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Joint Venture and Equity Method Investment
 6 Months Ended
Jul. 31, 2023
Noncontrolling Interest [Abstract]  
Joint Venture and Equity Method Investment
12. 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.
During fiscal year 2023, JiHu closed its Series A-1 through A-3 rounds of common stock financings where investors contributed a total of $54.6 million, net of issuance costs. 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.
Subsequent to the closing of the financing rounds during fiscal year 2023, the Company retained control over JiHu with its equity stake reduced from 72% to 55%. As of July 31, 2023, the Company still retains control over JiHu with its equity stake at approximately 55%.
In April 2022, the board of directors of JiHu approved an employee stock option plan (“JiHu ESOP”) for its employees. As a result of forfeitures triggered by the departure of certain executives during the three and six months ended July 31, 2023, the Company reversed stock-based compensation previously recorded for such executives. The Company recorded a $0.2 million and $2.7 million gain for the three
and six months ended July 31, 2023, respectively. For the three and six months ended July 31, 2022, the Company recorded $2.8 million and $3.0 million of stock-based compensation expense, respectively.
As of July 31, 2023, approximately $4.3 million of total unrecognized compensation cost was related to the JiHu ESOP that is expected to be recognized over 2.7 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 $0.1 million and $0.3 million of operating lease expense during the three and six months ended July 31, 2023, respectively, and $0.2 million and $0.3 million of operating lease expense during the three and six months ended July 31, 2022, respectively. JiHu has non-cancelable operating leases maturing over the next two years with total lease payments of $0.7 million and total present value of lease liabilities of $0.7 million. Lease expense for the one short-term lease was immaterial during each of the three and six months ended July 31, 2023 and 2022.
The table below presents supplemental information related to operating leases for the six months ended July 31, 2023 (in thousands, except weighted-average information):
Weighted-average remaining lease term (in years)1.06
Weighted-average discount rate 3.7 %
Cash paid for amounts included in the measurement of lease liabilities
$316 
Selected Financial Information
Selected financial information of JiHu, post intercompany eliminations, is as follows (in thousands):
Three Months Ended July 31,Six Months Ended July 31,
2023202220232022
Revenue$1,609 $1,020 $3,073 $2,113 
Cost of revenue560 413 1,051 712 
Gross profit1,049 607 2,022 1,401 
Operating expenses:
Sales and marketing1,960 1,865 4,044 3,252 
Research and development727 1,909 2,683 2,837 
General and administrative1,407 3,539 (37)4,293 
Total operating expenses4,094 7,313 6,690 10,382 
Loss from operations(3,045)(6,706)(4,668)(8,981)
Interest income240 142 555 210 
Other income, net293 339 562 1,012 
Net loss before income taxes(2,512)(6,225)(3,551)(7,759)
Net loss$(2,512)$(6,225)$(3,551)$(7,759)
Net loss attributable to noncontrolling interest$(1,128)$(2,473)$(1,558)$(2.987)
July 31, 2023January 31, 2023
Cash and cash equivalents$47,671 $56,744 
Property and equipment, net848 1,135 
Operating lease right-of-use assets673 998 
Other assets3,273 3,950 
Total assets$52,465 $62,827 
Total liabilities$7,277 $8,871 
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 in April 2022. The fair value of retained interest was determined using the 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 $10.6 million in “equity method investment” on its condensed consolidated balance sheet as of July 31, 2023. During the three and six months ended July 31, 2023, the Company recognized a loss from equity method investment of $0.9 million and $1.7 million, net of tax on the condensed consolidated statements of operations, respectively. During the three and six months ended July 31, 2022, the Company recognized a loss from equity method investment of $0.8 million and $1.0 million, net of tax on the condensed consolidated statements of operations, respectively.
As of July 31, 2023, the Company owns 93% of the common stock in Meltano. As of July 31, 2023, Meltano has 3.3 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.