I3 Verticals Inc. (IIIV), a payment and software solutions serving the public sector and healthcare markets, significantly boosted operating cash flow by excluding an expense that, in our view, is clearly recurring in nature and part of operations.

In its latest quarterly filing, i3 Verticals disclosed it had made what it calls a presentation change impacting the cash flow statement and:

“...elected to change its presentation of cash flows associated with "Settlement obligations" from operating activities to financing activities…”

Settlement obligations, in our view, are undeniably a part of doing business as a payments firm.

In fact, it appears as if i3 acknowledges as much in filings defining settlements:

“Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expenses, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations.”

The treatment appears to be outside the norm in the payments industry.

—Block (SQ) classifies settlement payables and receivables as cash flows from operating activities
—PayPal (PYPL) categorizes settlement services as part of payment services, which are recorded in cash flows from operating activities
—American Express (AXP) includes servicing and settlement within its four operating segments, which are recorded in cash flows from operating activities

The reclassification of settlement obligation as a financing activity significantly improved i3 Verticals’s performance.

In the six months ended March 31, 2024, the change inflated operating cash flow $3.28 million, or 15.03%.

The timing of the change is also interesting as settlement obligations have risen significantly year-over-year.

In the six months ended March 31, 2023, the change lifted operating cash flow just $0.35 million, or 1.39%.