B) the remaining 80% of the Bonus
Payments due within 15 business days of commencement of on-site construction of
a mine for the Beskauga Main Project or the Beskauga South Project, as
applicable, and (ii) up to 50% of the Bonus Payments payable in shares of our
common stock to be valued at the 20-day volume-weighted average trading price of
the shares on the Toronto Stock Exchange calculated as of the date immediately
preceding the date such shares are issued:
Gold equivalent resources Cumulative Bonus Payments
Beskauga Main Project
3,000,000 ounces $ 2,000,000
5,000,000 ounces $ 6,000,000
7,000,000 ounces $ 12,000,000
10,000,000 ounces $ 20,000,000
Beskauga South Project
2,000,000 ounces $ 2,000,000
3,000,000 ounces $ 5,000,000
4,000,000 ounces $ 8,000,000
5,000,000 ounces $ 12,000,000
The Beskauga Option Agreement may be terminated under certain circumstances,
including (i) upon the mutual written agreement of us and CB; (ii) upon the
delivery of written notice by us, provided that at the time of delivery of such
notice, unless there has been a material breach of a representation or warranty
given by CB that has not been cured, the Beskauga Property is in good standing;
or (iii) if there is a material breach by a party of its obligations under the
Beskauga Option Agreement and the other party has provided written notice of
such material breach, which is incapable of being cured or remains uncured.
On August 24, 2020, we loaned $360,000 to Ekidos Minerals LLP, an unrelated
third-party Kazakh entity, relating to the acquisition of mineral property
concessions in Kazakhstan. The loan is interest free and is to be repaid on
January 31, 2021.
On December 21, 2020, we loaned an additional $400,000 to Ekidos Minerals LLP.
This loan is interest free and is to be repaid by June 30, 2021.
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South32 Option Agreement
On June 1, 2018, we and our subsidiaries Minera Metalin and Contratistas entered
into the South32 Option Agreement with South32, whereby South32 is able to
obtain the South32 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 South32 Option Agreement, South32 earns into the South32 Option by
funding a collaborative exploration program on the Sierra Mojada Project. Upon
the terms and subject to the conditions set forth in the South32 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 South32 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
South32 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 South32 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 South32 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 South32 Option Agreement. In April
2019, we received a notice from South32 to maintain the South32 Option Agreement
for Year 2 by providing cumulative funding of $6 million by the end of such
period. As of October 31, 2020, we had received funding of $1,420,161 from
South32 for Year 2 of the South32 Option Agreement, the time period for which
has been extended by an event of force majeure described in more detail below.
In November 2020, we received a payment of $60,286 for the extended Year 2 time
period. If the South32 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 South32 Option Agreement.
Upon exercise of the South32 Option, Minera Metalin and Contratistas are
required to issue common shares to South32. Pursuant to the South32 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 South32 Option Agreement has not resulted in the transfer
of control of the Sierra Mojada Project to South32. We have also determined that
the South32 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 South32 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 South32 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 South32 Option Agreement. Pursuant to the
South32 Option Agreement, any time period provided for in the South32 Option
Agreement will generally be extended by a period equal to the period of delay
caused by the event of force majeure.
Sierra Mojada Property
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. In June 2020, our board of directors approved an exploration budget
for the Sierra Mojada Property of $0.1 million for the period from June 2020
through December 2020. Due to the blockade by Mineros Norteños previously
mentioned under the "Recent Developments - South32 Option Agreement" section of
this Form 10-K, we have temporarily halted all exploration work at the Sierra
Mojada Property.
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2020 Drilling
During the year ended October 31, 2020, we conducted no drilling as we halted
the drilling program due to the blockade.
2021 Exploration Program
The focus of our 2021 calendar year exploration program on the Sierra Mojada
Property will be to resolve the blockade and to maintain our property
concessions in Mexico. Upon resolution of the blockade, we will work with
South32 to approve an updated exploration program.
In addition, we anticipate the commencement of an exploration drilling program
in the second calendar quarter of 2021 on the Beskauga Property. This will
involve a geological mapping and sampling program of key select areas, as well
as a diamond drilling program targeting extensions to the known mineralization
in the second half of calendar year 2021. The exploration program's design is
being determined based historical geological information in the area and an
airborne geophysics program that has recently been completed. The exploration
drilling program is subject to obtaining adequate financing.
Management Changes
On September 28, 2020, Christopher Richards was appointed Chief Financial
Officer, replacing Sean Fallis who served as Chief Financial Officer until
September 25, 2020. Mr. Richards is a CPA (Chartered Professional Accountant,
British Columbia), CA and was the Vice President of Finance for Great Panther
Mining Limited. Prior to Great Panther, he served as a senior financial
consultant at various public and private mining companies. Prior to that, he
spent seven years as the Vice President Finance and Corporate Secretary of
Kazakhstan-focused Kyzyl Gold Ltd., and was Corporate Controller at NovaGold
Resources Inc. and a Senior Manager at KPMG LLP.
Results of Operations
Fiscal Year Ended October 31, 2020 Compared to Fiscal Year Ended October 31,
2019
For the fiscal year ended October 31, 2020, we reported a consolidated net loss
of $2,226,000 or approximately $0.08 per share, compared to a consolidated net
loss of $3,939,000 or approximately $0.13 per share during the fiscal year ended
October 31, 2019. The $1,713,000 decrease in the consolidated net loss was
primarily due to a $1,873,000 decrease in exploration and property holding
costs, a $285,000 decrease in general and administrative expenses, which was
partially offset by $15,000 in other expenses in the 2020 fiscal year compared
to $428,000 in other income in the 2019 fiscal year as described below.
Exploration and Property Holding Costs
Exploration and property holding costs decreased by $1,873,000 to $680,000 in
the 2020 fiscal year from $2,553,000 in the 2019 fiscal year. This decrease was
mainly due to the blockade discussed in the "Recent Developments - South32
Option Agreement" section above and the fact that we were drilling and completed
an airborne geophysics survey in the 2019 fiscal year.
General and Administrative Costs
General and administrative expenses decreased by $285,000 to $1,523,000 in the
2020 fiscal year from $1,808,000 in the 2019 fiscal year as described below.
Personnel costs decreased by $78,000 to $614,000 in the 2020 fiscal year from
$692,000 in the 2019 fiscal year. This decrease was mainly due to a $87,000
decrease in stock-based compensation expense as a result of stock options
vesting in the 2020 fiscal year having a lower fair value than stock options
vesting in the 2019 fiscal year.
Office and administrative expenses decreased by $130,000 to $317,000 in the 2020
fiscal year from $447,000 in the 2019 fiscal year. This decrease was mainly due
to a decrease in investor relations activities.
Professional services increased by $152,000 to $398,000 in the 2020 fiscal year
from $246,000 in the 2019 fiscal year. This increase was mainly due to a
$177,000 increase in legal fees, which was partially offset by a $35,000
decrease in accounting fees.
Directors' fees decreased by $57,000 to $144,000 in the 2020 fiscal year as
compared to $201,000 for the 2019 fiscal year. This decrease was primarily due
to a $56,000 decrease in stock-based compensation expense as a result of stock
options vesting in the 2020 fiscal year having a lower fair value than stock
options vesting in the 2019 fiscal year.
We recorded a $50,000 provision for uncollectible VAT for the 2020 fiscal year
as compared to a $222,000 provision for uncollectible VAT in the 2019 fiscal
year. The decrease was mainly due to increased exploration activity at the
Sierra Mojada Property and a reduction in the probability of collecting
outstanding in the 2019 fiscal year 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.
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Other (Expenses) Income
We recorded other expense of $15,000 in the 2020 fiscal year as compared to
other income of $428,000 in the 2019 fiscal year. The significant factor
contributing to other expenses in the 2020 fiscal year was a $22,000 foreign
currency transaction loss. 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.
Material Changes in Financial Condition; Liquidity and Capital Resources
2020 Private Placement
On October 27, 2020, in the initial tranche of the Private Placement, we sold
3,623,580 Units at a purchase price of $0.47 per Unit for gross proceeds of
$1,703,000. On November 9, 2020, in the second tranche of the Private Placement,
we sold 319,000 Units at a purchase price of $0.47 per Unit for gross proceeds
of $150,000. Each Unit consists of one share of our common stock and one half of
one transferable common stock purchase warrant (each whole warrant, a
"Warrant"). Each Warrant entitles the holder thereof to acquire one share of our
common stock at a price of $0.59 until the fifth annual anniversary of the
closing of the respective tranche of the Private Placement.
We paid a finder's fee totaling $26,000 to an agent with respect to certain
purchasers who were introduced by the agent. We incurred other offering costs
associated with the Private Placement of $98,456.
Cash Flows
During the 2020 fiscal year, we primarily utilized cash and cash equivalents to
fund (i) exploration activities at the Sierra Mojada Property, (ii) project
evaluation, (iii) a loan to a Kazakh entity with respects to the acquisition of
mineral concessions located in Kazakhstan, and (iv) general and administrative
expenses. In addition, we received $1,101,000 from South32, net proceeds of
$1,669,000 from the first tranche of the Private Placement, and a Canada
Emergency Business Account ("CEBA") loan for $30,000. As a result of net cash
proceeds received from the Private Placement, funding from South32 and the CEBA
loan, which was partially offset by exploration activities and general and
administrative expenses, cash and cash equivalents increased from $1,432,000 at
October 31, 2019 to $1,862,000 at October 31, 2020.
Cash flows used in operations for the 2020 fiscal year was $1,958,000 as
compared to $4,209,000 in the 2019 fiscal year. This decrease was mainly due to
decreased exploration and property holding costs due to the blockade and
decreased general and administrative expenses.
Cash flows used in investing activities for the 2020 fiscal year was $408,000
for (i) acquisition of property concessions, (ii) a loan to a Kazakh entity, and
(iii) purchases of equipment. Cash flows used in investing activities in the
2019 fiscal year was $69,000 for the acquisition of property concessions and
purchases of equipment.
Cash flows provided by financing activities for the 2020 fiscal year was
$2,799,000 as compared to $2,684,000 in the 2019 fiscal year. The cash flows
provided by financing activities in the 2020 fiscal year was due to the Private
Placement, funding from South32 and the CEBA loan. The cash flows provided by
financing activities in the 2019 fiscal year was due to funding from South32 and
the exercise of certain warrants.
Capital Resources
As of October 31, 2020, we had cash and cash equivalents of $1,862,000 as
compared to cash and cash equivalents of $1,432,000 as of October 31, 2019. The
increase in our liquidity was primarily the result of the Private Placement,
funding from South32 and the CEBA loan, which was partially offset by the
exploration activities at the Sierra Mojada Property and general and
administrative expenses.
Since our inception in November 1993, we have not generated revenue and have
incurred an accumulated deficit of $132,019,000. 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.
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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.
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 and Beskauga Property as discussed below.
The continued exploration of the Sierra Mojada Property and the Beskauga
Property will require significant amounts of additional capital. In January
2021, our board of directors approved an exploration budget for the Sierra
Mojada Property of $0.2 million, an exploration budget for the Beskauga Property
of $8.6 million subject to completion of due diligence and $1.4 million for
general and administrative expenses for calendar year 2021. As of December 31,
2020, we had approximately $1.1 million in cash and cash equivalents and a loan
receivable of $0.8 million as described in the "Recent Developments - Beskauga
Option Agreement" section above. The continued exploration of the Sierra Mojada
Property and Beskauga 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 - South32 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 South32 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 South32 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. We will continue to evaluate our
ability to obtain additional financial resources, and we will attempt to reduce
or limit expenditures on the Sierra Mojada Property and Beskauga Property as
well as general and administrative costs if we determine that additional
financial resources are unavailable or available on terms that we determine are
unacceptable. However, it may not be possible to reduce costs, and even if we
are successful in reducing costs, we still may not be able to continue
operations for the next 12 months as a going concern. If we are unable to fund
future operations by obtaining additional financial resources, including through
public or private offerings of equity, we do not expect to have sufficient
available cash and cash equivalents to continue our operations for the next 12
months as a going concern. 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. Our limited ability to issue shares to raise capital
without an increase in the number of authorized shares of common stock is
discussed further in the "Risk Factors - Risks Related to our Business" section
above.
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.
Recent Accounting Pronouncements Adopted in the Fiscal Year Ended October 31,
2020
On November 1, 2019, we adopted the Financial Accounting Standards Board's (the
"FASB's") Accounting Standards Update ("ASU") 2018-07, "Compensation - Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting", which became effective for fiscal years beginning after
December 15, 2018. ASU 2018-07 simplifies the accounting for nonemployee
share-based payments, aligning it more closely with the accounting for employee
awards. Under the adoption provisions, equity-classified awards for which a
measurement date had already been established as of the adoption date, including
our South32 Option Agreement (Note 3), are unaffected by ASU 2018-07. As a
result of this adoption, we reclassified $4,803 from stock option liability to
additional paid-in capital (Note 11).
On November 1, 2019, we adopted the FASB's ASU 2016-02, "Leases (Topic 842),"
together with subsequent amendments, which became effective for fiscal years
beginning after December 15, 2018. The new standard requires a lessee to
recognize on its balance sheet, a liability to make lease payments (the lease
liability) and the right-of-use ("ROU") asset representing the right to the
underlying asset for the lease term and allows companies to elect to apply the
standard at the effective date. We elected the package of practical expedients
permitted under the transition guidance, which applies to expired or existing
leases and allows us not to reassess whether a contract contains a lease, the
lease classification, and any initial direct costs incurred.
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We also elected a number of optional practical expedients including the
following:
º the short-term lease recognition exemption whereby ROU assets and lease
liabilities will not be recognized for leasing arrangements with terms less
than one year;
º the land easements practical expedient whereby existing land easements are
not reassessed under the new standard;
º the hindsight practical expedient when determining lease term at
transition; and
º the practical expedient not to apply lease accounting to the intangible
right to explore for those natural resources, and rights to use the land in
which those natural resources are contained.
The adoption of this update did not have an impact on our financial position,
results of operations or cash flows and disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the
Accounting for Income Taxes (Topic 740)," which is intended to simplify various
aspects related to accounting for income taxes. ASU 2019-12 removes certain
exceptions to the general principles in Topic 740 and clarifies and amends
existing guidance to improve consistent application. ASU 2019-12 will be
effective for interim and annual periods beginning after December 15, 2020.
Early adoption is permitted. At this time, we do not expect this standard to
affect our 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 South32 Option Agreement with South32, described in Note 3 to the
consolidated financial statements. Under the South32 Option Agreement, South32
is able to obtain an option to purchase 70% of the shares of Minera Metalin and
Contratistas (the "South32 Option"). We have determined that the South32 Option
Agreement has not resulted in the transfer of control of the Sierra Mojada
Project to South32 and that the South32 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. In
the event the South32 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 South32 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.
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.
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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, 2020 and October 31, 2019 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.
Foreign Currency Translation
During the fiscal years ended October 31, 2020 and October 31, 2019, the
functional currency of Silver Bull Resources, Inc. and our subsidiaries was the
U.S. dollar.
During the fiscal years ended October 31, 2020 and October 31, 2019, our Mexican
operations' monetary assets and liabilities with foreign source currencies were
translated into U.S. dollars at the period-end exchange rate, and non-monetary
assets and liabilities with foreign source currencies 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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