Priority Technology Holdings Inc
For the period ended Dec 31, 2023. Filed Mar 12, 2024.
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FY2023 · Filed Mar 12, 2024
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Item 8. Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Priority Technology Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Priority Technology Holdings, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, changes in stockholders' deficit and non-controlling interests and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounting for Plastiq
| Description of the Matter | As more fully described in Note 2 of the consolidated financial statements, the Company completed its acquisition of substantially all of the assets of Plastiq, including the equity interests in Plastiq Canada, Inc. The purchase was completed on July 31, 2023 for total consideration of $37.0 million including $28.5 million in cash and the remaining consideration is in the nature of deferred or contingent consideration and certain equity interest in Plastiq, Powered by Priority, LLC. The acquisition was accounted for as a business combination. The Company’s accounting for the acquisition included determining the fair value of contingent consideration payments in addition to intangible assets acquired of $30.5 million, which primarily included customer relationships, referral partner relationships, tradename, and developed technology. |
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| Auditing the Company’s accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of the contingent consideration payments as well as the fair value of the acquired intangible assets. The significant estimation was primarily due to the sensitivity of the respective fair values to the future performance of the acquired business. The significant underlying assumptions used to estimate the fair value of contingent consideration payments and intangible assets, included revenue and operating margin growth rates and prospective free cash flow from the operations of the acquired business, weighted average cost of capital, and royalty rate assumptions, as applicable. These assumptions relate to the future performance of the acquired business are forward-looking and could be affected by future economic and market conditions. |
| Description of the Matter | As more fully described in Note 2 of the consolidated financial statements, the Company completed its acquisition of Plastiq, Inc. during the year ended December 31, 2023 for total consideration of $37.0 million including $28.5 million in cash and the remaining consideration of $8.5 million was in the form of deferred or contingent consideration and certain equity interest in the acquiring entity. The acquisition was accounted for as a business combination. The Company’s accounting for the acquisition included determining the fair value of contingent consideration payments in addition to intangible assets acquired of $30 million, which primarily included customer relationships, referral partner relationships, tradename, and developed technology.Auditing the Company’s accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of the contingent consideration payments as well as the fair value of the acquired intangible assets. The significant estimation was primarily due to the sensitivity of the respective fair values to the future performance of the acquired business. The significant underlying assumptions used to estimate the fair value of contingent consideration payments and intangible assets, included revenue and operating margin growth rates and prospective free cash flow from the operations of the acquired entity, weighted average cost of capital, and royalty rate assumptions, as applicable. These assumptions relate to the future performance of the acquired business are forward-looking and could be affected by future economic and market conditions. |
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| How We Addressed the Matter in Our Audit | To test the fair value of the contingent consideration payments and intangible assets identified, our audit procedures included, among others, evaluating the Company’s use of income approach and Monte Carlo simulation, as applicable, evaluating the significant assumptions, and evaluating the completeness and accuracy of underlying data supporting the significant assumptions. We involved our specialist to assist with our evaluation of the methodologies used by management’s expert and significant assumptions used in the valuation of the contingent consideration payments and intangible assets identified. For example, we compared the significant assumptions to current industry, market and economic trends, as well as historical results of the acquired businesses. We performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions. We also evaluated the appropriateness of the Company’s disclosures included in Note 2 in relation to the acquisition. |
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Accrued Residual Commissions and Residual Commission Expenses
| Description of the Matter | Accrued residual commissions recorded by the Company and included on the Consolidated Balance Sheet were $33.0 million at December 31, 2023, and residual commission expenses included within costs of services on the Consolidated Statement of Operations were $415.1 million for the year ended December 31, 2023. As discussed in Note 1 of the consolidated financial statements, the Company accrues and pays commission expense for certain customer services and other services provided by its independent sales organizations (ISOs). Commissions are based on a percentage of the net revenues generated from the Company’s merchant customers, and these percentages vary based on the program type and transaction volume of each merchant. |
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| Auditing residual commissions was complex due to the non-standard nature of the pricing terms within the ISO contracts, the volume of contracts, the volume of transactions processed each month, and the degree of auditor judgment needed to design the nature and extent of audit procedures to obtain sufficient audit evidence. |
| How We Addressed the Matter in Our Audit | To test accrued residual commissions and residual commission expenses, our audit procedures included, among others, testing the completeness and accuracy of the underlying data supporting the commission calculations and the accuracy of the calculations. We selected a sample of monthly ISO payments and, for each sample item, we compared the pricing terms included in the calculation to the respective ISO contract or other source documents, recalculated the related expense and accrual, and agreed the commission payment to evidence of cash disbursement. Additionally, for these monthly ISO payments, we selected a sample of merchant customers, obtained their monthly processing statements, which were generated by the Company’s third-party processors, and agreed the monthly payment volumes to the commission calculations. |
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Atlanta, Georgia
March 12, 2024
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