XML 20 R9.htm IDEA: XBRL DOCUMENT v3.5.0.2
Discontinued Operations
 9 Months Ended
Jun. 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.
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 Condensed Consolidated Balance Sheet at June 30, 2016 approximates their fair values, which were determined using level 3 cash flow fair value measurement techniques.
3. DISCONTINUED OPERATIONS (CONTINUED)
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 June 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 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015 is as follows (in thousands):
 
Three months ended June 30,
 
Nine months ended June 30,
 
2016
 
2015
 
2016
 
2015
Service revenue
$
—

 
$
2,483

 
$
891

 
$
6,738

Cost of service
—

 
2,158

 
713

 
6,205

Gross profit
—

 
325

 
178

 
533

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
—

 
452

 
148

 
1,433

Research and development
—

 
589

 
103

 
1,567

General and administrative
—

 
246

 
43

 
850

Restructuring
—

 
—

 
—

 
106

Total operating expenses
—

 
1,287

 
294

 
3,956

Loss from discontinued operations, before income taxes
—

 
(962
)
 
(116
)
 
(3,423
)
Gain on sale of discontinued operations, before income taxes
—

 
—

 
2,870

 
—

Total income (loss) from discontinued operations, before income taxes
—

 
(962
)
 
2,754

 
(3,423
)
Income tax benefit on discontinued operations
—

 
(373
)
 
(476
)
 
(1,261
)
Income (loss) from discontinued operations, after income taxes
$
—

 
$
(589
)
 
$
3,230

 
$
(2,162
)

Income tax benefit on discontinued operations for the nine months ended June 30, 2016 was $0.5 million and primarily represents 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, 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 was recorded in the third quarter of fiscal 2016 upon completion of the capital loss calculation.
3. DISCONTINUED OPERATIONS (CONTINUED)
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):
 
Nine months ended June 30,
 
2016
 
2015
Amortization of identifiable intangible assets
$
30

 
$
362

Depreciation of property, equipment and improvements
$
—

 
$
21

Purchases of property, equipment, improvements and certain other intangible assets
$
—

 
$
(11
)