UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL ... ?· gamenet group unaudited interim condensed…

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<ul><li><p>GAMENET GROUP </p><p>UNAUDITED INTERIM CONDENSED CONSOLIDATED </p><p>FINANCIAL STATEMENTS </p><p>AS OF MARCH 31, 2017 AND FOR THE THREE MONTHS ENDED </p><p>MARCH 31, 2017 AND 2016 </p></li><li><p>The following information is confidential and does not constitute an offer to sell or a solicitation of an offer to buy any securities of Gamenet Group S.p.A. or any of its subsidiaries or affiliates. Any such securities may not be offered or sold in the United States absent registration unless pursuant to an applicable exemption from the registration requirements of the U.S. Securities Act and other applicable securities laws. The information provided on the following pages is not intended for distribution into or within the United States of America or to U.S. persons other than to qualified institutional buyers as defined under Rule 144A of the U.S. Securities Act. Statements on the following pages which are not historical facts are forward-looking statements. All forward-looking statements involve risks and uncertainties which could affect Gamenet Group S.p.A.s actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Gamenet Group S.p.A.. </p></li><li><p>Managements report on the Groups result at March 31, 2017 </p><p>BASIS OF PRESENTATION Gamenet Group S.p.A. (hereafter Gamenet Group, the Company or the Parent and together with its subsidiaries and associates the Group or Gamenet Group) is a company incorporated and domiciled in Italy, with registered offices in Rome, Corso dItalia 6, organized under the laws of the Republic of Italy. The Company was incorporated on June 21, 2016 to effect the acquisition (hereafter the Acquisition) on June 27, 2016 of Intralot Holding &amp; Services S.p.A. (hereafter Intralot) by Gamenet S.p.A. (hereafter Gamenet). </p><p>The Company is controlled by TCP Lux Euroinvest S..r.l. (hereafter TCP), which holds 79.1% of the share capital; the remaining share capital is held 20% by the Dutch company Intralot Italian Investments B.V. (hereafter Intralot B.V.) and 0.9% by Stefano Francolini. Gamenet Group is one of the largest operators in the Italian public gaming sector, which is regulated by the Customs and </p><p>Monopolies Agency (Agenzia delle Dogane e dei Monopoli hereafter ADM). The Group is an active gaming concessionaire and </p><p>has a product offering ranging from AWP (Amusement With Prizes) and VLT (Video Lottery Terminals), to management of </p><p>its nationwide network of variously branded company owned points of sales, betting and online as well as service provision </p><p>to business partners. </p><p>This report on operations has been prepared to provide additional information and offer a more complete representation of the Groups financial position and economic results. </p><p>OVERVIEW </p><p>We are one of the largest players in the gaming industry in Italy based on total bet and distribution network with Euro 1.8 billion in bets collected in the three months ended March 31, 2017 across a network of approximately 14,000 points of sale. </p><p>As of March 31, 2017, our distribution network included 781 gaming halls. Of the 781 gaming halls in our distribution network, we owned (or held a majority interest) in 64. In these gaming halls, we hold the required authorizations and the lease contracts. </p><p>The Group operates in four main business areas: (i) video lottery terminal (VLT), (ii) amusement with prize (AWP), (iii) betting and online (Betting and online), (iv) company owned gaming halls and direct AWP operations (Retail and Street Operations). </p><p>VLT </p><p>VLTs were first introduced to Italy in August 2010 and to date they represent the most innovative and attractive gaming solution for players, due to the wide variety of games offered and a high average payout ratio. They also offer the chance to win jackpots of up to Euro 500,000. </p><p>At present, Gamenet offers three VLT platforms, Spielo, Novomatic and Inspired, which differ in terms of the games on offer and whether or not jackpots are foreseen. </p><p>Group VLTs accept Euro 0.50, Euro 1 and Euro 2 coins as well as Euro 5, Euro 10, Euro 20, Euro 50 and Euro 100 notes. In each game, bets may range from a minimum of Euro 0.50 to a maximum of Euro 10. </p><p>The percentage of bets paid out as winnings may not be lower than 85%, with reference both to the gaming system as a whole and to each individual game. </p><p>The maximum payout for a single game is Euro 5,000. However, in the case of the Spielo VLTs, higher winnings are possible as a result of the Jackpot mechanism referred to above. </p><p>As of March 31, 2017 we operated 8,225 VLTs. </p></li><li><p>MANAGEMENTS REPORT ON THE GROUPS RESULT AT </p><p> MARCH 31, 2017 </p><p>AWP </p><p>AWPs are traditional slot machines that offer players a good level of interaction, using a graphical reel containing pictures; they also offer controlled-win games that pay cash to winners. </p><p>The maximum cost of each single game is Euro 1.00 and the maximum win is set at Euro 100.00. Each game must last at least 4 seconds and any winnings must be distributed immediately after the game (only) in coins. </p><p>Winnings, which are calculated by the machines on a random basis over a cycle comprising a maximum of 140,000 games, must not fall below 70% of the amounts bet. New slot machines may not reproduce the game of poker nor, even partially, its basic rules. </p><p>AWPs may be installed in all authorized betting shops pursuant to Articles 86 or 88 of the TULPS, including bars, coffee shops and similar outlets, public gaming halls, horse racing and sports betting shops and corners, etc. </p><p>As of March 31, 2017 we provided network connection services to 40,384 AWPs. </p><p>Betting and online </p><p>Gamenet Group is active in the betting and online segment through a network of around 750 sport betting rights e 58 horse betting rights. The Company operates through its subsidiaries Gamenet Scommesse S.p.A. Intralot Italia S.p.A. and Veneta Servizi which offer their customers a wide range of games mainly including sports betting, virtual games and horse racing through 683 active points of sale. In addition, a wide variety of online products including poker casino games, bingo and prediction games are offered through the websites Gamenet.it and Intralot.it. </p><p>Retail and Street Operations </p><p>In 2012, Gamenet Group began to pursue a strategy of vertical integration in the retail segment by establishing a company, Gamenet Entertainment S.r.l., to conduct gaming hall business. Significant efforts have resulted in the Group now directly managing 64 company-owned gaming halls (7 of which are large-size gaming halls). </p><p>More recently, the Group continued pursuing its vertical integration strategy through: </p><p> Retail: the acquisition, in March 2015, of 51% of Billions Italia S.r.l. (which opened two additional gaming halls during 2016); the acquisition through Gamenet Entertainment S.r.l. of 100% of Gamecity S.r.l. in August 2016; Verve S.p.A.s company owned gaming hall started operations in 2016 (as also disclosed later in this document, the Group in April 2016 increased its equity interest in Verve from 51% to 100%); the acquisition, in March 2017, through Gamenet Entertainment, of 60% of La Chance S.r.l., which owns the entire share capital of Slot Planet S.r.l. </p><p> Street Operations: the acquisition of 100% of Gnetwork S.r.l. in August 2015; the acquisition of 70% of Jolly Videogiochi S.r.l. and 51% of NewMatic S.r.l. in June 2016, all aimed at developing the Groups position in the AWP Street Operations business. </p><p> Service providing: the acquisition in July 2016 of 60% of Agesoft S.r.l., a company specialized in the development of software for the AWP business. </p><p> Significant events </p><p>Relating to Gamenet Group S.p.A. </p><p>On March 23, 2017 Intralot Global Holdings B.V., which held 20% of the issued and paid up share capital of Gamenet Group S.p.A., contributed and transferred the full legal and beneficial right, title and interest in and to Intralot Italian Investments B.V., in which Intralot Global Holdings B.V. holds the entire issued share capital. Relating to Gamenet S.p.A. / Intralot Gaming Machines S.p.A. / Intralot Holdigs &amp; Services S.p.A </p><p> On January 31, 2017, 2% of the share capital of Intralot Gaming Machines S.p.A., owned by Gamenet S.p.A., was transferred to Intralot Holding &amp; Services S.p.A.. As a result of this operation, the company's share capital is now 100% owned by Intralot Holding &amp; Services S.p.A.. </p></li><li><p>MANAGEMENTS REPORT ON THE GROUPS RESULT AT </p><p> MARCH 31, 2017 </p><p> During the first quarter of 2017, the board of directors of Gamenet S.p.A. / Intralot Holdings &amp; Services S.pA. / Intralot Gaming Machines S.p.A. approved the merger project (Progetto di Fusione) of both Intralot Gaming Machines S.p.A. and Intralot Holdings &amp; Services S.p.A. into Gamenet S.p.A. The merger, which is expected to be completed during the second quarter of 2017, is meant to streamline the existing corporate structure. </p><p>Relating to Gamenet Entertainment S.r.l. </p><p>On March 2, 2017 Gamenet Entertainment S.r.l. acquired 60% of the share capital of La Chance S.r.l., which owns the entire share capital of Slot Planet S.r.l.. These companies are active in the public gaming sector through the management of VLT gaming halls. </p></li><li><p>MANAGEMENTS REPORT ON THE GROUPS RESULT AT </p><p> MARCH 31, 2017 </p><p>ECONOMIC TRENDS </p><p> The following tables set forth key information relating to the Italian economy trend: </p><p> For the three months ended March 31, June 30, September 30 and December 31 Gross Domestic I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q </p><p>product1 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 </p><p> -0.5% -0.3% -0.1% 0.0% 0.4% 0.3% 0.2% 0.1% 0.3% 0.0% 0.3% 0.2% 0.2% </p><p> First quarters 2017 Italian GDP increased by 0.2 per cent with respect to the fourth quarter of 2016 and by 0.8 per cent in comparison with the first quarter of 2016. </p><p>The inflation rate in the first quarter 2017 in comparison with the first quarter of 2016 is set below: </p><p> Three months ended March 31, </p><p> 2016 2017 </p><p>Inflation rate23 0.5% 1.4% </p><p> During first quarter 2017, the unemployment rate decreased slightly vs year end 2016, as indicated in the graph below. </p><p> 1 Percentage changes versus previous quarter. Source: Istat 2 Source: Istat </p><p>http://www.istat.it/http://www.istat.it/</p></li><li><p>MANAGEMENTS REPORT ON THE GROUPS RESULT AT </p><p> MARCH 31, 2017 </p><p>OPERATING INFORMATION </p><p> The following table sets forth key information for the VLT activities for the three months ended March 31, 2017 and the three months ended March 31, 2016: </p><p> For the three months ended March 31, 2017 2016 </p><p> ( in millions, except non-financial information and percentages) Number of VLT licenses awarded 8,570 </p><p> 7,805 </p><p>Average number of VLTs in operation for the period 8,205 </p><p>7,437 </p><p>Number of VLTs in operation as of the period end 8,225 </p><p>7,489 </p><p>As a percentage of VLT rights 96.0% </p><p>96.0% </p><p>VLT Bet (*) 811 </p><p>773 </p><p>VLT PREU (as percentage of bet) 5.5% 5.5% </p><p>(*)This figure does not include bet generated by the Retail segment in the Isola del Tesoro, Gamecity and Billions (Rome and Bologna) gaming halls connected to other concessionaires, amounting to Euro 75.1 million. </p><p> As of March 31, 2017, Gamenet Group held 8,570 licenses, of which 8,225 VLT machines were in operation, equal to 96.0% of available licenses, which represents full deployment when considering the machines under maintenance or subject to asset management activities. Total VLT bet increased by 4.9% from 773 million for the three months ended March 31, 2016 to Euro 811 million for the three months ended March 31, 2017. This is mainly due to a 10.3% increase in the average number of VLTs in operation during the period, partly compensated by a 4.9% decrease in unit bet. Considering Intralot as part of the consolidation area also in the three months ended March 31, 2016, bet would have increased by 2.8% from Euro 789 million to Euro 811 million for the three months ended March 31, 2017. The following table sets forth key information for the AWP business for the three months ended March 31, 2017 and 2016: </p><p> For the three months ended March 31, </p><p> 2017 2016 </p><p> ( in millions, except non-financial information and percentages) </p><p>Number of AWPs in operation as of the period end 40,384 28,754 </p><p>Average number of AWPs in operation for the period 39,621 28,760 AWP Bet (*) 655 574 </p><p>AWP PREU (as percentage of bet) 17.5% 17.5% </p><p>(*)This figure does not include bet generated by the Retail segment in the Isola del Tesoro, Gamecity and Billions (Rome and Bologna) gaming halls connected to other concessionaires, amounting to Euro 42.0 million. </p><p> For the three months ended March 31, 2017, we had an average of 39,621 machines in operation, an increase of 37.8% compared to the three months ended March 31, 2016. Total AWP bet increased by 14.1% amounting to Euro 655 million for the three months ended March 31, 2017 and Euro 574 million for the three months ended March 31, 2016. This is mainly due to the increase in the average number of AWPs in operation mentioned above, partly offset by a 17.2% reduction in unit bet. This decline is a market wide event, primarily driven by the fact that the so called gestori (i.e. the members of the supply chain who actually own the AWPs) temporarily reduced their investments in new games, waiting to have more clarity around the expected 30% reduction in the number of AWPs. In other words: players start to get used to existing games / there is limited novelty effect generated by new products being introduced into the market (and having new products available help offset the impact of AWP payout reduction, which increased by about 15% the unit cost of entertainment for players). Considering Intralot as part of the consolidation area for the three months ended March 31, 2016, the average number of operational machines would have increased by 3.4% while bet would have decreased by 13.0%. The following table sets forth key information for the Betting and Online business for the three months ended March 31, 2017 and 2016: </p></li><li><p>MANAGEMENTS REPORT ON THE GROUPS RESULT AT </p><p> MARCH 31, 2017 </p><p> For the three months ended March 31, </p><p> 2017 2016 </p><p> ( in millions, except non-financial information and percentages) Number of licenses/concessions (1) 750 185 Number of active points of sale as of March 31 (shops and corner) 683 165 Average number of active points of sale (shops and corner) 678 167 Total retail bet 134.8 17.8 Average bet per point of sale for the period 0.20 0.11 Total online bet 60.4 2.8 </p><p> (1) Does not include the 58 licenses related to horse racing bet Total bets for the first quarter ended March 31, 2017, increased by more than 100% compared to the same period of last year (moving from Euro 20.6 million in 2016 to Euro 195.2 million in 2017), mainly due to the Intralot acquisition. Specifically, Retail bet increased from Eur...</p></li></ul>

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