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Acquisitions | 12 Months Ended
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Sep. 30, 2023
Business Combinations [Abstract] |
ACQUISITIONS | ACQUISITIONS Fiscal 2022 Acquisition Acquisition of Ventus On November 1, 2021, we acquired Ventus for approximately $350 million in cash. The acquisition was funded through a combination of cash on hand and debt financing under a $350 million credit facility committed by BMO Harris Bank N.A. For tax purposes, this acquisition was treated as an asset acquisition. We believe this is a complementary acquisition for us as it significantly enhances our IoT Solutions segment by enhancing Digi's service portfolio and immediately extends the company's market reach with a Managed Network-as-a-Service ("MNaaS") solutions offering. Costs directly related to the acquisition of $4.4 million incurred in fiscal 2022 were charged to operations and are included in general and administrative expense in our consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees. The following table summarizes the fair values of Ventus assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash |  | $ | 350,000 |
Fair value of net tangible assets acquired |  | $ | 20,365 |
Identifiable intangible assets: |  |
Customer relationships |  | 179,000 |
Purchased and core technology |  | 16,000 |
Trademarks |  | 16,000 |
Goodwill |  | 118,635 |
Total |  | $ | 350,000 |
The consolidated balance sheet as of September 30, 2022 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair value of customer relationships was calculated using the excess earnings method, while purchased and core technology and patents were valued using the relief from royalty method. These methodologies utilize future estimates including revenues attributable to customer relationships, tax rates, discount rates, royalty rates and obsolescence rates. The final purchase price allocation includes an adjustment made in the fourth fiscal quarter of 2022 to reflect an update from our preliminary purchase price allocation to the valuation of the net tangible assets acquired and goodwill resulting from the acquisition. Included in the fair value of net tangible assets acquired was $0.9 million of right-of-use asset included in other non-current assets and $0.9 million of lease liability included in other current liabilities and other non-current liabilities associated with Ventus’ operating leases. The weighted average useful life for all the identifiable intangibles listed above is estimated to be 19.2 years. For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 20.5 years, purchased and core technology is assumed to have useful life of 11 years and trademarks are assumed a useful life of 13 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. The identifiable intangible assets are amortized using the straight-line method which reflects the pattern in which the assets are expected to be consumed. The fiscal 2022 consolidated results include $54.3 million in revenue contributed by the acquired Ventus business. It is impracticable to quantify the amount of Ventus contribution to our consolidated net income due to the business structure management uses for reporting and allocating expenses to segments. 2. ACQUISITIONS (CONTINUED) The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2020 (in thousands):
|  |  | Year ended September 30,
|  |  |  |  | 2022 |  | 2021
Net sales |  |  |  |  | $ | 393,290 |  |  | $ | 360,820 |
Net income (loss) |  |  |  |  | $ | 14,274 |  |  | $ | (2,701) |
Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition, amortization on the fair value of the intangibles acquired and remove any costs incurred with the sale transaction. Net income for the year ended September 30, 2021 was adjusted to include acquisition-related costs of $3.1 million. Fiscal 2021 Acquisitions Acquisition of Haxiot On March 26, 2021, we acquired Haxiot, a Dallas-based provider of low power wide area ("LPWA") wireless technology. Following this date, the results of operations are included within our IoT Products & Services segment. We believe this is a complementary acquisition for us as it significantly enhances our IoT Products & Services segment by enhancing Digi's embedded systems portfolio and immediately extends the company's market reach with a complete LoRaWAN-based solutions offering. The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with $7.1 million of cash on hand. The future earn-out payments are based on Haxiot revenue performance and contractually are not to exceed $3.0 million and $5.0 million for the annual periods ended December 31, 2021 and December 31, 2022. In the third quarter of fiscal 2021, the purchase price allocation was updated, including related determination of fair value and income tax implications. As a result, we adjusted goodwill to $8.6 million and adjusted contingent consideration to $5.9 million. In the fourth fiscal quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $5.9 million, resulting in a fair value of $0.0 million for contingent consideration relating to the acquisition of Haxiot at September 30, 2023 and 2022. For tax purposes, this acquisition is treated as a stock acquisition. The goodwill therefore is not deductible. Costs directly related to the acquisition of $0.3 million have been charged to operations in fiscal 2021. These costs are included in general and administrative expense in our consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees. The following table summarizes the fair values of Haxiot assets acquired, net of $50 thousand of cash acquired, and liabilities assumed as of the acquisition date (in thousands).
Cash |  | $ | 7,096 |
Contingent consideration |  | 5,900 |
Total |  | $ | 12,996 |
Fair value of net tangible assets acquired |  | $ | 86 |
Identifiable intangible assets: |  |
Customer relationships |  | 3,900 |
Purchased and core technology |  | 1,050 |
Trademarks |  | 500 |
Deferred tax liability on identifiable intangible assets |  | (1,145) |
Goodwill |  | 8,605 |
Total |  | $ | 12,996 |
2. ACQUISITIONS (CONTINUED) Acquisition of Ctek, Inc. On July 6, 2021, we acquired Ctek, Inc. ("Ctek"), a San Pedro, California-based provider that specializes in solutions for remote monitoring and industrial controls. The results of operations of Ctek are included in our fourth quarter fiscal 2021 results within our IoT Products & Services segment. Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and monitoring of critical infrastructure, from complex off-shore oil rig locations to localized deployments such as municipal park lighting. In addition, Ctek’s offering and existing client portfolio is set to further Digi’s reach in a rapidly expanding market. The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with $12.0 million of cash on hand. The future earn-out payments are based on revenue performance outlined in the terms of the purchase agreement for the annual periods ending December 31, 2021, December 31, 2022 and December 31, 2023. The cumulative amount of these earn-outs for the annual periods had a max $0.5 million, $1.0 million and $1.5 million, respectively. In the fiscal fourth quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $0.3 million, resulting in a fair value of $0.0 million for contingent consideration relating to the acquisition of Ctek at September 30, 2023 and 2022. For tax purposes, this acquisition is treated as a stock acquisition. The goodwill therefore is not deductible. Costs directly related to the acquisition of $0.3 million have been charged to operations in fiscal 2021. These costs are included in general and administrative expense in our consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees. The following table summarizes the fair values of Ctek assets acquired and liabilities assumed as of the acquisition date (in thousands).
Cash |  | $ | 12,012 |
Contingent consideration |  | 300 |
Working capital adjustment |  | 422 |
Total |  | $ | 12,734 |
Fair value of net tangible assets acquired |  | $ | 397 |
Identifiable intangible assets: |  |
Customer relationships |  | 5,100 |
Purchased and core technology |  | 1,300 |
Trademarks |  | 70 |
Backlog |  | 1,000 |
Goodwill |  | 4,867 |
Total |  | $ | 12,734 |

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