ACQUISITIONS

The Acquisition

As discussed in Note 1 to the consolidated financial statements, on September 16, 2013, the Company acquired, through a wholly owned subsidiary, 100% of the equity in AGS Capital from AGS Holdings. The Acquisition was consummated on December 20, 2013.

The Acquisition was financed in part by the Senior Secured Credit Facilities, which are comprised of the $155 million Term Facility and the $25 million Revolving Facility (each, as defined herein). AP Gaming I, LLC, an indirect wholly owned subsidiary of AP Gaming, is the borrower of the Senior Secured Credit Facilities, which are guaranteed by AP Gaming Holdings, LLC (“AP Gaming Holdings”), AP Gaming I, LLC’s direct parent company, and each of AP Gaming I, LLC’s direct and indirect material wholly owned domestic subsidiaries including AGS Capital. Additionally, the Company issued 10,000,000 Class A shares of common stock at $0.01 par value to Apollo Gaming Holdings, L.P. The total cost to acquire all the outstanding shares was $100,000,000. The source of the funds for the acquisition of the Company was provided by committed equity capital contributed by certain equity funds managed by Apollo.

The contractual purchase price of $220.3 million, a seller note of $2.2 million, the settlement of $3.3 million in contingent consideration resulting in an additional seller note of $3.3 million issued in January 2014, and a working capital reduction of $5.3 million, resulted in an aggregate purchase price of $220.5 million. The contingent consideration of $3.3 million was based on certain financial performance metrics that were achieved between signing and closing.

The following summarizes the consideration paid for the Acquisition of AGS Capital (in thousands):



Contractual cash purchase price	$	220,300
Seller notes	5,531
Working capital adjustment	(5,340		)
Total consideration	$	220,491

The Acquisition was accounted for as a business combination using the acquisition method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the assets or liabilities. The significant items for which a final fair value has not been determined as of the filing of this Quarterly Report of Form 10-Q include the working capital adjustment and intangible assets.

During the Company’s continued review of the allocation of the purchase price to the identified tangible and intangible assets, the Company refined certain assumptions used in the calculation of the internally developed gaming software. As a result the Company reduced the value of the acquired internally developed gaming software by $1.5 million with a corresponding increase to goodwill in the first quarter of 2014.

In the second quarter of 2014, the Company reduced the value of the acquired gaming equipment, vehicles and other equipment, net by $2.0 million with a corresponding increase to goodwill. The decrease to the gaming equipment, vehicles and other equipment, net was a result of the removal of installation and delivery costs that were included in the fair value of the gaming machines in the valuation (see Note 6).

A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on management’s estimates. The preliminary allocation of the purchase price to the estimated fair values of the assets acquired and the liabilities assumed was as follows (in thousands):



At December 20, 2013
Currents assets	$	17,858
Gaming equipment, vehicles and other equipment, net	46,786
Goodwill	63,821
Intangible assets	97,512
Other long-term assets	1,616
Total assets	227,593
Total liabilities	7,102
Total equity purchase price	$	220,491

Our preliminary estimates of the fair values of depreciable tangible assets are as follows (in thousands):

Our preliminary estimates of the fair values of identifiable intangible assets are as follows (in thousands):



	Fair values at December 20, 2013		Average remaining useful life (in years)
Trade name - “American Gaming Systems”	$	12,126	Indefinite
Trade name - “Gambler’s Choice”	809		7
Customer agreements and relationships	60,112		7
Third party licenses	11,520		3 - 5
Internally developed gaming software	10,872		1 - 5
Purchased software	2,073		1 - 5
	$	97,512

The fair value of acquired gaming equipment, vehicles and other, was determined using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable.

The fair values of acquired finite- and indefinite-lived trade names, third party licenses and internally developed gaming software was determined using the relief from royalty method under the income approach, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be impacted by the trade name, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets. The indefinite-lived trade name relates to "American Gaming Systems" and the finite-lived trade name relates to "Gambler’s Choice".

The fair value of the acquired customer relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as fixed assets, working capital, workforce and other intangible assets, including trade names and internally developed gaming software and third party licenses - was estimated through contributory asset capital charges. The value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets.

As a result of the Acquisition, the Company recorded goodwill of $63.8 million at June 30, 2014, which is deductible for tax purposes, primarily attributed to enhanced financial scale, opportunities for synergies and opportunities with other Apollo related companies and other strategic benefits. Some of the values and amounts used in the initial application of purchase accounting in our consolidated balance sheets were based on estimates and assumptions.

The following table presents the unaudited pro forma results as if the Acquisition had occurred at the beginning of the respective periods presented (in thousands, except per share data):



	Three months ended June 30, 2013			Six months ended June 30, 2013
	Three months ended June 30, 2013			Six months ended June 30, 2013
Revenues	$	14,850		$	31,176
Loss from operations	(8,302		)	(7,793		)
Net loss	(23,144		)	(27,207		)
Basic and diluted loss per share common share	(2.31		)	(2.72		)

C2 Gaming, LLC acquisition

As discussed in Note 1 to the consolidated financial statements, on May 6, 2014, a wholly owned subsidiary of the Company entered into an agreement to purchase 100% of the equity of C2 Gaming, LLC (“C2 Gaming”) for $23.3 million in cash, subject to terms outlined in the C2 Acquisition Agreement. The acquisition was initially funded by a $10.0 million draw on our Revolving Facility (as defined herein) and available cash on hand. The consideration paid for the acquisition of C2 Gaming consisted of the following (in thousands):



Paid at close	$	11,000
One-year payment	9,000
Contingent consideration	3,000
Working capital adjustment	273
Total consideration	$	23,273

The acquisition of C2 Gaming was consummated on May 6, 2014. The one-year payment of $9.0 million is due to the sellers on the one-year anniversary of the closing of the acquisition. The contingent consideration of $3.0 million is subject to the satisfaction of certain milestones, including the submittal and approval of video slot platforms to various jurisdictions as outlined in the C2 Acquisition Agreement. As these milestones were considered to be probable of being met within one year, the $3.0 million liability approximates fair value. The remaining purchase price is expected to be funded by existing cash or existing availability on the Revolving Facility.

The acquisition was accounted for as a business combination using the acquisition method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the assets or liabilities. The significant items for which a final fair value has not been determined as of the filing of this Quarterly Report of Form 10-Q include the working capital adjustment, gaming equipment, vehicles and other, and intangible assets.



At December 20, 2013
Current assets	$	545
Gaming equipment, vehicles and other equipment, net	1,048
Goodwill	12,443
Intangible assets	9,509
Total assets	23,545
Total liabilities	272
Total equity purchase price	$	23,273

Our preliminary estimates of the fair values of depreciable tangible assets are as follows (in thousands):

Our preliminary estimates of the fair values of identifiable intangible assets are as follows (in thousands):



	Fair values at May 6, 2014		Average remaining useful life (in years)
Colossal platform	$	1,941	5
Colossal titles	2,367		3
Colossal customer agreements and relationships	5,201		7
	$	9,509

The preliminary estimate of the fair value of acquired gaming equipment, vehicles and other, was determined using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable.

The preliminary estimate of the fair value of the acquired Colossal platform and titles was determined using the relief from royalty method under the income approach, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset.

The preliminary estimate of the fair value of the acquired customer agreements and relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets.

As a result of the acquisition, the Company recorded goodwill of $12.4 million at June 30, 2014, which is deductible for tax purposes, primarily attributed to enhanced financial scale, expanded video slot platforms and other strategic benefits. Some of the values and amounts used in the initial application of purchase accounting for our consolidated balance sheet were based on estimates and assumptions.

Fair values at December 20, 2013

Average remaining useful life (in years)

Gaming equipment, vehicles and other