PART I [ITEM 3. KEY INFORMATION](index=7&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section outlines the significant risks that could adversely affect Gravity's business, financial condition, and operations, categorized into business, structural, regulatory, market, and ADS-related risks [Risk Factors](index=7&type=section&id=ITEM%203.D.%20Risk%20Factors) The company faces substantial risks from its heavy reliance on the Ragnarok IP, intense industry competition, dependence on overseas licensees and mobile platforms, and potential network or regulatory challenges - The company is heavily dependent on its main game, Ragnarok Online, and games developed from its IP; in 2023, Ragnarok Online accounted for **10.7%** of total revenues, while games based on its content contributed **87.1%** of total revenues[33](index=33&type=chunk) - Mobile games are the primary revenue source, representing **86.8%** of total revenues in 2023, with Ragnarok Origin alone accounting for **62.3%** of total revenues[36](index=36&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk) - A significant portion of revenue (**78.4%** in 2023) is generated through third-party mobile platforms like Apple's App Store and the Google Play Store, subjecting the company to their unilateral policy changes[54](index=54&type=chunk) - GungHo Online Entertainment is the majority shareholder, beneficially owning **59.3%** of common shares, which creates potential conflicts of interest and gives them significant control over corporate matters[102](index=102&type=chunk) - The company believes it was a **Passive Foreign Investment Company (PFIC)** for U.S. federal income tax purposes for taxable years 2022 and 2023, which could result in adverse tax consequences for U.S. investors[95](index=95&type=chunk) [ITEM 4. INFORMATION ON THE COMPANY](index=32&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section provides a comprehensive overview of Gravity Co, Ltd, detailing its history, business operations, organizational structure, and physical properties [History and Development of the Company](index=32&type=section&id=ITEM%204.A.%20History%20and%20Development%20of%20the%20Company) Incorporated in 2000 and listed on NASDAQ in 2005, the company's recent growth has been significantly shaped by a 2015 agreement with Dream Square that produced successful Ragnarok-based mobile games - Incorporated on April 4, 2000, and listed its ADSs on the NASDAQ Global Market on February 8, 2005, under the symbol "GRVY"[149](index=149&type=chunk) - Entered a pivotal development agreement with Dream Square in 2015 to create mobile games based on Ragnarok Online, leading to the launch of highly successful titles like Ragnarok M: Eternal Love (2017), Ragnarok Origin (2020), and Ragnarok X: Next Generation (2020)[149](index=149&type=chunk) [Business Overview](index=32&type=section&id=ITEM%204.B.%20Business%20Overview) The company's business centers on developing and publishing online and mobile games, with a strong focus on its flagship Ragnarok intellectual property and global operations Revenue by Game Type (2023) | Game Type | Revenue (in millions of Won) | Percentage of Total | | :--- | :--- | :--- | | Mobile Games | ₩629,604 | 86.8% | | Online Games | ₩81,017 | 11.1% | | Other | ₩14,895 | 2.1% | Top Revenue-Generating Games (2023) | Game Title | Revenue (in millions of Won) | Percentage of Total | | :--- | :--- | :--- | | Ragnarok Origin | ₩451,887 | 62.3% | | Ragnarok X: Next Generation | ₩99,321 | 13.7% | | Ragnarok M: Eternal Love | ₩69,773 | 9.6% | | Ragnarok Online | ₩77,660 | 10.7% | Revenue by Geographic Area (2023) | Country | Revenue (in millions of Won) | Percentage of Total | | :--- | :--- | :--- | | Taiwan | ₩176,071 | 24.3% | | Thailand | ₩136,874 | 18.9% | | The Philippines | ₩102,595 | 14.1% | | Korea | ₩86,058 | 11.9% | | Indonesia | ₩58,763 | 8.1% | | Malaysia | ₩58,553 | 8.1% | | Other | ₩113,102 | 15.6% | - The company competes with major online game providers like NCSoft, Krafton, and Nexon, and mobile game publishers such as Tencent, NetEase, and Kakao Games[271](index=271&type=chunk)[275](index=275&type=chunk) [Organizational Structure](index=68&type=section&id=ITEM%204.C.%20Organizational%20Structure) Gravity Co, Ltd operates through a network of subsidiaries located in key global markets, including the USA, Taiwan, Thailand, Japan, Singapore, Hong Kong, Korea, and Indonesia - The company's organizational chart shows Gravity Co, Ltd as the parent company with multiple subsidiaries across key regions including Korea, the U.S., Taiwan, Indonesia, Thailand, Japan, Singapore, and Hong Kong[368](index=368&type=chunk)[732](index=732&type=chunk) [Property, Plants and Equipment](index=68&type=section&id=ITEM%204.D.%20Property%2C%20Plants%20and%20Equipment) The company's property and equipment had a net book value of ₩10,151 million as of year-end 2023, with its principal executive offices and subsidiary offices being leased - The net book value of property and equipment was **₩10,151 million** (US$7,863 thousand) as of December 31, 2023[368](index=368&type=chunk) - The company leases its principal executive offices in Seoul, Korea, and also leases office spaces for its subsidiaries in the U.S., Taiwan, Japan, Indonesia, Thailand, Singapore, and Hong Kong[369](index=369&type=chunk)[370](index=370&type=chunk)[371](index=371&type=chunk) [ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS](index=70&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section provides a detailed analysis of the company's financial performance, liquidity, capital resources, cash flows, and research and development activities [Operating Results](index=70&type=section&id=ITEM%205.A.%20Operating%20Results) In 2023, total revenues surged by 56.5% driven by mobile games, though gross margin declined due to higher commission costs, while operating and net profit saw significant growth Financial Performance Summary (2023 vs. 2022) | Metric | 2023 (in millions of Won) | 2022 (in millions of Won) | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | ₩725,516 | ₩463,618 | 56.5% | | Gross Profit | ₩240,558 | ₩196,253 | 22.6% | | Operating Profit | ₩160,367 | ₩104,708 | 53.2% | | Profit for the year | ₩131,982 | ₩83,058 | 58.9% | | Gross Profit Margin | 33.2% | 42.3% | - | | Operating Profit Margin | 22.1% | 22.6% | - | - The **56.5% increase in total revenues** in 2023 was primarily due to a **75.5% rise in mobile game revenues**, led by the successful launch of Ragnarok Origin in Southeast Asia in April 2023[381](index=381&type=chunk)[414](index=414&type=chunk) - Cost of revenues increased by **81.4%** in 2023, mainly due to a significant rise in commissions paid for mobile platform service fees, royalties, and outsourcing fees related to Ragnarok Origin[414](index=414&type=chunk) - Selling, general and administrative expenses decreased by **14.9%** in 2023, largely due to a **54.3% reduction in advertising expenses** compared to 2022[416](index=416&type=chunk) [Liquidity and Capital Resources](index=83&type=section&id=ITEM%205.B.%20Liquidity%20and%20Capital%20Resources) The company maintained a strong liquidity position with significant cash reserves and short-term financial instruments, primarily funded by increased cash flow from operating activities Cash and Liquidity Position (as of Dec 31, 2023) | Item | Amount (in millions of Won) | | :--- | :--- | | Cash and cash equivalents | ₩184,082 | | Short-term financial instruments | ₩277,215 | Summary of Cash Flows (2023) | Cash Flow Activity | Amount (in millions of Won) | | :--- | :--- | | Net cash inflow from operating activities | ₩132,430 | | Net cash outflow from investing activities | (₩116,579) | | Net cash outflow from financing activities | (₩4,083) | - The company's material cash requirements as of December 31, 2023, include **₩6.7 billion in lease obligations** and **₩4.9 billion in purchase obligations**[454](index=454&type=chunk) [Research and Development, Patents and Licenses, Etc.](index=85&type=section&id=ITEM%205.C.%20Research%20and%20Development%2C%20Patents%20and%20Licenses%2C%20Etc.) The company continues to invest in research and development to remain competitive, with expenditures totaling ₩13.5 billion in 2023 Research and Development Expenditures | Year | Expenditure (in millions of Won) | | :--- | :--- | | 2023 | ₩13,486 | | 2022 | ₩13,797 | | 2021 | ₩16,570 | [ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES](index=86&type=section&id=ITEM%206.%20DIRECTORS%2C%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section details the composition of the board and senior management, their compensation, board practices, and employee information [Directors and Senior Management](index=86&type=section&id=ITEM%206.A.%20Directors%20and%20Senior%20Management) The company's leadership includes the CEO, Chairman, and CFO, with a Board of eleven directors reflecting significant influence from majority shareholder GungHo - The Board of Directors consists of 11 members: Hyun Chul Park (CEO), Yoshinori Kitamura (Chairman & COO), Heung Gon Kim (CFO), Kazuki Morishita, Kazuya Sakai, Koji Yoshida, and five independent directors[463](index=463&type=chunk) [Compensation](index=89&type=section&id=ITEM%206.B.%20Compensation) Total compensation for all directors and executive officers was ₩1,734 million in 2023, with a shareholder-approved cap of ₩4 billion for the 2024 fiscal year - The aggregate compensation for all directors and executive officers in 2023 was **₩1,734 million** (US$1,343 thousand)[477](index=477&type=chunk) [Board Practices](index=89&type=section&id=ITEM%206.C.%20Board%20Practices) As a foreign private issuer and a "controlled company," Gravity is exempt from certain NASDAQ governance requirements, such as having a majority-independent board - As a foreign private issuer and a "controlled company," Gravity is exempt from certain NASDAQ corporate governance rules, such as having a majority of independent directors on its board[481](index=481&type=chunk)[484](index=484&type=chunk) - The Board of Directors has three committees: an audit committee composed of three independent directors, and director nomination and compensation committees, each with one independent and two non-independent directors[490](index=490&type=chunk)[491](index=491&type=chunk)[492](index=492&type=chunk)[493](index=493&type=chunk) [Employees](index=92&type=section&id=ITEM%206.D.%20Employees) As of year-end 2023, the company and its subsidiaries employed a total of 936 people, with the parent company headcount increasing to 437 Employee Headcount by Department (Parent Company) | Department | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Senior management | 12 | 11 | 11 | | Finance | 24 | 22 | 22 | | Marketing | 101 | 96 | 87 | | Game development and support | 300 | 271 | 257 | | **Total** | **437** | **400** | **377** | - As of December 31, 2023, the company's subsidiaries employed a total of **499 people**, with Gravity NeoCyon, Inc in Korea being the largest subsidiary employer with 188 employees[496](index=496&type=chunk) [ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS](index=94&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section identifies GungHo Online Entertainment, Inc as the controlling shareholder and details business agreements with them, primarily for game licensing in Japan [Major Shareholders](index=94&type=section&id=ITEM%207.A.%20Major%20Shareholders) GungHo Online Entertainment, Inc is the company's controlling shareholder, beneficially owning 59.3% of the total outstanding common shares - GungHo Online Entertainment, Inc is the majority shareholder, beneficially owning **59.3%** of the company's common shares as of April 26, 2024[507](index=507&type=chunk) [Related Party Transactions](index=95&type=section&id=ITEM%207.B.%20Related%20Party%20Transactions) The company engages in significant related party transactions with its majority shareholder, GungHo, including multiple service and distribution agreements for its key games in Japan - The company has multiple license and distribution agreements with its majority shareholder, GungHo, for servicing its key Ragnarok titles in Japan[509](index=509&type=chunk)[510](index=510&type=chunk)[511](index=511&type=chunk)[512](index=512&type=chunk) - Several of Gravity's executive directors, including the CEO, Chairman, and others, also serve in executive or director roles at GungHo, indicating a strong overlap in management[513](index=513&type=chunk) [ITEM 8. FINANCIAL INFORMATION](index=95&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section confirms the inclusion of financial statements, states there are no material legal proceedings, and outlines the dividend policy - The company has not declared or paid any dividends since its inception and has no intention to pay dividends in the near future, prioritizing cash for capital expenditures and investments[517](index=517&type=chunk) - As of the report date, the company is not involved in any legal proceedings expected to have a material adverse effect on its business[516](index=516&type=chunk) [ITEM 9. THE OFFER AND LISTING](index=96&type=section&id=ITEM%209.%20THE%20OFFER%20AND%20LISTING) This section provides details about the trading of the company's American Depositary Shares (ADSs) on the NASDAQ Global Market under the symbol "GRVY" - The company's American Depositary Shares (ADSs) are traded on the NASDAQ Global Market under the symbol "GRVY"[520](index=520&type=chunk) - As of December 31, 2023, there were **3,304,151 ADSs outstanding**, each representing one share of common stock[522](index=522&type=chunk) [ITEM 10. ADDITIONAL INFORMATION](index=97&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section provides supplementary details on corporate governance, Korean exchange controls, and material Korean and U.S. federal income tax considerations [Memorandum and Articles of Incorporation](index=97&type=section&id=ITEM%2010.B.%20Memorandum%20and%20Articles%20of%20Incorporation) This subsection summarizes key provisions of the company's articles of incorporation, covering business purposes, director appointments, dividend policies, and shareholder rights - The company's purpose includes software development, online game services, character merchandising, and blockchain-based digital content businesses[530](index=530&type=chunk) - Directors are elected for one-year terms at shareholder meetings, and the board must consist of at least three directors[485](index=485&type=chunk)[532](index=532&type=chunk) - The company may issue new shares to persons other than existing shareholders through methods such as a general public offering (up to 50% of total shares) or to raise funds on an emergency basis, which bypasses preemptive rights[543](index=543&type=chunk) [Exchange Controls](index=103&type=section&id=ITEM%2010.D.%20Exchange%20Controls) This subsection outlines Korea's Foreign Exchange Transaction Laws, which regulate foreign investment and grant the government authority to impose restrictions in emergencies - Korea's Foreign Exchange Transaction Laws regulate investment by non-residents, and the government can suspend payments or transactions in emergency situations[571](index=571&type=chunk)[572](index=572&type=chunk) - To issue ADSs, the company must file a report with Korea's Ministry of Economy and Finance, and the depositary requires company consent to increase the number of underlying common shares beyond a pre-set limit[573](index=573&type=chunk)[574](index=574&type=chunk) [Taxation](index=105&type=section&id=ITEM%2010.E.%20Taxation) This subsection details the Korean and U.S. tax implications for non-resident holders of the company's securities, highlighting the company's status as a PFIC for U.S. tax purposes - Under Korean law, dividends paid to non-resident holders are subject to a **22% withholding tax**, which may be reduced under an applicable tax treaty[585](index=585&type=chunk) - Capital gains from the transfer of ADSs or common shares are generally subject to Korean withholding tax, but exemptions are available under most tax treaties, including the one with the U.S[589](index=589&type=chunk) - For U.S. federal income tax purposes, the company believes it was a **Passive Foreign Investment Company (PFIC)** for the 2023 taxable year, subjecting U.S. Holders to adverse tax rules[612](index=612&type=chunk)[616](index=616&type=chunk)[617](index=617&type=chunk) [ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=115&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company is exposed to market risks, primarily from foreign currency fluctuations, interest rate changes, and credit risk associated with its cash holdings and receivables - The company has significant exposure to foreign currency risk, as **88.1%** of its revenues in 2023 were denominated in currencies other than the Korean Won[403](index=403&type=chunk)[642](index=642&type=chunk) - A hypothetical **10% depreciation** in the exchange rates of relevant foreign currencies against the Won in 2023 would have decreased revenue by **₩59,721 million**[645](index=645&type=chunk) - Credit risk exists from concentrating cash and short-term financial instruments in a few financial institutions, with four institutions holding approximately **46.2%** of these assets as of December 31, 2023[649](index=649&type=chunk) [ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES](index=116&type=section&id=ITEM%2012.%20DESCRIPTION%20OF%20SECURITIES%20OTHER%20THAN%20EQUITY%20SECURITIES) This section details the fees and charges applicable to the company's American Depositary Shares (ADSs), which are paid by ADS holders to the depositary, Citibank, N.A ADS Holder Fees | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to $5.00 per 100 ADSs | | Cancellation of ADSs | Up to $5.00 per 100 ADSs | | Cash distributions | Up to $5.00 per 100 ADSs | | Stock distributions | Up to $5.00 per 100 ADSs | PART II [ITEM 15. CONTROLS AND PROCEDURES](index=118&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[660](index=660&type=chunk) - Management assessed the internal control over financial reporting and concluded that it was effective as of December 31, 2023; this assessment was audited and confirmed by the independent registered public accounting firm[664](index=664&type=chunk)[665](index=665&type=chunk) [ITEM 16. RESERVED](index=119&type=section&id=ITEM%2016.%20RESERVED) This section covers governance topics, including the identification of an audit committee financial expert, adoption of a Code of Ethics, accountant fees, and an overview of the cybersecurity risk management strategy [Audit Committee Financial Expert](index=119&type=section&id=ITEM%2016.A.%20Audit%20Committee%20Financial%20Expert) The Board of Directors has determined that Mr Yong Seon Kwon, an independent director, qualifies as an "audit committee financial expert" - The Board of Directors has identified Mr Yong Seon Kwon as the "audit committee financial expert"[668](index=668&type=chunk) [Code of Ethics](index=119&type=section&id=ITEM%2016.B.%20Code%20of%20Ethics) The company has adopted a Code of Ethics applicable to all directors, officers, and employees, which is available on its website - A Code of Ethics has been adopted for all directors, officers, and employees and is publicly available on the company's website[669](index=669&type=chunk) [Principal Accountant Fees and Services](index=119&type=section&id=ITEM%2016.C.%20Principal%20Accountant%20Fees%20and%20Services) Aggregate fees billed by the principal accountant, Samil PricewaterhouseCoopers, totaled ₩1,540 million for the 2023 fiscal year Accountant Fees (2023 vs. 2022) | Type of Service | 2023 (in millions of Won) | 2022 (in millions of Won) | | :--- | :--- | :--- | | Audit Fees | ₩1,501 | ₩1,224 | | Tax Fees | ₩39 | ₩24 | | **Total** | **₩1,540** | **₩1,248** | [Cybersecurity](index=120&type=section&id=ITEM%2016.K.%20Cybersecurity) The company has integrated cybersecurity into its overall risk management framework, overseen by the Board and managed by a Chief Information Security Officer, with no material incidents in the last three years - The company's cybersecurity risk management is integrated into its overall risk management system, with oversight from the Board of Directors and day-to-day management led by a Chief Information Security Officer (CISO)[680](index=680&type=chunk)[684](index=684&type=chunk)[685](index=685&type=chunk) - A layered governance structure is in place, including a Security Forum, a Crisis Incident Management Team, and an Information Security Operation Committee to manage cybersecurity risks and incidents[685](index=685&type=chunk)[688](index=688&type=chunk) - The company has not experienced any material cybersecurity incidents during the fiscal years 2021, 2022, and 2023[681](index=681&type=chunk) PART III [ITEM 18. FINANCIAL STATEMENTS](index=122&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section contains the audited consolidated financial statements of Gravity Co, Ltd and its subsidiaries for the fiscal years ended December 31, 2023, 2022, and 2021 Consolidated Statement of Financial Position (Assets) | Assets | Dec 31, 2023 (in millions of Won) | Dec 31, 2022 (in millions of Won) | | :--- | :--- | :--- | | Total current assets | ₩546,899 | ₩421,767 | | Total non-current assets | ₩31,282 | ₩22,327 | | **Total assets** | **₩578,181** | **₩444,094** | Consolidated Statement of Financial Position (Liabilities and Equity) | Liabilities and Equity | Dec 31, 2023 (in millions of Won) | Dec 31, 2022 (in millions of Won) | | :--- | :--- | :--- | | Total liabilities | ₩114,453 | ₩113,914 | | Total equity | ₩463,728 | ₩330,180 | | **Total liabilities and equity** | **₩578,181** | **₩444,094** | Consolidated Statement of Comprehensive Income | Item | 2023 (in millions of Won) | 2022 (in millions of Won) | 2021 (in millions of Won) | | :--- | :--- | :--- | :--- | | Total Revenues | ₩725,516 | ₩463,618 | ₩413,938 | | Gross profit | ₩240,558 | ₩196,253 | ₩189,765 | | Operating profit | ₩160,367 | ₩104,708 | ₩96,719 | | Profit for the year | ₩131,982 | ₩83,058 | ₩65,880 | | Basic earnings per share (in Won) | ₩18,999 | ₩11,968 | ₩9,490 | Consolidated Statement of Cash Flows | Item | 2023 (in millions of Won) | 2022 (in millions of Won) | 2021 (in millions of Won) | | :--- | :--- | :--- | :--- | | Net cash inflow from operating activities | ₩132,430 | ₩98,278 | ₩74,183 | | Net cash outflow in investing activities | (₩116,579) | (₩22,340) | (₩82,471) | | Net cash outflow in financing activities | (₩4,083) | (₩3,918) | (₩3,306) | | Net increase (decrease) in cash | ₩14,205 | ₩70,772 | (₩11,527) |

Seoul, South Korea, April 26, 2024 (GLOBE NEWSWIRE) -- GRAVITY Co., Ltd. (NASDAQGM:GRVY) ("Gravity" or the "Company") today announced that the Company filed its annual report on Form 20-F for the fiscal year ended December 31, 2023 with the Securities and Exchange Commission on April 26, 2024. The annual report can be accessed on the Company's investor relations Web site at https://www.gravity.co.kr/en/ir/notice The shareholders and ADS holders of Gravity may receive a hard copy of the annual report, which ...

For the Years Ended December 31, 2023 and 2022 (With Independent Auditors' Report Thereon) Contents Independent Auditors' Report 1 Consolidated Financial Statements Consolidated Statements of Financial Position 3 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Changes in Equity 6 Consolidated Statements of Cash Flows 7 Notes to the Consolidated Financial Statements 8 Page GRAVITY CO., LTD. and Subsidiaries Consolidated Financial Statements Independent Auditors' Report English Tr ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________________________________________________ Form 20-F (Mark One) ☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 or ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or ...

Financial Performance - Total revenue for 2022 was W 232,717,405 thousand, a decrease of 19.3% from W 288,258,376 thousand in 2021[16] - Operating profit for 2022 was W 62,144,800 thousand, down 20.5% from W 78,174,467 thousand in 2021[16] - Profit for the year decreased to W 54,914,724 thousand in 2022, a decline of 15.2% compared to W 64,732,833 thousand in 2021[16] - The company reported a gross profit of W 120,204,998 thousand in 2022, down 17.9% from W 146,443,113 thousand in 2021[16] - Total expenses for 2022 were W 170,572,605 thousand, down 18.8% from W 210,083,909 thousand in 2021[153] - Research and development expenses decreased to W 12,160,829 thousand in 2022 from W 18,101,978 thousand in 2021, a reduction of 32.8%[156] - Micro transaction and subscription revenue decreased to W 80,679,602 thousand in 2022 from W 92,578,768 thousand in 2021, representing a decline of 12.9%[149] - Revenue from mobile games dropped to W 74,830,047 thousand in 2022, down 15.0% from W 88,114,690 thousand in 2021[149] Cash Flow and Liquidity - Cash and cash equivalents increased to W 42,985,625 thousand in 2022 from W 26,602,122 thousand in 2021, representing a growth of 61.5%[13] - Net cash provided by operating activities was W 45,514,786 in 2022, down from W 70,320,586 in 2021, indicating a decrease of about 35%[20] - Net cash used in investing activities significantly reduced to W 26,443,349 in 2022 from W 88,153,976 in 2021, a decrease of approximately 70%[20] - The company recognized a total cash outflow of W 2,118,456 thousand for leases in 2022, compared to W 1,963,708 thousand in 2021[169] - The company’s cash generated from operations was W 12,550,795 thousand in 2021, a decrease from W 18,716,916 thousand in 2020[162] Assets and Liabilities - Total assets rose to W 292,309,340 thousand in 2022, up 13.0% from W 258,665,573 thousand in 2021[13] - Total liabilities decreased significantly to W 31,717,523 thousand in 2022, down 40.1% from W 52,988,480 thousand in 2021[15] - Total financial liabilities at amortized cost decreased to W 18,078,201 thousand in 2022 from W 32,483,876 thousand in 2021, representing a reduction of about 44.0%[115] - The company's total liabilities decreased significantly to W 31,717,523 thousand in 2022 from W 52,988,480 thousand in 2021, resulting in a debt ratio reduction from 26% to 12%[173] - The total carrying amount of property and equipment is W 3,520,385 thousand, a decrease from W 5,608,320 thousand in 2021, reflecting a depreciation expense of W 2,382,370 thousand for 2022[137] Shareholder and Equity Information - Major shareholder GungHo Online Entertainment, Inc. holds 59.31% of the company's shares as of December 31, 2021[22] - The company’s total equity increased to W 260,591,817 thousand in 2022 from W 205,677,093 thousand in 2021, representing a growth of approximately 26.7%[173] - The number of shares issued remains constant at 6,948,900, with a total common share value of W 3,474,450,000 as of December 31, 2022[146] Revenue Recognition and Accounting Policies - The company estimates game user life cycles to recognize revenue from micro-transactions, reflecting a strategic approach to revenue recognition[27] - The company recognizes revenue for license fees through the straight-line method during the contract period, ensuring consistent revenue recognition over time[101] - The company deferred revenue for remaining virtual currency possessed by active paying users at the end of the reporting period, indicating a focus on revenue recognition based on user engagement[99] - The company has no refund obligation after game users purchase virtual currency, which supports revenue stability from micro-transactions[98] Investments and Subsidiaries - Total investment in subsidiaries increased to W 26,732,334 thousand in 2022, up from W 21,679,845 thousand in 2021, representing a growth of 23.3%[130] - Gravity Game Vision Limited was established in 2022, contributing to the increase in total investments in subsidiaries[129] - The total assets of Gravity Game Vision Limited reached W 63,608,043 thousand in 2022, with a profit of W 17,090,044 thousand, indicating a successful market entry[134] - Gravity Game Hub PTE., Ltd. reported a loss of W 3,081,397 thousand in 2022, highlighting challenges in its operations[134] Financial Instruments and Risk Management - The company recognized a total net income from financial instruments of 4,922,787 thousand won in 2022, up from 3,887,952 thousand won in 2021, which is an increase of approximately 26.5%[116] - The company measures foreign exchange risk at a rate of 10% for each foreign currency, reflecting management's assessment of potential fluctuations[175] - The sensitivity analysis indicates that a 10% increase in USD exchange rate would increase profit before tax by W 3,456,381 in 2022[175] Internal Control and Compliance - The management's report on the effectiveness of Internal Control over Financial Reporting (ICFR) states that the ICFR is designed and operating effectively as of December 31, 2022[193] - The review of ICFR was conducted in accordance with standards established by the Korean Institute of Certified Public Accountants, focusing on the company's compliance with the relevant guidelines[194] - The CEO and ICFR Officer assessed the design and operation of the company's ICFR for the year ending December 31, 2022, ensuring reliable financial information[199]

[Certain Defined Terms](index=5&type=section&id=Certain%20Defined%20Terms) This section defines key terms and abbreviations used throughout the report, including company references, geographical regions, currencies, and a specific Won to US dollar exchange rate for convenience - The report defines key terms and abbreviations used throughout the document, including company references ('Gravity,' 'the Company,' 'we,' 'us,' 'our'), geographical regions (e.g., 'China,' 'Korea,' 'Taiwan'), and currencies (e.g., 'Won,' 'US$,' 'Japanese Yen')[14](index=14&type=chunk)[15](index=15&type=chunk) - It also notes that Won amounts are translated to U.S. dollars at a rate of **Won 1,188.59 to US$ 1.00** as of December 30, 2021, for convenience[15](index=15&type=chunk) [Forward-Looking Statements](index=6&type=section&id=Forward-Looking%20Statements) This section highlights that the annual report contains forward-looking statements based on current expectations, subject to various risks and uncertainties, and the company undertakes no obligation to update them - This section highlights that the annual report contains forward-looking statements, which are based on current expectations and are subject to various risks and uncertainties[17](index=17&type=chunk)[18](index=18&type=chunk) - These statements are identifiable by terms like 'anticipate,' 'believe,' 'expect,' and 'will' or 'may' occur, covering future prices and demand for products, earnings and cash flow, game development schedules, customer acquisition and retention, industry growth, and the impact of economic, political, and social conditions[17](index=17&type=chunk)[18](index=18&type=chunk) - Readers are cautioned not to place undue reliance on these statements, as actual results could differ materially due to factors such as regulatory changes, technology shifts, litigation, competition, customer preferences, global economic events (including COVID-19), and foreign exchange rate fluctuations[18](index=18&type=chunk) - The company undertakes no obligation to update or revise these statements[18](index=18&type=chunk) Part I [ITEM 1. Identity of Directors, Senior Management and Advisers](index=7&type=section&id=ITEM%201.%20Identity%20of%20Directors%2C%20Senior%20Management%20and%20Advisers) This item states that the information regarding the identity of directors, senior management, and advisers is not applicable for this report - The information for this item is not applicable[20](index=20&type=chunk) [ITEM 2. Offer Statistics and Expected Timetable](index=7&type=section&id=ITEM%202.%20Offer%20Statistics%20and%20Expected%20Timetable) This item indicates that information regarding offer statistics and expected timetable is not applicable - The information for this item is not applicable[21](index=21&type=chunk) [ITEM 3. Key Information](index=7&type=section&id=ITEM%203.%20Key%20Information) This section covers essential company information, including reserved items, capitalization, offer details, and a comprehensive overview of risk factors affecting the business and its securities [ITEM 3.A. Reserved](index=7&type=section&id=ITEM%203.A.%20Reserved) This sub-item is reserved and contains no information - This sub-item is reserved[22](index=22&type=chunk) [ITEM 3.B. Capitalization and Indebtedness](index=7&type=section&id=ITEM%203.B.%20Capitalization%20and%20Indebtedness) This sub-item states that information regarding capitalization and indebtedness is not applicable - The information for this sub-item is not applicable[22](index=22&type=chunk) [ITEM 3.C. Reasons for the Offer and Use of Proceeds](index=7&type=section&id=ITEM%203.C.%20Reasons%20for%20the%20Offer%20and%20Use%20of%20Proceeds) This sub-item indicates that information regarding reasons for the offer and use of proceeds is not applicable - The information for this sub-item is not applicable[23](index=23&type=chunk) [ITEM 3.D. Risk Factors](index=7&type=section&id=ITEM%203.D.%20Risk%20Factors) This section outlines various risks that could materially and adversely affect the company's business, financial condition, results of operations, and the price of its shares [Risk Factor Summary](index=7&type=section&id=Risk%20Factor%20Summary) This section provides a high-level summary of the principal risks detailed in the subsequent pages, covering aspects like dependence on core games, ability to develop new games, mobile game profitability, reliance on licensees, competitive industry, platform provider policies, third-party developer risks, and intellectual property protection - The company is highly dependent on 'Ragnarok Online' and its derivatives for a significant portion of revenues[27](index=27&type=chunk)[31](index=31&type=chunk) - Challenges include consistently developing commercially successful games, making mobile games profitable (which have lower margins), and relying on overseas licensees for distribution and compliance[27](index=27&type=chunk)[33](index=33&type=chunk)[38](index=38&type=chunk)[42](index=42&type=chunk) - The company operates in a highly competitive industry and is exposed to risks from mobile platform policy changes, third-party developer issues, and intellectual property infringement[27](index=27&type=chunk)[49](index=49&type=chunk)[54](index=54&type=chunk)[61](index=61&type=chunk)[80](index=80&type=chunk) [Risks Relating to our Business](index=8&type=section&id=Risks%20Relating%20to%20our%20Business) This section details risks inherent to the company's gaming business, including heavy reliance on its flagship game, challenges in new game development and profitability, dependence on overseas licensees, intense competition, and operational risks such as network security, intellectual property protection, and personnel retention - The company heavily relies on 'Ragnarok Online' and its derivatives, which generated **17.4% and 75.9% of total revenues in 2021**, respectively[31](index=31&type=chunk)[32](index=32&type=chunk) - A decline in these games could materially affect financial results[31](index=31&type=chunk)[32](index=32&type=chunk) - Mobile games constituted **77.3% of total revenues in 2021**, with 'Ragnarok X: Next Generation' (**30.5%**) and 'Ragnarok M: Eternal Love' (**27.2%**) being key contributors[34](index=34&type=chunk)[35](index=35&type=chunk)[38](index=38&type=chunk) - Profit margins from mobile games are generally lower than online games due to revenue-sharing arrangements with app stores[38](index=38&type=chunk) - Dependence on overseas licensees for distribution and compliance poses risks, as **37.6% of 2021 revenues** came from mobile game license fees and royalties, with **81.2% from Nuverse** for 'Ragnarok X: Next Generation'[42](index=42&type=chunk) - The company faces intense competition from large companies with greater resources, and the mobile game market has low barriers to entry, increasing competitive pressure[49](index=49&type=chunk)[50](index=50&type=chunk)[53](index=53&type=chunk) - Operational risks include network interruptions, security breaches (e.g., Zeny misappropriation in March 2021, data manipulation in July 2021, DDOS attack in March 2022), and intellectual property infringement by third parties, which could harm reputation and financial results[68](index=68&type=chunk)[69](index=69&type=chunk)[72](index=72&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - The company recognized impairment losses on intangible assets of **Won 281 million in 2021** and **Won 115 million in 2020**, highlighting risks from rapid technological developments and market changes[93](index=93&type=chunk) [Risks Relating to our Company Structure](index=19&type=section&id=Risks%20Relating%20to%20our%20Company%20Structure) This section addresses risks stemming from the company's ownership structure, particularly the control exerted by its majority shareholder, GungHo, and its status as a 'controlled company' under NASDAQ rules - GungHo Online Entertainment Inc. is the majority shareholder, beneficially owning **59.3% of common shares**, giving it significant control over shareholder approvals and board decisions[96](index=96&type=chunk) - This may lead to conflicts of interest, as GungHo is also a game developer and a licensee of Gravity's games in Japan[96](index=96&type=chunk) - As a 'controlled company' under NASDAQ rules, Gravity is exempt from certain corporate governance requirements, such as having a majority independent board or independent oversight of director nominations and compensation, which may reduce shareholder protections[97](index=97&type=chunk) [Risks relating to our Regulatory Environment](index=21&type=section&id=Risks%20relating%20to%20our%20Regulatory%20Environment) This section discusses the regulatory and legal risks faced by the company in its various operating markets, including unpredictable changes in laws, potential governmental restrictions on games, and adverse changes in tax rates or currency exchange controls - The company's operations are subject to evolving and unpredictable laws and regulations in countries like Thailand, Taiwan, Korea, Japan, the United States, and the Philippines, covering areas such as user privacy, content, and taxation[98](index=98&type=chunk)[99](index=99&type=chunk) - Changes could increase compliance costs or force business practice alterations[99](index=99&type=chunk) - Governmental restrictions or ratings systems on game content (e.g., age restrictions in Korea, Taiwan, China, US) could delay new game releases or reduce the user base[100](index=100&type=chunk) - Restrictions on currency exchange in Korea and other markets (e.g., Taiwan, China, Thailand) may limit the ability to utilize Won-generated revenues or receive/remit foreign currency payments effectively[101](index=101&type=chunk)[102](index=102&type=chunk) - Adverse changes in withholding tax rates in countries from which license fees and royalties are received, or in Korean tax law regarding foreign tax credits, could negatively impact net profit[103](index=103&type=chunk)[104](index=104&type=chunk) [Risks relating to our Market Environment](index=22&type=section&id=Risks%20relating%20to%20our%20Market%20Environment) This section addresses market-specific risks, including the ongoing impact of the COVID-19 pandemic, geopolitical tensions, economic conditions in key markets, and foreign exchange rate fluctuations - The COVID-19 pandemic continues to pose risks, potentially impacting consumer demand, staff availability, marketing, and game development timelines, despite vaccine rollouts[105](index=105&type=chunk)[106](index=106&type=chunk) - Geopolitical tensions, particularly between China and the United States, could adversely affect the company's businesses and partnerships, especially given its agreements with Chinese entities and **5.1% of 2021 revenue from the US**[107](index=107&type=chunk)[108](index=108&type=chunk) - Adverse economic developments in principal markets (Thailand, Taiwan, Korea, Japan, representing **22.8%, 18.7%, 17.8%, and 9.7% of 2021 revenues**, respectively) could negatively impact user numbers and revenues[109](index=109&type=chunk)[180](index=180&type=chunk) - Fluctuations in exchange rates pose a risk, as **82.2% of 2021 revenues** were foreign currency-denominated[113](index=113&type=chunk)[114](index=114&type=chunk) - Depreciation of local currencies against the U.S. dollar or appreciation of the Won against foreign currencies could lead to foreign currency losses[114](index=114&type=chunk) - Increased tensions with North Korea could adversely affect the Korean economy and the company's business and ADS price[115](index=115&type=chunk)[116](index=116&type=chunk) [RISKS RELATING TO OUR AMERICAN DEPOSITARY SHARES](index=25&type=section&id=RISKS%20RELATING%20TO%20OUR%20AMERICAN%20DEPOSITARY%20SHARES) This section details risks specific to the company's American Depositary Shares (ADSs), including potential delisting from NASDAQ, differences in shareholder rights under Korean law, and impacts of exchange rate fluctuations on dividends and share value - Delisting from NASDAQ could significantly reduce ADS liquidity and price, and harm the company's ability to raise capital[118](index=118&type=chunk)[119](index=119&type=chunk) - ADS holders may have fewer protections than shareholders of a U.S. corporation due to differences in Korean corporate law regarding minority shareholder rights and director fiduciary duties[120](index=120&type=chunk) - Fluctuations in the Won-U.S. dollar exchange rate will affect the U.S. dollar amount of dividends received and the value of ADSs upon sale[121](index=121&type=chunk)[131](index=131&type=chunk) - ADS holders may face limitations in depositing or withdrawing common shares and may not be able to exercise preemptive rights, potentially leading to dilution[122](index=122&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk)[127](index=127&type=chunk) - U.S. investors could be subject to adverse U.S. federal income tax consequences if the company is classified as a Passive Foreign Investment Company (PFIC), as it was from **2008-2016** and may be in future years[90](index=90&type=chunk)[91](index=91&type=chunk) - Substantial sales or transfers of common shares by the largest shareholder, GungHo (**59.3% ownership**), could adversely affect the market price of ADSs[135](index=135&type=chunk) [ITEM 4. Information on the Company](index=29&type=section&id=ITEM%204.%20Information%20on%20the%20Company) This section provides comprehensive information on Gravity's history, business operations, organizational structure, and property, plants, and equipment [ITEM 4.A. History and Development of the Company](index=29&type=section&id=ITEM%204.A.%20History%20and%20Development%20of%20the%20Company) Gravity Co., Ltd. was incorporated in April 2000 and listed its ADSs on NASDAQ in February 2005. The company has focused on developing and distributing mobile games based on 'Ragnarok Online' through agreements with third-party developers like Dream Square, and has expanded its organizational structure with new subsidiaries - Gravity Co., Ltd. was incorporated on **April 4, 2000**, and its ADSs were listed on NASDAQ Global Market on **February 8, 2005**[137](index=137&type=chunk) - The company entered a development agreement with Dream Square in January 2015 (amended March 2016) to develop and distribute mobile and web games based on 'Ragnarok Online' in China and other territories[137](index=137&type=chunk) - This led to the launch of six mobile games, including 'Ragnarok M: Eternal Love', 'Ragnarok Origin', and 'Ragnarok X: Next Generation'[137](index=137&type=chunk) - A Publishing and Technical Support Agreement (PTSA) with Dream Square, which clarified technical assistance and profit sharing, expired in **March 2021** and will not be renewed, prompting the company to seek new service partners[138](index=138&type=chunk) - Recent organizational developments include establishing Gravity Game Hub PTE., Ltd. in Singapore (**January 2021**) and Gravity Game Vision Limited in Hong Kong (**January 2022**), and liquidating Gravity Entertainment Corporation (**July 2020**) and its Taiwan branch (**July 2021**)[139](index=139&type=chunk) [ITEM 4.B. Business Overview](index=29&type=section&id=ITEM%204.B.%20Business%20Overview) This section provides an overview of Gravity's business, focusing on its online and mobile game development and publishing, other game-related products and services, key markets, pricing structures, development processes, marketing strategies, customer support, network infrastructure, competitive landscape, insurance, intellectual property, seasonality, and applicable laws and regulations [OVERVIEW](index=29&type=section&id=OVERVIEW) Gravity is a Korean-based online and mobile games developer and publisher. Its primary revenue sources are online and mobile games, with 'Ragnarok Online' being a historical principal product and mobile games now dominating revenue. The company aims to diversify its product offerings - Gravity is a leading online and mobile games developer and publisher based in Korea[141](index=141&type=chunk) - Mobile games accounted for **77.3% of total revenues in 2021**, up from **73.5% in 2020**[142](index=142&type=chunk)[375](index=375&type=chunk) - Key mobile games include 'Ragnarok X: Next Generation' (**30.5%**), 'Ragnarok M: Eternal Love' (**27.2%**), and 'Ragnarok Origin' (**16.0%**) of total revenues in 2021[142](index=142&type=chunk)[375](index=375&type=chunk) - 'Ragnarok Online' revenues decreased in 2021, representing **17.4% of total revenues**, down from **20.8% in 2020**[141](index=141&type=chunk) - The main geographic markets in 2021 were Thailand, Taiwan, Korea, and Japan[143](index=143&type=chunk) [Online games](index=30&type=section&id=Online%20games) Gravity's online game portfolio is centered around 'Ragnarok Online', an MMORPG launched in 2002 and available in 91 markets. While its revenue share decreased in 2021, the company continues to maintain and update it, and also offers other online titles. Revenue is generated through subscriptions and royalties/license fees, depending on the market - 'Ragnarok Online' is an action-adventure MMORPG, commercially launched in **August 2002** and offered in **91 markets** as of March 31, 2022[147](index=147&type=chunk)[148](index=148&type=chunk) - Revenues from 'Ragnarok Online' decreased to **Won 72,177 million (US$ 60,726 thousand) in 2021**, representing **17.4% of total revenues**, down from **20.8% in 2020**, mainly due to decreased revenue in Thailand[148](index=148&type=chunk) - The company operates 'Ragnarok Online' directly or through subsidiaries in most markets, generating subscription fees, while third-party licensees in Japan, Vietnam, Europe, Russia/CIS, and China generate royalties or licensing fees[148](index=148&type=chunk) Ragnarok Online Revenue by Key Market (2019-2021) | Revenue Type | Country | 2021 (Won millions) | 2021 (US$ thousands) | 2020 (Won millions) | 2019 (Won millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Online games—subscription revenue | Thailand | 26,866 | 22,603 | 36,332 | — | | | Taiwan/Hong Kong/Macau | 25,930 | 21,816 | 23,422 | 16,989 | | | Korea | 4,429 | 3,726 | 6,004 | 6,211 | | | United States/Canada | 2,089 | 1,758 | 3,390 | 1,386 | | | Brazil | 1,854 | 1,560 | 1,988 | 2,031 | | | Indonesia | 517 | 435 | 664 | 470 | | **Subtotal (Subscription)** | | **61,685** | **51,898** | **71,800** | **27,087** | | Online games—royalties and license fees | Japan | 9,009 | 7,580 | 9,141 | 9,337 | | | The Philippines | 324 | 273 | 618 | 364 | | | Indonesia | — | — | — | 63 | | | Europe | 266 | 224 | 166 | 50 | | | Thailand | — | — | 135 | 760 | | | Other | 893 | 751 | 2,721 | 351 | | **Subtotal (Royalties/License Fees)** | | **10,492** | **8,828** | **12,781** | **10,925** | | **Total** | | **72,177** | **60,726** | **84,581** | **38,012** | [Mobile games](index=33&type=section&id=Mobile%20games) Mobile games are a significant and growing part of Gravity's business, accounting for 77.3% of total revenues in 2021. The company develops and publishes mobile games, often based on the 'Ragnarok Online' IP, and has launched numerous titles in various markets. The lifecycle of mobile games is relatively short, requiring continuous new releases - Mobile games represented **77.3% of total revenues in 2021**, with a relatively short lifecycle of **six to twenty-four months**, peaking within the first three months[34](index=34&type=chunk)[157](index=157&type=chunk) - Key mobile games in 2021 were 'Ragnarok X: Next Generation' (**30.5% of total revenues**), 'Ragnarok M: Eternal Love' (**27.2%**), and 'Ragnarok Origin' (**16.0%**)[142](index=142&type=chunk)[169](index=169&type=chunk)[166](index=166&type=chunk)[171](index=171&type=chunk) - Mobile game revenues increased by **7.3% to Won 320,164 million (US$ 269,365 thousand) in 2021** from Won 298,324 million in 2020, driven by the launch of 'Ragnarok X: Next Generation' in Southeast Asia[35](index=35&type=chunk)[169](index=169&type=chunk) Mobile Games Revenue by Type and Region (2019-2021) | Revenue Type | Country | 2021 (Won millions) | 2021 (US$ thousands) | 2020 (Won millions) | 2019 (Won millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Mobile games—micro transaction revenue | Korea | 49,798 | 41,897 | 84,428 | 20,981 | | | Taiwan | 23,906 | 20,113 | 42,593 | 31,912 | | | Malaysia | 19,359 | 16,287 | 22,880 | 13,416 | | | United States | 17,241 | 14,505 | 17,040 | 53,242 | | | Thailand | 14,235 | 11,976 | 22,613 | 61,214 | | | The Philippines | 13,337 | 11,221 | 23,313 | 30,627 | | | Indonesia | 3,629 | 3,053 | 10,241 | 21,659 | | | Other | 23,141 | 19,470 | 28,852 | 46,204 | | **Subtotal (Micro-transaction)** | | **164,646** | **138,522** | **251,960** | **279,255** | | Mobile games—royalties and license fees | Thailand | 53,357 | 44,891 | — | — | | | Taiwan | 26,928 | 22,655 | 31,848 | — | | | Japan | 26,559 | 22,345 | 11,730 | 18,061 | | | Malaysia | 10,882 | 9,155 | — | — | | | The Philippines | 6,693 | 5,631 | — | — | | | Indonesia | 5,198 | 4,373 | — | 161 | | | Other | 25,901 | 21,792 | 2,786 | 4,426 | | **Subtotal (Royalties/License Fees)** | | **155,518** | **130,842** | **46,364** | **22,648** | | **Total** | | **320,164** | **269,364** | **298,324** | **301,903** | [Other games and game‑related products and services](index=36&type=section&id=Other%20games%20and%20game%E2%80%91related%20products%20and%20services) Beyond online and mobile games, Gravity also offers console and IPTV games, and engages in game character merchandising. These activities represent a smaller portion of total revenues - The company provides games for consoles (Nintendo, Xbox, PlayStation) and IPTV, with console games including 'Ragnarok DS' and 'GRANDIA HD Collection'[172](index=172&type=chunk)[173](index=173&type=chunk)[174](index=174&type=chunk) - Revenues from console and IPTV games, as well as game character merchandising, each represented **less than 1% of total revenues** in both 2021 and 2020[175](index=175&type=chunk)[177](index=177&type=chunk) - Gravity NeoCyon, Inc. provides system development and maintenance services to third parties, contributing **4.2% of total revenues (Won 17,196 million / US$ 14,468 thousand) in 2021**[178](index=178&type=chunk) [OUR MARKETS](index=37&type=section&id=OUR%20MARKETS) Gravity's primary geographic markets for revenue in 2021 were Thailand, Taiwan, Korea, and Japan. The company manages online game distribution directly or through subsidiaries in many regions, while relying on licensees in others. Mobile game distribution is also managed directly in key markets Revenues by Geographic Area (2019-2021) | Country | 2021 Revenue (Won millions) | 2021 Revenue (US$ thousands) | 2021 % of Total | 2020 Revenue (Won millions) | 2019 Revenue (Won millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Thailand | 94,475 | 79,485 | 22.8 % | 59,086 | 62,043 | | Taiwan | 77,462 | 65,171 | 18.7 % | 100,049 | 52,118 | | Korea | 73,751 | 62,049 | 17.8 % | 109,895 | 45,273 | | Japan | 40,259 | 33,871 | 9.7 % | 22,500 | 28,469 | | Malaysia | 30,422 | 25,595 | 7.3 % | 23,121 | 13,511 | | United States/Canada | 20,894 | 17,579 | 5.1 % | 20,659 | 55,062 | | The Philippines | 20,173 | 16,972 | 4.9 % | 23,690 | 30,951 | | Indonesia | 10,723 | 9,022 | 2.6 % | 12,729 | 22,355 | | Others | 45,779 | 38,516 | 11.1 % | 34,224 | 51,185 | | **Total** | **413,938** | **348,260** | **100.0 %** | **405,953** | **360,967** | - Gravity or its subsidiaries directly manage online game operations in Korea, Thailand, Taiwan, Hong Kong and Macau, the United States, Canada, Brazil, Indonesia, the Middle East, the Philippines, Singapore, and Malaysia[181](index=181&type=chunk)[182](index=182&type=chunk)[183](index=183&type=chunk) - Licensees handle distribution in Japan, China, Russia/CIS, and **37 European countries**[183](index=183&type=chunk) - For mobile games, Gravity directly manages distribution of 'Ragnarok M: Eternal Love' (except Japan and China) and 'Ragnarok Origin' in Korea, the United States, and Canada[185](index=185&type=chunk) [PRICING STRUCTURE AND PAYMENT SYSTEM](index=39&type=section&id=PRICING%20STRUCTURE%20AND%20PAYMENT%20SYSTEM) Gravity employs a hybrid pricing model for its online games, combining subscription fees (primarily for internet cafés) with micro-transactions for in-game items. Mobile games predominantly use a micro-transaction model, including 'Gatcha' systems. Pricing strategies are localized based on market conditions and user behavior, with various payment options available across different regions - Online games use a combination of subscription-based fees (for Internet cafés in Korea and Japan) and micro-transactions (sale of virtual in-game items) in all markets[186](index=186&type=chunk)[194](index=194&type=chunk)[198](index=198&type=chunk) - Mobile games primarily use a micro-transaction model, including a 'Gatcha' system (random box model) for in-game items, with prices ranging from **US$0.99 to US$99.99** in Southeast Asia, North/South America, Oceania, and Europe[212](index=212&type=chunk)[218](index=218&type=chunk) - Payment options vary by region, including debit cards, e-wallets, internet banking (Thailand), mobile/fixed telephone payments, prepaid cards, gift certificates, credit cards, and bank transfers (Korea, Japan, Taiwan, US/Canada)[190](index=190&type=chunk)[193](index=193&type=chunk)[197](index=197&type=chunk)[201](index=201&type=chunk)[205](index=205&type=chunk) - Commissions for payment processing range from **1.4% to 21%** depending on the region and payment method[190](index=190&type=chunk)[193](index=193&type=chunk)[205](index=205&type=chunk) [GAME DEVELOPMENT AND PUBLISHING](index=43&type=section&id=GAME%20DEVELOPMENT%20AND%20PUBLISHING) Gravity's strategy involves both in-house game development and publishing games from third-party developers, with a focus on high-quality, technologically advanced, and innovative titles. The company also leverages intellectual property licensing to diversify its game portfolio - The company's game development department is divided into online and mobile game teams, employing **208 game developers** as of December 31, 2021[226](index=226&type=chunk) - In-house development focuses on enhancing existing games and creating new ones with the latest technologies, including cross-platform titles like 'Ragnarok V: Returns' and 'Ragnarok Begins'[226](index=226&type=chunk) - Gravity also outsources game development (e.g., 'The Labyrinth of Ragnarok' to Funigloo Co., Ltd., 'RAGNAROK: Poring Merge' to IOI Games Inc.) and publishes games licensed from third parties[227](index=227&type=chunk)[229](index=229&type=chunk) - Intellectual property licensing is a key strategy, both licensing out (e.g., 'Ragnarok Online' to Dream Square for mobile/web games) and licensing in (e.g., 'Pororo Games' from ICONIX, NBA licensed game from NBA/NBPA)[230](index=230&type=chunk)[231](index=231&type=chunk)[233](index=233&type=chunk) [MARKETING](index=45&type=section&id=MARKETING) Gravity utilizes a diverse range of marketing and promotional activities, including online and offline events, advertising on web portals and game magazines, and promotional alliances. Due to COVID-19, most activities in 2021 were online, but large-scale offline events like G-Star 2021 were also held. Licensees are primarily responsible for marketing in overseas markets - Marketing efforts include in-game events (**495 for Ragnarok Online in 2021**), online advertising, trade shows, and promotional alliances[235](index=235&type=chunk)[237](index=237&type=chunk)[238](index=238&type=chunk) - Advertising and promotions expenses increased by **19.5% to Won 35,948 million (US$ 30,244 thousand) in 2021** from Won 30,084 million in 2020, driven by new game launches and event participation[237](index=237&type=chunk)[396](index=396&type=chunk) - In 2021, the company participated in G-Star 2021, attracting approximately **8,700 visitors** to its booth, and held an art exhibition for Ragnarok IP's 20th anniversary[240](index=240&type=chunk) - Overseas marketing is primarily conducted by licensees, who are responsible for associated costs and are selected based on their marketing capabilities[241](index=241&type=chunk) [GAME SUPPORT AND CUSTOMER SERVICE](index=46&type=section&id=GAME%20SUPPORT%20AND%20CUSTOMER%20SERVICE) Gravity is committed to providing comprehensive customer service and game support, both directly and through its licensees. This includes technical support, server maintenance, and handling customer inquiries and feedback to improve game experience - As of December 31, 2021, the company had **44 game masters** for testing, updating, and server maintenance, **21 domestic customer service staff**, and **23 overseas customer support staff**[243](index=243&type=chunk) - Customer service channels include website bulletin boards, call centers, email, facsimile, and walk-in centers in Korea[244](index=244&type=chunk) - Overseas licensees manage local customer service with assistance from Gravity's staff[244](index=244&type=chunk) - Customer feedback is collected and summarized in daily and weekly reports for management to address issues and improve games[245](index=245&type=chunk) [NETWORK AND TECHNOLOGY INFRASTRUCTURE](index=47&type=section&id=NETWORK%20AND%20TECHNOLOGY%20INFRASTRUCTURE) Gravity's network infrastructure is designed for global game management, scalability, and performance. It utilizes multiple servers and virtualization technology, with hardware hosted in third-party data centers. The company provides technical assistance to overseas subsidiaries and licensees for their local network setups - The company's game server network and information management system in Korea are designed for centralized global game management, accommodating a growing user base and demand for faster performance[246](index=246&type=chunk) - As of December 31, 2021, the Korean server network comprised **165 servers (65 physical, 100 virtualized)**[70](index=70&type=chunk)[247](index=247&type=chunk) - Servers are hosted at third-party data centers in the U.S., Indonesia, Korea, Taiwan, and Thailand[247](index=247&type=chunk) - Overseas subsidiaries and licensees own or lease their servers, with Gravity providing initial assembly, installation, and optimization support, including dispatching network engineers and database technicians[248](index=248&type=chunk) [COMPETITION](index=47&type=section&id=COMPETITION) Gravity operates in a highly competitive gaming industry, facing rivals in online, mobile, and console game sectors. Competition is based on game quality, service stability, customer support, and payment systems. The mobile game market, in particular, has low barriers to entry, intensifying competition - The company competes with other online and mobile game developers/distributors, as well as providers of console and arcade games, based on game experience quality, service stability, customer service, and secure payment systems[250](index=250&type=chunk) - Major online game competitors include NCSoft, Krafton, Nexon, Smilegate, Epic Games, Riot Games, Activision Blizzard, Tencent, and Mojang Studios[252](index=252&type=chunk) - The mobile game market has low barriers to entry due to less development time/personnel, easier tools, and open marketplaces (Google Play Store, Apple's App Store), leading to increasing competition[255](index=255&type=chunk) - Mobile game competitors include NCSoft, Nexon, Netmarble, Kakao Games, Tencent Holdings, NetEase, Playrix, Activision Blizzard, and BANDAI NAMCO Entertainment[256](index=256&type=chunk) [INSURANCE](index=49&type=section&id=INSURANCE) Gravity maintains limited insurance coverage, including medical and accident insurance for employees, and fire and general commercial insurance for facilities. However, it lacks specific business liability or disruption insurance for its Korean operations - The company carries medical and accident insurance for employees and fire/general commercial insurance for facilities, as well as directors' and officers' liability insurance[262](index=262&type=chunk) - Gravity does not maintain separate business liability or disruption insurance coverage for its operations in Korea, which could lead to substantial costs and resource diversion in case of natural disasters or other disruptive events[262](index=262&type=chunk) [INTELLECTUAL PROPERTY](index=49&type=section&id=INTELLECTUAL%20PROPERTY) Intellectual property is crucial to Gravity's business, protected through copyrights, trademarks, trade secrets, and confidentiality agreements. The company holds licenses for key IPs like 'Ragnarok' and has numerous registered software copyrights, domain names, and trademarks globally - Intellectual property rights (copyrights, service marks, trademarks, trade secrets) are critical and protected through various agreements[80](index=80&type=chunk)[263](index=263&type=chunk) - Gravity holds an exclusive license from Mr. Myoung-Jin Lee for the 'Ragnarok' cartoon storyline and characters for games, animation, and merchandising[154](index=154&type=chunk)[264](index=264&type=chunk) - As of December 31, 2021, the company owned **24 registered software copyrights** for **17 games**, **156 registered domain names**, **896 registered trademarks** in **55 countries**, **13 registered game characters**, and **six online game business model patents**[264](index=264&type=chunk) [SEASONALITY](index=49&type=section&id=SEASONALITY) The company's online and mobile game usage typically experiences slight increases around holiday seasons, particularly during the Lunar New Year and school winter and summer breaks - Game usage generally increases around Lunar New Year and during winter and summer school holidays[265](index=265&type=chunk) [LAWS AND REGULATIONS](index=49&type=section&id=LAWS%20AND%20REGULATIONS) Gravity's business operations are subject to a complex and evolving landscape of laws and regulations across its key markets, including Korea, Taiwan, Thailand, the Philippines, Japan, and the United States. These regulations cover areas such as personal information protection, copyright, consumer protection, game ratings, and telecommunications, with varying requirements and enforcement mechanisms in each jurisdiction [Korea](index=49&type=section&id=Korea) In Korea, Gravity is subject to stringent regulations including the Personal Information Protection Act (PIPA), the Information Protection Act, the Act on Consumer Protection for Electronic Commerce, the Copyright Act, the Game Act, and the Juvenile Protection Act. These laws govern data privacy, content ratings, prevention of excessive game use, and protection of minors - The Personal Information Protection Act (PIPA) requires consent for personal information collection/use, mandates destruction of unnecessary data, prohibits certain identifiers, and imposes penalties for leaks[267](index=267&type=chunk)[268](index=268&type=chunk)[269](index=269&type=chunk)[270](index=270&type=chunk)[271](index=271&type=chunk)[272](index=272&type=chunk)[274](index=274&type=chunk) - Amendments in 2020 integrated Special Provisions from the Information Protection Act[274](index=274&type=chunk) - The Game Act classifies online games into age ratings, requires prior ratings for distribution, and includes measures to prevent excessive game use and addiction, such as real-name verification, parental consent for minors, and access hour restrictions[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk)[290](index=290&type=chunk) - The Juvenile Protection Act designates 'Web sites for trading items' as harmful to minors, prohibiting access for those under 19[293](index=293&type=chunk)[294](index=294&type=chunk) - While Gravity sells in-game items, it does not broker trades among users[294](index=294&type=chunk) - The Telecommunications Business Act classifies Gravity as a value-added telecommunications service provider, requiring reports to the MSIP and compliance with its rules, with potential penalties for non-compliance[299](index=299&type=chunk) [Taiwan](index=54&type=section&id=Taiwan) In Taiwan, Gravity's operations are influenced by the Personal Data Protection Act (PDPA), Copyright Act, Regulations on Welfare and Rights of Children and Youths (game rating system), and Consumer Protection Act (CPA). These laws address data privacy, intellectual property, age-appropriate content, and consumer rights in online transactions - The Personal Data Protection Act (PDPA) requires informing data subjects about data collection, use, and rights, and generally requires prior consent[302](index=302&type=chunk)[303](index=303&type=chunk) - Restrictions on overseas data transmission are possible[303](index=303&type=chunk) - Online and mobile games are protected under the Copyright Act as 'computer programs' and 'audiovisual works'[305](index=305&type=chunk)[306](index=306&type=chunk) - Unauthorized reproduction or distribution constitutes infringement[306](index=306&type=chunk) - The Protection of Children and Youths Welfare and Rights Act mandates a five-category game rating system (e.g., 'Restricted', 'Parental Guidance') for all games, with compliance required for selling, operating, or displaying games[308](index=308&type=chunk)[309](index=309&type=chunk) - The Consumer Protection Act (CPA) governs distant sales, allowing consumers to cancel transactions within **seven days** without cause[310](index=310&type=chunk) - Standard contract terms for online games are subject to specific regulations, ensuring consumer rights[311](index=311&type=chunk) [Thailand](index=56&type=section&id=Thailand) In Thailand, Gravity's business is subject to the Copyright Act, Foreign Business Operations Act, and the Personal Data Protection Act (PDPA). The PDPA, influenced by GDPR, is set to become fully effective by June 2022 and will regulate data processing for Thai residents - The Copyright Act B.E. 2537 (1994) protects online and mobile games as 'literary work' or 'audiovisual works', with protection extending **fifty years** after the copyright holder's death or publication[315](index=315&type=chunk) - The Foreign Business Operations Act B.E. 2542 (1999) restricts foreign participation in certain industries, potentially requiring a 'Foreign Business License' for Gravity's operations[317](index=317&type=chunk) - The Personal Data Protection Act B.E. 2562 (2019) (PDPA), influenced by GDPR, was postponed to **June 1, 2022**, due to COVID-19[318](index=318&type=chunk)[319](index=319&type=chunk)[320](index=320&type=chunk)[322](index=322&type=chunk) - It regulates data controllers/processors in Thailand and those outside Thailand if activities involve data of Thai residents[322](index=322&type=chunk) [The Philippines](index=57&type=section&id=The%20Philippines) In the Philippines, Gravity's operations are governed by the Data Privacy Act of 2012, Intellectual Property Code (for copyright), Child and Youth Welfare Code, Consumer Act, Electronic Commerce Act, and Cybercrime Prevention Act. These laws cover data privacy, intellectual property, child protection, consumer rights, and cybersecurity - The Data Privacy Act of 2012 establishes a framework for protecting personal and sensitive information, requiring compliance from 'personal information controllers'[323](index=323&type=chunk) - Online and mobile games are protected as 'computer programs' under the Intellectual Property Code, granting economic and moral rights to creators for **fifty years** after their death[324](index=324&type=chunk) - The Child and Youth Welfare Code protects children from exploitation and harmful influences, potentially impacting games deemed detrimental to child development[325](index=325&type=chunk) - The Consumer Act protects consumer interests, requiring compliance with sales, advertising, and labeling practices for online/mobile games[326](index=326&type=chunk) - The Electronic Commerce Act validates electronic transactions, and the Cybercrime Prevention Act punishes illegal access or interference with computer systems[327](index=327&type=chunk)[329](index=329&type=chunk) [Japan](index=58&type=section&id=Japan) Japan lacks specific national regulations for online or mobile games, but businesses are subject to personal information protection laws, local ordinances for minor protection (including game ratings by CERO), and regulations on mobile game payments (e.g., 'complete gatcha' prohibition) and prepaid payment instruments under the Payment Service Act - Businesses must establish procedures to protect personal information acquired during operations[331](index=331&type=chunk) - Local governments have ordinances for minor protection, and the Computer Entertainment Rating Organization (CERO) provides voluntary age ratings for games, which must be prominently displayed[332](index=332&type=chunk) - The Consumer Affairs Agency prohibits 'complete gatcha' mechanisms in mobile games due to concerns about improper premiums, while regular gatcha are permitted[333](index=333&type=chunk) - In-game items purchasable with real money and functioning as currency are regulated as 'prepaid payment instruments' under the Payment Services Act, requiring notification to the Legal Affairs Bureau if unused balances exceed **JPY 10 million**[334](index=334&type=chunk) [The United States](index=59&type=section&id=The%20United%20States) In the United States, Gravity is subject to evolving data privacy and cybersecurity laws, including state-level regulations like the CCPA and CPRA in California, and the VCDPA in Virginia, which impose consumer rights and disclosure obligations. The Children's Online Privacy Protection Act (COPPA) specifically governs the collection of information from children under 13. The company also adheres to the ESRB rating system for games and is subject to laws regarding user speech and conduct - State laws require businesses to implement security measures for personal information and provide notification in case of security breaches, with varying definitions of 'personal information' and notification requirements[335](index=335&type=chunk) - Online privacy policies are required for websites collecting information from children or residents of certain states, and companies must comply with their stated policies to avoid deceptive practice claims by the FTC[336](index=336&type=chunk) - New and evolving data privacy laws like the California Consumer Privacy Act (CCPA) and California Privacy Rights Act (CPRA), and Virginia Consumer Data Protection Act (VCDPA) grant consumers rights over their personal information and impose strict obligations on businesses, especially regarding children's data and targeted advertising[337](index=337&type=chunk) - The Entertainment Software Rating Board (ESRB) provides a standardized rating system for video games, which the company complies with[338](index=338&type=chunk)[339](index=339&type=chunk)[341](index=341&type=chunk) - Improper ratings can lead to fines or product recalls[341](index=341&type=chunk) - The Children's Online Privacy Protection Act (COPPA) requires verifiable parental consent for collecting personal information from children under **13** and mandates specific privacy policy disclosures and security measures[342](index=342&type=chunk)[343](index=343&type=chunk) [ITEM 4.C. Organizational Structure](index=62&type=section&id=ITEM%204.C.%20Organizational%20Structure) This section presents the organizational structure of Gravity Co., Ltd., including its subsidiaries, and notes the recent incorporation of Gravity Game Vision Limited in Hong Kong - The organizational structure includes Gravity Co., Ltd. as the parent company and several subsidiaries[345](index=345&type=chunk)[346](index=346&type=chunk) - Gravity Game Vision Limited, a **100%-owned subsidiary**, was incorporated in Hong Kong on **January 5, 2022**[346](index=346&type=chunk) [ITEM 4.D. Property, Plants and Equipment](index=62&type=section&id=ITEM%204.D.%20Property%2C%20Plants%20and%20Equipment) Gravity's property and equipment primarily consist of network servers, PCs, and right-of-use assets, with a net book value of Won 11,338 million (US$ 9,539 thousand) as of December 31, 2021. The company leases office spaces for its headquarters in Korea and its subsidiaries in the United States, Taiwan, Japan, Indonesia, Thailand, and Singapore - As of December 31, 2021, the net book value of property and equipment was **Won 11,338 million (US$ 9,539 thousand)**, mainly comprising network servers, PCs, and right-of-use assets[347](index=347&type=chunk) - The company leases its principal executive and administrative offices in Seoul, Korea (**99,537 sq ft, annual lease Won 844 million**) and offices for its subsidiaries in the US, Taiwan, Japan, Indonesia, Thailand, and Singapore[348](index=348&type=chunk)[349](index=349&type=chunk)[350](index=350&type=chunk)[351](index=351&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk)[355](index=355&type=chunk) [ITEM 4.E. Unresolved Staff Comments](index=63&type=section&id=ITEM%204.E.%20Unresolved%20Staff%20Comments) This sub-item indicates that there are no unresolved staff comments - The information for this sub-item is not applicable[356](index=356&type=chunk) [ITEM 5. Operating and Financial Review and Prospects](index=63&type=section&id=ITEM%205.%20Operating%20and%20Financial%20Review%20and%20Prospects) This section provides a detailed discussion and analysis of Gravity's financial condition and results of operations, prepared in accordance with IFRS [ITEM 5.A. Operating Results](index=63&type=section&id=ITEM%205.A.%20Operating%20Results) Gravity's operating results for 2021 showed a 2.0% increase in total revenues, driven by mobile games, particularly 'Ragnarok X: Next Generation' and 'Ragnarok Origin'. Gross profit margin improved to 45.8%, and operating profit margin increased to 23.4%. The section details revenue recognition policies, cost of revenues, operating expenses, and segment performance [OVERVIEW](index=63&type=section&id=OVERVIEW) Gravity is a leading online and mobile game developer and distributor, with revenues primarily driven by 'Ragnarok Online' and its mobile game derivatives. In 2021, total revenues increased by 2.0%, net profit attributable to owners increased by 5.2%, and both gross and operating profit margins improved - Revenues are primarily driven by 'Ragnarok Online' and its mobile game derivatives: 'Ragnarok X: Next Generation' (**30.5%**), 'Ragnarok M: Eternal Love' (**27.2%**), and 'Ragnarok Origin' (**16.0%**) of total revenues in 2021[358](index=358&type=chunk) Key Financial Highlights (2020-2021) | Metric | 2021 (Won millions) | 2021 (US$ thousands) | 2020 (Won millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | 413,938 | 348,260 | 405,953 | 2.0% | | Net Profit Attributable to Owners | 65,947 | 55,483 | 62,703 | 5.2% | | Gross Profit Margin | 45.8% | 45.8% | 41.1% | +4.7 pp | | Operating Profit | 96,719 | 81,373 | 88,368 | 9.5% | | Operating Profit Margin | 23.4% | 23.4% | 21.8% | +1.6 pp | - The revenue increase in 2021 was mainly due to mobile games 'Ragnarok X: Next Generation' (launched in Southeast Asia) and 'Ragnarok Origin' (launched in Japan)[360](index=360&type=chunk) - Cost of revenues decreased in 2021 due to lower commissions for 'Ragnarok M: Eternal Love', while operating expenses increased due to higher advertising, salaries, and R&D[361](index=361&type=chunk) [Revenues](index=64&type=section&id=Revenues) Gravity's revenue streams are categorized into online games, mobile games, and other revenue, with mobile games being the largest contributor. Revenue recognition for micro-transactions depends on the nature of virtual items (consumable, periodic, permanent) and estimated user life cycles. Royalties and license fees are recognized over the license period - Revenue is primarily derived from online games (subscription, micro-transactions, royalties, license fees), mobile games (royalties, license fees, micro-transactions), and other sources (console games, character merchandise, animation, other services)[364](index=364&type=chunk) - For micro-transactions, revenue from consumable items is recognized upon consumption, periodic items ratably over their effective period, and permanent items ratably over the estimated user life cycle[366](index=366&type=chunk)[371](index=371&type=chunk) - Refundable virtual currency is deferred[371](index=371&type=chunk) - Royalties and license fees for intellectual property access are recognized over the license period, with running royalties recognized on an accrual basis[368](index=368&type=chunk)[369](index=369&type=chunk)[372](index=372&type=chunk)[373](index=373&type=chunk) Revenue Breakdown by Type (2019-2021) | Revenue Type | 2021 (Won millions) | 2021 % of Total | 2021 (US$ thousands) | 2020 (Won millions) | 2020 % of Total | 2019 (Won millions) | 2019 % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Online games - Subscription and micro-transaction | 64,382 | 15.6 % | 54,167 | 76,110 | 18.7 % | 30,751 | 8.5 % | | Online games - Royalties and license fees | 10,988 | 2.6 % | 9,245 | 13,435 | 3.3 % | 11,571 | 3.2 % | | **Online games Subtotal** | **75,370** | **18.2 %** | **63,412** | **89,545** | **22.0 %** | **42,322** | **11.7 %** | | Mobile games - Micro-transaction revenue | 164,646 | 39.8 % | 138,522 | 251,960 | 62.1 % | 279,255 | 77.4 % | | Mobile games - Royalties and license fees | 155,518 | 37.6 % | 130,842 | 46,364 | 11.4 % | 22,648 | 6.3 % | | **Mobile games Subtotal** | **320,164** | **77.4 %** | **269,364** | **298,324** | **73.5 %** | **301,903** | **83.7 %** | | Other revenue | 18,404 | 4.4 % | 15,484 | 18,084 | 4.5 % | 16,742 | 4.6 % | | **Total** | **413,938** | **100 %** | **348,260** | **405,953** | **100.0 %** | **360,967** | **100 %** | [Cost of revenues](index=66&type=section&id=Cost%20of%20revenues) Cost of revenues primarily includes operational expenses, commissions, royalty payments, server costs, mobile platform fees, and outsourcing fees related to game development and services. Royalty payments to Mr. Myoung-Jin Lee for the 'Ragnarok' IP are also a significant component - Cost of revenues consists of operational expenses, commissions, royalty payments, server depreciation/maintenance, mobile platform fees, channeling service fees, and outsourcing fees for game updates[377](index=377&type=chunk) - Royalty payments to Mr. Myoung-Jin Lee for the 'Ragnarok' IP amounted to **Won 1,752 million (US$ 1,474 thousand) in 2021**, down from Won 1,851 million in 2020[377](index=377&type=chunk) [Selling, general and administrative expenses](index=66&type=section&id=Selling%2C%20general%20and%20administrative%20expenses) Selling, general and administrative expenses encompass sales commissions, payment settlement provider commissions, administrative and personnel expenses, and marketing and promotional costs - Expenses include sales commissions to promotional agents, commissions to payment settlement providers, administrative and executive staff personnel expenses, and marketing and promotional expenses[378](index=378&type=chunk) [Research and development expenses](index=67&type=section&id=Research%20and%20development%20expenses) Research and development expenses primarily consist of payroll and overhead, expensed as incurred. Capitalization of development costs only occurs after a game's technological feasibility is established, typically at the open beta testing stage - R&D expenses are mainly payroll and overhead, expensed as incurred[380](index=380&type=chunk) - Capitalization of game development costs begins only after technological feasibility is established, generally at open beta testing[380](index=380&type=chunk) [Foreign currency effects](index=67&type=section&id=Foreign%20currency%20effects) Gravity is exposed to foreign currency risk as a significant portion of its revenues are denominated in foreign currencies. Depreciation of local currencies against the U.S. dollar or appreciation of the Won against foreign currencies can lead to exchange losses and impact net profit - In 2021, **82.2% of revenues** were denominated in foreign currencies, primarily Thai Baht, NT Dollar, Japanese Yen, U.S. Dollar, and Philippines Peso[381](index=381&type=chunk) - Depreciation of local currencies against the U.S. dollar (for remittance) or appreciation of the Won against foreign currencies can result in foreign currency losses and negatively impact net profit[382](index=382&type=chunk)[383](index=383&type=chunk) - The company had no foreign currency forward contracts outstanding as of December 31, 2021, but may use hedging transactions in the future[384](index=384&type=chunk) [Income tax expenses](index=67&type=section&id=Income%20tax%20expenses) Income tax expenses are influenced by changes in withholding tax rates in countries generating license fees and royalties, and the ability to realize deferred tax assets. These factors can adversely affect net profit - Income tax expenses are affected by withholding tax rates in countries where license fees and royalties are derived, and the company's ability to realize deferred tax assets[384](index=384&type=chunk) [Segment Reporting](index=67&type=section&id=Segment%20Reporting) Gravity manages its business through several operating segments: mobile, online, and others. Performance is assessed based on operating profit or loss, which is reviewed by the Chief Operating Decision Maker (CEO) - Operating segments are mobile, online, and others, consistent with internal structure and CEO review[386](index=386&type=chunk) - Segment performance is assessed based on operating profit or loss, which does not differ from the consolidated statement of comprehensive income, except for inter-segment transactions[387](index=387&type=chunk) Segment Performance (2019-2021) | Segment | 2021 Revenue (Won millions) | 2021 Operating Profit (Won millions) | 2020 Revenue (Won millions) | 2020 Operating Profit (Won millions) | 2019 Revenue (Won millions) | 2019 Operating Profit (Won millions) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Online | 90,123 | 31,266 | 107,949 | 45,115 | 48,182 | 7,754 | | Mobile | 346,928 | 65,179 | 336,326 | 42,493 | 346,878 | 38,655 | | Others | 23,417 | 760 | 22,333 | 510 | 19,352 | 562 | | **Subtotal** | **460,468** | **97,205** | **466,608** | **88,118** | **414,412** | **46,971** | | Inter-segment eliminations | (46,530) | (486) | (60,655) | 250 | (53,445) | 1,692 | | **Total** | **413,938** | **96,719** | **405,953** | **88,368** | **360,967** | **48,663** | [New standards and interpretations not yet adopted by us](index=68&type=section&id=New%20standards%20and%20interpretations%20not%20yet%20adopted%20by%20us) This section notes that certain new accounting standards and interpretations published but not yet mandatory for the annual reporting period commencing January 1, 2021, have not been early adopted by the company - The company has not early adopted new or amended IFRS standards effective after **January 1, 2021**, but these are not expected to have a significant impact on consolidated financial statements[390](index=390&type=chunk)[827](index=827&type=chunk) [RESULTS OF OPERATIONS: 2021 COMPARED TO 2020](index=69&type=section&id=RESULTS%20OF%20OPERATIONS%3A%202021%20COMPARED%20TO%202020) In 2021, Gravity's total revenues increased by 2.0% year-over-year, primarily driven by a 7.3% increase in mobile game revenues, particularly from 'Ragnarok X: Next Generation' and 'Ragnarok Origin'. Online game revenues decreased by 15.8%. Gross profit rose by 13.7%, and operating profit increased by 9.5%, leading to improved margins. Selling, general, and administrative expenses, along with R&D, also saw increases Consolidated Statements of Comprehensive Income (2020-2021) | Metric | 2021 (Won millions) | 2021 (US$ thousands) | 2020 (Won millions) | % Changes | | :--- | :--- | :--- | :--- | :--- | | Revenues: Online games | 75,370 | 63,411 | 89,545 | (15.8)% | | Revenues: Mobile games | 320,164 | 269,365 | 298,324 | 7.3% | | Revenues: Other revenue | 18,404 | 15,484 | 18,084 | 1.8% | | **Total revenues** | **413,938** | **348,260** | **405,953** | **2.0%** | | Cost of revenues | 224,173 | 188,604 | 239,045 | (6.2)% | | **Gross profit** | **189,765** | **159,656** | **166,908** | **13.7%** | | Selling, general and administrative expenses | (75,631) | (63,631) | (62,400) | 21.2% | | Research and development | (16,570) | (13,941) | (15,034) | 10.2% | | **Operating profit** | **96,719** | **81,373** | **88,368** | **9.5%** | | Profit for the year | 65,880 | 55,427 | 62,556 | 5.3% | | Profit attributable to: Owners of the Parent Company | 65,947 | 55,483 | 62,703 | 5.2% | - Mobile game revenues increased by **7.3%** due to new launches of 'Ragnarok X: Next Generation' in Southeast Asia and 'Ragnarok Origin' in Japan, partially offset by decreased revenues from 'Ragnarok M: Eternal Love' and 'Ragnarok Origin' in Korea[395](index=395&type=chunk) - Cost of revenues decreased by **6.2%** mainly due to lower commissions for 'Ragnarok M: Eternal Love', despite increased commissions for 'Ragnarok X: Next Generation'[393](index=393&type=chunk) - Selling, general and administrative expenses rose by **21.2%** due to a **31.7% increase in salaries** (more employees) and a **19.5% increase in advertising expenses** for new game launches[395](index=395&type=chunk)[396](index=396&type=chunk) - Research and development expenses increased by **10.2%** due to higher development costs for mobile games[397](index=397&type=chunk) - Net finance income was **Won 2,582 million in 2021**, a significant improvement from a net finance cost of Won 357 million in 2020[400](index=400&type=chunk) - The effective tax rate increased from **29% in 2020 to 34% in 2021**, mainly due to an increase in foreign tax not utilized as tax credit[401](index=401&type=chunk) [RESULTS OF OPERATIONS: 2020 COMPARED TO 2019](index=72&type=section&id=RESULTS%20OF%20OPERATIONS%3A%202020%20COMPARED%20TO%202019) In 2020, Gravity's total revenues increased by 12.5% year-over-year, primarily driven by a significant 111.6% increase in online game revenues due to the re-launch of 'Ragnarok Online' in Thailand. Mobile game revenues saw a slight decrease of 1.2%. Gross profit surged by 75.4%, and operating profit increased by 81.6%, leading to substantial improvements in margins. Operating expenses, particularly advertising and salaries, also rose significantly Consolidated Statements of Comprehensive Income (2019-2020) | Metric | 2020 (Won millions) | 2019 (Won millions) | % Changes | | :--- | :--- | :--- | :--- | | Revenues: Online games | 89,545 | 42,322 | 111.6% | | Revenues: Mobile games | 298,324 | 301,903 | (1.2)% | | Revenues: Other revenue | 18,084 | 16,742 | 8.0% | | **Total revenues** | **405,953** | **360,967** | **12.5%** | | Cost of revenues | 239,045 | 265,788 | (10.1)% | | **Gross profit** | **166,908** | **95,179** | **75.4%** | | Selling, general and administrative expenses | (62,400) | (36,873) | 69.2% | | Research and development | (15,034) | (9,503) | 58.2% | | **Operating profit** | **88,368** | **48,663** | **81.6%** | | Profit for the year | 62,556 | 39,730 | 57.5% | | Profit attributable to: Owners of the Parent Company | 62,703 | 39,876 | 57.2% | - Online game revenues increased by **111.6%** due to the re-launch of 'Ragnarok Online' in Thailand[409](index=409&type=chunk) - Mobile game revenues decreased slightly by **1.2%** due to lower revenues from 'Ragnarok M: Eternal Love' in several regions, partially offset by new launches of 'Ragnarok Origin' and 'Ragnarok X: Next Generation'[409](index=409&type=chunk) - Cost of revenues decreased by **10.1%** due to lower commissions for 'Ragnarok M: Eternal Love', despite increases for 'Ragnarok Origin' and 'Ragnarok X: Next Generation'[409](index=409&type=chunk) - Selling, general and administrative expenses increased by **69.2%**, driven by a **101.3% rise in advertising expenses** for new game launches and re-launches, and a **36.1% increase in salaries** due to more employees[410](index=410&type=chunk)[411](index=411&type=chunk) - Research and development expenses increased by **58.2%** due to higher development costs for mobile games[410](index=410&type=chunk) - Net finance costs were **Won 357 million in 2020**, a shift from net finance income of Won 2,593 million in 2019[414](index=414&type=chunk) - The effective tax rate increased from **22% in 2019 to 29% in 2020**, primarily due to increased operating profit[415](index=415&type=chunk) [ITEM 5.B. Liquidity and Capital Resources](index=73&type=section&id=ITEM%205.B.%20Liquidity%20and%20Capital%20Resources) Gravity's liquidity is primarily supported by cash flows from operating activities and its initial public offering. The company maintains a strong cash position and invests in short-term financial instruments. Cash flows from operations increased in 2021, while investing activities saw a significant outflow due to increased short-term financial instruments. The company expects sufficient capital for its needs through at least 2023 but may seek additional financing for future developments [Liquidity](index=73&type=section&id=Liquidity) Gravity's liquidity is mainly derived from operating activities and its 2005 IPO. As of December 31, 2021, the company held Won 99,105 million (US$ 83,380 thousand) in cash and cash equivalents, and increased its short-term financial instruments to Won 148,000 million. The ability to finance operations depends on royalties from licensees and dividends from subsidiaries - Principal liquidity sources are cash flows from operating activities and proceeds from the **February 2005 IPO**[420](index=420&type=chunk) - As of December 31, 2021, cash and cash equivalents were **Won 99,105 million (US$ 83,380 thousand)**[420](index=420&type=chunk)[425](index=425&type=chunk) - Short-term financial instruments increased from **Won 71,000 million in 2020 to Won 148,000 million in 2021**, primarily from converting cash and cash equivalents[424](index=424&type=chunk) - The company believes its available cash and operating cash flows will be sufficient to meet capital needs through at least **2023**, but may seek additional equity or debt financing if needed[425](index=425&type=chunk) [Cash Flows](index=76&type=section&id=Cash%20Flows) Net cash inflow from operating activities increased in 2021 due to higher cash generation. Net cash outflow from investing activities significantly increased, driven by a substantial rise in short-term financial instruments. Financing activities also saw increased outflows, mainly for lease liability repayments Summary of Cash Flows (2019-2021) | Metric | 2021 (Won millions) | 2021 (US$ thousands) | 2020 (Won millions) | 2019 (Won millions) | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents at beginning of year | 110,632 | 93,078 | 79,428 | 86,051 | | Net cash inflow from operating activities | 74,183 | 62,413 | 69,856 | 26,371 | | Net cash outflow from investing activities | (82,471) | (69,386) | (36,049) | (32,526) | | Net cash outflow from financing activities | (3,306) | (2,781) | (2,547) | (1,686) | | Net increase (decrease) in cash and cash equivalents | (11,527) | (9,698) | 31,204 | (6,623) | | Cash and cash equivalents at end of year | 99,105 | 83,380 | 110,632 | 79,428 | - Net cash inflow from operating activities increased to **Won 74,183 million (US$ 62,413 thousand) in 2021** from Won 69,856 million in 2020[427](index=427&type=chunk) - Net cash outflow from investing activities increased to **Won 82,471 million (US$ 69,386 thousand) in 2021**, primarily due to a **Won 77,000 million net increase** in short-term financial instruments[428](index=428&type=chunk) - Net cash outflow from financing activities increased to **Won 3,306 million (US$ 2,781 thousand) in 2021**, mainly due to increased repayment of lease liabilities[429](index=429&type=chunk) [Material Cash Requirements](index=76&type=section&id=Material%20Cash%20Requirements) Gravity's material cash requirements as of December 31, 2021, include lease obligations and purchase obligations. The company has no long-term debt. Lease payments are due over several years, and purchase obligations are primarily for game development and licensing Material Cash Requirements by Period (as of Dec 31, 2021) | Obligation