Joint Venture and Equity Method Investment

12 Months Ended

Jan. 31, 2023

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 year ended January 31, 2023, the board of directors of JiHu approved an employee stock option plan (“JiHu ESOP”) for its employees. During the year ended January 31, 2023, the Company recognized $7.8 million of stock-based compensation expense related to JiHu ESOP, respectively. As of January 31, 2023, approximately $14.5 million of total unrecognized compensation cost was related to the JiHu ESOP that is expected to be recognized over 3.2 years. The Company considers the RSAs 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.

Operating Leases

The Company recognized $0.6 million, $0.2 million and zero of operating lease expense during the year ended January 31, 2023, 2022 and 2021, respectively. The Company has non-cancelable operating leases maturing over the next two years with total lease payments of $1.2 million and total present value of lease liabilities of $1.1 million.

The table below presents supplemental information related to operating leases for the year ended January 31, 2023 (in thousands, except weighted-average information):


Weighted-average remaining lease term (in years)	1.30
Weighted-average discount rate	3.70		%
Right-of-use assets obtained in exchange for new operating lease liabilities	$	515
Cash paid for amounts included in the measurement of lease liabilities	$	797

Selected financial information

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


	Fiscal Year Ended January 31,
		2023		2022

Revenue		$	4,743	$	1,237
Cost of revenue		1,731		945
Gross profit (loss)		3,012		292
Operating expenses:
Sales and marketing		7,670		3,200
Research and development		6,818		2,299
General and administrative		10,515		3,589
Total operating expenses		25,003		9,088
Loss from operations		(21,991)		(8,796)
Interest income		659		—
Other income, net		1,633		67
Net loss before income taxes		(19,699)		(8,729)

Net loss		$	(19,699)	$	(8,729)

Net loss attributable to noncontrolling interest		$	(8,385)	$	(2,422)


	January 31, 2023		January 31, 2022

Cash and cash equivalents	$	56,744	$	14,198
Property and equipment, net	1,135		769
Operating lease right-of-use assets	998		—
Other assets	3,950		2,765
Total assets	$	62,827	$	17,732

Total liabilities	$	8,871	$	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 year

ended January 31, 2023. 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 $12.7 million in “equity method investment” on its consolidated balance sheet as of January 31, 2023. During the year ended January 31, 2023, the Company recognized a loss from equity method investment of $2.5 million, net of tax on the consolidated statements of operations.

As of January 31, 2023, the Company owns 96% of the common stock in Meltano. As of January 31, 2023, Meltano has 3.5 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 46% in the Company’s stake in Meltano once all these instruments get converted into common stock of Meltano.