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Joint Venture and Equity Method Investment
 9 Months Ended
Oct. 31, 2022
Noncontrolling Interest [Abstract]  
Joint Venture and Equity Method Investment
11. Joint Venture and Equity Method Investment
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 accounted for JiHu as a variable interest entity and consolidated the entity in accordance with ASC Topic 810, Consolidation.
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. On July 1, 2022, JiHu closed its Series A-2 round of common stock financing where investors contributed $22.8 million, net of issuance costs. On September 7, 2022, JiHu closed its Series A-3 round of financing with an external investor who contributed $4.1 million, net of issuance costs. The Company accounted for these funding events as equity transactions with the carrying amount of the non-controlling interest adjusted to reflect the change in the ownership interest in JiHu, and the difference was recognized in the Company’s additional paid-in capital. Subsequent to the closing of the rounds, the Company retains control over JiHu with its equity stake reduced from 72% to 55%.
In March 2022, 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 was repayable within ten business days of receipt of capital contribution from the investor. JiHu received an equity contribution from this investor during the Series A-2 round and repaid the loan in full in July 2022.
During the nine months ended October 31, 2022, the board of directors of JiHu approved an employee stock option plan (“JiHu ESOP”) for its employees. During the three and nine months ended October 31, 2022, the Company recognized $2.5 million and $5.5 million stock-based compensation expense related to JiHu ESOP, respectively. As of October 31, 2022, approximately $15.8 million of total unrecognized compensation cost was related to the JiHu ESOP that is expected to be recognized over 3.5 years. The Company considers the RSUs and stock option awards granted pursuant to the JiHu ESOP as potentially dilutive equity instruments that will result in dilution of the Company’s stake in JiHu upon vesting of such award (or, in the case of option awards granted pursuant to the JiHu ESOP, upon vesting and subsequent exercise into shares of JiHu common stock). Any such dilution will be accounted for as an equity transaction. Until such awards granted pursuant to the JiHu ESOP are vested (or, in the case of
option awards, vested and ultimately exercised into shares of JiHu common stock), the Company will continue to record the recognized stock-compensation expense of JiHu as part of the noncontrolling interest.
Selected financial information of JiHu, post intercompany eliminations, is as follows (in thousands):
Three Months Ended October 31,Nine Months Ended October 31,
2022202120222021
Revenue$1,275 $265 $3,388 $297 
Cost of revenue481 243 1,193 604 
Gross profit (loss)794 22 2,195 (307)
Operating expenses:
Sales and marketing1,999 780 5,251 1,630 
Research and development1,898 499 4,735 1,376 
General and administrative3,070 621 7,363 1,984 
Total operating expenses6,967 1,900 17,349 4,990 
Loss from operations(6,173)(1,878)(15,154)(5,297)
Interest income193 — 403 — 
Other income, net1,452 7 2,464 8 
Net loss before income taxes(4,528)(1,871)(12,287)(5,289)
Net loss$(4,528)$(1,871)$(12,287)$(5,289)
Net loss attributable to noncontrolling interest$(2,010)$(521)$(4,997)$(1,443)
October 31, 2022January 31, 2022
Cash and cash equivalents$55,573 $14,198 
Property and equipment, net964 769 
Other assets2,965 2,765 
Total assets$59,502 $17,732 
Total liabilities$4,527 $3,663 
Equity Method Investment
In April 2021, the Company reorganized Meltano Inc. (“Meltano”), which started as an internal project within the Company in July 2018, into a separate legal entity. The entity was funded by the Company’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 the Company 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, the Company 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, recognition of retained interest at fair value of $15.9 million, and a gain of $17.8 million recorded in other income (expense), net during the nine months ended October 31, 2022. 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 the date of the loss of control, the basis difference between the fair value of investment in Meltano and the Company’s share in the net assets of Meltano was attributed to equity method goodwill.
Effective April 4, 2022, the Company accounts for this investment under the equity method and has recorded $13.6 million in “equity method investment” on its condensed consolidated balance sheet as of October 31, 2022. During the three and nine months ended October 31, 2022, the Company recognized a loss from equity method investment of $0.8 million and $1.8 million, net of tax on the condensed consolidated statements of operations, respectively.
As of October 31, 2022, the Company owns 97% of the common stock in Meltano. As of October 31, 2022, Meltano has 2.9 million employee stock options and 3.1 million shares of preferred stock outstanding that are potentially dilutive equity instruments and will result in dilution to 49% in the Company’s stake in Meltano once all these instruments get converted into common stock of Meltano.