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Gravity(GRVY) - 2021 Q4 - Annual Report
2022-04-28 10:04
[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