Business Context and Reporting Period
This Form 6-K filing by GRAVITY Co., Ltd. (NasdaqCM: GRVY) covers business updates issued on January 26, 2016. The company is a South Korean developer and publisher of online and mobile games, with its principal product, Ragnarok Online, commercially offered in 71 markets.
Key Financial Metrics and Material Changes
The filing details specific financial impacts resulting from strategic decisions regarding the Ragnarok Online II franchise:
- Refund Obligation: The company must refund US$5 million in initial payments previously received from Gungho Online Entertainment Inc. following the termination of their license agreement.
- Impairment Loss: Gravity anticipates recognizing an impairment loss on intangible assets of approximately Won 4,605 million. This amount represents the total remaining capitalized development cost of Ragnarok Online II.
- Revenue Potential: A new memorandum of understanding (MOU) with Dream Square for the Chinese market could yield more than US$10 million in minimum guaranteed royalties and additional royalties on gross sales, subject to a definitive agreement.
The filing does not provide consolidated revenue, profit, cash flow, or debt figures for the period.
Material Changes and Strategic Actions
- Termination of Gungho Agreement: The Board of Directors unanimously approved the termination of the 2006 license and distribution agreement with Gungho for Ragnarok Online II in Japan. The game has not launched in Japan and has seen limited success elsewhere.
- New China Partnership: Gravity signed an MOU with Dream Square to exclusively develop and distribute mobile and web games based on Ragnarok Online IP in China for five years. Two mobile games are expected to launch in China in 2016.
- Taiwan Expansion: Gravity established a representative office in Taipei in November 2015. The company plans to launch Ragnarok Prequel in Taiwan in Q1 2016 and a third-party mobile game in Q2 2016.
Outlook, Risks, and Contingencies
Management anticipates the launch of a new version of Ragnarok Online II in China in Q1 2017, developed by Dream Square. The company also plans to expand Ragnarok Prequel to North America, Hong Kong, and Thailand during 2016. Key risks include the uncertainty of finalizing the definitive agreement with Dream Square and the execution of new market launches. The filing includes standard forward-looking statements regarding future performance and market expansion.
Investor Verification Checklist
- Verify the exact timing and accounting treatment of the Won 4,605 million impairment loss in upcoming quarterly reports.
- Confirm the execution of the definitive agreement with Dream Square to secure the potential US$10 million+ royalty stream.
- Monitor the actual launch dates and performance of Ragnarok Prequel in Taiwan and other new markets.
- Review the impact of the US$5 million refund on the company's immediate cash position.