Joint Venture and Deconsolidation of Majority Owned Subsidiary

3 Months Ended

Apr. 30, 2022

Joint Venture and Deconsolidation of Majority Owned Subsidiary

11. Joint Venture and Deconsolidation of Majority Owned Subsidiary

Joint Venture

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. The Company contributed an intellectual property license in exchange for a 72% 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. While the Company has disproportionately few voting rights in JiHu pursuant to the Investment Agreement given its 72% 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 28% ownership interest of remaining investors as a noncontrolling interest on its condensed consolidated balance sheets. 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.

On March 29, 2022, JiHu closed its Series A-1 round of common stock financing where investors contributed $27.7 million, net of issuance costs. The Company accounted for this funding as an equity transaction with the carrying amount of the non-controlling interest adjusted to reflect the change in the ownership interest in the subsidiary, and the difference was recognized in the Company’s additional paid-in capital. Subsequent to the closing, the Company retains control over JiHu with equity stake reduced from 72% to 62%.

One of the potential investors who could not participate in the Series A-1 financing round provided a $2.9 million loan to JiHu as an advance pending a capital contribution. The loan is repayable within ten business days of receipt of capital contribution from the investor and expected to be repaid by June 30

2022. The loan was recorded in other current liabilities on the condensed consolidated balance sheet as of April 30, 2022.

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


	Three Months Ended April 30,
	2022		2021

Revenue	$	1,093	$	—
Cost of revenue	300		87
Gross profit (loss)	793		(87)
Operating expenses:
Sales and marketing	1,387		145
Research and development	928		328
General and administrative	754		634
Total operating expenses	3,069		1,107
Loss from operations	(2,276)		(1,194)
Interest Income	67		—
Other income (expense), net	674		(48)
Net loss before income taxes	(1,535)		(1,242)

Net loss	$	(1,535)	$	(1,242)

Net loss attributable to noncontrolling interest	$	(514)	$	(345)


	April 30, 2022		January 31, 2022

Cash and cash equivalents	$	42,455	$	14,198
Property and equipment, net	739		769
Other assets	2,154		2,765
Total assets	$	45,348	$	17,732

Total liabilities(1)	$	6,839	$	3,663

(1) As of April 30, 2022, total liabilities include a loan of $2.9 million described above.

Deconsolidation of Majority Owned Subsidiary

In April 2021, the Company reorganized Meltano Inc. (“Meltano”), 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.

On April 4, 2022, Meltano closed its Series Seed-2 round of preferred stock financing and raised $7.2 million. Pursuant to this transaction, the board composition of Meltano changed and GitLab no longer has the power to appoint the majority of the board of directors of Meltano. Consequently, despite having majority voting rights at the stockholder level, GitLab no longer has control over Meltano.

The loss of control of a majority owned subsidiary resulted in the deconsolidation of net assets of $9.4 million and non-controlling interest of Meltano of $11.3 million, and recognition of retained interest at fair value of $17.8 million. Effective April 4, 2022, the Company accounts for this investment under the equity method and has recorded $15.6 million in “equity method investment” on its condensed consolidated balance sheet as of April 30, 2022. During the three months ended April 30, 2022, the Company recognized a gain attributable to the deconsolidation of Meltano of $17.8 million in other income (expense), net and a loss from equity method investment of $0.2 million, net of tax on the condensed consolidated statements of operations.

The fair value of retained interest was determined using Option Pricing Model (“OPM”) Backsolve approach based on the most recent funding round of preferred stock.

As of April 30, 2022, Meltano has 2.7 million employee stock options and 2.9 million shares of preferred stock outstanding that are potentially dilutive equity instruments and will result in dilution to 51% in the Company’s stake in Meltano once all these instruments get converted into common stock of Meltano.