CONVERTIBLE NOTE

12 Months Ended

Dec. 31, 2014

10.	CONVERTIBLE NOTE

On October 21, 2013, pursuant to a convertible note purchase agreement, the Company issued a convertible note due June 30, 2014 in the aggregate principal amount of US$20,000 to Sequoia Capital 2010 CGF Holdco, Ltd., or “Sequoia”. The total principal amount of US$20,000 was received in October 2013. The convertible note bore interest at 10% per annum, uncompounded and computed on the basis of the actual number of days elapsed, or 13% per annum upon an event of default, uncompounded and computed on the basis of the actual number of days elapsed.

The convertible note was automatically converted into the number of Class B ordinary shares equivalent to the outstanding amount of the convertible note divided by the applicable conversion price immediately upon the completion of the Group's IPO. The applicable conversion price was equal to 80% of the per share issuance price of the Class A ordinary shares issued for the Group's IPO. In the event of automatic conversion triggered by the IPO, the convertible note shall be deemed interest free between the date of issuance and the date of conversion.

The redemption feature meets the definition of a derivative and is bifurcated from the convertible note and accounted for in accordance with ASC 815, “Derivatives and Hedging”. The change in fair value of the embedded derivative is recorded in earnings.

Upon completion of the IPO, the conversion of the convertible note into US$25,000 of 19,230,769 Class B ordinary shares was accounted for as an extinguishment in accordance with ASC 405, “Liabilities”. The sum of: (i) the interest expense arising from the host debt instrument of RMB3,933, (ii) change in fair value of the bifurcated redemption feature RMB26,809, and (iii) extinguishment gain or loss (Nil), equaled to RMB30,742, which represented the incremental value the holder receives upon the conversion.

In accordance with ASC 820, the Group measures the fair value of the derivative redemption feature using an income approach based on inputs that are unobservable (Level 3) in the market.

A reconciliation of the derivative redemption feature measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is presented below:

	Derivative redemption feature
	RMB

Balance as of December 31, 2012		-
Fair value of the derivative redemption feature on issuance date		22,355
Change in fair value of the derivative redemption feature		26,809
Settlement of the derivate redemption feature upon IPO		(49,164	)

Balance as of December 31, 2013		-

The change in fair value of the derivative redemption feature for the year ended December 31, 2013 was recorded as "Changes in fair value of the derivative component of the convertible note” in the consolidated statements of comprehensive income.

No convertible note was issued during the year ended December 31, 2014.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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