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Investment Thesis

Founded in 1997 with only one patent on a blackjack side bet called Lucky Ladies, Galaxy Gaming has gone through its fair share of ups and downs over the past 23 years but is slowly building itself up as an emerging gaming powerhouse. The past two years have called for some major internal reorganization, on a quantitative and qualitative basis, in effort to take this company to the next level. We believe Galaxy Gaming is undervalued at current levels and has the potential for upside growth into 2020 and beyond due to its strong business fundamentals, positive quarterly reports, and experienced management team.

Business Fundamentals

GLXZ has two sets of products that translates into high levels of recurring revenue along with other factors that will play into the company’s advantage in 2020.

Galaxy Gaming is a developer and distributor of casino table games and enhanced systems that serve over 600 casinos on approximately 7,000 gaming tables. Located in Las Vegas, Nevada, this evolving micro-cap company generates a high level of recurring revenue through two streams: proprietary table games and enhanced table systems.

-Propietary Table Games: Galaxy Gaming began as a premier supplier of “side bets” and “premium games” to casinos all around the world. Their side bets are patent protected features added to public domain games such as Blackjack, Poker, or Baccarat to enhance the profitability and probability of casino operators. Some of their famous side bets are Lucky Ladies, Bonus Craps, and 21+3. Along with that, they develop premium games which are unique stand-alone games placed on casino floors. Examples of these include Three Card Poker, High Card Flush, and Texas Shootout.

-Enhanced Table Systems: These are electronic enhancements placed on casino table games to add to player appeal and enhance game security. The Bonus Jackpot System is their most famous electronic enhancement that is designed to collect data on player wages and other activities. Casinos love this as they are able to evaluate game play, improve dealer efficiency, and offer special bonuses to players. The enhanced table systems are some of their newer additions, but have been gaining traction with many casinos throughout the world.

They are also preparing to provide its intellectual property to legal online gaming sites. As the regulatory restrictions in the U.S. with gambling begins to decrease, GLXZ will be at the forefront of this market as a first mover. With time and regulatory easing around online gambling in the U.S., GLXZ will be able to gain a leg up on competitors and in turn, generate higher levels of revenue and profitability.

A unique factor I like about Galaxy Gaming is that it has plenty of geographic exposure outside of the United States. Many small cap stocks with under <$500 million in annualized revenues, typically have almost no international revenue exposure. GLXZ, on the other hand, has about 30% of its revenues coming from Europe and the other 70% from North America and the Caribbean. The geographic diversification should make investors comfortable due to the fact that its revenues are hedged against a recession in the U.S.

The company also seems to be one of the only developers and distributors of casino table games and enhanced systems in the micro-cap arena, with its closest public competitors being larger names such as Scientific Games (SGMS) and PlayAGS (AGS). SGMS and AGS are both much bigger that GLXZ in terms of market cap and revenue, however, they operate in various gaming segments such as lottery, electronics, and digital support therefore allowing GLXZ to solely focus on gaming. GLXZ has focused more on securing patents for popular table games such as Lucky Ladies and Three Card Poker to set themselves apart from their competitors. We believe this is beneficial because Galaxy Gaming will be able to put all their resources into one segment and begin expanding out once they increase market share.

In terms of valuation, GLXZ is miles ahead of competition with a ROIC (Return on Invested Capital) of 14.20% compared to 1.78% for SGMS and -3.58% for AGS.

Data by YCharts

With only a few real competitors and virtually no other micro-cap competitor, GLXZ has slowly been able to attract investors over the past couple of years and has yielded a return of 11.43% in 2019.

GLXZ 5 Year Chart

Data by YCharts

At present share prices around $1.55, Galaxy Gaming trades at a market cap of $27.9 million. After netting out the $8.57 million of cash and $48.1 million of debt on GLXZ’s balance sheet, we are left with an enterprise value of $67.43 million. The company now finds itself at an inflection point that can vault profitability (and valuation) in the coming months and years.

Q3 Highlights

Shares of Galaxy Gaming have fell ~27% so far after reporting strong/neutral third quarter results; indicating a great buying opportunity for this volatile micro-cap stock with strong fundamentals. Here’s a look at how GLXZ performed in the third quarter:

Galaxy Gaming Q3 2019 Results

Source: Galaxy Gaming Q3 earnings release

Revenues grew ~13% Y/Y to $5.371 million and total revenue for the nine months ended September 30, 2019 up ~18% to $16.116 million, mostly due to the additional placements for the Bonus Jackpot System and premium games. It’s also important to note that GLXZ’s revenue base is almost all recurring (99% of total revenues), giving the company extremely high revenue visibility and a solid foundation from which to expand on as they navigate the path to obtaining more individual regional gambling licenses. GLXZ also has some of the highest gross margins in the industry (>97% on a GAAP basis), indicating that almost every dollar of incremental revenue flows through to the bottom line – indicating its tremendous profitability potential at scale.

Galaxy Gaming’s CEO, Todd Cravens, noted the strong financial results along with the potential for revenue growth in 2020 in their Q3 earnings report. Top-line growth is clearly on a steady path in line with management expectations and is set to take off in 2020 as revenue from the recently acquired licenses will be recognized. Per Cravens’ remarks:

We are pleased to continue delivering double-digit growth in both revenue and Adjusted EBITDA. The new licenses we have received and are pursuing should give us the opportunity to offer more of our products in underserved markets. However, we do not expect to realize meaningful revenue from the new license opportunities until 2020.”

CFO Harry Haggerty also discussed the strong results with the balance sheet for Q3. It’s important to note that the majority of micro-cap companies struggle with their balance sheet strength, but GLXZ has proven it’s focused on complimenting growth with a strong backbone. Per Hagerty’s remarks:

The third quarter showed our ability to continue to execute. We paid down $370K in debt and still added to the cash balance. Most importantly, just after quarter’s end we were able to sign an amendment to our credit agreement with Nevada State Bank that restructured the leverage covenants to allow us to carry the debt incurred in the redemption transaction. The new covenants will become effective for the December 31, 2019 quarter. For the third quarter of 2019, we were solidly in compliance with the Free Cash Flow and Senior Leverage covenants and our non-compliance with the Total Leverage covenant was waived as a result of the amendment entered into in May 2019.”

Free cash flow continues to be another highlight that separates Galaxy Gaming from the majority of companies trading at a sub $100 million market cap, many of whom are consistently burning through cash. Cash flow from operations for the nine months ending September 30, 2019 came in at $3.294 million, up ~17% from $2.806 million reported in the period prior. With low CapEx spending of $32,495, they are producing FCF of $3.261 million.

GLXZ’s Q3 results came in strong, but did not seem to match the market’s expectations. Investors were expecting to see the revenues from the licenses they recently acquired, but as Todd Cravens mentioned in their Q3 earnings call, the revenues wouldn’t be recognized until 2020. Galaxing Gaming is still producing strong top-line and bottom-line growth and has a strong balance sheet to support them throughout all of 2020. The high recurring revenue associated with their new licenses should be reflected in their earnings, therefore sending the stock price back to its rightful valuation.

With little analyst coverage on the stock, we believe the market’s overreaction doesn’t hold any merit and should play in our favor as a great buying opportunity has been set up for investors looking for value.

Management Team

Robert Saucier, GLXZ’s previous CEO and Chairman, was removed in 2017 and has since been replaced with a credible and experienced management team. His removal was in response to Nevada’s gaming commission rejecting GLXZ’s application for a gaming license in the state, stating that Saucier has had a troubled past of criminal activity and unsuitable associations. He also caused the company difficulty in getting licensed in other states such as Washington and Oregon.

Judge Catherine Frink, an Administrative Law Judge in charge of the California Gambling Control Commission’s complaint against Robert Saucier, commented this:

Saucier was evasive and, in some instances, intentionally dishonest and misleading in his response to questions. In a highly regulated industry such as gaming, the failure to be forthcoming with relevant information was inexcusable.”

You can also find a link discussing Saucier’s problems with getting licensed in the past here.

Once Saucier stepped down, the company’s directors filed a lawsuit in full compliance with their Articles of Incorporation against Triangulum Partners, an entity controlled by the former Chairman and CEO in order to redeem the 23.271 million shares he owned, roughly ~60% of the company. On May 6, 2019, Galaxy Gaming was finally successful in redeeming his shares in the company and in consideration for the redemption, they issued Triangulum a promissory note in the face amount of $39.096 million. The promissory note does not hurt the company as it has no mandatory amortization, is subordinated to all other debt, matures in 2029, and bears an interest rate of 2% per year.

The company received licenses in Ontario, Canada, Maryland, Wisconsin, and Arkansas immediately after the stock redemption.

With the removal of their toxic CEO, former Gaming Commission Board and state senator Mark Lipparelli stepped in as Chairman of the Board in July 2017. Mark’s great relationships in the gaming world along with his reputation gives Galaxy Gaming the ability to gain licenses in new areas all around the world, therefore leading to higher product placements and increased revenue.

GLXZ appointed their former VP of Business Development, Todd Cravens, as CEO of the company. Cravens brings over 25 years of experience in the gaming industry, including previous experience as the CEO of the Americas for TCS John Huxley and President of AGS Illinois. Along with Mark Lipparelli, Cravens brings a solid reputation amongst casino operators to the table.

Finally, they appointed Harry Hagerty as CFO. Hagerty has a deep knowledge of finance and extensive experience as a CFO for other publicly traded companies. He was the CFO of Caesars Entertainment, CFO of Global Cash Access later taking them public, and was a managing director at Deutsche Bank. His success working as a CFO at other public companies gives investors comfort in his ability to properly manage the company’s finances.

With Saucier out the door and new management in, Galaxy Gaming is setting itself up for success and strong returns for shareholders in the long term.


Although we believe Galaxy Gaming is a strong value play for micro-cap investors, there are still a few risks associated with investing in the company. One main thing is debt. Equity investors should continue to pay attention to the company’s ability to service its debt throughout the economic cycle as interest expense could eat into profitability and large amounts of continuous loans could potentially send them into bankruptcy if their financials begin to decline.

As of September 30, 2019, GLXZ has ~48 million of debt on its balance sheet and is extremely overlevered with a Debt to Total Capitalization ratio of 248.3%. Of that $48 million is the $39 million Triangulum Promissory Note that was redeemed from Robert Saucier.

We can take a look at the GLXZ’s LTM Coverage Ratios relative to direct competitors such as SGMS and AGS to get a feel for their ability to pay down interest with profits.

Ticker LTM EBITDA/Int. Exp. LTM EBITDA-Cap Ex./Int. Exp. EBIT/Int. Exp.
GLXZ 7.0x 6.9x 5.0x
SGMS 2.1x 1.6x 1.0x
AGS 2.7x 1.2x 0.4x

As you can see, Galaxy Gaming’s coverage ratios are a lot higher than its competitors. These are numbers we will continue to keep a close eye on as the economic cycle begins to contract and we get to see how the company’s profitability keeps up.


We believe with recent events, Galaxy Gaming is a great opportunity for investors looking to find value in a micro-cap company that has strong business fundamentals, good top-line and bottom-line growth, a healthy balance sheet, and a solid management team. The company is set up for success in the coming year and it will reflect in their stock price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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