Note 1. Organization and Summary of Significant Accounting Policies

Nature of Operations

Support.com, Inc. ("Support.com", "the Company", "We" or "Our"), was incorporated in the state of Delaware on December 3, 1997. Our common stock trades on the Nasdaq Global Select Market under the symbol "SPRT."

Support.com is a provider of cloud-based services and software designed to enhance a customer's experience with technology.

Our solution includes, the cloud-based Nexus^® Service Delivery Platform, a scalable workforce of technology specialists, mobile and desktop applications for end-users and proven expertise in program design and execution. We offer turnkey solutions including all of these elements. We also make our Nexus platform available on a SaaS basis and license our end-user applications separately.

We offer our customers a broad array of technology services to meet the needs of their own customers. Service programs available for consumer markets include computer and mobile device set-up, security and support, virus and malware removal and wireless network set-up, security and support. Service programs available for small business markets include the consumer services plus managed services such as server and network monitoring and maintenance. Our services can be purchased either as one-time incidents or subscriptions, with subscriptions representing an increasing percentage of our revenue. Our technology specialists deliver our services to customers online via remote control and by telephone, leveraging the Nexus platform. Most of our technology specialists work from their homes rather than in brick and mortar facilities.

Basis of Presentation

The Consolidated Financial Statements include the accounts of Support.com and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is generally the local currency. Assets and liabilities of our wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates prevailing during the year. Any material resulting translation adjustments are reflected as a separate component of stockholders' equity in accumulated other comprehensive income or loss. Realized foreign currency transaction gains and losses were not material during the years ended December 31, 2012, 2011, and 2010.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most significant, difficult and subjective judgments include revenue recognition, fair value measurements, purchase accounting in business combinations, accounting for goodwill and other intangible assets, stock-based compensation and accounting for income taxes. Actual results could differ materially from these estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, investments and trade accounts receivable. Our investment portfolio consists of investment grade securities. Except for obligations of the United States government and securities issued by agencies of the United States government, we diversify our investments by limiting our holdings with any individual issuer. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the balance sheet. The credit risk in our trade accounts receivable is substantially mitigated by our evaluation of the customers' financial conditions at the time we enter into business and reasonably short payment terms.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount. We perform evaluations of our customers' financial condition and generally do not require collateral. We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Reserves are made based on a specific review of all significant outstanding invoices. For those invoices not specifically provided for, reserves are recorded at differing rates, based on the age of the receivable. In determining these rates, we analyze our historical collection experience and current payment trends. The determination of past-due accounts is based on contractual terms.

The following table summarizes the allowance for doubtful accounts as of December 31, 2012, 2011 and 2010 (in thousands):

	Balance at Beginning of Period		Adjustments to Costs and Expenses			Write- offs			Balance at End of Period
Allowance for doubtful accounts:

Year ended December 31, 2010	$	9	$	34		$	—		$	43
Year ended December 31, 2011	$	43	$	(16	)	$	(7	)	$	20
Year ended December 31, 2012	$	20	$	(18	)	$	—		$	2

As of December 31, 2012, Comcast (52%) and OfficeMax (10%) accounted for 10% or more of our total accounts receivable. As of December 31, 2011, Comcast (41%), Staples (17%), Office Depot (15%) and OfficeMax (13%) accounted for 10% or more of our total accounts receivable. No other customers accounted for 10% or more of our total accounts receivable as of December 31, 2012 or 2011.

Cash, Cash Equivalents and Investments

All liquid instruments with an original maturity at the date of purchase of 90 days or less are classified as cash equivalents. Cash equivalents and short-term investments consist primarily of money market funds, certificates of deposit, commercial paper, corporate and municipal bonds. Our interest income on cash, cash equivalents and investments is recorded monthly and reported as interest income and other in our consolidated statements of operations.

Long-term investment at December 31, 2011 consisted of an ARS position. Our cash equivalents and short-term and long-term investments are classified as available-for-sale, and are reported at fair value with unrealized gains/losses (when deemed to be temporary) included in accumulated other comprehensive income within stockholders' equity on the consolidated balance sheets. We view our available-for-sale portfolio as available for use in our current operations, and therefore we present our marketable securities as short-term assets.

We monitor our investments for impairment on a quarterly basis and determine whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the security's issuer, the length of time an investment's fair value has been below our carrying value, the Company's intent to sell the security and the Company's belief that it will not be required to sell the security before the recovery of its amortized cost. If an investment's decline in fair value is deemed to be other-than-temporary, we reduce its carrying value to its estimated fair value, as determined based on quoted market prices or liquidation values. Declines in value judged to be other-than-temporary, if any, are recorded in operations as incurred. At December 31, 2012, the Company evaluated its unrealized losses on available-for-sale securities and determined them to be temporary. We currently do not intend to sell securities with unrealized losses and we concluded that we will not be required to sell these securities before the recovery of their amortized cost basis.

At December 31, 2012 and 2011, the fair value of cash, cash equivalents and investments was $56.3 million and $53.0 million, respectively. The following is a summary of cash, cash equivalents and investments at December 31, 2012 and 2011 (in thousands):

	For the Year Ended December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	11,116	$	—	$	—		$	11,116
Money market fund		17,235		—		—			17,235
Certificates of deposit		1,880		—		(1	)		1,879
Commercial paper		5,745		1		(1	)		5,745
Corporate notes and bonds		20,172		7		(6	)		20,173
U.S. government agency securities		202		—		—			202
	$	56,350	$	8	$	(8	)	$	56,350
Classified as:
Cash and cash equivalents	$	30,853	$	—	$	(1	)	$	30,852
Short-term investments		25,497		8		(7	)		25,498
	$	56,350	$	8	$	(8	)	$	56,350

	For the Year Ended December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	6,461	$	—	$	—		$	6,461
Money market fund		15,698		—		—			15,698
Certificates of deposit		480		—		—			480
Commercial paper		6,295		—		(6	)		6,289
Corporate notes and bonds		15,283		1		(16	)		15,268
U.S. government agency securities		7,707		—		(1	)		7,706
Auction-rate security		1,400		—		(289	)		1,111
	$	53,324	$	1	$	(312	)	$	53,013
Classified as:
Cash and cash equivalents	$	22,159	$	—	$	—		$	22,159
Short-term investments		29,765		1		(23	)		29,743
Long-term investment		1,400		—		(289	)		1,111
	$	53,324	$	1	$	(312	)	$	53,013

The following table summarizes the estimated fair value of our available-for-sale securities classified by the stated maturity date of the security (in thousands):

	December 31,
	2012		2011
Due within one year	$	23,885	$	29,503
Due within two years		1,613		240
Due after two years		—		1,111
	$	25,498	$	30,854

We determined that the gross unrealized losses on our available-for-sale investments as of December 31, 2012 are temporary in nature. The fair value of our available-for-sale securities at December 31, 2012 and 2011 reflects a net unrealized loss of zero and $311,000, respectively. We recognized net realized gains related to available-for-sale securities of zero and $7,000 for the years ended December 31, 2012 and 2011, respectively. There were no net realized losses on available-for-sale securities in the years ended December 31, 2012 and 2011, respectively. The cost of securities sold is based on the specific identification method.

At December 31, 2011, we had an investment in AAA-rated ARS with a state student loan authority with an estimated fair value of $1.1 million. At December 31, 2012, we had no investment in ARS because our long-term investment in ARS was settled at par for cash in May 2012.

The following table sets forth the unrealized losses for the Company's available-for-sale investments as of December 31, 2012 and 2011 (in thousands):

As of December 31, 2012	In Loss Position Less Than 12 Months					In Loss Position More Than 12 Months					Total In Loss Position
Description	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Certificate of deposits	$	1,159	$	(1	)	$	—	$	—		$	1,159	$	(1	)
Commercial paper		3,498		(1	)		—		—			3,498		(1	)
Corporate notes and bonds		12,045		(4	)		1,613		(2	)		13,658		(6	)
Total	$	16,702	$	(6	)	$	1,613	$	(2	)	$	18,315	$	(8	)

As of December 31, 2011	In Loss Position Less Than 12 Months					In Loss Position More Than 12 Months					Total In Loss Position
Description	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Commercial paper	$	4,288	$	(6	)	$	—	$	—		$	4,288	$	(6	)
Corporate notes and bonds		12,947		(16	)		—		—			12,947		(16	)
U.S. government agency securities		3,805		(1	)		—		—			3,805		(1	)
Auction-rate security		—		—			1,111		(289	)		1,111		(289	)
Total	$	21,040	$	(23	)	$	1,111	$	(289	)	$	22,151	$	(312	)

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation which is determined using the straight-line method over the estimated useful lives of two years for computer equipment and software, three years for furniture and fixtures, and the shorter of the estimated useful lives or the lease term for leasehold improvements. Repairs and maintenance costs are expensed as they are incurred.

Goodwill

We test goodwill for impairment annually on September 30 and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with ASC 350, Intangibles - Goodwill and Other. Consistent with our assessment that we have only one reporting segment, we test goodwill for impairment at the entity level. We test goodwill using the two-step process required by ASC 350. In the first step, we compare the carrying value of the reporting unit to the fair value based on quoted market prices of our common stock. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, we compare the implied fair value of the goodwill, as defined by ASC 350, to the carrying amount to determine the impairment loss, if any.

We conduct our annual evaluation for impairment of goodwill on September 30. No goodwill impairment charges have been recorded through December 31, 2012.

Intangible Assets

We record purchased intangible assets at fair value. Useful life is estimated as the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. As we do not believe that we can reliably determine a pattern by which the economic benefits of these assets will be consumed, management adopted straight-line amortization in accordance with ASC 350. The original cost is amortized on a straight-line basis over the estimated useful life of each asset.

We assess the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. If our estimates regarding future cash flows derived from such assets were to change, we may record an impairment charge to the value of these assets. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value.

Revenue Recognition

For all transactions, we recognize revenue only when all of the following criteria are met:

•

Persuasive evidence of an arrangement exists;

•

Delivery has occurred;

•

Collection is considered probable; and

•

The fees are fixed or determinable.

We consider all arrangements with payment terms longer than 90 days not to be fixed or determinable. If the fee is considered not to be fixed or determinable, revenue is recognized as payment becomes due from the customer.

Services Revenue

Services revenue is comprised primarily of fees for technology support services. Service programs available for consumer markets include computer and mobile device set-up, security and support, virus and malware removal and wireless network set-up, security and support. Service programs available for small business markets include the consumer services plus managed services such as server and network monitoring and maintenance.

We offer services to consumers and small businesses, primarily through our channel partners (which include broadband service providers, retailers, technology companies and others). We transact with customers via reseller programs, referral programs and direct transactions. In reseller programs, the channel partner generally executes the financial transactions with the consumer and pays a fee to us which we recognize as revenue when the service is delivered. In referral programs, we transact with the consumer directly and pay a referral fee to the referring party. Referral fees are generally expensed in the period in which revenues are recognized. In such instances, since we are the transacting party and bear substantially all risks associated with the transaction, we record the gross amount of revenue. In direct transactions, we sell directly to the customer at the retail price.

Our services are of three types for revenue recognition purposes:

Subscriptions—Customers purchase subscriptions or "service plans" under which certain services are provided over a fixed subscription period. Revenues for subscriptions are recognized ratably over the respective subscription periods.

• Incident-Based Services—Customers purchase a discrete, one-time service. Revenue recognition occurs at the time of service delivery. Fees paid for services sold but not yet delivered are recorded as deferred revenue and recognized at the time of service delivery.

• Service Cards / Gift Cards—Customers purchase a service card or a gift card, which entitles the cardholder to redeem a certain service at a time of their choosing. For these sales, revenue is deferred until the card has been redeemed and the service has been provided.

In certain cases, we are paid for services that are sold but not yet delivered. We initially record such balances as deferred revenue, and recognize revenue when the service has been delivered or, on the non-subscription portion of these balances, when the likelihood of the service being redeemed by the customer is remote ("services breakage"). Based on our historical redemption patterns for these relationships, we believe that the likelihood of a service being delivered more than 90 days after sale is remote. We therefore recognized non-subscription deferred revenue balances older than 90 days as services revenue. For the years ended December 31, 2012, 2011 and 2010, services breakage revenues were immaterial, and accounted for approximately 1% of total revenue.

Channel partners are generally invoiced monthly. Fees from consumers via referral programs and direct transactions are generally paid with a credit card at the time of sale. Revenue is recognized net of any applicable sales tax.

We generally provide a refund period on services, during which refunds may be granted to consumers under certain circumstances, including inability to resolve certain support issues. For our channel sales, the refund period varies by partner, but is generally between 5 and 14 days. For referral programs and direct transactions, the refund period is generally 5 days. For all channels, we recognize revenue net of refunds and cancellations during the period. Refunds and cancellations have not been material.

Software and Other Revenue

Software and other revenue is comprised primarily of fees for end-user software products provided through direct customer downloads and through the sale of this software via channel partners. Our software is sold to consumers as a perpetual license or as a fixed period subscription. We act as the primary obligor and generally control fulfillment, pricing, product requirements, and collection risk and therefore we record the gross amount of revenue. We provide a 30-day money back guarantee for certain of our software products.

For certain products, we sell perpetual licenses. We provide a limited amount of free technical support to customers. Since the cost of providing this free technical support is insignificant and free product enhancements are minimal and infrequent, we do not defer the recognition of revenue associated with sales of these products.

For certain of our products (principally SUPERAntiSpyware), we sell licenses for a fixed subscription period. We provide regular, significant updates over the subscription period and therefore recognize revenue for these products ratably over the subscription period.

Other revenue consists primarily of revenue generated through partners advertising to our customer base in various forms, including toolbar advertising, email marketing, and free trial offers. We recognize other revenue in the period in which our partners notify us that the revenue has been earned.

Research and Development

Research and development expenditures are charged to operations as they are incurred. Based on our product development process, technological feasibility is established on the completion of a working model. Costs incurred by us between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, we have charged all such costs to research and development expense in the period in which they were incurred in the consolidated statements of operations.

Purchased Technology and Internal Use Software

We capitalize costs related to software that we license and incorporate into our product and service offerings or develop for internal use. In July 2009, we acquired purchased technology for $350,000 and recorded amortization expense related to this technology of $81,000, $83,000 and $83,000 in 2012, 2011 and 2010, respectively. During the year ended December 31, 2012, we recorded an impairment charge in general and administrative expenses of $70,000 in connection with the development of software of internal use.

Advertising Costs

Advertising costs are recorded as sales and marketing expense in the period in which they are incurred. Advertising expense was $8.2 million, $10.8 million, and $10.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Net Loss Per Share

Basic net loss per share is computed using our net loss and the weighted average number of common shares outstanding during the reporting period. Diluted net loss per share is computed using our net loss and the weighted average number of common shares outstanding, including the effect from the potential issuance of common stock such as stock issuable pursuant to the exercise of stock options using the treasury stock method when dilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Year Ended December 31,
	2012			2011			2010
Net loss	$	(5,424	)	$	(18,640	)	$	(18,067	)
Basic:
Weighted-average shares of common stock outstanding		48,798			48,288			46,818
Shares used in computing basic net loss per share		48,798			48,288			46,818
Basic net loss per share	$	(0.11	)	$	(0.39	)	$	(0.39	)
Diluted:
Weighted-average shares of common stock outstanding		48,798			48,288			46,818
Add: Common equivalent shares outstanding		—			—			—
Shares used in computing diluted net loss per share		48,798			48,288			46,818
Diluted net loss per share	$	(0.11	)	$	(0.39	)	$	(0.39	)

For the years ended December 31, 2012, 2011 and 2010, 1.5 million, 2.9 million and 941,000 outstanding options were excluded from the computation of diluted net loss per share, respectively, since their effect would have been anti-dilutive.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss relate entirely to accumulated foreign currency translation losses and unrealized gains and losses on investments. Accumulated currency translation losses were $1.5 million and $1.4 million as of December 31, 2012 and 2011, respectively, and accumulated unrealized gains (losses) on investments were zero and $(0.3) million as of December 31, 2012 and 2011, respectively. During the year ended December 31, 2011, the Company reclassified $284,000 from cumulative translation adjustments to discontinued operations within the consolidated statements of operations, as a result of substantial liquidation of the Company's investment in its UK subsidiary.

The amounts noted in the consolidated statements of comprehensive loss are shown before taking into account the related income tax impact. The income tax effect allocated to each component of other comprehensive income for each of the periods presented is not significant.

Stock-Based Compensation

We apply the provisions of ASC 718, Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards, including grants of stock and options to purchase stock, made to employees and directors based on estimated fair values.

Determining Fair Value of Share-Based Payments

Valuation and Attribution Method: We estimate the fair value of stock options granted using the Black-Scholes-Merton option pricing model. Stock options vest on a graded schedule; however we recognize the expense on a straight-line basis over the requisite service period of the entire award, net of estimated forfeitures. These limitations require that on any date the compensation cost recognized is at least equal to the portion of the grant-date fair value of the award that is vested at that date.

Risk-free Interest Rate: We base our risk-free interest rate on the yield currently available on U.S. Treasury zero coupon issues for the expected term of the stock options.

Expected Term: Our expected term represents the period that our stock options are expected to be outstanding and is determined based on historical experience of similar stock options considering the contractual terms of the stock options, vesting schedules and expectations of future employee behavior.

Expected Volatility: Our expected volatility represents the amount by which the stock price is expected to fluctuate throughout the period that the stock option is outstanding. Historically, we have based our expected volatility on historical company data. Our methodology combines available Company-specific volatility for the period with the volatility of a peer group. The relative weight given to Company-specific volatility increases each reporting period, while the relative weighting for our peer group's volatility decreases. Given the expected life of our stock grants, we expect Company-specific volatility to wholly account for our volatility estimates beginning in 2013.

Expected Dividend: We use a dividend yield of zero, as we have never paid cash dividends and do not expect to pay dividends in the future.

In the second quarter of 2011, to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward eligible employees and by motivating such persons to contribute to the growth and profitability of the Company, the Company's Board of Directors and stockholders approved a new Employee Stock Purchase Plan and reserved 1,000,000 shares of our common stock for issuance effective as of May 15, 2011. The ESPP continues in effect for ten (10) years from its effective date unless terminated earlier by the Company. The ESPP consists of six-month offering periods during which employees may enroll in the plan. The purchase price on each purchase date shall not be less than eighty-five percent (85%) of the lesser of (a) the fair market value of a share of stock on the offering date of the offering period or (b) the fair market value of a share of stock on the purchase date.

The fair value of our stock-based awards was estimated using the following weighted average assumptions for the years ended December 31, 2012, 2011 and 2010:

	Stock Option Plan									Employee Stock Purchase Plan
	2012			2011			2010			2012			2011			2010
Risk-free interest rate		0.6	%		1.0	%		1.7	%		0.1	%		0	%		n/a
Expected term (in years)		3.7			3.6			3.6			0.5			0.5			n/a
Volatility		57.2	%		59.2	%		66.6	%		62.3	%		75.3	%		n/a
Expected dividend		0	%		0	%		0	%		0	%		0	%		n/a
Weighted average grant-date fair value	$	1.30		$	1.63		$	1.71		$	1.15		$	0.77			n/a

On December 13, 2012, the Compensation Committee of the Board of Directors extended the term of 700,000 stock options granted to the Company's Chief Executive Officer and President. The stock options were granted on April 6, 2006 and were originally scheduled to expire on April 6, 2013. After the extension, the stock options will expire on April 6, 2016. The stock options were granted under the Company's Amended and Restated 1998 Stock Option Plan. At the time of the extension, the exercise price of the stock options exceeded the current fair market value of the Company's common shares. No other terms of the stock options were modified. As part of the modification of the stock options, the Company recorded incremental stock-based compensation expense of approximately $810,000 in the fourth quarter of 2012.

We recorded the following stock-based compensation expense for the fiscal years ended December 31, 2012, 2011 and 2010 (in thousands):

	For the Year Ended December 31,
	2012		2011		2010
Stock option compensation expense recognized in:
Cost of service	$	305	$	222	$	168
Cost of software and others		25		28		1
Research and development		1,004		806		588
Sales and marketing		478		581		693
General and administrative		2,464		2,088		1,881
	$	4,276	$	3,725	$	3,331
ESPP compensation expense recognized in:
Cost of service	$	49	$	23	$	—
Cost of software and others		1		1		—
Research and development		15		10		—
Sales and marketing		5		5		—
General and administrative		10		5		—
	$	80	$	44	$	—
RSU compensation expense recognized in:
General and administrative	$	169	$	—	$	—

Stock-based compensation expense included in total costs and expenses	$	4,525	$	3,769	$	3,331

Net cash proceeds from the exercise of stock options were $3.4 million, $450,000, and $4.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. No income tax benefit was realized from stock option exercises during the years ended December 31, 2012, 2011 and 2010, respectively. In accordance with ASC 718, we present excess tax benefits from the exercise of stock options, if any, as net cash generated in financing activities.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets, if it is more likely than not, that such assets will not be realized.

Warranties and Indemnifications

We generally provide a refund period on sales, during which refunds may be granted to consumers under certain circumstances, including our inability to resolve certain support issues. For our channel sales, the refund period varies by channel partner, but is generally between 5 and 14 days. For referral programs and direct transactions, the refund period is generally 5 days. For all sales channels, we recognize revenue net of refunds and cancellations during the period. Refunds and cancellations have not been material.

We generally agree to indemnify our customers against legal claims that our software products infringe certain third-party intellectual property rights. As of December 31, 2012 and 2011, we have not been required to make any material payments resulting from infringement claims asserted against our customers and have not recorded any material related accruals.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

•

Level 1 - Quoted prices in active markets for identical assets or liabilities.

•

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 820, the following table represents our fair value hierarchy for our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2012 and 2011 (in thousands):

As of December 31, 2012	Level 1		Level 2		Level 3		Total
Money market funds	$	17,235	$	—	$	—	$	17,235
Certificates of deposits		1,879		—		—		1,879
Commercial paper		—		5,745		—		5,745
Corporate notes and bonds		—		20,173		—		20,173
U.S. government agency securities		—		202		—		202
Total	$	19,114	$	26,120	$	—	$	45,234

As of December 31, 2011	Level 1		Level 2		Level 3		Total
Money market funds	$	15,698	$	—	$	—	$	15,698
Certificates of deposits		480		—		—		480
Commercial paper		—		6,289		—		6,289
Corporate notes and bonds		—		15,268		—		15,268
U.S. government agency securities		—		7,706		—		7,706
Auction-rate security	$	—		—		1,111		1,111
Total	$	16,178	$	29,263	$	1,111	$	46,552

For marketable securities, measured at fair value using Level 2 inputs, we review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data. There have been no transfers between Level 1 and Level 2 measurements during the years ended December 31, 2012 and 2011.

Level 3 asset consisted of an ARS with a state student loan authority. We classified our holding as a long-term asset due to the failure of the auction and the underlying maturity of this security. The fair value for our ARS as of December 31, 2011 was estimated by management and based on a discounted cash flow valuation that takes into account a number of factors including the estimated weighted average remaining term (WART) of the underlying securities, the expected return, and the discount rate. The WART was estimated based on servicing reports and expectations regarding redemptions. The expected return was calculated based on the last twelve months' average for the 91 day T-bill plus a spread. This rate was the typical default rate for ARS held by us. The discount rate was calculated using the 3-month LIBOR rate plus adjustments for the security type. As of December 31, 2012, we had no level 3 assets due to the settlement at par of our long-term investment in ARS for cash in May 2012.

The following table provides a summary of changes in fair value of our Level 3 financial assets during the years ended December 31, 2012 and 2011 (in thousands):

	Year Ended December 31,
	2012			2011
Beginning balance	$	1,111		$	2,667
Sales		(1,400	)		(1,400	)
Total gain (loss) included in other comprehensive loss		289			(156	)
Ending balance	$	—		$	1,111

Segment Information

In accordance with ASC 820, Segment Reporting, the Company reports it's operation as a single operating segment. Revenue from customers located outside the United States was less than 1% of total revenue and accounted for approximately $309,000, $366,000, and $302,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

For the year ended December 31, 2012, Comcast (35%), Office Depot (12%), OfficeMax (12%) and Staples (10%) accounted for 10% or more of our total revenue. For the year ended December 31, 2011, Office Depot (23%), Staples (15%) and Comcast (14%) accounted for 10% or more of our total revenue. For the year ended December 31, 2010, Office Depot (43%) and Staples (17%) accounted for 10% or more of our total revenue. There were no other customers that accounted for 10% or more of our total revenue in any of the periods presented.

Long-lived assets are attributed to the geographic location in which they are located. We include in long-lived assets all tangible assets. Long-lived assets regarding geographic areas are as follows (in thousands):

	December 31,
	2012		2011
United States	$	552	$	418
India		39		43
Total	$	591	$	461

Recent Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income". This update is to improve the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 is effective for public entities for fiscal years and interim periods within those years beginning after December 15, 2011. The Company adopted this guidance in its consolidated financial statements for the year ended December 31, 2012 by presenting total comprehensive income/loss in two separate but consecutive statements.

In September 2011, a pronouncement was issued that amended the guidance for goodwill impairment testing. The pronouncement allows the entity to perform an initial qualitative assessment to determine whether it is "more likely than not" that the fair value of the reporting unit is less than its carrying amount. This assessment is used as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The methodology for how goodwill is calculated, assigned to reporting units, and the application of the two step goodwill impairment test have not been revised. The pronouncement is effective for fiscal years beginning after December 15, 2011. The adoption of this pronouncement did not have a significant impact on the Company's consolidated financial statements.