Joint Venture and Spin-off

9 Months Ended

Oct. 31, 2021

13. Joint Venture and Spin-off

In February 2021, the Company along with Sequoia CBC Junyuan (Hubei) Equity Investment Partnership (Limited Partnership) and Suzhou Gaocheng Xinjian Equity Investment Fund Partnership (Limited Partnership) executed an investment agreement (the “Investment Agreement”) to establish GitLab Information Technology (Hubei) Co., LTD (“JiHu”), a legal entity in the People’s Republic of China. This new company offers a dedicated distribution of GitLab’s DevOps platform available as both a self-managed and SaaS offering (GitLab.cn) that will only be available in mainland China, Hong Kong and Macau. The Company contributed an intellectual property license in exchange for a 72.25% equity stake in JiHu and the other two unrelated investors contributed cash in exchange for the remaining equity stake, for a combined interest of $80 million. The term of the Investment Agreement is 50 years unless extended by mutual consent or terminated earlier upon certain specified events. While the Company has disproportionately few voting rights in JiHu pursuant to the Investment Agreement given its 72.25% equity interest, the Company has entered into a license agreement and a technical services agreement with JiHu which when evaluated on a collective basis enables the Company to direct the activities that most significantly affect the economic performance of JiHu. Further, the Company has the obligation to absorb losses and the right to receive benefits of JiHu that could potentially be significant to JiHu. Therefore, the Company accounted for JiHu as a variable interest entity and consolidated the entity in accordance with ASC Topic 810, Consolidation. The Company recorded the 27.75% ownership interest of remaining investors as a noncontrolling interest on its condensed consolidated balance sheet. The assets and liabilities and results of operations of JiHu, post inter-company eliminations, were not significant to the Company’s condensed consolidated financial statements, with the exception of cash and cash equivalents of $17.8 million as of October 31, 2021, predominantly comprised of capital contributions from noncontrolling interest holders. The assets of JiHu can be used only to settle obligations of JiHu and creditors of JiHu do not have recourse against the general credit of the Company. JiHu is primarily financed through equity and has no financial borrowings.

Selected financial information of JiHu, post inter-company eliminations, is as follows (in thousands):


	Three Months Ended October 31,		Nine Months Ended October 31,
	2021		2021

Revenue	$	265	$	297
Cost of revenue	243		604
Gross profit (loss)	22		(307)
Operating expenses:
Sales and marketing	780		1,630
Research and development	499		1,376
General and administrative	621		1,984
Total operating expenses	1,900		4,990
Loss from operations	(1,878)		(5,297)
Other income, net	7		8
Net loss before income taxes	(1,871)		(5,289)

Net loss	$	(1,871)	$	(5,289)

Net loss attributable to noncontrolling interest	$	(521)	$	(1,443)


	October 31, 2021

Cash and cash equivalents	$	17,750
Other assets	2,742
Total assets	$	20,492

Total liabilities	$	3,009

In April 2021, the Company spun off Meltano (“Meltano Inc.”), which started as an internal project within GitLab in July 2018, into a separate legal entity. The entity was funded by GitLab's contribution of intellectual property with the fair value of approximately $0.4 million and a preferred stock financing from third parties of $4.2 million, representing 12% ownership on a fully diluted basis. Even after the preferred stock financing, the Company is the largest shareholder with majority voting rights. Meltano Inc. is considered a subsidiary of the Company under the voting interest model and consolidated in accordance with ASC Topic 810, Consolidation. The Company recorded the preferred stock funding and unvested stock options as noncontrolling interest on its condensed consolidated balance sheet.