Upgraded to three stars at 8 cents at a sub $9M market cap in November of 2022. Selected as a Wolf Pick a month later at a dime. The pick is currently up 1570% and once hit $2.35 for a twenty-three bagger. They are now greater than a quarter billion market cap company today. If there’s a better story on the CSE in the last five years, I’d like to hear it.
In the words of SNL’s Chico Escuela, Happy Belly Food Group has been berry berry good to me. That doesn’t mean the company gets any free passes however. My stock holdings and especially my stock picks do tend to get some extra scrutiny, particularly when they release financials.
My last two reviews were not great ones. In fact, the last one I issued the company my first ever downgrade of the stock in the four plus years I’ve been covering them.
Happy Belly Food Group ($HBFG.C) FINS Review
After years of doing this, you think I would know better by now than to comment immediately on socials and bulletin boards when financials drop. The argument can be made that I should probably refrai…
I called that review, “Under Pressure” as I felt then that there was extra significance on these financials just released to the market. I still feel that way.
On a sequential basis, revenue was soft (heavily influenced by seasonality), and they had the worst back to back operational cash flow quarters since the company became relevant. Margin was wacky and cash burning expenses (irrespective of the large share based compensation) used to support their growth aspirations caused their P&L to look like a dog’s breakfast.
It was deserving of the downgrade. I firmly stand by it despite the incessant whining by the Neanderthals' on stock picking forums who quite frankly couldn’t hold my jock strap when it comes to evaluating company’s.
I had trimmed my position late last year as the stock crossed $2, and despite my downgrade I added to my position twice leading into these financials in the Buy Zone below. This was also repeated in my recent What’s Wolf Watching article earlier this month.
But after my last review, I was still bothered by the limited visibility we have into the seasonality of the business on the QSR revenue side of the equation. With openings across many different brands, whether or not they opened on the first or last day of the quarter can significantly impact their top line numbers. I wanted to find a better way to smooth these numbers out, and to take my first stab at a QSR sales estimate for this quarter.
That involved taking about eight quarters of history and finding out how many days they had a QSR location open and coming up with an average. That led me to a a mid point estimate of $26.9M in QSR sales for this quarter. That would represent a 66% increase over last year and 40% sequentially.
My intro’s to Happy Belly Food Group’s reviews tend to get longer with each quarter. Let’s end the madness here and get on with the review, see how I did with my first estimate and see how the rest of the financials shape up. Are they deserving to get that quarter star back?
Balance Sheet:
Here is where I anticipated we would see some significant improvement and for the most part, we have achieved that. But some surprises emerged.
Happy Belly ended Q2 with a current ratio of 2.6, improving from the 2.2 they ended Q1 with. That consists of a record $12M in cash, $3.6M of receivables and $800k in other short term assets overtop of $6.2M in liability commitments over their next twelve months.
Their cash position alone is nearly double their one year financial commitments so they are also in the strongest liquidity position they have ever been in.
Can you sense a “But” coming?
I was bothered by the companies accounts receivables last quarter, and these financials have presented some additional fodder. Approximately a third of their A/R is made up from insiders. These amounts specifically relate to the options and warrants they exercised in June.
There is some irony here. After the first quarter I made the case that insiders could very likely sell, or organize some block trades in order to finance the significant amount of securities they had to exercise - just as the CEO, and former CEO did themselves not that long ago. Well, yours truly was accused of all sorts of things for that mere mention including trying to drive down the share price for my own nefarious purposes.
I simply mentioned this as a fact of life. Not everyone has hundreds of thousands of dollars in immediate liquidity to pull that off. Fast forward three months and not only did one insider pull off a block trade, but two others were “loaned” the cash/shares, and now that $1.4M is sitting in one balance sheet account rather than the cash line.
Now, I’m ok with this as a temporary measure rather than these insiders trying to organize a block trade below market value which may push the share price downwards. If it’s gone by this quarter end and it ends up in the cash column when we look at Q3 in November, we’re all good.
But to all the haters out there who doubted what I said or my motives - this is why you can’t hold my jock strap. You spiked the football way too early.
If we take that $1.4M out of receivables, we’re down to $2.12M of typical A/R. I say “typical” in a loose way because in this type of business, these receipts are due primarily from franchisees, rather than invoicing customers for goods in the traditional way we normally think about it.
Therefore last quarter’s $2.42M, a number which had risen by 44% from their year end looked a little concerning. Particularly since that did not include over $200k in which the company had deemed uncollectable.
Post Q1 financials we learned of a Pihro location closing and the rest of Joey Turks QSR locations appear to be suffering the same fate. We can therefore assume that those write offs are related to these closures.
There are really only two reasons for A/R to age in this sector. Whomever is in charge of collections is not doing their job to the best of their abilities, or the franchisee is just unable to pay on time. That can speak to an overall health of a location or locations, and sadly that appears to be the case with Joey Turks. Most investors (I’m looking at the yawners here) would gloss over this account. Don’t.
The good news is these receivable amounts have come down considerably (12%) in a quarter where they just blew the doors off on the QSR revenue line. That’s encouraging regardless of how the last couple of paragraphs may have sounded.
In terms of debt, HBFG only has $1.4M in convertible debentures.
While I got sidetracked on some explanations above, this was a good balance sheet quarter for the company, significantly shoring up their cash position. They doubled what it was a quarter ago, and quadrupled it from six months ago.
Cash Flow:
Happy Belly generated $600k in operational cash flow (OCF) in the second quarter, down 16% to the comparable quarter a year ago. On a YTD basis they have burned $340k of OCF vs generating $556k at the half way point of 2025.
Within investing activities the company spent $430k on asset spending and received $944k through their divestiture of their CPG brand, Holy Crap.
Financing activities was where all of the action was, receiving $9.3M into the treasury for options and warrants exercised. ALL from insiders.
Overall, their cash position is up 297% from where they started the year.
After a great A/R quarter, it’s disappointing to see them not match and improve on last year’s OCF number. You could also argue that number is also somewhat inflated as 97% of it is related to working capital adjustments. Last year they delivered $435k in OCF prior to these adjustments. This year, $17k on a heck of a lot more business. That suggests we are going to see some issues when we examine the income statment.
Share Capital:
166.4M shares outstanding, 29% dilution over the past year with most of that occurring in the quarter
17.9M warrants outstanding, all at $2, all tied to share price performance and all expiring in Nov 2030
12.7M options, only 500k currently ITM. The remainder at $2 are similarly ones that vest upon share price conditions
12% insider ownership, 6% institutional per SimplyWallSt
Even with exercising warrants and options, insiders are continual participants in the open market. That includes nine transactions from three different insiders in the month of July alone
Income Statement:
Total revenue was up by 56% in the quarter with significant double digit gains across their three revenue silo’s - product sales, franchise revenue, and consulting income.
Gross margin was off to last year by 550 basis points. HBFG doesn’t show a traditional margin line on their P&L due to their silo presentation of their revenues. Their COGS is shown as direct operating costs and that is applied to only product sales. The offset of course becomes their gross margin.
Franchise revenue is effectively 100% margin (I’ve referred to it as gravy before) which basically goes directly to the bottom line.
So on 41% more product sales this quarter, they only delivered 26% more gross profit dollars in that segment. When you add in the “gravy”, 57% more gross profit dollars.
For the rest of the P&L, I’m going to strip out the SBC costs and speak to that separately in my summary.
Happy Belly has two major cash burning expense buckets - G&A, and payroll. G&A costs rose by 72% while payroll increased by 89%. Both of those percentages you will notice are higher than their rate of revenue, but more importantly higher than their gross profit dollars, even when you add the “gravy”. That is going to combine for a worsening performance within their profitability metrics.
After slightly higher depreciation costs and an $86k credit loss, their operating income (SBC excluded) fell from a gain of $221k last year, to a loss of $338k this quarter.
On a YTD basis, the metrics tell a similar story:
Total revenue is up by 66%
Gross margin on product sales off by 740 basis points from 54.6% to 47.2%
Gross profit (gravy included) was up 60%
G&A costs rose by 85%, payroll by 84%
Operating income from a $219k gain to a loss of $832k, or $1.05M worse than last year
Summary:
That’s a lot of information thrown your way so far. Let’s break it down this way:
The Good:
They blew away my QSR sales estimate by $1.5M. That tells me a couple of things. The average revenue per location per day was much higher than my $3100’ish estimate I used (I will go back and recalculate post review to come up with my Q3 estimate). That also suggests to me that a significant part of their growth has been organic. Rosie’s appears to have been a large part of that impact. Last year, they made up 12% of all locations, this quarter it was 17%. Rosie’s is clearly a hit and with a higher AUV than Heal, more Rosie’s are a great thing.
The company is also in the best financial situation from a balance sheet perspective they have ever been in due to the influx of cash from all of those performance options and warrants. They also deserve credit for improving their A/R QoQ after I listed it as a concerning metric three months ago.
The concerns:
Firstly, I was hoping the previous section would be longer.
After driving nearly $1M in positive OCF in 2025, this is now the third straight quarter where OCF has been worse to last year and this quarter takes them slightly negative on a TTM basis.
This is of course all due to their cash burning expenses outpacing their revenue and gross margin dollars.
The question is how bothersome should that be to investors? The company is expanding at an extremely rapid pace, and often that is going to cause expenses to get ahead of that growth curve.
The cause for the spike in the last three quarters is two-fold. The main cause is a near tripling in advertising and marketing expense. I think this one surprises me the most. Apart from influencers, I haven’t seen other very large campaigns. I guess the social media influencer business and naming a smoothy after them is much better business I would have thought.
The second is a one time hit, and a pretty healthy one at that related to their SBC (highlighted above). That one time hit is responsible for 65% of their profitability miss to last year.
The other thing to consider is the company now has the balance sheet and liquidity to absorb a little bit of worsening here and there with their OCF. That couldn’t be said as little as a year ago. If they faced this situation a year ago, another round of convertible debentures might be on the table. That’s not where we are and that affords HBFG the luxury to be a little more aggressive on their spending to expand the network. The big test will be in Q4 and Q1 when they face the reality of seasonality impacts. What they can’t do is further compound on these recent numbers:
Things I’m neither concerned or overly exited about:
SBC Costs - Yes, upon glancing at the P&L, that hit looks grotesque. But if you have ten cent shares and been following the company for this long, you should have known this was going to occur. You can’t celebrate a $2 stock price and then complain when the back end of SBC kicks in with their time of incentive program. Seriously, shut up about it.
Joey Turks and Pirho closures - Sure, it’s disappointing, and for someone who has managed franchisees it’s a sad moment when one goes down. While showing empathy, these brands cost HBFG very little. Some will be Home Runs, some will go down swinging, and that’s ok. But, watch that A/R number for signals that others could be on the horizon. Problems will arise there first. Let’s not forget the closing of Ghost Taco is also on the horizon. I feel pretty good about that one.
Texas - I’m aware of all of the fanfare Heal’s launch into Texas is having, but I’m a lot more cautiously optimistic than the average retail investor when it comes to this. It’s been 15 months since the ten unit agreement was signed for Lubbock - home to the Texas Tech Red Raiders and Texas’ tenth largest city. Two of those ten are in development, likely to open in the next couple of months. My lack of exuberance relates back to some of the concerns we are seeing with their level of spending. Two locations this far away from corporate and in a different country is going to stretch operations and add cost. Obviously, you have to start with one and two before you can get to ten and beyond. My exuberance level will match that of others if and when that happens.
So the market isn’t overly enamored with yesterday’s results. It’s just past 11 am as I write this, the stock initially pulled back about 8% and now settling in around the top of my Buy Zone leading into these financials.
Days ago, I said I thought these financials would push the stock to challenge $1.77 resistance. Clearly that isn’t happening but I feel the market is getting it right so far.
The stock price the day before their Q1 was $1.58. Currently, it is $1.60. Basically flat. The market cap on the other hand went from $211.8M to $266.2M, an increase of 26%. That’s the power of dilution, and while I strongly defend the company’s SBC program, the end result is I think the current price is pretty fair given these results.
The price is right!
Maintaining the three stars.
Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from company’s I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.