January 24, 2024
VIA EDGAR
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Ms. Sandra Hunter Berkheimer
Ms. Sonia Bednarowski
Ms. Kate Tillan
Ms. Bonnie Baynes
Re: CleanSpark, Inc.
Form 10-K for the Fiscal Year
Ended September 30, 2023
Filed December 1, 2023
File No. 001-39187
Dear Ms. Tillan and Ms. Bednarowski:
This letter is being furnished on behalf of CleanSpark, Inc. (the Company,
we or us ) in response to
the comment received from the staff of the Division of Corporation Finance
Office of Crypto Assets (the
Staff ) of the U.S. Securities and Exchange Commission (the Commission
) by letter dated December
18, 2023, regarding the Company s Form 10-K for the Fiscal Year Ended
September 30, 2023 (the 10-K )
(File No. 000-39187) filed on December 1, 2023.
The text of the Staff s comment has been included in bold and italics for
your convenience, and we have
numbered the paragraph below to correspond to the number in the Staff s
letter. For your convenience, we
have also set forth the Company s response immediately below the numbered
comment.
Form 10-K for the fiscal year ended September 30, 2023
General
1.
Refer to your response to comment 5 of our March 31, 2023 comment letter. In
future filings, please
disclose whether the mining pools provide services only for bitcoin mining or
if they are multi-crypto
asset mining pools. Please also disclose the fees associated with participating
in the mining pool.
***Copyrighted Material Omitted***
Response: The Company acknowledges the
Staff's comment. The
Foundry USA Pool in which CleanSpark
participates does not provide
services (i.e., hash computations, computing
power) for mining any
cryptocurrencies other than bitcoin and
bitcoin cash.
Foundry charges the Company fees for its
services and such fees are
dependent on the hashrate that the Company are
provided to the pool.
The fees charged by Foundry to the Company
have historically varied
from 0.15%-0.19% and are based on the
Company's previous quarter's
hashrate. The Company anticipates a rate of
0.15% for periods
subsequent to the date of this letter. The
Company will disclose in future
filings commencing with the quarterly report
on Form 10-Q for the
period ended December 31, 2023, that the
Foundry USA pool, to which
Company contributes its
computer power, only provides service for
bitcoin mining. The Company
will also disclose within its management
discussion and analysis the fees
charged by the mining pool operator.
2.
Refer to your response to comment 6 of our February 6, 2023 comment letter. In
future filings, please
disclose whether you hold any other types of crypto assets. If so, please
identify the types and amount
of such crypto assets, and discuss the purpose of holding the other types of
crypto assets.
Response: The Company acknowledges the Staff
s comment and will
disclose in future filings commencing with the
quarterly report on Form
10-Q for the period ended December 31, 2023
whether it holds any other
types of crypto assets. The Company will also
reiterate that it is the
Company s strategy to solely hold or
transact in bitcoin.
3.
In future filings, in your breakeven analysis comparing the cost to earn or
mine one bitcoin with the
value of one bitcoin, please include equipment costs in a separate row to the
table or tell us why this
information is not relevant.
Response: The Company acknowledges the Staff's
comment. The
Company does not include equipment costs
(depreciation expense) in the
breakeven analysis, which compares the cost to
earn or mine one bitcoin
with the value of one bitcoin. Depreciation is
not comparable because of
the timing of depreciation lives across miners
so it is not typically
considered in the cost to mine a bitcoin.
Further, management, in
analyzing its operating results, does not
consider depreciation expense to
be an incremental cost associated with the
mining activity. This
conclusion is supported by the Company's
presentation in the
consolidated statements of operations and
comprehensive loss which
separately includes a line for depreciation
and amortization. The
Company further clarifies this approach by
denoting that depreciation
and amortization is excluded from cost of
revenues. Also, the Company
will modify the disclosure in the management
discussion and analysis to
expressly indicate that the cost to mine one
bitcoin, excludes
depreciation expense for its miners.
Financial Statements
Consolidated Statements of Cash Flows, page F-11
4.
We acknowledge your response to comment 8. Please note that we are continuing
to review your
response.
Response: The Company acknowledges the Staff
s comment.
Note 2. Summary of Significant Accounting Policies
Revenue Recognition, page F-14
5.
In response to comment 5, you refer to Exhibit A and the updated Foundry USA
Pool Terms and
Conditions as of August 28, 2023. We note that this exhibit was not included
with your response.
Please file the exhibit on EDGAR as correspondence.
Response: The Company acknowledges the Staff
s comment and has
attached the Foundry USA Pool Terms and
Conditions as an exhibit to
this correspondence, as file on EDGAR.
6.
We acknowledge your responses to comments 5 and 6. Please respond to the
following and revise
your disclosure in future filings to specifically address the following
concerning your mining revenue
recognition under ASC 606
2
In your response you told us that each 24-hour period is a contract day, which
begins at 00:00:00
UTC and ends at 23:59:59 UTC. You also disclose that your contracts are
terminable at any time by
either party and you told us that there are no penalties for either party in
case of termination. Tell
us your consideration for the guidance in Examples 1 and 2 of Question 7 and of
Question 8 to the
FASB Revenue Recognition Implementation Q&As and whether the mining pool
agreement is
continuously renewed and the duration of your contracts is less than 24 hours.
Response: We acknowledge the Staff
s comment. As
contracts are terminable at any time
without penalty, the
contract term is shorter than a 24
hour period and is
continuously renewed. As the
contract payout is non-cash,
the non-cash consideration should be
measured at contract
inception which would occur
throughout the day. We
consistently utilize the daily
closing bitcoin price for
recording revenue, and we measured
the impact of the
recording revenue under both the
average bitcoin price and
opening bitcoin price and determined
impact to bitcoin
mining revenue as compared to the
daily closing price was
less than 0.5% of total bitcoin
mining revenue during each
period. We will revise our
disclosure to state that contracts
are shorter than 24 hours in future
filings.
Disclose, similar to your response, that the contracts are terminable at any
time by either party
without compensation or penalty to the other party for such termination.
Response: In future filings
commencing with the December
31, 2023 quarterly filing, we will
disclose the following The
contract with our mining pool
operator is terminable at any
time by either party. There are no
penalties for contract
termination by either party.
Assuming you conclude that your contracts are continually renewed, tell us
whether the rate of
payment remains the same upon renewal and whether your customer s option to
renew represents a
material right that results in a separate performance obligation as
contemplated in ASC 606-10-55-
42.
Response: Based upon the customer
s terms of service, the
calculation to determine rewards
remains the same during
each contract renewal. This would
indicate the rate of
payment remains the same as it is
based on the calculation in
the contractual agreement. The
option to renew does not
represent a material right that
results in a separate
performance obligation as
contemplated in ASC 606-10-55-
42 as the pricing in the renewal
periods is the same as the
initial contract, there are no
upfront or incremental fees in the
initial contract or the terms,
conditions, and compensation
amounts for the renewal options are
at the market rates.
You told us that you are precisely aware of the computing power (measured in
hashrate) contributed
to the pool operator at any time during the contract period and at any point in
time during the
contract period you could calculate the daily pay-per-share earnings (step 1 of
the Foundry USA
Pool's Payout). As such, tell us why the block reward portion of the
consideration cannot be
reasonably estimated and is fully constrained. In this regard, it appears for
FPPS contracts that the
only variable at contract inception is the number of hashes you will perform,
which is wholly in your
control and would appear to be reasonably estimable.
Response: Although we are able to
determine the computing
power contributed to the pool
operator at any time during the
contract period, to calculate the
block reward, we would
require the network difficulty and
the transaction fees that
will be earned by the network. Based
on historical data, we
are able to make an estimate
throughout the day; however, as
the variability
3
is resolved by the following day, we
record the actual revenue
earned. In future filings, we plan
to remove any statements
related to uncertainty that revenue
is fully constrained until
received.
You told us that your performance obligation is to provide computing power
services (in the form of
hashrate). Tell us your consideration of disclosing your one performance
obligation as a service to
perform hash computations for the mining pool operator, or something similar,
to align with the
promise under your agreement.
Response: We have a single
performance obligation in
providing hash computations (i.e.,
hashing/computing
power) to the mining pool operator
(i.e., customer). The
performance obligation of computing
power services is
fulfilled daily over-time, as
opposed to a point in time, as we
provide hashrate throughout the day
and the customer
simultaneously obtains control of it
and uses the asset to
produce bitcoin. Our customer s
payout methodology is
based on daily hashrate provided,
which is converted into
shares per day prior to being used
in the full-pay-per-share
model. While our miners do perform
hash computations as
part of their operations, we believe
our performance
obligation is based on the speed at
which we perform hash
computations.
Disclose, similar to your response, that your agreement utilizes the Full Pay
Per Share (FPPS) payout
method and summarize the nature of each component of your consideration (i.e.,
network block
subsidies, network transaction fees, and pool operating fees). It should be
clear from the disclosure
whether the amounts are calculated based on expected or actual amounts. For
example, we note from
the agreement that network block subsidies are based on the total amount of
block subsidies that are
expected to be generated on the bitcoin network as a whole during the 24-hour
period beginning at
midnight UTC daily (i.e., the measurement period), regardless of whether the
mining pool operator
successfully records a block to the blockchain, while network transaction fees
are based on the total
amount of transaction fees and block rewards that are actually generated on the
blockchain network
as a whole during the measurement period.
Response: In future filings
commencing with the December
31, 2023 quarterly filing, the
Company plans to disclose the
following: The Company earns
revenue based on the Full-
Pay-Per-Share ( FPPS ) payout
method, set forth by our
customer. The calculation has
specific components which
include network block subsidies,
network difficulty, network
transaction fees, and pool operating
fees. The network block
subsidy consists of newly generated
coins and comprises the
largest share of the block reward.
Network difficulty is the
difficulty required to mine a block
on the Bitcoin network,
which a component in the calculation
for payout. Network
transaction fees consist of fees
paid by the users of the
network for the execution of
transactions that are included in
the block. Pool operating fees are
fees charged by the mining
pool operator in order to operate
the pool. Network block
subsidies are based on the total
amount of block subsidies
that are expected to be generated
on the bitcoin network as a
whole during the 24-hour period
beginning at midnight UTC
daily, regardless of whether the
mining pool operator
successfully records a block to
the blockchain. Network
difficulty is based on the actual
difficulty to mine a block on
the Bitcoin network. Network
transaction fees are based on
the total amount of transaction
fees and block rewards that
are actually generated on the
blockchain network as a whole
during the 24-hour period. Pool
operating fees are
determined by a fee rate set forth
in the customer s terms of
service as a percentage of the
actual daily FPPS payout .
4
Tell us your consideration of clarifying in your disclosure, if true, that for
each contract, you measure
the noncash consideration using the end of the day bitcoin spot price on the
date of contract inception
and recognize the noncash consideration on the same day that control of the
contracted service
transfers to the mining pool operator (i.e., the customer), which is the same
day as contract inception.
Response: In future filings, we
will clarify that we measure
the noncash consideration (i.e.,
bitcoin) using the end of the
day spot price based on the date
where computing power was
provided. Although this price may
be different from contract
inception price, which would occur
throughout the day, we
have determined the change in
price would not result in a
material difference as denoted in
bullet one. In future filings
commencing with the quarterly
report on Form 10-Q for the
period ended December 31, 2023, we
will revise our
disclosure to clarify that end of
day spot price is not
materially different from using
the price at the inception of
each contract.
Bitcoin, page F-17
7.
We acknowledge your response to comment 10 and your disclosure on page F-17. As
noted in your
response, the definition of a current asset in the FASB Master Glossary refers
to a reasonable
expectation of realization. Your response and disclosure refer to your intent.
Please revise your
disclosure in future filings to state, if true, that your bitcoin holdings are
reasonably expected to be
realized in cash or sold or consumed during the normal operation cycle of your
business.
Response: In the Company's future filings, the
Company will enhance its
disclosure in the Summary of Significant
Accounting policies regarding
the classification of bitcoin as a current
asset to state that bitcoin holdings
are reasonably expected to be realized in cash
or sold or consumed during
the normal operating cycle of the Company.
8.
We acknowledge your response to comment 11. You told us that you perform the
impairment analysis
of bitcoin at the end of each reporting period through a "look-back" based on
the bitcoin held at each
reporting period end to determine any impairment based on the lowest intraday
price during the
reporting period. It appears that you adopted this policy after December 31,
2022. Prior to January
1, 2023, you based your quarterly impairment analysis on the lowest daily
closing price. Please
address the following:
We note that ASC 350-30-35-19 states that if the carrying amount exceeds fair
value then the entity
shall recognize an impairment loss equal to that excess. Also, per ASC
350-30-35-18, the test is
annually and more frequently if events or changes in circumstances indicate
that it is more likely
than not that the asset is impaired. Tell us why you believe that anytime the
market price is below
carrying value is not an event or circumstance that indicates it is more likely
than not that the asset
is impaired.
Response: We acknowledge the
Staff's comment. We
determined we would utilize the
daily intraday low price for
bitcoin held as this treatment
ensures the balance sheet is
appropriately reflected and
provides investors with
information that reflects the
underlying economics of the
asset. We have analyzed the
intraday lows for bitcoin held at
period end for all balance sheet
periods from March 31, 2023
and earlier, and determined that
the impact to the balance
sheet and Net Income would not be
material. Additionally,
for each period after March 31,
2023, there was no impact to
the balance sheet, since the
bitcoin held at each reporting
period end was recorded at the
impairment value of the low
intraday Coinbase price. We have
elected this accounting
treatment as it provides investors
with decision-useful
information and represents
5
the underlying economics and
financial position of our
bitcoin. Additionally, in our
future filings commencing with
the December 31, 2023 quarterly
filing, we are planning to
early adopt ASU 2023-08 which
states that An entity shall
measure crypto assets at fair value
in the statement of
financial position. Therefore we
will be adjusting our
accounting policy for the valuation
of bitcoin as of October
1, 2023.
Further, ASC 350-30-35-18B requires assessment of all relevant events and
circumstances that could
affect the significant inputs to fair value. We note that a market price would
be a significant input
and a market price below carrying value would indicate more likely than not
that an impairment
exists. Per ASC 350- 50-35-20, a subsequent reversal of a previously recognized
impairment loss is
prohibited. Tell us how you considered whether your policy of only considering
impairment on a
quarterly basis is consistent with this guidance since you would be ignoring
any impairments that
occur during the quarter.
Response: We record our bitcoin
impairment based on the
daily intraday low price for all
bitcoin held at period end. The
impairment calculation is a fully
daily impairment that would
capture all impairments related to
bitcoin held at period end.
To the extent that an impairment loss
is recognized, the loss
establishes the new costs basis of
the digital asset. We have
performed this calculation on a
quarterly basis as this ensures
the balance sheet is correctly
stated. This is to provide
investors with information that
represent the underlying
economics of our assets and to ensure
our financial position
is appropriately stated. We have also
prepared an analysis
whereby we have determined the impact
to Net Income
utilizing the intraday low for
bitcoin held at period end and
determined the change would be an
immaterial impact to Net
Income. Additionally, in our future
filings commencing with
the quarterly report on Form 10-Q for
the period ended
December 31, 2023, we are planning to
early adopt ASU
2023-08 which states that An
entity shall measure crypto
assets at fair value in the statement
of financial position.
Therefore we will be adjusting our
accounting policy for the
valuation of bitcoin as of October 1,
2023.
In your application of ASC 350-30-35-18B, tell us at what point impairment
occurs, if not whenever
the fair market value is below the carrying amount.
Response: Our accounting policy for
determining if there is
an impairment related to its bitcoin
holdings is measured on
the daily intraday low price of
bitcoin related to bitcoin held.
We have determined this is
representative of the underlying
economics of our assets held. We
performs this calculation
on a quarterly basis as this ensures
the balance sheet is
correctly stated and has an
immaterial impact to overall net
income. However, in our future
filings, we are planning to
early adopt ASU 2023-08 which states
that An entity shall
measure crypto assets at fair value
in the statement of
financial position. Therefore we
will be adjusting our
accounting policy for the valuation
of bitcoin as of October
1, 2023.
Tell us how timing only at quarter end is relevant to the analysis of
determining whether or not
impairment exists.
Response: We have determined that
quarter end is relevant to
users of the financial statements as
it demonstrates the lowest
closing cost for bitcoin held based
on the First In-First Out
("FIFO") method. Any bitcoin held as
of period end would
be revalued to its lowest close price
since the Company
received the bitcoin. This would
ensure that the balance sheet
is appropriately stated.
Additionally, in our future filings, we
are planning to early adopt ASU
2023-08 which states that
An entity shall measure crypto
assets at fair value in the
statement of financial position.
Therefore we will be
adjusting our accounting policy for
the valuation of bitcoin
as of October 1, 2023.
6
You told us that you account for your bitcoin as a single unit of accounting
but you also disclose that
you use the FIFO method to account for gains and losses on sales and exchanges.
Explain to us how
you determined the initial carrying value of your bitcoin (or fraction
thereof), the steps you took
when performing your quarter end impairment analysis as of June 30, 2023, how
you calculated the
total amount of the impairment charge of $1,017,000, how you determined the
subsequent carrying
value of each bitcoin (or fraction thereof), and how you then determine gains
and losses on sales and
exchanges of bitcoin.
Response: The Company records
bitcoin activity on a daily
basis using the FIFO method to
track costs. The bitcoin
mined each day is recorded at the
closing Coinbase price and
is maintained for that group of
bitcoin mined on such day.
When sales of bitcoin are
transacted by the Company,
gains/losses are recorded based on
difference between the
proceeds from the sale and the cost
of the oldest bitcoin held
as of such day. If such bitcoin was
mined in a prior quarter,
then such bitcoin is measured as of
the lowest quoted bitcoin
price during the current such
measurement period.
Alternatively, if such bitcoin was
mined AND sold during the
same reporting period, then the
gains/losses are recorded
based on the value of such coin on
the date it was mined. At
the end of such quarter, if the
bitcoin mined during the
quarter is held at the end of such
quarter, then that bitcoin is
subjected to impairment measurement
and recorded at the
lowest quoted price during such
measurement period. The
impairment charge recorded at the
end of each quarterly
period is the amount recorded to
adjust the bitcoin held at the
end of each quarter to the lowest
quoted bitcoin price for each
daily tranche of bitcoin.
The June 30, 2023 year-to-date
impairment charge of
$1,017,000 represents the
accumulation of the quarterly
impairment charges recorded through
the year of $83,000,
$194,000, and $740,000 for the
quarters ended at each of the
December, 31, 2022, March 31, 2023
and June 30, 2023,
respectively.
The Company does recognize that
bitcoin prices are volatile
and intraday low quoted prices
represent the primary
evidence of an impairment
indicator. However, the Company
had historically sold bitcoin on a
consistent basis and
considered the recognized sale
proceeds of the bitcoin in the
same reporting period to be an
alternative indication of fair
value. Therefore, if a bitcoin
mined or held during the
reporting period was sold, that
subsequent sale price was
determined as the better source of
evidence. The Company
does recognize the importance of
presenting bitcoin at each
balance sheet reporting period at
the lowest quoted bitcoin
price and for the each of the
balance sheet of June 30, 2023
and thereafter, bitcoin has been
presented in accordance with
ASC 350.
In your response, you told us that in your review of the five indicators in ASC
350- 30-35-24, none of
them apply to your bitcoin. Explain to us further how you considered ASC
350-30-35-24 (b) and (c)
and determined that these do not apply since we note that you do sell your
bitcoin separately.
Response: As we are able and do sell
our bitcoin separately,
we have determined that each daily
tranche of bitcoin earned
does represent an individual unit of
account. We evaluate
impairment for each bitcoin tranche,
as each tranche is at the
same price and earned on the same
day.
9.
With respect to the materiality analysis you provided in your response to
comment 11 and your
response to comment 12 that address your impairment calculation and your use of
NASDAQ.com
values, please address the following:
Tell us the nature and amount of each adjustment included in the analysis.
Explain how you
determined the adjusted amounts.
7
Response: The Company tracks its
bitcoin and related pricing
through a FIFO based analysis with
the value of all bitcoin
mined on a particular day being
valued at the closing price of
such day. As described previously,
the value of the daily
bitcoin was valued based on
Nasdaq.com closing price
through December 31, 2022 and based
on the closing bitcoin
price from Coinbase for periods
subsequent to December 31,
2022. The analysis also tracks
bitcoin sold and provided for
services and assigns the carrying
amount of the bitcoin based
on the FIFO basis, such that the
value of the oldest bitcoin is
assigned to the transaction. The
analysis is updated
throughout the full quarterly
reporting period. Then, at the
end of each quarter, an impairment
test is performed to
revalue each bitcoin held as of the
period end, based upon the
lowest quoted price from Coinbase
during the period in
which the bitcoin was held.
In performing such analysis, the
Company is properly
recording the value of the
intangible asset. The adjustment to
the overall carrying amount of the
bitcoin under the impaired
value is compared to the overall
carrying amount of bitcoin
on the quarter end, and an
impairment charge is recorded to
the Consolidated Statement of
Operations and
Comprehensive loss. As, noted
previously, the impairment
calculation for the quarters ended
March 31, 2023 and
thereafter, the Company utilized the
low closing price of the
bitcoin as reported by Coinbase and
for periods ended
December 31, 2022 and prior, the
Company was utilizing the
low closing price of bitcoin as
reported by Nasdaq.com. The
Company performed an analysis to evaluate the impact to (1)
bitcoin mining revenue, (2) other impairment expense
(related to bitcoin), (3) realized (gain) loss on sale of bitcoin
and (4) net income of modifying valuing all transactions to
using Coinbase as the primary market and utilizing the
intraday low quoted price for impairment.
"Revenue - (Overstated)/ Understated" - The Company
utilized daily bitcoin closing price quotes from Nasdaq.com
for its revenue recognition for periods prior to January 1,
2023. The Company recalculated the bitcoin mining revenue
for the fiscal years ended September 30, 2022 and 2021 and
for the quarter ended December 31, 2022 utilizing daily
bitcoin closing price from Coinbase (the Company's primary
market) and compared the amounts to determine the impact
to revenue. The amount reflected in the response to question
11 reflects the impact there would have been to bitcoin
mining revenue of using Coinbase prices instead of
Nasdaq.com prices of ($18,301), $191,787 and ($5,167) for
the fiscal years ended September 30, 3021, September 30,
2022 and the quarter ended December 31, 2022, respectively,
which as a percentage of reported revenues is (0.05%),
0.15%, and (0.02%), respectively.
The Company then rolled forward the bitcoin carrying
amounts for bitcoin mined in the FIFO cost analysis to
evaluate the impact to gain (loss) on sale of bitcoin and other
impairment expense (related to bitcoin) using the same
process as described earlier.
"Impairment Charge - Adj for Coinbase" - Within in the
new bitcoin FIFO analysis using Coinbase pricing for
revenue, the Company utilized the period ending bitcoin
quantity and "repriced" each bitcoin to the intraday low
bitcoin price during the period in which each bitcoin was
held. The recalculated price of bitcoin held at the end of the
period was compared to the carrying amount and a revised
impairment charge was calculated. This adjusted other
impairment expense (related to bitcoin) under the revised
FIFO analysis was compared to the other impairment
expense (related to bitcoin) reported in the Company periodic
reporting. Hence, the "Impairment Charge - Adj for
Coinbase" line in the August response letter of ($8,379,140),
($15,182,700), and ($125,941) for the fiscal years ended
September 30, 2021 and 2022 and for the quarter ended
December 2022, respectively, represents the newly
calculated impairment charge, which was then compared to
the impairment charge reported in external financial reports
and the resulting "Understatement" in the response is the
additional impairment charge at each period end that would
have been recorded.
8
"Gain (loss) on sale - Adj for
Coinbase" - The Company
substituted the new carrying amount
of bitcoin as calculated
in the adjustment to bitcoin mining
revenues above and
recalculated the realized (gain)
loss on sale of bitcoin.
"Net Impact (Overstated) /
Understated" - This
adjustment reflects the net of all
the adjustments reflected in
the above categories during the
applicable periods.
If applicable, tell us the dates when you made changes to your accounting
policies.
Response: The Company can confirm
that effective January
1, 2023, the Company began
utilizing Coinbase for all bitcoin
transactions, including using the
daily closing price for
bitcoin mining revenue recognition
and measuring bitcoin
impairment.
However, the Company continued
utilizing the low closing
bitcoin price from January 1, 2023
through March 31, 2023
for calculating bitcoin impairment
and began utilizing the
intraday low bitcoin price from
Coinbase for calculating
bitcoin impairment for all periods
beginning after April 1,
2023.
Revise future filings to include adjustments for income taxes, if any, as a
result of the adjustments.
Response: The Company acknowledges
the Staff s comment
and can confirm that the
adjustments reflected in question 11
were not recorded to the financial
statements and were
included merely for evaluation
under SAB 99. Additionally,
had the entries been recorded,
there would have been no
income tax provision impact based
on the zero effective
income tax rate during such periods
(which tax rate would
not have been affected).
Tell us how you determined that the adjustments, both individually and in the
aggregate, were not
material. Refer to SAB Topic 1.M.
Response: In assessing whether the
adjustments were
material to the Company s
financial statements, management
has applied the guidance set forth
in SEC Staff Accounting
Bulletin Topic 1.M, Assessing
Materiality ( SAB 99 ) and
FASB ASC Topic 250, Accounting
Changes and Error
Corrections. SAB 99 focuses on the
circumstances under
which companies and their auditors
might have concluded an
adjustment was immaterial based
solely on a quantitative
analysis that showed the error did
not exceed a particular
threshold and notes that
quantifying the error is only the
beginning of the materiality
analysis.
Under SAB 99, Topic 1.M, the SEC
staff indicated that a
quantitative analysis would be
insufficient to conclude that
an error was immaterial and set
forth its belief that
quantitatively small
misstatements may be material when
considering a number of
qualitative factors.
In considering the preliminary
quantification of the errors,
management notes that the
adjustments to revenues (using
closing prices from Coinbase
rather than Nasdaq.com) for
any of the years ended September
30, 2021 and 2022 or the
quarter ended December 2022 of
$18,301, $191,787, and
$5,167, respectively do not
exceed $1.3 million and as a
percentage of reported revenues
were (0.05%), 0.15%, and
(0.02%), respectively. Management
does not believe that the
amounts of any of the adjustments
are quantitatively
material. However, as required by
SAB 99, management
noted that an analysis of
qualitative factors is necessary to
determine whether the error would
have significantly
altered the total mix of
information made available to a
reasonable investor.
SAB 99 provides the following
qualitative factors to be
considered in completing a
materiality analysis (with
management s assessment of
those factors following each
factor):
9
Whether the misstatement arises from an item capable of precise measurement or
whether it arises from an
estimate and, if so, the degree of imprecision inherent in the estimate. The
error results from an incorrect
application of the literature applicable in ASC 350-30-35-19 requirement to
recognize impairment
whenever carrying value exceeds fair value. Effectively, the Company has now
determined that ASC 350-
30-35-19 calls for the intraday low price of bitcoin to be utilized in
calculating impairment of the
Company s bitcoin held as that metric is the most accurate indicator of
whether it is more likely than not
that the asset is impaired. The Company had previously selected the daily
closing price to measure bitcoin
impairment, which was not arbitrary, and therefore was objective. The
misstatement arose from an item
capable of precise measurement and was not an estimate.
Whether the misstatement masks a change in earnings or other trends. Management
notes that the
Company s loss from continuing operations before taxes and net loss has
fluctuated significantly from year
to year and quarter to quarter, largely due to increases in the quantity of
bitcoin mined and the prices of
bitcoin, which are highly volatile. The Company reported GAAP net loss for each
of the three months ended
December 31, 2022 and the fiscal years ended September 30, 2022 and 2021. Based
on its analysis of the
annual and quarterly results, management does not believe the misstatement
masks a change in earnings or
other trends that are important to investors.
Whether the misstatement hides a failure to meet analysts' consensus
expectations for the enterprise.
Management notes that analyst expectations (as well as the reporting of the
Company s historical operating
results) in analyst research reports are consistently based on the Company s
bitcoin mining revenue, gross
margins, non-GAAP adjusted EBITDA and hashrate.
Based on review of analyst
reports, key metrics from analyst
reports include revenue, gross
margins and non-GAAP
adjusted EBITDA. The
misstatements on the revenue and
impairment calculations of
bitcoin do not impact the most
significant expectations of
analysts and investors.
Whether the misstatement changes a loss into income or vice versa.The
misstatement of the other
impairment expense (related to bitcoin) did not change a loss into income or
vice versa for the three-month
period ended December 31, 2022 or either of the fiscal years ended September
30, 2022 and 2021.
Whether the misstatement has the effect of increasing management's compensation
- for example, by
satisfying requirements for the award of bonuses or other forms of incentive
compensation. The
misstatement did not have the effect of increasing management s compensation
in either 2022 or 2021. The
Company awards bonuses or other forms of incentive compensation based on growth
in the Company s
hashrate and achieving non-GAAP adjusted EBITDA targets. Specifically, the
other impairment charges
(related to bitcoin) and realized gain on sale of bitcoin are excluded from all
incentive compensation
metrics.
Based on its assessment of the
quantitative and qualitative
factors, management concludes the
overstatement of bitcoin
and the understatement of other
impairment expense
(pertaining to bitcoin) are not
material to the Company s
financial condition as of
December 31, 2022, September 30,
2022, and September 30, 2021 or
its results of operations for
the three-month and fiscal years
then ended, respectively.
10
Financial Statements
Property and Equipment, page F-20
10.
We acknowledge your response to comment 9. Your response provided information
for only the three
months ended March 31 and June 30, 2023. Please update to tell us your response
specifically
addressing the quarter ended December 31, 2022 as we note that the price of
bitcoin declined during
that period to a low of approximately $15,460. Further, tell us whether the
adverse changes in
business climate during the quarter ended December 31, 2022, including
decreases in the market
price of miners, indicated that an impairment triggering event had occurred.
Refer to ASC 360-10-
35-21(a). Tell us the average revenue and cost of revenue for each bitcoin
mined during the quarter
ended December 31, 2022.
Response: The Company generates and earns
bitcoin through its mining
operations, which is our sole operating
segment. As outlined in ASC 360-
10-35-23, an asset group is the grouping of
assets and liabilities that
represents the lowest level of identifiable
cash flows that are largely
independent of the cash flows of other groups
of assets and liabilities. As
the Company s operations consist of assets
that serve a common purpose
and are related as part of the overall
operational process, having a similar
nature, or being subject to the management
oversight and cost structure,
the operating segment is determined to be the
lowest level of identifiable
cash flows and therefore, the asset group
under ASC 360. As miners do
not have individual cash outflows and are
operated as a fleet with an
overall cost/expenditure structure, the
Company has determined they do
not meet the definition of an asset group
under ASC360.
During the three months ended September 30,
2022, the Company
performed a quantitative impairment test of
it's long lived assets. As
outlined in ASC 360, the Company performed the
Step 1 test of long-
lived assets to determine whether the carrying
amount of the long-lived
asset (asset group) is recoverable. The
Company prepared a detailed
estimate of the asset group s mining output,
a calculated estimate of the
related required costs to mine and a forecast
of bitcoin prices over the
period of life of the asset group to determine
the estimated undiscounted
cash flows of the asset group. Based on this
estimate, the undiscounted
cash flows of the asset group exceeded the
carrying value of the asset
group and therefore, the long-lived asset
values recorded were
determined to not be required to be impaired.
As part of the reporting process for the three
months ended December 31,
2022, the Company evaluated ASC 360 impairment
considerations and
noted that bitcoin prices declined during the
period. The Company noted
that this decline was consistent with the
price range anticipated in bitcoin
prices in the forecast used in the Step 1
recoverability test at September
30, 2023. The average price estimated in the
December 2022 quarter in
the impairment analysis was $20,225 as
compared to the average revenue
for one bitcoin of $18,130. This decline was
not considered a change in
the market price of bitcoin that would
indicate a triggering event of
impairment as of December 31, 2022 as
significant fluctuations in bitcoin
price were already anticipated and included in
the Company s passing
recovery test assumptions the previous
quarter. There were no other
changes in expected future cash flows that
would indicate that the
carrying amount may not be recoverable.
The average revenue of each bitcoin mined and
weighted average cost of
mining one bitcoin for the quarter ended
December 31, 2022 was $18,130
and $13,221, respectively. Such amounts will
be disclosed in the
Company's management discussion and analysis
for the future quarterly
filing for the period ended December 31, 2023.
11
We appreciate the Staff s time and attention and we hope that the foregoing
has been responsive to the
Staff s comments. If you have any further questions or need any additional
information, please feel free to
contact the undersigned at 702-989-7692 ext. 700 or Mark D. Wood of our counsel
Katten Muchin
Rosenman LLP at 312-902-5493 or mark.wood@katten.com at your convenience.
Sincerely,
/s/ Gary A. Vecchiarelli
Gary A. Vecchiarelli
Chief Financial Officer
cc: Mark D. Wood
Katten Muchin Rosenman LLP
12
EXHIBIT 1
Foundry USA Pool Terms of Service
Effective as of August 28, 2023
The ownership and operation rights of the services provided by the Foundry
USA Pool ( Pool ) are owned by Foundry Digital LLC ( Foundry ). The
Foundry
Terms of Service specified herein ( Terms ), along with Foundry s Terms
and
Conditions ( Conditions ), Privacy Policy ( Privacy Policy ) and
Foundry USA
Pool s Payout Methodology ( Pool s Payout Methodology ) are the
relevant
rights and obligations required to be read and accepted by anyone that shall
access and/or use the Pool ( User ).
By accessing and using the Pool, User accepts and agrees to the Terms,
Conditions, and Privacy Policy (collectively, the Service Agreement ). As
the
operator of the Pool, Foundry shall provide a mining Pool Service (as defined
below) to User under the Service Agreement.
User agrees that Foundry will have the right to modify the Service Agreement
at any time without prior notice. Further, User agrees to be solely
responsible
for reviewing the Service Agreement and/or any modifications thereto. If User
does not agree to the Service Agreement and/or any of its modifications, then
User shall cease to use and will not be allowed further access to the Pool and
Service.
1.
Foundry Terms and Conditions
a.
Foundry s Terms and Conditions ( Conditions ) are available at
https://foundrydigital.com/terms-and-conditions.
2.
Privacy and Protection
a.
Foundry places great importance on the protection of User s personal
information. When using the Pool and Service provided by Foundry, User agrees
that Foundry will collect, store, use, disclose and protect User s personal
information in accordance with the Privacy Policy , available at
https://foundrydigital.com/privacy-policy.
3.
Pool s Payout Methodology
a.
Foundry USA Pool s Payout Methodology ( Pool s Payout Methodology ) is
available at https://pool-faq.foundrydigital.com/what-is-foundry-usa-pools-
payout-methodology.
i
4.
Definitions
a.
For purposes of this Service Agreement, all capitalized terms that are not
otherwise defined herein shall have the meanings set forth in the Pool s
Payout
Methodology.
5.
Services
a.
Foundry uses its own system, through the Internet and other means to provide
User with a digital currency mining Pool and other services/products that may
be added based on the Pool site ( Service ). For the avoidance of doubt,
the
Pool and Service shall not include wallet or custodial services from Foundry to
User.
b.
User shall be responsible for preparing the necessary equipment and bear the
expenses related to using such necessary equipment to participate in the Pool
and Service.
c.
User hereby authorizes Foundry to be fully responsible for disposal and
distribution of the profit from such value-added Service.
d.
Foundry reserves the right to modify, suspend, interrupt, and/or terminate the
Service at any time without informing User and without liability to User or any
third party not directly related.
6.
User Rights and Obligations
a.
Prior to entering and using the Pool and Service, User agrees it must first
successfully complete the client onboarding process required by Foundry.
b.
User agrees to provide legal, true, accurate and detailed personal information
to
Foundry, and update such information as needed.
c.
User shall comply with all applicable laws, rules, and regulations including,
but
not limited to, those related to the use of the Pool and Service.
d.
User acknowledges and agrees that it is using the Pool and Service at its own
risk.
e.
In the event User s access and/or rights to the Pool and Service have been
discontinued for any reason, then User is solely responsible for settling the
remaining balances left in its account. Foundry shall use commercially
reasonable efforts to assist User with settling any remaining balances in User
s
account.
f.
For the avoidance of doubt, Foundry shall not be responsible or liable to User
ii
for any balances remaining in User s account three (3) months after User s
access and/or rights to the Pool and Service have been discontinued (regardless
of whether the balances were left in User s account intentionally).
7.
Third Party Services
a.
If User provides services to any third parties who may benefit, whether
directly
or indirectly, from payments under this Agreement, User agrees to notify
Foundry: (a) at the time of the client onboarding process; and (b) immediately
upon any changes to the offering of third-party products and services.
Furthermore, User agrees to provide any necessary information and
documentation to cause Foundry to perform any necessary due diligence on
third parties, at Foundry s sole discretion.
8.
Confidentiality
a.
User agrees not to disclose any Confidential Information from the Pool and/or
Service. Confidential Information" includes (but is not limited to)
information
regarding Foundry s Pool, Service, documentation, software, trade secrets
embodied therein and any other written or electronic information that is either
(i) marked as confidential and/or proprietary, or which is accompanied by
written notice that such information is confidential and/or proprietary, or
(ii) not
marked or accompanied by notice that it is confidential and/or proprietary but
which, if disclosed to any third party, could reasonably and foreseeably cause
competitive harm to the owner of such information.
b.
Confidential Information shall not include information which is: (i) publicly
available, (ii) lawfully obtained by a party from third parties without
restrictions
on disclosure, or (iii) independently developed by a party without reference to
or use of the Confidential Information.
c.
If the User is requested or required (by deposition, interrogatories, requests
for
information or documents, subpoena, civil investigative demand or similar
process, hereinafter Legal Demand ) to disclose any confidential
information of
Foundry, then, to the extent User is permitted under applicable law or
regulation, it shall provide Foundry with prompt written notice of such
request(s), and provide commercially reasonable assistance to Foundry in
obtaining a protective order preventing or limiting the disclosure or requiring
that the confidential information of Foundry so disclosed be used only for the
purposes for which the law or regulation required, or for which the order was
issued. User agrees that, in the event Foundry is unsuccessful in obtaining
such
protective order, that User shall only disclose the minimum amount of
information required to satisfy such Legal Demand.
iii
d.
SOC Report- For the avoidance of doubt, the service organization controls
report ( SOC Report ) shared with User by Foundry shall be considered
"Confidential Information" as defined herein, and as such, User agrees not to
disclose the SOC Report to any third-party (regardless of whether or not such
third-party is separately a user of the Pool and/or Service) without the prior
and
express written consent of Foundry. For purposes herein, a "third party" shall
not include User's affiliates, subsidiaries, officers, directors, employees,
contractors, attorneys, accountants, bankers or consultants ("Authorized
Representatives") with a need to know of such SOC Report, provided, however,
that such Authorized Representatives shall be under an obligation of
confidentiality and non-use of the SOC Report at least as strict as set out in
this
Agreement.
9.
Payouts to Users
a.
The Daily Earnings of each User is calculated and paid in accordance with the
Pool s
Payout Methodology:
i.
Bitcoin (BTC)- The Pool shall issue payments using the Full-Pay-Per-Share (FPPS
payout scheme, where the User shall receive the expected value from the block
reward plus the transaction fee reward.
ii.
Bitcoin Cash (BCH)- The Pool shall issue payments using the Pay-Per-Share
(PPS) payout scheme, where the User shall receive the expected value from the
block reward.
iii.
Disruption in Service- Foundry may, at its sole discretion, offer User payment
or
credits in the event of a disruption in Service.
b.
User is entitled to compensation regardless of whether the Pool successfully
records a block to the Bitcoin blockchain.
10.
Pool Fees
a.
Foundry reserves the right to charge the User pool fees at any time, in
accordance with Exhibit A of the Terms. Further, Foundry may update Exhibit A
of the Terms in its sole and absolute discretion, and in such event, shall make
commercially reasonable efforts to notify User prior to any such updates.
iv
11.
Contract Term and Termination
a.
User s access and usage rights to the Pool and Service shall commence upon
the successful completion by User of the client onboarding process required by
Foundry (the Commencement Date ) and continue until 23:59:59 UTC on the
Commencement Date and shall automatically be renewed for successive 24-
hour periods (the period between 00:00:00 UTC and 23:59:59 UTC) (each, a
Contract Day ) unless terminated in accordance with the Terms set forth
herein
(the Contract Term ). For avoidance of doubt, (i) User s access and
usage
rights to the Pool and Service are not contingent on delivering any minimum
amount of User hashrate to the Pool during any Contract Day of the Contract
Term and (ii) User is not bound to continue using the Pool in accordance with
any other agreement with Foundry.
b.
User s access and usage rights to the Pool and Service may be terminated for
any reason, without penalty, by either Foundry or User by providing one
Contract Day s prior written notice to the other party.
c.
Further, Foundry may, at its sole discretion, limit, suspend or terminate User
s
access to
the Pool and Service if:
iv.
User becomes subject to bankruptcy/insolvency proceedings;
v.
User liquidates, dissolves, terminates, or suspends its business;
vi.
User breaches this Service Agreement; or
vii.
User performs any act or omission that materially impacts its ability to adhere
to the Service Agreement.
12.
Force Majeure
a.
Foundry shall not be liable for any non-performance of its obligations pursuant
to the Service Agreement if such non-performance is caused by a Force Majeure
event. In case of a Force Majeure event, Foundry has the right to suspend or
terminate its services immediately under the Service Agreement.
b.
Force Majeure events shall mean any event or circumstance, or any
combination of events or circumstances which are beyond the control of
Foundry. Such events or circumstances shall include, but are not limited to
events or occurrences that delay, prevent or hinder Foundry from performing
such obligations, war, armed conflict, terrorist activities, acts of sabotage,
blockade, fire, lightning, acts of God, national strikes, riots,
v
insurrections, civil commotions, quarantine restrictions, epidemics, pandemics,
earthquakes, landslides, avalanches, floods, hurricanes, explosions, and
regulatory, administrative or similar action or delays to take actions of any
governmental authority.
vi
EXHIBIT A: FOUNDRY USA POOL FEES
***
Pricing tiers are assessed quarterly and are calculated based on the prior
quarter s average hashrate to determine the following quarter s pricing
tier.
The average quarterly hashrate is calculated by summing the daily hashrate
(as recorded by Foundry USA Pool in Daily Statistics) for the given quarter
(excluding the lowest 30 days***) and dividing it by the number of remaining
days in the quarter. Hashrate is calculated at the Group level, meaning all
subaccounts within a group are considered in the calculation. It may take up
to 10 business days into a quarter for a fee to be adjusted. ***Exclusion of
the lowest 30 days does not apply within the first quarter of a Group joining
the Foundry USA Pool.
vii