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Note Receivable
12 Months Ended
Sep. 30, 2016
Receivables [Abstract]  
Loan Receivable
Loan Receivable
In fiscal year 2012, the Company provided a strategic partner (the "Borrower") a loan of $3.0 million to support the Borrower's future product development and other working capital requirements. The loan initially bore a stated interest rate of 9%, and the outstanding principal and interest were initially due in May 2015. The Company also received a warrant to purchase the Borrower's common stock in the event of an equity offering by the Borrower and certain other rights related to conversion of the loan, including the first refusal to acquire the Borrower and a redemption premium. The loan was initially secured by a security agreement granting the Company a first-priority security interest in all of the Borrower's assets.
The Company determined that the Borrower represented a variable interest entity since the level of equity investment at risk was not sufficient for the entity to finance its activities without additional financial support. However, the Company does not qualify as the primary beneficiary since it would not absorb the majority of the expected losses from the Borrower and does not have the power to direct the Borrower's product research, development and marketing activities that have the most significant impact on its economic performance. The Company has no future contractual funding commitments to the Borrower and, as a result, the Company's exposure to loss is limited to the outstanding principal and interest due on the loan.
During fiscal year 2014, the Borrower informed the Company of its intent to secure additional funding from an investment program funded by the Commonwealth of Massachusetts designed to support early-stage companies. In connection with the Borrower’s efforts to secure additional financing, the Company agreed to subordinate its security interest in the assets of the Borrower to the new lender. Additionally, the Company agreed to extend the due date of its loan by approximately 5 years, to September 2019, in order to coincide with the due date of the new loan. The amended loan has a stated interest rate of 10%.
In connection with its efforts to secure additional financial support, the Borrower developed revised assumptions about its future cash flows. Based on the information provided by the Borrower and the subordination of the loan to the new lender, the Company determined it was probable that it would not recover all amounts due from the loan and recorded an impairment charge of $2.6 million during fiscal year 2014. The impairment charge included the warrant write-off and was recorded in the "Selling, general and administrative" expenses in the Company's Consolidated Statements of Operations.
The fair value of the loan is determined by considering the fair value of the collateral using valuation techniques, principally the discounted cash flow method, reduced by the amounts subordinated to the debt provided by the new lender. The observable inputs used in the Company's analysis are limited primarily to the discount rate, which is based on a rate commensurate with the risks and uncertainties of the Borrower. As a result, the fair value of the loan could vary under different conditions or assumptions, including the varying assumptions regarding future cash flows of the Borrower or discount rates.
Carrying value of the loan receivable was $0.2 million and $1.0 million, respectively, at September 30, 2016 and 2015. The Company determines fair value of the loan based on a relief from royalty and discounted cash flow approaches. During fiscal year 2016, the Company concluded that recent operating trends and declining future cash flow forecasts of the Borrower represented indicators of potential loan impairment. As a result, the Company updated the discounted cash flow valuation model based on revised lower forecasted future cash flow assumptions and determined, based on a relief from royalty and discounted cash flow approaches, that carrying value of the loan exceeded its estimated fair value by $0.8 million. Accordingly, the Company recorded an impairment based on charge of $0.8 million in "Selling, general and administrative" expenses in the Company's Consolidated Statements of Operations during fiscal year ended September 30, 2016 which resulted in the loan's carrying value of $0.2 million at September 30, 2016.