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Recall that the GeoTeam® recently coded Gravity (NASDAQ:GRVY) as a low tier special situation play. While this is still the case, there a few items that the GeoTeam® uncovered during further due diligence.

1. Originally we indicated that the 2009 first quarter was the company's first profit in some time. In actuality, the company was able to achieve profits in 2008. a

  • Using the 20F as our guide the company posted a loss of $0.08 per ADR share. Reviewing the cash flow statement it appears that it contains some non-cash charges that should be added back in order to calculate a non-GAAP Earnings Per Share number. In doing this the GeoTeam® estimated a 2008 fully taxed $0.04 non-GAAP EPS figure ( $1.1 million). This should also have translated into a non-GAAP profit for the fourth quarter.
  • The company reported a profit in its 2008 third quarter.

2. Inconsistency between net income reported in its 2008 year end release and its 2008 year end SEC 20F Filing, page 74 (likely due to a GAAP vs. non-GAAP issue, but we could not locate such a reference).

  • 20F: "We recorded a net loss of Won 2,773 million (US$2,172,000) in 2008."
  • Press Release (as reported in 6-K): "The Company recorded net income of KRW 921 million (US$730,000) for 2008."

3. A significant portion of the company's year end and quarterly net income includes interest income and foreign currency income.

4. Outstanding legal issues per the 2008 year end SEC 20F Filing, page 95.

  • The filing states, "As of December 31, 2008, we are a defendant in two separate lawsuits claiming damages for breach of contract in which we have been a party. In May 2007, YNK Korea Inc., formerly known as Sunny YNK Inc., our former investor for Ragnarok Online, filed a lawsuit against us claiming that we failed to distribute the earnings from a certain amount of net sales due to the embezzlement of royalty revenue committed by our former chairman and from license fees from overseas licensees. The claim of the lawsuit amounts to approximately Won 1,344 million. In October 2006, Softstar Entertainment Inc., our former licensee in Taiwan, Hong Kong and Macao for R.O.S.E. Online, filed a lawsuit against us insisting that the game program for the open beta testing of the game in Taiwan which was provided by us was different from the program used for the closed beta testing and was materially deficient, thereby causing them to incur a loss in their business."

a The GeoTeam® is still reviewing Gravity's 2008 quarterly financials statements in order to derive non-GAAP EPS data. Unfortunately, we were unable to locate quarterly cash flow statements which normally contains information to identify non-GAAP adjustments. We will email the company on this point and provide more information if warranted.

Source: Seeking Clarity in Gravity's Long Case