United States securities and exchange commission logo
April 6, 2023
Hugh Gallagher
Chief Financial Officer
Marathon Digital Holdings, Inc.
1180 North Town Center Drive, Suite 100
Las Vegas, NV 89144
Re: Marathon Digital
Holdings, Inc.
Form 10-K for the
Fiscal Year Ended December 31, 2022
File No. 001-36555
Dear Hugh Gallagher:
We have reviewed your March 3, 2023 and March 10, 2023
responses to our comment
letter and have the following comments. In some of our comments, we may
ask you to provide
us with information so we may better understand your disclosure.
Please respond to these comments within ten business days by
providing the requested
information or advise us as soon as possible when you will respond. If
you do not believe our
comments apply to your facts and circumstances, please tell us why in
your response.
After reviewing your response to these comments, we may have
additional
comments. Unless we note otherwise, our references to prior comments are
to comments in our
February 22, 2023 letter.
Form 10-K for the year ended December 31, 2022
Business
Corporate Overview
History and Pivot to Bitcoin Mining, page 5
1. Clarify the types of
businesses that are "ancillary" to your bitcoin mining business that
you may expand into in
the future.
Risk Factors, page 12
2. Please revise to also
address any material risk or impact that the current crypto asset
market disruption may
have on the use and valuation of your mining rigs. In this regard,
we note the decrease in
the cost of bitcoin mining rigs that was driven by the drop in
bitcoin prices during
the fourth quarter ended December 31, 2022 resulted in significant
impairment of your
mining rigs and the deposits with bitcoin mining equipment
Hugh Gallagher
Marathon Digital Holdings, Inc.
April 6, 2023
Page 2
manufacturers. Also address the risk that bitcoin mining rigs would
have to be shut down
for lack of profitability once the price of bitcoin declines below a
certain amount.
We may have further restrictions on our liquidity due to unique risks which we
could face in
2023, page 24
3. We note your response to prior comment 23 regarding various risks due
to disruptions in
the crypto asset markets. Please address the termination of your term
loan and line of
credit with the now closed Silvergate Bank, which was your primary
lender. Clarify here
and in your MD&A section how the lack of access to up to $200 million
of bank loans and
credit will impact your operations and liquidity. For example, clarify
whether the lack of
a lender and current market conditions will make it difficult to meet
your funding
obligations for the Abu Dhabi joint venture or the buildout of your
mining operations in
2023. Further, clarify whether you may have difficulty finding another
lender that will
offer you similar or favorable terms given the current volatile
environment in the crypto
asset markets.
4. We note that your cash is primarily held at Signature Bridge Bank, NA,
as overseen by the
FDIC, since Signature Bank, NA, was closed by New York State banking
regulators.
Please address the risk to your cash, acknowledging that your deposits
are only insured up
to $250,000 at the bank, however, the federal government will provide
you access to your
funds but are not required to do so under current banking laws or in
the future. Address
how you will mitigate such risks in the future for bank failure of any
institution where you
will hold a material amount of cash assets.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies and Estimates
Digital assets, page 36
5. Please explain how you determined that the price of digital assets
used for purposes of
assessing impairment is a Level 2 input under ASC 820. Refer to ASC
820-10-35-37
through 35-54A. Also explain how the use of multiple observable
inputs (exchanges)
that provide slightly differing benchmarks of digital asset value
is consistent with the
guidance in ASC 820-10-35-5.
6. Please tell us why your policy indicates that any realized gains or
losses from sales of
digital assets are included in other income (expense). In this regard,
we note the
classification of realized and unrealized gains (losses) on digital
assets loan receivable and
digital assets within operating loss on your statements of other
comprehensive income
FirstName LastNameHugh Gallagher
(loss). Also refer to your response to comment 1 in your letter dated
August 1, 2022
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indicating you wouldDigital
presentHoldings, Inc. on the sale of digital
currencies as a component
realized gain
April 6,of2023
income
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FirstName LastName
Hugh Gallagher
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Marathon Digital Holdings,Gallagher
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April NameMarathon Digital Holdings, Inc.
6, 2023
April 36, 2023 Page 3
Page
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Revenues from contracts with customers, page 37
7. Please clarify your performance obligation in contracts with mining
pool operators as a
participant. You indicate that computing power is the only performance
obligation, but
also indicate that providing computing power to solve a block is the
primary output of
your ordinary activities.
8. We note your statement on page 39 that There is currently no
definitive guidance under
GAAP or alternative accounting framework for the accounting for
digital assets
recognized as revenue or held, and your disclosure on page 29 that
no official guidance
has yet been provided by the Financial Accounting Standards Board.
Please help us
understand the basis for these statements and consider the need to
revise or remove this
disclosure.
Property and Equipment, page 39
9. You indicate that the impairment tests for items of property and
equipment other than
mining rigs are performed annually and the recoverable amounts in
property equipment
are determined based on the higher of value-in-use or fair value less
costs to sell. Tell us
how your accounting policy complies with ASC 360-10-35-17 and 35-21.
Results of Operations, page 42
10. We note that you disclose your bitcoin production during the period in
the supplemental
information provided in the charts on pages 42 and 45. Tell us what
consideration you
gave to also discussing and analyzing additional metrics that are key
performance
indicators, such as the average BTC produced per day,
operational/energized hash rate,
and installed hash rate, as disclosed in your monthly press releases
announcing updates to
your bitcoin production and mining operation. Refer to Item 303(a) of
Regulation S-K
and SEC Release No. 33-10751.
11. In your discussion of the change in cost of revenues, please explain
how higher production
costs of $30,134 thousand per bitcoin mined contributed to an increase
in cost of revenues
of only $45,226 thousand during the year ended December 31, 2022. In
this regard, we
note that bitcoin production increased by 947 BTC in 2022. Tell us if
$30,134 thousand is
actually the increase in production costs for the total bitcoin mined
during the year, rather
than the increase per bitcoin, and, if so, please revise.
12. Please revise to describe the underlying reasons for the material
changes in stock-based
compensation expense. Refer to Item 303(b) of Regulation S-K.
Consolidated Statements of Other Comprehensive Income (Loss), page 55
13. Please explain the nature of the items included in the line item of
realized and unrealized
gains (losses) on digital assets loan receivable and digital assets
and how you
differentiate unrealized losses included in this line item from
impairment included in the
Hugh Gallagher
Marathon Digital Holdings, Inc.
April 6, 2023
Page 4
line item of impairment of digital assets. To the extent that
this line item only includes
changes in fair value related to digital assets loan receivable and
realized gains and losses
on digital assets, please consider revising the caption accordingly.
Consolidated Statements of Cash Flows, page 57
14. Please tell us why the collection of loaned bitcoin is the same amount
as the issuance of
loaned bitcoin in your supplemental schedule of non-cash investing and
financing
activities. In this regard, we note from your rollforward on page 66
that you recognized
loaned digital assets of $13,324 in 2022.
Notes to Consolidated Condensed Financial Statements
Note 2 - Restatement of Consolidated Financial Statements, page 58
15. We note that you include the year ended December 31, 2022 in your
tables depicting the
impacts of the errors. Considering your assertion that the period
ended December 31,
2022 was not subject to restatement, please tell us why your tables
show the impact for
that period. In addition, revise to disclose the impact of each of the
errors on the six
months ended June 30, 2022 and the nine months ended September 30,
2022.
Accounting Policy Adjustments, page 61
16. Please revise to refrain from referring to guidance issued by the SEC
in December 2022.
In this regard, the Staff believes its views regarding the accounting
for loans of digital
assets are in accordance with GAAP.
Restated Consolidated Financial Statements, page 61
17. Please revise to include the operating income (loss) amounts in your
restated consolidated
statements of other comprehensive income (loss) for the year ended
December 31, 2021.
Note 3 - Summary of Significant Accounting Policies
Revenues from Contracts with Customers, page 69
18. As we continue to evaluate your Operator accounting policy disclosure,
please clarify
when you recognize revenue. We note your disclosure that you measure the
fair value of
bitcoin earned using the daily quoted closing U.S. dollar spot rate, but
you state that you
FirstName LastNameHugh Gallagher
recognize revenue at the point in time that a block is successfully
mined. That is, your
Comapany NameMarathon
disclosure Digital
implies that Holdings,revenue
you recognize Inc. throughout the day when
the block is
April 6,solved, before
2023 Page 4 it is measured at the end of the day.
FirstName LastName
Hugh Gallagher
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Marathon Digital Holdings,Gallagher
Inc.
Comapany
April NameMarathon Digital Holdings, Inc.
6, 2023
April 56, 2023 Page 5
Page
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19. We note your disclosure that you measure the fair value of bitcoin
earned using the daily
quoted closing U.S. dollar spot rate each day for reasons of
operational practicality. As
we continue to evaluate your Operator accounting policy disclosure,
please further explain
why it is appropriate to measure noncash consideration other than at
contract inception in
accordance with ASC 606-10-32-21. Tell us what consideration you gave
to measuring
noncash consideration at the point in time that the block is
successfully solved.
20. As we continue to evaluate your Participant accounting policy
disclosure, please tell us
and further revise your revenue recognition policy disclosure to
ensure the following
items are succinctly articulated, as previously requested in prior
comment 5:
Explain the payment terms of your contracts, including how the
amount of
compensation paid to you by third-party pool operators is
determined;
Clearly disclose what you believe is the duration and inception
of your contracts. In
this regard, you disclose that your contracts are
period-to-period contracts and a
new contract is determined to exist each period that
neither party terminates the
arrangement. Revise to define what you consider to be the
period. We note from
your response to comment 20 in your letter dated December 2, 2022
and your
response to prior comment 6 in your letter dated March 10, 2023
that such period
reflects a distinct increment of time of a minute. However, you
also indicate in
response (d) to prior comment 6 in your letter dated March 10,
2023 that contract
inception is upon successful placement of a block on the bitcoin
blockchain;
Indicate when you believe that you satisfy your performance
obligation; and
Clarify your disclosure of why you believe variable
consideration is no longer
constrained upon settlement, consistent with the guidance in ASC
606-10-32-11 and
32-12. That is, you indicate this is the point that the
variability is resolved and
there is no longer the reasonable possibility of
significant reversal of revenue and,
before settlement, the estimation of variable consideration
carries the risk of a
significant revenue reversal. In this regard, variable
consideration should be
constrained to the extent that it is probable that a significant
reversal of revenue will
occur when the uncertainty related to the variable consideration
is subsequently
resolved.
21. We note your supplemental response to prior comment 6 in your letter
dated March 10,
2023 regarding the quantitative impact of your accounting convention
as a Participant. As
we continue to evaluate your accounting policy, please also provide us
with your
sensitivity analysis of the impact of the difference between
recognizing revenue at fair
value of bitcoin at contract inception versus recognizing and
measuring revenue at the
daily closing U.S. dollar spot rate of bitcoin on the date of receipt
of the block rewards
and transaction fees for the quarterly and annual periods in the year
ended December 31,
2021.
Hugh Gallagher
Marathon Digital Holdings, Inc.
April 6, 2023
Page 6
22. As we continue to evaluate your revenue recognition policy as a
Participant, please clarify
the basis for measuring noncash consideration using the daily closing
U.S. dollar spot rate
of bitcoin on the date of settlement. Although, as indicated in
response to prior comment
6 in your letter dated March 10, 2023, you do not have visibility into
the exact moment of
contract inception, tell us what consideration you gave to measuring
noncash
consideration at the point in time that the third-party mining pool is
successful in the
placement of a block on the bitcoin blockchain. Tell us how much
transaction fees and
your proportional contribution of computing power to the pool actually
vary from block to
block during a single 24-hour period.
23. In response to comment 20 in your letter dated December 2, 2022, you
state, ASC 606-
10-32-21 requires noncash consideration to be measured at fair value
at contract inception
which is at each minute... However, you state in your response to
prior comment 6 in
your letter dated March 10, 2023, as a participant in a third party
pool, the company has
no visibility into the exact time of contract inception and it is
therefore impossible to fair
value the revenue recognition at the contact inception. You also
indicate that the amount
of remuneration to which you are entitled is not known at the time a
block is won as the
transaction fees per block, and the proportion of the Company s
contributed computing
power to the pool (which have significant effect on the fractional
share of the block
reward and transaction fees to which the Company is entitled) are both
unknown until
settlement into the Company s wallet. Tell us what impact, if any,
your inability to
measure noncash consideration in accordance with GAAP has on your
assessment of
controls and procedures.
Note 13 - Leases, page 86
24. In response to prior comment 15, you indicate that the use of the
racks at the Garden City,
TX facility represents an embedded lease within the agreement at
December 31, 2022.
Please confirm that these embedded leases are included in your leases
disclosures.
Note 14 - Legal Proceedings
Ho Matter, page 87
FirstName LastNameHugh Gallagher
25. You indicate that the Court noted that a jury is more likely to accept
$150,000,000 as an
Comapany NameMarathon
appropriate damagesDigital
amountHoldings,
if liabilityInc.
is found. Please explain why
you disclose on
April 6,page
202331Page
that 6the Court would more likely accept $150,000.
FirstName LastName
Hugh Gallagher
FirstName LastNameHugh
Marathon Digital Holdings,Gallagher
Inc.
Comapany
April NameMarathon Digital Holdings, Inc.
6, 2023
April 76, 2023 Page 7
Page
FirstName LastName
Note 16 - Quarterly Financial Data (Unaudited)
Unaudited Consolidated Interim Statements of Other Comprehensive Income (Loss),
page 94
26. Please revise to ensure your financial statements labeled as
reported are consistent with
those as reported in your periodic reports. Consider also including
the statements of other
comprehensive income (loss) as reported initially in your periodic
reports filed in 2021, as
well as the statements of other comprehensive income (loss) as
restated in your periodic
reports filed in 2022, along with the restatement adjustments as
reflected in those periodic
reports filed in 2022.
Controls and Procedures
Management's Report on Internal Control over Financial Reporting, page 104
27. Please revise to provide a statement as to whether or not internal
control over financial
reporting is effective. Refer to Item 308(a)(3) of Regulation S-K. In
addition, your
definition of internal control over financial reporting is narrower
than defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act. Confirm that your
assessment was based on
the full definition of internal controls over financial reporting, and
revise your disclosure,
accordingly.
28. You indicate that you identified a weakness in internal control over
financial reporting
related to the application and interpretation of GAAP. Please revise
to indicate whether
this weakness was a material weakness. In addition, tell us what
consideration you gave
to whether more than one material weakness existed related to your
restatements.
Exhibits, page 108
29. You indicate in response to prior comment 7 that you entered in a
Digital Asset Custodial
Agreement with NYDIG in July 2021. Tell us what consideration you gave
to filing the
agreement as an exhibit. Refer to Item 601(b)(10) of Regulation S-K.
You may contact Melissa Walsh, Staff Accountant, at (202) 551-3224 or
Stephen Krikorian, Accounting Branch Chief, at (202) 551-3488 if you have
questions regarding
comments on the financial statements and related matters. Please contact Edwin
Kim, Staff
Attorney, at (202) 551-3297 or Larry Spirgel, Office Chief, at (202) 551-3815
with any other
questions.
Sincerely,
Division of
Corporation Finance
Office of
Technology
cc: Jolie Kahn