D-MARKET Electronic Services & Trading(US:HEPS)2022-05-02 20:50PART I Key Information Details significant risks including net losses, intense competition, Turkish macroeconomic instability, concentrated voting control, and internal control weaknesses Risk Factors Faces substantial risks including consistent net losses, intense competition, Turkish macroeconomic instability, and founder's controlling voting power Historical Net Losses | Fiscal Year | Net Loss (TRY million) | | :--- | :--- | | 2021 | 700.1 | | 2020 | 474.5 | | 2019 | 131.6 | - Two material weaknesses in internal control over financial reporting were identified in FY2021: Ineffective controls over the review of complex and unusual transactions in accordance with IFRS, and ineffective information technology general controls (ITGCs) for a recently developed IT product, including a lack of segregation of duties160161163 - Due to high inflation, Turkey is classified as a hyperinflationary economy under IFRS (IAS 29), requiring the company to restate its financial statements for periods ending on or after June 30, 2022176184 - The founder and chairwoman holds 71.1% of the total voting power through super-voting Class A shares (15 votes per share), making the company a 'controlled company' under Nasdaq rules215217220 - The Turkish Competition Authority (TCA) is investigating the company for alleged anti-competitive agreements in labor markets. A provision of TRY 127.5 million was recognized for a potential fine, which could range from 2% to 4% of the previous year's annual net revenue134 Information On The Company Overview of Hepsiburada's history, hybrid business model, integrated ecosystem, organizational structure, and leased fulfillment centers History and Development of the Company Founded in 2000, Hepsiburada evolved from 1P to 3P marketplace, launched logistics, and became the first Nasdaq-listed Turkish company - The company was founded in 2000 as a 1P e-commerce platform and launched its 3P Marketplace in 2015258261 - Became the first-ever Nasdaq-listed Turkish company on July 1, 2021266 - Acquired Doruk Finansman, a consumer finance company, in February 2022 to offer diversified consumer financing solutions268 Business Overview Operates a leading hybrid commerce platform in Turkey, connecting customers and merchants with an expanding ecosystem of strategic assets Key Business Metrics | Metric (as of Dec 31, 2021) | Value | | :--- | :--- | | Active Customers | 11.3 million | | Active Merchants | ~75,000 | | SKUs | >90.3 million | | Order Frequency (FY2021) | 4.7 | | Aided Brand Awareness (2021) | 99% | - In 2021, the 3P Marketplace model accounted for approximately 68% of the company's Gross Merchandise Value (GMV), with the 1P Direct Sales model comprising the remaining 32%278309324 - The company is building an ecosystem of strategic assets including: HepsiExpress: On-demand grocery and essentials delivery, Hepsipay: Digital wallet, BNPL, and payment solutions, HepsiJet: In-house last-mile delivery service covering all 81 cities in Turkey, HepsiLojistik: Fulfillment-as-a-service for merchants, HepsiGlobal: Cross-border e-commerce platform302376388 - The logistics network includes 7 fulfillment centers, 165 cross-docks, and over 2,690 pick-up & drop-off (PUDO) points as of December 2021280382 Organizational Structure Turkish joint stock company with wholly-owned subsidiaries operating its payment, logistics, and fintech strategic assets - The company's main operating subsidiaries are: D-Ödeme: Operates Hepsipay (e-money and payment services), D-Fast: Operates HepsiJet (last-mile delivery), Hepsi Finansal: Holding company for fintech, including Doruk Finansman441442443 - The acquisition of Doruk Finansman, a consumer finance company, was completed on February 28, 2022, for a total transaction value of TRY 20 million441446 Property, Plant and Equipment Primary physical assets are seven leased fulfillment centers across Turkey, totaling 143.5 thousand square meters, with owned warehouse equipment Fulfillment Center Network | Fulfillment Center Location | Size (thousand sq. meters) | | :--- | :--- | | Gebze/Kocaeli | 85.0 | | Tuzla | 12.0 | | İzmir | 15.4 | | Ankara | 11.5 | | Adana | 12.6 | | Diyarbakır | 4.3 | | Erzurum | 2.6 | | Total | 143.5 | - All fulfillment centers are operated under lease agreements with third parties447 Operating And Financial Review And Prospects Analyzes FY2021 financial performance, highlighting revenue growth, widening net loss from investments, and boosted IPO-driven liquidity Operating Results FY2021 revenues grew 18.5% while net loss widened to TRY 700.1 million due to increased operating expenses, partially offset by financial income Consolidated Statements of Comprehensive Loss | Metric (TRY million) | 2021 | 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Revenues | 7,558.0 | 6,375.7 | +18.5% | | Sales of goods | 6,134.4 | 5,301.9 | +15.7% | | Marketplace revenues | 601.3 | 603.2 | -0.3% | | Delivery services revenue | 740.2 | 445.9 | +66.0% | | Operating Loss | (1,843.5) | (181.0) | +918.5% | | Net Loss | (700.1) | (474.5) | +47.5% | - The increase in net loss was primarily driven by higher operating expenses: Advertising expenses increased by 131.9% to TRY 1.5 billion, Payroll and outsource staff expenses increased by 147.8% to TRY 806.1 million, which includes TRY 206.5 million in share-based payment expenses576578579 - Financial income surged to TRY 2.16 billion in 2021 from TRY 102.9 million in 2020, mainly due to foreign exchange gains on U.S. dollar-denominated cash balances following the IPO585 Liquidity and Capital Resources Liquidity significantly improved in 2021 due to IPO proceeds, despite negative free cash flow driven by increased capital expenditures - Received approximately $469.3 million in net proceeds from its July 2021 IPO, substantially boosting its cash position589849 Liquidity and Capital Resources Summary | Metric (TRY million) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | 3,813.5 | 592.6 | | Net Working Capital | (2,584.6) | (1,160.3) | | Free Cash Flow | (124.1) | 341.4 | - Capital expenditures increased to TRY 228.5 million in 2021 from TRY 100.1 million in 2020, driven mainly by website development costs. A significant increase is expected in 2022 due to inflation, currency depreciation, and investments in strategic assets like HepsiJet and Hepsipay618619620 Research and Development, Patents and Licenses, etc. Conducts R&D at two Istanbul centers, protecting intellectual property through trademarks, copyrights, and patents, holding one patent and ten pending applications - The company operates two certified R&D centers in Istanbul627 - As of December 31, 2021, the company held one patent and had ten pending patent applications628 Directors, Senior Management And Employees Outlines leadership, compensation, and workforce, covering board composition, executive compensation, and employee growth Directors and Senior Management Led by a nine-member board, chaired by the founder, with a legal proceeding against the founder posing a potential risk to her board position - The Board of Directors is composed of nine members, led by founder and Chairwoman Hanzade Vasfiye Doğan Boyner631634 - A legal proceeding from 2016, related to the founder's previous board membership at Petrol Ofisi between 2007-2010, is ongoing. An adverse outcome could require her to step down from her position as a director of the Company658663 Compensation Total compensation for executives and board members was TRY 224.8 million in 2021, with a new Incentive Plan adopted post-IPO including cash and equity awards - Total compensation for executive officers and board members was TRY 224.8 million for the year ended December 31, 2021677 - A new Incentive Plan was adopted in March 2021, which includes cash awards, RSUs, and PSUs. The cash award portion of TRY 121.2 million was paid in Q4 2021 following the successful IPO678683 - The equity portion of the incentive plan reserves up to 6.5 million Class B ordinary shares, which will vest over a three-year period beginning 18 months after the IPO date687689 Board Practices Board established audit, risk, and corporate governance committees, relying on foreign private issuer and controlled company exemptions from Nasdaq rules - The board has three key committees: Audit, Risk, and Corporate Governance700 - As a foreign private issuer and a controlled company, the company relies on exemptions from certain Nasdaq corporate governance standards, including the requirement for a majority-independent board and a fully independent compensation committee713877 Employees Employee base grew significantly to 3,789 by year-end 2021, primarily in Operations (1,145 employees) and Call Center (694 employees), with no union representation Employee Count by Year | Year | Number of Employees | | :--- | :--- | | 2021 | 3,789 | | 2020 | 2,432 | | 2019 | 1,218 | - The company's employees are not represented by any labor unions721 Major Shareholders And Related Party Transactions Details ownership structure, with founder holding majority voting power, and transactions with Doğan family-controlled entities Major Shareholders Founder Hanzade Vasfiye Doğan Boyner holds 71.1% of total voting power, making Hepsiburada a 'controlled company', with other significant shareholders including TurkCommerce B.V Major Shareholders and Voting Power | Shareholder | Class B Share % | Total Voting Power % | | :--- | :--- | :--- | | Hanzade V. Doğan Boyner | 10.4% | 71.1% | | Vuslat Doğan Sabancı | 17.0% | 5.5% | | Yaşar B. Doğan Faralyalı | 17.0% | 5.5% | | Arzuhan Doğan Yalçındağ | 15.5% | 5.0% | | TurkCommerce B.V. | 16.6% | 5.4% | - The company is a controlled company due to the founder's majority voting power, which is derived from Class A shares that carry 15 votes per share723725 Related Party Transactions Conducts market-term transactions with Doğan family-controlled entities and has a post-IPO Shareholders' Agreement granting TurkCommerce B.V. certain governance rights - In 2021, the company engaged in transactions with entities controlled by the Doğan family, totaling TRY 89.7 million in purchases and TRY 8.6 million in sales735 - A post-IPO Shareholders' Agreement grants TurkCommerce B.V. the right to nominate one director and provides veto rights over certain decisions as long as it maintains at least a 7.5% ownership stake748751 - The company maintains directors' and officers' (D&O) liability insurance with an aggregate coverage of $30 million743 Financial Information Covers ongoing class action lawsuits alleging misleading IPO statements and the company's policy to retain earnings for growth - The company is a defendant in two putative class action lawsuits filed in New York in September and October 2021. The complaints allege that the IPO Registration Statement contained misleading statements regarding the company's revenue and GMV growth757758759 - The company has never declared or paid cash dividends and intends to retain all available funds for future operations and expansion762 Additional Information Details articles of association, material contracts, Turkish exchange controls, and U.S. federal income tax considerations for ADS holders - Dividends paid to holders of ADSs who are not tax residents in Turkey are subject to a 15% withholding tax245788 - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2021 taxable year and does not expect to be treated as one in the foreseeable future, though this is a factual determination made annually174813 Quantitative And Qualitative Disclosures About Market Risk Exposed to foreign currency and interest rate risks, assessed to minimize adverse effects and maintain optimal capital structure - The company's primary market risks are foreign currency risk and interest rate risk829 Description Of Securities Other Than Equity Securities Details terms of American Depositary Shares (ADSs), their representation of Class B ordinary shares, and associated fees payable by holders - Each American Depositary Share (ADS) represents one Class B ordinary share833 - ADS holders are subject to various fees payable to the depositary, including up to $5.00 per 100 ADSs for issuance or cancellation and up to $0.05 per ADS for cash distributions834 Part II Material Modifications To The Rights Of Security Holders And Use Of Proceeds Post-IPO, the company received $469.3 million in net proceeds, using $148.2 million for general corporate purposes by year-end 2021 - The company received net proceeds of approximately $469.3 million from its IPO in July 2021849 - As of December 31, 2021, $148.2 million of the IPO proceeds had been used for general corporate purposes, including working capital and capital expenditures852 Controls And Procedures Management concluded disclosure controls were ineffective as of December 31, 2021, due to two material weaknesses in internal financial controls - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021854 - Two material weaknesses were identified: Complex IFRS Transactions: Ineffective controls led to an overstatement of stock-based compensation fair value (TRY 54 million adjustment) and misclassification of time deposits (TRY 133.6 million reclassification), IT General Controls (ITGCs): A lack of segregation of duty controls and proper documentation for access rights and software changes for a new IT product858859860 - A remediation plan is underway, which includes forming a dedicated IFRS team, engaging third-party consultants, expanding internal control staff, and improving IT control procedures860 Principal Accountant Fees And Services Total fees to Guney Bagimsiz Denetim Ve Serbest Muhasebeci Mali Musavirlik A.S. for FY2021 were TRY 9.6 million, primarily for pre-approved audit services Principal Accountant Fees | Fee Category (TRY million) | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | 8.6 | 4.3 | | Audit-related Fees | 1.0 | 3.8 | | Tax Fees | — | — | | All Other Fees | — | — | | Total Fees | 9.6 | 8.1 | Corporate Governance As a foreign private issuer and controlled company, Hepsiburada leverages Nasdaq exemptions, following Turkish corporate governance practices - The company relies on exemptions available to foreign private issuers and controlled companies, and does not comply with several Nasdaq corporate governance rules, including: Requirement for a majority-independent board of directors, Requirement for compensation and nomination committees to be composed entirely of independent directors, Certain requirements for shareholder approval of transactions877878 Part III Financial Statements Audited consolidated financial statements for D-MARKET Elektronik Hizmetler and subsidiaries for FY2021 and 2020 are presented under IFRS Consolidated Balance Sheets | (in thousands TRY) | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | 7,881,363 | 1,964,957 | | Total Current Assets | 7,085,012 | 1,689,831 | | Total Liabilities | 5,205,187 | 2,752,289 | | Total Current Liabilities | 5,000,549 | 2,656,145 | | Total Equity | 2,676,176 | (787,332) | Consolidated Statements of Comprehensive Loss | (in thousands TRY) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | 7,558,021 | 6,375,727 | 2,603,735 | | Operating Loss | (1,843,528) | (181,012) | 101,115 | | Loss for the year | (700,078) | (474,516) | (131,647) | | Total comprehensive loss | (703,368) | (476,500) | (132,869) | Consolidated Statements of Cash Flows | (in thousands TRY) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 89,476 | 441,361 | 363,780 | | Net cash used in investing activities | (1,095,785) | (99,947) | (53,340) | | Net cash from financing activities | 3,291,191 | (18,887) | (170,721) | | Cash at end of year | 3,812,605 | 592,281 | 281,982 |