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 prior to fiscal 2017. 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 was included within the total fair value of consideration received. These receivable amounts are unsecured and non-interest bearing. We received $3.0 million in October 2016. The carrying value of the remaining receivable of $2.0 million presented on our Condensed Consolidated Balance Sheet at September 30, 2017 approximates its fair value, which was determined using Level 3 cash flow fair value measurement techniques. We received the second installment of $2.0 million in October 2017.

Goodwill was 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 consisted of a single reporting unit for goodwill impairment testing purposes at the time of disposal.

As a condition to the sale agreement, we retained the operating leases in the Dallas and Chicago locations. Digi ceased using these facilities in October 2015 and has sublet the Dallas location to West Monroe Partners, LLC through December 31, 2018. In January 2017, we signed an early-termination agreement along with an immaterial payment to exit our Chicago lease. Also in connection with the sale, we assigned our San Francisco lease to West Monroe Partners, LLC.

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



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

Income tax benefit on discontinued operations for the twelve months ended September 30, 2016 was $0.5 million, which 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, 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.

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):



	Fiscal year ended September 30,
	2016		2015
Amortization of identifiable intangible assets	$	30	$	483
Depreciation of property, equipment and improvements	$	—	$	29
Purchases of property, equipment, improvements and certain other intangible assets	$	—	$	(11	)