GOODWILL

At June 30, 2015 and September 30, 2015, the goodwill balance totaled $30.1 million. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Factors considered important, which could trigger an impairment review, include the following:


•	significant other-than-temporary decline in the Company's stock price for a sustained period;


•	significant underperformance relative to expected historical or projected future operating results;


•	significant changes in the manner of use of assets or the strategy for the Company's overall business;


•	significant negative industry or economic trends; and


•	significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments.

The Company considers its market capitalization and other valuation techniques, as applicable, when estimating fair value for goodwill impairment tests. When conducting annual and interim goodwill impairment assessments, the Company initially performs a qualitative evaluation (considering factors described above as applicable) of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, a two-step impairment test is applied. The two-step impairment test first compares the estimated fair value of the Company's single reporting unit to its carrying or book value. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and there is no requirement to perform further testing. If the carrying value of the reporting unit exceeds its estimated fair value, the Company is required to determine the estimated implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeds its estimated implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statements of operations.

June 30, 2015 Goodwill Impairment Assessment. At June 30, 2015, the Company assessed the impact of the recent downward volatility in the Company's stock price and concluded that the decline constituted a triggering event requiring an interim goodwill impairment test. The Company conducted the first step of the goodwill impairment test for its single reporting unit as of June 30, 2015. The estimated fair value of the reporting unit exceeded its carrying value as of June 30, 2015 by approximately 4%, utilizing the market capitalization plus cost synergies approach described below, and therefore, goodwill was determined to not be impaired as of June 30, 2015.

September 30, 2015 Goodwill Impairment Analysis Update. The Company updated the quantitative impairment assessment described above as of September 30, 2015, conducting the first step of the goodwill impairment test for the Company's single reporting unit as of September 30, 2015. The fair value of the reporting unit exceeded its carrying value as of September 30, 2015, and therefore goodwill was determined to not be impaired as of September 30, 2015.

At September 30, 2015, fair value was estimated using the Company's market capitalization as of September 30, 2015. The estimated market capitalization was determined by multiplying the Company's stock price and the common shares outstanding as of September 30, 2015, resulting in a market capitalization and fair value estimate of approximately $460.8 million. The carrying value of the Company was $439.5 million at September 30, 2015, resulting in an excess fair value estimate of $21.3 million or 5%. When considering an estimated control premium based on estimated cost synergies that could be realized by an acquirer in a hypothetical sale of the company, the estimated fair value increased to $502.8 million, resulting in an excess fair value estimate of $63.3 million or 14%.

Utilization of the Company's market capitalization in the first step of the analysis to estimate the fair value of the company for the purpose of assessing the recoverability of goodwill is significantly impacted by the stock price of the company at the measurement date. Historically, the Company's stock price has been volatile, and this volatility has continued for the periods reflected herein, ranging from $7.88 to $17.22 during the 2015 periods. In addition, subsequent to September 30, 2015, the Company's stock price volatility has continued, trending downward to $6.91, as of November 3, 2015. If the first step of the analysis was performed using the market capitalization approach as of November 3, 2015, the fair value estimate would have been approximately $350.6 million, resulting in a deficit of $88.9 million or 20% when compared to the September 30, 2015 carrying value of the company. If the first step of the analysis was performed using the market capitalization plus control premium approach on the same date, the fair value estimate would have been $392.6 million, resulting in a deficit of $46.9 million or 11% when compared to the September 30, 2015 carrying value of the company.

If this downward stock price movement since September 30, 2015 were deemed to be sustained and/or other-than-temporary, the Company may fail the first step of the goodwill impairment analysis using the market capitalization measurement approach and market capitalization plus cost synergies approach in future periods. As of the date of this report, management believes that the decline in the Company's stock price subsequent to September 30, 2015 is temporary, based on the historical volatility of the Company's stock price and management's belief that there have been no material changes to the estimates, judgments and assumptions underlying the estimates of fair value of the Company, subsequent to September 30, 2015. However, as of the filing date of this report, Acacia's operating subsidiaries have in excess of 10 patent infringement cases with a scheduled trial date in the next six months. It is difficult to predict the outcome of patent enforcement litigation at the trial level, and outcomes can be unfavorable. An unfavorable outcome in certain of the litigations scheduled to occur in the next six months could materially impact the Company's stock price (potentially resulting in an other-than-temporary-decline) and could materially reduce expected estimated future cash flows, which could materially reduce estimates of fair value in future periods. If, in future periods it is determined by the first step of the two-step impairment analysis that the carrying value of the reporting unit exceeds its fair value, the Company is required to determine the implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference would be recorded in the consolidated statements of operations.

In future periods, fair value may be estimated using the “Income Approach,” focusing on the estimated future income-producing capability of the Company's assets, principally its patent portfolios. The underlying premise of this approach is that the value of the Company can be estimated by the present value of the estimated future net economic benefit (cash receipts less cash outlays). The approach contemplates estimates of after-tax cash flows attributable to the Company's aggregate assets and converting these after-tax cash flows to present value through “discounting.” The discounting process contemplates an estimated rate of return that accounts for both the time value of money and investment risk factors. The cash inflows considered are comprised of an estimate of revenues to be generated from future licensing. Estimated cash outflows are based on estimated contractual obligations, such as contingent legal fee and inventor royalty obligations, applied to estimated revenues, in addition to other estimates of out-of-pocket expenses associated with licensing and enforcement and ongoing operations. Net cash flows also consider utilization of applicable tax assets, including net operating loss carryforwards, subject to applicable limitations on use.

As described above, in assessing the recoverability of goodwill using a discounted cash flow analysis, significant judgments and estimates are required in connection with estimates of fair values, including estimates of the amount and timing of future cash inflows and outflows, estimates of time and risk related discount factors, estimates of costs and expenses and estimates of other factors that are used to estimate fair values of the Company. These estimates and judgments may change in future periods based on new or changing facts and circumstances. For example, significant declines in estimates of future revenues due to future adverse litigation or trial outcomes, changes in estimates of patent coverages, adverse rulings by the courts or other regulatory bodies that increase the complexity of patent law and the costs associated with the litigation process, changes in the Company's ability to invest in additional high-quality patent portfolios in future periods, changes in estimates of the Company's ability to launch new products or strategies, or other increases in costs associated with current or future licensing and enforcement programs, could have a material impact on estimates of fair value in connection with future interim or annual impairment tests. If these estimates or related projections result in material reductions to estimates of fair value in future periods, future intangible asset and/or goodwill impairment tests may result in material impairment charges to earnings.