SecProbe.io

CORRESP
1
filename1.htm

December
2, 2022

Securities
and Exchange Commission

Division
of Corporation Finance

100
F Street, NE

Washington,
D.C. 20549-4561

    Attn:
    Melissa
    Walsh

    Stephen
    Krikorian

    Re:
    Marathon
    Digital Holdings, Inc

    Form
    10-K for the Fiscal year Ended December 31, 2021

    Form
    10-Q for the Quarterly Period Ended June 30, 2022

    File
    No. 001-36555

Dear
Ms. Walsh and Mr. Krikorian:

This
letter constitutes the response (“Response”) of Marathon Digital Holdings, Inc. (the “Company”) to your comment
letter dated October 11, 2022 (the “Letter”) to Hugh Gallagher, Chief Financial Offer of the Company, relating to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 10-K”) and form 10-Q for the quarterly
period ended June 30, 2022 (the “Q2 2022 10-Q”). Unless otherwise indicated, capitalized terms used herein have the meanings
ascribed to them in the 2022 10-K and Q2 2022 10-Q. For ease of reference, we have copied each comment verbatim from your Letter and
have placed our response immediately below each comment.

Form
10-K for the Fiscal Year Ended December 31, 2021

Notes
to Consolidated Financial Statements

Note
1 – Organization and Description of Business

Organization,
page F-8

Comment:

1.
You indicate in response to prior comment 2 that you determined that the loan did not meet the derecognition criteria in ASC 606 because
the Company held a repurchase right in the form of a call option under ASC 606-10-55-67(b) and therefore retained control per ASC 606-10-55-68.
Please elaborate on the material rights and obligations of both parties to the borrowings. As part of your response, explain the rights
of the borrower with respect to the digital assets and whether there are any restrictions on what the borrower can do with the borrowed
digital assets. Further explain to us why you believe the customer does not obtain control of the asset. That is, explain whether the
borrower has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the digital assets. Please
also clarify whether, and if so how, your accounting policy captures counterparty non-performance related to their obligation to return
the borrowed digital assets to you.

Response:

Pursuant
to the Master Services Loan Agreement (“MSLA”) with NYDIG (“Borrower”), the material rights and obligations of
Company and the Borrower (collectively, the “Parties”) were as follows:

    i.
    Borrower
    or Lender will agree on the terms of each loan (“Loan”) which shall include designation of the amount and type of digital
    assets to be lent (i.e., Bitcoin), the trade date, loan date, scheduled termination date, estimated nominal value of loaned security,
    type of collateral, amount of collateral, margin percentage, and loan fee rate;

    ii.
    Borrower
    shall transfer to the Company collateral with a market value equal to 100% of the loaned digital assets (“Loaned Securities”)
    concurrently with the transfer of Loaned Securities to the Borrower. To the extent the collateral is comprised of cash, Company will
    pay the Borrower a cash collateral rebate on such collateral computed daily based on the amount of cash held by the Company as collateral.

MARATHON
DIGITAL
HOLDINGS,
INC.

1180 North Town Center Drive Suite 100 Las Vegas, NV 89144

TELE
725.202.6780

    iii.
    Borrower
    agrees to pay the Company a loan fee computed daily on each Loan based on the aggregate market value of loaned securities on the
    respective day such loan fees are computed.

    iv.
    Unless
    otherwise agreed, either Party may terminate a Loan at any time by giving notice to the other party. Otherwise, Borrower shall transfer
    the Loaned Securities back to the Company before cutoff time on the termination date of each Loan;

    v.
    Until
    Loaned Securities are required to be redelivered to the Company upon termination of the Loan, Borrower shall have all incidents of
    ownership of the Loaned Securities including the right to transfer the Loaned Securities to others.

    vi.
    The
    Company is entitled to receive all distributions made on or in respect of Loaned Securities to the extent to which it would be entitled
    to if the Loaned Securities were not lent to the Borrower;

    vii.
    To
    the extent the market value of collateral for Loans is less than the market value of the Loans, the Borrower shall transfer additional
    collateral to the Company such that the market value of the collateral equals or exceeds 100% of the Loaned Securities. To the extent
    the market value of the collateral for the Loans is greater than the market value of the Loans, Borrower may demand that the Company
    transfer back such excess of collateral to Borrower;

    viii.
    All
    Loans may be terminated immediately upon an event of default which includes non-performance, failure to transfer collateral, either
    party becomes insolvent, or any representation made is incorrect (each event, a “Default”) at the option of the non-defaulting
    party; and

    ix.
    Upon
    an occurrence of Default, the Company may, as a remedy, sell collateral to replace Loaned Securities, or the Borrower may purchase
    replacement collateral or sell an amount of Loaned Securities to set off any amounts due to the Company. Only in such event of Default
    may the Borrower treat the Loaned Securities as its own, and the Company’s obligation to return the collateral shall terminate.

Management
has determined that the Company retained control (i.e., as defined in ASC 606-10-25-25, the ability to direct the use of and obtain substantially
all of the remaining benefits from) over the loaned digital assets on the basis of ASC 606-10-55-68, which states expressly (i.e., without
any caveat – e.g. “except for” or “unless” type language – or other observable consideration) that
“If an entity has an obligation or a right to repurchase the asset (a forward or a call option), a customer does not obtain
control of the asset because the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining
benefits from, the asset…”. The Basis for Conclusions to ASU 2014-09, which is codified in ASC 606, affirms this in paragraph
BC424, which similarly states, without caveat or exception, “If an entity has an obligation or a right to repurchase an asset (that
is, a forward or a call option, respectively), the Boards decided that a customer does not obtain control of the asset…This is
because the customer is constrained in its ability to direct the use of, and obtain substantially all of the remaining benefits from,
the asset.” While we are now aware that lenders’ accounting for digital asset loans is currently being debated in practice,
we believe our application of ASC 606 in determining whether we or the Borrower controlled the loaned digital assets in our arrangement
was appropriate based on the explicit wording in ASC 606 and ASU 2014-09 and the ‘at any time’ nature of our option to terminate
the loan (and retake possession of the loaned digital assets).

In
reaching our conclusion, we also considered Question 25 in the AICPA Digital Assets Practice Aid (“AICPA Digital Guide”).
Similar to the fact pattern in Question 25 of the AICPA Digital Guide, the Borrower in our MSLA had the same rights as the borrower in
Question 25 to transfer, encumber or pledge the crypto asset borrowed in any way it chooses. The AICPA Digital Guide concludes that the
borrower in that fact pattern does not obtain control of the lent digital asset because, pursuant to ASC 606-10-55-68, the customer is
limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. We considered the
Response to Question 25 confirmatory to our conclusion outlined in the preceding paragraph. We note that, also consistent with the Response
to Question 25, we clearly and separately presented and designated our loaned digital assets on our balance sheet as “Digital Assets,
Loaned”.

Looking
past ASC 606-10-55-68, we observe that until the loaned digital assets were required to be returned to the Company upon termination of
the loan, the Borrower had the ability to direct the use of the loaned digital assets, including the right to transfer the loaned digital
assets to others. However, we believe it is at least debatable whether the Borrower had the ability to obtain substantially all the remaining
benefits of the loaned digital assets when we had a call option on those assets at any time. We believe this call option, exercisable
at any time under the MSLA, means that we, instead of the Borrower, retained all of the residual value of the loaned digital assets;
and therefore, the Borrower did not have the ability to obtain substantially all of the remaining benefits from those assets.
For example, if a loaned digital asset appreciates in value (e.g., from $10,000 to $12,000) during the loan period, the Borrower was
not entitled to the benefits of that appreciation because we could call the loaned digital asset at any time in order to sell it and
realize the value appreciation ourselves. Even if the Borrower sold the asset before we could exercise our call right, the Borrower would
have to expend its proceeds from the appreciation to purchase an equivalent digital asset to return to us, meaning we would, instead
of the Borrower, realize the benefit of that appreciation.

 MARATHON
DIGITAL
HOLDINGS,
INC.

1180 North Town Center Drive Suite 100 Las Vegas, NV 89144

TELE
725.202.6780

With
respect to the Staff’s request for clarification on consideration of counterparty non-performance, the Company evaluated counterparty
non-performance risk and determined that NYDIG is a reputable entity that is backed by Stone Ridge Asset Management LLC, a national advisory
firm and is a well-known digital asset custodian. Therefore, the Company concluded that the lifetime expected credit loss associated
with the digital assets Loan was de minimis while the Loan was outstanding. In addition, the Company notes that the Loan was terminated
as of June 13, 2022 and the loaned BTC has been returned to the Company by Borrower. The Company does not plan loan BTC in the future.

Comment:

2.
We note your response to prior comment 2 indicating that you will reclassify the cash interest received on the BTC loans prospectively
to conform any comparable prior period amounts to the current period classification. Please clarify the category of the statements of
cash flow within which this line item will be presented. Refer to ASC 230-10-45-16(b).

Response:

For
the year ended December 31, 2021, the Company received cash interest of $129 thousand on the Loan of BTC to NYDIG under the MSLA. Per
ASC 230-10-45-16(b), cash receipts from returns on loans (i.e., interest) are classified as cash inflows from operating activities. However,
the interest received was erroneously included in the reconciliation between net income and operating cash flows in the statement of
cash flows under the line item, “Changes in operating assets and liabilities – digital currencies” as this interest
was paid in cash and not BTC. The Company passed on the error as of December 31, 2021 due to the de minimis balance of the error. In
addition, as the Company has terminated its MSLA to loan BTC as of June 13, 2022, there is no prospective impact on the Company’s
financial statements.

Comment:

3.
We note and continue to consider your response to prior comment 3 in your letter dated August 5, 2022.

Response:

The
Company acknowledges the Staff’s continued consideration of its response to prior comment 3.

Note
2 – Summary of Significant Accounting Policies

Digital
Currencies, page F-13

Comment:

4.
Please reconcile for us your discussion in response to prior comment 4 indicating that a decline in fair value below carrying value “could
be an indication” of impairment with your stated policy that an impairment exists when carrying value exceeds fair value and with
ASC 350-30-35-19.

Response:

The
Company has determined that its digital currencies (BTC) are indefinite lived intangible assets within the scope of FASB ASC 350 –
Intangible Assets Goodwill and Other (“ASC 350”) and as such, are subject to impairment testing on an annual basis
or more frequently if events or changes in circumstances indicate it is more likely than not that the asset is impaired in accordance
with ASC 350-30-35-18. The Company also considered Response 5 in the AICPA Digital Guide that states when an identical digital asset
is bought and sold at a price below the entity’s current carrying value, this will often serve as an indicator that impairment
is more likely than not. As such, the Company monitors on a daily basis, whether there is a point in time during each day where BTC is
bought or sold at a price lower than the BTC carrying value on the Company’s financial statements. The Company views this event
(i.e., BTC bought or sold at a price lower than the BTC carrying value on the Company’s financial statements) as an indicator
that impairment is more likely than not, and proceeds to the quantitative impairment test outlined in ASC 350-30-35-19 which compares
the fair value of the asset (BTC) with its carrying amount to determine the amount of impairment.

 MARATHON
DIGITAL
HOLDINGS,
INC.

1180 North Town Center Drive Suite 100 Las Vegas, NV 89144

TELE
725.202.6780

In
determining the fair value of BTC, the Company notes that Response 5 in the AICPA Digital Guide further states that the fair value should
be determined following the fair value framework in FASB ASC 820, Fair Value Measurement. ASC 820-10-35-2 defines fair value as
“the price that would be received to sell an asset…in an orderly transaction between market participants at the measurement
date.” In order to determine the fair value at the measurement date, the Company looked to Response 20 in the AICPA Digital Guide
which indicates that given there is no traditional close for the crypto market, an accounting convention may establish a cut-off time
for determining the fair value of the crypto asset based on prices at the close of the business day of the entity, a fixed coordinated
universal time, or other timing as deemed reasonable, such as traditional close time based on local market jurisdictions. Response 20
in the AICPA Digital Guide also indicates that entities should consider transactions that take place after the cut-off time but before
the end of the reporting period, similar to the guidance in FASB ASC 820-10-35-41C. The Company has considered that given there is no
traditional close for the crypto market, determination of the fair value of BTC on the date an impairment indicator exists should be
based on the fair value of BTC at 23:59 GMT on that respective measurement date. Any difference between such fair value of BTC at 23:59
GMT and BTC carrying value on the day an indicator of impairment exists is recorded as an impairment charge to the income statement by
the amount by which the carrying value exceeds the fair value of BTC.

Note
5 – Debt, Commitments and Contingencies

Revolving
Credit Line, page F-27

Comment:

5.
In order to help us evaluate your response to prior comment 14:

●
You state, “The lender has exclusive control over the collateral account, including liquidation of the collateral only in the
event of a default under the RLOC.” Clarify to what the phrase “in the event of a default” refers and what you mean
by “exclusive control” and how that is differentiated from control. For example, are you representing that the lender cannot
direct the use of, and obtain substantially all of the benefits from, each distinct nonfinancial asset you transfer as collateral unless
and until an event of default occurs?

●
Tell us whether the lender has the right to pl