Discontinued Operations Discontinued Operations

12 Months Ended

Sep. 30, 2016

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

DISCONTINUED OPERATIONS

On October 23, 2015, we sold all the outstanding stock of our wholly owned subsidiary, Etherios to West Monroe Partners, LLC. We sold Etherios as part of a strategy to focus on providing highly reliable machine connectivity solutions for business and mission-critical application environments. Etherios was included in our single operating segment.

3. DISCONTINUED OPERATIONS (CONTINUED)

Below is a summary of the gain on sale (in thousands):

Gross proceeds	$	4,096
Less:
Employee related liabilities	(1,134		)
Working capital adjustment	(113		)
Net cash proceeds	2,849
Present value of receivable due on October 23, 2016	2,941
Present value of receivable due on October 23, 2017	1,922
Total fair value of consideration received	7,712
Less:
Net assets of Etherios	(3,383		)
Facility abandonment costs	(725		)
Transaction costs, primarily professional fees	(734		)
Gain on sale of discontinued operations, before income taxes	$	2,870

The terms of the sale agreement provide that West Monroe Partners LLC will pay us $3.0 million on October 23, 2016 and $2.0 million on October 23, 2017. The present value of these amounts is included within the total fair value of consideration received. These receivable amounts are unsecured and non-interest bearing. The carrying value of these receivables presented on our Consolidated Balance Sheet at September 30, 2016 approximated their fair values, which were determined using level 3 cash flow fair value measurement techniques. We received the first payment of $3.0 million on October 21, 2016.

Goodwill has been included in the net assets of Etherios based on the relative fair value of Etherios compared to the fair value of the Company, as the Company consists of a single reporting unit for goodwill impairment testing purposes.

As a condition to the sale agreement, we retained the operating leases in the Dallas and Chicago locations. Digi is no longer using these facilities and has sublet the Dallas location to West Monroe Partners, LLC through December 31, 2017. Also in connection with the sale, we assigned our San Francisco lease to West Monroe Partners, LLC. A remaining potential obligation exists in the event of a default under the assigned lease. However, we believe the likelihood of a liability related to this lease is remote. As of September 30, 2016, the future minimum lease payments for the San Francisco lease are approximately $0.1 million.

Income (loss) from discontinued operations, after income taxes, as presented in the Consolidated Statements of Operations for the twelve months ended September 30, 2016, 2015 and 2014 is as follows (in thousands):

	Twelve months ended September 30,
	2016			2015			2014
Service revenue	$	891		$	9,011		$	9,528
Cost of service	713			8,101			9,421
Gross profit	178			910			107
Operating expenses:
Sales and marketing	148			1,970			1,825
Research and development	103			2,098			877
General and administrative	43			1,208			1,669
Restructuring	—			106			—
Total operating expenses	294			5,382			4,371
Loss from discontinued operations, before income taxes	(116		)	(4,472		)	(4,264		)
Gain on sale of discontinued operations, before income taxes	2,870			—			—
Income (loss) from discontinued operations, before income taxes	2,754			(4,472		)	(4,264		)
Income tax benefit on discontinued operations	(476		)	(1,627		)	(1,522		)
Income (loss) from discontinued operations, after income taxes	$	3,230		$	(2,845	)	$	(2,742	)

3. DISCONTINUED OPERATIONS (CONTINUED)

Income tax benefit on discontinued operations for the twelve months ended September 30, 2016 was $0.5 million and primarily represented income tax benefits for deductible transaction costs, partially offset by a tax expense for equity awards for which we will not receive a tax deduction. For tax purposes, this transaction resulted in a capital loss of $13.7 million, as the tax basis of the Etherios stock was higher than the book basis of the assets that were sold. Since we do not expect to be able to utilize this capital loss in the five year carryforward period, a deferred tax asset offset by a full valuation allowance of $5.1 million was recorded in the third quarter of fiscal 2016 upon completion of the capital loss calculation.

At September 30, 2015, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheet was as follows (in thousands):

	September 30, 2015
Current assets:
Accounts receivable, net	$	1,417
Deferred tax assets	127
Other current assets	80
Total current assets	1,624
Property, equipment and improvements, net	18
Identifiable intangible assets, net	1,531
Goodwill	1,914
Deferred tax assets (1)	(589		)
Total assets of discontinued operations	$	4,498
Current liabilities:
Accounts payable	$	50
Accrued compensation	1,346
Other current liabilities	85
Total current liabilities	1,481
Other non-current liabilities	95
Total liabilities of discontinued operations	$	1,576

(1) As of September 30, 2015, we had a consolidated net deferred income tax asset related to the United States federal jurisdiction. That net deferred income tax asset position included a deferred income tax liability of $589 thousand related to Etherios which was entirely in the United States federal tax jurisdiction.

The following table presents amortization, depreciation and purchases of property, equipment, improvements and certain other intangible assets of the discontinued operations related to Etherios (in thousands):

	Twelve months ended September 30,
	2016		2015			2014
Amortization of identifiable intangible assets	$	30	$	483		$	513
Depreciation of property, equipment and improvements	$	—	$	29		$	21
Purchases of property, equipment, improvements and certain other intangible assets	$	—	$	(11	)	$	(144	)