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revenue recognition effective january 1 , 2018 the company adopted accounting standards update ( “ asu ” ) 2014-09 , “ revenue from contracts with customers ( topic 606 ) ” , ( “ topic 606 ” ) using the “ modified retrospective ” method , meaning the standard is applied only to the most current period presented in the financial statements . topic 606 requires the company to identify the performance obligations in our revenue arrangements – that is , those promised goods and services ( or bundles of promised goods or services ) that are distinct – and allocate the transaction price of the revenue arrangement to those performance obligations on the basis of estimated standalone selling prices ( “ ssp 's ” ) . 19 sales of hardware which include sales of radio frequency solutions in the network solutions segment , digital signal processing hardware in the embedded solutions segment and power meters and analyzers and noise generators and components in the test and measurement segment generally consist of one performance obligation which is satisfied upon shipment to the customer . when contract terms require transfer of control upon delivery at a customer 's location , revenue is recognized on the date of delivery . sales of hardware to distributors that include a limited right of return are recorded net of expected returns . sale of software licenses in the embedded solutions segment may involve multiple performance obligations including multiple software releases and consultancy services . in these cases transaction price is allocated to each distinct performance obligation on the basis of ssp and revenue is recognized when the distinct performance obligation is satisfied . the company determines performance obligations and ssp 's in arrangements with multiple performance obligations in accordance with topic 606 which requires significant judgement . services arrangements involving repairs and calibrations in the company 's test and measurement segment are generally considered a single performance obligation and revenue is recognized as the services are rendered . certain software arrangements in the embedded solutions segment may involve the transfer of software along with significant customization services . in these cases the customization services and software licenses are combined as one distinct performance obligation and revenue is recognized over time as the project is completed . the duration of these performance obligations are typically one year or less . business combinations business combinations are accounted under the acquisition method of accounting in accordance with accounting standards codification ( “ asc ” ) 805 , “ business combinations ” which requires assets acquired and liabilities assumed be recorded at their fair values on the acquisition date . goodwill represents the excess of the purchase price over the fair value of the net assets acquired . the fair values of the assets acquired and liabilities assumed are determined based upon management 's valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date . we use a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed . the measurement period ends once all information is obtained , but no later than one year from the acquisition date . valuation of goodwill goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination . goodwill is evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary . after assessing the totality of events or circumstances , if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount , then we perform additional quantitative tests to determine the magnitude of any impairment . as of december 31 , 2018 the company 's consolidated goodwill balance of $ 9.8 million is comprised of $ 1.4 million related to the microlab reporting unit and $ 8.4 million related to the commagility reporting unit . as of december 31 , 2017 the company 's consolidated goodwill balance of $ 10.3 million was comprised of $ 1.4 million related to the microlab reporting unit and $ 8.9 million related to the commagility reporting unit . management 's qualitative assessment performed in the fourth quarters of 2018 and 2017 did not indicate any impairment of goodwill . intangible and long-lived assets intangible assets include patents , non-competition agreements , customer relationships and trademarks . intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets , which range from five to seven years . long-lived assets , including intangible assets with finite lives , are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable . determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition . measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset . long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell . the estimated useful lives of intangible and long-lived assets are based on many factors including assumptions regarding the effects of obsolescence , demand , competition and other economic factors , expectations regarding the future use of the asset , and our historical experience with similar assets . the assumptions used to determine the estimated useful lives could change due to numerous factors including product demand , 20 market conditions , technological developments , economic conditions and competition . story_separator_special_tag inventories and inventory valuation inventories are stated at the lower of cost ( average cost ) or net realizable value . the company reviews inventory for excess and obsolescence based on best estimates of future demand , product lifecycle status and product development plans . allowances for doubtful accounts the company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments . a key consideration in estimating the allowance for doubtful accounts has been , and will continue to be , our customer 's payment history and aging of its accounts receivable balance . impairment of long-lived assets long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable . determination of recoverability is based on an estimate of undiscounted cash flows resulting from the use of the assets and their eventual disposition . measurement of an impairment loss for long-lived assets that management expects to hold for sale is based on the fair value of the assets . long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell . warranties the company generally offers standard warranties against product defects . we estimate future warranty costs to be incurred based on historical warranty claims experience including estimates of material and service costs over the warranty period . comparison of the results of operations for the year ended december 31 , 2018 with the year ended december 31 , 2017 net revenues ( in thousands ) replace_table_token_1_th net consolidated revenues for the year ended december 31 , 2018 were $ 52.8 million as compared to $ 46.1 million for the year ended december 31 , 2017 , an increase of $ 6.7 million or 14.6 % . embedded solutions segment revenue increased $ 6.7 million primarily due to increased sales of digital processing hardware that is used in wireless network test equipment . test and measurement segment revenue increased $ 0.8 million or 6.2 % due primarily to increased sales of noise generation components and modules to customers in the satellite industry and for use in optical applications offset by lower military and government orders . network solutions segment revenue decreased $ 0.8 million or 3.4 % due primarily to the use of highly competitive pricing and decreases in certain passive rf component demand , which were only slightly offset by increased sales of active components and customized integrated solutions . 22 gross profit ( in thousands ) replace_table_token_2_th gross profit increased by $ 4.9 million from 41.8 % of revenue to 45.8 % of revenue due primarily to increased volumes at the embedded solutions segment . the increase over 2017 also reflected inventory impairment charges recorded in 2017 related to the network solutions segment of $ 1.2 million and the test and measurement segment of $ 0.7 million . network solutions gross profit as a percentage of revenue in 2018 was adversely affected by lower volumes resulting from a highly competitive pricing environment and decreases in certain passive rf component demand . operating expenses ( in thousands ) replace_table_token_3_th research and development expenses increased $ 0.5 million due to the embedded solutions segment . embedded solutions segment research and development expenses increased $ 0.9 million due to investments in 5g research and development , the impact of a full 12 months of expense in 2018 versus 10.5 months expense in 2017 and the unfavorable impact of foreign exchange . the increase in the embedded solutions segment research and development expenses was offset by a $ 0.4 million decrease in research and development expenses in the network solutions and test and measurement segments due to lower third party spend . sales and marketing expenses increased $ 0.6 million primarily due to increased headcount in the network solutions segment offset by lower commission expense in the network solutions segment due to lower volumes . general and administrative expenses decreased $ 0.7 million due to lower mergers and acquisitions expenses , and lower severance charges on executive team restructuring , offset by increased stock compensation and bonus expense . the increase also reflected the impact of a full year of commagility general and administrative expenses in 2018 versus 10.5 months in 2017 as well as the unfavorable impact of foreign exchange . in 2018 the company recorded a loss on change in fair value of contingent consideration of $ 0.6 million as our estimate of the earn-out payment related to the commagility acquisition was increased from our original estimate recorded at the time of acquisition due to the improved financial results of the business . in 2017 the company recorded a gain on change in fair value of contingent consideration of $ 0.3 million . other income/expense other expenses increased $ 39 thousand due to higher foreign exchange unrealized and realized losses on transactions denominated in currencies other than our functional currencies . 23 interest expense interest expense increased $ 0.3 million due to a full year of borrowing under our credit facility versus 10.5 months in 2017 and an increase in our average borrowing rate due to an increase in libor . additionally , the company recorded higher interest expense related to the commagility contingent consideration liability in 2018 due to increases in the liability as a result of higher financial results of the business than previously estimated . tax the company recorded tax expense of $ 48,000 in 2018 due primarily to deferred federal taxes in the u.s. offset by current and deferred tax benefits related to our foreign jurisdictions due to a research and development tax deduction and the reduction of the deferred tax liability . tax expense for the year ended december 31 , 2017 was $ 1.2 million primarily as a result of reduction of our net deferred tax asset largely driven by u.s. tax rate reductions due to the tcja enacted in december 2017.

liquidity and capital resources as disclosed in note 4 to the consolidated financial statements , on february 16 , 2017 the company entered into a credit facility which provided for a term loan in the aggregate principal amount of $ 0.8 million ( the “ term loan ” ) and an asset based revolving loan ( the “ revolver ” ) , which is subject to a borrowing base calculation ( as defined in the credit facility ) of up to a maximum availability of $ 9 million . the proceeds of the term loan and revolver were used to finance the acquisition of commagility . we expect our existing cash balance , cash generated by operations and borrowings available under our credit facility to be our primary sources of short-term liquidity , and we believe these sources will be sufficient to meet our liquidity needs for at least the next twelve months . as disclosed in note 15 to the consolidated financial statements , on february 27 , 2019 the company entered into amendment no . 3 to the credit facility which extended the term of the revolver to march 31 , 2020. during the first quarter of 2019 the company will pay the final deferred purchase price and contingent consideration amounts due related to the commagility acquisition which are approximately $ 0.4 million and $ 1.4 million , respectively , as of december 31 , 2018. our ability to meet our cash requirements will depend on our ability to generate cash in the future , which is subject to general economic , financial , competitive , legislative , regulatory and other factors that are beyond our control . the company expects to realize tax benefits in future periods due to the available net operating loss carryforwards resulting from the disposition of a former wholly owned subsidiary in 2010. accordingly , future taxable income is expected to be offset by the utilization of operating loss carryforwards and as a result will increase the company 's liquidity as cash needed to pay federal and state income taxes will be substantially reduced .

in 2007 and 2006 , azek products have accounted for a majority of our net sales . through our two-step , dual distribution system , we have established an extensive network of distributors and dealers throughout the united states and canada . our strategy continues to be to maintain two distributors in each geographic region that we enter . as of december 31 , 2007 , our distributors were selling our products to over 2,100 local stocking dealers who frequently request our products by brand name . in the first quarter of each year , we conduct an “ early buy ” sales promotion that encourages distributors to stock azek products through the use of incentive discounts , typically in the range of 1 % to 6 % . over the course of 2007 we have expanded azek building products through internal development of additional product offerings as well as through the procell acquisition in 2007 and the composatron acquisition in 2008. with the introduction of azek moulding and azek deck in 2007 , we continued to establish ourselves as a premier provider of branded building products . our goal is to continue to expand our product offerings through the development of additional trim , moulding and decking products , as well as through the introduction of additional product lines . across all of our target markets , we are focused on capitalizing on the functional advantages of our synthetic products relative to competing wood , fiber and metal products . in this regard , we have developed the leading brand in the synthetic bathroom and locker room products market , comtec . our product offerings which include comtec , capitol , hiny hider , evertuff and tufftec brands , and are sold to similar primary end-markets , which include schools , stadiums , prisons , retail locations and other high-traffic environments . through scranton product 's widely established distribution network , we are able to service our customers through representatives in all 50 states . although we were able to successfully integrate the santana acquisition and benefit from various manufacturing synergies through integration , we experienced some erosion in our customer base in 2007. our current focus is to regain market share within the commercial building markets , by actively engaging key dealers and productive sales representatives prior to the 2008 bid season . we are also focusing on improving our customer service experience by making improvements within our customer service departments . our focus is also to continue to develop leading brands for 2008 including new locker designs as well as a line of fire rated partitions . we believe that these additional goals will allow us to continue our market penetration into the commercial building market . dry petrochemical resins , primarily pvc , hdpe and pp , represented a majority of our raw material costs and cost of sales in 2007. throughout our 24-year history , resin prices have been subject to cyclical price fluctuations . due to increases in natural gas and crude oil prices and demand in the broader economy , dry petrochemical resin prices have risen to higher levels than in previous years . although , our annual average cost of resin decreased by approximately 11.2 % from the year ended december 31 , 2006 to december 31 , 2007 , resin prices have steadily risen from their low point in the first half of 2007. in the past , we have been able to partially offset the impact of significantly higher resin costs through increased sales volumes , improved productivity , and selling price increases in all of our product lines . we have not taken any significant pricing actions since we took several pricing actions late in the third quarter and early in the fourth quarter of 2005 that were used to mitigate higher resin prices . these pricing actions have not resulted in reduced volume growth in our products , on a period to period basis , through 2007. in addition , we have developed significant scale in purchasing resin , which we believe places us in a better cost position relative to many of our competitors . with respect to our basic non-fabricated products , we have been moderately successful in passing through resin cost increases to our customers . our azek building products are sold in various building and industrial end markets . azek products are sold in various stages of the home building construction market , including remodeling and renovation and new construction , thereby diversifying sales across the construction cycle . celtec products are sold to several industrial sectors , thereby diversifying sales across sectors sensitive to differing economic factors . scranton products fabricated and non-fabricated products are sold to various non-residential construction and industrial markets further adding to our end market diversity . in 2007 , approximately 25 % of our products were sold for new construction , 34 % were for remodeling , and 22 % were in the commercial building sector , with the remaining 19 % sold to various industrial end markets . over 98 % and 96 % of our sales in 2007 and 2006 , respectively , were in the united states . 27 we experienced economic factors that had affected our growth in the residential building market . sales were stronger in the first three quarters of 2007 due to the procell acquisition and the expansion of our azek sales network that was partially offset by the impact of a declining market for residential construction . these factors combined to slow azek trim , millwork and moulding sales as dealers and distributors worked through inventory purchased in azek 's successful early-buy program in the first quarter of 2007. by late second quarter , distributors and dealers had worked through their early-buy inventories causing order demand for azek trim , millwork and mouldings to improve . story_separator_special_tag year ended december 31 , 2006 compared with year ended december 31 , 2005 32 the following table summarizes certain financial information relating to the successor and predecessor operating results that have been derived from their consolidated financial statements : replace_table_token_4_th ( a ) represents the mathematical addition of the predecessor period january 1 , 2005 to may 10 , 2005 and the successor period may 11 , 2005 to december 31 , 2005.the combined predecessor and successor results of operations are not indicative of our future results of operations or results of operations that would have actually occurred had the transaction with the predecessor been consummated as of january 1 , 2005 , due to the fair values assigned to our assets and liabilities , the changes made in the related estimated useful lives of the assets at may 11 , 2005 , as well as changes in interest and income tax expenses as a result of the transaction . the following table summarizes certain information relating to the successor and predecessor operating results as a percentage of net sales and has been derived from the financial information presented above . we believe this presentation is useful to investors in comparing historical results . certain amounts in the table may not sum due to the rounding of individual components . replace_table_token_5_th _ ( a ) represents the mathematical addition of the predecessor period january 1 , 2005 to may 10 , 2005 and the successor period may 11 , 2005 to december 31 , 2005. the combined predecessor and successor results of operations are not indicative of our future results of operations or results of operations that would have actually occurred had the 33 transaction with the predecessor been consummated as of january 1 , 2005 , due to the fair values assigned to our assets and liabilities , the changes made in the related estimated useful lives of the assets at may 11 , 2005 , as well as changes in interest and income tax expenses as a result of the transaction . net sales . net sales increased by $ 39.2 million , or 17.6 % , to $ 261.8 million for the year ended december 31 , 2006 , from $ 222.6 million for the year ended december 31 , 2005 due to increased volumes and higher average selling prices . overall , azek building products net sales increased 8.4 % from december 31 , 2006 compared to december 31 , 2005 , and scranton products net sales increased 36.6 % from december 31 , 2006 compared to december 31 , 2005. we sold 186.7 million pounds of product during the year ended december 31 , 2006 , which was a 3.5 % increase from the 180.3 million pounds sold during the year ended december 31 , 2005. volume growth was primarily attributable to the santana acquisition and year over year growth within azek building products , offset by volume decline in scranton products industrial building products . in addition to volume growth , revenues increased as a result of the full year benefit from price increases across all of our product lines , implemented in the second half of 2005. cost of sales . cost of sales increased by $ 21.5 million , or 12.5 % , to $ 193.4 million for the year ended december 31 , 2006 from $ 171.9 million for the same period in 2005. the increase was primarily attributable to increased volumes from the santana acquisition , as well as an increase in average resin prices per pound of 5.6 % in the year ended december 31 , 2006 compared to the same period in 2005. despite the period over period increase in average resin prices , resin costs have significantly declined from their peak levels in the fall of 2005. in 2005 , our cost of sales included the effect of the fair value adjustment of acquired inventories recorded in connection with the transaction . the $ 5.2 million non-cash fair value adjustment increased acquired inventory values to estimated selling price at may 11 , 2005. this increase was then recognized as an increase to cost of sales during the period may 11 , 2005 to december 31 , 2005 as the related inventory was sold . gross margin . gross margin increased by $ 17.7 million , or 34.9 % , to $ 68.4 million for the year ended december 31 , 2006 from $ 50.7 million for the same period of 2005. this increase was mainly attributable to increases in selling prices which allowed us to offset the increase in average resin costs . gross margin as a percent of net sales increased to 26.1 % for the year ended december 31 , 2006 from 22.8 % for the same period in 2005. this increase was mainly due to the increase in selling prices and volume growth . the increase in gross margin in 2006 from 2005 was also attributable to the impact of the fair value adjustment we incurred in 2005 as a result of the transaction as discussed above . selling , general and administrative expenses . selling , general and administrative expenses decreased by $ 0.5 million , or 1.3 % , to $ 40.2 million , or 15.4 % of net sales for the year ended december 31 , 2006 from $ 40.8 million , or 18.3 % of net sales for the same period in 2005. the decrease in selling , general and administrative expenses from 2005 was primarily attributable to a one-time compensation charge of approximately $ 12.8 million relating to the vesting of certain restricted stock units upon the closing of the transaction in 2005. this decrease was primarily offset by the addition of santana , increased sales staff and marketing efforts for both our residential and commercial building product lines , an approximately $ 0.9 million increase in amortization of intangible assets recorded in conjunction with the transaction and

liquidity and capital resources as disclosed in note 4 to the consolidated financial statements , on february 16 , 2017 the company entered into a credit facility which provided for a term loan in the aggregate principal amount of $ 0.8 million ( the “ term loan ” ) and an asset based revolving loan ( the “ revolver ” ) , which is subject to a borrowing base calculation ( as defined in the credit facility ) of up to a maximum availability of $ 9 million . the proceeds of the term loan and revolver were used to finance the acquisition of commagility . we expect our existing cash balance , cash generated by operations and borrowings available under our credit facility to be our primary sources of short-term liquidity , and we believe these sources will be sufficient to meet our liquidity needs for at least the next twelve months . as disclosed in note 15 to the consolidated financial statements , on february 27 , 2019 the company entered into amendment no . 3 to the credit facility which extended the term of the revolver to march 31 , 2020. during the first quarter of 2019 the company will pay the final deferred purchase price and contingent consideration amounts due related to the commagility acquisition which are approximately $ 0.4 million and $ 1.4 million , respectively , as of december 31 , 2018. our ability to meet our cash requirements will depend on our ability to generate cash in the future , which is subject to general economic , financial , competitive , legislative , regulatory and other factors that are beyond our control . the company expects to realize tax benefits in future periods due to the available net operating loss carryforwards resulting from the disposition of a former wholly owned subsidiary in 2010. accordingly , future taxable income is expected to be offset by the utilization of operating loss carryforwards and as a result will increase the company 's liquidity as cash needed to pay federal and state income taxes will be substantially reduced .

in 2007 and 2006 , azek products have accounted for a majority of our net sales . through our two-step , dual distribution system , we have established an extensive network of distributors and dealers throughout the united states and canada . our strategy continues to be to maintain two distributors in each geographic region that we enter . as of december 31 , 2007 , our distributors were selling our products to over 2,100 local stocking dealers who frequently request our products by brand name . in the first quarter of each year , we conduct an “ early buy ” sales promotion that encourages distributors to stock azek products through the use of incentive discounts , typically in the range of 1 % to 6 % . over the course of 2007 we have expanded azek building products through internal development of additional product offerings as well as through the procell acquisition in 2007 and the composatron acquisition in 2008. with the introduction of azek moulding and azek deck in 2007 , we continued to establish ourselves as a premier provider of branded building products . our goal is to continue to expand our product offerings through the development of additional trim , moulding and decking products , as well as through the introduction of additional product lines . across all of our target markets , we are focused on capitalizing on the functional advantages of our synthetic products relative to competing wood , fiber and metal products . in this regard , we have developed the leading brand in the synthetic bathroom and locker room products market , comtec . our product offerings which include comtec , capitol , hiny hider , evertuff and tufftec brands , and are sold to similar primary end-markets , which include schools , stadiums , prisons , retail locations and other high-traffic environments . through scranton product 's widely established distribution network , we are able to service our customers through representatives in all 50 states . although we were able to successfully integrate the santana acquisition and benefit from various manufacturing synergies through integration , we experienced some erosion in our customer base in 2007. our current focus is to regain market share within the commercial building markets , by actively engaging key dealers and productive sales representatives prior to the 2008 bid season . we are also focusing on improving our customer service experience by making improvements within our customer service departments . our focus is also to continue to develop leading brands for 2008 including new locker designs as well as a line of fire rated partitions . we believe that these additional goals will allow us to continue our market penetration into the commercial building market . dry petrochemical resins , primarily pvc , hdpe and pp , represented a majority of our raw material costs and cost of sales in 2007. throughout our 24-year history , resin prices have been subject to cyclical price fluctuations . due to increases in natural gas and crude oil prices and demand in the broader economy , dry petrochemical resin prices have risen to higher levels than in previous years . although , our annual average cost of resin decreased by approximately 11.2 % from the year ended december 31 , 2006 to december 31 , 2007 , resin prices have steadily risen from their low point in the first half of 2007. in the past , we have been able to partially offset the impact of significantly higher resin costs through increased sales volumes , improved productivity , and selling price increases in all of our product lines . we have not taken any significant pricing actions since we took several pricing actions late in the third quarter and early in the fourth quarter of 2005 that were used to mitigate higher resin prices . these pricing actions have not resulted in reduced volume growth in our products , on a period to period basis , through 2007. in addition , we have developed significant scale in purchasing resin , which we believe places us in a better cost position relative to many of our competitors . with respect to our basic non-fabricated products , we have been moderately successful in passing through resin cost increases to our customers . our azek building products are sold in various building and industrial end markets . azek products are sold in various stages of the home building construction market , including remodeling and renovation and new construction , thereby diversifying sales across the construction cycle . celtec products are sold to several industrial sectors , thereby diversifying sales across sectors sensitive to differing economic factors . scranton products fabricated and non-fabricated products are sold to various non-residential construction and industrial markets further adding to our end market diversity . in 2007 , approximately 25 % of our products were sold for new construction , 34 % were for remodeling , and 22 % were in the commercial building sector , with the remaining 19 % sold to various industrial end markets . over 98 % and 96 % of our sales in 2007 and 2006 , respectively , were in the united states . 27 we experienced economic factors that had affected our growth in the residential building market . sales were stronger in the first three quarters of 2007 due to the procell acquisition and the expansion of our azek sales network that was partially offset by the impact of a declining market for residential construction . these factors combined to slow azek trim , millwork and moulding sales as dealers and distributors worked through inventory purchased in azek 's successful early-buy program in the first quarter of 2007. by late second quarter , distributors and dealers had worked through their early-buy inventories causing order demand for azek trim , millwork and mouldings to improve . story_separator_special_tag year ended december 31 , 2006 compared with year ended december 31 , 2005 32 the following table summarizes certain financial information relating to the successor and predecessor operating results that have been derived from their consolidated financial statements : replace_table_token_4_th ( a ) represents the mathematical addition of the predecessor period january 1 , 2005 to may 10 , 2005 and the successor period may 11 , 2005 to december 31 , 2005.the combined predecessor and successor results of operations are not indicative of our future results of operations or results of operations that would have actually occurred had the transaction with the predecessor been consummated as of january 1 , 2005 , due to the fair values assigned to our assets and liabilities , the changes made in the related estimated useful lives of the assets at may 11 , 2005 , as well as changes in interest and income tax expenses as a result of the transaction . the following table summarizes certain information relating to the successor and predecessor operating results as a percentage of net sales and has been derived from the financial information presented above . we believe this presentation is useful to investors in comparing historical results . certain amounts in the table may not sum due to the rounding of individual components . replace_table_token_5_th _ ( a ) represents the mathematical addition of the predecessor period january 1 , 2005 to may 10 , 2005 and the successor period may 11 , 2005 to december 31 , 2005. the combined predecessor and successor results of operations are not indicative of our future results of operations or results of operations that would have actually occurred had the 33 transaction with the predecessor been consummated as of january 1 , 2005 , due to the fair values assigned to our assets and liabilities , the changes made in the related estimated useful lives of the assets at may 11 , 2005 , as well as changes in interest and income tax expenses as a result of the transaction . net sales . net sales increased by $ 39.2 million , or 17.6 % , to $ 261.8 million for the year ended december 31 , 2006 , from $ 222.6 million for the year ended december 31 , 2005 due to increased volumes and higher average selling prices . overall , azek building products net sales increased 8.4 % from december 31 , 2006 compared to december 31 , 2005 , and scranton products net sales increased 36.6 % from december 31 , 2006 compared to december 31 , 2005. we sold 186.7 million pounds of product during the year ended december 31 , 2006 , which was a 3.5 % increase from the 180.3 million pounds sold during the year ended december 31 , 2005. volume growth was primarily attributable to the santana acquisition and year over year growth within azek building products , offset by volume decline in scranton products industrial building products . in addition to volume growth , revenues increased as a result of the full year benefit from price increases across all of our product lines , implemented in the second half of 2005. cost of sales . cost of sales increased by $ 21.5 million , or 12.5 % , to $ 193.4 million for the year ended december 31 , 2006 from $ 171.9 million for the same period in 2005. the increase was primarily attributable to increased volumes from the santana acquisition , as well as an increase in average resin prices per pound of 5.6 % in the year ended december 31 , 2006 compared to the same period in 2005. despite the period over period increase in average resin prices , resin costs have significantly declined from their peak levels in the fall of 2005. in 2005 , our cost of sales included the effect of the fair value adjustment of acquired inventories recorded in connection with the transaction . the $ 5.2 million non-cash fair value adjustment increased acquired inventory values to estimated selling price at may 11 , 2005. this increase was then recognized as an increase to cost of sales during the period may 11 , 2005 to december 31 , 2005 as the related inventory was sold . gross margin . gross margin increased by $ 17.7 million , or 34.9 % , to $ 68.4 million for the year ended december 31 , 2006 from $ 50.7 million for the same period of 2005. this increase was mainly attributable to increases in selling prices which allowed us to offset the increase in average resin costs . gross margin as a percent of net sales increased to 26.1 % for the year ended december 31 , 2006 from 22.8 % for the same period in 2005. this increase was mainly due to the increase in selling prices and volume growth . the increase in gross margin in 2006 from 2005 was also attributable to the impact of the fair value adjustment we incurred in 2005 as a result of the transaction as discussed above . selling , general and administrative expenses . selling , general and administrative expenses decreased by $ 0.5 million , or 1.3 % , to $ 40.2 million , or 15.4 % of net sales for the year ended december 31 , 2006 from $ 40.8 million , or 18.3 % of net sales for the same period in 2005. the decrease in selling , general and administrative expenses from 2005 was primarily attributable to a one-time compensation charge of approximately $ 12.8 million relating to the vesting of certain restricted stock units upon the closing of the transaction in 2005. this decrease was primarily offset by the addition of santana , increased sales staff and marketing efforts for both our residential and commercial building product lines , an approximately $ 0.9 million increase in amortization of intangible assets recorded in conjunction with the transaction and

liquidity and capital resources our primary cash needs are working capital , capital expenditures and debt service . we have historically financed these cash requirements through internally-generated cash flow and debt financings . we also have a senior secured revolving credit facility which provides additional liquidity to support our growth . in addition , we may also issue additional equity and or debt to finance acquisitions in the future . net cash provided by operating activities was $ 21.3 million , $ 1.9 million and $ 35.1 million for the years ended december 31 , 2007 , 2006 and 2005 , respectively . the increase in cash provided by operating activities in the year 2007 was primarily due to higher earnings and non-cash expenses including depreciation and amortization , as well as continued improvements in receivables and accounts payables management , offset by increased levels of finished goods related to our winter buy at the end of 2007 compared to 2006. the decrease in cash provided by operating activities from 2005 to 2006 was primarily due to higher interest payments on our long-term debt , increased raw material costs , reduction in levels of payables at the end of 2006 compared to 2005 ( mainly for resin purchases made at the end of 2005 ) and higher working capital levels to support growth . these factors were only partially offset by improved finished good inventory management . net cash used in investing activities was $ 70.6 million , $ 52.0 million and $ 234.5 million for the years ended december 31 , 2007 , 2006 and 2005 , respectively . in 2007 , cash used in investing activities of $ 58.2 million related to the procell acquisition completed on january 31 , 2007. the remaining cash used in investing activities in 2007 related to $ 14.4 million in capital expenditures primarily for the capacity expansion at our foley alabama manufacturing facility . on may 10 , 2007 we also sold one of our manufacturing facilities for approximately $ 2.0 million .

the operating partnership 's interest in the llc subsidiaries generally entitles the operating partnership to all cash distributions from , and the profits and losses of , the llc subsidiaries other than the preferred distribution to the continuing investors who hold class b llc units in these llc subsidiaries described below . the continuing investors own an aggregate amount of 26,317,396 class b llc units , representing 68.8 % of the company 's common stock on a fully diluted basis ( 59.0 % immediately following the ipo ) . accordingly , the operating partnership 's interests in the llc subsidiaries entitle the operating partnership to receive approximately 31.2 % of the aggregate distributions from the llc subsidiaries ( 41.0 % immediately following this offering ) . the company , through the operating partnership , owns all of the ownership interests in the aspen property . 45 our primary business objective is to enhance stockholder value by increasing cash flow from operations and total return to stockholders through the following strategies : ● increase existing below-market rents by repositioning of our portfolio and utilize solid market fundamentals at several of our properties . ● acquire additional properties with a focus on premier submarkets and assets utilizing the significant experience of our senior management . ● manage our properties to increase occupancy and rental rates , control operating expenses ● reposition assets through a capital program utilizing cash on hand and proceeds of the above-mentioned offerings . we believe that the following competitive strengths distinguish our company from other owners and operators of commercial and multi-family residential properties : ● diverse portfolio of properties in the new york metropolitan area which is characterized by dense population , supply constraints and generally high rent . ● expertise in repositioning and managing multi-family residential properties . ● experienced management team with proven track record over generations . ● balance sheet well positioned for future growth . ● strong internal rent growth prospects as of december 31 , 2016 , we had approximately 180 employees who provide property management , maintenance , landscaping , construction management and accounting services . how we derive our revenue our revenue consists primarily of rents received from our residential , commercial and , to a lesser extent , retail properties . trends during 2016 and 2015 , the company 's properties generally experienced increasing demand . at the company 's commercial property at 141 livingston street , in the downtown brooklyn neighborhood , the company entered into a new lease in december 2015 , effective as of june 2014 that provides for a 94 % increase in rent per square foot and a 29 % increase in rentable square feet through a remeasurement . at the company 's nearby commercial property , also rented to the city of new york , the company recently entered into a lease renewal and amendment agreement for the renewal of a lease that expired in december 2016. each city of new york lease expires in august 2020. at the company 's flatbush gardens residential apartment complex , the company increased average rent per square foot from $ 18.88 at december 31 , 2013 to $ 19.69 at december 31 , 2014 , $ 20.63 at december 31 , 2015 and $ 21.24 at december 31 , 2016. the company purchased the tribeca house properties in december 2014 , and although operating the property for a short period of time , has increased average rent from $ 61.09 per square foot to $ 68.05 per square foot . no retail properties in these buildings have been subject to renewal . throughout 2014 , 2015 and 2016 , we have continued to benefit from lower interest rates . our average interest rate as of december 31 , 2016 is approximately 4.2 % per annum . short term interest rates continue to be at historically low levels and , as a result , we expect a continuation of favorable interest rates in the near term with rates rising as the economy improves . 46 factors that may influence future results of operations we derive approximately 75 % of our revenues from rents received from residents in our apartment rental properties and the remainder from commercial and retail rental customers . we believe we have expertise in operating , renovating and repositioning our properties . as we grow we will likely add personnel as necessary to provide outstanding customer service to our residents in order to maintain or increase occupancy levels at our apartment communities and to preserve the ability to increase rents . this is likely to result in an increase in our operating and general and administrative expenses . a majority of the leases at our apartment communities are for approximately one-year terms , which generally enables us to seek increased rents upon renewal of existing leases or commencement of new leases . this may offset the potential adverse effect of inflation or deflation on rental revenue , although residents may leave without penalty at the end of their lease terms for any reason . our ability to seek increased rents at our flatbush gardens property is limited , however , as a result of the rent stabilization laws and regulation of new york city . these generally limit the increase in rents we can charge at our flatbush gardens property upon lease renewal for approximately 47 % of our tenants , effective october 1 , 2016 , to 0 % for a one-year lease and 2 % for a two-year lease . they also limit the maximum rent we can charge at our flatbush gardens property on new leases although , on average , the maximum rent is approximately 30 % above our actual average rental rates for such leases . story_separator_special_tag general and administrative expense , excluding aspen , increased from $ 5,296 for the year ended december 31 , 2015 to $ 8,243 for the year ended december 31 , 2016 primarily due to executive compensation effected by the reit formation transactions in august of 2015 , which includes an increase in non-cash ltip amortization of $ 1,814. depreciation and amortization . depreciation and amortization expense , excluding aspen , increased from $ 12,521 for the year ended december 31 , 2015 to $ 13,822 for the year ended december 31 , 2016 , due to additions to fixed assets . interest expense , net . interest expense , net , excluding aspen , was $ 36,703 for the year ended december 31 , 2015 and $ 36,704 for the year ended december 31 , 2016. this results from higher average outstanding debt in 2016 as a result of the refinancing of the 141 livingston street property in may 2016 and slightly higher libor rate on the tribeca house property loans partially offset by lower amortization of debt costs . interest expense includes amortization of loan costs and change in fair value of interest rate cap of $ 5,061 and $ 6,558 for the year ended december 31 , 2016 and 2015 , respectively . net loss . as a result of the foregoing , net loss , excluding aspen , increased from $ 8,200 for the year ended december 31 , 2015 to $ 11,626 for the year ended december 31 , 2016 . 51 income statement for the years ended december 31 , 2015 and 2014 ( in thousands ) replace_table_token_8_th revenue . residential rental revenue , excluding the tribeca house properties , increased from $ 30,032 in 2014 to $ 33,315 in 2015 due to higher revenues on new leases , higher occupancy and routine annual increases on renewed rentals primarily at the flatbush gardens property complex . base rent per square foot increased at the flatbush gardens property from $ 19.69 ( 95.6 % occupancy ) at december 31 , 2014 to $ 20.63 ( 97.0 % occupancy ) at december 31 , 2015. routine annual rent increases on renewed leases at flatbush gardens were approximately 1 % . commercial rental revenue , excluding the tribeca house properties , increased from $ 12,223 in 2014 to $ 14,086 in 2015 primarily due to the new lease with the city of new york at our 141 livingston street property . the lease , executed in december 2015 and effective june 1 , 2014 , included an 82 % increase in base rent per square foot and a 37 % increase in rentable space through a remeasurement over the previous agreement with the city of new york . the lease has a 10 year term with a termination option by the city of new york at the end of the fifth year . tenant recoveries , excluding the tribeca house properties , increased from $ 2,415 in 2014 to $ 3,167 in 2015 primarily due to terms in the above-mentioned new lease related to the 141 livingston street property . garage and other income , excluding the tribeca house properties , was $ 1,503 in 2014 and $ 1,498 in 2015 , primarily at the flatbush gardens property . property operations expense . property operating expenses , excluding the tribeca house properties , include property-level costs including compensation costs for property-level personnel , repairs and maintenance , supplies , utilities and landscaping . property operating expenses decreased from $ 19,267 in 2014 to $ 18,670 in 2015 primarily due to lower utilities expense at all of the properties . real estate taxes and insurance expenses , excluding the tribeca house properties , increased from $ 6,222 in 2014 to $ 6,840 in 2015. general and administrative expense . general and administrative expense , excluding the tribeca house properties , increased from $ 2,292 in 2014 to $ 4,233 in 2015 primarily due to incremental legal , insurance and accounting costs incurred in 2014 and 2015 for the formation transactions and the private offering , including accounting and auditing fees . depreciation and amortization . depreciation and amortization expense , excluding the tribeca house properties , decreased from $ 4,109 in 2014 to $ 4,462 in 2015 due to fully depreciated assets , partially offset by additions . interest expense , net . interest expense , net , excluding the tribeca house properties , increased from $ 8,067 in 2014 to $ 11,758 in 2015 due to higher outstanding borrowings on new loans obtained in september and december of 2014 secured by the flatbush gardens and 141 livingston street properties . interest expense includes amortization of loan costs and change in fair value of interest rate cap of $ 753 and $ 2,317 in 2014 and 2015 , respectively . tribeca house properties . tribeca house properties net loss of $ 14,228 in 2015 included $ 8,059 of depreciation and amortization expense and $ 24,945 of interest charges of which $ 4,241 was amortization of debt issuance costs and interest rate cap mark-to-market . 52 net income . as a result of the foregoing , net income , excluding the tribeca house properties , decreased from $ 6,101 in 2014 to $ 6,028 in 2015. liquidity and capital resources on february 9 , 2017 , we completed our ipo ( including the exercise in full of the over-allotment option which closed on march 10 , 2017 , which provided net proceeds of approximately $ 78.2 million , after deducting underwriting discounts and commissions and other estimated offering expenses payable by us . we intend to use cash on hand and the net proceeds of the ipo to fund approximately $ 46 million in capital improvements , including the columbia heights property acquisition , for operating purposes and to fund potential acquisitions , including the columbia heights property . as of december 31 , 2016 , we had $ 754.5

liquidity and capital resources our primary cash needs are working capital , capital expenditures and debt service . we have historically financed these cash requirements through internally-generated cash flow and debt financings . we also have a senior secured revolving credit facility which provides additional liquidity to support our growth . in addition , we may also issue additional equity and or debt to finance acquisitions in the future . net cash provided by operating activities was $ 21.3 million , $ 1.9 million and $ 35.1 million for the years ended december 31 , 2007 , 2006 and 2005 , respectively . the increase in cash provided by operating activities in the year 2007 was primarily due to higher earnings and non-cash expenses including depreciation and amortization , as well as continued improvements in receivables and accounts payables management , offset by increased levels of finished goods related to our winter buy at the end of 2007 compared to 2006. the decrease in cash provided by operating activities from 2005 to 2006 was primarily due to higher interest payments on our long-term debt , increased raw material costs , reduction in levels of payables at the end of 2006 compared to 2005 ( mainly for resin purchases made at the end of 2005 ) and higher working capital levels to support growth . these factors were only partially offset by improved finished good inventory management . net cash used in investing activities was $ 70.6 million , $ 52.0 million and $ 234.5 million for the years ended december 31 , 2007 , 2006 and 2005 , respectively . in 2007 , cash used in investing activities of $ 58.2 million related to the procell acquisition completed on january 31 , 2007. the remaining cash used in investing activities in 2007 related to $ 14.4 million in capital expenditures primarily for the capacity expansion at our foley alabama manufacturing facility . on may 10 , 2007 we also sold one of our manufacturing facilities for approximately $ 2.0 million .

the operating partnership 's interest in the llc subsidiaries generally entitles the operating partnership to all cash distributions from , and the profits and losses of , the llc subsidiaries other than the preferred distribution to the continuing investors who hold class b llc units in these llc subsidiaries described below . the continuing investors own an aggregate amount of 26,317,396 class b llc units , representing 68.8 % of the company 's common stock on a fully diluted basis ( 59.0 % immediately following the ipo ) . accordingly , the operating partnership 's interests in the llc subsidiaries entitle the operating partnership to receive approximately 31.2 % of the aggregate distributions from the llc subsidiaries ( 41.0 % immediately following this offering ) . the company , through the operating partnership , owns all of the ownership interests in the aspen property . 45 our primary business objective is to enhance stockholder value by increasing cash flow from operations and total return to stockholders through the following strategies : ● increase existing below-market rents by repositioning of our portfolio and utilize solid market fundamentals at several of our properties . ● acquire additional properties with a focus on premier submarkets and assets utilizing the significant experience of our senior management . ● manage our properties to increase occupancy and rental rates , control operating expenses ● reposition assets through a capital program utilizing cash on hand and proceeds of the above-mentioned offerings . we believe that the following competitive strengths distinguish our company from other owners and operators of commercial and multi-family residential properties : ● diverse portfolio of properties in the new york metropolitan area which is characterized by dense population , supply constraints and generally high rent . ● expertise in repositioning and managing multi-family residential properties . ● experienced management team with proven track record over generations . ● balance sheet well positioned for future growth . ● strong internal rent growth prospects as of december 31 , 2016 , we had approximately 180 employees who provide property management , maintenance , landscaping , construction management and accounting services . how we derive our revenue our revenue consists primarily of rents received from our residential , commercial and , to a lesser extent , retail properties . trends during 2016 and 2015 , the company 's properties generally experienced increasing demand . at the company 's commercial property at 141 livingston street , in the downtown brooklyn neighborhood , the company entered into a new lease in december 2015 , effective as of june 2014 that provides for a 94 % increase in rent per square foot and a 29 % increase in rentable square feet through a remeasurement . at the company 's nearby commercial property , also rented to the city of new york , the company recently entered into a lease renewal and amendment agreement for the renewal of a lease that expired in december 2016. each city of new york lease expires in august 2020. at the company 's flatbush gardens residential apartment complex , the company increased average rent per square foot from $ 18.88 at december 31 , 2013 to $ 19.69 at december 31 , 2014 , $ 20.63 at december 31 , 2015 and $ 21.24 at december 31 , 2016. the company purchased the tribeca house properties in december 2014 , and although operating the property for a short period of time , has increased average rent from $ 61.09 per square foot to $ 68.05 per square foot . no retail properties in these buildings have been subject to renewal . throughout 2014 , 2015 and 2016 , we have continued to benefit from lower interest rates . our average interest rate as of december 31 , 2016 is approximately 4.2 % per annum . short term interest rates continue to be at historically low levels and , as a result , we expect a continuation of favorable interest rates in the near term with rates rising as the economy improves . 46 factors that may influence future results of operations we derive approximately 75 % of our revenues from rents received from residents in our apartment rental properties and the remainder from commercial and retail rental customers . we believe we have expertise in operating , renovating and repositioning our properties . as we grow we will likely add personnel as necessary to provide outstanding customer service to our residents in order to maintain or increase occupancy levels at our apartment communities and to preserve the ability to increase rents . this is likely to result in an increase in our operating and general and administrative expenses . a majority of the leases at our apartment communities are for approximately one-year terms , which generally enables us to seek increased rents upon renewal of existing leases or commencement of new leases . this may offset the potential adverse effect of inflation or deflation on rental revenue , although residents may leave without penalty at the end of their lease terms for any reason . our ability to seek increased rents at our flatbush gardens property is limited , however , as a result of the rent stabilization laws and regulation of new york city . these generally limit the increase in rents we can charge at our flatbush gardens property upon lease renewal for approximately 47 % of our tenants , effective october 1 , 2016 , to 0 % for a one-year lease and 2 % for a two-year lease . they also limit the maximum rent we can charge at our flatbush gardens property on new leases although , on average , the maximum rent is approximately 30 % above our actual average rental rates for such leases . story_separator_special_tag general and administrative expense , excluding aspen , increased from $ 5,296 for the year ended december 31 , 2015 to $ 8,243 for the year ended december 31 , 2016 primarily due to executive compensation effected by the reit formation transactions in august of 2015 , which includes an increase in non-cash ltip amortization of $ 1,814. depreciation and amortization . depreciation and amortization expense , excluding aspen , increased from $ 12,521 for the year ended december 31 , 2015 to $ 13,822 for the year ended december 31 , 2016 , due to additions to fixed assets . interest expense , net . interest expense , net , excluding aspen , was $ 36,703 for the year ended december 31 , 2015 and $ 36,704 for the year ended december 31 , 2016. this results from higher average outstanding debt in 2016 as a result of the refinancing of the 141 livingston street property in may 2016 and slightly higher libor rate on the tribeca house property loans partially offset by lower amortization of debt costs . interest expense includes amortization of loan costs and change in fair value of interest rate cap of $ 5,061 and $ 6,558 for the year ended december 31 , 2016 and 2015 , respectively . net loss . as a result of the foregoing , net loss , excluding aspen , increased from $ 8,200 for the year ended december 31 , 2015 to $ 11,626 for the year ended december 31 , 2016 . 51 income statement for the years ended december 31 , 2015 and 2014 ( in thousands ) replace_table_token_8_th revenue . residential rental revenue , excluding the tribeca house properties , increased from $ 30,032 in 2014 to $ 33,315 in 2015 due to higher revenues on new leases , higher occupancy and routine annual increases on renewed rentals primarily at the flatbush gardens property complex . base rent per square foot increased at the flatbush gardens property from $ 19.69 ( 95.6 % occupancy ) at december 31 , 2014 to $ 20.63 ( 97.0 % occupancy ) at december 31 , 2015. routine annual rent increases on renewed leases at flatbush gardens were approximately 1 % . commercial rental revenue , excluding the tribeca house properties , increased from $ 12,223 in 2014 to $ 14,086 in 2015 primarily due to the new lease with the city of new york at our 141 livingston street property . the lease , executed in december 2015 and effective june 1 , 2014 , included an 82 % increase in base rent per square foot and a 37 % increase in rentable space through a remeasurement over the previous agreement with the city of new york . the lease has a 10 year term with a termination option by the city of new york at the end of the fifth year . tenant recoveries , excluding the tribeca house properties , increased from $ 2,415 in 2014 to $ 3,167 in 2015 primarily due to terms in the above-mentioned new lease related to the 141 livingston street property . garage and other income , excluding the tribeca house properties , was $ 1,503 in 2014 and $ 1,498 in 2015 , primarily at the flatbush gardens property . property operations expense . property operating expenses , excluding the tribeca house properties , include property-level costs including compensation costs for property-level personnel , repairs and maintenance , supplies , utilities and landscaping . property operating expenses decreased from $ 19,267 in 2014 to $ 18,670 in 2015 primarily due to lower utilities expense at all of the properties . real estate taxes and insurance expenses , excluding the tribeca house properties , increased from $ 6,222 in 2014 to $ 6,840 in 2015. general and administrative expense . general and administrative expense , excluding the tribeca house properties , increased from $ 2,292 in 2014 to $ 4,233 in 2015 primarily due to incremental legal , insurance and accounting costs incurred in 2014 and 2015 for the formation transactions and the private offering , including accounting and auditing fees . depreciation and amortization . depreciation and amortization expense , excluding the tribeca house properties , decreased from $ 4,109 in 2014 to $ 4,462 in 2015 due to fully depreciated assets , partially offset by additions . interest expense , net . interest expense , net , excluding the tribeca house properties , increased from $ 8,067 in 2014 to $ 11,758 in 2015 due to higher outstanding borrowings on new loans obtained in september and december of 2014 secured by the flatbush gardens and 141 livingston street properties . interest expense includes amortization of loan costs and change in fair value of interest rate cap of $ 753 and $ 2,317 in 2014 and 2015 , respectively . tribeca house properties . tribeca house properties net loss of $ 14,228 in 2015 included $ 8,059 of depreciation and amortization expense and $ 24,945 of interest charges of which $ 4,241 was amortization of debt issuance costs and interest rate cap mark-to-market . 52 net income . as a result of the foregoing , net income , excluding the tribeca house properties , decreased from $ 6,101 in 2014 to $ 6,028 in 2015. liquidity and capital resources on february 9 , 2017 , we completed our ipo ( including the exercise in full of the over-allotment option which closed on march 10 , 2017 , which provided net proceeds of approximately $ 78.2 million , after deducting underwriting discounts and commissions and other estimated offering expenses payable by us . we intend to use cash on hand and the net proceeds of the ipo to fund approximately $ 46 million in capital improvements , including the columbia heights property acquisition , for operating purposes and to fund potential acquisitions , including the columbia heights property . as of december 31 , 2016 , we had $ 754.5

cash flows for the years ended december 31 , 2016 and 2015 ( in thousands ) replace_table_token_11_th cash flows provided by ( used in ) operating activities , investing activities and financing activities for the years ended december 31 , 2016 and 2015 were as follows : net cash flow provided by operating activities was $ 9,350 for the year ended december 31 , 2016 as compared to $ 9,440 for the years ended december 31 , 2015. the change principally reflects executive compensation recorded for only five months in 2015 following the offering of common stock under rule 144a on august 5 , 2015 , the collection in 2015 of a large prior year outstanding receivable on the 141 livingston street property , offset by an increase in receivables at the flatbush gardens property . net cash used in investing activities was $ 121,285 for the year ended december 31 , 2016 as compared to $ 9,025 for the year ended december 31 , 2015. the increase in 2016 as compared to 2015 reflects the cost of acquisition of the aspen property acquired in june 2016 and higher capital costs in 2016 of apartment and building renovations at the flatbush gardens , tribeca house and 141 livingston street properties in connection with our property development plans .

service provider technology includes our airmax , edgemax and airfiber platforms , as well as embedded radio products and other 802.11 standard products including base stations , radios , backhaul equipment and customer premise equipment ( “ cpe ” ) . additionally , service provider technology includes antennas and other products in the 0.9 to 6.0ghz spectrum and miscellaneous products such as mounting brackets , cables and power over ethernet adapters . service provider technology also includes solar products ( sales of which have not been material to date ) and revenues that are attributable to pcs . enterprise technology includes our unifi and mfi platforms , including unifi enterprise wi-fi products , unifi video products , and unifi switching and routing solutions . enterprise technology also includes revenues that are attributable to pcs . 33 we sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors , and , to a lesser extent , direct customers . sales to distributors accounted for 99 % of our revenues in the year ended june 30 , 2016 . other channel partners , such as resellers , largely accounted for the balance of our revenues . cost of revenues our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and chipsets that we consign to certain of our contract manufacturers . in addition , cost of revenues includes tooling , labor and other costs associated with engineering , testing and quality assurance , warranty costs , stock-based compensation , logistics related fees and excess and obsolete inventory . in addition to utilizing contract manufacturers , we outsource most of our logistics warehousing and order fulfillment functions , which are located primarily in china , and to a lesser extent , taiwan and united states . we also evaluate and utilize other vendors for various portions of our supply chain from time to time . our operations organization consists of employees and consultants engaged in the management of our contract manufacturers , new product introduction activities , logistical support and engineering . gross profit our gross profit has been , and may in the future be , influenced by several factors including changes in product mix , target end markets for our products , pricing due to competitive pressure , production costs and global demand for electronic components . although we procure and sell our products in u.s. dollars , our contract manufacturers incur many costs , including labor costs , in other currencies . to the extent that the exchange rates move unfavorably for our contract manufacturers , they may try to pass these additional costs on to us , which could have a material impact on our future average selling prices and unit costs . operating expenses we classify our operating expenses as research and development , sales , general and administrative expenses and expense related to the business email compromise fraud loss . research and development expenses consist primarily of salary and benefit expenses , including stock-based compensation , for employees and costs for contractors engaged in research , design and development activities , as well as costs for prototypes , licensed or purchased intellectual property , facilities and travel . over time , we expect our research and development costs to increase as we continue making significant investments in developing new products in addition to new versions of our existing products . sales , general and administrative expenses include salary and benefit expenses , including stock-based compensation , for employees and costs for contractors engaged in sales , marketing and general and administrative activities , as well as the costs of legal expenses , trade shows , marketing programs , promotional materials , bad debt expense , professional services , facilities , general liability insurance and travel . as our product portfolio and targeted markets expand , we may need to employ different sales models , such as building a direct sales force . these sales models would likely increase our costs . over time , we expect our sales , general and administrative expenses to increase in absolute dollars due to continued growth in headcount , expansion of our efforts to register and defend trademarks and patents and to support our business and operations . business e-mail compromise fraud ( recovery ) loss - in june 2015 , we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department . the fraud resulted in transfers of funds aggregating $ 46.7 million held by a company subsidiary incorporated in hong kong to other overseas accounts held by third parties , of which we recovered $ 8.1 million in fiscal 2015. as a result , we recorded a charge of $ 39.1 million in the fourth quarter of 2015 , including additional expenses consisting of professional service fees associated with the fraud loss . in fiscal 2016 , the company recorded a net recovery of an additional $ 8.3 million , comprised of an $ 8.6 million recovery less $ 0.3 million of professional service fees associated with the recovery . the company is continuing to pursue the recovery of the remaining $ 30.0 million and is cooperating with u.s. federal and numerous overseas law enforcement authorities who are actively pursuing a multi-agency criminal investigation . however , any additional recoveries are likely remote and , therefore , can not be assured . 34 deferred revenues we recognize revenues when persuasive evidence of an arrangement exists , delivery has occurred , the sales price is fixed or determinable and the collectability of the resulting receivable is reasonably assured . in cases where we lack evidence that all of these criteria have been met , we defer recognition of revenue . story_separator_special_tag this increase in absolute dollar expenditures is primarily driven by a $ 2.5 million impairment charge for capitalized software and software in development costs recognized in the second quarter of fiscal 2016 due to the cancellation of the commercial launch of certain software in development . over time , we expect our research and development costs to continue to increase in absolute dollars as we continue making investments in developing new products in addition to new versions of our existing products . sales , general and administrative sales , general and administrative expenses increased $ 11.7 million , or 54 % , from $ 21.6 million in fiscal 2015 to $ 33.3 million in fiscal 2016 . as a percentage of revenues , sales , general and administrative expenses increased to 5 % in fiscal 2016 , compared to 4 % in fiscal 2015 . the increase in sales , general and administrative expenses in absolute dollars and as a percentage of revenues was due to higher consulting fees incurred to support the finance team and to assist with material weakness remediation , higher legal costs , and an increase in headcount in the business development organization . during fiscal 2017 , we expect our sales , general and administrative expenses to stabilize as we anticipate lower consulting related fees . however , as the business grows , additional costs will be necessary to support this business , to register and defend trademarks and patents and to support our business and operations . business e-mail compromise fraud ( recovery ) loss in june 2015 , we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department . the fraud resulted in transfers of funds aggregating $ 46.7 million held by a company subsidiary incorporated in hong kong to other overseas accounts held by third parties . the company recovered $ 8.1 million in fiscal 2015 and recorded a charge of $ 39.1 million in the fourth quarter of fiscal 2015 , including additional expenses consisting of professional service fees associated with the fraud loss . in fiscal 2016 , the company recorded a net recovery of an additional $ 8.3 million , comprised of an $ 8.6 million recovery less $ 0.3 million of professional service fees associated with the recovery . the company is continuing to pursue the recovery of the remaining $ 30.0 million and is cooperating with u.s. federal and numerous overseas law enforcement authorities who are actively pursuing a multi-agency criminal investigation . however , any additional recoveries are likely remote and therefore can not be assured . provision for income taxes our provision for income taxes increased $ 10.2 million from $ 16.1 million for fiscal 2015 to $ 26.3 million for fiscal 2016 . our effective tax rate remained flat at 11 % in both fiscal 2016 and fiscal 2015 because the company 's ratio of domestic and foreign income remained relatively constant for fiscal 2015 and fiscal 2016 . overall , the rate benefit is due to income in foreign jurisdictions that have lower tax rates than the u.s. 39 comparison of years ended june 30 , 2015 and 2014 replace_table_token_9_th revenues revenues increased $ 23.5 million , or 4 % , from $ 572.5 million in fiscal 2014 to $ 595.9 million in fiscal 2015 . we believe the overall increase in revenues during fiscal 2015 was driven by increased adoption of our enterprise technologies , partially offset by a decrease in sales of our service provider technologies due to lower demand from our service provider customers outside of north america , including as a result of political and economic instability in some of those regions . in fiscal 2014 , flytec computers inc. represented 13 % of our revenues . no other distributor or customer represented more than 10 % of our revenues in fiscal 2015 or fiscal 2014 . revenues by product type replace_table_token_10_th service provider technology revenues decreased $ 32.6 million , or 7 % , during fiscal 2015. the decline in revenues from service provider technologies was primarily due to lower demand from our service provider customers outside of north america , including as a result of political and economic instability in some of those regions and the strength of the us dollar during the fiscal year compared to some of the currencies in these regions . enterprise technology revenues increased $ 56.1 million , or 46 % , during fiscal 2015 , primarily due to product expansion and further adoption of our unifi technology platform . 40 revenues by geography we have determined the geographical distribution of our product revenues based on our customers ' ship-to destinations . a majority of our sales are to distributors who in turn sell to resellers or directly to end customers , which may be different countries than the initial ship-to destination . the following are our revenues by geography for fiscal 2015 and fiscal 2014 ( in thousands , except percentages ) : replace_table_token_11_th ( 1 ) revenue for the united states was $ 187.3 million and $ 136.6 million in fiscal 2015 and fiscal 2014 , respectively . north america revenues in north america increased $ 55.3 million , or 39 % , from $ 142.4 million in fiscal 2014 to $ 197.7 million in fiscal 2015. the increase in revenues in north america in fiscal 2015 compared to fiscal 2014 was due to increased adoption of our service provider technologies and enterprise technologies . south america revenues in south america decreased $ 12.5 million , or 11 % , from $ 109.6 million in fiscal 2014 to $ 97.1 million in fiscal 2015. we believe the decrease in revenues in south america in fiscal 2015 compared to fiscal 2014 was primarily due to decreased demand for our service provider technologies due in part to economic instability and partially

cash flows for the years ended december 31 , 2016 and 2015 ( in thousands ) replace_table_token_11_th cash flows provided by ( used in ) operating activities , investing activities and financing activities for the years ended december 31 , 2016 and 2015 were as follows : net cash flow provided by operating activities was $ 9,350 for the year ended december 31 , 2016 as compared to $ 9,440 for the years ended december 31 , 2015. the change principally reflects executive compensation recorded for only five months in 2015 following the offering of common stock under rule 144a on august 5 , 2015 , the collection in 2015 of a large prior year outstanding receivable on the 141 livingston street property , offset by an increase in receivables at the flatbush gardens property . net cash used in investing activities was $ 121,285 for the year ended december 31 , 2016 as compared to $ 9,025 for the year ended december 31 , 2015. the increase in 2016 as compared to 2015 reflects the cost of acquisition of the aspen property acquired in june 2016 and higher capital costs in 2016 of apartment and building renovations at the flatbush gardens , tribeca house and 141 livingston street properties in connection with our property development plans .

service provider technology includes our airmax , edgemax and airfiber platforms , as well as embedded radio products and other 802.11 standard products including base stations , radios , backhaul equipment and customer premise equipment ( “ cpe ” ) . additionally , service provider technology includes antennas and other products in the 0.9 to 6.0ghz spectrum and miscellaneous products such as mounting brackets , cables and power over ethernet adapters . service provider technology also includes solar products ( sales of which have not been material to date ) and revenues that are attributable to pcs . enterprise technology includes our unifi and mfi platforms , including unifi enterprise wi-fi products , unifi video products , and unifi switching and routing solutions . enterprise technology also includes revenues that are attributable to pcs . 33 we sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors , and , to a lesser extent , direct customers . sales to distributors accounted for 99 % of our revenues in the year ended june 30 , 2016 . other channel partners , such as resellers , largely accounted for the balance of our revenues . cost of revenues our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and chipsets that we consign to certain of our contract manufacturers . in addition , cost of revenues includes tooling , labor and other costs associated with engineering , testing and quality assurance , warranty costs , stock-based compensation , logistics related fees and excess and obsolete inventory . in addition to utilizing contract manufacturers , we outsource most of our logistics warehousing and order fulfillment functions , which are located primarily in china , and to a lesser extent , taiwan and united states . we also evaluate and utilize other vendors for various portions of our supply chain from time to time . our operations organization consists of employees and consultants engaged in the management of our contract manufacturers , new product introduction activities , logistical support and engineering . gross profit our gross profit has been , and may in the future be , influenced by several factors including changes in product mix , target end markets for our products , pricing due to competitive pressure , production costs and global demand for electronic components . although we procure and sell our products in u.s. dollars , our contract manufacturers incur many costs , including labor costs , in other currencies . to the extent that the exchange rates move unfavorably for our contract manufacturers , they may try to pass these additional costs on to us , which could have a material impact on our future average selling prices and unit costs . operating expenses we classify our operating expenses as research and development , sales , general and administrative expenses and expense related to the business email compromise fraud loss . research and development expenses consist primarily of salary and benefit expenses , including stock-based compensation , for employees and costs for contractors engaged in research , design and development activities , as well as costs for prototypes , licensed or purchased intellectual property , facilities and travel . over time , we expect our research and development costs to increase as we continue making significant investments in developing new products in addition to new versions of our existing products . sales , general and administrative expenses include salary and benefit expenses , including stock-based compensation , for employees and costs for contractors engaged in sales , marketing and general and administrative activities , as well as the costs of legal expenses , trade shows , marketing programs , promotional materials , bad debt expense , professional services , facilities , general liability insurance and travel . as our product portfolio and targeted markets expand , we may need to employ different sales models , such as building a direct sales force . these sales models would likely increase our costs . over time , we expect our sales , general and administrative expenses to increase in absolute dollars due to continued growth in headcount , expansion of our efforts to register and defend trademarks and patents and to support our business and operations . business e-mail compromise fraud ( recovery ) loss - in june 2015 , we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department . the fraud resulted in transfers of funds aggregating $ 46.7 million held by a company subsidiary incorporated in hong kong to other overseas accounts held by third parties , of which we recovered $ 8.1 million in fiscal 2015. as a result , we recorded a charge of $ 39.1 million in the fourth quarter of 2015 , including additional expenses consisting of professional service fees associated with the fraud loss . in fiscal 2016 , the company recorded a net recovery of an additional $ 8.3 million , comprised of an $ 8.6 million recovery less $ 0.3 million of professional service fees associated with the recovery . the company is continuing to pursue the recovery of the remaining $ 30.0 million and is cooperating with u.s. federal and numerous overseas law enforcement authorities who are actively pursuing a multi-agency criminal investigation . however , any additional recoveries are likely remote and , therefore , can not be assured . 34 deferred revenues we recognize revenues when persuasive evidence of an arrangement exists , delivery has occurred , the sales price is fixed or determinable and the collectability of the resulting receivable is reasonably assured . in cases where we lack evidence that all of these criteria have been met , we defer recognition of revenue . story_separator_special_tag this increase in absolute dollar expenditures is primarily driven by a $ 2.5 million impairment charge for capitalized software and software in development costs recognized in the second quarter of fiscal 2016 due to the cancellation of the commercial launch of certain software in development . over time , we expect our research and development costs to continue to increase in absolute dollars as we continue making investments in developing new products in addition to new versions of our existing products . sales , general and administrative sales , general and administrative expenses increased $ 11.7 million , or 54 % , from $ 21.6 million in fiscal 2015 to $ 33.3 million in fiscal 2016 . as a percentage of revenues , sales , general and administrative expenses increased to 5 % in fiscal 2016 , compared to 4 % in fiscal 2015 . the increase in sales , general and administrative expenses in absolute dollars and as a percentage of revenues was due to higher consulting fees incurred to support the finance team and to assist with material weakness remediation , higher legal costs , and an increase in headcount in the business development organization . during fiscal 2017 , we expect our sales , general and administrative expenses to stabilize as we anticipate lower consulting related fees . however , as the business grows , additional costs will be necessary to support this business , to register and defend trademarks and patents and to support our business and operations . business e-mail compromise fraud ( recovery ) loss in june 2015 , we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department . the fraud resulted in transfers of funds aggregating $ 46.7 million held by a company subsidiary incorporated in hong kong to other overseas accounts held by third parties . the company recovered $ 8.1 million in fiscal 2015 and recorded a charge of $ 39.1 million in the fourth quarter of fiscal 2015 , including additional expenses consisting of professional service fees associated with the fraud loss . in fiscal 2016 , the company recorded a net recovery of an additional $ 8.3 million , comprised of an $ 8.6 million recovery less $ 0.3 million of professional service fees associated with the recovery . the company is continuing to pursue the recovery of the remaining $ 30.0 million and is cooperating with u.s. federal and numerous overseas law enforcement authorities who are actively pursuing a multi-agency criminal investigation . however , any additional recoveries are likely remote and therefore can not be assured . provision for income taxes our provision for income taxes increased $ 10.2 million from $ 16.1 million for fiscal 2015 to $ 26.3 million for fiscal 2016 . our effective tax rate remained flat at 11 % in both fiscal 2016 and fiscal 2015 because the company 's ratio of domestic and foreign income remained relatively constant for fiscal 2015 and fiscal 2016 . overall , the rate benefit is due to income in foreign jurisdictions that have lower tax rates than the u.s. 39 comparison of years ended june 30 , 2015 and 2014 replace_table_token_9_th revenues revenues increased $ 23.5 million , or 4 % , from $ 572.5 million in fiscal 2014 to $ 595.9 million in fiscal 2015 . we believe the overall increase in revenues during fiscal 2015 was driven by increased adoption of our enterprise technologies , partially offset by a decrease in sales of our service provider technologies due to lower demand from our service provider customers outside of north america , including as a result of political and economic instability in some of those regions . in fiscal 2014 , flytec computers inc. represented 13 % of our revenues . no other distributor or customer represented more than 10 % of our revenues in fiscal 2015 or fiscal 2014 . revenues by product type replace_table_token_10_th service provider technology revenues decreased $ 32.6 million , or 7 % , during fiscal 2015. the decline in revenues from service provider technologies was primarily due to lower demand from our service provider customers outside of north america , including as a result of political and economic instability in some of those regions and the strength of the us dollar during the fiscal year compared to some of the currencies in these regions . enterprise technology revenues increased $ 56.1 million , or 46 % , during fiscal 2015 , primarily due to product expansion and further adoption of our unifi technology platform . 40 revenues by geography we have determined the geographical distribution of our product revenues based on our customers ' ship-to destinations . a majority of our sales are to distributors who in turn sell to resellers or directly to end customers , which may be different countries than the initial ship-to destination . the following are our revenues by geography for fiscal 2015 and fiscal 2014 ( in thousands , except percentages ) : replace_table_token_11_th ( 1 ) revenue for the united states was $ 187.3 million and $ 136.6 million in fiscal 2015 and fiscal 2014 , respectively . north america revenues in north america increased $ 55.3 million , or 39 % , from $ 142.4 million in fiscal 2014 to $ 197.7 million in fiscal 2015. the increase in revenues in north america in fiscal 2015 compared to fiscal 2014 was due to increased adoption of our service provider technologies and enterprise technologies . south america revenues in south america decreased $ 12.5 million , or 11 % , from $ 109.6 million in fiscal 2014 to $ 97.1 million in fiscal 2015. we believe the decrease in revenues in south america in fiscal 2015 compared to fiscal 2014 was primarily due to decreased demand for our service provider technologies due in part to economic instability and partially

cash flows from operating activities net cash provided by operating activities in fiscal 2016 consisted primarily of net income of $ 213.6 million partially offset by net changes in operating assets and liabilities that resulted in net cash outflows of $ 27.1 million . this net change was primarily driven by outflows arising from a $ 20.0 million increase in inventory , and a $ 9.3 million increase in vendor deposits due to our strategic efforts to reduce lead times and maximize order fulfillments , a $ 16.7 million increase in accounts receivable due to our overall increase in revenue . these outflows were offset by changes in operating assets and liabilities resulting in cash inflows , including a $ 11.0 million increase in accounts payable and accrued liabilities due to the timing of payments with our vendors , a $ 7.0 million net increase in taxes payable and decrease in prepaid income taxes due the timing of federal tax payments , a $ 0.7 million increase in deferred revenue due to additional pcs revenue deferrals during the year and a $ 0.2 million decrease in prepaid expenses and other current assets due to timing of deposit payments with our suppliers . overall , cash inflows from operating activities were driven by our net income , which included non-cash adjustments due to stock-based compensation , depreciation and amortization , increases to our provision for inventory obsolescence , decreases to our provision for losses on deposits with our vendors , decreases in our allowance for doubtful accounts and taxes .

we estimate that we currently host and maintain more than 6,1 00 websites for dealers in all of our vertical markets . websites have become ari 's largest source of revenue and accounted for 51 % of total revenue during fiscal 2014. website revenue increased 28.1 % to $ 16,826,000 in fiscal 2014 , compared to $ 13,140,000 during fiscal 2013. the growth in website revenue was largely the result of our acquisition of 50 below in november 2012. since the acquisition , we have integrated our sales , support and implementation teams related to our website products . as part of the 50 below acquisition , the company assumed a significant recurring revenue service obligation and has had a high success rate in renewing those contracts . we anticipate that our web platforms will continue to be the company 's largest source of growth , much of this growth coming in the atw and hme markets , both of which are new to ari . ecatalog revenue ou r ecatalog solutions generate revenue from renewable subscription fees for our software , data content , software maintenance and support fees and software customization fees . ecatalog is our second largest source of rr , representing 4 2 . 5 % of total revenue during fiscal 2014. ecatalog revenue in creased 1 . 2 % or $ 1 60 ,000 during fiscal 2014 , compared to fiscal 2013. ecatalog revenues have historically had the company 's lowest revenue growth rates , primarily attributable to ari 's already strong market position . we saw a small increase in ecatalog revenue as a result of our new accessorysmart product , which is a fitment-powered aftermarket pg & a lookup solution and is a first-of-its-kind in the powersports industry . the product won a “ nifty 50 award ” from powersports business , a leading industry trade publication , at the powersports industry 's largest trade show in february 2014. lead management revenue lead management revenue is primarily generated from renewable subscription fees and variable transaction fees for the use of our footsteps products . lead management revenue decreased 6.7 % to $ 969,000 in fiscal 201 4 from $ 1,039 ,000 during fiscal 201 3 . management is currently reviewing various options with respect to the footsteps product , including the possibility of including the core functionality of the product within our web platforms and expects this product to continue to be instrumental in our goal of helping our customers sell more stuff ! tm digital marketing revenue revenue s from our digital marketing solutions are generated from set-up fees and subscription fees for our lead generation tools through search engine optimization , social media marketing and website enhancements . we derived approximately 1 % of our revenues from digital marketing services during fiscal 2014. digital marketing services is a relatively new service offering by ari and in the third quarter of fiscal 2014 , we went to market with a more robust offering in the space , which included rr offerings , as a result of our integration of the duo business we acquired in november 2013 . digital marketing revenue decreased 47.5 % from $ 856,000 during fiscal 2013 to $ 449,000 during fiscal 2014. the decline in digital marketing revenues was primarily driven by a change in business model for our lead generation service . the largest cost associated with this service is the purchase of ad words from internet search providers such as google . historically , the revenues recognized on this service included the cost associated with the ad word spend . these costs were then “ passed through ” directly to the internet search provider . under this model , gaap requires these costs to be recognized as both a revenue and a cost of sale . not only did this treatment have the impact of reducing gross margins as a percentage of revenue , but also provided negative float to ari as the ad word costs were at times paid to the internet search provider prior to receiving the funds from the customer . during the latter part of fiscal 2013 , we made a change to this business model whereby the customer is now responsible for paying the cost of the ad words directly to the internet search provider . ari now simply charges the customer a fee for the service provided . this change had the impact of reducing gaap revenues associated with this service , as discussed above . however , the change had little or no net impact on the gross profit or net cash receipts associated with the service . other revenue we also offer a suite of complementary solutions , which include software and website customization services and hosting services . other revenue , which is primarily non-recurring in nature , declined 38.1 % from $ 1,185,000 during fiscal 2013 to $ 733,000 during fiscal 2014. the decline in other revenue is primarily due to a decrease in our professional services revenue as a result of our goal of focusing on rr , which generates higher gross profits . revenues from non-recurring professional services will fluctuate from period to period based on the timing of custom projects . 18 recurring revenue rr is one of the most important growth drivers of our business . increasing the percentage of our revenues that are recurring , while at the same time reducing the rate of product churn , enhances our ability to generate profitable growth . our subscription-based saas and daas products generate higher margins than our non-recurring products and services , and the incremental cost of selling these products to new dealers ( we refer to these as new “ logos ” ) is relatively low . story_separator_special_tag we had income tax expense of $ 241 ,000 during fiscal 2014 , compared to an income tax benefit of $ 1 , 133 ,000 during fiscal 2013 . we recorded a tax benefit related to a change in estimate of the valuation allowance against future nols of $ 32,000 during fiscal 2014 and $ 1 , 341 ,000 during fiscal 2013 , because of expected increase s in future taxable income . we paid income taxes of $ 106 ,000 and $ 91 ,000 during fiscal 2014 and 2013 , respectively , primarily related to statutory alternative minimum taxes . income tax expense may vary from period to period as we continue to evaluate the valuation allowance against net deferred tax assets . we also have nols related to tax losses incurred by our netherlands operation . we have determined that , consistent with prior periods , it is not likely that the net operating losses will be utilized and therefore , a full valuation allowance is recorded , resulting in $ 0 net deferred tax assets related to the netherlands operation at july 31 , 2014 and 2013 , respectively . liquidity and capital resources the following table sets forth , for the periods indicated , certain cash flow information derived from our financial statements : replace_table_token_7_th we utilized $ 387 ,000 of net story_separator_special_tag outstanding principal amount of the term loan upon certain notice to svb and , in certain circumstances , the payment of a prepayment penalty of up to $ 90,000 as of july 31 , 2014 . 24 the agreement contains covenants that restrict , among other things and subject to certain conditions , the ability of the company to permit a change of control , incur debt , create liens on its assets , make certain investments , enter into merger or acquisition transactions and make distributions to its shareholders . as of july 31 , 2014 , f inancial covenants include d the maintenance of a minimum senior leverage ratio equal to or less than 2.00 to 1.00 , and the maintenance of a fixed charge coverage ratio ( as defined in the agreement ) equal to or greater than 1.25 to 1.00. the agreement also contains customary events of default that , if triggered , could result in an acceleration of the company 's obligations under the agreement . the loans are secured by a first priority security interest in substantially all assets of the company . the company was in compliance with its debt covenants at july 31 , 2014 . fifth third bank on july 27 , 2011 , the company entered into a loan and security agreement ( the “ loan and security agreement ” ) with fifth third bank ( “ fifth third ” ) . pursuant to the terms of the loan and security agreement , fifth third extended to the company credit facilities consisting of a $ 1,500,000 revolving credit facility ( the “ revolving loan ” ) and a $ 5,000,000 term loan facility ( the “ term loan ” and , together with the revolving loan , the “ credit facilities ” ) . on august 17 , 2012 , the credit facilities were amended to increase the principal amount of the term loan by $ 1,000,000 , and extend the maturity date to december 15 , 2014. each of the credit facilities bore interest at a rate based on the one , two , three or six month libor ( as selected by the company on the last business day of each month ) plus 4.0 % . on november 28 , 2012 the credit facilities were further amended to waive the provisions of the agreement that would prohibit ari 's acquisition of 50 below and the financing of $ 3,500,000 of the acquisition with a secured subordinated promissory note in the same amount . under the amendment , fifth third consented to the acquisition of the 50 below assets and the related transactions and provided waivers of certain provisions of the credit facilities , subject to certain terms and conditions . such terms and conditions included , among others : ( i ) amendments to the fixed charge coverage ratio and senior leverage ( maximum senior funded debt to ebitda ) ratio financial covenants ; ( ii ) the addition of a maximum total funded debt to ebitda ratio financial covenant ; ( iii ) amendment of the revolving loan and term loan maturity dates from july 27 , 2014 to december 15 , 2013 ; and ( iv ) other customary terms and conditions . on march 8 , 2013 , the company entered into the third amendment to the loan and security agreement . the third amendment was intended for the following purposes : ( i ) to amend the definition of ebitda to permit adjustments for certain non-recurring transaction expenses and certain other non-cash expenses ; ( ii ) to amend the required fixed charge coverage ratio for the rolling four fiscal quarter periods ending january 31 , 2013 and april 30 , 2013 to 0.90x and 1.00x , respectively ; ( iii ) to restrict the company 's ability to enter into certain transactions without the prior written consent of fifth third , including , without limitation , certain change in control transactions , reclassifications , reorganizations and recapitalizations of the company 's common stock ; and ( iv ) to permit the company to use the net cash proceeds from an equity raise transaction in excess of $ 1,500,000 for working capital or to prepay the outstanding principal balance under other debt obligations described below . the loan agreement amendment also contained fifth third bank 's consent to the company raising additional capital by selling and issuing additional equity securities , and waivers by fifth third of the provisions of the loan and security agreement that would otherwise have prohibited such a transaction , subject to

cash flows from operating activities net cash provided by operating activities in fiscal 2016 consisted primarily of net income of $ 213.6 million partially offset by net changes in operating assets and liabilities that resulted in net cash outflows of $ 27.1 million . this net change was primarily driven by outflows arising from a $ 20.0 million increase in inventory , and a $ 9.3 million increase in vendor deposits due to our strategic efforts to reduce lead times and maximize order fulfillments , a $ 16.7 million increase in accounts receivable due to our overall increase in revenue . these outflows were offset by changes in operating assets and liabilities resulting in cash inflows , including a $ 11.0 million increase in accounts payable and accrued liabilities due to the timing of payments with our vendors , a $ 7.0 million net increase in taxes payable and decrease in prepaid income taxes due the timing of federal tax payments , a $ 0.7 million increase in deferred revenue due to additional pcs revenue deferrals during the year and a $ 0.2 million decrease in prepaid expenses and other current assets due to timing of deposit payments with our suppliers . overall , cash inflows from operating activities were driven by our net income , which included non-cash adjustments due to stock-based compensation , depreciation and amortization , increases to our provision for inventory obsolescence , decreases to our provision for losses on deposits with our vendors , decreases in our allowance for doubtful accounts and taxes .

we estimate that we currently host and maintain more than 6,1 00 websites for dealers in all of our vertical markets . websites have become ari 's largest source of revenue and accounted for 51 % of total revenue during fiscal 2014. website revenue increased 28.1 % to $ 16,826,000 in fiscal 2014 , compared to $ 13,140,000 during fiscal 2013. the growth in website revenue was largely the result of our acquisition of 50 below in november 2012. since the acquisition , we have integrated our sales , support and implementation teams related to our website products . as part of the 50 below acquisition , the company assumed a significant recurring revenue service obligation and has had a high success rate in renewing those contracts . we anticipate that our web platforms will continue to be the company 's largest source of growth , much of this growth coming in the atw and hme markets , both of which are new to ari . ecatalog revenue ou r ecatalog solutions generate revenue from renewable subscription fees for our software , data content , software maintenance and support fees and software customization fees . ecatalog is our second largest source of rr , representing 4 2 . 5 % of total revenue during fiscal 2014. ecatalog revenue in creased 1 . 2 % or $ 1 60 ,000 during fiscal 2014 , compared to fiscal 2013. ecatalog revenues have historically had the company 's lowest revenue growth rates , primarily attributable to ari 's already strong market position . we saw a small increase in ecatalog revenue as a result of our new accessorysmart product , which is a fitment-powered aftermarket pg & a lookup solution and is a first-of-its-kind in the powersports industry . the product won a “ nifty 50 award ” from powersports business , a leading industry trade publication , at the powersports industry 's largest trade show in february 2014. lead management revenue lead management revenue is primarily generated from renewable subscription fees and variable transaction fees for the use of our footsteps products . lead management revenue decreased 6.7 % to $ 969,000 in fiscal 201 4 from $ 1,039 ,000 during fiscal 201 3 . management is currently reviewing various options with respect to the footsteps product , including the possibility of including the core functionality of the product within our web platforms and expects this product to continue to be instrumental in our goal of helping our customers sell more stuff ! tm digital marketing revenue revenue s from our digital marketing solutions are generated from set-up fees and subscription fees for our lead generation tools through search engine optimization , social media marketing and website enhancements . we derived approximately 1 % of our revenues from digital marketing services during fiscal 2014. digital marketing services is a relatively new service offering by ari and in the third quarter of fiscal 2014 , we went to market with a more robust offering in the space , which included rr offerings , as a result of our integration of the duo business we acquired in november 2013 . digital marketing revenue decreased 47.5 % from $ 856,000 during fiscal 2013 to $ 449,000 during fiscal 2014. the decline in digital marketing revenues was primarily driven by a change in business model for our lead generation service . the largest cost associated with this service is the purchase of ad words from internet search providers such as google . historically , the revenues recognized on this service included the cost associated with the ad word spend . these costs were then “ passed through ” directly to the internet search provider . under this model , gaap requires these costs to be recognized as both a revenue and a cost of sale . not only did this treatment have the impact of reducing gross margins as a percentage of revenue , but also provided negative float to ari as the ad word costs were at times paid to the internet search provider prior to receiving the funds from the customer . during the latter part of fiscal 2013 , we made a change to this business model whereby the customer is now responsible for paying the cost of the ad words directly to the internet search provider . ari now simply charges the customer a fee for the service provided . this change had the impact of reducing gaap revenues associated with this service , as discussed above . however , the change had little or no net impact on the gross profit or net cash receipts associated with the service . other revenue we also offer a suite of complementary solutions , which include software and website customization services and hosting services . other revenue , which is primarily non-recurring in nature , declined 38.1 % from $ 1,185,000 during fiscal 2013 to $ 733,000 during fiscal 2014. the decline in other revenue is primarily due to a decrease in our professional services revenue as a result of our goal of focusing on rr , which generates higher gross profits . revenues from non-recurring professional services will fluctuate from period to period based on the timing of custom projects . 18 recurring revenue rr is one of the most important growth drivers of our business . increasing the percentage of our revenues that are recurring , while at the same time reducing the rate of product churn , enhances our ability to generate profitable growth . our subscription-based saas and daas products generate higher margins than our non-recurring products and services , and the incremental cost of selling these products to new dealers ( we refer to these as new “ logos ” ) is relatively low . story_separator_special_tag we had income tax expense of $ 241 ,000 during fiscal 2014 , compared to an income tax benefit of $ 1 , 133 ,000 during fiscal 2013 . we recorded a tax benefit related to a change in estimate of the valuation allowance against future nols of $ 32,000 during fiscal 2014 and $ 1 , 341 ,000 during fiscal 2013 , because of expected increase s in future taxable income . we paid income taxes of $ 106 ,000 and $ 91 ,000 during fiscal 2014 and 2013 , respectively , primarily related to statutory alternative minimum taxes . income tax expense may vary from period to period as we continue to evaluate the valuation allowance against net deferred tax assets . we also have nols related to tax losses incurred by our netherlands operation . we have determined that , consistent with prior periods , it is not likely that the net operating losses will be utilized and therefore , a full valuation allowance is recorded , resulting in $ 0 net deferred tax assets related to the netherlands operation at july 31 , 2014 and 2013 , respectively . liquidity and capital resources the following table sets forth , for the periods indicated , certain cash flow information derived from our financial statements : replace_table_token_7_th we utilized $ 387 ,000 of net story_separator_special_tag outstanding principal amount of the term loan upon certain notice to svb and , in certain circumstances , the payment of a prepayment penalty of up to $ 90,000 as of july 31 , 2014 . 24 the agreement contains covenants that restrict , among other things and subject to certain conditions , the ability of the company to permit a change of control , incur debt , create liens on its assets , make certain investments , enter into merger or acquisition transactions and make distributions to its shareholders . as of july 31 , 2014 , f inancial covenants include d the maintenance of a minimum senior leverage ratio equal to or less than 2.00 to 1.00 , and the maintenance of a fixed charge coverage ratio ( as defined in the agreement ) equal to or greater than 1.25 to 1.00. the agreement also contains customary events of default that , if triggered , could result in an acceleration of the company 's obligations under the agreement . the loans are secured by a first priority security interest in substantially all assets of the company . the company was in compliance with its debt covenants at july 31 , 2014 . fifth third bank on july 27 , 2011 , the company entered into a loan and security agreement ( the “ loan and security agreement ” ) with fifth third bank ( “ fifth third ” ) . pursuant to the terms of the loan and security agreement , fifth third extended to the company credit facilities consisting of a $ 1,500,000 revolving credit facility ( the “ revolving loan ” ) and a $ 5,000,000 term loan facility ( the “ term loan ” and , together with the revolving loan , the “ credit facilities ” ) . on august 17 , 2012 , the credit facilities were amended to increase the principal amount of the term loan by $ 1,000,000 , and extend the maturity date to december 15 , 2014. each of the credit facilities bore interest at a rate based on the one , two , three or six month libor ( as selected by the company on the last business day of each month ) plus 4.0 % . on november 28 , 2012 the credit facilities were further amended to waive the provisions of the agreement that would prohibit ari 's acquisition of 50 below and the financing of $ 3,500,000 of the acquisition with a secured subordinated promissory note in the same amount . under the amendment , fifth third consented to the acquisition of the 50 below assets and the related transactions and provided waivers of certain provisions of the credit facilities , subject to certain terms and conditions . such terms and conditions included , among others : ( i ) amendments to the fixed charge coverage ratio and senior leverage ( maximum senior funded debt to ebitda ) ratio financial covenants ; ( ii ) the addition of a maximum total funded debt to ebitda ratio financial covenant ; ( iii ) amendment of the revolving loan and term loan maturity dates from july 27 , 2014 to december 15 , 2013 ; and ( iv ) other customary terms and conditions . on march 8 , 2013 , the company entered into the third amendment to the loan and security agreement . the third amendment was intended for the following purposes : ( i ) to amend the definition of ebitda to permit adjustments for certain non-recurring transaction expenses and certain other non-cash expenses ; ( ii ) to amend the required fixed charge coverage ratio for the rolling four fiscal quarter periods ending january 31 , 2013 and april 30 , 2013 to 0.90x and 1.00x , respectively ; ( iii ) to restrict the company 's ability to enter into certain transactions without the prior written consent of fifth third , including , without limitation , certain change in control transactions , reclassifications , reorganizations and recapitalizations of the company 's common stock ; and ( iv ) to permit the company to use the net cash proceeds from an equity raise transaction in excess of $ 1,500,000 for working capital or to prepay the outstanding principal balance under other debt obligations described below . the loan agreement amendment also contained fifth third bank 's consent to the company raising additional capital by selling and issuing additional equity securities , and waivers by fifth third of the provisions of the loan and security agreement that would otherwise have prohibited such a transaction , subject to

cash during fiscal 2014 , compared to generation of $ 845 ,000 in fiscal 2013 . we generated n et cash provided by operating activities of $ 2 , 383 , 000 during fiscal 2014 compared to $ 2,404,000 during fiscal 2013 . 23 cash used in investing activities de creased 4 0 . 7 % or $ 1,955 ,000 in fiscal 2014 , compared to the same period last year . we paid net cash of $ 490,000 in acquisition related investments , capitalized $ 1,7 98 ,000 of software development costs , and acquired technology equipment of $ 658 ,000 during fiscal 2014 . we paid net cash of $ 2,479,000 for the acquisitions of ready2ride and 50 below , c apitalized $ 1,746,000 of software development costs , and acquired technology equipment of $ 722,000 during fiscal 2013 . we will continue to invest cash in the business to further our growth strategies previously discussed . net cash provided from financing activities was $ 45 ,000 during fiscal 2014 , as the company received cash proceeds of $ 312,000 related to capital leases and $ 283,000 from the issuance of common stock , offset in part by debt payments of $ 550,000 . net c ash provided by financing activities was $ 3,249,000 in fiscal 2013 , as the company borrowed an additional $ 1,000,000 of debt from fifth third , under its previous credit facilities , to fund its acquisition of ready2ride in august 2012 and borrowed an additional $ 3,500,000 from an affiliate of a shareholder for its acquisition of 50 below in november 2012. the company paid off $ 4,300,000 of debt with the proceeds from the march 2013 equity offering and the remaining debt was refinanced in april 2013 under more favorable payment terms .

additionally , at january 31 , 2015 , we , together with the partnership , owned a 51.01 % interest in another hotel located in tucson , arizona and a 51.71 % interest in a hotel located in ontario , california . at january 31 , 2014 , we owned through our sole general partner 's interest in the partnership , a 72.04 % interest in the tucson , arizona hotel , direct 50.85 % interest in the albuquerque , new mexico hotel , and a 99.90 % direct interest in the yuma , arizona hotel . additionally , at january 31 , 2014 , we together with the partnership owned a 51.00 % interest in another hotel located in tucson , arizona and a 61.60 % interest in a hotel located in ontario , california . we purchased 9,903 and 0 partnership class a units during the years ended january 31 , 2015 and 2014 , respectively . 8 our expenses consist primarily of property taxes , insurance , corporate overhead , interest on mortgage debt , professional fees , depreciation of the hotels and hotel operating expenses . hotel operating expenses consist primarily of payroll , guest and maintenance supplies , marketing and utilities expenses . under the terms of its partnership agreement , the partnership is required to reimburse us for all such expenses . accordingly , management believes that a review of the historical performance of the operations of the hotels , particularly with respect to occupancy , which is calculated as rooms sold divided by total rooms available , average daily rate ( “ adr ” ) , calculated as total room revenue divided by number of rooms sold , and revenue per available room ( “ revpar ” ) , calculated as total room revenue divided by number of rooms available , is appropriate for understanding revenue from the hotels . in fiscal year 2015 , occupancy decreased 2.49 % to 63.16 % from 65.65 % in the prior fiscal year . adr increased by $ 1.30 or 1.95 % to $ 67.85 in fiscal year 2015 from $ 66.55 in fiscal year 2014. the decreased occupancy and the increased adr resulted in a decrease in revpar of $ 0.83 or 1.90 % to $ 42.86 in fiscal year 2015 from $ 43.69 in fiscal year 2014. the increased occupancy and continued pressure on rates reflect the slowly improving economy and travel industry during fiscal year 2015. we have accepted slightly reduced rates to increase our occupancy . the following table shows certain historical financial and other information for the periods indicated : replace_table_token_4_th no assurance can be given that occupancy , adr and revpar will not increase or decrease as a result of changes in national or local economic or hospitality industry conditions . we enter into transactions with certain related parties from time to time . for information relating to such related party transactions see the following : for a discussion of management and licensing agreements with certain related parties , see “ item 1 – business – management and licensing contracts . ” for a discussion of guarantees of our mortgage notes payable by certain related parties , see note 10 to our consolidated financial statements – “ mortgage notes payable . ” for a discussion of our equity sales and restructuring agreements involving certain related parties , see notes 3 , 4 , 5 and 6 to our consolidated financial statements – “ sale of ownership interests in albuquerque subsidiary , ” “ sale of ownership interests in tucson hospitality properties subsidiary , ” “ sale of ownership interests in ontario hospitality properties subsidiary , ” and “ sale of ownership interests in yuma hospitality properties subsidiary ” respectively . for a discussion of other related party transactions , see note 17 to our consolidated financial statements – “ other related party transactions . ” 9 results of operations of the trust for the fiscal year ended january 31 , 201 5 compared to the fiscal year ended january 31 , 201 4 . overview a summary of total trust operating results for the fiscal years ended january 31 , 2015 and 2014 is as follows : replace_table_token_5_th our overall results in fiscal year 2015 were negatively affected by a slight decrease in revenues and an increase in operating expenses which included our growing ibc hotels division and our inability to control our income tax expenses . a summary of operating results by segment for the fiscal years ended january 31 , 2015 and 2014 is as follows : replace_table_token_6_th replace_table_token_7_th revenue : hotel operations & corporate overhead segment for the twelve months ended january 31 , 2015 , we had total revenue of approximately $ 14,653,000 compared to approximately $ 14,884,000 for the twelve months ended january 31 , 2014 , a decrease of approximately $ 231,000. with continued pressure on the economy , especially in the yuma , arizona and ontario , california markets , we realized a 1.9 % decrease in room revenues during fiscal year 2015 as room revenues were approximately $ 13,186,000 for fiscal year 2014 as compared to approximately $ 13,442,000 during fiscal year 2014. food and beverage revenue was approximately $ 954,000 for fiscal year 2015 as compared to approximately $ 992,000 during fiscal year 2014 , a decrease of approximately $ 38,000. during fiscal year 2016 , we expect improvements in occupancy , modest improvements in rates and steady food and beverage revenues . we also realized a 43 % increase in management and trademark fee revenues during fiscal year 2015 as management and trademark revenues were approximately $ 278,000 during fiscal year 2015 as compared to approximately $ 195,000 during fiscal year 2014. management and trademark fee revenues increased during fiscal year 2015 as a result of increased revenues in the three hotels owned by mr. wirth . story_separator_special_tag class b units sold and 8.5 class c units sold at $ 10,000 per unit . as of january 31 , 2015 , the trust held a 50.82 % ownership interest , or 279 class b units , in the albuquerque entity , mr. wirth and his affiliates held a 1.64 % interest , or 9 class c units , and other parties held a 47.54 % interest , or 261 class a units . as of january 31 , 2015 , the albuquerque entity has discretionary priority return payments to unrelated unit holders of approximately $ 183,000 , to the trust of approximately $ 195,000 , and to mr. wirth and his affiliates of approximately $ 6,000 per year payable quarterly for calendar year 2015. sale of ownership interests in tucson hospitality properties subsidiary on february 17 , 2011 , the partnership entered into a restructuring agreement with rare earth to allow for the sale of non-controlling interest units in tucson hospitality properties , lp ( the “ tucson entity ” ) , which operates the tucson oracle hotel property , then wholly-owned by the partnership . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 250 units , which represents approximately 41 % of the outstanding limited partnership units in the tucson entity , on a post-transaction basis , and the parties agreed to restructure the limited partnership agreement of the tucson entity . the board of trustees approved this restructuring on january 31 , 2011. on october 1 , 2013 , the partnership entered into an updated restructured limited partnership agreement with rare earth to allow for the sale of additional interest units in the tucson entity for $ 10,000 per unit . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 160 ( and potentially up to 200 if the overallotment is exercised ) units . under the terms of the updated restructuring agreement , the partnership agreed to hold at least 50.1 % of the outstanding limited partnership units in the tucson entity , on a post-transaction basis and intends to maintain this minimum ownership percentage through the purchase of units under this offering . the board of trustees approved this restructuring on september 14 , 2013. the limited partnership interests in the tucson entity are allocated to three classes with differing cumulative discretionary priority distribution rights through june 30 , 2016. class a units are owned by unrelated third parties and have first priority for distributions . class b units are owned by the partnership and have second priority for distributions . class c units are owned by rare earth or other affiliates of mr. wirth and have the lowest priority for distributions from the tucson entity . priority distributions of $ 700 per unit per year are cumulative until june 30 , 2016 ; however , after june 30 , 2016 class a unit holders continue to hold a preference on distributions over class b and class c unit holders . if certain triggering events related to the tucson entity occur prior to the payment of all accumulated distributions to its members , such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the members . in the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated distributions owed to the members , all class a members will participate pro rata in the funds available for distribution to them until paid in full , then class b , and then class c. after all investors have received their initial capital plus a 7 % per annum simple return , any additional profits will be allocated 50 % to rare earth , with the remaining 50 % allocated proportionately to all unit classes . rare earth also received a restructuring fee of $ 128,000 , conditioned upon and arising from the sale of the first 100 units in the tucson entity following the october 1 , 2013 restructuring . the tucson entity plans to use its best efforts to pay the discretionary priority distributions . the trust does not guarantee and is not otherwise obligated to pay the cumulative discretionary priority distributions . innsuites hotels will continue to provide management , licensing and reservation services to the tucson , arizona property . during the twelve months ended january 31 , 2015 , there were 9.5 class a units of the tucson entity sold , of which 1 class a unit was purchased from ref , and 9 class b units sold at $ 10,000 per unit . as of january 31 , 2015 , the partnership held a 51.01 % ownership interest , or 404 class b units , in the tucson entity , mr. wirth and his affiliates held a 1.39 % interest , or 11 class c units , and other parties held a 47.60 % interest , or 377 class a units . as of january 31 , 2014 , the partnership held a 51.00 % ownership interest , or 395 class b units , in the tucson entity , mr. wirth and his affiliates held a 1.55 % interest , or 12 class c units , and other parties held a 47.45 % interest , or 367.5 class a units . as of january 31 , 2015 , the tucson entity has discretionary priority return payments to unrelated unit holders of approximately $ 264,000 to the partnership of approximately $ 283,000 and to rare earth of approximately $ 8,000 per year payable quarterly for calendar years 2015 and 2016 . 15 sale of ownership interests in ontario hospitality properties subsidiary on february 29 , 2012 , the trust and partnership entered into a restructuring agreement with rare earth to allow for the sale of non-controlling interest units in ontario hospitality

cash during fiscal 2014 , compared to generation of $ 845 ,000 in fiscal 2013 . we generated n et cash provided by operating activities of $ 2 , 383 , 000 during fiscal 2014 compared to $ 2,404,000 during fiscal 2013 . 23 cash used in investing activities de creased 4 0 . 7 % or $ 1,955 ,000 in fiscal 2014 , compared to the same period last year . we paid net cash of $ 490,000 in acquisition related investments , capitalized $ 1,7 98 ,000 of software development costs , and acquired technology equipment of $ 658 ,000 during fiscal 2014 . we paid net cash of $ 2,479,000 for the acquisitions of ready2ride and 50 below , c apitalized $ 1,746,000 of software development costs , and acquired technology equipment of $ 722,000 during fiscal 2013 . we will continue to invest cash in the business to further our growth strategies previously discussed . net cash provided from financing activities was $ 45 ,000 during fiscal 2014 , as the company received cash proceeds of $ 312,000 related to capital leases and $ 283,000 from the issuance of common stock , offset in part by debt payments of $ 550,000 . net c ash provided by financing activities was $ 3,249,000 in fiscal 2013 , as the company borrowed an additional $ 1,000,000 of debt from fifth third , under its previous credit facilities , to fund its acquisition of ready2ride in august 2012 and borrowed an additional $ 3,500,000 from an affiliate of a shareholder for its acquisition of 50 below in november 2012. the company paid off $ 4,300,000 of debt with the proceeds from the march 2013 equity offering and the remaining debt was refinanced in april 2013 under more favorable payment terms .

additionally , at january 31 , 2015 , we , together with the partnership , owned a 51.01 % interest in another hotel located in tucson , arizona and a 51.71 % interest in a hotel located in ontario , california . at january 31 , 2014 , we owned through our sole general partner 's interest in the partnership , a 72.04 % interest in the tucson , arizona hotel , direct 50.85 % interest in the albuquerque , new mexico hotel , and a 99.90 % direct interest in the yuma , arizona hotel . additionally , at january 31 , 2014 , we together with the partnership owned a 51.00 % interest in another hotel located in tucson , arizona and a 61.60 % interest in a hotel located in ontario , california . we purchased 9,903 and 0 partnership class a units during the years ended january 31 , 2015 and 2014 , respectively . 8 our expenses consist primarily of property taxes , insurance , corporate overhead , interest on mortgage debt , professional fees , depreciation of the hotels and hotel operating expenses . hotel operating expenses consist primarily of payroll , guest and maintenance supplies , marketing and utilities expenses . under the terms of its partnership agreement , the partnership is required to reimburse us for all such expenses . accordingly , management believes that a review of the historical performance of the operations of the hotels , particularly with respect to occupancy , which is calculated as rooms sold divided by total rooms available , average daily rate ( “ adr ” ) , calculated as total room revenue divided by number of rooms sold , and revenue per available room ( “ revpar ” ) , calculated as total room revenue divided by number of rooms available , is appropriate for understanding revenue from the hotels . in fiscal year 2015 , occupancy decreased 2.49 % to 63.16 % from 65.65 % in the prior fiscal year . adr increased by $ 1.30 or 1.95 % to $ 67.85 in fiscal year 2015 from $ 66.55 in fiscal year 2014. the decreased occupancy and the increased adr resulted in a decrease in revpar of $ 0.83 or 1.90 % to $ 42.86 in fiscal year 2015 from $ 43.69 in fiscal year 2014. the increased occupancy and continued pressure on rates reflect the slowly improving economy and travel industry during fiscal year 2015. we have accepted slightly reduced rates to increase our occupancy . the following table shows certain historical financial and other information for the periods indicated : replace_table_token_4_th no assurance can be given that occupancy , adr and revpar will not increase or decrease as a result of changes in national or local economic or hospitality industry conditions . we enter into transactions with certain related parties from time to time . for information relating to such related party transactions see the following : for a discussion of management and licensing agreements with certain related parties , see “ item 1 – business – management and licensing contracts . ” for a discussion of guarantees of our mortgage notes payable by certain related parties , see note 10 to our consolidated financial statements – “ mortgage notes payable . ” for a discussion of our equity sales and restructuring agreements involving certain related parties , see notes 3 , 4 , 5 and 6 to our consolidated financial statements – “ sale of ownership interests in albuquerque subsidiary , ” “ sale of ownership interests in tucson hospitality properties subsidiary , ” “ sale of ownership interests in ontario hospitality properties subsidiary , ” and “ sale of ownership interests in yuma hospitality properties subsidiary ” respectively . for a discussion of other related party transactions , see note 17 to our consolidated financial statements – “ other related party transactions . ” 9 results of operations of the trust for the fiscal year ended january 31 , 201 5 compared to the fiscal year ended january 31 , 201 4 . overview a summary of total trust operating results for the fiscal years ended january 31 , 2015 and 2014 is as follows : replace_table_token_5_th our overall results in fiscal year 2015 were negatively affected by a slight decrease in revenues and an increase in operating expenses which included our growing ibc hotels division and our inability to control our income tax expenses . a summary of operating results by segment for the fiscal years ended january 31 , 2015 and 2014 is as follows : replace_table_token_6_th replace_table_token_7_th revenue : hotel operations & corporate overhead segment for the twelve months ended january 31 , 2015 , we had total revenue of approximately $ 14,653,000 compared to approximately $ 14,884,000 for the twelve months ended january 31 , 2014 , a decrease of approximately $ 231,000. with continued pressure on the economy , especially in the yuma , arizona and ontario , california markets , we realized a 1.9 % decrease in room revenues during fiscal year 2015 as room revenues were approximately $ 13,186,000 for fiscal year 2014 as compared to approximately $ 13,442,000 during fiscal year 2014. food and beverage revenue was approximately $ 954,000 for fiscal year 2015 as compared to approximately $ 992,000 during fiscal year 2014 , a decrease of approximately $ 38,000. during fiscal year 2016 , we expect improvements in occupancy , modest improvements in rates and steady food and beverage revenues . we also realized a 43 % increase in management and trademark fee revenues during fiscal year 2015 as management and trademark revenues were approximately $ 278,000 during fiscal year 2015 as compared to approximately $ 195,000 during fiscal year 2014. management and trademark fee revenues increased during fiscal year 2015 as a result of increased revenues in the three hotels owned by mr. wirth . story_separator_special_tag class b units sold and 8.5 class c units sold at $ 10,000 per unit . as of january 31 , 2015 , the trust held a 50.82 % ownership interest , or 279 class b units , in the albuquerque entity , mr. wirth and his affiliates held a 1.64 % interest , or 9 class c units , and other parties held a 47.54 % interest , or 261 class a units . as of january 31 , 2015 , the albuquerque entity has discretionary priority return payments to unrelated unit holders of approximately $ 183,000 , to the trust of approximately $ 195,000 , and to mr. wirth and his affiliates of approximately $ 6,000 per year payable quarterly for calendar year 2015. sale of ownership interests in tucson hospitality properties subsidiary on february 17 , 2011 , the partnership entered into a restructuring agreement with rare earth to allow for the sale of non-controlling interest units in tucson hospitality properties , lp ( the “ tucson entity ” ) , which operates the tucson oracle hotel property , then wholly-owned by the partnership . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 250 units , which represents approximately 41 % of the outstanding limited partnership units in the tucson entity , on a post-transaction basis , and the parties agreed to restructure the limited partnership agreement of the tucson entity . the board of trustees approved this restructuring on january 31 , 2011. on october 1 , 2013 , the partnership entered into an updated restructured limited partnership agreement with rare earth to allow for the sale of additional interest units in the tucson entity for $ 10,000 per unit . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 160 ( and potentially up to 200 if the overallotment is exercised ) units . under the terms of the updated restructuring agreement , the partnership agreed to hold at least 50.1 % of the outstanding limited partnership units in the tucson entity , on a post-transaction basis and intends to maintain this minimum ownership percentage through the purchase of units under this offering . the board of trustees approved this restructuring on september 14 , 2013. the limited partnership interests in the tucson entity are allocated to three classes with differing cumulative discretionary priority distribution rights through june 30 , 2016. class a units are owned by unrelated third parties and have first priority for distributions . class b units are owned by the partnership and have second priority for distributions . class c units are owned by rare earth or other affiliates of mr. wirth and have the lowest priority for distributions from the tucson entity . priority distributions of $ 700 per unit per year are cumulative until june 30 , 2016 ; however , after june 30 , 2016 class a unit holders continue to hold a preference on distributions over class b and class c unit holders . if certain triggering events related to the tucson entity occur prior to the payment of all accumulated distributions to its members , such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the members . in the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated distributions owed to the members , all class a members will participate pro rata in the funds available for distribution to them until paid in full , then class b , and then class c. after all investors have received their initial capital plus a 7 % per annum simple return , any additional profits will be allocated 50 % to rare earth , with the remaining 50 % allocated proportionately to all unit classes . rare earth also received a restructuring fee of $ 128,000 , conditioned upon and arising from the sale of the first 100 units in the tucson entity following the october 1 , 2013 restructuring . the tucson entity plans to use its best efforts to pay the discretionary priority distributions . the trust does not guarantee and is not otherwise obligated to pay the cumulative discretionary priority distributions . innsuites hotels will continue to provide management , licensing and reservation services to the tucson , arizona property . during the twelve months ended january 31 , 2015 , there were 9.5 class a units of the tucson entity sold , of which 1 class a unit was purchased from ref , and 9 class b units sold at $ 10,000 per unit . as of january 31 , 2015 , the partnership held a 51.01 % ownership interest , or 404 class b units , in the tucson entity , mr. wirth and his affiliates held a 1.39 % interest , or 11 class c units , and other parties held a 47.60 % interest , or 377 class a units . as of january 31 , 2014 , the partnership held a 51.00 % ownership interest , or 395 class b units , in the tucson entity , mr. wirth and his affiliates held a 1.55 % interest , or 12 class c units , and other parties held a 47.45 % interest , or 367.5 class a units . as of january 31 , 2015 , the tucson entity has discretionary priority return payments to unrelated unit holders of approximately $ 264,000 to the partnership of approximately $ 283,000 and to rare earth of approximately $ 8,000 per year payable quarterly for calendar years 2015 and 2016 . 15 sale of ownership interests in ontario hospitality properties subsidiary on february 29 , 2012 , the trust and partnership entered into a restructuring agreement with rare earth to allow for the sale of non-controlling interest units in ontario hospitality

liquidity and capital resources overview – hotel operations & corporate overhead and ibc development segments our principal source of cash to meet our cash requirements , including distributions to our shareholders , is our share of the partnership 's cash flow , quarterly distributions from the albuquerque , new mexico and yuma , arizona properties and more recently , sales of non-controlling interest in certain of our hotels . the partnership 's principal source of revenue is hotel operations for the one hotel property it owns and quarterly distributions from the tucson , arizona and ontario , california properties . our liquidity , including our ability to make distributions to our shareholders , will depend upon our ability , and the partnership 's ability , to generate sufficient cash flow from hotel operations and to service our debt . hotel operations are significantly affected by occupancy and room rates at the hotels . we anticipate occupancy and adr will be improved in the coming year ; capital improvements are expected to be similar from the prior year . as of january 31 , 2015 , the trust had $ 125,000 drawn on its bank line of credit . our credit line matures on june 23 , 2015 and we are currently in discussions with the bank and anticipate a renewal of at least an additional year on this line of credit .

demand has since recovered to varying degrees by product as local conditions improved in certain geographies that opened after an initial improvement in covid-19 infection rates , allowing patients to resume receiving their treatments . during the second half of the year , our own efforts remain focused on assisting patients with improving their continuity of care to increase product access as compared to what they experienced during the earlier stages of the pandemic . recently , higher rates of infection have been observed in certain geographies , including the united states and europe , which may further restrict demand , similar to early phases of the pandemic . as a result , we expect to see continued volatility through at least the duration of the pandemic as governments respond to current local conditions . 2 represents reductions against established baselines , taking into account only verified reduction projects , and does not take into account changes associated with contraction or expansion of the company . 61 the majority of clinical trials that were paused at the onset of the pandemic to ensure subject safety or data integrity have resumed . study enrollment was affected negatively the most in the second quarter of the year and by the end of 2020 resumed to around pre-pandemic levels . however , going forward covid-19 infection rates and related vaccination activities may impact future study enrollment . we continuously monitor our ability for study enrollment on an institution by institution basis and reevaluate the status of studies , pausing when uncertainty arises with regard to the trial sites ' ability to ensure safety or data integrity . we remain focused on supporting our active clinical sites in providing care for these patients and in providing investigational drug supply . in addition , our r & d organization is supporting efforts to combat the covid-19 pandemic in a number of ways , including by ( i ) working to support production of therapeutic antibodies that could diminish the impact of covid-19 on patients , ( ii ) joining a public–private partnership between leading companies in our industry and u.s. government health agencies to develop a strategy for a coordinated research response and ( iii ) participating in platform studies to investigate treatments in adult patients hospitalized with severe covid-19 infections . we continue to believe that existing funds , cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital , capital expenditures and debt service requirements as well as to engage in the capital-return and other business initiatives that we plan to strategically pursue . for a discussion of the risks presented by the covid-19 pandemic to our results , see part i , item 1a . risk factors of this form 10-k. 62 selected financial information the following is an overview of our results of operations ( in millions , except percentages and per-share data ) : replace_table_token_5_th in the following discussion of changes in product sales , any reference to unit demand growth or decline refers to changes in the purchases of our products by healthcare providers ( such as physicians or their clinics ) , dialysis centers , hospitals and pharmacies . in addition , any reference to increases or decreases in inventory refers to changes in inventory held by wholesaler customers and end users ( such as pharmacies ) . total product sales increased for 2020 , primarily driven by unit demand increases from newer brands including otezla ® , acquired in november 2019 , mvasi ® , kanjinti ® and repatha ® . these unit demand increases were partially offset by declines in net selling prices for certain products , unit demand declines for mature brands that face biosimilar or generic competition and the effects of the covid-19 pandemic . for 2021 , we expect that net selling prices will continue to decline . we also expect increasing competition against our biosimilar products . further , the first quarter historically represents the lowest product sales quarter for the year , in part , due to plan changes , insurance reverifications and higher co-pay expenses as u.s. patients work through deductibles , particularly for our pharmacy benefit products . during the initial stages of the covid-19 pandemic , we experienced changes in demand trends for some of our products . the pandemic interrupted many physician–patient interactions , which led to delays in diagnosis and treatment , with varying degrees of impact across our portfolio . in general , sales of negatively affected products fell the most in the early part of the second quarter , with product demand beginning to show some recovery in the second half of the year but still below pre-pandemic levels . nevertheless , given the increased intensity exiting 2020 and the unpredictable nature of the pandemic , we expect there could be intermittent disruptions in physician–patient interactions going forward , and thus we continue to expect quarter-to-quarter variability . see part i , item 1a . risk factors of this form 10-k. in addition , other changes in the healthcare ecosystem introduce variability into product sales trends . for example , changes in u.s. employment could lead to changes to the insured population , with growth in medicaid enrollees and uninsured individuals having a negative impact on revenues . overall , uncertainty has increased around the timing and magnitude of our sales during the covid-19 pandemic . other revenues increased for 2020 , primarily driven by higher royalties . operating expenses increased for 2020 , primarily driven by acquisition- and commercial-related expenses for otezla ® . story_separator_special_tag the decrease in sg & a expense for 2019 was primarily driven by lower general and administrative expenses , the end of certain amortization charges in 2018 and lower spend for launched and marketed products , partially offset by spending for otezla ® commercial-related expenses . other other operating expenses for 2020 primarily consisted of legal settlement expenses . other operating expenses for 2019 included $ 47 million in restructuring costs . other operating expenses for 2018 included a $ 330 million impairment charge associated with an ipr & d asset and a $ 42 million favorable net change in the fair values of contingent consideration liabilities . see part iv—note 17 , fair value measurement , to the consolidated financial statements . nonoperating expenses/income and income taxes nonoperating expenses/income and income taxes were as follows ( dollar amounts in millions ) : replace_table_token_18_th interest expense , net the decrease in interest expense , net , for 2020 was primarily due to lower libor rates on debt for which we effectively pay a variable rate of interest , partially offset by net costs associated with the early retirement of debt . the decrease in interest expense , net , for 2019 was primarily due to a reduction in outstanding long-term debt as a result of maturities in 2019. interest and other income , net the decrease in interest and other income , net , for 2020 was primarily due to reduced interest income as a result of lower average cash balances and a decline in interest yields and losses incurred in connection with our beigene investment , partially offset by gains recognized on our investments in publicly traded equity securities and limited partnerships . we may continue to recognize losses in connection with our beigene investment in 2021. see part iv—note 9 , investments , to the consolidated financial statements . the increase in interest and other income , net , for 2019 was primarily due to net gains on sales of investments in interest-bearing securities liquidated to fund our acquisition of otezla ® and our investment in beigene compared with losses in the prior year , partially offset by reduced interest income as a result of lower average cash balances and a gain recognized in connection with our acquisition of kirin-amgen , inc. ( k-a ) , in the first quarter of 2018. see part iv—note 2 , acquisitions , to the consolidated financial statements . 69 income taxes the decrease in our effective tax rate for 2020 compared with 2019 was primarily driven by favorable items , including audit settlements , adjustments to prior year tax liabilities , lower interest expense on uncertain tax positions and amortization related to the otezla ® acquisition , partially offset by changes in valuation allowance . the increase in our effective tax rate for 2019 compared with 2018 was primarily driven by a prior-year tax benefit associated with intercompany sales under u.s. corporate tax reform . in march and december 2020 , in response to the covid-19 pandemic , the cares act and the consolidated appropriations act , 2021 , were passed into law and provide additional economic stimulus to address the impact of the covid-19 pandemic . we do not expect any significant benefit to our income tax provision as a result of this legislation . in 2017 , we received an rar and a modified rar from the irs for the years 2010 , 2011 and 2012 proposing significant adjustments that primar ily relate to the allocation of profits between certain of our entities in the united states and the u.s. territory of puerto rico . we disagree with the proposed adjustments and calculations and have been pursuing resolution with the irs administrative appeals office . however , we have been unable to reach resolution at the administrative appeals level , and we anticipate that we will receive a notice of deficiency which we would expect to vigorously contest through the judicial process . in addition , in 2020 , we received an rar and a modified rar from the irs for the years 2013 , 2014 and 2015 also proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the united states and the u.s. territory of puerto rico similar to those proposed for the years 2010 , 2011 and 2012. we disagree with the 2013 , 2014 and 2015 proposed adjustments and calculations and are pursuing resolution with the irs administrative appeals office . the irs audit for years 2016 , 2017 and 2018 is expected to start in the near term . we are also currently under examination by a number of other state and foreign tax jurisdictions . final resolution of these complex matters is not likely within the next 12 months . we believe our accrual for income tax liabilities is appropriate based on past experience , interpretations of tax law , application of the tax law to our facts and judgments about potential actions by tax authorities ; however , due to the complexity of the provision for income taxes and uncertain resolution of these matters , the ultimate outcome of any tax matters may result in payments substantially greater than amounts accrued and could have a material adverse impact on our consolidated financial statements . see summary of critical accounting policies—income taxes , and part iv—note 6 , income taxes , to the consolidated financial statements . financial condition , liquidity and capital resources selected financial data was as follows ( in millions ) : replace_table_token_19_th cash , cash equivalents and marketable securities we have global access to our $ 10.6 billion balance of cash , cash equivalents and marketable securities . the primary objective of our investment portfolio is to maintain safety of principal , prudent levels of liquidity and acceptable levels of risk . our investment policy limits interest-bearing security investments to certain types of debt and money market instruments issued by institutions with

liquidity and capital resources overview – hotel operations & corporate overhead and ibc development segments our principal source of cash to meet our cash requirements , including distributions to our shareholders , is our share of the partnership 's cash flow , quarterly distributions from the albuquerque , new mexico and yuma , arizona properties and more recently , sales of non-controlling interest in certain of our hotels . the partnership 's principal source of revenue is hotel operations for the one hotel property it owns and quarterly distributions from the tucson , arizona and ontario , california properties . our liquidity , including our ability to make distributions to our shareholders , will depend upon our ability , and the partnership 's ability , to generate sufficient cash flow from hotel operations and to service our debt . hotel operations are significantly affected by occupancy and room rates at the hotels . we anticipate occupancy and adr will be improved in the coming year ; capital improvements are expected to be similar from the prior year . as of january 31 , 2015 , the trust had $ 125,000 drawn on its bank line of credit . our credit line matures on june 23 , 2015 and we are currently in discussions with the bank and anticipate a renewal of at least an additional year on this line of credit .

demand has since recovered to varying degrees by product as local conditions improved in certain geographies that opened after an initial improvement in covid-19 infection rates , allowing patients to resume receiving their treatments . during the second half of the year , our own efforts remain focused on assisting patients with improving their continuity of care to increase product access as compared to what they experienced during the earlier stages of the pandemic . recently , higher rates of infection have been observed in certain geographies , including the united states and europe , which may further restrict demand , similar to early phases of the pandemic . as a result , we expect to see continued volatility through at least the duration of the pandemic as governments respond to current local conditions . 2 represents reductions against established baselines , taking into account only verified reduction projects , and does not take into account changes associated with contraction or expansion of the company . 61 the majority of clinical trials that were paused at the onset of the pandemic to ensure subject safety or data integrity have resumed . study enrollment was affected negatively the most in the second quarter of the year and by the end of 2020 resumed to around pre-pandemic levels . however , going forward covid-19 infection rates and related vaccination activities may impact future study enrollment . we continuously monitor our ability for study enrollment on an institution by institution basis and reevaluate the status of studies , pausing when uncertainty arises with regard to the trial sites ' ability to ensure safety or data integrity . we remain focused on supporting our active clinical sites in providing care for these patients and in providing investigational drug supply . in addition , our r & d organization is supporting efforts to combat the covid-19 pandemic in a number of ways , including by ( i ) working to support production of therapeutic antibodies that could diminish the impact of covid-19 on patients , ( ii ) joining a public–private partnership between leading companies in our industry and u.s. government health agencies to develop a strategy for a coordinated research response and ( iii ) participating in platform studies to investigate treatments in adult patients hospitalized with severe covid-19 infections . we continue to believe that existing funds , cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital , capital expenditures and debt service requirements as well as to engage in the capital-return and other business initiatives that we plan to strategically pursue . for a discussion of the risks presented by the covid-19 pandemic to our results , see part i , item 1a . risk factors of this form 10-k. 62 selected financial information the following is an overview of our results of operations ( in millions , except percentages and per-share data ) : replace_table_token_5_th in the following discussion of changes in product sales , any reference to unit demand growth or decline refers to changes in the purchases of our products by healthcare providers ( such as physicians or their clinics ) , dialysis centers , hospitals and pharmacies . in addition , any reference to increases or decreases in inventory refers to changes in inventory held by wholesaler customers and end users ( such as pharmacies ) . total product sales increased for 2020 , primarily driven by unit demand increases from newer brands including otezla ® , acquired in november 2019 , mvasi ® , kanjinti ® and repatha ® . these unit demand increases were partially offset by declines in net selling prices for certain products , unit demand declines for mature brands that face biosimilar or generic competition and the effects of the covid-19 pandemic . for 2021 , we expect that net selling prices will continue to decline . we also expect increasing competition against our biosimilar products . further , the first quarter historically represents the lowest product sales quarter for the year , in part , due to plan changes , insurance reverifications and higher co-pay expenses as u.s. patients work through deductibles , particularly for our pharmacy benefit products . during the initial stages of the covid-19 pandemic , we experienced changes in demand trends for some of our products . the pandemic interrupted many physician–patient interactions , which led to delays in diagnosis and treatment , with varying degrees of impact across our portfolio . in general , sales of negatively affected products fell the most in the early part of the second quarter , with product demand beginning to show some recovery in the second half of the year but still below pre-pandemic levels . nevertheless , given the increased intensity exiting 2020 and the unpredictable nature of the pandemic , we expect there could be intermittent disruptions in physician–patient interactions going forward , and thus we continue to expect quarter-to-quarter variability . see part i , item 1a . risk factors of this form 10-k. in addition , other changes in the healthcare ecosystem introduce variability into product sales trends . for example , changes in u.s. employment could lead to changes to the insured population , with growth in medicaid enrollees and uninsured individuals having a negative impact on revenues . overall , uncertainty has increased around the timing and magnitude of our sales during the covid-19 pandemic . other revenues increased for 2020 , primarily driven by higher royalties . operating expenses increased for 2020 , primarily driven by acquisition- and commercial-related expenses for otezla ® . story_separator_special_tag the decrease in sg & a expense for 2019 was primarily driven by lower general and administrative expenses , the end of certain amortization charges in 2018 and lower spend for launched and marketed products , partially offset by spending for otezla ® commercial-related expenses . other other operating expenses for 2020 primarily consisted of legal settlement expenses . other operating expenses for 2019 included $ 47 million in restructuring costs . other operating expenses for 2018 included a $ 330 million impairment charge associated with an ipr & d asset and a $ 42 million favorable net change in the fair values of contingent consideration liabilities . see part iv—note 17 , fair value measurement , to the consolidated financial statements . nonoperating expenses/income and income taxes nonoperating expenses/income and income taxes were as follows ( dollar amounts in millions ) : replace_table_token_18_th interest expense , net the decrease in interest expense , net , for 2020 was primarily due to lower libor rates on debt for which we effectively pay a variable rate of interest , partially offset by net costs associated with the early retirement of debt . the decrease in interest expense , net , for 2019 was primarily due to a reduction in outstanding long-term debt as a result of maturities in 2019. interest and other income , net the decrease in interest and other income , net , for 2020 was primarily due to reduced interest income as a result of lower average cash balances and a decline in interest yields and losses incurred in connection with our beigene investment , partially offset by gains recognized on our investments in publicly traded equity securities and limited partnerships . we may continue to recognize losses in connection with our beigene investment in 2021. see part iv—note 9 , investments , to the consolidated financial statements . the increase in interest and other income , net , for 2019 was primarily due to net gains on sales of investments in interest-bearing securities liquidated to fund our acquisition of otezla ® and our investment in beigene compared with losses in the prior year , partially offset by reduced interest income as a result of lower average cash balances and a gain recognized in connection with our acquisition of kirin-amgen , inc. ( k-a ) , in the first quarter of 2018. see part iv—note 2 , acquisitions , to the consolidated financial statements . 69 income taxes the decrease in our effective tax rate for 2020 compared with 2019 was primarily driven by favorable items , including audit settlements , adjustments to prior year tax liabilities , lower interest expense on uncertain tax positions and amortization related to the otezla ® acquisition , partially offset by changes in valuation allowance . the increase in our effective tax rate for 2019 compared with 2018 was primarily driven by a prior-year tax benefit associated with intercompany sales under u.s. corporate tax reform . in march and december 2020 , in response to the covid-19 pandemic , the cares act and the consolidated appropriations act , 2021 , were passed into law and provide additional economic stimulus to address the impact of the covid-19 pandemic . we do not expect any significant benefit to our income tax provision as a result of this legislation . in 2017 , we received an rar and a modified rar from the irs for the years 2010 , 2011 and 2012 proposing significant adjustments that primar ily relate to the allocation of profits between certain of our entities in the united states and the u.s. territory of puerto rico . we disagree with the proposed adjustments and calculations and have been pursuing resolution with the irs administrative appeals office . however , we have been unable to reach resolution at the administrative appeals level , and we anticipate that we will receive a notice of deficiency which we would expect to vigorously contest through the judicial process . in addition , in 2020 , we received an rar and a modified rar from the irs for the years 2013 , 2014 and 2015 also proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the united states and the u.s. territory of puerto rico similar to those proposed for the years 2010 , 2011 and 2012. we disagree with the 2013 , 2014 and 2015 proposed adjustments and calculations and are pursuing resolution with the irs administrative appeals office . the irs audit for years 2016 , 2017 and 2018 is expected to start in the near term . we are also currently under examination by a number of other state and foreign tax jurisdictions . final resolution of these complex matters is not likely within the next 12 months . we believe our accrual for income tax liabilities is appropriate based on past experience , interpretations of tax law , application of the tax law to our facts and judgments about potential actions by tax authorities ; however , due to the complexity of the provision for income taxes and uncertain resolution of these matters , the ultimate outcome of any tax matters may result in payments substantially greater than amounts accrued and could have a material adverse impact on our consolidated financial statements . see summary of critical accounting policies—income taxes , and part iv—note 6 , income taxes , to the consolidated financial statements . financial condition , liquidity and capital resources selected financial data was as follows ( in millions ) : replace_table_token_19_th cash , cash equivalents and marketable securities we have global access to our $ 10.6 billion balance of cash , cash equivalents and marketable securities . the primary objective of our investment portfolio is to maintain safety of principal , prudent levels of liquidity and acceptable levels of risk . our investment policy limits interest-bearing security investments to certain types of debt and money market instruments issued by institutions with

cash flows our summarized cash flow activity was as follows ( in millions ) : replace_table_token_20_th operating cash provided by operating activities has been and is expected to continue to be our primary recurring source of funds . cash provided by operating activities increased during 2020 primarily due to higher net income after adding back the noncash amortization related to the acquisition of otezla ® , the monetization of interest rate swap contracts and working capital adjustments . cash provided by operating activities decreased during 2019 primarily due to changes in working capital , an increase in payments to the irs related to an advance deposit and lower net income . 72 investing cash used in investing activities during 2020 was primarily due to our $ 3.2 billion of purchases of equity method investments , primarily beigene , and net cash outflows related to marketable securities of $ 1.5 billion . cash provided by investing activities during 2019 and 2018 was primarily due to net cash inflows related to marketable securities of $ 20.0 billion and $ 15.0 billion , respectively . the liquidation of portions of our marketable securities portfolio in 2019 was primarily the result of funding the acquisition of otezla ® and our investment in beigene and , in 2018 , to fund our tender offer to repurchase our common stock . capital expenditures were $ 608 million , $ 618 million and $ 738 million in 2020 , 2019 and 2018 , respectively .

the pharmaceutical ingredients segment has two product groups : active pharmaceutical ingredients ( apis ) and pharmaceutical intermediates . we supply apis to many of the major generic drug companies , who we believe view aceto as a valued partner in their effort to develop and market generic drugs . the process of introducing a new api from pipeline to market spans a number of years and begins with aceto partnering with a generic pharmaceutical manufacturer and jointly selecting an api , several years before the expiration of a composition of matter patent , for future genericizing . we then identify the appropriate supplier , and concurrently utilizing our global technical network , work to ensure they meet standards of quality to comply with regulations . our client , the generic pharmaceutical company , will submit the abbreviated new drug application ( “ anda ” ) for u.s. food and drug administration ( “ fda ” ) approval or european-equivalent approval . the introduction of the api to market occurs after all the development testing has been completed and the anda or european-equivalent is approved and the patent expires or is deemed invalid . aceto , at all times , has a pipeline of apis at various stages of development both in the united states and europe . additionally , as the pressure to lower the overall cost of healthcare increases , aceto has focused on , and works very closely with our customers to develop new api opportunities to provide alternative , more economical , second-source options for existing generic drugs . by leveraging our worldwide sourcing , regulatory and quality assurance capabilities , we provide to generic drug manufacturers an alternative , economical source for existing api products . aceto has long been a supplier of pharmaceutical intermediates , the complex chemical compounds that are the building blocks used in producing apis . these are the critical components of all drugs , whether they are already on the market or currently undergoing clinical trials . faced with significant economic pressures as well as ever-increasing regulatory barriers , the innovative drug companies look to aceto as a source for high quality intermediates . aceto employs , on occasion , the same second source strategy for our pharmaceutical intermediates business that we use in our api business . historically , pharmaceutical manufacturers have had one source for the intermediates needed to produce their products . utilizing our global sourcing , regulatory support and quality assurance network , aceto works with the large , global pharmaceutical companies , sourcing lower cost , quality pharmaceutical intermediates that will meet the same high level standards that their current commercial products adhere to . the performance chemicals segment includes specialty chemicals and agricultural protection products . aceto is a major supplier to many different industrial segments providing chemicals used in the manufacture of plastics , surface coatings , cosmetics and personal care , textiles , fuels and lubricants . the paint and coatings industry produces products that bring color , texture , and protection to houses , furniture , packaging , paper , and durable goods . many of today 's coatings are eco-friendly , by allowing inks and coatings to be cured by ultraviolet light instead of solvents , or allowing power coatings to be cured without solvents . these growing technologies are critical in protecting and enhancing the world 's ecology and aceto is focused on supplying the specialty additives that make modern coating techniques possible . the chemistry that makes much of the modern world possible is often done by building up simple molecules to sophisticated compounds in step-by-step chemical processes . the products that are incorporated in each step are known as intermediates and they can be as varied as the end uses they serve , such as crop protection products , dyes and pigments , textiles , fuel additives , electronics - essentially all things chemical . aceto provides various specialty chemicals for the food , flavor , fragrance , paper and film industries . aceto 's raw materials are also used in sophisticated technology products , such as high-end electronic parts used for photo tooling , circuit boards , production of computer chips , and in the production of many of today 's modern gadgets . 25 aceto 's agricultural protection products include herbicides , fungicides and insecticides , which control weed growth as well as the spread of insects and microorganisms that can severely damage plant growth . one of aceto 's most widely used agricultural protection products is a sprout inhibitor that extends the storage life of potatoes . utilizing our global sourcing and regulatory capabilities , we identify and qualify manufacturers either producing the product or with knowledge of the chemistry necessary to produce the product , and then file an application with the u.s. epa for a product registration . aceto has an ongoing working relationship with manufacturers in china and india to determine which of the non-patented or generic , agricultural protection products they produce can be effectively marketed in the western world . we have successfully brought numerous products to market . we have a strong pipeline , which includes future additions to our product portfolio . the combination of our global sourcing and regulatory capabilities makes the generic agricultural market a niche for us and we will continue to offer new product additions in this market . we believe our main business strengths are sourcing , regulatory support , quality assurance and marketing and distribution . we distribute more than 1,100 chemical compounds used principally as finished products or raw materials in the pharmaceutical , nutraceutical , agricultural , coatings and industrial chemical industries . with business operations in ten countries , we believe that our global reach is distinctive in the industry , enabling us to source and supply quality products on a worldwide basis . story_separator_special_tag performance chemicals net sales for the performance chemicals segment decreased to $ 169,478 for the year ended june 30 , 2016 , representing a decrease of $ 2,914 or 1.7 % , from net sales of $ 172,392 for the prior year . the primary reason for the decrease in net sales for performance chemicals was a decline of $ 13,775 in domestic sales of products sold by our specialty chemicals business . this decrease in domestic specialty chemicals sales includes an $ 8,833 drop in sales of agricultural , dye , pigment and miscellaneous intermediates , as well as a $ 1,553 decline in sales of polymer additives and a $ 1,915 decrease in products sold to the food , beverage and cosmetic industries . in addition , overall sales of specialty chemicals are down due to the government devaluation of the chinese renminbi , as well as the severe drop in oil prices , resulting in reduced customer pricing . the decreases in the specialty chemicals business are partially offset by an increase of $ 8,941 in sales of our agricultural protection products , predominantly from an increase in sales of a wide-range insecticide that is used on various crops including cereals , citrus , cotton , grapes , ornamental grasses and vegetables , as well as an increase in sales volume of our sprout inhibitor products , which extends the storage life of potatoes and an herbicide used to control sedge on rice . gross profit gross profit increased $ 7,351 or 5.4 % to $ 142,785 ( 25.6 % of net sales ) for the year ended june 30 , 2016 , as compared to $ 135,434 ( 24.8 % of net sales ) for the prior year . human health human health segment 's gross profit of $ 77,880 for the year ended june 30 , 2016 increased $ 2,131 , or 2.8 % , over the prior year . the gross margin of 34.2 % was higher than the prior year 's gross margin of 33.6 % . the increase in gross profit and gross margin in the human health segment predominantly relates to price increases experienced in the prior year on certain rising products . overall , our human health segment has experienced gross profit pressure , including increased chargebacks , from the consolidation of wholesalers with retail drug chains . we expect the overall trend will persist , but aceto will continue to defend its price position . pharmaceutical ingredients gross profit for the year ended june 30 , 2016 for the pharmaceutical ingredients business increased by $ 2,069 or 7.8 % over the prior year . the gross margin of 17.9 % was unchanged from the prior year . the increase in gross profit is predominantly the result of the increase in the sales volume of apis sold abroad , specifically by our singapore and german operations , as well as favorable product mix on sales of domestic apis . 31 performance chemicals gross profit for the performance chemicals segment increased to $ 36,153 for the year ended june 30 , 2016 , versus $ 33,002 for the prior year , an increase of $ 3,151 , or 9.5 % . the gross margin at 21.3 % for the year ended june 30 , 2016 was also higher than the prior year 's gross margin of 19.1 % . the increase in gross profit is due to $ 2,292 rise in gross profit for the agricultural protection products business , primarily due to increased sales volume of a wide-range insecticide that is used on various crops , a sprout inhibitor that extends the storage life of potatoes , as well as an herbicide used to control sedge on rice . the performance chemicals segment also experienced favorable gross margin impact in the specialty chemicals business resulting in overall increased gross profit of $ 859 , due to a decline in sales of lower margin products , as well as $ 376 of duty refunds related to the generalized system of preferences , a tariff system which expired in july 2013 and was not renewed until july 2015. in addition , both gross profit and gross margin of the specialty chemicals business were favorably impacted by the overall decline in costs of products sourced from china , due to the devaluation of the chinese renminbi . selling , general and administrative expenses sg & a increased $ 3,661 , or 5.0 % , to $ 76,820 for the year ended june 30 , 2016 compared to $ 73,159 for the prior year . as a percentage of sales , sg & a increased from 13.4 % to 13.8 % for the year ended june 30 , 2016 versus the prior year . the increase in sg & a is primarily due to increased stock-based compensation expense of $ 2,182. sg & a for the current year also included $ 1,213 of transaction costs related to a potential acquisition of a target company that we evaluated during the year but ultimately determined not to pursue , as well as $ 1,313 environmental remediation charge related to arsynco . these increases in sg & a were offset in part by $ 833 reversal of contingent consideration related to the pack acquisition and $ 241 reversal of contingent consideration related to the acquisition of a company in france , due to management 's evaluation and assessment of the potential earnout amounts defined in the purchase agreements . sg & a for the prior year included $ 1,618 environmental remediation charge related to arsynco and $ 3,468 reversal of contingent consideration related to the pack acquisition . research and development expenses research and development expenses ( “ r & d ” ) increased $ 1,995 or 33.6 % to $ 7,937 for the year ended june 30 , 2016 compared to $ 5,942 for the prior year . r & d expenses represent investment in our

cash flows our summarized cash flow activity was as follows ( in millions ) : replace_table_token_20_th operating cash provided by operating activities has been and is expected to continue to be our primary recurring source of funds . cash provided by operating activities increased during 2020 primarily due to higher net income after adding back the noncash amortization related to the acquisition of otezla ® , the monetization of interest rate swap contracts and working capital adjustments . cash provided by operating activities decreased during 2019 primarily due to changes in working capital , an increase in payments to the irs related to an advance deposit and lower net income . 72 investing cash used in investing activities during 2020 was primarily due to our $ 3.2 billion of purchases of equity method investments , primarily beigene , and net cash outflows related to marketable securities of $ 1.5 billion . cash provided by investing activities during 2019 and 2018 was primarily due to net cash inflows related to marketable securities of $ 20.0 billion and $ 15.0 billion , respectively . the liquidation of portions of our marketable securities portfolio in 2019 was primarily the result of funding the acquisition of otezla ® and our investment in beigene and , in 2018 , to fund our tender offer to repurchase our common stock . capital expenditures were $ 608 million , $ 618 million and $ 738 million in 2020 , 2019 and 2018 , respectively .

the pharmaceutical ingredients segment has two product groups : active pharmaceutical ingredients ( apis ) and pharmaceutical intermediates . we supply apis to many of the major generic drug companies , who we believe view aceto as a valued partner in their effort to develop and market generic drugs . the process of introducing a new api from pipeline to market spans a number of years and begins with aceto partnering with a generic pharmaceutical manufacturer and jointly selecting an api , several years before the expiration of a composition of matter patent , for future genericizing . we then identify the appropriate supplier , and concurrently utilizing our global technical network , work to ensure they meet standards of quality to comply with regulations . our client , the generic pharmaceutical company , will submit the abbreviated new drug application ( “ anda ” ) for u.s. food and drug administration ( “ fda ” ) approval or european-equivalent approval . the introduction of the api to market occurs after all the development testing has been completed and the anda or european-equivalent is approved and the patent expires or is deemed invalid . aceto , at all times , has a pipeline of apis at various stages of development both in the united states and europe . additionally , as the pressure to lower the overall cost of healthcare increases , aceto has focused on , and works very closely with our customers to develop new api opportunities to provide alternative , more economical , second-source options for existing generic drugs . by leveraging our worldwide sourcing , regulatory and quality assurance capabilities , we provide to generic drug manufacturers an alternative , economical source for existing api products . aceto has long been a supplier of pharmaceutical intermediates , the complex chemical compounds that are the building blocks used in producing apis . these are the critical components of all drugs , whether they are already on the market or currently undergoing clinical trials . faced with significant economic pressures as well as ever-increasing regulatory barriers , the innovative drug companies look to aceto as a source for high quality intermediates . aceto employs , on occasion , the same second source strategy for our pharmaceutical intermediates business that we use in our api business . historically , pharmaceutical manufacturers have had one source for the intermediates needed to produce their products . utilizing our global sourcing , regulatory support and quality assurance network , aceto works with the large , global pharmaceutical companies , sourcing lower cost , quality pharmaceutical intermediates that will meet the same high level standards that their current commercial products adhere to . the performance chemicals segment includes specialty chemicals and agricultural protection products . aceto is a major supplier to many different industrial segments providing chemicals used in the manufacture of plastics , surface coatings , cosmetics and personal care , textiles , fuels and lubricants . the paint and coatings industry produces products that bring color , texture , and protection to houses , furniture , packaging , paper , and durable goods . many of today 's coatings are eco-friendly , by allowing inks and coatings to be cured by ultraviolet light instead of solvents , or allowing power coatings to be cured without solvents . these growing technologies are critical in protecting and enhancing the world 's ecology and aceto is focused on supplying the specialty additives that make modern coating techniques possible . the chemistry that makes much of the modern world possible is often done by building up simple molecules to sophisticated compounds in step-by-step chemical processes . the products that are incorporated in each step are known as intermediates and they can be as varied as the end uses they serve , such as crop protection products , dyes and pigments , textiles , fuel additives , electronics - essentially all things chemical . aceto provides various specialty chemicals for the food , flavor , fragrance , paper and film industries . aceto 's raw materials are also used in sophisticated technology products , such as high-end electronic parts used for photo tooling , circuit boards , production of computer chips , and in the production of many of today 's modern gadgets . 25 aceto 's agricultural protection products include herbicides , fungicides and insecticides , which control weed growth as well as the spread of insects and microorganisms that can severely damage plant growth . one of aceto 's most widely used agricultural protection products is a sprout inhibitor that extends the storage life of potatoes . utilizing our global sourcing and regulatory capabilities , we identify and qualify manufacturers either producing the product or with knowledge of the chemistry necessary to produce the product , and then file an application with the u.s. epa for a product registration . aceto has an ongoing working relationship with manufacturers in china and india to determine which of the non-patented or generic , agricultural protection products they produce can be effectively marketed in the western world . we have successfully brought numerous products to market . we have a strong pipeline , which includes future additions to our product portfolio . the combination of our global sourcing and regulatory capabilities makes the generic agricultural market a niche for us and we will continue to offer new product additions in this market . we believe our main business strengths are sourcing , regulatory support , quality assurance and marketing and distribution . we distribute more than 1,100 chemical compounds used principally as finished products or raw materials in the pharmaceutical , nutraceutical , agricultural , coatings and industrial chemical industries . with business operations in ten countries , we believe that our global reach is distinctive in the industry , enabling us to source and supply quality products on a worldwide basis . story_separator_special_tag performance chemicals net sales for the performance chemicals segment decreased to $ 169,478 for the year ended june 30 , 2016 , representing a decrease of $ 2,914 or 1.7 % , from net sales of $ 172,392 for the prior year . the primary reason for the decrease in net sales for performance chemicals was a decline of $ 13,775 in domestic sales of products sold by our specialty chemicals business . this decrease in domestic specialty chemicals sales includes an $ 8,833 drop in sales of agricultural , dye , pigment and miscellaneous intermediates , as well as a $ 1,553 decline in sales of polymer additives and a $ 1,915 decrease in products sold to the food , beverage and cosmetic industries . in addition , overall sales of specialty chemicals are down due to the government devaluation of the chinese renminbi , as well as the severe drop in oil prices , resulting in reduced customer pricing . the decreases in the specialty chemicals business are partially offset by an increase of $ 8,941 in sales of our agricultural protection products , predominantly from an increase in sales of a wide-range insecticide that is used on various crops including cereals , citrus , cotton , grapes , ornamental grasses and vegetables , as well as an increase in sales volume of our sprout inhibitor products , which extends the storage life of potatoes and an herbicide used to control sedge on rice . gross profit gross profit increased $ 7,351 or 5.4 % to $ 142,785 ( 25.6 % of net sales ) for the year ended june 30 , 2016 , as compared to $ 135,434 ( 24.8 % of net sales ) for the prior year . human health human health segment 's gross profit of $ 77,880 for the year ended june 30 , 2016 increased $ 2,131 , or 2.8 % , over the prior year . the gross margin of 34.2 % was higher than the prior year 's gross margin of 33.6 % . the increase in gross profit and gross margin in the human health segment predominantly relates to price increases experienced in the prior year on certain rising products . overall , our human health segment has experienced gross profit pressure , including increased chargebacks , from the consolidation of wholesalers with retail drug chains . we expect the overall trend will persist , but aceto will continue to defend its price position . pharmaceutical ingredients gross profit for the year ended june 30 , 2016 for the pharmaceutical ingredients business increased by $ 2,069 or 7.8 % over the prior year . the gross margin of 17.9 % was unchanged from the prior year . the increase in gross profit is predominantly the result of the increase in the sales volume of apis sold abroad , specifically by our singapore and german operations , as well as favorable product mix on sales of domestic apis . 31 performance chemicals gross profit for the performance chemicals segment increased to $ 36,153 for the year ended june 30 , 2016 , versus $ 33,002 for the prior year , an increase of $ 3,151 , or 9.5 % . the gross margin at 21.3 % for the year ended june 30 , 2016 was also higher than the prior year 's gross margin of 19.1 % . the increase in gross profit is due to $ 2,292 rise in gross profit for the agricultural protection products business , primarily due to increased sales volume of a wide-range insecticide that is used on various crops , a sprout inhibitor that extends the storage life of potatoes , as well as an herbicide used to control sedge on rice . the performance chemicals segment also experienced favorable gross margin impact in the specialty chemicals business resulting in overall increased gross profit of $ 859 , due to a decline in sales of lower margin products , as well as $ 376 of duty refunds related to the generalized system of preferences , a tariff system which expired in july 2013 and was not renewed until july 2015. in addition , both gross profit and gross margin of the specialty chemicals business were favorably impacted by the overall decline in costs of products sourced from china , due to the devaluation of the chinese renminbi . selling , general and administrative expenses sg & a increased $ 3,661 , or 5.0 % , to $ 76,820 for the year ended june 30 , 2016 compared to $ 73,159 for the prior year . as a percentage of sales , sg & a increased from 13.4 % to 13.8 % for the year ended june 30 , 2016 versus the prior year . the increase in sg & a is primarily due to increased stock-based compensation expense of $ 2,182. sg & a for the current year also included $ 1,213 of transaction costs related to a potential acquisition of a target company that we evaluated during the year but ultimately determined not to pursue , as well as $ 1,313 environmental remediation charge related to arsynco . these increases in sg & a were offset in part by $ 833 reversal of contingent consideration related to the pack acquisition and $ 241 reversal of contingent consideration related to the acquisition of a company in france , due to management 's evaluation and assessment of the potential earnout amounts defined in the purchase agreements . sg & a for the prior year included $ 1,618 environmental remediation charge related to arsynco and $ 3,468 reversal of contingent consideration related to the pack acquisition . research and development expenses research and development expenses ( “ r & d ” ) increased $ 1,995 or 33.6 % to $ 7,937 for the year ended june 30 , 2016 compared to $ 5,942 for the prior year . r & d expenses represent investment in our

cash flows at june 30 , 2016 , we had $ 66,828 in cash , of which $ 39,473 was outside the united states , $ 881 in short-term investments , all of which is held outside the united states and $ 118,789 in long-term debt ( including the current portion ) , all of which is an obligation in the united states . working capital was $ 253,755 at june 30 , 2016 compared to $ 185,310 at june 30 , 2015. the $ 39,473 of cash held outside of the united states is fully accessible to meet any liquidity needs of the countries in which we operate . the cash located outside of the united states can be transferred into the united states . although these amounts are fully accessible , transferring these amounts into the united states or any other countries could have certain tax consequences . a deferred tax liability will be recognized when we expect that we will recover undistributed earnings of our foreign subsidiaries in a taxable manner , such as through receipt of dividends or sale of the investments . we intend to indefinitely reinvest these undistributed earnings and have no plan for further repatriation . a portion of our cash is held in operating accounts that are with third party financial institutions . while we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate , these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets . to date , we have experienced no loss or lack of access to cash in our operating accounts . our cash position at june 30 , 2016 increased $ 32,808 from the amount at june 30 , 2015. operating activities for the year ended june 30 , 2016 provided cash of $ 31,831 for this period , as compared to cash provided of $ 8,343 for the prior year .

asia pacific consists of our operations in australia , china , hong kong , japan , taiwan , and southeast asia . europe consists of our operations in france , germany , spain , and the u.k. north america consists of our operations in canada and the u.s. for the year ended december 31 , 2017 , asia pacific operations were 7 % of revenues , european operations were 32 % of revenues and north american op erations were 61 % of our total revenues . financial information with respect to our business segments and certain financial information about geographic areas appears in note 10 to the accompanying consolidated financial statements . when evaluating the financial condition and operating performance of the company , management focuses on financial and non-financial indicators such as growth in the number of members to the company 's newsletters , operating margin , growth in revenues in the absolute and relative to the growth in reach of the company 's publications measured as revenue per member and revenue per employee as a measure of productivity . how we generate revenues our revenues are advertising revenues , consisting primarily of listing fees paid by travel , entertainment and local businesses to advertise their offers on travelzoo 's media properties . listing fees are based on audience reach , placement , number of listings , number of impressions , number of clicks , number of referrals , or percentage of the face value of vouchers sold . insertion orders are typically for periods between one month and twelve months and are not automatically renewed . merchant agreements for local deals and getaway advertisers are typically for twelve months and are not automatically renewed . we have two separate groups of our advertising products : travel and local . our travel category of revenue includes the publishing revenue for negotiated high-quality deals from travel companies , such as hotels , airlines , cruises or car rentals and includes products such as top 20 , travelzoo website , newsflash , travelzoo network as well as getaway vouchers . the revenues generated from these products are based upon a fee for number of e-mails delivered to our audience , a fee for clicks delivered to the advertisers , a fee for placement of the advertising on our website or a fee based on a percentage of the face value of vouchers sold , hotel booking stays or other items sold . we recognize revenue upon delivery of the e-mails , delivery of the clicks , over the period of placement of the advertising , upon hotel booking stays and upon the sale of the vouchers or other items sold . our local category of revenue includes the publishing revenue for negotiated high-quality deals from local businesses , such as restaurants , spas , shows , and other activities and includes local deals vouchers and entertainment offers ( vouchers and direct bookings ) . the revenues generated from these products are based upon a percentage of the face value of vouchers or items sold or a fee for clicks delivered to the advertisers . we recognize revenue upon the sale of the vouchers , when we receive notification of the direct bookings or upon delivery of the clicks . the company earns a fee for acting as an agent in these transactions , which is recorded on a net basis and is included in revenue upon completion of the voucher sale . certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon 33 expiration , which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants , members or others . trends in our business our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new advertisers , our ability to increase our audience reach and advertising rates , our ability to have sufficient supply of hotels offered at competitive rates , and our ability to develop and launch new products . our current revenue model primarily depends on advertising fees paid primarily by travel , entertainment and local businesses . a number of factors can influence whether current and new advertisers decide to advertise their offers with us . we have been impacted and expect to continue to be impacted by external factors such as the shift from offline to online advertising , the relative condition of the economy , competition and the introduction of new methods of advertising , and the decline in consumer demand for vouchers . a number of factors will have impact on our revenue , such as the reduction in spending by travel intermediaries due to their focus on improving profitability , the trend towards mobile usage by consumers , the willingness of consumers to purchase the deals we advertise , and the willingness of certain competitors to grow their business unprofitably . in addition , we have been impacted and expect to continue to be impacted by internal factors such as introduction of new advertising products , hiring and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire . existing advertisers may shift from one advertising service ( e.g . top 20 ) to another ( e.g . local deals and getaway ) . these shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers , and in particular with local deals and getaway , depending on how many vouchers are purchased by members . story_separator_special_tag advertising expenses accounted for 15 % , 18 % and 21 % , respectively , of total sales and marketing expenses and consisted primarily of online advertising , which we refer to as traffic acquisition cost and member acquisition costs . the goal of our advertising was to acquire new members for our e-mail products , increase the traffic to our websites and increase brand awareness . sales and marketing expenses decreased $ 1.1 million in 2017 compared to 2016 . the decrease was primarily due to a $ 1.2 million decrease in member acquisition costs and a $ 0.4 million decrease in salary and employee related expenses , offset partially by a $ 0.3 million increase in facility costs and $ 0.3 million increase in marketing costs . sales and marketing expenses decreased $ 7.2 million in 2016 compared to 2015 . the decrease was primarily due to a $ 4.0 million decrease in salary and employee related expenses due in part to a decrease in headcount , a $ 1.9 million decrease in trade and brand marketing expenses , $ 0.7 million decrease in member acquisition costs and a $ 0.4 million decrease in professional service expenses . product development product development expenses consist primarily of compensation for software development staff , fees for professional services , software maintenance and amortization and facilities costs . product development expenses were $ 9.2 million , $ 9.1 million and $ 12.2 million for 2017 , 2016 and 2015 , respectively . product development expenses increased $ 128,000 in 2017 compared to 2016 . the increase was primarily due to an increase in professional services related in part to our continuous enhancement to our website . product development expenses decreased $ 3.1 million in 2016 compared to 2015 . the decrease was primarily due to a $ 1.5 million decrease in salary and employee related expenses , a $ 1.0 million decrease in professional service expenses and a $ 0.3 million decrease in contractor expenses . 39 general and administrative general and administrative expenses consist primarily of compensation for administrative , executive , fees for professional services , rent , bad debt expense , amortization of intangible assets , and general office expense . general and administrative expenses were $ 22.6 million , $ 22.7 million and $ 24.2 million for 2017 , 2016 and 2015 , respectively . general and administrative expenses decreased $ 139,000 in 2017 compared to 2016 . the decrease was primarily due to a $ 548,000 decrease in professional services expenses related to various outside services , offset partially by a $ 435,000 increase in salary and employee related expenses . general and administrative expenses decreased $ 1.5 million in 2016 compared to 2015 . the decrease was primarily due to a $ 2.2 million decrease in salary and employee related expenses due in part to a decrease in headcount , offset partially by a $ 0.5 million increase in professional services expenses . other income ( loss ) other income ( loss ) consisted primarily of foreign exchange transactions gains and losses , interest income earned on cash , cash equivalents and restricted cash as well as interest expense . other income ( loss ) was $ 173,000 , $ ( 187,000 ) and $ ( 1.2 ) million for 2017 , 2016 and 2015 , respectively . other income ( loss ) increased $ 360,000 from 2016 to 2017 primarily due to foreign exchange transaction gains in 2017. other income ( loss ) decreased $ 1.1 million from 2015 to 2016 primarily due to foreign exchange transaction losses in 2015. income taxes on december 22 , 2017 , the u.s. government enacted the tax cuts and jobs act ( the “ tax act ” ) . the tax act includes significant changes to the u.s. corporate income tax system including : a federal corporate rate reduction from 35 % to 21 % ; limitations on the deductibility of interest expense and executive compensation ; creation of new minimum taxes such as the base erosion anti-abuse tax ( “ beat ” ) and global intangible low taxed income ( “ gilti ” ) tax ; and the transition of u.s. international taxation from a worldwide tax system to a modified territorial tax system , which will result in a one time u.s. tax liability on those earnings which have not previously been repatriated to the u.s. ( the “ transition tax ” ) . in connection with the company 's initial analysis of the impact of the tax act , the company has recorded a provisional estimate of discrete net tax expense of $ 508,000 for the period ended december 31 , 2017. this discrete expense consists of provisional estimates of zero net expense for the transition tax , $ 173,000 net benefit for the decrease in the company 's deferred tax liability on unremitted foreign earnings , and $ 681,000 net expense for remeasurement of the company 's deferred tax assets/liabilities for the corporate rate reduction . we have not completed our accounting for the income tax effects of certain elements of the tax act , including the new gilti and beat taxes . due to the complexity of these new tax rules , we are continuing to evaluate these provisions of the tax act and whether such taxes are recorded as a current-period expense when incurred or whether such amounts should be factored into a company 's measurement of its deferred taxes . as a result , we have not included an estimate of the tax expense/benefit related to these items for the period ended december 31 , 2017. our income is generally taxed in the u.s. , canada and u.k. our income tax provision reflects federal , state and country statutory rates applicable to our worldwide income , adjusted to take into account expenses that are treated as having no recognizable tax benefit . income tax expense ( benefit ) was $

cash flows at june 30 , 2016 , we had $ 66,828 in cash , of which $ 39,473 was outside the united states , $ 881 in short-term investments , all of which is held outside the united states and $ 118,789 in long-term debt ( including the current portion ) , all of which is an obligation in the united states . working capital was $ 253,755 at june 30 , 2016 compared to $ 185,310 at june 30 , 2015. the $ 39,473 of cash held outside of the united states is fully accessible to meet any liquidity needs of the countries in which we operate . the cash located outside of the united states can be transferred into the united states . although these amounts are fully accessible , transferring these amounts into the united states or any other countries could have certain tax consequences . a deferred tax liability will be recognized when we expect that we will recover undistributed earnings of our foreign subsidiaries in a taxable manner , such as through receipt of dividends or sale of the investments . we intend to indefinitely reinvest these undistributed earnings and have no plan for further repatriation . a portion of our cash is held in operating accounts that are with third party financial institutions . while we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate , these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets . to date , we have experienced no loss or lack of access to cash in our operating accounts . our cash position at june 30 , 2016 increased $ 32,808 from the amount at june 30 , 2015. operating activities for the year ended june 30 , 2016 provided cash of $ 31,831 for this period , as compared to cash provided of $ 8,343 for the prior year .

asia pacific consists of our operations in australia , china , hong kong , japan , taiwan , and southeast asia . europe consists of our operations in france , germany , spain , and the u.k. north america consists of our operations in canada and the u.s. for the year ended december 31 , 2017 , asia pacific operations were 7 % of revenues , european operations were 32 % of revenues and north american op erations were 61 % of our total revenues . financial information with respect to our business segments and certain financial information about geographic areas appears in note 10 to the accompanying consolidated financial statements . when evaluating the financial condition and operating performance of the company , management focuses on financial and non-financial indicators such as growth in the number of members to the company 's newsletters , operating margin , growth in revenues in the absolute and relative to the growth in reach of the company 's publications measured as revenue per member and revenue per employee as a measure of productivity . how we generate revenues our revenues are advertising revenues , consisting primarily of listing fees paid by travel , entertainment and local businesses to advertise their offers on travelzoo 's media properties . listing fees are based on audience reach , placement , number of listings , number of impressions , number of clicks , number of referrals , or percentage of the face value of vouchers sold . insertion orders are typically for periods between one month and twelve months and are not automatically renewed . merchant agreements for local deals and getaway advertisers are typically for twelve months and are not automatically renewed . we have two separate groups of our advertising products : travel and local . our travel category of revenue includes the publishing revenue for negotiated high-quality deals from travel companies , such as hotels , airlines , cruises or car rentals and includes products such as top 20 , travelzoo website , newsflash , travelzoo network as well as getaway vouchers . the revenues generated from these products are based upon a fee for number of e-mails delivered to our audience , a fee for clicks delivered to the advertisers , a fee for placement of the advertising on our website or a fee based on a percentage of the face value of vouchers sold , hotel booking stays or other items sold . we recognize revenue upon delivery of the e-mails , delivery of the clicks , over the period of placement of the advertising , upon hotel booking stays and upon the sale of the vouchers or other items sold . our local category of revenue includes the publishing revenue for negotiated high-quality deals from local businesses , such as restaurants , spas , shows , and other activities and includes local deals vouchers and entertainment offers ( vouchers and direct bookings ) . the revenues generated from these products are based upon a percentage of the face value of vouchers or items sold or a fee for clicks delivered to the advertisers . we recognize revenue upon the sale of the vouchers , when we receive notification of the direct bookings or upon delivery of the clicks . the company earns a fee for acting as an agent in these transactions , which is recorded on a net basis and is included in revenue upon completion of the voucher sale . certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon 33 expiration , which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants , members or others . trends in our business our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new advertisers , our ability to increase our audience reach and advertising rates , our ability to have sufficient supply of hotels offered at competitive rates , and our ability to develop and launch new products . our current revenue model primarily depends on advertising fees paid primarily by travel , entertainment and local businesses . a number of factors can influence whether current and new advertisers decide to advertise their offers with us . we have been impacted and expect to continue to be impacted by external factors such as the shift from offline to online advertising , the relative condition of the economy , competition and the introduction of new methods of advertising , and the decline in consumer demand for vouchers . a number of factors will have impact on our revenue , such as the reduction in spending by travel intermediaries due to their focus on improving profitability , the trend towards mobile usage by consumers , the willingness of consumers to purchase the deals we advertise , and the willingness of certain competitors to grow their business unprofitably . in addition , we have been impacted and expect to continue to be impacted by internal factors such as introduction of new advertising products , hiring and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire . existing advertisers may shift from one advertising service ( e.g . top 20 ) to another ( e.g . local deals and getaway ) . these shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers , and in particular with local deals and getaway , depending on how many vouchers are purchased by members . story_separator_special_tag advertising expenses accounted for 15 % , 18 % and 21 % , respectively , of total sales and marketing expenses and consisted primarily of online advertising , which we refer to as traffic acquisition cost and member acquisition costs . the goal of our advertising was to acquire new members for our e-mail products , increase the traffic to our websites and increase brand awareness . sales and marketing expenses decreased $ 1.1 million in 2017 compared to 2016 . the decrease was primarily due to a $ 1.2 million decrease in member acquisition costs and a $ 0.4 million decrease in salary and employee related expenses , offset partially by a $ 0.3 million increase in facility costs and $ 0.3 million increase in marketing costs . sales and marketing expenses decreased $ 7.2 million in 2016 compared to 2015 . the decrease was primarily due to a $ 4.0 million decrease in salary and employee related expenses due in part to a decrease in headcount , a $ 1.9 million decrease in trade and brand marketing expenses , $ 0.7 million decrease in member acquisition costs and a $ 0.4 million decrease in professional service expenses . product development product development expenses consist primarily of compensation for software development staff , fees for professional services , software maintenance and amortization and facilities costs . product development expenses were $ 9.2 million , $ 9.1 million and $ 12.2 million for 2017 , 2016 and 2015 , respectively . product development expenses increased $ 128,000 in 2017 compared to 2016 . the increase was primarily due to an increase in professional services related in part to our continuous enhancement to our website . product development expenses decreased $ 3.1 million in 2016 compared to 2015 . the decrease was primarily due to a $ 1.5 million decrease in salary and employee related expenses , a $ 1.0 million decrease in professional service expenses and a $ 0.3 million decrease in contractor expenses . 39 general and administrative general and administrative expenses consist primarily of compensation for administrative , executive , fees for professional services , rent , bad debt expense , amortization of intangible assets , and general office expense . general and administrative expenses were $ 22.6 million , $ 22.7 million and $ 24.2 million for 2017 , 2016 and 2015 , respectively . general and administrative expenses decreased $ 139,000 in 2017 compared to 2016 . the decrease was primarily due to a $ 548,000 decrease in professional services expenses related to various outside services , offset partially by a $ 435,000 increase in salary and employee related expenses . general and administrative expenses decreased $ 1.5 million in 2016 compared to 2015 . the decrease was primarily due to a $ 2.2 million decrease in salary and employee related expenses due in part to a decrease in headcount , offset partially by a $ 0.5 million increase in professional services expenses . other income ( loss ) other income ( loss ) consisted primarily of foreign exchange transactions gains and losses , interest income earned on cash , cash equivalents and restricted cash as well as interest expense . other income ( loss ) was $ 173,000 , $ ( 187,000 ) and $ ( 1.2 ) million for 2017 , 2016 and 2015 , respectively . other income ( loss ) increased $ 360,000 from 2016 to 2017 primarily due to foreign exchange transaction gains in 2017. other income ( loss ) decreased $ 1.1 million from 2015 to 2016 primarily due to foreign exchange transaction losses in 2015. income taxes on december 22 , 2017 , the u.s. government enacted the tax cuts and jobs act ( the “ tax act ” ) . the tax act includes significant changes to the u.s. corporate income tax system including : a federal corporate rate reduction from 35 % to 21 % ; limitations on the deductibility of interest expense and executive compensation ; creation of new minimum taxes such as the base erosion anti-abuse tax ( “ beat ” ) and global intangible low taxed income ( “ gilti ” ) tax ; and the transition of u.s. international taxation from a worldwide tax system to a modified territorial tax system , which will result in a one time u.s. tax liability on those earnings which have not previously been repatriated to the u.s. ( the “ transition tax ” ) . in connection with the company 's initial analysis of the impact of the tax act , the company has recorded a provisional estimate of discrete net tax expense of $ 508,000 for the period ended december 31 , 2017. this discrete expense consists of provisional estimates of zero net expense for the transition tax , $ 173,000 net benefit for the decrease in the company 's deferred tax liability on unremitted foreign earnings , and $ 681,000 net expense for remeasurement of the company 's deferred tax assets/liabilities for the corporate rate reduction . we have not completed our accounting for the income tax effects of certain elements of the tax act , including the new gilti and beat taxes . due to the complexity of these new tax rules , we are continuing to evaluate these provisions of the tax act and whether such taxes are recorded as a current-period expense when incurred or whether such amounts should be factored into a company 's measurement of its deferred taxes . as a result , we have not included an estimate of the tax expense/benefit related to these items for the period ended december 31 , 2017. our income is generally taxed in the u.s. , canada and u.k. our income tax provision reflects federal , state and country statutory rates applicable to our worldwide income , adjusted to take into account expenses that are treated as having no recognizable tax benefit . income tax expense ( benefit ) was $

liquidity and capital resources as of december 31 , 2017 , we had $ 22.6 million in cash and cash equivalents , of which $ 16.4 million was held outside the u.s. in certain of our foreign operations . if these assets are distributed to the u.s. , we may be subject to additional u.s. taxes in certain circumstances . cash and cash equivalents decreased from $ 26.8 million as of december 31 , 2016 primarily as a result of cash used for repurchases of our common stock . we expect that cash on hand will be sufficient to provide for working capital needs for at least the next twelve months . replace_table_token_11_th net cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities . net cash provided by operating activities was $ 2.1 million for 2017 , which consisted of a net income of $ 3.5 million , adjustments for non-cash items of $ 265,000 , offset partially a $ 1.7 million decrease in cash from changes in operating assets and liabilities . a dj ustments for non-cash items primarily consisted of the $ 2.9 million discontinued operations gain on the sale of the fly.com domain name , offset by $ 2.1 million of depreciation and amortization expense on property and equipment and $ 1.0 million of stock-based compensation expense . the decrease in cash from changes in operating assets and liabilities primarily consisted of $ 2.5 million decrease in other non-current liabilities primarily associated with the resolution of 2009 irs audit related to the sale of our asia pacific business segment and $ 1.6 million decrease in accounts payable , offset partially by $ 3.1 million decrease in accounts receivable .

our total revenues from biothrax sales were $ 246.7 million , $ 215.9 million and $ 202.4 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . in addition , we had rsdl product sales of $ 11.2 million during the year ended december 31 , 2013. we are focused on increasing sales of biothrax and rsdl to u.s. government customers , expanding the market for biothrax and rsdl to other customers domestically and internationally and pursuing label expansions and improvements . contracts and grants we seek to advance development of our product candidates through external funding arrangements . we may slow down development programs or place them on hold during periods that are not covered by external funding . we have received funding from the u.s. government for the following development programs :  biothrax as a post-exposure prophylaxis , or pep ;  nuthrax ;  large-scale manufacturing for biothrax ; and  previthrax . we continue to actively pursue additional government sponsored development contracts and grants and commercial collaborative relationships . we also encourage both governmental and non-governmental agencies and philanthropic organizations to provide development funding or to conduct clinical studies of our product candidates . manufacturing infrastructure we have a manufacturing facility focused on bacterial fermentation located at our 12.5 acre , multi-building campus in lansing , michigan . we currently manufacture biothrax at the 100 liter scale at this facility . to augment our existing biothrax manufacturing capabilities , we have constructed a large-scale , multi-product facility capable of producing biothrax at the 1320 liter scale . in july 2010 , we entered into a contract with the biomedical advanced research and development authority , or barda , which provides funding to support the work needed to approve manufacturing of biothrax at the larger scale . we continue to pursue fda approval for biothrax at this larger production scale . we also have a manufacturing facility focused on disposable manufacturing for viral and non-viral products located at our biodefense manufacturing facility in baltimore , maryland . this facility has been designed to leverage single-use bioreactor technology and is capable of making several different products . the facility is designed to produce proteins derived from cell culture or microbial systems . in june 2012 , we entered into a contract with barda , which established our baltimore facility as a center for innovation in advanced development and manufacturing , or ciadm . the ciadm contract with barda provides us with funding for manufacturing and development activities relating to a clinical stage pandemic flu vaccine candidate that we in-licensed from a third party . we envision our biodefense baltimore facility supporting future ciadm development and manufacturing activities for chemical , biological , radiological and nuclear threat countermeasures , as well as our current and future non-ciadm product development and manufacturing needs . in connection with our acquisition of the healthcare protective products division of bracco diagnostics inc. , we acquired rights to a manufacturing and packaging facility at the university of southern mississippi 's accelerator , an innovation and commercialization park . this facility is equipped to manufacture and package rsdl . a significant portion of the doses of rsdl that we sell to domestic customers are packaged at this facility . in connection with this acquisition in august 2013 , we also entered into a three year manufacturing agreement with bracco diagnostics inc. , and its wholly-owned subsidiary , e-z-em canada inc. ( dba therapex ) , to manufacture finished rsdl units and bulk quantities of rsdl 's active ingredient . in connection with the cangene acquisition , we acquired facilities with manufacturing and other capabilities located in winnipeg , manitoba , canada . these facilities include space for plasma-derived hyperimmune therapeutics manufacturing , chromatography-based plasma fractionation , bacterial fermentation , downstream processing capability , aseptic filling , packaging and warehousing , quality assurance and control , development laboratories and office space . this facility has the potential capacity to provide additional contract research and manufacturing activities if needed . additionally , as part of the cangene acquisition we acquired a manufacturing facility focused on contract manufacturing services located in baltimore , maryland . this facility provides biopharmaceutical contract manufacturing services and is an approved manufacturing facility under the regulatory regimes in the united states , canada , japan , brazil , the middle east and several countries in the european union . the facility includes warehousing space used for cold-storage and freezer capacity to support our biosciences product distribution activities within the u.s. this facility and its capabilities may be utilized in the future to fill and finish our development and commercial stage products , which currently rely upon third party fill/finish providers . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations\are based on our financial statements , which have been prepared in accordance with accounting principles generally accepted in the u.s. the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . our analysis of financial conditions and results of operations along with our critical accounting policies and estimates excludes the impact of cangene . on an ongoing basis , we evaluate our estimates and judgments , including those related to accrued expenses , income taxes , stock-based compensation , inventory , in-process research and development and goodwill . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . story_separator_special_tag the period of performance under the award is from september 30 , 2011 through september 29 , 2016. the maximum amount that could be paid to us under the contract is up to $ 1.25 billion , subject to availability of funding by the u.s. government . to date , the u.s. government has committed approximately $ 704 million for the procurement of biothrax doses under this contract . through december 31 , 2013 , we have delivered and , upon cdc acceptance , recognized revenue on approximately 17.9 million doses , representing approximately $ 479 million under this contract . as part of the august 2013 acquisition of the assets of hppd , we assumed responsibility for an indefinite delivery/indefinite quantity contract with the u.s. department of defense , or dod , to provide rsdl to active military personnel . the contract term runs through 2017. through december 31 , 2013 , we recognized revenue of approximately $ 9.9 million under this contract . we have received contract and grant funding from the national institute of allergy and infectious diseases , or niaid , and barda for the following development programs : replace_table_token_3_th our revenue , operating results and profitability have varied , and we expect that they will continue to vary on a quarterly basis , primarily due to the timing of our fulfilling orders for biothrax and work done under new and existing grants and development contracts , and collaborative relationships . cost of product sales the primary expense that we incur to deliver biothrax to our customers is manufacturing cost , consisting of fixed and variable costs . variable manufacturing costs for biothrax consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff and contract filling operations . fixed manufacturing costs include facilities and utilities . we determine the cost of product sales for doses sold during a reporting period based on the average manufacturing cost per dose in the period those doses were manufactured . we calculate the average manufacturing cost per dose in the period of manufacture by dividing the actual costs of manufacturing in such period by the number of units produced in that period . in addition to the fixed and variable manufacturing costs described above , the average manufacturing cost per dose depends on the efficiency of the manufacturing process , utilization of available manufacturing capacity and the production yield for the period of production . the primary expense that we incur to deliver rsdl to our customers is the cost per unit of production from our third-party contract manufacturer . other associated expenses include sales-based royalties , amoritization of intangible assets , shipping , logistics and the cost of support functions . research and development expenses we expense research and development costs as incurred . our research and development expenses consist primarily of :  personnel-related expenses ;  fees to professional service providers for , among other things , analytical testing , independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies ;  costs of contract manufacturing services for clinical trial material ;  costs of materials used in clinical trials and research and development ;  depreciation of capital assets used to develop our products ; and  operating costs , such as the operating costs of facilities and the legal costs of pursuing patent protection of our intellectual property . we intend to focus our product development efforts on promising late-stage candidates that we believe satisfy well-defined criteria and seek to utilize collaborations or non-dilutive funding . we plan to seek funding for earlier stage development activities from external sources and third parties , such as governments and non-governmental organizations . we expect our research and development spending will be dependent upon such factors as the results from our clinical trials , the availability of reimbursement of research and development spending , the number of product candidates under development , the size , structure and duration of any follow-on clinical programs that we may initiate , the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials , and our ability to use or rely on data generated by government agencies , such as studies involving biothrax conducted by the cdc . selling , general and administrative expenses selling , general and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive , sales and marketing , business development , finance , accounting , information technology , legal and human resource functions . other costs include facility costs not otherwise included in cost of product sales or research and development expense and professional fees for legal , accounting and auditing services . we currently market and sell biothrax and rsdl directly to the u.s. and foreign governments with a small , targeted marketing and sales group . as we seek to broaden the market for biothrax , rsdl and we acquire additional product candidates or we receive marketing approval for our product candidates , we expect that we will increase our spending for marketing and sales activities . total other income ( expense ) total other income ( expense ) consists primarily of interest income and interest expense , and in 2012 , a business interruption insurance recovery . we earn interest income on our cash and cash equivalents , and we incur interest expense on our indebtedness . we capitalize interest expense based on the cost of major ongoing projects which have not yet been placed in service , such as new manufacturing facilities . some of our existing debt arrangements provide for increasing amortization of principal payments in future periods . see `` liquidity and capital resources — debt financing `` for additional information . results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 revenues product sales revenues

liquidity and capital resources as of december 31 , 2017 , we had $ 22.6 million in cash and cash equivalents , of which $ 16.4 million was held outside the u.s. in certain of our foreign operations . if these assets are distributed to the u.s. , we may be subject to additional u.s. taxes in certain circumstances . cash and cash equivalents decreased from $ 26.8 million as of december 31 , 2016 primarily as a result of cash used for repurchases of our common stock . we expect that cash on hand will be sufficient to provide for working capital needs for at least the next twelve months . replace_table_token_11_th net cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities . net cash provided by operating activities was $ 2.1 million for 2017 , which consisted of a net income of $ 3.5 million , adjustments for non-cash items of $ 265,000 , offset partially a $ 1.7 million decrease in cash from changes in operating assets and liabilities . a dj ustments for non-cash items primarily consisted of the $ 2.9 million discontinued operations gain on the sale of the fly.com domain name , offset by $ 2.1 million of depreciation and amortization expense on property and equipment and $ 1.0 million of stock-based compensation expense . the decrease in cash from changes in operating assets and liabilities primarily consisted of $ 2.5 million decrease in other non-current liabilities primarily associated with the resolution of 2009 irs audit related to the sale of our asia pacific business segment and $ 1.6 million decrease in accounts payable , offset partially by $ 3.1 million decrease in accounts receivable .

our total revenues from biothrax sales were $ 246.7 million , $ 215.9 million and $ 202.4 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . in addition , we had rsdl product sales of $ 11.2 million during the year ended december 31 , 2013. we are focused on increasing sales of biothrax and rsdl to u.s. government customers , expanding the market for biothrax and rsdl to other customers domestically and internationally and pursuing label expansions and improvements . contracts and grants we seek to advance development of our product candidates through external funding arrangements . we may slow down development programs or place them on hold during periods that are not covered by external funding . we have received funding from the u.s. government for the following development programs :  biothrax as a post-exposure prophylaxis , or pep ;  nuthrax ;  large-scale manufacturing for biothrax ; and  previthrax . we continue to actively pursue additional government sponsored development contracts and grants and commercial collaborative relationships . we also encourage both governmental and non-governmental agencies and philanthropic organizations to provide development funding or to conduct clinical studies of our product candidates . manufacturing infrastructure we have a manufacturing facility focused on bacterial fermentation located at our 12.5 acre , multi-building campus in lansing , michigan . we currently manufacture biothrax at the 100 liter scale at this facility . to augment our existing biothrax manufacturing capabilities , we have constructed a large-scale , multi-product facility capable of producing biothrax at the 1320 liter scale . in july 2010 , we entered into a contract with the biomedical advanced research and development authority , or barda , which provides funding to support the work needed to approve manufacturing of biothrax at the larger scale . we continue to pursue fda approval for biothrax at this larger production scale . we also have a manufacturing facility focused on disposable manufacturing for viral and non-viral products located at our biodefense manufacturing facility in baltimore , maryland . this facility has been designed to leverage single-use bioreactor technology and is capable of making several different products . the facility is designed to produce proteins derived from cell culture or microbial systems . in june 2012 , we entered into a contract with barda , which established our baltimore facility as a center for innovation in advanced development and manufacturing , or ciadm . the ciadm contract with barda provides us with funding for manufacturing and development activities relating to a clinical stage pandemic flu vaccine candidate that we in-licensed from a third party . we envision our biodefense baltimore facility supporting future ciadm development and manufacturing activities for chemical , biological , radiological and nuclear threat countermeasures , as well as our current and future non-ciadm product development and manufacturing needs . in connection with our acquisition of the healthcare protective products division of bracco diagnostics inc. , we acquired rights to a manufacturing and packaging facility at the university of southern mississippi 's accelerator , an innovation and commercialization park . this facility is equipped to manufacture and package rsdl . a significant portion of the doses of rsdl that we sell to domestic customers are packaged at this facility . in connection with this acquisition in august 2013 , we also entered into a three year manufacturing agreement with bracco diagnostics inc. , and its wholly-owned subsidiary , e-z-em canada inc. ( dba therapex ) , to manufacture finished rsdl units and bulk quantities of rsdl 's active ingredient . in connection with the cangene acquisition , we acquired facilities with manufacturing and other capabilities located in winnipeg , manitoba , canada . these facilities include space for plasma-derived hyperimmune therapeutics manufacturing , chromatography-based plasma fractionation , bacterial fermentation , downstream processing capability , aseptic filling , packaging and warehousing , quality assurance and control , development laboratories and office space . this facility has the potential capacity to provide additional contract research and manufacturing activities if needed . additionally , as part of the cangene acquisition we acquired a manufacturing facility focused on contract manufacturing services located in baltimore , maryland . this facility provides biopharmaceutical contract manufacturing services and is an approved manufacturing facility under the regulatory regimes in the united states , canada , japan , brazil , the middle east and several countries in the european union . the facility includes warehousing space used for cold-storage and freezer capacity to support our biosciences product distribution activities within the u.s. this facility and its capabilities may be utilized in the future to fill and finish our development and commercial stage products , which currently rely upon third party fill/finish providers . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations\are based on our financial statements , which have been prepared in accordance with accounting principles generally accepted in the u.s. the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . our analysis of financial conditions and results of operations along with our critical accounting policies and estimates excludes the impact of cangene . on an ongoing basis , we evaluate our estimates and judgments , including those related to accrued expenses , income taxes , stock-based compensation , inventory , in-process research and development and goodwill . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . story_separator_special_tag the period of performance under the award is from september 30 , 2011 through september 29 , 2016. the maximum amount that could be paid to us under the contract is up to $ 1.25 billion , subject to availability of funding by the u.s. government . to date , the u.s. government has committed approximately $ 704 million for the procurement of biothrax doses under this contract . through december 31 , 2013 , we have delivered and , upon cdc acceptance , recognized revenue on approximately 17.9 million doses , representing approximately $ 479 million under this contract . as part of the august 2013 acquisition of the assets of hppd , we assumed responsibility for an indefinite delivery/indefinite quantity contract with the u.s. department of defense , or dod , to provide rsdl to active military personnel . the contract term runs through 2017. through december 31 , 2013 , we recognized revenue of approximately $ 9.9 million under this contract . we have received contract and grant funding from the national institute of allergy and infectious diseases , or niaid , and barda for the following development programs : replace_table_token_3_th our revenue , operating results and profitability have varied , and we expect that they will continue to vary on a quarterly basis , primarily due to the timing of our fulfilling orders for biothrax and work done under new and existing grants and development contracts , and collaborative relationships . cost of product sales the primary expense that we incur to deliver biothrax to our customers is manufacturing cost , consisting of fixed and variable costs . variable manufacturing costs for biothrax consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff and contract filling operations . fixed manufacturing costs include facilities and utilities . we determine the cost of product sales for doses sold during a reporting period based on the average manufacturing cost per dose in the period those doses were manufactured . we calculate the average manufacturing cost per dose in the period of manufacture by dividing the actual costs of manufacturing in such period by the number of units produced in that period . in addition to the fixed and variable manufacturing costs described above , the average manufacturing cost per dose depends on the efficiency of the manufacturing process , utilization of available manufacturing capacity and the production yield for the period of production . the primary expense that we incur to deliver rsdl to our customers is the cost per unit of production from our third-party contract manufacturer . other associated expenses include sales-based royalties , amoritization of intangible assets , shipping , logistics and the cost of support functions . research and development expenses we expense research and development costs as incurred . our research and development expenses consist primarily of :  personnel-related expenses ;  fees to professional service providers for , among other things , analytical testing , independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies ;  costs of contract manufacturing services for clinical trial material ;  costs of materials used in clinical trials and research and development ;  depreciation of capital assets used to develop our products ; and  operating costs , such as the operating costs of facilities and the legal costs of pursuing patent protection of our intellectual property . we intend to focus our product development efforts on promising late-stage candidates that we believe satisfy well-defined criteria and seek to utilize collaborations or non-dilutive funding . we plan to seek funding for earlier stage development activities from external sources and third parties , such as governments and non-governmental organizations . we expect our research and development spending will be dependent upon such factors as the results from our clinical trials , the availability of reimbursement of research and development spending , the number of product candidates under development , the size , structure and duration of any follow-on clinical programs that we may initiate , the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials , and our ability to use or rely on data generated by government agencies , such as studies involving biothrax conducted by the cdc . selling , general and administrative expenses selling , general and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive , sales and marketing , business development , finance , accounting , information technology , legal and human resource functions . other costs include facility costs not otherwise included in cost of product sales or research and development expense and professional fees for legal , accounting and auditing services . we currently market and sell biothrax and rsdl directly to the u.s. and foreign governments with a small , targeted marketing and sales group . as we seek to broaden the market for biothrax , rsdl and we acquire additional product candidates or we receive marketing approval for our product candidates , we expect that we will increase our spending for marketing and sales activities . total other income ( expense ) total other income ( expense ) consists primarily of interest income and interest expense , and in 2012 , a business interruption insurance recovery . we earn interest income on our cash and cash equivalents , and we incur interest expense on our indebtedness . we capitalize interest expense based on the cost of major ongoing projects which have not yet been placed in service , such as new manufacturing facilities . some of our existing debt arrangements provide for increasing amortization of principal payments in future periods . see `` liquidity and capital resources — debt financing `` for additional information . results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 revenues product sales revenues

liquidity and capital resources sources of liquidity we have funded our cash requirements from inception through 2013 principally with a combination of revenues from biothrax product sales , debt financings , development funding from government entities and non-government and philanthropic organizations and collaborative partners , and the net proceeds from our initial public offering and the sale of our common stock upon exercise of stock options . we have operated profitably for each of the five years ended december 31 , 2013. as of december 31 , 2013 , we had cash and cash equivalents of $ 179.3 million . additionally , at december 31 , 2013 , our accounts receivable balance was $ 60.6 million . cash flows the following table provides information regarding our cash flows for the years ended december 31 , 2013 , 2012 and 2011. replace_table_token_6_th ( 1 ) includes the effect of exchange rate changes on cash and cash equivalents . net cash provided by operating activities of $ 97.0 million in 2013 was primarily due to our net income of $ 31.1 million , a decrease in accounts receivable of $ 35.5 million related to the timing of collection of amounts billed primarily to the cdc , along with the effect of non-cash charges of $ 11.2 million for stock-based compensation and $ 19.0 million for depreciation and amortization . net cash provided by operating activities of $ 39.6 million in 2012 was principally due to our net income of $ 23.5 million , a net increase in income taxes of $ 11.4 million related to timing differences , non-cash charges of $ 11.1 million for stock-based compensation , $ 11.2 million for depreciation and amortization , and $ 9.6 million for the impairment of in-process research and development , partially offset by an increase in accounts receivable of $ 21.9 million due to the timing of collection of amounts billed primarily to cdc .

it , energy and management consulting group - our it , energy and management consulting group provides technical and consulting services primarily to various dod and federal civilian agencies , including the united states departments of energy , homeland security , and interior ; the social security administration ; the national institutes of health ; customers in the military health system ; and other government agencies and commercial clients . this group consists of our subsidiaries energetics incorporated ( `` energetics `` ) and akimeka , llc ( `` akimeka `` ) . energetics provides technical , policy , business , and management support in areas of energy modernization , clean and efficient energy , climate change mitigation , infrastructure protection , and measurement technology . akimeka offers solutions in fields that include medical logistics , medical command and control , e-health , information assurance , public safety , enterprise architecture development , business continuity , program and portfolio management , network it services , cloud managed services , systems design and integration , quality assurance services , and product and process improvement services . - 18 - concentration of revenues replace_table_token_6_th management outlook we saw steady revenue growth in 2016 , as revenue increased on a quarter to quarter basis throughout the year and was up 30 % over the prior year . the improvements in our revenue levels were led by renewed vigor in our federal services group markets , for which revenues increased by 83 % . strong contract funding awards in 2016 allowed us to finish the year with a contract funded backlog that positions us well as we head into 2017. increased revenues from our supply chain management group and a full year of revenue from our aviation group ( as compared to eleven months in 2015 when we acquired these businesses ) also contributed to our revenue growth in 2016. we are encouraged to see contributions to our federal services group revenue base from both our long time programs and newer programs . activity on our fms program has increased over the past year , including work to transfer two frigates to taiwan and equipment supply services to u.s. navy foreign client countries . our equipment refurbishment services for u.s. army reserve transportation equipment and other assets continue to be a key service offering to this legacy customer . our newer programs enhancing revenue growth include our rrad ers program , started in may 2016 , and our fort benning logistics support services program , started in august 2015. these four programs , including a full year of revenue on our rrad ers program in 2017 , as well as additional smaller new work efforts , provide our federal services group with a solid revenue base . contract funding increases resulted in bookings of $ 458 million in 2016 and contract funded backlog of $ 322 million for our federal contracting businesses as of the end 2016 , which will help sustain our 2017 federal contracting revenues . additionally , we have developed strong international business relationships through our decades of work with foreign client countries . we are extending these relationships to market our services to several international clients . revenues for our supply chain management group have increased in 2016 at more modest levels than the previous two years . although our vehicle parts supply and inventory management support for the usps delivery vehicle fleet continue to be the primary drivers of this group 's successful results , 2016 revenue growth for this group has been provided by greater diversification and growth of parts sales to the dod , increased supply chain and inventory management support for commercial vehicle fleets , and revenue from our acquisition of ultra seating company in december 2015. we continue to broaden our base of commercial clients and make progress toward capturing new commercial vehicle fleet clients . we are a key partner with the usps and our mission critical supply chain support should continue to be essential in sustaining the aging usps fleet as this client embarks on a lengthy procurement process to acquire a new class of delivery vehicles to both augment and replace older vehicles . the usps anticipates the first deployment of a small number of newly produced vehicles will occur in three or four years . at that point in time , production and procurement of vehicles will be scheduled to occur annually over a seven-year period . usps ' previously published vehicle procurement time lines continue to experience changes and delays . based on the size , scope , and complexity of usps ' new vehicle procurement strategy , we can not be certain of the timing and quantities of new vehicles to be deployed . we also can not determine the timing or number of existing delivery vehicles that will be redeployed for other routes or purposes . while we will not participate in the competition to provide new vehicles , we will be seeking to participate with the selected providers to offer original content , program management , and warranty support . aftermarket parts supply and supply chain services to support the usps ' newly acquired vehicles will be part of our model in addition to continuing our support for older usps vehicles that remain in service . in 2016 the usps disclosed that 1.1 million addresses were added to their delivery network and shipping and packaging volume increased by half a billion items in 2015 , all contributing to an increased requirement for delivery capacity which may require a combination of both old and new vehicles for longer than currently planned . story_separator_special_tag approximately $ 900 thousand of transaction costs associated with our aviation acquisition that were not deductible for tax purposes resulted in an increase to our effective tax rate for 2015. other permanent differences and federal and state tax credits such as the work opportunity tax credit and a state educational improvement tax credit provided benefit to our tax rates for 2016 , 2015 and 2014. supply chain management group results the results of operations for our supply chain management group are ( in thousands ) : replace_table_token_11_th revenues for our supply chain management group increased approximately $ 9 million or 4 % for 2016 , as compared to the prior year . the revenue increase resulted primarily from an increase in sales to government and commercial customers of approximately $ 10.9 million , including sales of approximately $ 3.3 million from ultra seating company , which we acquired in december 2015. costs and operating expenses for our supply chain management group increased approximately $ 10 million or 6 % and operating income decreased by approximately $ 821 thousand or 2 % for 2016 as compared to the prior year . the increase in costs and operating expenses resulted primarily from an increase in products sold . the products sold associated with our increasing government and commercial customer revenues tends to lower our overall profit margins as our revenue mix changes . the decrease in operating income was primarily attributable to market competition and a change in the mix of products sold , and to increased costs associated with investments to support revenue growth . revenues for our supply chain management group increased approximately $ 24 million or 14 % for 2015 , as compared to the prior year . the revenue increase resulted primarily from increases in wbi 's usps mip revenues and to dod and commercial customer revenues and other projects performed for the usps . costs and operating expenses for our supply chain management group increased by approximately $ 19 million or 13 % and operating income increased by approximately $ 5.8 million or 19 % for 2015 as compared to the prior year . costs and operating expenses and operating income increases resulted primarily from the increase in usps mip revenues . operating income for this segment was decreased by approximately $ 527 thousand in 2015 and by approximately $ 3.1 million in 2014 due to adjustments to the accrued earn-out obligation for our wbi acquisition . the earn-out period for our wbi acquisition ended june 30 , 2015 , and the final earn-out payment for this obligation was made in september 2015 . - 24 - aviation group results the results of operations for our aviation group since the acquisition date of january 28 , 2015 are as follows ( in thousands ) : replace_table_token_12_th our aviation group began operations upon the acquisition of our aviation businesses on january 28 , 2015 ; therefore , the results for our aviation group include a full 12 months for 2016 and approximately 11 months for 2015. accordingly , year over year comparisons for this group for 2016 should consider this variance . costs and operating expenses for this group include expense for amortization of intangible assets associated with the acquisition of our aviation businesses , allocated corporate costs , and valuation adjustments to the accrued earn-out obligation associated with the acquisition . expense for amortization of intangible assets was approximately $ 6.6 million for 2016 and $ 6.1 million for 2015. expense for allocated corporate costs was approximately $ 3.9 million for 2016 and $ 4.5 million for 2015. valuation adjustments to the accrued earn-out obligation decreased costs and operating expenses approximately $ 1.3 million for 2016 and decreased costs and operating expenses approximately $ 101 thousand for 2015. federal services group results the results of operations for our federal group are ( in thousands ) : replace_table_token_13_th revenues for our federal services group increased approximately $ 139 million or 83 % and costs and operating expenses increased approximately $ 137 million or 83 % for 2016 , as compared to the prior year . revenues for this group decreased approximately $ 24 million or 12 % and costs and operating expenses decreased approximately $ 22 million or 12 % for 2015 , as compared to the prior year . significant items affecting changes in our revenues and costs and operating expenses for 2016 included an increase in revenue of approximately $ 93 million from our fms program services , an increase in revenue of approximately $ 40 million associated with the startup of our rrad ers program , and an increase in revenue of approximately $ 15 million from the inclusion of a full year for our ft. benning logistics support services program as compared to a partial year in 2015. operating income and profit percentage increases for 2016 resulted primarily from the increase in revenues and a more favorable balance of our cost structure relative to revenue levels for this group that improved margins on our existing work . these increases were reduced by losses associated with the start of new contract work that was won in a more competitive bidding environment that requires us to price our services more aggressively to sustain and build our revenue levels significant items affecting changes in our revenues and costs and operating expenses for 2015 included a decrease in revenue of approximately $ 15.2 million associated with a reduction in our army reserve vehicle refurbishment work , a decrease in revenue of approximately $ 9.9 million associated with a reduction in our fms program services , a decrease in revenue of approximately $ 9.3 million associated with the completion of our u.s. treasury seized assets program in march 2014 , and an increase in revenue of approximately $ 8.5 million associated with the start of our ft. benning logistics support services program . operating income and profit percentage decreases for 2015 resulted primarily from the decrease in revenues and

liquidity and capital resources sources of liquidity we have funded our cash requirements from inception through 2013 principally with a combination of revenues from biothrax product sales , debt financings , development funding from government entities and non-government and philanthropic organizations and collaborative partners , and the net proceeds from our initial public offering and the sale of our common stock upon exercise of stock options . we have operated profitably for each of the five years ended december 31 , 2013. as of december 31 , 2013 , we had cash and cash equivalents of $ 179.3 million . additionally , at december 31 , 2013 , our accounts receivable balance was $ 60.6 million . cash flows the following table provides information regarding our cash flows for the years ended december 31 , 2013 , 2012 and 2011. replace_table_token_6_th ( 1 ) includes the effect of exchange rate changes on cash and cash equivalents . net cash provided by operating activities of $ 97.0 million in 2013 was primarily due to our net income of $ 31.1 million , a decrease in accounts receivable of $ 35.5 million related to the timing of collection of amounts billed primarily to the cdc , along with the effect of non-cash charges of $ 11.2 million for stock-based compensation and $ 19.0 million for depreciation and amortization . net cash provided by operating activities of $ 39.6 million in 2012 was principally due to our net income of $ 23.5 million , a net increase in income taxes of $ 11.4 million related to timing differences , non-cash charges of $ 11.1 million for stock-based compensation , $ 11.2 million for depreciation and amortization , and $ 9.6 million for the impairment of in-process research and development , partially offset by an increase in accounts receivable of $ 21.9 million due to the timing of collection of amounts billed primarily to cdc .

it , energy and management consulting group - our it , energy and management consulting group provides technical and consulting services primarily to various dod and federal civilian agencies , including the united states departments of energy , homeland security , and interior ; the social security administration ; the national institutes of health ; customers in the military health system ; and other government agencies and commercial clients . this group consists of our subsidiaries energetics incorporated ( `` energetics `` ) and akimeka , llc ( `` akimeka `` ) . energetics provides technical , policy , business , and management support in areas of energy modernization , clean and efficient energy , climate change mitigation , infrastructure protection , and measurement technology . akimeka offers solutions in fields that include medical logistics , medical command and control , e-health , information assurance , public safety , enterprise architecture development , business continuity , program and portfolio management , network it services , cloud managed services , systems design and integration , quality assurance services , and product and process improvement services . - 18 - concentration of revenues replace_table_token_6_th management outlook we saw steady revenue growth in 2016 , as revenue increased on a quarter to quarter basis throughout the year and was up 30 % over the prior year . the improvements in our revenue levels were led by renewed vigor in our federal services group markets , for which revenues increased by 83 % . strong contract funding awards in 2016 allowed us to finish the year with a contract funded backlog that positions us well as we head into 2017. increased revenues from our supply chain management group and a full year of revenue from our aviation group ( as compared to eleven months in 2015 when we acquired these businesses ) also contributed to our revenue growth in 2016. we are encouraged to see contributions to our federal services group revenue base from both our long time programs and newer programs . activity on our fms program has increased over the past year , including work to transfer two frigates to taiwan and equipment supply services to u.s. navy foreign client countries . our equipment refurbishment services for u.s. army reserve transportation equipment and other assets continue to be a key service offering to this legacy customer . our newer programs enhancing revenue growth include our rrad ers program , started in may 2016 , and our fort benning logistics support services program , started in august 2015. these four programs , including a full year of revenue on our rrad ers program in 2017 , as well as additional smaller new work efforts , provide our federal services group with a solid revenue base . contract funding increases resulted in bookings of $ 458 million in 2016 and contract funded backlog of $ 322 million for our federal contracting businesses as of the end 2016 , which will help sustain our 2017 federal contracting revenues . additionally , we have developed strong international business relationships through our decades of work with foreign client countries . we are extending these relationships to market our services to several international clients . revenues for our supply chain management group have increased in 2016 at more modest levels than the previous two years . although our vehicle parts supply and inventory management support for the usps delivery vehicle fleet continue to be the primary drivers of this group 's successful results , 2016 revenue growth for this group has been provided by greater diversification and growth of parts sales to the dod , increased supply chain and inventory management support for commercial vehicle fleets , and revenue from our acquisition of ultra seating company in december 2015. we continue to broaden our base of commercial clients and make progress toward capturing new commercial vehicle fleet clients . we are a key partner with the usps and our mission critical supply chain support should continue to be essential in sustaining the aging usps fleet as this client embarks on a lengthy procurement process to acquire a new class of delivery vehicles to both augment and replace older vehicles . the usps anticipates the first deployment of a small number of newly produced vehicles will occur in three or four years . at that point in time , production and procurement of vehicles will be scheduled to occur annually over a seven-year period . usps ' previously published vehicle procurement time lines continue to experience changes and delays . based on the size , scope , and complexity of usps ' new vehicle procurement strategy , we can not be certain of the timing and quantities of new vehicles to be deployed . we also can not determine the timing or number of existing delivery vehicles that will be redeployed for other routes or purposes . while we will not participate in the competition to provide new vehicles , we will be seeking to participate with the selected providers to offer original content , program management , and warranty support . aftermarket parts supply and supply chain services to support the usps ' newly acquired vehicles will be part of our model in addition to continuing our support for older usps vehicles that remain in service . in 2016 the usps disclosed that 1.1 million addresses were added to their delivery network and shipping and packaging volume increased by half a billion items in 2015 , all contributing to an increased requirement for delivery capacity which may require a combination of both old and new vehicles for longer than currently planned . story_separator_special_tag approximately $ 900 thousand of transaction costs associated with our aviation acquisition that were not deductible for tax purposes resulted in an increase to our effective tax rate for 2015. other permanent differences and federal and state tax credits such as the work opportunity tax credit and a state educational improvement tax credit provided benefit to our tax rates for 2016 , 2015 and 2014. supply chain management group results the results of operations for our supply chain management group are ( in thousands ) : replace_table_token_11_th revenues for our supply chain management group increased approximately $ 9 million or 4 % for 2016 , as compared to the prior year . the revenue increase resulted primarily from an increase in sales to government and commercial customers of approximately $ 10.9 million , including sales of approximately $ 3.3 million from ultra seating company , which we acquired in december 2015. costs and operating expenses for our supply chain management group increased approximately $ 10 million or 6 % and operating income decreased by approximately $ 821 thousand or 2 % for 2016 as compared to the prior year . the increase in costs and operating expenses resulted primarily from an increase in products sold . the products sold associated with our increasing government and commercial customer revenues tends to lower our overall profit margins as our revenue mix changes . the decrease in operating income was primarily attributable to market competition and a change in the mix of products sold , and to increased costs associated with investments to support revenue growth . revenues for our supply chain management group increased approximately $ 24 million or 14 % for 2015 , as compared to the prior year . the revenue increase resulted primarily from increases in wbi 's usps mip revenues and to dod and commercial customer revenues and other projects performed for the usps . costs and operating expenses for our supply chain management group increased by approximately $ 19 million or 13 % and operating income increased by approximately $ 5.8 million or 19 % for 2015 as compared to the prior year . costs and operating expenses and operating income increases resulted primarily from the increase in usps mip revenues . operating income for this segment was decreased by approximately $ 527 thousand in 2015 and by approximately $ 3.1 million in 2014 due to adjustments to the accrued earn-out obligation for our wbi acquisition . the earn-out period for our wbi acquisition ended june 30 , 2015 , and the final earn-out payment for this obligation was made in september 2015 . - 24 - aviation group results the results of operations for our aviation group since the acquisition date of january 28 , 2015 are as follows ( in thousands ) : replace_table_token_12_th our aviation group began operations upon the acquisition of our aviation businesses on january 28 , 2015 ; therefore , the results for our aviation group include a full 12 months for 2016 and approximately 11 months for 2015. accordingly , year over year comparisons for this group for 2016 should consider this variance . costs and operating expenses for this group include expense for amortization of intangible assets associated with the acquisition of our aviation businesses , allocated corporate costs , and valuation adjustments to the accrued earn-out obligation associated with the acquisition . expense for amortization of intangible assets was approximately $ 6.6 million for 2016 and $ 6.1 million for 2015. expense for allocated corporate costs was approximately $ 3.9 million for 2016 and $ 4.5 million for 2015. valuation adjustments to the accrued earn-out obligation decreased costs and operating expenses approximately $ 1.3 million for 2016 and decreased costs and operating expenses approximately $ 101 thousand for 2015. federal services group results the results of operations for our federal group are ( in thousands ) : replace_table_token_13_th revenues for our federal services group increased approximately $ 139 million or 83 % and costs and operating expenses increased approximately $ 137 million or 83 % for 2016 , as compared to the prior year . revenues for this group decreased approximately $ 24 million or 12 % and costs and operating expenses decreased approximately $ 22 million or 12 % for 2015 , as compared to the prior year . significant items affecting changes in our revenues and costs and operating expenses for 2016 included an increase in revenue of approximately $ 93 million from our fms program services , an increase in revenue of approximately $ 40 million associated with the startup of our rrad ers program , and an increase in revenue of approximately $ 15 million from the inclusion of a full year for our ft. benning logistics support services program as compared to a partial year in 2015. operating income and profit percentage increases for 2016 resulted primarily from the increase in revenues and a more favorable balance of our cost structure relative to revenue levels for this group that improved margins on our existing work . these increases were reduced by losses associated with the start of new contract work that was won in a more competitive bidding environment that requires us to price our services more aggressively to sustain and build our revenue levels significant items affecting changes in our revenues and costs and operating expenses for 2015 included a decrease in revenue of approximately $ 15.2 million associated with a reduction in our army reserve vehicle refurbishment work , a decrease in revenue of approximately $ 9.9 million associated with a reduction in our fms program services , a decrease in revenue of approximately $ 9.3 million associated with the completion of our u.s. treasury seized assets program in march 2014 , and an increase in revenue of approximately $ 8.5 million associated with the start of our ft. benning logistics support services program . operating income and profit percentage decreases for 2015 resulted primarily from the decrease in revenues and

liquidity our internal sources of liquidity are primarily from operating activities , specifically from changes in our level of revenues and associated inventory , accounts receivable , and accounts payable , and from profitability . significant increases or decreases in revenues and inventory , accounts receivable , and accounts payable can affect our liquidity . our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases . our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform , by the timing of large materials purchases and subcontractor efforts used in our contracts , and by delays in the award of contractual coverage and funding and payments . government funding delays can cause delays in our ability to invoice for revenues earned , presenting a potential negative impact on our days sales outstanding . we also purchase property and equipment ; invest in expansion , improvement , and maintenance of our operational and administrative facilities ; and invest in the acquisition of other companies . in 2015 , our acquisitions required a significant use of cash . our external financing consists of a loan agreement with a bank group that provides for a term loan , revolving loans , and letters of credit . the termination date of the loan agreement is january 2020. this agreement was implemented in january 2015 concurrent with the aviation acquisition .

during initial startup operations we produced approximately 100,000 gallons of bio-based isobutanol for sale and future customer testing . these initial startup operations included production of initial quantities of isobutanol produced at commercial scale , completion of initial commissioning of new equipment and development of operating discipline at commercial scale . in september 2012 , as a result of a lower than planned production rate of isobutanol , we made the strategic decision to pause isobutanol production at the agri-energy facility for a period of time to focus on optimizing specific parts of our technology to further enhance isobutanol production rates . factors that contributed to this strategic decision included , among others , that producing isobutanol at startup production rates while working to improve those production rates would result in operating the agri-energy facility at significantly below break-even cash flow level and that we believed that we had generated the necessary information required from our startup operations to work on enhancing our production rates at our testing laboratory in colorado . we intend to resume isobutanol production at the agri-energy facility in support of future commercial operations once this work has been completed . based on our progress to date , we anticipate resuming isobutanol production at the agri-energy facility in 2013. through december 31 , 2012 , we have incurred capital costs of approximately $ 56.1 million on the retrofit of the agri-energy facility . the retrofit of the agri-energy facility includes a number of additional capital costs that are unique to the design of the facility , including additional equipment that we believe will allow us to switch between ethanol and isobutanol production , modifications to increase the potential production capacity of gift ® at this facility and the establishment of an enhanced yeast seed train to accelerate the adoption of improved yeast strains at the agri-energy facility and at future plants . capital expenditures at the agri-energy facility also include upfront design and engineering expenses , plant modifications identified as necessary during initial startup operations for the production of isobutanol as well as sales tax on equipment and capitalized interest . we have incurred approximately $ 21.7 million in capital expenditures associated with these additional design features and other costs . we do not anticipate installing an advanced yeast seed train at each future retrofit site . until may 2012 , when we commenced initial startup operations for the production of isobutanol at the agri-energy facility , we derived revenue from the sale of ethanol , distiller 's grains and other related products produced as part of the ethanol production process at the agri-energy facility . continued ethanol production during the retrofit process allowed us to retain local staff for the future operation of the plant , maintain the equipment and generate cash flow . however , the continued production of ethanol is not our intended business and our future return on invested capital depends on our ability to produce and market isobutanol and products derived from isobutanol , not on continued production and sales of ethanol . we believe that we will be able to transition back to the production and sale of ethanol and related products at the agri-energy facility , other than during certain periods while we are working to optimize certain parts of our isobutanol production technology , if we were to project positive cash flows from ethanol operations versus maintaining the facility at idle , including any costs related to the transition , but there is no guarantee that this will be the case . through the filing of this annual report , we have not transitioned back to ethanol production because , based on current ethanol operating conditions , we believe that we would generate greater negative cash flows compared to maintaining the agri-energy facility at idle . following the commencement of full-scale commercial production of isobutanol , we do not expect to generate significant future revenues from the sale of ethanol produced at the agri-energy facility . accordingly , the historical operating results of our subsidiary , agri-energy , and the operating results reported during the retrofit to isobutanol production may not be indicative of future operating results for agri-energy or gevo once commercial scale isobutanol production commences at this facility . 77 revenues , cost of goods sold and operating expenses revenues during the years ended december 31 , 2012 , 2011 and 2010 , we derived revenue primarily from the sale of ethanol . substantially all ethanol sold through agri-energy from the date of acquisition through december 31 , 2012 was sold to c & n , a subsidiary of mansfield oil company , pursuant to an ethanol purchase and marketing agreement . our revenue also includes the sale of distiller 's grains and other products produced as part of the ethanol production process to third parties . we also derived revenue from our grant and research and development programs . our grant , research and development program and other revenue primarily consists of the following : ( i ) revenues relating to government research grants ; ( ii ) revenues relating to cooperative agreements ; ( ii ) research services ; ( iii ) sale of inventory assets ; and ( iv ) the procurement of our products for purposes of certification and testing . cost of goods sold and gross ( loss ) margin our cost of goods sold includes costs incurred in conjunction with the initial startup operations for the production of isobutanol at the agri-energy facility and costs directly associated with our ethanol production process such as costs for direct materials , direct labor and certain plant overhead costs . direct materials consist of corn feedstock , denaturant and process chemicals . direct labor includes compensation of personnel directly involved in production operations at the agri-energy facility . plant overhead costs primarily consist of plant utilities and plant depreciation . story_separator_special_tag during 2011 , we used the “normal purchases and normal sales scope exception” guidance of u.s. gaap for our forward purchase contracts and , as a result , they were not recorded at fair value during 2011. to qualify for the normal purchases and normal sales scope exception , a contract must be appropriately designated and must provide for the purchase or sale of physical commodities in quantities that are expected to be used or sold over a reasonable period of time in the normal course of operations . prior to january 1 , 2011 and for new contracts entered into beginning january 1 , 2012 , we did not apply the “normal purchases and normal sale scope exception” to our forward purchase contracts and , as a result , we began to record forward purchase contracts at fair value . changes in fair value associated with our forward purchase contracts have been included as a component of cost of goods sold in our consolidated statements of operations . we also enter into exchange-traded futures contracts for corn as a means of managing exposure to changes in corn prices . these contracts are recorded as a derivative asset or liability on our consolidated balance sheets at fair value . changes in the fair value during a reporting period are recognized as cost of goods sold in our consolidated statements of operations . both our forward purchase and exchange-traded futures contracts are considered to be derivatives and they do not include any credit risk related contingent features . we have not entered into these derivative financial 82 instruments for trading or speculative purposes , and we have not designated any of our derivatives as hedges for financial accounting purposes . result of operations comparison of the years ended december 31 , 2012 and 2011 ( in thousands ) replace_table_token_6_th n/m—not meaningful ethanol sales and related products , net . during fiscal year 2011 , our agri-energy facility produced and shipped ethanol and related products for the full year but , during fiscal year 2012 , the facility produced and shipped ethanol and related products only during the period from january 2012 through may 2012. the decrease in ethanol sales and related products was due to our commencement of initial start-up production of isobutanol at the agri-energy facility in may 2012. grant revenue , research and development program revenue and other revenue . the increase in grant revenue primarily resulted from agreements with the usaf and the u.s. department of agriculture that generated $ 2.1 million in revenue during 2012 compared with $ 0.7 million during 2011 as these contracts were either in place for the entire 2012 period or new to 2012. we also had an increase in revenue associated with our research and development contract with coca-cola which we entered into during the fourth quarter of 2011 and had other revenue in 2012 associated with the proceeds from sales of our corn inventory during the fourth quarter of 2012 . 83 cost of goods sold . our cost of goods sold during the year ended december 31 , 2012 primarily resulted from $ 22.0 million of costs related to the production of ethanol and distiller 's grains . we also incurred $ 6.6 million of start-up costs related to isobutanol production at our agri-energy facility . during the year ended december 31 , 2011 , our cost of goods sold related primarily to the production of ethanol and distiller 's grains . research and development . research and development expense decreased approximately $ 0.3 million for the year ended december 31 , 2012 compared to the year ended december 31 , 2011. contributing to this decrease were the following : ( i ) a $ 2.0 million decrease in laboratory costs and other costs associated with the construction of a hydrocarbon demonstration facility on the south hampton resources . site during the year ended december 31 , 2011 , costs which were not repeated in 2012 ; and ( ii ) a $ 1.4 million decline in depreciation expense . these items were partially offset by an increase of $ 2.6 million in salary and compensation-related expenses , including stock-based compensation , and an increase of $ 0.5 million in travel-related expenses . these increases primarily resulted from our increased headcount and travel in support of initial startup operations for the production of isobutanol and testing activities at our agri-energy facility . selling , general and administrative . the increase in selling , general and administrative expenses during the year ended december 31 , 2012 primarily resulted from the following increases : ( i ) $ 12.0 million in legal-related expenses primarily attributable to our ongoing litigation with butamax ; ( ii ) $ 1.7 million in salary and compensation-related expenses primarily resulting from severance payments due to the departure of four of our executive vice presidents ; and ( iii ) $ 1.1 million in stock-based compensation expenses primarily due to the accelerated vesting of certain equity awards upon the departure of three of our executive vice presidents in accordance with the terms of their respective employment agreements . interest expense . interest expense increased during the year ended december 31 , 2012 primarily as a result of the following : ( i ) $ 2.0 million in accrued interest and amortization of debt discounts and issue costs associated with our offering of convertible notes completed in july 2012 ; and ( ii ) increases in cash and non-cash interest expenses primarily related to our debt with triplepoint as a result of additional borrowing for the retrofit of the agri-energy facility in october 2011 and january 2012. change in fair value of embedded derivatives . during the year ended december 31 , 2012 , we reported a $ 17.0 million gain associated with the decrease in the fair value of derivatives embedded in our convertible notes . as more fully described above under the heading “critical accounting policies and

liquidity our internal sources of liquidity are primarily from operating activities , specifically from changes in our level of revenues and associated inventory , accounts receivable , and accounts payable , and from profitability . significant increases or decreases in revenues and inventory , accounts receivable , and accounts payable can affect our liquidity . our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases . our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform , by the timing of large materials purchases and subcontractor efforts used in our contracts , and by delays in the award of contractual coverage and funding and payments . government funding delays can cause delays in our ability to invoice for revenues earned , presenting a potential negative impact on our days sales outstanding . we also purchase property and equipment ; invest in expansion , improvement , and maintenance of our operational and administrative facilities ; and invest in the acquisition of other companies . in 2015 , our acquisitions required a significant use of cash . our external financing consists of a loan agreement with a bank group that provides for a term loan , revolving loans , and letters of credit . the termination date of the loan agreement is january 2020. this agreement was implemented in january 2015 concurrent with the aviation acquisition .

during initial startup operations we produced approximately 100,000 gallons of bio-based isobutanol for sale and future customer testing . these initial startup operations included production of initial quantities of isobutanol produced at commercial scale , completion of initial commissioning of new equipment and development of operating discipline at commercial scale . in september 2012 , as a result of a lower than planned production rate of isobutanol , we made the strategic decision to pause isobutanol production at the agri-energy facility for a period of time to focus on optimizing specific parts of our technology to further enhance isobutanol production rates . factors that contributed to this strategic decision included , among others , that producing isobutanol at startup production rates while working to improve those production rates would result in operating the agri-energy facility at significantly below break-even cash flow level and that we believed that we had generated the necessary information required from our startup operations to work on enhancing our production rates at our testing laboratory in colorado . we intend to resume isobutanol production at the agri-energy facility in support of future commercial operations once this work has been completed . based on our progress to date , we anticipate resuming isobutanol production at the agri-energy facility in 2013. through december 31 , 2012 , we have incurred capital costs of approximately $ 56.1 million on the retrofit of the agri-energy facility . the retrofit of the agri-energy facility includes a number of additional capital costs that are unique to the design of the facility , including additional equipment that we believe will allow us to switch between ethanol and isobutanol production , modifications to increase the potential production capacity of gift ® at this facility and the establishment of an enhanced yeast seed train to accelerate the adoption of improved yeast strains at the agri-energy facility and at future plants . capital expenditures at the agri-energy facility also include upfront design and engineering expenses , plant modifications identified as necessary during initial startup operations for the production of isobutanol as well as sales tax on equipment and capitalized interest . we have incurred approximately $ 21.7 million in capital expenditures associated with these additional design features and other costs . we do not anticipate installing an advanced yeast seed train at each future retrofit site . until may 2012 , when we commenced initial startup operations for the production of isobutanol at the agri-energy facility , we derived revenue from the sale of ethanol , distiller 's grains and other related products produced as part of the ethanol production process at the agri-energy facility . continued ethanol production during the retrofit process allowed us to retain local staff for the future operation of the plant , maintain the equipment and generate cash flow . however , the continued production of ethanol is not our intended business and our future return on invested capital depends on our ability to produce and market isobutanol and products derived from isobutanol , not on continued production and sales of ethanol . we believe that we will be able to transition back to the production and sale of ethanol and related products at the agri-energy facility , other than during certain periods while we are working to optimize certain parts of our isobutanol production technology , if we were to project positive cash flows from ethanol operations versus maintaining the facility at idle , including any costs related to the transition , but there is no guarantee that this will be the case . through the filing of this annual report , we have not transitioned back to ethanol production because , based on current ethanol operating conditions , we believe that we would generate greater negative cash flows compared to maintaining the agri-energy facility at idle . following the commencement of full-scale commercial production of isobutanol , we do not expect to generate significant future revenues from the sale of ethanol produced at the agri-energy facility . accordingly , the historical operating results of our subsidiary , agri-energy , and the operating results reported during the retrofit to isobutanol production may not be indicative of future operating results for agri-energy or gevo once commercial scale isobutanol production commences at this facility . 77 revenues , cost of goods sold and operating expenses revenues during the years ended december 31 , 2012 , 2011 and 2010 , we derived revenue primarily from the sale of ethanol . substantially all ethanol sold through agri-energy from the date of acquisition through december 31 , 2012 was sold to c & n , a subsidiary of mansfield oil company , pursuant to an ethanol purchase and marketing agreement . our revenue also includes the sale of distiller 's grains and other products produced as part of the ethanol production process to third parties . we also derived revenue from our grant and research and development programs . our grant , research and development program and other revenue primarily consists of the following : ( i ) revenues relating to government research grants ; ( ii ) revenues relating to cooperative agreements ; ( ii ) research services ; ( iii ) sale of inventory assets ; and ( iv ) the procurement of our products for purposes of certification and testing . cost of goods sold and gross ( loss ) margin our cost of goods sold includes costs incurred in conjunction with the initial startup operations for the production of isobutanol at the agri-energy facility and costs directly associated with our ethanol production process such as costs for direct materials , direct labor and certain plant overhead costs . direct materials consist of corn feedstock , denaturant and process chemicals . direct labor includes compensation of personnel directly involved in production operations at the agri-energy facility . plant overhead costs primarily consist of plant utilities and plant depreciation . story_separator_special_tag during 2011 , we used the “normal purchases and normal sales scope exception” guidance of u.s. gaap for our forward purchase contracts and , as a result , they were not recorded at fair value during 2011. to qualify for the normal purchases and normal sales scope exception , a contract must be appropriately designated and must provide for the purchase or sale of physical commodities in quantities that are expected to be used or sold over a reasonable period of time in the normal course of operations . prior to january 1 , 2011 and for new contracts entered into beginning january 1 , 2012 , we did not apply the “normal purchases and normal sale scope exception” to our forward purchase contracts and , as a result , we began to record forward purchase contracts at fair value . changes in fair value associated with our forward purchase contracts have been included as a component of cost of goods sold in our consolidated statements of operations . we also enter into exchange-traded futures contracts for corn as a means of managing exposure to changes in corn prices . these contracts are recorded as a derivative asset or liability on our consolidated balance sheets at fair value . changes in the fair value during a reporting period are recognized as cost of goods sold in our consolidated statements of operations . both our forward purchase and exchange-traded futures contracts are considered to be derivatives and they do not include any credit risk related contingent features . we have not entered into these derivative financial 82 instruments for trading or speculative purposes , and we have not designated any of our derivatives as hedges for financial accounting purposes . result of operations comparison of the years ended december 31 , 2012 and 2011 ( in thousands ) replace_table_token_6_th n/m—not meaningful ethanol sales and related products , net . during fiscal year 2011 , our agri-energy facility produced and shipped ethanol and related products for the full year but , during fiscal year 2012 , the facility produced and shipped ethanol and related products only during the period from january 2012 through may 2012. the decrease in ethanol sales and related products was due to our commencement of initial start-up production of isobutanol at the agri-energy facility in may 2012. grant revenue , research and development program revenue and other revenue . the increase in grant revenue primarily resulted from agreements with the usaf and the u.s. department of agriculture that generated $ 2.1 million in revenue during 2012 compared with $ 0.7 million during 2011 as these contracts were either in place for the entire 2012 period or new to 2012. we also had an increase in revenue associated with our research and development contract with coca-cola which we entered into during the fourth quarter of 2011 and had other revenue in 2012 associated with the proceeds from sales of our corn inventory during the fourth quarter of 2012 . 83 cost of goods sold . our cost of goods sold during the year ended december 31 , 2012 primarily resulted from $ 22.0 million of costs related to the production of ethanol and distiller 's grains . we also incurred $ 6.6 million of start-up costs related to isobutanol production at our agri-energy facility . during the year ended december 31 , 2011 , our cost of goods sold related primarily to the production of ethanol and distiller 's grains . research and development . research and development expense decreased approximately $ 0.3 million for the year ended december 31 , 2012 compared to the year ended december 31 , 2011. contributing to this decrease were the following : ( i ) a $ 2.0 million decrease in laboratory costs and other costs associated with the construction of a hydrocarbon demonstration facility on the south hampton resources . site during the year ended december 31 , 2011 , costs which were not repeated in 2012 ; and ( ii ) a $ 1.4 million decline in depreciation expense . these items were partially offset by an increase of $ 2.6 million in salary and compensation-related expenses , including stock-based compensation , and an increase of $ 0.5 million in travel-related expenses . these increases primarily resulted from our increased headcount and travel in support of initial startup operations for the production of isobutanol and testing activities at our agri-energy facility . selling , general and administrative . the increase in selling , general and administrative expenses during the year ended december 31 , 2012 primarily resulted from the following increases : ( i ) $ 12.0 million in legal-related expenses primarily attributable to our ongoing litigation with butamax ; ( ii ) $ 1.7 million in salary and compensation-related expenses primarily resulting from severance payments due to the departure of four of our executive vice presidents ; and ( iii ) $ 1.1 million in stock-based compensation expenses primarily due to the accelerated vesting of certain equity awards upon the departure of three of our executive vice presidents in accordance with the terms of their respective employment agreements . interest expense . interest expense increased during the year ended december 31 , 2012 primarily as a result of the following : ( i ) $ 2.0 million in accrued interest and amortization of debt discounts and issue costs associated with our offering of convertible notes completed in july 2012 ; and ( ii ) increases in cash and non-cash interest expenses primarily related to our debt with triplepoint as a result of additional borrowing for the retrofit of the agri-energy facility in october 2011 and january 2012. change in fair value of embedded derivatives . during the year ended december 31 , 2012 , we reported a $ 17.0 million gain associated with the decrease in the fair value of derivatives embedded in our convertible notes . as more fully described above under the heading “critical accounting policies and

liquidity and capital resources from inception to december 31 , 2012 , we have funded our operations primarily through equity offerings , issuances of debt , borrowings under our secured debt financing arrangements and revenues earned primarily from the sale of ethanol and related products . our cash and cash equivalents at december 31 , 2012 totaled $ 66.7 million which is primarily being used for the following : ( 1 ) operating activities at our agri-energy facility ; ( 2 ) operating activities at our corporate headquarters in colorado , including research and development work ; ( 3 ) capital improvements primarily associated with our agri-energy facility ; ( 4 ) litigation defense costs associated with the ongoing litigation with butamax ; and ( 5 ) repayment of debt obligations . based on our current plans , we anticipate capital expenditures necessary to complete the retrofit of the agri-energy facility will be significantly lower than the capital expenditures of $ 49.5 million incurred in fiscal year 2012 for this project . we believe that actions taken during 2012 to reduce ongoing litigation expenses and other operating expenses will reduce 2013 operating expenses from fiscal year 2012 levels . we also have the ability to further limit some cash spend associated with the foregoing activities , including limiting the usage of cash associated with research and development activities or delaying the timing of capital improvements , based on then-current facts and circumstances . notwithstanding our ability to further reduce our monthly cash usage , based on our current level of operations and anticipated growth , we believe that our existing cash and cash equivalents on hand at december 31 , 2012 , will provide sufficient funds for ongoing operations , planned capital expenditures and working capital requirements for at least the next 12 months .

we are also commercializing the unyvero lrt bal test for testing bronchoalveolar lavage , or bal , specimens from patients with lower respiratory tract infections following fda clearance received by curetis in december 2019. the unyvero lrt bal automated test simultaneously detects 20 pathogens and 10 antibiotic resistance markers , and it is the first and only fda-cleared panel that now also includes pneumocystis jirovecii , a key fungal pathogen often found in immunocompromised patients that can be difficult to diagnose as the 20 th pathogen on the panel . we believe the unyvero lrt and lrt bal tests have the ability to help address a significant , previously unmet medical need that causes over $ 10 billion in annual costs for the u.s. healthcare system , according to the centers for disease control , or cdc . · the unyvero urinary tract infection , or uti , test which is ce-ivd marked in europe is currently being made available to laboratories in the u.s. as a research use only or ruo kit . the test detects a broad range of pathogens as well as antimicrobial resistance markers directly from native urine specimens . as part of our portfolio strategy update on october 13 , 2020 , we have decided to proceed with the analytical and clinical performance evaluation including clinical trials required for a subsequent u.s. fda submission . · the unyvero invasive joint infection , or iji , test , which is a variant developed for the u.s. market based on the ce-ivd-marked european unyvero iti test , has also been selected for analytical and clinical performance evaluation including clinical trials towards a future u.s. fda submission . microbial diagnosis of iji is difficult because of challenges in sample collection , usually at surgery , and patients being on prior antibiotic therapy which minimizes the chances of recovering viable bacteria . we believe that unyvero iji could be useful in identifying pathogens as well as their amr markers to help guide optimal antibiotic treatment for these patients . 55 · the acuitas amr gene panel ( isolates ) is currently pending final fda review and a potential clearance decision . the fda recently notified us that the agency plans to continue prioritizing emergency use authorization requests for diagnostic products intended to address the covid-19 pandemic for at least the remainder of the year , which will impact the statutory review periods for submissions , including the potential clearance decision on our acuitas amr gene panel ( isolates ) submission . despite the fda having informed us of their resumed review at the end of january 2021 of the responses filed by opgen to the ai letters , the fda still does not commit to any mdufa timelines . once fda cleared , we expect to commercialize the acuitas amr gene panel for isolates more broadly to customers in the u.s. the acuitas amr gene panel ( urine ) test has been discontinued as part of the october 13 , 2020 portfolio and pipeline strategy review . · we are also developing novel bioinformatics tools and solutions to accompany or augment our current and potential future ivd products and may seek regulatory clearance for such bioinformatics tools and solutions to the extent they would be required either as part of our portfolio of ivd products or even as a standalone bioinformatics product . opgen has extensive offerings of additional in vitro diagnostic tests including ce-ivd-marked unyvero tests for hospitalized pneumonia patients , implant and tissue infections , intra-abdominal infections , complicated urinary tract infections , and blood stream infections . our portfolio furthermore includes a ce-ivd-marked pcr based rapid test kit for sars cov-2 detection in combination with our pcr compatible universal lysis buffer ( pulb ) which we also market as a stand-alone ruo reagent . opgen 's combined amr bioinformatics offerings , once such products are cleared for marketing , if ever , will offer important new tools to clinicians treating patients with amr infections . we have collaborated with merck , inc. to establish the acuitas lighthouse knowledgebase , which is currently commercially available in the united states for ruo . the acuitas lighthouse knowledgebase includes approximately 15,000 bacterial isolates from the merck smart surveillance network of 192 hospitals in 52 countries and other sources . ares genetics ' aresdb is a comprehensive database of genetic and phenotypic information . aresdb was originally designed based on the siemens microbiology strain collection covering resistant pathogens and its development has significantly expanded , also by transferring data from the acuitas lighthouse® into aresdb to now cover approximately 55,000 bacterial isolates that have been sequenced using ngs technology and tested for susceptibility with applicable antibiotics from a range of over 100 antimicrobial drugs . in september 2019 , ares genetics signed a technology evaluation agreement with an undisclosed global ivd corporation . in the collaboration , ares genetics further enriched aresdb with a focus on certain pathogens relevant in a first , undisclosed infectious disease indication . following the successful completion of this collaborative r & d project , the ivd partner exercised their option for a 90-day period of exclusive negotiations with ares genetics for a potential exclusive license to aresdb in the field of human clinical diagnostics . following the lapse of such 90-day period without any commercial deal being signed , ares genetics is now in multiple , nonexclusive parallel discussions with several interested parties and such discussions are ongoing . in addition to potential future licensing and partnering , opgen 's subsidiary ares genetics intends to independently utilize the proprietary biomarker content in these databases , as well as to build an independent business in ngs and ai based offerings for amr research and diagnostics in collaboration with its current and potential future partners in the life science , pharmaceutical and diagnostics industries . story_separator_special_tag critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer/distributions relationships , developed technology , and in-process research & development discount rates , and terminal values . our estimate of fair value is based upon assumptions believed to be reasonable , but actual results may differ from estimates . we determine the fair value of assumed debt using a discounted cash flow analysis using interest rates for debt with similar terms and maturities . differences between the fair value and the stated value is recorded as a discount or premium and amortized over the remaining term using the effective interest method . we utilize a monte carlo simulation method to determine the fair value of conversion notes , which utilizes inputs including the common stock price , volatility of common stock , the risk-free interest rate and the probability of conversion to common shares at the conversion rate . other estimates associated with the accounting for the acquisition may change as additional information becomes available regarding the assets acquired and liabilities assumed , as more fully discussed in note 4 – business combination of the notes to the consolidated financial statements ( part ii , item 8 of this form 10-k ) . 61 revenue recognition the company derives revenues from ( i ) the sale of quickfish and pna fish diagnostic test products , unyvero application cartridges , unyvero systems , sars cov-2 tests , acuitas amr gene panel ruo test products , ( ii ) providing laboratory services , and ( iii ) providing collaboration services including funded software arrangements , and license arrangements . the company analyzes contracts to determine the appropriate revenue recognition using the following steps : ( i ) identification of contracts with customers , ( ii ) identification of distinct performance obligations in the contract , ( iii ) determination of contract transaction price , ( iv ) allocation of contract transaction price to the performance obligations and ( v ) determination of revenue recognition based on timing of satisfaction of the performance obligation . the company recognizes revenues upon the satisfaction of its performance obligation ( upon transfer of control of promised goods or services to our customers ) in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services . the company defers incremental costs of obtaining a customer contract and amortizes the deferred costs over the period that the goods and services are transferred to the customer . the company had no material incremental costs to obtain customer contracts in any period presented . deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of services being provided . impairment of long-lived assets property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset . recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets . if such assets are considered to be impaired , impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets . definite-lived intangible assets include trademarks , developed technology , software and customer relationships . if any indicators were present , the company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset . if those net undiscounted cash flows do not exceed the carrying amount ( i.e . , the asset is not recoverable ) , the company would perform the next step , which is to determine the fair value of the asset and record an impairment loss , if any . acquired in-process research & development represents the fair value assigned to those research and development projects that were acquired in a business combination for which the related products have not received regulatory approval and have no alternative future use . ipr & d is capitalized at its fair value as an indefinite-lived intangible asset , and any development costs incurred after the acquisition are expensed as incurred . upon achieving regulatory approval or commercial viability for the related product , the indefinite-lived intangible asset is accounted for as a finite-lived asset and is amortized on a straight-line basis over the estimated useful life . if the project is not completed or is terminated or abandoned , the company may have an impairment related to the ipr & d which is charged to expense . indefinite-lived intangible assets are tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may be impaired . impairment is calculated as the excess of the asset 's carrying value over its fair value . goodwill represents the excess of the purchase price paid when the company acquired advandx , inc. in july 2015 and curetis in april 2020 , over the fair values of the acquired tangible or intangible assets and assumed liabilities . the company will conduct an impairment test of goodwill on an annual basis as of december 31 of each year and will also conduct tests if events occur or circumstances change that would , more likely than not , reduce the company 's fair value below its net equity value . share-based compensation share-based payments to employees , directors and consultants are recognized at fair value . the resulting fair value is recognized ratably over the requisite service period , which is generally the vesting period of the option . the estimated fair value of equity instruments issued to nonemployees is recorded at fair value on

liquidity and capital resources from inception to december 31 , 2012 , we have funded our operations primarily through equity offerings , issuances of debt , borrowings under our secured debt financing arrangements and revenues earned primarily from the sale of ethanol and related products . our cash and cash equivalents at december 31 , 2012 totaled $ 66.7 million which is primarily being used for the following : ( 1 ) operating activities at our agri-energy facility ; ( 2 ) operating activities at our corporate headquarters in colorado , including research and development work ; ( 3 ) capital improvements primarily associated with our agri-energy facility ; ( 4 ) litigation defense costs associated with the ongoing litigation with butamax ; and ( 5 ) repayment of debt obligations . based on our current plans , we anticipate capital expenditures necessary to complete the retrofit of the agri-energy facility will be significantly lower than the capital expenditures of $ 49.5 million incurred in fiscal year 2012 for this project . we believe that actions taken during 2012 to reduce ongoing litigation expenses and other operating expenses will reduce 2013 operating expenses from fiscal year 2012 levels . we also have the ability to further limit some cash spend associated with the foregoing activities , including limiting the usage of cash associated with research and development activities or delaying the timing of capital improvements , based on then-current facts and circumstances . notwithstanding our ability to further reduce our monthly cash usage , based on our current level of operations and anticipated growth , we believe that our existing cash and cash equivalents on hand at december 31 , 2012 , will provide sufficient funds for ongoing operations , planned capital expenditures and working capital requirements for at least the next 12 months .

we are also commercializing the unyvero lrt bal test for testing bronchoalveolar lavage , or bal , specimens from patients with lower respiratory tract infections following fda clearance received by curetis in december 2019. the unyvero lrt bal automated test simultaneously detects 20 pathogens and 10 antibiotic resistance markers , and it is the first and only fda-cleared panel that now also includes pneumocystis jirovecii , a key fungal pathogen often found in immunocompromised patients that can be difficult to diagnose as the 20 th pathogen on the panel . we believe the unyvero lrt and lrt bal tests have the ability to help address a significant , previously unmet medical need that causes over $ 10 billion in annual costs for the u.s. healthcare system , according to the centers for disease control , or cdc . · the unyvero urinary tract infection , or uti , test which is ce-ivd marked in europe is currently being made available to laboratories in the u.s. as a research use only or ruo kit . the test detects a broad range of pathogens as well as antimicrobial resistance markers directly from native urine specimens . as part of our portfolio strategy update on october 13 , 2020 , we have decided to proceed with the analytical and clinical performance evaluation including clinical trials required for a subsequent u.s. fda submission . · the unyvero invasive joint infection , or iji , test , which is a variant developed for the u.s. market based on the ce-ivd-marked european unyvero iti test , has also been selected for analytical and clinical performance evaluation including clinical trials towards a future u.s. fda submission . microbial diagnosis of iji is difficult because of challenges in sample collection , usually at surgery , and patients being on prior antibiotic therapy which minimizes the chances of recovering viable bacteria . we believe that unyvero iji could be useful in identifying pathogens as well as their amr markers to help guide optimal antibiotic treatment for these patients . 55 · the acuitas amr gene panel ( isolates ) is currently pending final fda review and a potential clearance decision . the fda recently notified us that the agency plans to continue prioritizing emergency use authorization requests for diagnostic products intended to address the covid-19 pandemic for at least the remainder of the year , which will impact the statutory review periods for submissions , including the potential clearance decision on our acuitas amr gene panel ( isolates ) submission . despite the fda having informed us of their resumed review at the end of january 2021 of the responses filed by opgen to the ai letters , the fda still does not commit to any mdufa timelines . once fda cleared , we expect to commercialize the acuitas amr gene panel for isolates more broadly to customers in the u.s. the acuitas amr gene panel ( urine ) test has been discontinued as part of the october 13 , 2020 portfolio and pipeline strategy review . · we are also developing novel bioinformatics tools and solutions to accompany or augment our current and potential future ivd products and may seek regulatory clearance for such bioinformatics tools and solutions to the extent they would be required either as part of our portfolio of ivd products or even as a standalone bioinformatics product . opgen has extensive offerings of additional in vitro diagnostic tests including ce-ivd-marked unyvero tests for hospitalized pneumonia patients , implant and tissue infections , intra-abdominal infections , complicated urinary tract infections , and blood stream infections . our portfolio furthermore includes a ce-ivd-marked pcr based rapid test kit for sars cov-2 detection in combination with our pcr compatible universal lysis buffer ( pulb ) which we also market as a stand-alone ruo reagent . opgen 's combined amr bioinformatics offerings , once such products are cleared for marketing , if ever , will offer important new tools to clinicians treating patients with amr infections . we have collaborated with merck , inc. to establish the acuitas lighthouse knowledgebase , which is currently commercially available in the united states for ruo . the acuitas lighthouse knowledgebase includes approximately 15,000 bacterial isolates from the merck smart surveillance network of 192 hospitals in 52 countries and other sources . ares genetics ' aresdb is a comprehensive database of genetic and phenotypic information . aresdb was originally designed based on the siemens microbiology strain collection covering resistant pathogens and its development has significantly expanded , also by transferring data from the acuitas lighthouse® into aresdb to now cover approximately 55,000 bacterial isolates that have been sequenced using ngs technology and tested for susceptibility with applicable antibiotics from a range of over 100 antimicrobial drugs . in september 2019 , ares genetics signed a technology evaluation agreement with an undisclosed global ivd corporation . in the collaboration , ares genetics further enriched aresdb with a focus on certain pathogens relevant in a first , undisclosed infectious disease indication . following the successful completion of this collaborative r & d project , the ivd partner exercised their option for a 90-day period of exclusive negotiations with ares genetics for a potential exclusive license to aresdb in the field of human clinical diagnostics . following the lapse of such 90-day period without any commercial deal being signed , ares genetics is now in multiple , nonexclusive parallel discussions with several interested parties and such discussions are ongoing . in addition to potential future licensing and partnering , opgen 's subsidiary ares genetics intends to independently utilize the proprietary biomarker content in these databases , as well as to build an independent business in ngs and ai based offerings for amr research and diagnostics in collaboration with its current and potential future partners in the life science , pharmaceutical and diagnostics industries . story_separator_special_tag critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer/distributions relationships , developed technology , and in-process research & development discount rates , and terminal values . our estimate of fair value is based upon assumptions believed to be reasonable , but actual results may differ from estimates . we determine the fair value of assumed debt using a discounted cash flow analysis using interest rates for debt with similar terms and maturities . differences between the fair value and the stated value is recorded as a discount or premium and amortized over the remaining term using the effective interest method . we utilize a monte carlo simulation method to determine the fair value of conversion notes , which utilizes inputs including the common stock price , volatility of common stock , the risk-free interest rate and the probability of conversion to common shares at the conversion rate . other estimates associated with the accounting for the acquisition may change as additional information becomes available regarding the assets acquired and liabilities assumed , as more fully discussed in note 4 – business combination of the notes to the consolidated financial statements ( part ii , item 8 of this form 10-k ) . 61 revenue recognition the company derives revenues from ( i ) the sale of quickfish and pna fish diagnostic test products , unyvero application cartridges , unyvero systems , sars cov-2 tests , acuitas amr gene panel ruo test products , ( ii ) providing laboratory services , and ( iii ) providing collaboration services including funded software arrangements , and license arrangements . the company analyzes contracts to determine the appropriate revenue recognition using the following steps : ( i ) identification of contracts with customers , ( ii ) identification of distinct performance obligations in the contract , ( iii ) determination of contract transaction price , ( iv ) allocation of contract transaction price to the performance obligations and ( v ) determination of revenue recognition based on timing of satisfaction of the performance obligation . the company recognizes revenues upon the satisfaction of its performance obligation ( upon transfer of control of promised goods or services to our customers ) in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services . the company defers incremental costs of obtaining a customer contract and amortizes the deferred costs over the period that the goods and services are transferred to the customer . the company had no material incremental costs to obtain customer contracts in any period presented . deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of services being provided . impairment of long-lived assets property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset . recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets . if such assets are considered to be impaired , impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets . definite-lived intangible assets include trademarks , developed technology , software and customer relationships . if any indicators were present , the company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset . if those net undiscounted cash flows do not exceed the carrying amount ( i.e . , the asset is not recoverable ) , the company would perform the next step , which is to determine the fair value of the asset and record an impairment loss , if any . acquired in-process research & development represents the fair value assigned to those research and development projects that were acquired in a business combination for which the related products have not received regulatory approval and have no alternative future use . ipr & d is capitalized at its fair value as an indefinite-lived intangible asset , and any development costs incurred after the acquisition are expensed as incurred . upon achieving regulatory approval or commercial viability for the related product , the indefinite-lived intangible asset is accounted for as a finite-lived asset and is amortized on a straight-line basis over the estimated useful life . if the project is not completed or is terminated or abandoned , the company may have an impairment related to the ipr & d which is charged to expense . indefinite-lived intangible assets are tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may be impaired . impairment is calculated as the excess of the asset 's carrying value over its fair value . goodwill represents the excess of the purchase price paid when the company acquired advandx , inc. in july 2015 and curetis in april 2020 , over the fair values of the acquired tangible or intangible assets and assumed liabilities . the company will conduct an impairment test of goodwill on an annual basis as of december 31 of each year and will also conduct tests if events occur or circumstances change that would , more likely than not , reduce the company 's fair value below its net equity value . share-based compensation share-based payments to employees , directors and consultants are recognized at fair value . the resulting fair value is recognized ratably over the requisite service period , which is generally the vesting period of the option . the estimated fair value of equity instruments issued to nonemployees is recorded at fair value on

liquidity and capital resources at december 31 , 2020 , the company had cash and cash equivalents of $ 13.4 million , compared to $ 2.7 million at december 31 , 2019. the company has funded its operations primarily through external investor financing arrangements and has raised significant funds in 2020 and 2019 , including : on november 25 , 2020 , the company closed the 2020 pipe of 2,245,400 shares of common stock together with 2,597,215 pre-funded warrants . the 2020 pipe raised aggregate net proceeds of $ 9.3 million , and gross proceeds of $ 10.0 million . on february 11 , 2020 , we entered into the 2020 atm agreement , pursuant to which we may offer and sell from time to time at our option , up to an aggregate of $ 22.1 million of shares of our common stock through the sales agents . during the year ended december 31 , 2020 , the company sold 7,521,610 shares of its common stock under the 2020 atm offering resulting in aggregate net proceeds of approximately $ 15.8 million , and gross proceeds of $ 16.7 million . 59 during the year ended december 31 , 2020 , approximately 4.3 million common warrants issued in the company 's october 2019 public offering were exercised raising net proceeds of approximately $ 8.7 million . on october 28 , 2019 , the company closed the october 2019 public offering of 2,590,170 units at $ 2.00 per unit and 2,109,830 pre-funded units at $ 1.99 per pre-funded unit .

sec , the public company accounting oversight board , or pcaob , the financial accounting standards board or other accounting standards setting bodies ; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers ; the willingness of users to substitute competitors ' products and services for our products and services ; the effect of acquisitions we may make , including , without limitation , the failure to achieve the expected revenue growth and or expense savings from such acquisitions ; changes in the level of our nonperforming assets and charge-offs ; our involvement , from time to time , in legal proceedings and examination and remedial actions by regulators ; potential exposure to fraud , negligence , computer theft and cyber-crime . the foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this form 10-k , including those discussed in the section entitled `` risk factors `` in item 1a above . if one or more of the factors affecting our forward-looking information and statements proves incorrect , then our actual results , performance or achievements could differ materially from those expressed in , or implied by , forward-looking information and statements contained in this form 10-k. therefore , we caution you not to place undue reliance on our forward-looking information and statements . we will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements . new risks and uncertainties may emerge from time to time , and it is not possible for us to predict their occurrence or how they will affect us . 47 overview we are a bank holding company headquartered in fairfax county , virginia . our sole subsidiary , fvcbank , was formed in november 2007 as a community-oriented , locally-owned and managed commercial bank under the laws of the commonwealth of virginia . the bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers . our commercial relationship officers focus on attracting small and medium sized businesses , commercial real estate developers and builders , including government contractors , non-profit organizations , and professionals . our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals . on october 12 , 2018 , we announced the completion of our acquisition of colombo , pursuant to a previously announced definitive merger agreement . colombo , which was headquartered in rockville , maryland , merged into fvcbank effective october 12 , 2018 adding five banking locations in washington , d.c. , and montgomery county and the city of baltimore in maryland . pursuant to the terms of the merger agreement , based on the average closing price of the company 's common stock during the five trading day period ended on october 10 , 2018 , the second trading day prior to closing , of $ 19.614 ( the `` average closing price `` ) holders of shares of colombo common stock received 0.002217 shares of the company 's common stock and $ 0.053157 in cash for each share of colombo common stock held immediately prior to the effective date of the merger , plus cash in lieu of fractional shares at a rate equal to the average closing price , and subject to the right of holders of colombo common stock who owned fewer than 45,086 shares of colombo common stock after aggregation of all shares held in the same name , and who made a timely election , to receive only cash in an amount equal to $ 0.096649 per share of colombo common stock . as a result of the merger , 763,051 shares of the company 's common stock were issued in exchange for outstanding shares of colombo common stock . net interest income is our primary source of revenue . we define revenue as net interest income plus noninterest income . as discussed further in `` quantitative and qualitative disclosures about market risk `` below , we manage our balance sheet and interest rate risk exposure to maximize , and concurrently stabilize , net interest income . we do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities . we attempt to minimize our exposure to interest rate risk , but are unable to eliminate it entirely . in addition to managing interest rate risk , we also analyze our loan portfolio for exposure to credit risk . loan defaults and foreclosures are inherent risks in the banking industry , and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit . in addition to net interest income , noninterest income is a complementary source of revenue for us and includes , among other things , service charges on deposits and loans , merchant services fee income , insurance commission income , income from bank owned life insurance , or boli , and gains and losses on sales of investment securities available-for-sale . critical accounting policies general the accounting principles we apply under gaap are complex and require management to apply significant judgment to various accounting , reporting and disclosure matters . management must use assumptions , judgments and estimates when applying these principles where precise measurements are not possible or practical . these policies are critical because they are highly dependent upon subjective or complex judgments , assumptions and estimates . changes in such judgments , assumptions and estimates may have a significant impact on the consolidated financial statements . actual results , in fact , could differ from initial estimates . story_separator_special_tag net interest income/margin the following table presents average balance sheet information , interest income , interest expense and the corresponding average yields earned and rates paid for the years ended december 31 , 2019 , 2018 , and 2017 . 53 average balance sheets and interest rates on interest-earning assets and interest-bearing liabilities years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) replace_table_token_5_th ( 1 ) non-accrual loans are included in average balances and do not have a material effect on the average yield . interest income on non-accruing loans was not material for the years presented . ( 2 ) the average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 22.5 % for 2019 , 21 % for 2018 , and 34.5 % for 2017. the level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities , as well as changes in interest rates . see `` quantitative and qualitative disclosures about market risk `` below for further information . the following table shows the effect that these 54 factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities . rate and volume analysis years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) replace_table_token_6_th ( 1 ) non-accrual loans are included in average balances and do not have a material effect on the average yield . interest income on non-accruing loans was not material for the years presented . ( 2 ) the average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 22.5 % for 2019 , 21 % for 2018 and 34.5 % for 2017 . ( 3 ) changes attributable to rate/volume have been allocated to volume . net interest income for the year ended december 31 , 2019 was $ 48.1 million on a fully taxable-equivalent basis , compared to $ 39.8 million for the year ended december 31 , 2018 , an increase of $ 8.2 million , or 20.7 % . the increase in net interest income was primarily a result of an increase in the volume of interest-earning assets related to organic growth during 2019 compared to 2018 , in addition to the earning assets acquired from colombo . the yield on interest-earning assets increased 25 basis points to 4.83 % for the year ended december 31 , 2019 , compared to 4.58 % for the same period of 2018 , a result of the increased rate environment during the first six months of 2019. offsetting this 55 increase in yields on earning assets was a 41 basis point increase in the cost of interest-bearing liabilities , reflecting the increased rates on interest-bearing deposits prior to three rate cuts during the last half of 2019. our net interest margin , on a tax equivalent basis , for the years ended december 31 , 2019 and 2018 was 3.48 % and 3.51 % , respectively . the decrease in our net interest margin was primarily a result of an increase in rates on our interest-bearing liabilities during 2019 as compared to 2018. net interest income , on a tax equivalent basis , is a financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes . to derive our net interest margin on a tax equivalent basis , net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense . for purposes of this calculation , we use our federal and state statutory tax rates for the periods presented . this measure ensures comparability of net interest income arising from taxable and tax-exempt sources . the following table provides a reconciliation of our gaap net interest income to our tax equivalent net interest income . supplemental financial data and reconciliations to gaap financial measures years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) replace_table_token_7_th average interest-earning assets increased by 21.8 % to $ 1.38 billion at december 31 , 2019 compared to $ 1.13 billion at december 31 , 2018 , which resulted in an increase in total interest income on a tax equivalent basis of $ 14.8 million , to $ 66.8 million for the year ended december 31 , 2019 compared to $ 51.9 million for the year ended december 31 , 2018. the increase in our earning assets was primarily driven by an increase in average volume of loans receivable of $ 233.8 million , which contributed to an additional $ 11.6 million in interest income . this increase in interest income was enhanced by an increase in yields earned on the loan portfolio which increased interest income $ 2.4 million . average balances of nonperforming loans , which consist of nonaccrual loans , are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2019 and 2018 . 56 total average interest-bearing deposits increased $ 169.4 million to $ 952.9 million at december 31 , 2019 compared to $ 783.5 million at december 31 , 2018. average noninterest-bearing deposits increased $ 47.4 million to $ 270.4 million at december 31 , 2019 compared to $ 223.0 million at december 31 , 2018. the largest increase in average interest-bearing deposit balances was in our interest checking accounts , which increased $ 127.4 million compared to 2018. average time deposits increased $ 51.2 to $ 316.2 million as of december 31 , 2019 compared to $ 265.0 million at december 31 , 2018. average wholesale deposits decreased $ 2.8 million to $ 74.7 million as of december 31 , 2019 compared to $ 77.5 million as of december 31 , 2018. this change in the mix of our interest-bearing liabilities , in addition to the

liquidity and capital resources at december 31 , 2020 , the company had cash and cash equivalents of $ 13.4 million , compared to $ 2.7 million at december 31 , 2019. the company has funded its operations primarily through external investor financing arrangements and has raised significant funds in 2020 and 2019 , including : on november 25 , 2020 , the company closed the 2020 pipe of 2,245,400 shares of common stock together with 2,597,215 pre-funded warrants . the 2020 pipe raised aggregate net proceeds of $ 9.3 million , and gross proceeds of $ 10.0 million . on february 11 , 2020 , we entered into the 2020 atm agreement , pursuant to which we may offer and sell from time to time at our option , up to an aggregate of $ 22.1 million of shares of our common stock through the sales agents . during the year ended december 31 , 2020 , the company sold 7,521,610 shares of its common stock under the 2020 atm offering resulting in aggregate net proceeds of approximately $ 15.8 million , and gross proceeds of $ 16.7 million . 59 during the year ended december 31 , 2020 , approximately 4.3 million common warrants issued in the company 's october 2019 public offering were exercised raising net proceeds of approximately $ 8.7 million . on october 28 , 2019 , the company closed the october 2019 public offering of 2,590,170 units at $ 2.00 per unit and 2,109,830 pre-funded units at $ 1.99 per pre-funded unit .

sec , the public company accounting oversight board , or pcaob , the financial accounting standards board or other accounting standards setting bodies ; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers ; the willingness of users to substitute competitors ' products and services for our products and services ; the effect of acquisitions we may make , including , without limitation , the failure to achieve the expected revenue growth and or expense savings from such acquisitions ; changes in the level of our nonperforming assets and charge-offs ; our involvement , from time to time , in legal proceedings and examination and remedial actions by regulators ; potential exposure to fraud , negligence , computer theft and cyber-crime . the foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this form 10-k , including those discussed in the section entitled `` risk factors `` in item 1a above . if one or more of the factors affecting our forward-looking information and statements proves incorrect , then our actual results , performance or achievements could differ materially from those expressed in , or implied by , forward-looking information and statements contained in this form 10-k. therefore , we caution you not to place undue reliance on our forward-looking information and statements . we will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements . new risks and uncertainties may emerge from time to time , and it is not possible for us to predict their occurrence or how they will affect us . 47 overview we are a bank holding company headquartered in fairfax county , virginia . our sole subsidiary , fvcbank , was formed in november 2007 as a community-oriented , locally-owned and managed commercial bank under the laws of the commonwealth of virginia . the bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers . our commercial relationship officers focus on attracting small and medium sized businesses , commercial real estate developers and builders , including government contractors , non-profit organizations , and professionals . our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals . on october 12 , 2018 , we announced the completion of our acquisition of colombo , pursuant to a previously announced definitive merger agreement . colombo , which was headquartered in rockville , maryland , merged into fvcbank effective october 12 , 2018 adding five banking locations in washington , d.c. , and montgomery county and the city of baltimore in maryland . pursuant to the terms of the merger agreement , based on the average closing price of the company 's common stock during the five trading day period ended on october 10 , 2018 , the second trading day prior to closing , of $ 19.614 ( the `` average closing price `` ) holders of shares of colombo common stock received 0.002217 shares of the company 's common stock and $ 0.053157 in cash for each share of colombo common stock held immediately prior to the effective date of the merger , plus cash in lieu of fractional shares at a rate equal to the average closing price , and subject to the right of holders of colombo common stock who owned fewer than 45,086 shares of colombo common stock after aggregation of all shares held in the same name , and who made a timely election , to receive only cash in an amount equal to $ 0.096649 per share of colombo common stock . as a result of the merger , 763,051 shares of the company 's common stock were issued in exchange for outstanding shares of colombo common stock . net interest income is our primary source of revenue . we define revenue as net interest income plus noninterest income . as discussed further in `` quantitative and qualitative disclosures about market risk `` below , we manage our balance sheet and interest rate risk exposure to maximize , and concurrently stabilize , net interest income . we do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities . we attempt to minimize our exposure to interest rate risk , but are unable to eliminate it entirely . in addition to managing interest rate risk , we also analyze our loan portfolio for exposure to credit risk . loan defaults and foreclosures are inherent risks in the banking industry , and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit . in addition to net interest income , noninterest income is a complementary source of revenue for us and includes , among other things , service charges on deposits and loans , merchant services fee income , insurance commission income , income from bank owned life insurance , or boli , and gains and losses on sales of investment securities available-for-sale . critical accounting policies general the accounting principles we apply under gaap are complex and require management to apply significant judgment to various accounting , reporting and disclosure matters . management must use assumptions , judgments and estimates when applying these principles where precise measurements are not possible or practical . these policies are critical because they are highly dependent upon subjective or complex judgments , assumptions and estimates . changes in such judgments , assumptions and estimates may have a significant impact on the consolidated financial statements . actual results , in fact , could differ from initial estimates . story_separator_special_tag net interest income/margin the following table presents average balance sheet information , interest income , interest expense and the corresponding average yields earned and rates paid for the years ended december 31 , 2019 , 2018 , and 2017 . 53 average balance sheets and interest rates on interest-earning assets and interest-bearing liabilities years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) replace_table_token_5_th ( 1 ) non-accrual loans are included in average balances and do not have a material effect on the average yield . interest income on non-accruing loans was not material for the years presented . ( 2 ) the average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 22.5 % for 2019 , 21 % for 2018 , and 34.5 % for 2017. the level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities , as well as changes in interest rates . see `` quantitative and qualitative disclosures about market risk `` below for further information . the following table shows the effect that these 54 factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities . rate and volume analysis years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) replace_table_token_6_th ( 1 ) non-accrual loans are included in average balances and do not have a material effect on the average yield . interest income on non-accruing loans was not material for the years presented . ( 2 ) the average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 22.5 % for 2019 , 21 % for 2018 and 34.5 % for 2017 . ( 3 ) changes attributable to rate/volume have been allocated to volume . net interest income for the year ended december 31 , 2019 was $ 48.1 million on a fully taxable-equivalent basis , compared to $ 39.8 million for the year ended december 31 , 2018 , an increase of $ 8.2 million , or 20.7 % . the increase in net interest income was primarily a result of an increase in the volume of interest-earning assets related to organic growth during 2019 compared to 2018 , in addition to the earning assets acquired from colombo . the yield on interest-earning assets increased 25 basis points to 4.83 % for the year ended december 31 , 2019 , compared to 4.58 % for the same period of 2018 , a result of the increased rate environment during the first six months of 2019. offsetting this 55 increase in yields on earning assets was a 41 basis point increase in the cost of interest-bearing liabilities , reflecting the increased rates on interest-bearing deposits prior to three rate cuts during the last half of 2019. our net interest margin , on a tax equivalent basis , for the years ended december 31 , 2019 and 2018 was 3.48 % and 3.51 % , respectively . the decrease in our net interest margin was primarily a result of an increase in rates on our interest-bearing liabilities during 2019 as compared to 2018. net interest income , on a tax equivalent basis , is a financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes . to derive our net interest margin on a tax equivalent basis , net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense . for purposes of this calculation , we use our federal and state statutory tax rates for the periods presented . this measure ensures comparability of net interest income arising from taxable and tax-exempt sources . the following table provides a reconciliation of our gaap net interest income to our tax equivalent net interest income . supplemental financial data and reconciliations to gaap financial measures years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) replace_table_token_7_th average interest-earning assets increased by 21.8 % to $ 1.38 billion at december 31 , 2019 compared to $ 1.13 billion at december 31 , 2018 , which resulted in an increase in total interest income on a tax equivalent basis of $ 14.8 million , to $ 66.8 million for the year ended december 31 , 2019 compared to $ 51.9 million for the year ended december 31 , 2018. the increase in our earning assets was primarily driven by an increase in average volume of loans receivable of $ 233.8 million , which contributed to an additional $ 11.6 million in interest income . this increase in interest income was enhanced by an increase in yields earned on the loan portfolio which increased interest income $ 2.4 million . average balances of nonperforming loans , which consist of nonaccrual loans , are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2019 and 2018 . 56 total average interest-bearing deposits increased $ 169.4 million to $ 952.9 million at december 31 , 2019 compared to $ 783.5 million at december 31 , 2018. average noninterest-bearing deposits increased $ 47.4 million to $ 270.4 million at december 31 , 2019 compared to $ 223.0 million at december 31 , 2018. the largest increase in average interest-bearing deposit balances was in our interest checking accounts , which increased $ 127.4 million compared to 2018. average time deposits increased $ 51.2 to $ 316.2 million as of december 31 , 2019 compared to $ 265.0 million at december 31 , 2018. average wholesale deposits decreased $ 2.8 million to $ 74.7 million as of december 31 , 2019 compared to $ 77.5 million as of december 31 , 2018. this change in the mix of our interest-bearing liabilities , in addition to the

capital resources capital adequacy is an important measure of financial stability and performance . our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence . regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution . the minimum capital requirements are : ( i ) a common equity tier 1 , or cet1 , capital ratio of 4.5 % ; ( ii ) a tier 1 to risk-based assets capital ratio of 6 % ; ( iii ) a total risk based capital ratio of 8 % ; and ( iv ) a tier 1 leverage ratio of 4 % . additionally , a capital conservation buffer requirement of 2.5 % of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to our cet1 capital , tier 1 capital and total capital ratios . including the conservation buffer , we currently consider our minimum capital ratios to be as follows : 7.00 % for cet1 ; 8.50 % for tier 1 capital ; and 10.50 % for total capital . banking institutions with a ratio of common equity tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends , equity repurchases , and compensation . the federal banking agencies have adopted a cblr , calculated by dividing tangible equity capital by average consolidated total assets of 9 % . if a `` qualified community bank , '' generally a depository institution or depository institution holding company with consolidated assets of less than $ 10 billion , has a leverage ratio which exceeds the cblr , then such bank will be considered to have met all generally applicable leverage and risk based capital requirements , the capital ratio requirements for `` well capitalized '' status under section 38 of the fdia , and any other leverage or capital requirements to which it is subject .

our technology and solutions include : digital merchandising systems and omni-channel customer engagement systems ; content creation , production and scheduling programs and systems ; a comprehensive series of recurring maintenance , support , and field service offerings ; interactive digital shopping assistants , advisors and kiosks ; and , other interactive marketing technologies such as mobile , social media , point-of-sale transactions , beaconing and web-based media that enable our customers to transform how they engage with consumers . our main operations are conducted directly through creative realities , inc. and our wholly owned subsidiaries allure global solutions , inc. , a georgia corporation , creative realities canada , inc. , a canadian corporation , and conexus world global , llc , a kentucky limited liability company . our other wholly owned subsidiary creative realities , llc , a delaware limited liability company , has been effectively dormant since october 2015 , the date of the merger with conexus world global , llc . we generate revenue in our business by : ● consulting with our customers to determine the technologies and solutions required to achieve their specific goals , strategies and objectives ; ● designing our customers ' digital marketing experiences , content and interfaces ; ● engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized , reliable and effective digital marketing experience ; ● managing the efficient , timely and cost-effective deployment of our digital marketing technology solutions for our customers ; ● delivering and updating the content of our digital marketing technology solutions using a suite of advanced media , content and network management software products ; and ● maintaining our customers ' digital marketing technology solutions by : providing content production and related services ; creating additional software-based features and functionality ; hosting the solutions ; monitoring solution service levels ; and responding to and or managing remote or onsite field service maintenance , troubleshooting and support calls . these activities generate revenue through : bundled-solution sales ; consulting services , experience design , content development and production , software development , engineering , implementation , and field services ; software license fees ; and maintenance and support services related to our software , managed systems and solutions . our sources of revenue we generate revenue through digital marketing solution sales , which include system hardware , professional and implementation services , software design and development , software licensing , deployment , and maintenance and support services . 21 we currently market and sell our technology and solutions primarily through our sales and business development personnel , but we also utilize agents , strategic partners , and lead generators who provide us with access to additional sales , business development and licensing opportunities . our expenses our expenses are primarily comprised of three categories : sales and marketing , research and development , and general and administrative . sales and marketing expenses include salaries and benefits for our sales , business development solution management and marketing personnel , and commissions paid on sales . this category also includes amounts spent on marketing networking events , promotional materials , hardware and software to prospective new customers , including those expenses incurred in trade shows and product demonstrations , and other related expenses . our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers . our general and administrative expenses consist of corporate overhead , including administrative salaries , real property lease payments , salaries and benefits for our corporate officers and other expenses such as legal and accounting fees . critical accounting policies and estimates our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation . our management believes these policies are reasonable and appropriate . the company 's significant accounting policies are described in note 2 summary of significant accounting policies of the company 's consolidated financial statements included within part ii , item 8 of this report . the following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements , the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions . the preparation of financial statements in conformity with gaap requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . our actual results could differ from those estimates . revenue recognition on january 1 , 2018 , we adopted financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) 606 , revenue from contracts with customers ( “ asc 606 ” ) using the modified retrospective method for all contracts not completed as of the date of adoption . results for reporting periods beginning on or after january 1 , 2018 are presented under asc 606 , while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period . under this method , we concluded that the cumulative effect of applying this guidance was not material to the financial statements and no adjustment to the opening balance of accumulated deficit was required on the adoption date . story_separator_special_tag interest expense see note 9 loans payable to the consolidated financial statements for a discussion of the company 's debt and related interest expense obligations . change in fair value of warrant liability all of the company 's outstanding warrants classified as liabilities expired during the three months ended september 30 , 2019. see note 6 fair value measurement to the consolidated financial statements for a discussion of the company 's non-cash change in warrant liability . gain on settlement of obligations during the year ended december 31 , 2019 , the company settled and or wrote off obligations of $ 3,178 for $ 1,132 cash payment and recognized a gain of $ 2,046 . $ 1,619 of this gain related to settlement of legacy sales commissions due to a third-party vendor which were settled with a cash payment of $ 1,100 during the three-months ended december 31 , 2019. the remaining settlements related to legacy accounts payable deemed to no longer be legal obligations to vendors . in 2018 , the company settled and or wrote off obligations of $ 313 for $ 58 cash payment and recognized a gain of $ 255. this obligation included $ 30 of accrued wage labor liabilities no longer anticipated to be pursued against the company . 26 debt conversion expense the company recorded debt conversion expense of $ 5,055 in connection with issuance of incentive shares issued upon conversion of the convertible promissory notes into common stock on november 19 , 2018 in conjunction with the public offering . see note 9 loans payable to the consolidated financial statements . there was no such corresponding activity and expense in 2019. dividends on preferred stock the company issued common stock dividends on series a convertible preferred stock of $ 345 during the year-ended december 31 , 2018. there was no outstanding preferred stock in 2019 and no such dividends were issued during the year-ended december 31 , 2019. preferred stock conversion expense the company recorded preferred stock conversion expense of $ 3,932 , which is reflected as a loss to common shareholders , in connection with issuance of incentive shares issued upon conversion of the series a preferred stock into common stock on november 19 , 2018 in conjunction with the public offering . see note 13 convertible preferred stock to the consolidated financial statements . there was no such corresponding activity and expense in 2019. summary unaudited quarterly financial information the following represents unaudited financial information derived from the company 's annual and quarterly financial statements : replace_table_token_2_th replace_table_token_3_th supplemental operating results on a non-gaap basis the following non-gaap data , which adjusts for the categories of expenses described below , is a non-gaap financial measure . our management believes that this non-gaap financial measure is useful information for investors , shareholders and other stakeholders of our company in gauging our results of operations on an ongoing basis . we believe that ebitda is a performance measure and not a liquidity measure , and therefore a reconciliation between net loss/income and ebitda and adjusted ebitda has been provided . ebitda should not be considered as an alternative to net loss/income as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows , in each case as determined in accordance with gaap , or as a measure of liquidity . in addition , ebitda does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows . we do not intend the presentation of these non-gaap measures to be considered in isolation or as a substitute for results prepared in accordance with gaap . these non-gaap measures should be read only in conjunction with our consolidated financial statements prepared in accordance with gaap . 27 replace_table_token_4_th story_separator_special_tag 10pt `` > on november 9 , 2018 , slipstream extended the maturity date of our term loan and revolving loan to august 16 , 2020. in conjunction with the extension of the maturity date of our term loan , we agreed that the cash portion of the interest rate would increase from 8.0 % per annum to 10.0 % per annum effective july 1 , 2019 . 28 management believes that , based on ( i ) the extension of the maturity date on our term loan and revolving loans , and ( ii ) our operational forecast through 2021 , we can continue as a going concern through at least march 31 , 2021. however , given our net losses , cash used in operating activities and working capital deficit , we obtained a continued support letter from slipstream through march 31 , 2021. we can provide no assurance that our ongoing operational efforts will be successful which could have a material adverse effect on our results of operations and cash flows . see note 9 loans payable to the consolidated financial statements for an additional discussion of the company 's debt obligations . operating activities we do not currently generate positive cash flow . our operational costs have been greater than sales generated to date . as of december 31 , 2019 , we had an accumulated deficit of $ 35,643. the cash flows used in operating activities was ( $ 970 ) and ( $ 1,564 ) for the years ended december 31 , 2019 and 2018 , respectively . the majority of the cash consumed by operations for both periods was attributed to our net losses . for the years ended december 31 , 2019 and 2018 , our net loss attributable to common shareholders was $ ( 1,008 ) and ( $ 15,191 ) when adjusted for gain on settlements of obligations , respectively . included in our net losses were non-cash charges consisting of depreciation , amortization of debt discount related to convertible preferred stock / issued for debt-issuance costs , change in warrant liability , stock-based compensation

capital resources capital adequacy is an important measure of financial stability and performance . our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence . regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution . the minimum capital requirements are : ( i ) a common equity tier 1 , or cet1 , capital ratio of 4.5 % ; ( ii ) a tier 1 to risk-based assets capital ratio of 6 % ; ( iii ) a total risk based capital ratio of 8 % ; and ( iv ) a tier 1 leverage ratio of 4 % . additionally , a capital conservation buffer requirement of 2.5 % of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to our cet1 capital , tier 1 capital and total capital ratios . including the conservation buffer , we currently consider our minimum capital ratios to be as follows : 7.00 % for cet1 ; 8.50 % for tier 1 capital ; and 10.50 % for total capital . banking institutions with a ratio of common equity tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends , equity repurchases , and compensation . the federal banking agencies have adopted a cblr , calculated by dividing tangible equity capital by average consolidated total assets of 9 % . if a `` qualified community bank , '' generally a depository institution or depository institution holding company with consolidated assets of less than $ 10 billion , has a leverage ratio which exceeds the cblr , then such bank will be considered to have met all generally applicable leverage and risk based capital requirements , the capital ratio requirements for `` well capitalized '' status under section 38 of the fdia , and any other leverage or capital requirements to which it is subject .

our technology and solutions include : digital merchandising systems and omni-channel customer engagement systems ; content creation , production and scheduling programs and systems ; a comprehensive series of recurring maintenance , support , and field service offerings ; interactive digital shopping assistants , advisors and kiosks ; and , other interactive marketing technologies such as mobile , social media , point-of-sale transactions , beaconing and web-based media that enable our customers to transform how they engage with consumers . our main operations are conducted directly through creative realities , inc. and our wholly owned subsidiaries allure global solutions , inc. , a georgia corporation , creative realities canada , inc. , a canadian corporation , and conexus world global , llc , a kentucky limited liability company . our other wholly owned subsidiary creative realities , llc , a delaware limited liability company , has been effectively dormant since october 2015 , the date of the merger with conexus world global , llc . we generate revenue in our business by : ● consulting with our customers to determine the technologies and solutions required to achieve their specific goals , strategies and objectives ; ● designing our customers ' digital marketing experiences , content and interfaces ; ● engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized , reliable and effective digital marketing experience ; ● managing the efficient , timely and cost-effective deployment of our digital marketing technology solutions for our customers ; ● delivering and updating the content of our digital marketing technology solutions using a suite of advanced media , content and network management software products ; and ● maintaining our customers ' digital marketing technology solutions by : providing content production and related services ; creating additional software-based features and functionality ; hosting the solutions ; monitoring solution service levels ; and responding to and or managing remote or onsite field service maintenance , troubleshooting and support calls . these activities generate revenue through : bundled-solution sales ; consulting services , experience design , content development and production , software development , engineering , implementation , and field services ; software license fees ; and maintenance and support services related to our software , managed systems and solutions . our sources of revenue we generate revenue through digital marketing solution sales , which include system hardware , professional and implementation services , software design and development , software licensing , deployment , and maintenance and support services . 21 we currently market and sell our technology and solutions primarily through our sales and business development personnel , but we also utilize agents , strategic partners , and lead generators who provide us with access to additional sales , business development and licensing opportunities . our expenses our expenses are primarily comprised of three categories : sales and marketing , research and development , and general and administrative . sales and marketing expenses include salaries and benefits for our sales , business development solution management and marketing personnel , and commissions paid on sales . this category also includes amounts spent on marketing networking events , promotional materials , hardware and software to prospective new customers , including those expenses incurred in trade shows and product demonstrations , and other related expenses . our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers . our general and administrative expenses consist of corporate overhead , including administrative salaries , real property lease payments , salaries and benefits for our corporate officers and other expenses such as legal and accounting fees . critical accounting policies and estimates our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation . our management believes these policies are reasonable and appropriate . the company 's significant accounting policies are described in note 2 summary of significant accounting policies of the company 's consolidated financial statements included within part ii , item 8 of this report . the following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements , the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions . the preparation of financial statements in conformity with gaap requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . our actual results could differ from those estimates . revenue recognition on january 1 , 2018 , we adopted financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) 606 , revenue from contracts with customers ( “ asc 606 ” ) using the modified retrospective method for all contracts not completed as of the date of adoption . results for reporting periods beginning on or after january 1 , 2018 are presented under asc 606 , while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period . under this method , we concluded that the cumulative effect of applying this guidance was not material to the financial statements and no adjustment to the opening balance of accumulated deficit was required on the adoption date . story_separator_special_tag interest expense see note 9 loans payable to the consolidated financial statements for a discussion of the company 's debt and related interest expense obligations . change in fair value of warrant liability all of the company 's outstanding warrants classified as liabilities expired during the three months ended september 30 , 2019. see note 6 fair value measurement to the consolidated financial statements for a discussion of the company 's non-cash change in warrant liability . gain on settlement of obligations during the year ended december 31 , 2019 , the company settled and or wrote off obligations of $ 3,178 for $ 1,132 cash payment and recognized a gain of $ 2,046 . $ 1,619 of this gain related to settlement of legacy sales commissions due to a third-party vendor which were settled with a cash payment of $ 1,100 during the three-months ended december 31 , 2019. the remaining settlements related to legacy accounts payable deemed to no longer be legal obligations to vendors . in 2018 , the company settled and or wrote off obligations of $ 313 for $ 58 cash payment and recognized a gain of $ 255. this obligation included $ 30 of accrued wage labor liabilities no longer anticipated to be pursued against the company . 26 debt conversion expense the company recorded debt conversion expense of $ 5,055 in connection with issuance of incentive shares issued upon conversion of the convertible promissory notes into common stock on november 19 , 2018 in conjunction with the public offering . see note 9 loans payable to the consolidated financial statements . there was no such corresponding activity and expense in 2019. dividends on preferred stock the company issued common stock dividends on series a convertible preferred stock of $ 345 during the year-ended december 31 , 2018. there was no outstanding preferred stock in 2019 and no such dividends were issued during the year-ended december 31 , 2019. preferred stock conversion expense the company recorded preferred stock conversion expense of $ 3,932 , which is reflected as a loss to common shareholders , in connection with issuance of incentive shares issued upon conversion of the series a preferred stock into common stock on november 19 , 2018 in conjunction with the public offering . see note 13 convertible preferred stock to the consolidated financial statements . there was no such corresponding activity and expense in 2019. summary unaudited quarterly financial information the following represents unaudited financial information derived from the company 's annual and quarterly financial statements : replace_table_token_2_th replace_table_token_3_th supplemental operating results on a non-gaap basis the following non-gaap data , which adjusts for the categories of expenses described below , is a non-gaap financial measure . our management believes that this non-gaap financial measure is useful information for investors , shareholders and other stakeholders of our company in gauging our results of operations on an ongoing basis . we believe that ebitda is a performance measure and not a liquidity measure , and therefore a reconciliation between net loss/income and ebitda and adjusted ebitda has been provided . ebitda should not be considered as an alternative to net loss/income as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows , in each case as determined in accordance with gaap , or as a measure of liquidity . in addition , ebitda does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows . we do not intend the presentation of these non-gaap measures to be considered in isolation or as a substitute for results prepared in accordance with gaap . these non-gaap measures should be read only in conjunction with our consolidated financial statements prepared in accordance with gaap . 27 replace_table_token_4_th story_separator_special_tag 10pt `` > on november 9 , 2018 , slipstream extended the maturity date of our term loan and revolving loan to august 16 , 2020. in conjunction with the extension of the maturity date of our term loan , we agreed that the cash portion of the interest rate would increase from 8.0 % per annum to 10.0 % per annum effective july 1 , 2019 . 28 management believes that , based on ( i ) the extension of the maturity date on our term loan and revolving loans , and ( ii ) our operational forecast through 2021 , we can continue as a going concern through at least march 31 , 2021. however , given our net losses , cash used in operating activities and working capital deficit , we obtained a continued support letter from slipstream through march 31 , 2021. we can provide no assurance that our ongoing operational efforts will be successful which could have a material adverse effect on our results of operations and cash flows . see note 9 loans payable to the consolidated financial statements for an additional discussion of the company 's debt obligations . operating activities we do not currently generate positive cash flow . our operational costs have been greater than sales generated to date . as of december 31 , 2019 , we had an accumulated deficit of $ 35,643. the cash flows used in operating activities was ( $ 970 ) and ( $ 1,564 ) for the years ended december 31 , 2019 and 2018 , respectively . the majority of the cash consumed by operations for both periods was attributed to our net losses . for the years ended december 31 , 2019 and 2018 , our net loss attributable to common shareholders was $ ( 1,008 ) and ( $ 15,191 ) when adjusted for gain on settlements of obligations , respectively . included in our net losses were non-cash charges consisting of depreciation , amortization of debt discount related to convertible preferred stock / issued for debt-issuance costs , change in warrant liability , stock-based compensation

liquidity and capital resources we produced net income for the year ended december 31 , 2019 but incurred a net loss for the year ended december 31 , 2018 and have negative cash flows from operating activities as of december 31 , 2019. as of december 31 , 2019 , we had cash and cash equivalents of $ 2,534 and a working capital deficit of $ 2,449. on november 6 , 2019 , slipstream extended the maturity date of our term loan and revolver loan to june 30 , 2021 through the sixth amendment to the loan and security agreement , aligning the maturity date of our term loan and revolver loan with the secured disbursed escrow promissory note . on december 30 , 2019 , we entered into the secured convertible special loan promissory note ( “ special loan ” ) as part of the seventh amendment of the loan and security agreement with slipstream , under which we obtained $ 2,000 , with interest thereon at 8 % per annum payable 6 % in cash and 2 % via the issuance of paid-in-kind ( “ slpik ” ) interest , provided however that upon occurrence of an event of default the interest rate shall automatically be increased by 6 % per annum payable in cash.

the analysis presented below and discussed in more detail throughout the md & a was organized to provide instructive information for understanding the business going forward . however , this discussion should be read in conjunction with the consolidated financial statements in item 8 of this report , including the notes thereto and the risk factors contained herein . an overview of the segment results is provided in note 1 - business and segment information , in the notes to consolidated financial statements . for the year ended january 31 , 2015 , one customer in piping systems accounted for 11.2 % of the company 's net sales , and for the year ended january 31 , 2014 , one customer in piping systems accounted for 10.6 % of the company 's net sales . at january 31 , 2015 , one customer in piping systems accounted for 30.7 % of accounts receivable . at january 31 , 2014 one customer in piping systems accounted for 24.5 % of accounts receivable . in october 2013 , the company decided to sell its remaining industrial process cooling business in denmark . this business was sold on february 28 , 2014 and was previously reported as industrial process cooling . this business is reported as discontinued operations in the consolidated financial statements . loss from discontinued operations net of tax was $ 0.3 million and income from discontinued operations net of tax was $ 8.2 million for the years ended january 31 , 2015 and 2014 , respectively . for further information , see note 3 - discontinued operations , in the notes to consolidated financial statements . 2014 compared to 2013 net sales were $ 194.9 million in 2014 , a decrease of 14 % from $ 226.8 million in 2013 . piping systems sales decreased 20 % or $ 31.5 million compared to the prior year due to lower volume in saudi arabia and the u.a.e .. the first phases of major projects expanding the grand mosque in mecca and the king abdul-aziz international airport in jeddah are largely complete . the decrease was partially offset by an increase in domestic oil and gas projects . gross profit decreased 26 % to $ 38.5 million in 2014 from $ 52.2 million in 2013 due to the sales volume decrease in piping systems . filtration products gross profit decreased 12.2 % to $ 7.9 million in 2014 from $ 8.9 million in 2013 resulting from costs associated with the introduction of new products as well as overall product mix . operating expenses decreased 7.2 % to $ 36.3 million from $ 39.1 million due to lower management incentive and deferred compensation expenses and a decrease in stock compensation expense . these decreases were partially offset by an increase in professional fees related to compliance . operating expenses as a percent of net sales increased to 18.6 % from 17.3 % . pretax income from continuing operations was $ 3.3 million versus $ 12.3 million in the prior year . factors contributing to the 2014 results were lower volume in the middle east partially offset by a profitable performance by the canadian joint venture and lower interest expense . the company 's worldwide effective income tax rates on continuing operations for 2014 and 2013 were 97.5 % and negative 4.0 % , respectively . the 2014 effective income tax rate was affected primarily by the impact of the full valuation allowance maintained against domestic deferred tax assets and anticipated repatriation of foreign earnings . see the income taxes paragraphs later in the md & a . net loss was $ 0.3 million in 2014 compared to net income of $ 21.0 million in 2013 . the prior-year 's net income included the sale of most of thermal care 's domestic assets . piping systems since the piping systems segment is based on large discrete projects , operating results could be negatively impacted in the future as a result of large variations in the level of market demand in both geographies and reporting periods . replace_table_token_2_th net sales of $ 126.9 million decreased 20 % from $ 158.4 million in the prior year . the decrease was attributed to lower volume related to the aforementioned projects being largely complete in saudi arabia and the u.a.e . , offset by an increase in domestic oil and gas projects . gross margin decreased to 24 % of net sales from 27 % of net sales in the prior year . gross profit decreased due to the lower volume produced at the saudi arabian and u.a.e . piping facilities , partially offset by the domestic oil and gas projects . general and administrative expenses decreased to $ 12.3 million in 2014 from $ 14.0 million in 2013 due to lower management incentive compensation expense due to lower earnings in the period , as well as lower bank fees . general and administrative expenses as a percentage of net sales increased to 9.7 % in 2014 from 8.8 % in the prior year . selling expenses increased to $ 5.7 million from $ 5.1 million due to additional staffing , advertising and travel costs . as a percentage of net sales , selling expenses increased to 4.5 % in 2014 from 3.2 % in the prior year . income from the joint venture in 2014 was $ 2.0 million , an increase of $ 1.4 million over prior year , driven by growth in revenues . filtration products the timing of large orders can have a material effect on net sales and gross profit from period to period . pricing on large orders was extremely competitive and therefore resulted in comparatively low gross margins in all periods . story_separator_special_tag future earnings related to this subsidiary will not be deemed permanently reinvested . no u.s. cash tax payments will be made upon distribution of these foreign earnings as long as the company is in a net loss operating position . a reconciliation of the etr to the u.s. statutory tax rate is as follows : replace_table_token_4_th for further information , see note 8 - income taxes , in the notes to consolidated financial statements . 12 liquidity and capital resources cash and cash equivalents as of january 31 , 2015 were $ 10.5 million , compared to $ 13.4 million at january 31 , 2014 . at january 31 , 2015 , $ 0.7 million was held in the u.s. and $ 9.8 million was held in the foreign subsidiaries . the company 's working capital was $ 35.9 million at january 31 , 2015 compared to $ 47.6 million at january 31 , 2014 story_separator_special_tag style= `` line-height:120 % ; text-align : left ; font-size:11pt ; `` > on april 1 , 2015 , the company obtained a loan with no maturity date in the amount of $ 1.9 million , sourced from the cash surrender value of certain life insurance policies . the loan carries interest at a rate of approximately 5 % and requires interest only payments annually . critical accounting estimates and policies the company 's significant accounting policies are discussed in the notes to consolidated financial statements included in item 8 of this annual report on form 10-k. the application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the company as well as the related footnote disclosures . the company bases its estimates on historical experience and other assumptions that it believes are reasonable . if actual amounts ultimately differ from previous estimates , the revisions are included in the company 's results of operations for the period in which the actual amounts become known . revenue recognition . the company recognizes revenues , including shipping and handling charges billed to customers , when all the following criteria are met : ( i ) persuasive evidence of an arrangement exists , ( ii ) delivery has occurred or services have been rendered , ( iii ) the seller 's price to the buyer is fixed or determinable , and ( iv ) collectability is reasonably assured . all subsidiaries of the company , except as noted below , recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers . percentage of completion revenue recognition . all divisions recognize revenues under the above stated revenue recognition policy except for sizable domestic complex contracts that require periodic recognition of income . for these contracts , the company uses the `` percentage of completion `` accounting method . under this approach , income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete . the choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project . the percentage of completion is determined by the relationship of costs incurred to the total estimated costs of the contract . provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined . changes in job performance , job conditions , and estimated profitability , including those arising from contract penalty provisions and final contract settlements , may result in revisions to costs and income . such revisions are recognized in the period in which they are determined . claims for additional compensation due to the company are recognized in contract revenues when realization is probable and the amount can be reliably estimated . inventories . inventories are stated at the lower of cost or market . cost is determined using the first-in , first-out method for all inventories . income taxes . deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes . deferred income taxes on temporary differences have been recorded at the current tax rate . the company assesses its deferred tax assets for realizability at each reporting period . the company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit . for tax positions meeting the more likely than not threshold , the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority . equity-based compensation . stock compensation expense for employee equity awards is recognized ratably over the requisite service period of the award . the black-scholes option-pricing model is utilized to estimate the fair value of option awards . determining the fair value of stock options using the black-scholes model requires judgment , including estimates for ( 1 ) risk-free interest rate - an estimate based on the yield of zero-coupon treasury securities with a maturity equal to the expected life of the option ; ( 2 ) expected volatility - an estimate based on the historical volatility of the company 's common stock ; and ( 3 ) expected life of the option - an estimate based on historical experience including the effect of employee terminations . 15 fair value of financial instruments . the carrying values of cash and cash equivalents , accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature . the carrying value of the cash surrender value of life insurance policies approximated fair value and was based on the market value of the underlying investments , which may increase or

liquidity and capital resources we produced net income for the year ended december 31 , 2019 but incurred a net loss for the year ended december 31 , 2018 and have negative cash flows from operating activities as of december 31 , 2019. as of december 31 , 2019 , we had cash and cash equivalents of $ 2,534 and a working capital deficit of $ 2,449. on november 6 , 2019 , slipstream extended the maturity date of our term loan and revolver loan to june 30 , 2021 through the sixth amendment to the loan and security agreement , aligning the maturity date of our term loan and revolver loan with the secured disbursed escrow promissory note . on december 30 , 2019 , we entered into the secured convertible special loan promissory note ( “ special loan ” ) as part of the seventh amendment of the loan and security agreement with slipstream , under which we obtained $ 2,000 , with interest thereon at 8 % per annum payable 6 % in cash and 2 % via the issuance of paid-in-kind ( “ slpik ” ) interest , provided however that upon occurrence of an event of default the interest rate shall automatically be increased by 6 % per annum payable in cash.

the analysis presented below and discussed in more detail throughout the md & a was organized to provide instructive information for understanding the business going forward . however , this discussion should be read in conjunction with the consolidated financial statements in item 8 of this report , including the notes thereto and the risk factors contained herein . an overview of the segment results is provided in note 1 - business and segment information , in the notes to consolidated financial statements . for the year ended january 31 , 2015 , one customer in piping systems accounted for 11.2 % of the company 's net sales , and for the year ended january 31 , 2014 , one customer in piping systems accounted for 10.6 % of the company 's net sales . at january 31 , 2015 , one customer in piping systems accounted for 30.7 % of accounts receivable . at january 31 , 2014 one customer in piping systems accounted for 24.5 % of accounts receivable . in october 2013 , the company decided to sell its remaining industrial process cooling business in denmark . this business was sold on february 28 , 2014 and was previously reported as industrial process cooling . this business is reported as discontinued operations in the consolidated financial statements . loss from discontinued operations net of tax was $ 0.3 million and income from discontinued operations net of tax was $ 8.2 million for the years ended january 31 , 2015 and 2014 , respectively . for further information , see note 3 - discontinued operations , in the notes to consolidated financial statements . 2014 compared to 2013 net sales were $ 194.9 million in 2014 , a decrease of 14 % from $ 226.8 million in 2013 . piping systems sales decreased 20 % or $ 31.5 million compared to the prior year due to lower volume in saudi arabia and the u.a.e .. the first phases of major projects expanding the grand mosque in mecca and the king abdul-aziz international airport in jeddah are largely complete . the decrease was partially offset by an increase in domestic oil and gas projects . gross profit decreased 26 % to $ 38.5 million in 2014 from $ 52.2 million in 2013 due to the sales volume decrease in piping systems . filtration products gross profit decreased 12.2 % to $ 7.9 million in 2014 from $ 8.9 million in 2013 resulting from costs associated with the introduction of new products as well as overall product mix . operating expenses decreased 7.2 % to $ 36.3 million from $ 39.1 million due to lower management incentive and deferred compensation expenses and a decrease in stock compensation expense . these decreases were partially offset by an increase in professional fees related to compliance . operating expenses as a percent of net sales increased to 18.6 % from 17.3 % . pretax income from continuing operations was $ 3.3 million versus $ 12.3 million in the prior year . factors contributing to the 2014 results were lower volume in the middle east partially offset by a profitable performance by the canadian joint venture and lower interest expense . the company 's worldwide effective income tax rates on continuing operations for 2014 and 2013 were 97.5 % and negative 4.0 % , respectively . the 2014 effective income tax rate was affected primarily by the impact of the full valuation allowance maintained against domestic deferred tax assets and anticipated repatriation of foreign earnings . see the income taxes paragraphs later in the md & a . net loss was $ 0.3 million in 2014 compared to net income of $ 21.0 million in 2013 . the prior-year 's net income included the sale of most of thermal care 's domestic assets . piping systems since the piping systems segment is based on large discrete projects , operating results could be negatively impacted in the future as a result of large variations in the level of market demand in both geographies and reporting periods . replace_table_token_2_th net sales of $ 126.9 million decreased 20 % from $ 158.4 million in the prior year . the decrease was attributed to lower volume related to the aforementioned projects being largely complete in saudi arabia and the u.a.e . , offset by an increase in domestic oil and gas projects . gross margin decreased to 24 % of net sales from 27 % of net sales in the prior year . gross profit decreased due to the lower volume produced at the saudi arabian and u.a.e . piping facilities , partially offset by the domestic oil and gas projects . general and administrative expenses decreased to $ 12.3 million in 2014 from $ 14.0 million in 2013 due to lower management incentive compensation expense due to lower earnings in the period , as well as lower bank fees . general and administrative expenses as a percentage of net sales increased to 9.7 % in 2014 from 8.8 % in the prior year . selling expenses increased to $ 5.7 million from $ 5.1 million due to additional staffing , advertising and travel costs . as a percentage of net sales , selling expenses increased to 4.5 % in 2014 from 3.2 % in the prior year . income from the joint venture in 2014 was $ 2.0 million , an increase of $ 1.4 million over prior year , driven by growth in revenues . filtration products the timing of large orders can have a material effect on net sales and gross profit from period to period . pricing on large orders was extremely competitive and therefore resulted in comparatively low gross margins in all periods . story_separator_special_tag future earnings related to this subsidiary will not be deemed permanently reinvested . no u.s. cash tax payments will be made upon distribution of these foreign earnings as long as the company is in a net loss operating position . a reconciliation of the etr to the u.s. statutory tax rate is as follows : replace_table_token_4_th for further information , see note 8 - income taxes , in the notes to consolidated financial statements . 12 liquidity and capital resources cash and cash equivalents as of january 31 , 2015 were $ 10.5 million , compared to $ 13.4 million at january 31 , 2014 . at january 31 , 2015 , $ 0.7 million was held in the u.s. and $ 9.8 million was held in the foreign subsidiaries . the company 's working capital was $ 35.9 million at january 31 , 2015 compared to $ 47.6 million at january 31 , 2014 story_separator_special_tag style= `` line-height:120 % ; text-align : left ; font-size:11pt ; `` > on april 1 , 2015 , the company obtained a loan with no maturity date in the amount of $ 1.9 million , sourced from the cash surrender value of certain life insurance policies . the loan carries interest at a rate of approximately 5 % and requires interest only payments annually . critical accounting estimates and policies the company 's significant accounting policies are discussed in the notes to consolidated financial statements included in item 8 of this annual report on form 10-k. the application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the company as well as the related footnote disclosures . the company bases its estimates on historical experience and other assumptions that it believes are reasonable . if actual amounts ultimately differ from previous estimates , the revisions are included in the company 's results of operations for the period in which the actual amounts become known . revenue recognition . the company recognizes revenues , including shipping and handling charges billed to customers , when all the following criteria are met : ( i ) persuasive evidence of an arrangement exists , ( ii ) delivery has occurred or services have been rendered , ( iii ) the seller 's price to the buyer is fixed or determinable , and ( iv ) collectability is reasonably assured . all subsidiaries of the company , except as noted below , recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers . percentage of completion revenue recognition . all divisions recognize revenues under the above stated revenue recognition policy except for sizable domestic complex contracts that require periodic recognition of income . for these contracts , the company uses the `` percentage of completion `` accounting method . under this approach , income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete . the choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project . the percentage of completion is determined by the relationship of costs incurred to the total estimated costs of the contract . provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined . changes in job performance , job conditions , and estimated profitability , including those arising from contract penalty provisions and final contract settlements , may result in revisions to costs and income . such revisions are recognized in the period in which they are determined . claims for additional compensation due to the company are recognized in contract revenues when realization is probable and the amount can be reliably estimated . inventories . inventories are stated at the lower of cost or market . cost is determined using the first-in , first-out method for all inventories . income taxes . deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes . deferred income taxes on temporary differences have been recorded at the current tax rate . the company assesses its deferred tax assets for realizability at each reporting period . the company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit . for tax positions meeting the more likely than not threshold , the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority . equity-based compensation . stock compensation expense for employee equity awards is recognized ratably over the requisite service period of the award . the black-scholes option-pricing model is utilized to estimate the fair value of option awards . determining the fair value of stock options using the black-scholes model requires judgment , including estimates for ( 1 ) risk-free interest rate - an estimate based on the yield of zero-coupon treasury securities with a maturity equal to the expected life of the option ; ( 2 ) expected volatility - an estimate based on the historical volatility of the company 's common stock ; and ( 3 ) expected life of the option - an estimate based on historical experience including the effect of employee terminations . 15 fair value of financial instruments . the carrying values of cash and cash equivalents , accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature . the carrying value of the cash surrender value of life insurance policies approximated fair value and was based on the market value of the underlying investments , which may increase or

. cash provided by operations in 2014 was $ 4.1 million compared to $ 6.4 million in 2013 . during the third quarter of 2014 , the company received a distribution of foreign earnings of $ 0.8 million from a denmark subsidiary . these foreign earnings were previously considered to be indefinitely reinvested outside the u.s. the repatriation by the denmark subsidiary was a one-time nonrecurring event . the company has not provided federal tax on unremitted earnings of its denmark and middle east subsidiaries . the company does not believe that it will be necessary to repatriate investments from these subsidiaries . during the fourth quarter of 2014 , the company has concluded that not all of the undistributed earnings of perma-pipe india ltd , will remain permanently reinvested outside the u.s. and are now available for use in the u.s. or in entities in other foreign countries . as a result of that conclusion , the company has provided deferred taxes on a portion of the outside basis differences in the stock of this subsidiary . in the fourth quarter of 2014 , mfri recorded $ 0.8 million in tax expense related to withholding tax that would be paid to the indian government in the event that a dividend of up to $ 4.2 million is paid to its foreign parent company . no u.s. cash tax payments will be made upon distribution of these foreign earnings as long as the company is in a net loss operating position . net cash provided by investing activities in 2014 was $ 5.7 million . the company estimates that capital expenditures for 2015 could be as high as $ 18.7 million , and the company may finance capital expenditures through real estate mortgages , term loans , equipment financing loans , internally generated funds and its revolving line of credit . the majority of such expenditures relates to expected capacity expansion for piping systems in the middle east . debt totaled $ 18.3 million at january 31 , 2015 , a decrease of $ 13.5 million since january 31 , 2014 . net cash used in financing activities was $ 0.5 million .

a building during the year ended december 31 , 2019. the remaining decrease in income from operations was driven by lower capital markets transactions and compliance volumes , as well as higher restructuring , impairment and other charges , net , partially offset by lower spin-off related transaction expenses , disposition-related expenses and incentive compensation expense , as well as growth in software solutions offerings and mutual fund volume . interest expense , net increased $ 1.4 million to $ 38.1 million for the year ended december 31 , 2019 versus the year ended december 31 , 2018 , primarily due to a loss on extinguishment of debt of $ 4.1 million , partially offset by a decrease in average outstanding debt . investment and other income , net for the year ended december 31 , 2019 of $ 11.7 million primarily consisted of a $ 13.6 million gain related to an equity investment , partially offset by $ 1.8 million of non-cash pension expense . investment and other income , net for the year ended december 31 , 2018 primarily consisted of an $ 11.8 million gain related to an equity investment and net pension plan income . the effective income tax rate was 27.8 % for the year ended december 31 , 2019 compared to 28.3 % for the year ended december 31 , 2018. the 2019 effective income tax rate was impacted by favorable return to provision adjustments primarily related to foreign-derived intangible income , state and local income taxes and income tax credits , partially offset by increases in valuation allowances and non-deductible expense . refer to note 9 , income taxes , for further details . information by segment the following tables summarize net sales , income ( loss ) from operations and certain items impacting comparability within each of the operating segments and corporate . capital markets – software solutions replace_table_token_8_th nm – not meaningful year ended december 31 , 2020 compared to the year ended december 31 , 2019 net sales for the year ended december 31 , 2020 were $ 133.2 million , an increase of $ 6.5 million , or 5.1 % , compared to the year ended december 31 , 2019. net sales increased primarily due to higher activedisclosure and venue volumes and price increases in other compliance software solutions . income from operations decreased $ 1.1 million , or 11.5 % , to $ 8.5 million for the year ended december 31 , 2020 as compared to $ 9.6 million for the year ended december 31 , 2019 , primarily due to a $ 3.4 million non-income tax charge and higher incentive compensation expense , partially offset by cost control initiatives and higher sales volumes . operating margins decreased from 7.6 % for the year ended december 31 , 2019 to 6.4 % for the year ended december 31 , 2020 , primarily due to a non-income tax charge , which negatively impacted the change in operating margin by 2.6 % , and higher incentive compensation expense , partially offset by cost control initiatives and the impact of higher sales volumes . 35 year ended december 31 , 2019 compared to the year ended december 31 , 2018 net sales for the year ended december 31 , 2019 were $ 126.7 million , an increase of $ 7.3 million , or 6.1 % , compared to the year ended december 31 , 2018. net sales increased primarily due to higher activedisclosure volumes and the impact from the acquisition of ebrevia . income from operations increased $ 6.5 million to $ 9.6 million for the year ended december 31 , 2019 as compared to $ 3.1 million for the year ended december 31 , 2018 , primarily due to the net sales increase , the impact of cost control initiatives and lower spin-off related transaction expenses . operating margins increased from 2.6 % for the year ended december 31 , 2018 to 7.6 % for the year ended december 31 , 2019 , primarily due to the impact of cost control initiatives and lower spin-off related transaction expenses , which positively impacted the change in operating margin by 1.7 % . capital markets – compliance and communications management replace_table_token_9_th nm – not meaningful year ended december 31 , 2020 compared to the year ended december 31 , 2019 net sales for the year ended december 31 , 2020 were $ 424.0 million , an increase of $ 34.3 million , or 8.8 % , compared to the year ended december 31 , 2019 , primarily due to higher transactional volumes . income from operations increased $ 34.3 million , or 39.7 % , to $ 120.6 million for the year ended december 31 , 2020 as compared to $ 86.3 million for the year ended december 31 , 2019 , primarily due to cost control initiatives , higher sales volumes and a favorable sales mix , partially offset by higher restructuring , impairment and other charges , net and higher incentive compensation expense . operating margins increased from 22.1 % for the year ended december 31 , 2019 to 28.4 % for the year ended december 31 , 2020 , primarily due to cost control initiatives , higher sales volumes and a favorable sales mix , partially offset by higher restructuring , impairment and other charges , net , which negatively impacted the change in operating margin by 3.8 % , and higher incentive compensation expense . year ended december 31 , 2019 compared to the year ended december 31 , 2018 net sales for the year ended december 31 , 2019 were $ 389.7 million , a decrease of $ 50.5 million , or 11.5 % , compared to the year ended december 31 , 2018 , primarily due to lower transactional and compliance volumes . story_separator_special_tag operating margins increased from 4.9 % for the year ended december 31 , 2018 to 9.9 % for the year ended december 31 , 2019 , primarily due to the impact of the net gain from the sale of a building recorded in 2019 and a decline in spin-off related transaction expense , which combined to positively impact the change in operating margin by 8.4 % , along with the impact of cost control initiatives , partially offset by unfavorable sales mix . 38 language solutions results of operations for the year ended december 31 , 2018 include the operating results of the language solutions business that was sold on july 22 , 2018. summary operating results associated with the language solutions business were as follows : net sales $ 41.8 income from operations 50.1 operating margin nm items impacting comparability gain on sale of language solutions business ( 53.8 ) restructuring , impairment and other charges , net ( 0.2 ) spin-off related transaction expense 0.5 disposition-related expenses 1.4 nm – not meaningful corporate the following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as corporate : replace_table_token_12_th year ended december 31 , 2020 compared to the year ended december 31 , 2019 corporate operating expenses for the year ended december 31 , 2020 increased $ 41.7 million versus the same period in 2019 , primarily due to the $ 19.0 million charge related to the lsc multiemployer pension plans obligation , higher incentive compensation , healthcare and share-based compensation expense and higher restructuring , impairment , and other charges , net , partially offset by the loss on the sale of the language solutions business recorded in 2019 and lower investor-related expenses . year ended december 31 , 2019 compared to the year ended december 31 , 2018 corporate operating expenses for the year ended december 31 , 2019 decreased $ 7.6 million versus the same period in 2018 , primarily due to lower disposition-related expenses and spin-off related transaction expenses , partially offset by the net loss recognized in 2019 for the sale of the language solutions business and an increase in restructuring , impairment , and other charges , net . 39 non-gaap measures the company believes that certain non-gaap measures , such as non-gaap adjusted ebitda ( “ adjusted ebitda ” ) , provide useful information about the company 's operating results and enhance the overall ability to assess the company 's financial performance . the company uses these measures , together with other measures of performance under u.s. generally accepted accounting principles ( “ gaap ” ) , to compare the relative performance of operations in planning , budgeting and reviewing the performance of its business . adjusted ebitda allows investors to make a more meaningful comparison between the company 's core business operating results over different periods of time . the company believes that adjusted ebitda , when viewed with the company 's results under gaap and the accompanying reconciliations , provides useful information about the company 's business without regard to potential distortions . by eliminating potential differences in results of operations between periods caused by factors such as historic cost and age of assets , restructuring , impairment and other charges , acquisition-related expenses , and gain or loss on certain equity investments and asset sales as well as other items , as described below , the company believes that adjusted ebitda can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated . adjusted ebitda is not presented in accordance with gaap and has important limitations as an analytical tool . these measures should not be considered as a substitute for analysis of the company 's results as reported under gaap . in addition , these measures are defined differently by different companies and , accordingly , such measures may not be comparable to similarly-titled measures of other companies . in addition to the factors listed above , the following items are excluded from adjusted ebitda : share-based compensation expense . although share-based compensation is a key incentive offered to certain of the company 's employees , business performance is evaluated excluding share-based compensation expenses . depending upon the size , timing and the terms of grants , non-cash compensation expense may vary but will recur in future periods . covid-19 related sales surcharges and expenses , net . incremental expenses incurred , sales surcharges and government subsidies recognized as a result of the covid-19 pandemic . incremental expense included incremental vendor costs and premium wages paid to certain employees as well as costs to clean and disinfect the company 's facilities more frequently . as a result , of these incremental expenses , the company invoiced certain customers covid-19 related surcharges . the company also received certain government subsidies , primarily related to employee wages at certain international locations . investor-related expenses . expenses incurred related to non-routine investor matters , which include third-party advisory and consulting fees and legal fees . spin-off related transaction expenses . the company incurred expenses related to the separation to operate as a standalone publicly traded company . these expenses include third-party consulting fees , information technology expenses , employee retention payments , legal fees and other costs related to the separation , including system implementation expenses related to transitioning from transition service agreements with rrd and lsc . management does not believe that these expenses are reflective of ongoing operating results . disposition-related expenses . expenses incurred related to the disposition of the language solutions business . these expenses primarily include legal fees , third-party advisory and consulting fees and other costs related to the disposition . 40 a reconciliation of gaap net ( loss ) earnings to a djusted ebitda for the years ended december 31 , 2020 , 2019 and 2018 is presented in the following table : replace_table_token_13_th restructuring , impairment and other charges , net —the

. cash provided by operations in 2014 was $ 4.1 million compared to $ 6.4 million in 2013 . during the third quarter of 2014 , the company received a distribution of foreign earnings of $ 0.8 million from a denmark subsidiary . these foreign earnings were previously considered to be indefinitely reinvested outside the u.s. the repatriation by the denmark subsidiary was a one-time nonrecurring event . the company has not provided federal tax on unremitted earnings of its denmark and middle east subsidiaries . the company does not believe that it will be necessary to repatriate investments from these subsidiaries . during the fourth quarter of 2014 , the company has concluded that not all of the undistributed earnings of perma-pipe india ltd , will remain permanently reinvested outside the u.s. and are now available for use in the u.s. or in entities in other foreign countries . as a result of that conclusion , the company has provided deferred taxes on a portion of the outside basis differences in the stock of this subsidiary . in the fourth quarter of 2014 , mfri recorded $ 0.8 million in tax expense related to withholding tax that would be paid to the indian government in the event that a dividend of up to $ 4.2 million is paid to its foreign parent company . no u.s. cash tax payments will be made upon distribution of these foreign earnings as long as the company is in a net loss operating position . net cash provided by investing activities in 2014 was $ 5.7 million . the company estimates that capital expenditures for 2015 could be as high as $ 18.7 million , and the company may finance capital expenditures through real estate mortgages , term loans , equipment financing loans , internally generated funds and its revolving line of credit . the majority of such expenditures relates to expected capacity expansion for piping systems in the middle east . debt totaled $ 18.3 million at january 31 , 2015 , a decrease of $ 13.5 million since january 31 , 2014 . net cash used in financing activities was $ 0.5 million .

a building during the year ended december 31 , 2019. the remaining decrease in income from operations was driven by lower capital markets transactions and compliance volumes , as well as higher restructuring , impairment and other charges , net , partially offset by lower spin-off related transaction expenses , disposition-related expenses and incentive compensation expense , as well as growth in software solutions offerings and mutual fund volume . interest expense , net increased $ 1.4 million to $ 38.1 million for the year ended december 31 , 2019 versus the year ended december 31 , 2018 , primarily due to a loss on extinguishment of debt of $ 4.1 million , partially offset by a decrease in average outstanding debt . investment and other income , net for the year ended december 31 , 2019 of $ 11.7 million primarily consisted of a $ 13.6 million gain related to an equity investment , partially offset by $ 1.8 million of non-cash pension expense . investment and other income , net for the year ended december 31 , 2018 primarily consisted of an $ 11.8 million gain related to an equity investment and net pension plan income . the effective income tax rate was 27.8 % for the year ended december 31 , 2019 compared to 28.3 % for the year ended december 31 , 2018. the 2019 effective income tax rate was impacted by favorable return to provision adjustments primarily related to foreign-derived intangible income , state and local income taxes and income tax credits , partially offset by increases in valuation allowances and non-deductible expense . refer to note 9 , income taxes , for further details . information by segment the following tables summarize net sales , income ( loss ) from operations and certain items impacting comparability within each of the operating segments and corporate . capital markets – software solutions replace_table_token_8_th nm – not meaningful year ended december 31 , 2020 compared to the year ended december 31 , 2019 net sales for the year ended december 31 , 2020 were $ 133.2 million , an increase of $ 6.5 million , or 5.1 % , compared to the year ended december 31 , 2019. net sales increased primarily due to higher activedisclosure and venue volumes and price increases in other compliance software solutions . income from operations decreased $ 1.1 million , or 11.5 % , to $ 8.5 million for the year ended december 31 , 2020 as compared to $ 9.6 million for the year ended december 31 , 2019 , primarily due to a $ 3.4 million non-income tax charge and higher incentive compensation expense , partially offset by cost control initiatives and higher sales volumes . operating margins decreased from 7.6 % for the year ended december 31 , 2019 to 6.4 % for the year ended december 31 , 2020 , primarily due to a non-income tax charge , which negatively impacted the change in operating margin by 2.6 % , and higher incentive compensation expense , partially offset by cost control initiatives and the impact of higher sales volumes . 35 year ended december 31 , 2019 compared to the year ended december 31 , 2018 net sales for the year ended december 31 , 2019 were $ 126.7 million , an increase of $ 7.3 million , or 6.1 % , compared to the year ended december 31 , 2018. net sales increased primarily due to higher activedisclosure volumes and the impact from the acquisition of ebrevia . income from operations increased $ 6.5 million to $ 9.6 million for the year ended december 31 , 2019 as compared to $ 3.1 million for the year ended december 31 , 2018 , primarily due to the net sales increase , the impact of cost control initiatives and lower spin-off related transaction expenses . operating margins increased from 2.6 % for the year ended december 31 , 2018 to 7.6 % for the year ended december 31 , 2019 , primarily due to the impact of cost control initiatives and lower spin-off related transaction expenses , which positively impacted the change in operating margin by 1.7 % . capital markets – compliance and communications management replace_table_token_9_th nm – not meaningful year ended december 31 , 2020 compared to the year ended december 31 , 2019 net sales for the year ended december 31 , 2020 were $ 424.0 million , an increase of $ 34.3 million , or 8.8 % , compared to the year ended december 31 , 2019 , primarily due to higher transactional volumes . income from operations increased $ 34.3 million , or 39.7 % , to $ 120.6 million for the year ended december 31 , 2020 as compared to $ 86.3 million for the year ended december 31 , 2019 , primarily due to cost control initiatives , higher sales volumes and a favorable sales mix , partially offset by higher restructuring , impairment and other charges , net and higher incentive compensation expense . operating margins increased from 22.1 % for the year ended december 31 , 2019 to 28.4 % for the year ended december 31 , 2020 , primarily due to cost control initiatives , higher sales volumes and a favorable sales mix , partially offset by higher restructuring , impairment and other charges , net , which negatively impacted the change in operating margin by 3.8 % , and higher incentive compensation expense . year ended december 31 , 2019 compared to the year ended december 31 , 2018 net sales for the year ended december 31 , 2019 were $ 389.7 million , a decrease of $ 50.5 million , or 11.5 % , compared to the year ended december 31 , 2018 , primarily due to lower transactional and compliance volumes . story_separator_special_tag operating margins increased from 4.9 % for the year ended december 31 , 2018 to 9.9 % for the year ended december 31 , 2019 , primarily due to the impact of the net gain from the sale of a building recorded in 2019 and a decline in spin-off related transaction expense , which combined to positively impact the change in operating margin by 8.4 % , along with the impact of cost control initiatives , partially offset by unfavorable sales mix . 38 language solutions results of operations for the year ended december 31 , 2018 include the operating results of the language solutions business that was sold on july 22 , 2018. summary operating results associated with the language solutions business were as follows : net sales $ 41.8 income from operations 50.1 operating margin nm items impacting comparability gain on sale of language solutions business ( 53.8 ) restructuring , impairment and other charges , net ( 0.2 ) spin-off related transaction expense 0.5 disposition-related expenses 1.4 nm – not meaningful corporate the following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as corporate : replace_table_token_12_th year ended december 31 , 2020 compared to the year ended december 31 , 2019 corporate operating expenses for the year ended december 31 , 2020 increased $ 41.7 million versus the same period in 2019 , primarily due to the $ 19.0 million charge related to the lsc multiemployer pension plans obligation , higher incentive compensation , healthcare and share-based compensation expense and higher restructuring , impairment , and other charges , net , partially offset by the loss on the sale of the language solutions business recorded in 2019 and lower investor-related expenses . year ended december 31 , 2019 compared to the year ended december 31 , 2018 corporate operating expenses for the year ended december 31 , 2019 decreased $ 7.6 million versus the same period in 2018 , primarily due to lower disposition-related expenses and spin-off related transaction expenses , partially offset by the net loss recognized in 2019 for the sale of the language solutions business and an increase in restructuring , impairment , and other charges , net . 39 non-gaap measures the company believes that certain non-gaap measures , such as non-gaap adjusted ebitda ( “ adjusted ebitda ” ) , provide useful information about the company 's operating results and enhance the overall ability to assess the company 's financial performance . the company uses these measures , together with other measures of performance under u.s. generally accepted accounting principles ( “ gaap ” ) , to compare the relative performance of operations in planning , budgeting and reviewing the performance of its business . adjusted ebitda allows investors to make a more meaningful comparison between the company 's core business operating results over different periods of time . the company believes that adjusted ebitda , when viewed with the company 's results under gaap and the accompanying reconciliations , provides useful information about the company 's business without regard to potential distortions . by eliminating potential differences in results of operations between periods caused by factors such as historic cost and age of assets , restructuring , impairment and other charges , acquisition-related expenses , and gain or loss on certain equity investments and asset sales as well as other items , as described below , the company believes that adjusted ebitda can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated . adjusted ebitda is not presented in accordance with gaap and has important limitations as an analytical tool . these measures should not be considered as a substitute for analysis of the company 's results as reported under gaap . in addition , these measures are defined differently by different companies and , accordingly , such measures may not be comparable to similarly-titled measures of other companies . in addition to the factors listed above , the following items are excluded from adjusted ebitda : share-based compensation expense . although share-based compensation is a key incentive offered to certain of the company 's employees , business performance is evaluated excluding share-based compensation expenses . depending upon the size , timing and the terms of grants , non-cash compensation expense may vary but will recur in future periods . covid-19 related sales surcharges and expenses , net . incremental expenses incurred , sales surcharges and government subsidies recognized as a result of the covid-19 pandemic . incremental expense included incremental vendor costs and premium wages paid to certain employees as well as costs to clean and disinfect the company 's facilities more frequently . as a result , of these incremental expenses , the company invoiced certain customers covid-19 related surcharges . the company also received certain government subsidies , primarily related to employee wages at certain international locations . investor-related expenses . expenses incurred related to non-routine investor matters , which include third-party advisory and consulting fees and legal fees . spin-off related transaction expenses . the company incurred expenses related to the separation to operate as a standalone publicly traded company . these expenses include third-party consulting fees , information technology expenses , employee retention payments , legal fees and other costs related to the separation , including system implementation expenses related to transitioning from transition service agreements with rrd and lsc . management does not believe that these expenses are reflective of ongoing operating results . disposition-related expenses . expenses incurred related to the disposition of the language solutions business . these expenses primarily include legal fees , third-party advisory and consulting fees and other costs related to the disposition . 40 a reconciliation of gaap net ( loss ) earnings to a djusted ebitda for the years ended december 31 , 2020 , 2019 and 2018 is presented in the following table : replace_table_token_13_th restructuring , impairment and other charges , net —the

debt , as well as lower revolving facility borrowings during 2020. investment and other income , net for the year ended december 31 , 2020 of $ 1.7 million primarily consisted of net pension plan income . investment and other income , net for the year ended december 31 , 2019 primarily consisted of a $ 13.6 million gain related to an equity investment , partially offset by $ 1.8 million of pension expense . the effective income tax rate was ( 48.0 % ) for the year ended december 31 , 2020 compared to 27.8 % for the year ended december 31 , 2019. the 2020 effective income tax rate was impacted by the nondeductible goodwill impairment and other nondeductible items , partially offset by favorable adjustments primarily related to foreign-derived intangible income and other income tax credits . refer to note 9 , income taxes , for further details . 33 year ended december 31 , 2019 compared to the year ended december 31 , 2018 net sales of tech-enabled services for the year ended december 31 , 2019 decreased $ 75.0 million , or 17.1 % , to $ 364.7 million versus the year ended december 31 , 2018 , including a decrease of $ 41.8 million , or 9.5 % , due to the july 2018 sale of the language solutions business . in addition , net sales of tech-enabled services decreased primarily due to lower capital markets transactions and compliance volumes . net sales of software solutions for the year ended december 31 , 2019 increased $ 11.0 million , or 6.2 % , to $ 189.3 million versus the year ended december 31 , 2018. net sales of software solutions increased primarily due to increases in activedisclosure , arc suite as well as due to the impact from the acquisition of ebrevia .

this includes any internal costs that are directly related to development and exploration activities , but does not include any costs related to production , general corporate overhead or similar activities . proceeds received from property disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves , in which case a gain or loss is recognized . the sum of net capitalized costs and estimated future development and dismantlement costs for each cost center are amortized using the equivalent unit-of-production method , based on proved oil and natural gas reserves . the capitalized costs are amortized over the life of the reserves associated with the assets , with the dd & a recognized in the period that the reserves are produced . dd & a is calculated by dividing the period 's production volumes by the estimated volume of reserves associated with the investment and multiplying the calculated percentage by the sum of the capitalized investment and estimated future development costs associated with the investment . changes in our reserve estimates will therefore result in changes in our dd & a per unit . costs associated with production and general corporate activities are expensed in the period incurred . exploratory wells in progress are excluded from the dd & a calculation until the outcome of the well is determined . similarly , unproved property costs are initially excluded from the dd & a calculation . unproved property costs not subject to the dd & a calculation consist primarily of leasehold and seismic costs related to unproved areas . unproved property costs are transferred into the amortization base on an ongoing basis as the properties are evaluated and proved reserves are established or impairment is determined . unproved oil and natural gas properties are assessed quarterly for impairment to determine whether we are still actively pursuing the project and whether the project has been proven either to have economic quantities of reserves or that economic quantities of reserves do not exist . under the full cost method of accounting , capitalized oil and natural gas property costs less accumulated dd & a and net of deferred income taxes may not exceed the full cost ceiling . the full cost ceiling is equal to the present value , discounted at 10 % , of estimated future net revenues from proved oil and natural gas reserves plus the unimpaired cost of unproved properties not subject to amortization , plus the lower of cost or fair value of unproved properties that are subject to amortization . when net capitalized costs exceed the full cost ceiling , an impairment is recognized . derivative instruments . we use derivative instruments , typically costless collars and fixed-rate swaps , to manage price risk underlying our oil and natural gas production . we may also use puts , calls and basis swaps in the future . all derivative instruments are recorded in the consolidated balance sheets at fair value . we offset fair value amounts recognized for derivative instruments executed with the same counterparty . although we do not designate any of our derivative instruments as cash flow hedges , such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and natural gas production . these contracts are accounted for using the mark-to-market accounting method and accordingly , we recognize all unrealized and realized gains and losses related to these contracts currently in earnings and they are classified as gain ( loss ) on oil price risk derivatives in our consolidated statements of operations . our board of directors sets all risk management policies and reviews the status and results of derivative activities , including volumes , types of instruments and counterparties . the master contracts with approved counterparties identify the ceo and cfo as representatives authorized to execute trades . 43 joint interest operations . we do not serve as operator for any of our oil and natural gas properties . therefore , we rely to a large extent on the operator of the property to provide us with timely and accurate information about the operations of the properties . joint interest billings from the operators serve as our primary source of information to record revenue , operating expenses and capital expenditures for our properties on a monthly basis . many of our properties are subject to complex participation and operating agreements where our working interests and net revenue interests are subject to change upon the occurrence of certain events , such as the achievement of “ payout . ” these calculations may be subject to error and differences of interpretation which can cause uncertainties about the proper amount that should be recorded in our accounting records . when these issues arise , we make every effort to work with the operators to resolve the issues promptly . revenue recognition . we recognize revenue in accordance with fasb asc topic 606- revenue from contracts with customers , which we adopted effective january 1 , 2018 , using the modified retrospective approach . see note 3-revenue recognition to the consolidated financial statements herein for more information on our adoption of this new accounting standard . stock-based compensation . we measure the cost of employee services received in exchange for all equity awards granted , including stock options , based on the fair market value of the award as of the grant date . we recognize the cost of the equity awards over the period during which an employee is required to provide service in exchange for the award , usually the vesting period . for awards granted which contain a graded vesting schedule , and the only condition for vesting is a service condition , compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was , in substance , a single award . warrant liability . story_separator_special_tag ● we did not effectively monitor expense reimbursements to ensure that only business expenses are reimbursed to employees on their expense reports . ● we did not have a process in place to identify related parties . ● we did not have a policy in place that requires board approval prior to the company expending material amounts of company funds in connection with evaluating potential acquisitions or transactions with third parties and vendors . for a summary of the actions we have taken following the identification of the material weakness in our internal control over financial reporting as of december 31 , 2018 as noted above , see item 1. business.—litigation and liquidity and –recent developments—audit committee investigation . this annual report on form 10-k does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting . management 's report was not subject to attestation by our registered public accounting firm pursuant to rules of the sec that permit us to provide only management 's report in this annual report on form 10-k. changes in internal control over financial reporting . with the exception of the remediation efforts described below , there have been no changes to our system of internal control over financial reporting during the year and fiscal quarter ended december 31 , 2018 and during the subsequent time period through the filing of this annual report on form 10-k that have materially affected , or are reasonably likely to materially affect , our system of controls over financial reporting . we have designed a remediation plan to strengthen our internal control over financial reporting and have taken , and will continue to take , remediation steps to address the material weaknesses described above . we will also continue to take meaningful steps to enhance our disclosure controls and procedures and our internal controls over financial reporting . management 's remediation plan in response to the material weaknesses identified in “ management 's report on internal control over financial reporting ” above , we have developed a plan ( the “ remediation plan ” ) with oversight from our audit committee to remediate the material weaknesses and have begun working on implementing the remediation plan . our remediation plan implements certain changes to our internal control over financial reporting ( as defined in rule 13a-15 ( f ) and rule 15d-15 ( f ) under the exchange act ) , including , but not limited to , the following efforts : ● performing a full review of our system of internal control and evaluating the effectiveness of this system on an ongoing basis . ● adding professionals to our accounting staff who have experience in implementing and maintaining an effective system of internal control . 51 ● establishing effective segregation of duty controls , including segregation of duties to ensure the approval of disbursement transactions is performed by someone other than the person initiating the transaction . ● creating and enforcing a written expense reimbursement policy that applies to both employees and board members that ( i ) defines allowable expenses , ( ii ) requires pre-approval of expenditures above $ 500 in situations where personal conflicts of interest may exist ; ( iii ) prohibits the payment of vendors and reimbursement through expense reports ; ( iv ) outlines the documentation requirements for reimbursements , including receipts for meals or events exceeding $ 50 , listing all parties at such meal and the business purposes of each meal or event ; ( v ) requires detailed folios and receipts for all hotel stays ; ( vi ) requires passenger information for all flights and a description of the business purpose of such travel ; ( vii ) defines the levels of approval , including the approval of the chief executive officer 's expenses by the chairman of the audit committee and other officers ' expenses by the chief executive officer ; ( viii ) establishes that all expenses must be submitted within 60 days of incurring the expense or such expense will not be subject to reimbursement ; ( ix ) defines that all employees travel by coach for flights lasting less than three hours and by business class for flights lasting longer than three hours ; and ( x ) defines the type of rental car allowed while traveling . ● establishing that all checks or wire transfers issued by the company require the approval of both the chief financial officer and the controller . ● establishing a vendor approval process whereby any third-party vendors require approval by both the chief executive officer and the chief financial officer prior to engagement of such third-party vendors . ● requiring employees and board members to certify in writing at least annually that all potential conflicts of interest have been disclosed . ● implementing a policy that prohibits employees from using company vendors , including attorneys , accountants and consultants , for personal purposes without obtaining prior board approval . ● implementing a policy that clearly defines the types of potential projects or transactions that require prior board approval prior to evaluating such potential project or transaction and incurring material expenses in connection with such evaluation , including due diligence . our management believes the foregoing remedial efforts will effectively remediate the material weaknesses . as we continue to evaluate and work to improve our internal control over financial reporting , our management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan . if not remediated , these control deficiencies could result in material misstatements to our consolidated financial statements in the future . additionally , as part of a continuing effort to improve our business processes , management is currently evaluating its existing internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures . item 9b – other information . none . part iii item

debt , as well as lower revolving facility borrowings during 2020. investment and other income , net for the year ended december 31 , 2020 of $ 1.7 million primarily consisted of net pension plan income . investment and other income , net for the year ended december 31 , 2019 primarily consisted of a $ 13.6 million gain related to an equity investment , partially offset by $ 1.8 million of pension expense . the effective income tax rate was ( 48.0 % ) for the year ended december 31 , 2020 compared to 27.8 % for the year ended december 31 , 2019. the 2020 effective income tax rate was impacted by the nondeductible goodwill impairment and other nondeductible items , partially offset by favorable adjustments primarily related to foreign-derived intangible income and other income tax credits . refer to note 9 , income taxes , for further details . 33 year ended december 31 , 2019 compared to the year ended december 31 , 2018 net sales of tech-enabled services for the year ended december 31 , 2019 decreased $ 75.0 million , or 17.1 % , to $ 364.7 million versus the year ended december 31 , 2018 , including a decrease of $ 41.8 million , or 9.5 % , due to the july 2018 sale of the language solutions business . in addition , net sales of tech-enabled services decreased primarily due to lower capital markets transactions and compliance volumes . net sales of software solutions for the year ended december 31 , 2019 increased $ 11.0 million , or 6.2 % , to $ 189.3 million versus the year ended december 31 , 2018. net sales of software solutions increased primarily due to increases in activedisclosure , arc suite as well as due to the impact from the acquisition of ebrevia .

this includes any internal costs that are directly related to development and exploration activities , but does not include any costs related to production , general corporate overhead or similar activities . proceeds received from property disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves , in which case a gain or loss is recognized . the sum of net capitalized costs and estimated future development and dismantlement costs for each cost center are amortized using the equivalent unit-of-production method , based on proved oil and natural gas reserves . the capitalized costs are amortized over the life of the reserves associated with the assets , with the dd & a recognized in the period that the reserves are produced . dd & a is calculated by dividing the period 's production volumes by the estimated volume of reserves associated with the investment and multiplying the calculated percentage by the sum of the capitalized investment and estimated future development costs associated with the investment . changes in our reserve estimates will therefore result in changes in our dd & a per unit . costs associated with production and general corporate activities are expensed in the period incurred . exploratory wells in progress are excluded from the dd & a calculation until the outcome of the well is determined . similarly , unproved property costs are initially excluded from the dd & a calculation . unproved property costs not subject to the dd & a calculation consist primarily of leasehold and seismic costs related to unproved areas . unproved property costs are transferred into the amortization base on an ongoing basis as the properties are evaluated and proved reserves are established or impairment is determined . unproved oil and natural gas properties are assessed quarterly for impairment to determine whether we are still actively pursuing the project and whether the project has been proven either to have economic quantities of reserves or that economic quantities of reserves do not exist . under the full cost method of accounting , capitalized oil and natural gas property costs less accumulated dd & a and net of deferred income taxes may not exceed the full cost ceiling . the full cost ceiling is equal to the present value , discounted at 10 % , of estimated future net revenues from proved oil and natural gas reserves plus the unimpaired cost of unproved properties not subject to amortization , plus the lower of cost or fair value of unproved properties that are subject to amortization . when net capitalized costs exceed the full cost ceiling , an impairment is recognized . derivative instruments . we use derivative instruments , typically costless collars and fixed-rate swaps , to manage price risk underlying our oil and natural gas production . we may also use puts , calls and basis swaps in the future . all derivative instruments are recorded in the consolidated balance sheets at fair value . we offset fair value amounts recognized for derivative instruments executed with the same counterparty . although we do not designate any of our derivative instruments as cash flow hedges , such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and natural gas production . these contracts are accounted for using the mark-to-market accounting method and accordingly , we recognize all unrealized and realized gains and losses related to these contracts currently in earnings and they are classified as gain ( loss ) on oil price risk derivatives in our consolidated statements of operations . our board of directors sets all risk management policies and reviews the status and results of derivative activities , including volumes , types of instruments and counterparties . the master contracts with approved counterparties identify the ceo and cfo as representatives authorized to execute trades . 43 joint interest operations . we do not serve as operator for any of our oil and natural gas properties . therefore , we rely to a large extent on the operator of the property to provide us with timely and accurate information about the operations of the properties . joint interest billings from the operators serve as our primary source of information to record revenue , operating expenses and capital expenditures for our properties on a monthly basis . many of our properties are subject to complex participation and operating agreements where our working interests and net revenue interests are subject to change upon the occurrence of certain events , such as the achievement of “ payout . ” these calculations may be subject to error and differences of interpretation which can cause uncertainties about the proper amount that should be recorded in our accounting records . when these issues arise , we make every effort to work with the operators to resolve the issues promptly . revenue recognition . we recognize revenue in accordance with fasb asc topic 606- revenue from contracts with customers , which we adopted effective january 1 , 2018 , using the modified retrospective approach . see note 3-revenue recognition to the consolidated financial statements herein for more information on our adoption of this new accounting standard . stock-based compensation . we measure the cost of employee services received in exchange for all equity awards granted , including stock options , based on the fair market value of the award as of the grant date . we recognize the cost of the equity awards over the period during which an employee is required to provide service in exchange for the award , usually the vesting period . for awards granted which contain a graded vesting schedule , and the only condition for vesting is a service condition , compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was , in substance , a single award . warrant liability . story_separator_special_tag ● we did not effectively monitor expense reimbursements to ensure that only business expenses are reimbursed to employees on their expense reports . ● we did not have a process in place to identify related parties . ● we did not have a policy in place that requires board approval prior to the company expending material amounts of company funds in connection with evaluating potential acquisitions or transactions with third parties and vendors . for a summary of the actions we have taken following the identification of the material weakness in our internal control over financial reporting as of december 31 , 2018 as noted above , see item 1. business.—litigation and liquidity and –recent developments—audit committee investigation . this annual report on form 10-k does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting . management 's report was not subject to attestation by our registered public accounting firm pursuant to rules of the sec that permit us to provide only management 's report in this annual report on form 10-k. changes in internal control over financial reporting . with the exception of the remediation efforts described below , there have been no changes to our system of internal control over financial reporting during the year and fiscal quarter ended december 31 , 2018 and during the subsequent time period through the filing of this annual report on form 10-k that have materially affected , or are reasonably likely to materially affect , our system of controls over financial reporting . we have designed a remediation plan to strengthen our internal control over financial reporting and have taken , and will continue to take , remediation steps to address the material weaknesses described above . we will also continue to take meaningful steps to enhance our disclosure controls and procedures and our internal controls over financial reporting . management 's remediation plan in response to the material weaknesses identified in “ management 's report on internal control over financial reporting ” above , we have developed a plan ( the “ remediation plan ” ) with oversight from our audit committee to remediate the material weaknesses and have begun working on implementing the remediation plan . our remediation plan implements certain changes to our internal control over financial reporting ( as defined in rule 13a-15 ( f ) and rule 15d-15 ( f ) under the exchange act ) , including , but not limited to , the following efforts : ● performing a full review of our system of internal control and evaluating the effectiveness of this system on an ongoing basis . ● adding professionals to our accounting staff who have experience in implementing and maintaining an effective system of internal control . 51 ● establishing effective segregation of duty controls , including segregation of duties to ensure the approval of disbursement transactions is performed by someone other than the person initiating the transaction . ● creating and enforcing a written expense reimbursement policy that applies to both employees and board members that ( i ) defines allowable expenses , ( ii ) requires pre-approval of expenditures above $ 500 in situations where personal conflicts of interest may exist ; ( iii ) prohibits the payment of vendors and reimbursement through expense reports ; ( iv ) outlines the documentation requirements for reimbursements , including receipts for meals or events exceeding $ 50 , listing all parties at such meal and the business purposes of each meal or event ; ( v ) requires detailed folios and receipts for all hotel stays ; ( vi ) requires passenger information for all flights and a description of the business purpose of such travel ; ( vii ) defines the levels of approval , including the approval of the chief executive officer 's expenses by the chairman of the audit committee and other officers ' expenses by the chief executive officer ; ( viii ) establishes that all expenses must be submitted within 60 days of incurring the expense or such expense will not be subject to reimbursement ; ( ix ) defines that all employees travel by coach for flights lasting less than three hours and by business class for flights lasting longer than three hours ; and ( x ) defines the type of rental car allowed while traveling . ● establishing that all checks or wire transfers issued by the company require the approval of both the chief financial officer and the controller . ● establishing a vendor approval process whereby any third-party vendors require approval by both the chief executive officer and the chief financial officer prior to engagement of such third-party vendors . ● requiring employees and board members to certify in writing at least annually that all potential conflicts of interest have been disclosed . ● implementing a policy that prohibits employees from using company vendors , including attorneys , accountants and consultants , for personal purposes without obtaining prior board approval . ● implementing a policy that clearly defines the types of potential projects or transactions that require prior board approval prior to evaluating such potential project or transaction and incurring material expenses in connection with such evaluation , including due diligence . our management believes the foregoing remedial efforts will effectively remediate the material weaknesses . as we continue to evaluate and work to improve our internal control over financial reporting , our management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan . if not remediated , these control deficiencies could result in material misstatements to our consolidated financial statements in the future . additionally , as part of a continuing effort to improve our business processes , management is currently evaluating its existing internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures . item 9b – other information . none . part iii item

liquidity and capital resources the following table sets forth certain measures about our liquidity as of december 31 , 2018 and 2017 , in thousands : replace_table_token_14_th ( 1 ) working capital is computed by subtracting total current liabilities from total current assets . ( 2 ) the current ratio is computed by dividing total current assets by total current liabilities . ( 3 ) the debt to equity ratio is computed by dividing total debt by total shareholders ' equity . as of december 31 , 2018 , we had a working capital surplus of $ 2.0 million compared to a working capital surplus of $ 4.3 million as of december 31 , 2017 , a decrease of $ 2.3 million . this decrease was primarily attributable to ( i ) operating losses of $ 1.1 million , ( ii ) capital expenditures of $ 1.3 million , ( iii ) the reclassification of $ 0.9 million drawn on the credit facility to current liabilities , ( iv ) the reclassification of assets held for sale of $ 0.7 million to property and equipment , and ( v ) the reduction in fair value of marketable securities of $ 0.3 million , which decreases were partially offset by an increase of $ 1.7 million for proceeds from at-the-market offerings of common shares . our sole source of debt financing was a revolving credit facility with apeg ii , which we repaid in full in march 2019 and the credit facility matured on july 30 , 2019. the borrowing base was $ 6.0 million as of december 31 , 2018 and 2017. as of december 31 , 2018 , outstanding borrowings were $ 0.9 million and we had borrowing availability of $ 5.1 million . as of december 31 , 2018 , we were in compliance with all financial covenants associated with the credit facility . apeg ii was the secured lender under the credit facility and is currently involved in litigation with us , as described in item 1. business—litigation and liquidity—apeg ii litigation . as described above , the costs associated with the ongoing litigation have been a significant use of our existing cash .

net income was also impacted by a $ 2.1 million and $ 1.6 million increase in interest expense and income tax expense , respectively . total revenues increased to $ 610.2 million in fiscal 2015 , a $ 10.9 million , or 1.8 % , increase over the $ 599.3 million in fiscal 2014 . revenues from the 1,179 branches open throughout both fiscal years increased by 0.8 % . at march 31 , 2015 , the company had 1,320 branches in operation , an increase of 49 branches from march 31 , 2014 . interest and fee income during fiscal 2015 increased by $ 0.5 million , or 0.1 % , over fiscal 2014 . this increase resulted from an increase of $ 19.8 million , or 2.4 % , in average net loans receivable between the two fiscal years . the revenue increase was partially offset by a reduction in loan volume in the year , which resulted from the implementation of a system change that ensured customers were not encouraged to refinance existing loans where the proceeds from the transaction were less than 10 % of the loan being refinanced . the increase was also partially offset by a shift in the portfolio mix to larger loans and an increase in the amount of accounts 60 days or more past due , which are no longer accruing revenue . the percentage of loans outstanding that represent larger loans has increased from 39.2 % at march 31 , 2014 to 40.5 % at march 31 , 2015. insurance commissions and other income increased by $ 10.4 million , or 13.8 % , over the two fiscal years . insurance commissions decreased by $ 2.6 million , or 5.1 % , when comparing the two fiscal periods due to the decrease in loan volume mentioned above . other income increased by $ 13.0 million , or 51.8 % , when comparing the two fiscal periods . this increase resulted primarily from the sale of approximately $ 16.0 million of charged off accounts , partially offset by a decrease in the sales of world class buying club ( `` wcbc `` ) of $ 1.4 million , a decrease in the sales of motor club of $ 915,000 , and decreased revenue from paradata of $ 309,000. as disclosed in our second quarter , the company has decided to wind down the wcbc product . as of march 31 , 2015 , the company is no longer financing the purchase of products through the program . the company will continue to service all outstanding retail installment sales contracts . the wcbc product contributed $ 2.4 million to other income during the year and $ 3.9 million for the year ended march 31 , 2014. the wcbc loans contributed $ 2.0 million to interest and fees and resulted in net charge-offs of $ 3.2 million for the year ended march 31 , 2015 and $ 2.3 million and $ 4.1 million , respectively , for the year ended march 31 , 2014. the provision for loan losses during fiscal 2015 decreased by $ 7.7 million , or 6.1 % , from the previous year . this decrease resulted from a decrease in the amount of loans charged off and a decrease in the general reserve associated with slower growth during the current fiscal year partially offset by an increase in accounts 90 days or more past due . net charge-offs for fiscal 2015 amounted to $ 110.6 million , a 10.1 % decrease over the $ 123.0 million charged off during fiscal 2014 . accounts that were 60 days or more past due were 4.3 % and 3.0 % on a recency basis , and were 7.0 % and 5.3 % on a contractual basis at march 31 , 2015 and march 31 , 2014 . the increase in accounts contractually delinquent was primarily due to the change in branch level incentives discussed in the second quarter . when excluding the impact of payroll deduct loans in mexico , the accounts contractually delinquent 60 days or more past due were 6.1 % at march 31 , 2015. during the current fiscal year , the company has also had a decrease in year-over-year loan loss ratios . net charge-offs as a percentage of average net loans decreased from 14.7 % during fiscal 2014 to 12.9 % during fiscal 2015 . the net charge-off ratio benefited from the change in branch level incentives mentioned above . we estimate the net charge-off ratio would have been approximately 14.1 % for the year excluding the impact of the change . the prior year charge-off ratio of 14.7 % and the estimated current year charge-off ratio of 14.1 % are in line with historical levels . from fiscal 2002 to fiscal 2006 , the charge-offs as a percent of average loans ranged from 14.6 % to 14.8 % . in fiscal 2007 the company experienced a temporary decline to 13.3 % , which was attributed to a change in the bankruptcy law but returned to 14.5 % in fiscal 2008. in fiscal 2009 the ratio increased to 16.7 % , the highest in the company 's history as a result of the difficult economic environment and higher energy costs that our customers faced . the ratio steadily declined from 15.5 % in fiscal 2010 to 13.9 % in fiscal 2013. general and administrative expenses during fiscal 2015 increased by $ 10.8 million , or 3.8 % , over the previous fiscal year . of the total increase , approximately $ 5.0 million related to personnel expense , the majority of which was attributable to the year-over-year increase in our branch network , normal merit increases to employees , increased health insurance costs , and incentive costs . story_separator_special_tag for additional discussion concerning the allowance for loan losses , see “ credit quality ” below . share-based compensation the company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest . the fair value of restricted stock is based on the number of shares granted and the quoted price of our common stock at the time of grant , and the fair value of stock options is determined using the black-scholes valuation model . the black-scholes model requires the input of highly subjective assumptions , including expected volatility , risk-free interest rate and expected life , changes to which can materially affect the fair value estimate . in addition , the estimation of share-based awards that will ultimately vest requires judgment , and to the extent actual results or updated estimates differ from our current estimates , such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised . the company considers many factors when estimating expected forfeitures , including types of awards , employee class , and historical experience . actual results , and future changes in estimates , may differ substantially from our current estimates . income taxes management uses certain assumptions and estimates in determining income taxes payable or refundable , deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns , and income tax expense . determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations . management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets . these judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change . no assurance can be given that either the tax returns submitted by management or the income tax reported on the consolidated financial statements will not be adjusted by either adverse rulings by the u.s. tax court , changes in the tax code , or assessments made by the internal revenue service state , or foreign taxing authorities . the company is subject to potential adverse adjustments , including but not limited to : an increase in the statutory federal or state income tax rates , the permanent non-deductibility of amounts currently considered deductible either now or in future periods , and the dependency on the generation of future taxable income in order to ultimately realize deferred income tax assets . under fasb asc 740 , the company includes the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not ( likelihood of greater than 50 % ) that such positions will be sustained by taxing authorities , with full knowledge of relevant information , based on the technical merits of the tax position . while the company supports its tax positions by unambiguous tax law , prior experience with the taxing authority , and analysis that considers all relevant facts , circumstances and regulations , management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position . credit quality the company 's delinquency and net charge-off ratios reflect , among other factors , changes in the mix of loans in the portfolio , the quality of receivables , the success of collection efforts , bankruptcy trends and general economic conditions . delinquency is computed on the basis of the date of the last full contractual payment on a loan ( known as the recency method ) and on the basis of the amount past due in accordance with original payment terms of a loan ( known as the contractual method ) . upon refinancings , the contractual delinquency of a loan is measured based upon the terms of the new agreement , and is not impacted by the refinanced loan 's classification as a new loan or modification of the existing loan . management closely monitors portfolio delinquency using both methods to measure the quality of the company 's loan portfolio and the probability of credit losses . the following table classifies the gross loans receivable of the company that were delinquent on a contractual basis for at least 61 days at march 31 , 2015 , 2014 , and 2013 : replace_table_token_9_th when excluding the impact of payroll deduct loans in mexico , the accounts contractually delinquent 60 days or more were 6.1 % at march 31 , 2015 . our payroll deduct loans in mexico are installment loans to union members where we have an agreement with the union to deduct the loan payment from the member 's payroll and remit it on the members behalf to the company . the additional administrative process , which is unique to the payroll deduct product , often results in a higher level of contractual delinquencies . however , the historical net charge-offs to average net loans are lower than the overall company ratio . the payroll deduct loans have increased from 37.9 % of our mexican portfolio at march 31 , 2014 to 44.8 % at march 31 , 2015 . in fiscal 2015 approximately 83.1 % of the company 's loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers . a refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer . for fiscal 2015 , 2014 , and 2013 , the percentages of the company 's loan originations that were refinancings of existing loans were 71.5 % , 73.5 % , and 75.3 % , respectively . the company 's refinancing policies , while limited by state regulations , in all cases consider the customer 's payment history and require

liquidity and capital resources the following table sets forth certain measures about our liquidity as of december 31 , 2018 and 2017 , in thousands : replace_table_token_14_th ( 1 ) working capital is computed by subtracting total current liabilities from total current assets . ( 2 ) the current ratio is computed by dividing total current assets by total current liabilities . ( 3 ) the debt to equity ratio is computed by dividing total debt by total shareholders ' equity . as of december 31 , 2018 , we had a working capital surplus of $ 2.0 million compared to a working capital surplus of $ 4.3 million as of december 31 , 2017 , a decrease of $ 2.3 million . this decrease was primarily attributable to ( i ) operating losses of $ 1.1 million , ( ii ) capital expenditures of $ 1.3 million , ( iii ) the reclassification of $ 0.9 million drawn on the credit facility to current liabilities , ( iv ) the reclassification of assets held for sale of $ 0.7 million to property and equipment , and ( v ) the reduction in fair value of marketable securities of $ 0.3 million , which decreases were partially offset by an increase of $ 1.7 million for proceeds from at-the-market offerings of common shares . our sole source of debt financing was a revolving credit facility with apeg ii , which we repaid in full in march 2019 and the credit facility matured on july 30 , 2019. the borrowing base was $ 6.0 million as of december 31 , 2018 and 2017. as of december 31 , 2018 , outstanding borrowings were $ 0.9 million and we had borrowing availability of $ 5.1 million . as of december 31 , 2018 , we were in compliance with all financial covenants associated with the credit facility . apeg ii was the secured lender under the credit facility and is currently involved in litigation with us , as described in item 1. business—litigation and liquidity—apeg ii litigation . as described above , the costs associated with the ongoing litigation have been a significant use of our existing cash .

net income was also impacted by a $ 2.1 million and $ 1.6 million increase in interest expense and income tax expense , respectively . total revenues increased to $ 610.2 million in fiscal 2015 , a $ 10.9 million , or 1.8 % , increase over the $ 599.3 million in fiscal 2014 . revenues from the 1,179 branches open throughout both fiscal years increased by 0.8 % . at march 31 , 2015 , the company had 1,320 branches in operation , an increase of 49 branches from march 31 , 2014 . interest and fee income during fiscal 2015 increased by $ 0.5 million , or 0.1 % , over fiscal 2014 . this increase resulted from an increase of $ 19.8 million , or 2.4 % , in average net loans receivable between the two fiscal years . the revenue increase was partially offset by a reduction in loan volume in the year , which resulted from the implementation of a system change that ensured customers were not encouraged to refinance existing loans where the proceeds from the transaction were less than 10 % of the loan being refinanced . the increase was also partially offset by a shift in the portfolio mix to larger loans and an increase in the amount of accounts 60 days or more past due , which are no longer accruing revenue . the percentage of loans outstanding that represent larger loans has increased from 39.2 % at march 31 , 2014 to 40.5 % at march 31 , 2015. insurance commissions and other income increased by $ 10.4 million , or 13.8 % , over the two fiscal years . insurance commissions decreased by $ 2.6 million , or 5.1 % , when comparing the two fiscal periods due to the decrease in loan volume mentioned above . other income increased by $ 13.0 million , or 51.8 % , when comparing the two fiscal periods . this increase resulted primarily from the sale of approximately $ 16.0 million of charged off accounts , partially offset by a decrease in the sales of world class buying club ( `` wcbc `` ) of $ 1.4 million , a decrease in the sales of motor club of $ 915,000 , and decreased revenue from paradata of $ 309,000. as disclosed in our second quarter , the company has decided to wind down the wcbc product . as of march 31 , 2015 , the company is no longer financing the purchase of products through the program . the company will continue to service all outstanding retail installment sales contracts . the wcbc product contributed $ 2.4 million to other income during the year and $ 3.9 million for the year ended march 31 , 2014. the wcbc loans contributed $ 2.0 million to interest and fees and resulted in net charge-offs of $ 3.2 million for the year ended march 31 , 2015 and $ 2.3 million and $ 4.1 million , respectively , for the year ended march 31 , 2014. the provision for loan losses during fiscal 2015 decreased by $ 7.7 million , or 6.1 % , from the previous year . this decrease resulted from a decrease in the amount of loans charged off and a decrease in the general reserve associated with slower growth during the current fiscal year partially offset by an increase in accounts 90 days or more past due . net charge-offs for fiscal 2015 amounted to $ 110.6 million , a 10.1 % decrease over the $ 123.0 million charged off during fiscal 2014 . accounts that were 60 days or more past due were 4.3 % and 3.0 % on a recency basis , and were 7.0 % and 5.3 % on a contractual basis at march 31 , 2015 and march 31 , 2014 . the increase in accounts contractually delinquent was primarily due to the change in branch level incentives discussed in the second quarter . when excluding the impact of payroll deduct loans in mexico , the accounts contractually delinquent 60 days or more past due were 6.1 % at march 31 , 2015. during the current fiscal year , the company has also had a decrease in year-over-year loan loss ratios . net charge-offs as a percentage of average net loans decreased from 14.7 % during fiscal 2014 to 12.9 % during fiscal 2015 . the net charge-off ratio benefited from the change in branch level incentives mentioned above . we estimate the net charge-off ratio would have been approximately 14.1 % for the year excluding the impact of the change . the prior year charge-off ratio of 14.7 % and the estimated current year charge-off ratio of 14.1 % are in line with historical levels . from fiscal 2002 to fiscal 2006 , the charge-offs as a percent of average loans ranged from 14.6 % to 14.8 % . in fiscal 2007 the company experienced a temporary decline to 13.3 % , which was attributed to a change in the bankruptcy law but returned to 14.5 % in fiscal 2008. in fiscal 2009 the ratio increased to 16.7 % , the highest in the company 's history as a result of the difficult economic environment and higher energy costs that our customers faced . the ratio steadily declined from 15.5 % in fiscal 2010 to 13.9 % in fiscal 2013. general and administrative expenses during fiscal 2015 increased by $ 10.8 million , or 3.8 % , over the previous fiscal year . of the total increase , approximately $ 5.0 million related to personnel expense , the majority of which was attributable to the year-over-year increase in our branch network , normal merit increases to employees , increased health insurance costs , and incentive costs . story_separator_special_tag for additional discussion concerning the allowance for loan losses , see “ credit quality ” below . share-based compensation the company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest . the fair value of restricted stock is based on the number of shares granted and the quoted price of our common stock at the time of grant , and the fair value of stock options is determined using the black-scholes valuation model . the black-scholes model requires the input of highly subjective assumptions , including expected volatility , risk-free interest rate and expected life , changes to which can materially affect the fair value estimate . in addition , the estimation of share-based awards that will ultimately vest requires judgment , and to the extent actual results or updated estimates differ from our current estimates , such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised . the company considers many factors when estimating expected forfeitures , including types of awards , employee class , and historical experience . actual results , and future changes in estimates , may differ substantially from our current estimates . income taxes management uses certain assumptions and estimates in determining income taxes payable or refundable , deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns , and income tax expense . determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations . management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets . these judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change . no assurance can be given that either the tax returns submitted by management or the income tax reported on the consolidated financial statements will not be adjusted by either adverse rulings by the u.s. tax court , changes in the tax code , or assessments made by the internal revenue service state , or foreign taxing authorities . the company is subject to potential adverse adjustments , including but not limited to : an increase in the statutory federal or state income tax rates , the permanent non-deductibility of amounts currently considered deductible either now or in future periods , and the dependency on the generation of future taxable income in order to ultimately realize deferred income tax assets . under fasb asc 740 , the company includes the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not ( likelihood of greater than 50 % ) that such positions will be sustained by taxing authorities , with full knowledge of relevant information , based on the technical merits of the tax position . while the company supports its tax positions by unambiguous tax law , prior experience with the taxing authority , and analysis that considers all relevant facts , circumstances and regulations , management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position . credit quality the company 's delinquency and net charge-off ratios reflect , among other factors , changes in the mix of loans in the portfolio , the quality of receivables , the success of collection efforts , bankruptcy trends and general economic conditions . delinquency is computed on the basis of the date of the last full contractual payment on a loan ( known as the recency method ) and on the basis of the amount past due in accordance with original payment terms of a loan ( known as the contractual method ) . upon refinancings , the contractual delinquency of a loan is measured based upon the terms of the new agreement , and is not impacted by the refinanced loan 's classification as a new loan or modification of the existing loan . management closely monitors portfolio delinquency using both methods to measure the quality of the company 's loan portfolio and the probability of credit losses . the following table classifies the gross loans receivable of the company that were delinquent on a contractual basis for at least 61 days at march 31 , 2015 , 2014 , and 2013 : replace_table_token_9_th when excluding the impact of payroll deduct loans in mexico , the accounts contractually delinquent 60 days or more were 6.1 % at march 31 , 2015 . our payroll deduct loans in mexico are installment loans to union members where we have an agreement with the union to deduct the loan payment from the member 's payroll and remit it on the members behalf to the company . the additional administrative process , which is unique to the payroll deduct product , often results in a higher level of contractual delinquencies . however , the historical net charge-offs to average net loans are lower than the overall company ratio . the payroll deduct loans have increased from 37.9 % of our mexican portfolio at march 31 , 2014 to 44.8 % at march 31 , 2015 . in fiscal 2015 approximately 83.1 % of the company 's loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers . a refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer . for fiscal 2015 , 2014 , and 2013 , the percentages of the company 's loan originations that were refinancings of existing loans were 71.5 % , 73.5 % , and 75.3 % , respectively . the company 's refinancing policies , while limited by state regulations , in all cases consider the customer 's payment history and require

liquidity and capital resources the company has financed and continues to finance its operations , acquisitions , and branch expansion through a combination of cash flows from operations and borrowings from its institutional lenders . the company has generally applied its cash flows from operations to fund its increasing loan volume , fund acquisitions , repay long-term indebtedness , and repurchase its common stock . as the company 's gross loans receivable increased from $ 770.3 million at march 31 , 2010 to $ 1.1 billion at march 31 , 2015 , net cash provided by operating activities for fiscal years 2015 , 2014 and 2013 was $ 241.9 million , $ 246.0 million and $ 232.0 million , respectively . the company 's primary ongoing cash requirements relate to the funding of new branches and acquisitions , the overall growth of loans outstanding , the repayment of long-term indebtedness and the repurchase of its common stock . as of march 31 , 2015 , approximately 18.1 million shares have been repurchased since 1996 for an aggregate purchase price of approximately $ 849.2 million . during fiscal 2015 the company repurchased 1.4 million shares for $ 115.3 million . on march 10 , 2015 , the board of directors authorized the company to repurchase up to $ 25.0 million of the company 's common stock .

revenues and expenses are presented in the consolidated statements of operations , but are not subtotaled by segment . however , this information is available in total and by segment in note 24 , `` segmented information , `` to the consolidated financial statements , regarding reportable segment information . the nearest comparable u.s. gaap measure is loss from continuing operations before income tax benefit which , in addition to operating income ( loss ) , includes net investment income , net realized gains , other-than-temporary impairment loss , other income not allocated to segments , general and administrative expenses , restructuring expense , interest expense , amortization of intangible assets , contingent consideration ( benefit ) expense , impairment of asset held for sale , loss on change in fair value of debt , loss on disposal of subsidiary , loss on disposal of asset held for sale , loss on buy-back of debt and equity in net ( loss ) income of investee . a reconciliation of segment operating income ( loss ) to loss from continuing operations before income tax benefit for the year ended december 31 , 2014 is presented in table 1 of the `` results of continuing operations `` section of md & a . gross premiums written while net premiums earned is the related u.s. gaap measure used in the consolidated statements of operations , gross premiums written is the component of net premiums earned that measures insurance business produced before the impact of ceding reinsurance premiums , but without respect to when those premiums will be recognized as actual revenue . we use this measure as an overall gauge of gross business volume in insurance underwriting . net premiums written while net premiums earned is the related u.s. gaap measure used in the consolidated statements of operations , net premiums written is the component of net premiums earned that measures the difference between gross premiums written and the impact of ceding reinsurance premiums , but without respect to when those premiums will be recognized as actual revenue . we use this measure as an indication of retained or net business volume in insurance underwriting . underwriting ratios kingsway , like many insurance companies , analyzes performance based on underwriting ratios such as loss and loss adjustment expense ratio , expense ratio and combined ratio . the loss and loss adjustment expense ratio is derived by dividing the amount of net loss and loss adjustment expenses incurred by net premiums earned . the expense ratio is derived by dividing the sum of commissions and premium taxes ; general and administrative expenses ; and policy fee income by net premiums earned . the combined ratio is the sum of the loss and loss adjustment expense ratio and the expense ratio . a combined ratio below 100 % demonstrates underwriting profit whereas a combined ratio over 100 % demonstrates an underwriting loss . critical accounting estimates and assumptions the preparation of consolidated financial statements in conformity with u.s. gaap requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year . actual results could differ from these estimates . estimates and their underlying assumptions are reviewed on an ongoing basis . changes in estimates are recorded in the accounting period in which they are determined . the critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment expenses ; valuation of fixed maturities and equity investments ; valuation of deferred income taxes ; valuation of intangible assets ; goodwill recoverability ; deferred acquisition costs ; fair value assumptions for debt obligations ; and contingent consideration . provision for unpaid loss and loss adjustment expenses a significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for unpaid loss and loss adjustment expenses . the process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events . as such , the process is inherently complex and imprecise and estimates are constantly refined . the process of establishing the provision for unpaid loss and loss adjustment expenses relies on the judgment and opinions of a large number of individuals , including the opinions of the company 's actuaries . further information regarding estimates used in determining our provision for unpaid loss and loss adjustment expenses is discussed in the “ unpaid loss and loss adjustment expenses ” section of part i , item 1 of this annual report and note 14 , `` unpaid loss and loss adjustment expenses , `` to the consolidated financial statements . replace_table_token_37_th kingsway financial services inc. management 's discussion and analysis factors affecting the provision for unpaid loss and loss adjustment expenses include the continually evolving and changing regulatory and legal environment ; actuarial studies ; the professional experience and expertise of the company 's claims personnel and independent adjusters retained to handle individual claims ; the quality of the data used for projection purposes ; existing claims management practices including claims handling and settlement practices ; the effect of inflationary trends on future loss settlement costs ; court decisions ; economic conditions ; and public attitudes . the company utilizes external actuaries to evaluate the adequacy of our provision for unpaid loss and loss adjustment expenses under the terms of our insurance policies and vehicle service agreements . the provision is evaluated by the company 's actuaries with the results then shared with management , which is responsible for establishing the provision recorded in the consolidated balance sheets . story_separator_special_tag the increase in net premiums written and earned is due to increased premium volumes at mendota and mendakota as a result of the termination of their quota share reinsurance agreement effective january 1 , 2014 , partially offset by decreased premium volumes at amigo as a result of their run-off plan . the insurance underwriting operating income increased to $ 1.3 million for the year ended december 31 , 2014 compared to a loss of $ 15.7 million for the year ended december 31 , 2013 . the increase in operating income is primarily attributed to an increase in net premiums earned in 2014 as compared to 2013 . the insurance underwriting loss and loss adjustment expense ratio for 2014 was 69.7 % compared to 74.4 % in 2013 . the decrease in the loss and loss adjustment expense ratio is primarily due to an increase in net premiums earned at mendota combined with a reduction in loss adjustment expenses as a percent of net premiums earned at mendota , as well as a decrease in loss and loss adjustment expense at ucc and amigo due to favorable development on unpaid loss and loss adjustment expenses . the insurance underwriting expense ratio was 29.5 % in 2014 compared with 40.7 % in 2013 . the decrease in the expense ratio is primarily due to an overall reduction in general expenses . the insurance underwriting expense ratio includes policy fee income of $ 8.1 million and $ 9.0 million , respectively , for the years ended december 31 , 2014 and december 31 , 2013 . the insurance underwriting combined ratio was 99.2 % in 2014 compared with 115.1 % in 2013 , reflecting the dynamics which affected the loss and loss adjustment expense ratio and expense ratio . insurance services the insurance services service fee and commission income increase d 10.7 % to $ 54.8 million for the year ended december 31 , 2014 compared with $ 49.5 million for the year ended december 31 , 2013 . this increase was due to increased service fee and commission income at ars and trinity . the insurance services operating income was $ 4.8 million for the year ended december 31 , 2014 compared with $ 2.2 million for the year ended december 31 , 2013 . the increase in operating income is primarily related to improved operating income at ars for the year ended december 31 , 2014 compared to the same period in 2013 . net investment income net investment income decreased to $ 1.6 million in 2014 compared to $ 2.2 million in 2013 . the decrease is primarily related to less dividend income in 2014 as a result of the company 's sale of its holdings of atlas preferred stock during the third quarter of 2013. see `` other-than-temporary impairment loss `` section below for further details . net realized gains the company incurred net realized gains of $ 5.0 million in 2014 compared to $ 3.5 million in 2013 . the net realized gains in 2014 resulted primarily from the liquidation of equity investments in insurance underwriting . the net realized gains in 2013 resulted primarily from the sale of atlas common stock . during 2013 , the company realized a net gain of $ 2.6 million related to the sale of atlas common stock . see note 5 , `` dispositions and liquidations , `` to the consolidated financial statements , for further details of the company 's atlas common stock sales . other-than-temporary impairment loss on july 8 , 2013 , the company announced that it had entered into a non-binding letter of intent with atlas to sell its holdings of atlas preferred stock for 90 % of liquidation value , or $ 16.2 million . on august 1 , 2013 , the company announced that the transaction had closed . as a result , the company recorded a write-down for other-than-temporary impairment related to its investment in atlas preferred stock of $ 1.8 million for the year ended december 31 , 2013 . other income and expenses not allocated to segments , net other income and expenses not allocated to segments was a net expense of $ 5.3 million in 2014 compared to $ 12.3 million in 2013 . the decrease in net expense is primarily due to $ 3.2 million less of general expenses and $ 2.3 million of income reported in 2014 related to pih versus $ 1.1 million of loss reported in 2013 related to pih . as further discussed in note 5 , `` dispositions and liquidations , `` to the consolidated financial statements , effective march 31 , 2014 , pih completed an initial public offering of its common stock . the earnings of pih are included in the consolidated statements of operations through the march 31 , 2014 transaction date . prior to the transaction , pih was included in the insurance underwriting segment . as a result of the disposal of the company 's majority interest in pih on march 31 , 2014 , all segmented information has been adjusted to exclude pih from the insurance underwriting segment and to include its earnings in other income and expenses not allocated to segments , net . replace_table_token_43_th kingsway financial services inc. management 's discussion and analysis interest expense interest expense for 2014 was $ 5.6 million compared to $ 7.3 million in 2013 . the decrease is attributable to the redemption in february 2014 of the remaining outstanding principal balance on the senior unsecured debentures due february 1 , 2014. amortization of intangible assets the company 's intangible assets with definite useful lives are amortized over their estimated useful lives . amortization of intangible assets was $ 1.6 million in 2014 compared to $ 2.2 million in 2013 . the decrease is primarily attributed to less amortization expense related to the iws vsa in-force intangible asset in 2014 compared to 2013 . the vsa in-force asset is amortized

liquidity and capital resources the company has financed and continues to finance its operations , acquisitions , and branch expansion through a combination of cash flows from operations and borrowings from its institutional lenders . the company has generally applied its cash flows from operations to fund its increasing loan volume , fund acquisitions , repay long-term indebtedness , and repurchase its common stock . as the company 's gross loans receivable increased from $ 770.3 million at march 31 , 2010 to $ 1.1 billion at march 31 , 2015 , net cash provided by operating activities for fiscal years 2015 , 2014 and 2013 was $ 241.9 million , $ 246.0 million and $ 232.0 million , respectively . the company 's primary ongoing cash requirements relate to the funding of new branches and acquisitions , the overall growth of loans outstanding , the repayment of long-term indebtedness and the repurchase of its common stock . as of march 31 , 2015 , approximately 18.1 million shares have been repurchased since 1996 for an aggregate purchase price of approximately $ 849.2 million . during fiscal 2015 the company repurchased 1.4 million shares for $ 115.3 million . on march 10 , 2015 , the board of directors authorized the company to repurchase up to $ 25.0 million of the company 's common stock .

revenues and expenses are presented in the consolidated statements of operations , but are not subtotaled by segment . however , this information is available in total and by segment in note 24 , `` segmented information , `` to the consolidated financial statements , regarding reportable segment information . the nearest comparable u.s. gaap measure is loss from continuing operations before income tax benefit which , in addition to operating income ( loss ) , includes net investment income , net realized gains , other-than-temporary impairment loss , other income not allocated to segments , general and administrative expenses , restructuring expense , interest expense , amortization of intangible assets , contingent consideration ( benefit ) expense , impairment of asset held for sale , loss on change in fair value of debt , loss on disposal of subsidiary , loss on disposal of asset held for sale , loss on buy-back of debt and equity in net ( loss ) income of investee . a reconciliation of segment operating income ( loss ) to loss from continuing operations before income tax benefit for the year ended december 31 , 2014 is presented in table 1 of the `` results of continuing operations `` section of md & a . gross premiums written while net premiums earned is the related u.s. gaap measure used in the consolidated statements of operations , gross premiums written is the component of net premiums earned that measures insurance business produced before the impact of ceding reinsurance premiums , but without respect to when those premiums will be recognized as actual revenue . we use this measure as an overall gauge of gross business volume in insurance underwriting . net premiums written while net premiums earned is the related u.s. gaap measure used in the consolidated statements of operations , net premiums written is the component of net premiums earned that measures the difference between gross premiums written and the impact of ceding reinsurance premiums , but without respect to when those premiums will be recognized as actual revenue . we use this measure as an indication of retained or net business volume in insurance underwriting . underwriting ratios kingsway , like many insurance companies , analyzes performance based on underwriting ratios such as loss and loss adjustment expense ratio , expense ratio and combined ratio . the loss and loss adjustment expense ratio is derived by dividing the amount of net loss and loss adjustment expenses incurred by net premiums earned . the expense ratio is derived by dividing the sum of commissions and premium taxes ; general and administrative expenses ; and policy fee income by net premiums earned . the combined ratio is the sum of the loss and loss adjustment expense ratio and the expense ratio . a combined ratio below 100 % demonstrates underwriting profit whereas a combined ratio over 100 % demonstrates an underwriting loss . critical accounting estimates and assumptions the preparation of consolidated financial statements in conformity with u.s. gaap requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year . actual results could differ from these estimates . estimates and their underlying assumptions are reviewed on an ongoing basis . changes in estimates are recorded in the accounting period in which they are determined . the critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment expenses ; valuation of fixed maturities and equity investments ; valuation of deferred income taxes ; valuation of intangible assets ; goodwill recoverability ; deferred acquisition costs ; fair value assumptions for debt obligations ; and contingent consideration . provision for unpaid loss and loss adjustment expenses a significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for unpaid loss and loss adjustment expenses . the process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events . as such , the process is inherently complex and imprecise and estimates are constantly refined . the process of establishing the provision for unpaid loss and loss adjustment expenses relies on the judgment and opinions of a large number of individuals , including the opinions of the company 's actuaries . further information regarding estimates used in determining our provision for unpaid loss and loss adjustment expenses is discussed in the “ unpaid loss and loss adjustment expenses ” section of part i , item 1 of this annual report and note 14 , `` unpaid loss and loss adjustment expenses , `` to the consolidated financial statements . replace_table_token_37_th kingsway financial services inc. management 's discussion and analysis factors affecting the provision for unpaid loss and loss adjustment expenses include the continually evolving and changing regulatory and legal environment ; actuarial studies ; the professional experience and expertise of the company 's claims personnel and independent adjusters retained to handle individual claims ; the quality of the data used for projection purposes ; existing claims management practices including claims handling and settlement practices ; the effect of inflationary trends on future loss settlement costs ; court decisions ; economic conditions ; and public attitudes . the company utilizes external actuaries to evaluate the adequacy of our provision for unpaid loss and loss adjustment expenses under the terms of our insurance policies and vehicle service agreements . the provision is evaluated by the company 's actuaries with the results then shared with management , which is responsible for establishing the provision recorded in the consolidated balance sheets . story_separator_special_tag the increase in net premiums written and earned is due to increased premium volumes at mendota and mendakota as a result of the termination of their quota share reinsurance agreement effective january 1 , 2014 , partially offset by decreased premium volumes at amigo as a result of their run-off plan . the insurance underwriting operating income increased to $ 1.3 million for the year ended december 31 , 2014 compared to a loss of $ 15.7 million for the year ended december 31 , 2013 . the increase in operating income is primarily attributed to an increase in net premiums earned in 2014 as compared to 2013 . the insurance underwriting loss and loss adjustment expense ratio for 2014 was 69.7 % compared to 74.4 % in 2013 . the decrease in the loss and loss adjustment expense ratio is primarily due to an increase in net premiums earned at mendota combined with a reduction in loss adjustment expenses as a percent of net premiums earned at mendota , as well as a decrease in loss and loss adjustment expense at ucc and amigo due to favorable development on unpaid loss and loss adjustment expenses . the insurance underwriting expense ratio was 29.5 % in 2014 compared with 40.7 % in 2013 . the decrease in the expense ratio is primarily due to an overall reduction in general expenses . the insurance underwriting expense ratio includes policy fee income of $ 8.1 million and $ 9.0 million , respectively , for the years ended december 31 , 2014 and december 31 , 2013 . the insurance underwriting combined ratio was 99.2 % in 2014 compared with 115.1 % in 2013 , reflecting the dynamics which affected the loss and loss adjustment expense ratio and expense ratio . insurance services the insurance services service fee and commission income increase d 10.7 % to $ 54.8 million for the year ended december 31 , 2014 compared with $ 49.5 million for the year ended december 31 , 2013 . this increase was due to increased service fee and commission income at ars and trinity . the insurance services operating income was $ 4.8 million for the year ended december 31 , 2014 compared with $ 2.2 million for the year ended december 31 , 2013 . the increase in operating income is primarily related to improved operating income at ars for the year ended december 31 , 2014 compared to the same period in 2013 . net investment income net investment income decreased to $ 1.6 million in 2014 compared to $ 2.2 million in 2013 . the decrease is primarily related to less dividend income in 2014 as a result of the company 's sale of its holdings of atlas preferred stock during the third quarter of 2013. see `` other-than-temporary impairment loss `` section below for further details . net realized gains the company incurred net realized gains of $ 5.0 million in 2014 compared to $ 3.5 million in 2013 . the net realized gains in 2014 resulted primarily from the liquidation of equity investments in insurance underwriting . the net realized gains in 2013 resulted primarily from the sale of atlas common stock . during 2013 , the company realized a net gain of $ 2.6 million related to the sale of atlas common stock . see note 5 , `` dispositions and liquidations , `` to the consolidated financial statements , for further details of the company 's atlas common stock sales . other-than-temporary impairment loss on july 8 , 2013 , the company announced that it had entered into a non-binding letter of intent with atlas to sell its holdings of atlas preferred stock for 90 % of liquidation value , or $ 16.2 million . on august 1 , 2013 , the company announced that the transaction had closed . as a result , the company recorded a write-down for other-than-temporary impairment related to its investment in atlas preferred stock of $ 1.8 million for the year ended december 31 , 2013 . other income and expenses not allocated to segments , net other income and expenses not allocated to segments was a net expense of $ 5.3 million in 2014 compared to $ 12.3 million in 2013 . the decrease in net expense is primarily due to $ 3.2 million less of general expenses and $ 2.3 million of income reported in 2014 related to pih versus $ 1.1 million of loss reported in 2013 related to pih . as further discussed in note 5 , `` dispositions and liquidations , `` to the consolidated financial statements , effective march 31 , 2014 , pih completed an initial public offering of its common stock . the earnings of pih are included in the consolidated statements of operations through the march 31 , 2014 transaction date . prior to the transaction , pih was included in the insurance underwriting segment . as a result of the disposal of the company 's majority interest in pih on march 31 , 2014 , all segmented information has been adjusted to exclude pih from the insurance underwriting segment and to include its earnings in other income and expenses not allocated to segments , net . replace_table_token_43_th kingsway financial services inc. management 's discussion and analysis interest expense interest expense for 2014 was $ 5.6 million compared to $ 7.3 million in 2013 . the decrease is attributable to the redemption in february 2014 of the remaining outstanding principal balance on the senior unsecured debentures due february 1 , 2014. amortization of intangible assets the company 's intangible assets with definite useful lives are amortized over their estimated useful lives . amortization of intangible assets was $ 1.6 million in 2014 compared to $ 2.2 million in 2013 . the decrease is primarily attributed to less amortization expense related to the iws vsa in-force intangible asset in 2014 compared to 2013 . the vsa in-force asset is amortized

debt u.s. senior note offering on january 29 , 2004 , the company 's subsidiary , kingsway america inc. ( `` kai '' ) completed the sale of $ 100.0 million 7.50 % senior notes due 2014. in march 2004 , an additional $ 25.0 million of these senior notes were issued . interest payments were made on february 1 and august 1 of each year . the notes were fully and unconditionally guaranteed by the company . the notes were redeemable at kai 's option in whole at any time or in part from time to time on or after february 1 , 2009 subject to the conditions stated in the trust indenture . pursuant to the debt buy-back initiative previously mentioned , kai repurchased and retired most of the originally issued par value . on october 15 , 2013 , the company completed a partial , early redemption of its senior unsecured debentures due february 1 , 2014. the company used the proceeds from the september 2013 rights offering to partially redeem the senior unsecured debentures due february 1 , 2014. the partial early redemption was completed in the amount of $ 12.0 million at par plus accrued interest of $ 0.2 million . in february 2014 , the company repaid the $ 14.4 million remaining amount outstanding on its senior unsecured debentures due february 1 , 2014. replace_table_token_59_th kingsway financial services inc. management 's discussion and analysis lroc preferred units on july 14 , 2005 , kingsway linked return of capital trust ( `` klroc trust '' ) completed its public offering of c $ 78.0 million of 5.00 % lroc preferred units due june 30 , 2015 of which the company was a promoter . klroc trust 's net proceeds of the public offering was c $ 74.1 million .

subject to certain preconditions , basf also will make a series of prepayments to us in the aggregate of $ 22 million during the construction of our planned manufacturing facility in statesboro , georgia . the prepayments will be either credited against amounts invoiced to basf for spaceloft a2 or repaid by us to basf after december 31 , 2023. as a result of our decision to temporarily delay construction of the statesboro facility , we have yet to fulfill the preconditions , and commencement of the prepayments from basf will be delayed until the preconditions are satisfied . our revenue for the year ended december 31 , 2016 was $ 117.7 million , which represented a decrease of 4 % from the year ended december 31 , 2015. net loss for the year ended december 31 , 2016 was $ 12.0 million and diluted loss per share was $ 0.52. key metrics and non-gaap financial measures we regularly review a number of metrics , including the following key metrics , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections and make strategic decisions . square foot operating metric we price our product and measure our product shipments in square feet . we estimate our annual nameplate capacity was approximately 50 million square feet of aerogel blankets at december 31 , 2016. we believe the square foot operating metric allows us and our investors to measure the growth in our manufacturing capacity and product shipments on a uniform and consistent basis . the following chart sets forth product shipments associated with recognized revenue in square feet for the periods presented : replace_table_token_5_th adjusted ebitda we use adjusted ebitda , a non-gaap financial measure , as a means to assess our operating performance . we define adjusted ebitda as net income ( loss ) before interest expense , taxes , depreciation , amortization , stock-based compensation expense and other items , which occur from time to time , that we do not believe are indicative of our core operating performance , which included financing costs during the year ended december 31 , 2016. adjusted ebitda is a supplemental measure of our performance that is not presented in accordance with u.s. gaap . adjusted ebitda should not be considered as an alternative to net income ( loss ) or any other measure of financial performance calculated and presented in accordance with u.s. gaap . in addition , our definition and presentation of adjusted ebitda may not be comparable to similarly titled measures presented by other companies . we use adjusted ebitda : as a measure of operating performance because it does not include the impact of items that we do not consider indicative of our core operating performance ; for planning purposes , including the preparation of our annual operating budget , to allocate resources to enhance the financial performance of our business ; and as a performance measure used under our bonus plan . we also believe that the presentation of adjusted ebitda provides useful information to investors with respect to our results of operations and in assessing the performance and value of our business . various measures of ebitda are widely used by investors to measure a company 's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods , book values of assets , capital structures and the methods by which assets were acquired . although measures similar to adjusted ebitda are frequently used by investors and securities analysts in their evaluation of companies , we understand that adjusted ebitda has limitations as an analytical tool , and you should not consider it in isolation or as 46 a substitute for net income , income from operations , net cash provided by operating activities or an analysis of our results of operations as reported under u.s. gaap . some of these limitations are : adjusted ebitda does not reflect our historical cash expenditures or future requirements for capital expenditures or other contractual commitments ; adjusted ebitda does not reflect changes in , or cash requirements for , our working capital needs ; adjusted ebitda does not reflect stock-based compensation expense ; adjusted ebitda does not reflect our tax expense or cash requirements to pay our income taxes ; adjusted ebitda does not reflect our interest expense , or the cash requirements necessary to service interest or principal payments on our debt ; although depreciation , amortization and impairment charges are non-cash charges , the assets being depreciated , amortized or impaired will often have to be replaced in the future , and adjusted ebitda does not reflect any cash requirements for these replacements ; and other companies in our industry may calculate ebitda or adjusted ebitda differently than we do , limiting their usefulness as a comparative measure . because of these limitations , our adjusted ebitda should not be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash available for us to meet our obligations . to properly and prudently evaluate our business , we encourage you to review the gaap financial statements included elsewhere in this annual report on form 10-k , and not to rely on any single financial measure to evaluate our business . the following table presents a reconciliation of net loss , the most directly comparable gaap measure , to adjusted ebitda for the years presented : replace_table_token_6_th ( 1 ) represents non-cash stock-based compensation related to vesting and modifications of stock option grants , vesting of restricted stock units and vesting of restricted common stock . ( 2 ) interest expense in 2014 consists primarily of fair market value adjustments and issuance costs related to our then outstanding subordinated notes , senior convertible notes and convertible notes and certain imputed interest on previously settled obligations . story_separator_special_tag the average selling price per square foot of our products decreased by an effective $ 0.24 , or 8 % , to $ 2.61 per square foot for the year ended december 31 , 2016 from $ 2.85 per square foot for the year ended december 31 , 2015. the decrease in average selling 52 price reflects a year-over-year decline in the mix of high- priced subsea products , combined with an increase in the mix of products sold to reliance industries limited with project-based pricing . this de crease in average selling price had the effect of decreasing product revenue by $ 10.7 million for the year ended december 31 , 2016. in volume terms , product shipments increased 2.0 million square feet , or 5 % , to 44.3 million square feet of aerogel products for the year ended december 31 , 2016 , as compared to 42.2 million square feet in the year ended december 31 , 2015. the increase in volume was supported by the increase in manufacturing capacity associated with the operation of the third production line in the east providence facility for a full year . the increase in product volume had the effect of increasing product revenue by approximately $ 5.7 million for the year ended december 31 , 2016. research services revenue increased by $ 0.3 million , or 13 % , to $ 2.2 million in 2016 from $ 2.0 million in 2015. the increase was primarily due to the timing and amount of funding available under research contracts during the year ended december 31 , 2016 from the comparable period in 2015. product revenue as a percentage of total revenue was 98 % of total revenue in 2016 and 2015 , respectively . research services revenue was 2 % of total revenue in 2016 and 2015 , respectively . we expect that product revenue will continue to comprise a significant and growing percentage of our total revenue in the long-term due to the anticipated demand growth from adoption of our products in the energy infrastructure market , particularly in the district energy and power markets , and through penetration of new and existing markets , including the building materials market . during 2017 , we expect a decrease in product revenue as a result of the conclusion of the major petrochemical project with reliance industries limited , which comprised 25 % of our product revenue during 2016 , in combination with the impact of constrained capital investment and low activity levels in the global energy infrastructure market . accordingly , we are projecting a decline in product revenue and total revenue in the year ending december 31 , 2017 versus the comparable period in 2016. cost of revenue replace_table_token_12_th total cost of revenue decreased by $ 3.4 million , or 4 % , to $ 94.4 million in 2016 from $ 97.9 million in 2015. the decrease in total cost of revenue was the result of a decrease of $ 6.0 million in material costs , offset , in part , by an increase of $ 2.3 million in manufacturing expense and an increase of $ 0.3 million in cost of research services . product cost of revenue decreased $ 3.7 million , or 4 % , to $ 93.1 million in 2016 from $ 96.9 million in 2015. the $ 3.7 million decrease was the result of a $ 6.0 million decrease in material costs , offset , in part , by a $ 2.3 million increase in manufacturing expense year over year . the increase in manufacturing expense included increases in compensation expense of $ 0.9 million , utility expenses of $ 0.3 million and maintenance and facility expense of $ 1.1 million . the increased level of manufacturing expense was driven by operation of the third production line in the east providence facility for a full year in 2016 versus three quarters in 2015. despite growth in product volume of 5 % during the year ended december 31 , 2016 , material costs declined due to strong improvement in manufacturing yields and a shift in mix to lower cost products versus the comparable period in 2015. product cost of revenue as a percentage of product revenue increased to 81 % during 2016 from 80 % in 2015. this increase was the result of the combination of the increase in manufacturing expense associated with operation of the third production line in the east providence facility for a full year in 2016 and the decline in product revenue associated with the impact of constrained capital investment and low activity levels in the global energy infrastructure market . the impact of the increase in manufacturing expense and decline in product revenue was offset , in part , by the improvement in manufacturing yields and the shift in mix to lower cost products during the year ended december 31 , 2016 versus the comparable period in 2015. we expect that cost of product revenue will decrease during 2017 versus 2016. the projected decrease in cost of product revenue reflects planned actions to reduce manufacturing spending and an expected decrease in material costs due to lower projected 53 sales volumes . however , we expect that cost of product revenue as a percentage of product revenue will increase during the year . this projected increase reflects our expectation that , given high fixed cost levels in our manufacturing facility , the expected percentage reduction in cost of product revenue will not fully offset the expected percentage reduction in revenue in 2017 . research services cost of revenue increased by $ 0.3 million , or 30 % , to $ 1.3 million in 2016 from $ 1.0 million in 2015. the increase in research services cost of revenue was due to the 13 % increase in research services revenue during 2016 and an unfavorable mix of labor and expense required to perform the contracted research . gross profit replace_table_token_13_th gross profit decreased $

debt u.s. senior note offering on january 29 , 2004 , the company 's subsidiary , kingsway america inc. ( `` kai '' ) completed the sale of $ 100.0 million 7.50 % senior notes due 2014. in march 2004 , an additional $ 25.0 million of these senior notes were issued . interest payments were made on february 1 and august 1 of each year . the notes were fully and unconditionally guaranteed by the company . the notes were redeemable at kai 's option in whole at any time or in part from time to time on or after february 1 , 2009 subject to the conditions stated in the trust indenture . pursuant to the debt buy-back initiative previously mentioned , kai repurchased and retired most of the originally issued par value . on october 15 , 2013 , the company completed a partial , early redemption of its senior unsecured debentures due february 1 , 2014. the company used the proceeds from the september 2013 rights offering to partially redeem the senior unsecured debentures due february 1 , 2014. the partial early redemption was completed in the amount of $ 12.0 million at par plus accrued interest of $ 0.2 million . in february 2014 , the company repaid the $ 14.4 million remaining amount outstanding on its senior unsecured debentures due february 1 , 2014. replace_table_token_59_th kingsway financial services inc. management 's discussion and analysis lroc preferred units on july 14 , 2005 , kingsway linked return of capital trust ( `` klroc trust '' ) completed its public offering of c $ 78.0 million of 5.00 % lroc preferred units due june 30 , 2015 of which the company was a promoter . klroc trust 's net proceeds of the public offering was c $ 74.1 million .

subject to certain preconditions , basf also will make a series of prepayments to us in the aggregate of $ 22 million during the construction of our planned manufacturing facility in statesboro , georgia . the prepayments will be either credited against amounts invoiced to basf for spaceloft a2 or repaid by us to basf after december 31 , 2023. as a result of our decision to temporarily delay construction of the statesboro facility , we have yet to fulfill the preconditions , and commencement of the prepayments from basf will be delayed until the preconditions are satisfied . our revenue for the year ended december 31 , 2016 was $ 117.7 million , which represented a decrease of 4 % from the year ended december 31 , 2015. net loss for the year ended december 31 , 2016 was $ 12.0 million and diluted loss per share was $ 0.52. key metrics and non-gaap financial measures we regularly review a number of metrics , including the following key metrics , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections and make strategic decisions . square foot operating metric we price our product and measure our product shipments in square feet . we estimate our annual nameplate capacity was approximately 50 million square feet of aerogel blankets at december 31 , 2016. we believe the square foot operating metric allows us and our investors to measure the growth in our manufacturing capacity and product shipments on a uniform and consistent basis . the following chart sets forth product shipments associated with recognized revenue in square feet for the periods presented : replace_table_token_5_th adjusted ebitda we use adjusted ebitda , a non-gaap financial measure , as a means to assess our operating performance . we define adjusted ebitda as net income ( loss ) before interest expense , taxes , depreciation , amortization , stock-based compensation expense and other items , which occur from time to time , that we do not believe are indicative of our core operating performance , which included financing costs during the year ended december 31 , 2016. adjusted ebitda is a supplemental measure of our performance that is not presented in accordance with u.s. gaap . adjusted ebitda should not be considered as an alternative to net income ( loss ) or any other measure of financial performance calculated and presented in accordance with u.s. gaap . in addition , our definition and presentation of adjusted ebitda may not be comparable to similarly titled measures presented by other companies . we use adjusted ebitda : as a measure of operating performance because it does not include the impact of items that we do not consider indicative of our core operating performance ; for planning purposes , including the preparation of our annual operating budget , to allocate resources to enhance the financial performance of our business ; and as a performance measure used under our bonus plan . we also believe that the presentation of adjusted ebitda provides useful information to investors with respect to our results of operations and in assessing the performance and value of our business . various measures of ebitda are widely used by investors to measure a company 's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods , book values of assets , capital structures and the methods by which assets were acquired . although measures similar to adjusted ebitda are frequently used by investors and securities analysts in their evaluation of companies , we understand that adjusted ebitda has limitations as an analytical tool , and you should not consider it in isolation or as 46 a substitute for net income , income from operations , net cash provided by operating activities or an analysis of our results of operations as reported under u.s. gaap . some of these limitations are : adjusted ebitda does not reflect our historical cash expenditures or future requirements for capital expenditures or other contractual commitments ; adjusted ebitda does not reflect changes in , or cash requirements for , our working capital needs ; adjusted ebitda does not reflect stock-based compensation expense ; adjusted ebitda does not reflect our tax expense or cash requirements to pay our income taxes ; adjusted ebitda does not reflect our interest expense , or the cash requirements necessary to service interest or principal payments on our debt ; although depreciation , amortization and impairment charges are non-cash charges , the assets being depreciated , amortized or impaired will often have to be replaced in the future , and adjusted ebitda does not reflect any cash requirements for these replacements ; and other companies in our industry may calculate ebitda or adjusted ebitda differently than we do , limiting their usefulness as a comparative measure . because of these limitations , our adjusted ebitda should not be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash available for us to meet our obligations . to properly and prudently evaluate our business , we encourage you to review the gaap financial statements included elsewhere in this annual report on form 10-k , and not to rely on any single financial measure to evaluate our business . the following table presents a reconciliation of net loss , the most directly comparable gaap measure , to adjusted ebitda for the years presented : replace_table_token_6_th ( 1 ) represents non-cash stock-based compensation related to vesting and modifications of stock option grants , vesting of restricted stock units and vesting of restricted common stock . ( 2 ) interest expense in 2014 consists primarily of fair market value adjustments and issuance costs related to our then outstanding subordinated notes , senior convertible notes and convertible notes and certain imputed interest on previously settled obligations . story_separator_special_tag the average selling price per square foot of our products decreased by an effective $ 0.24 , or 8 % , to $ 2.61 per square foot for the year ended december 31 , 2016 from $ 2.85 per square foot for the year ended december 31 , 2015. the decrease in average selling 52 price reflects a year-over-year decline in the mix of high- priced subsea products , combined with an increase in the mix of products sold to reliance industries limited with project-based pricing . this de crease in average selling price had the effect of decreasing product revenue by $ 10.7 million for the year ended december 31 , 2016. in volume terms , product shipments increased 2.0 million square feet , or 5 % , to 44.3 million square feet of aerogel products for the year ended december 31 , 2016 , as compared to 42.2 million square feet in the year ended december 31 , 2015. the increase in volume was supported by the increase in manufacturing capacity associated with the operation of the third production line in the east providence facility for a full year . the increase in product volume had the effect of increasing product revenue by approximately $ 5.7 million for the year ended december 31 , 2016. research services revenue increased by $ 0.3 million , or 13 % , to $ 2.2 million in 2016 from $ 2.0 million in 2015. the increase was primarily due to the timing and amount of funding available under research contracts during the year ended december 31 , 2016 from the comparable period in 2015. product revenue as a percentage of total revenue was 98 % of total revenue in 2016 and 2015 , respectively . research services revenue was 2 % of total revenue in 2016 and 2015 , respectively . we expect that product revenue will continue to comprise a significant and growing percentage of our total revenue in the long-term due to the anticipated demand growth from adoption of our products in the energy infrastructure market , particularly in the district energy and power markets , and through penetration of new and existing markets , including the building materials market . during 2017 , we expect a decrease in product revenue as a result of the conclusion of the major petrochemical project with reliance industries limited , which comprised 25 % of our product revenue during 2016 , in combination with the impact of constrained capital investment and low activity levels in the global energy infrastructure market . accordingly , we are projecting a decline in product revenue and total revenue in the year ending december 31 , 2017 versus the comparable period in 2016. cost of revenue replace_table_token_12_th total cost of revenue decreased by $ 3.4 million , or 4 % , to $ 94.4 million in 2016 from $ 97.9 million in 2015. the decrease in total cost of revenue was the result of a decrease of $ 6.0 million in material costs , offset , in part , by an increase of $ 2.3 million in manufacturing expense and an increase of $ 0.3 million in cost of research services . product cost of revenue decreased $ 3.7 million , or 4 % , to $ 93.1 million in 2016 from $ 96.9 million in 2015. the $ 3.7 million decrease was the result of a $ 6.0 million decrease in material costs , offset , in part , by a $ 2.3 million increase in manufacturing expense year over year . the increase in manufacturing expense included increases in compensation expense of $ 0.9 million , utility expenses of $ 0.3 million and maintenance and facility expense of $ 1.1 million . the increased level of manufacturing expense was driven by operation of the third production line in the east providence facility for a full year in 2016 versus three quarters in 2015. despite growth in product volume of 5 % during the year ended december 31 , 2016 , material costs declined due to strong improvement in manufacturing yields and a shift in mix to lower cost products versus the comparable period in 2015. product cost of revenue as a percentage of product revenue increased to 81 % during 2016 from 80 % in 2015. this increase was the result of the combination of the increase in manufacturing expense associated with operation of the third production line in the east providence facility for a full year in 2016 and the decline in product revenue associated with the impact of constrained capital investment and low activity levels in the global energy infrastructure market . the impact of the increase in manufacturing expense and decline in product revenue was offset , in part , by the improvement in manufacturing yields and the shift in mix to lower cost products during the year ended december 31 , 2016 versus the comparable period in 2015. we expect that cost of product revenue will decrease during 2017 versus 2016. the projected decrease in cost of product revenue reflects planned actions to reduce manufacturing spending and an expected decrease in material costs due to lower projected 53 sales volumes . however , we expect that cost of product revenue as a percentage of product revenue will increase during the year . this projected increase reflects our expectation that , given high fixed cost levels in our manufacturing facility , the expected percentage reduction in cost of product revenue will not fully offset the expected percentage reduction in revenue in 2017 . research services cost of revenue increased by $ 0.3 million , or 30 % , to $ 1.3 million in 2016 from $ 1.0 million in 2015. the increase in research services cost of revenue was due to the 13 % increase in research services revenue during 2016 and an unfavorable mix of labor and expense required to perform the contracted research . gross profit replace_table_token_13_th gross profit decreased $

primary sources of liquidity our principal sources of liquidity are currently our cash and cash equivalents and our revolving credit facility with silicon valley bank . cash and cash equivalents consist primarily of cash and money market accounts on deposit with banks . as of december 31 , 2016 , we had $ 18.1 million of cash and cash equivalents . at december 31 , 2016 , our debt obligations were limited to $ 0.1 million related to capital lease obligations . at december 31 , 2016 , we also had $ 2.7 million of outstanding letters of credit secured by our revolving credit facility with silicon valley bank . we have maintained a revolving credit facility with silicon valley bank since march 2011 , which has been amended from time to time . under our revolving credit facility , we are permitted to borrow a maximum of $ 20.0 million , subject to continued covenant compliance and borrowing base requirements . at our election , the interest rate applicable to borrowings under the amended revolving credit facility may be based on the prime rate or libor . prime rate-based rates vary from prime rate plus 0.75 % per annum to prime rate plus 1.75 % per annum , while libor-based rates vary from libor plus 3.75 % per annum to libor plus 4.25 % per annum . in addition , we are required to pay a monthly unused revolving line facility fee of 0.5 % per annum of the average unused portion of the revolving credit facility . the revolving credit facility matures on january 28 , 2018. due to the borrowing base limitations of the revolving credit facility , the effective amount available to us under the facility at december 31 , 2016 was $ 12.1 million after giving effect to the $ 2.7 million of letters of credit outstanding .

in 2017 , our grain group will also continue its focus on driving profitable growth and enhancing risk management and grain marketing services . ethanol group the ethanol group continued to execute well , realizing high levels of production and exercising effective risk management throughout the year . some weakness in margins on co-products , such as ddg , occurred in the second half of the year due to lower international demand as well as localized elevated levels of vomitoxin in the 2016 corn crop . higher gasoline demand , improved demand and prices for ddg in relation to corn price , and an ample corn supply are factors that could potentially improve margins going into 2017. volumes shipped for the years ended december 31 , 2016 and 2015 were as follows : 20 replace_table_token_7_th the above table shows only shipped volumes that flow through the company 's sales revenues . total ethanol , ddg , and corn oil production by the unconsolidated llcs are higher , however , the portion of this volume that is sold directly to their customers is excluded here . construction is nearing completion of a project to double the ethanol production capacity of our facility in albion , michigan . albion is positioned in an attractive market for supply of corn and demand for ethanol . the group expects to complete the expansion on time and on budget in the first half of 2017. plant nutrient group while the plant nutrient group experienced a slight increase in volumes for the year , it was primarily due to activity from the first full year of sales following the acquisition of kay flo industries , inc. in the second quarter of 2015. looking at second half sales between 2015 and 2016 which included the impact of this acquisition in both periods , sales volume declined approximately 7 percent . total storage capacity at our wholesale nutrient and farm center facilities was approximately 489 thousand tons for dry nutrients and approximately 547 thousand tons for liquid nutrients at december 31 , 2016. during the fourth quarter of 2016 , the plant nutrient business closed one of its cob facilities in mt . pulaski , il and recorded an asset impairment charge of approximately $ 2.3 million . we have seen modest signs of improvement in fertilizer shipments in the early weeks of 2017 compared to the prior year and anticipate this trend will continue if current expectations for the planting season are met . tons shipped by product line ( including sales and service tons ) for the years ended december 31 , 2016 and 2015 were as follows : replace_table_token_8_th rail group the rail group experienced a decline in financial results from its base leasing business in 2016. this included the impact of higher than normal lease settlement activity in the previous year as well as decreases in lease utilization rates and higher storage costs on idle cars . rail group assets under management ( owned , leased or managed for financial institutions in non-recourse arrangements ) at december 31 , 2016 were 23,236 compared to 23,180 at december 31 , 2015. the average utilization rate ( rail group assets under management that are in lease service , exclusive of those managed for third-party investors ) is 87.8 % for the year ended december 31 , 2016 which is 4.6 percentage points lower than the prior year . for the year ended december 31 , 2016 , rail had gains on sales of rail group assets and related leases in the amount of $ 11.0 million compared to $ 13.3 million of gains on sales of rail group assets and related leases for the year ended december 31 , 2015. in 2017 , the group will continue to focus on ways to strategically grow the rail fleet in a challenged leasing environment and continue to look for opportunities to open new repair facilities and other adjacent businesses . we also anticipate future repair business related to new u.s. department of transportation rules affecting tank cars across the country . 21 retail group the retail industry is highly competitive . our stores compete with a variety of retail merchandisers , including home centers , department and hardware stores , as well as local and national grocers . in january 2017 , the company announced that the retail segment will be closed in the first half of 2017 and incurred asset impairment charges of $ 6.5 million in the fourth quarter of 2016. other our “ other ” represents corporate functions that provide support and services to the operating segments . the results contained within this group include expenses and benefits not allocated back to the operating segments , including a significant portion of our erp project and the settlement charges from the termination of our defined benefit pension plan in 2015. operating results the following discussion focuses on the operating results as shown in the consolidated statements of operations with a separate discussion by segment . additional segment information is included in note 13 to the company 's consolidated financial statements in item 8. replace_table_token_9_th comparison of 2016 with 2015 grain group replace_table_token_10_th 22 operating results for the grain group decreased $ 6.2 million compared to full year 2015 results . sales and merchandising revenues decreased $ 126.5 million compared to 2015. this was partially offset by a decrease of cost of sales and merchandising revenues of $ 110.9 million for a net unfavorable gross profit impact of approximately $ 15.6 million . the decrease was driven by $ 6.0 million in gross profit reduction from the 2016 sale of underperforming assets in iowa as well as $ 4.4 million of decrease in margins on sale of grain . we also saw a significant decline in opportunities for basis appreciation compared to 2015 for a negative gross profit variance of $ 14.2 million compared to the prior year . story_separator_special_tag an additional $ 158 million is estimated to be spent on the purchase and capitalized modifications of railcars and barges with related sales or financings of $ 133 million . financing arrangements net cash used in financing activities was $ 12.5 million in 2016 , compared to $ 33.4 million provided in 2015. the change in financing activity is primarily the result of significant debt issuance in the prior year to fund the kay flo acquisition which was partly offset by the 2015 completion of our $ 50 million share repurchase program . we have significant amounts of committed short-term lines of credit available to finance working capital , primarily inventories , margin calls on commodity contracts and accounts receivable . we are party to a borrowing arrangement with a syndicate of banks that provides a total of $ 871.3 million in borrowing capacity , including $ 21.3 million in non-recourse debt of the andersons denison ethanol llc . of that total , we had $ 779.6 million remaining available for borrowing at december 31 , 2016. peak short-term borrowings were $ 412.0 million on january 6 , 2016. typically , the company 's highest borrowing occurs in the first half of the year due to seasonal inventory requirements in the fertilizer and retail businesses . we paid $ 17.4 million in dividends in 2016 compared to $ 15.9 million in 2015. we paid $ 0.155 per common share for the dividends paid in january , april , july and october 2016 , and $ 0.14 per common share for the dividends paid in january , april , july and october 2015. on december 16 , 2016 , we declared a cash dividend of $ 0.16 per common share , payable on january 24 , 2017 to shareholders of record on january 3 , 2017. proceeds from the sale of treasury shares to employees and directors were $ 1.0 million and $ 0.5 million for 2016 and 2015 , respectively . certain of our long-term borrowings include covenants that , among other things , impose minimum levels of equity and limitations on additional debt . we are in compliance with all such covenants as of december 31 , 2016. in addition , certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets . our non-recourse long-term debt is collateralized by ethanol plant assets . because we are a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt , increases in interest rates could have a significant impact on our profitability . in addition , periods of high grain prices and / or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts . conversely , in periods of declining prices , we receive a return of cash . we believe our sources of liquidity will be adequate to fund our operations , capital expenditures and payments of dividends in the foreseeable future . sources and uses of cash 2015 compared to 2014 story_separator_special_tag replace_table_token_23_th ( a ) future interest obligations are calculated based on interest rates in effect as of december 31 , 2016 for the company 's variable rate debt and do not include any assumptions on expected borrowings , if any , under the short-term line of credit . ( b ) approximately 54 % of the operating lease commitments above relate to rail group assets that the company leases from financial intermediaries . see “ off-balance sheet transactions ” below . ( c ) includes the amounts related to purchase obligations in the company 's operating units , including $ 628 million for the purchase of grain from producers and $ 181 million for the purchase of ethanol from the ethanol joint ventures . there are also forward grain and ethanol sales contracts to consumers and traders and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts . see the narrative description of businesses for the grain and ethanol groups in item 1 of this annual report on form 10-k for further discussion . ( d ) other long-term liabilities include estimated obligations under our retiree healthcare programs and principal and interest payments for the financing arrangement on our new headquarters . obligations under the retiree healthcare programs are not fixed commitments and will vary depending on various factors , including the level of participant utilization and inflation . our estimates of postretirement payments through 2021 have considered recent payment trends and actuarial assumptions . at december 31 , 2016 , we had standby letters of credit outstanding of $ 32.5 million , as well as $ 0.2 million that was outstanding on a non-recourse basis . 32 off-balance sheet transactions our rail group utilizes leasing arrangements that provide off-balance sheet financing for its activities . we lease assets from financial intermediaries through sale-leaseback transactions , the majority of which involve operating leases . rail group assets we own or lease from a financial intermediary are generally leased to a customer under an operating lease . we also arrange non-recourse lease transactions under which we sell assets to a financial intermediary , and assign the related operating lease to the financial intermediary on a non-recourse basis . in such arrangements , we generally provide ongoing maintenance and management services for the financial intermediary , and receive a fee for such services . on most of the assets , we hold an option to purchase the assets at the end of the lease . the following table describes our rail group asset positions at december 31 , 2016. method of control financial statement units owned-railcars available for sale on balance sheet – current 551 owned-railcar assets leased to others on balance sheet – non-current 15,272 railcars leased from financial intermediaries off balance sheet 4,267 railcars – non-recourse arrangements off balance sheet 3,041 total railcars 23,131 locomotive

primary sources of liquidity our principal sources of liquidity are currently our cash and cash equivalents and our revolving credit facility with silicon valley bank . cash and cash equivalents consist primarily of cash and money market accounts on deposit with banks . as of december 31 , 2016 , we had $ 18.1 million of cash and cash equivalents . at december 31 , 2016 , our debt obligations were limited to $ 0.1 million related to capital lease obligations . at december 31 , 2016 , we also had $ 2.7 million of outstanding letters of credit secured by our revolving credit facility with silicon valley bank . we have maintained a revolving credit facility with silicon valley bank since march 2011 , which has been amended from time to time . under our revolving credit facility , we are permitted to borrow a maximum of $ 20.0 million , subject to continued covenant compliance and borrowing base requirements . at our election , the interest rate applicable to borrowings under the amended revolving credit facility may be based on the prime rate or libor . prime rate-based rates vary from prime rate plus 0.75 % per annum to prime rate plus 1.75 % per annum , while libor-based rates vary from libor plus 3.75 % per annum to libor plus 4.25 % per annum . in addition , we are required to pay a monthly unused revolving line facility fee of 0.5 % per annum of the average unused portion of the revolving credit facility . the revolving credit facility matures on january 28 , 2018. due to the borrowing base limitations of the revolving credit facility , the effective amount available to us under the facility at december 31 , 2016 was $ 12.1 million after giving effect to the $ 2.7 million of letters of credit outstanding .

in 2017 , our grain group will also continue its focus on driving profitable growth and enhancing risk management and grain marketing services . ethanol group the ethanol group continued to execute well , realizing high levels of production and exercising effective risk management throughout the year . some weakness in margins on co-products , such as ddg , occurred in the second half of the year due to lower international demand as well as localized elevated levels of vomitoxin in the 2016 corn crop . higher gasoline demand , improved demand and prices for ddg in relation to corn price , and an ample corn supply are factors that could potentially improve margins going into 2017. volumes shipped for the years ended december 31 , 2016 and 2015 were as follows : 20 replace_table_token_7_th the above table shows only shipped volumes that flow through the company 's sales revenues . total ethanol , ddg , and corn oil production by the unconsolidated llcs are higher , however , the portion of this volume that is sold directly to their customers is excluded here . construction is nearing completion of a project to double the ethanol production capacity of our facility in albion , michigan . albion is positioned in an attractive market for supply of corn and demand for ethanol . the group expects to complete the expansion on time and on budget in the first half of 2017. plant nutrient group while the plant nutrient group experienced a slight increase in volumes for the year , it was primarily due to activity from the first full year of sales following the acquisition of kay flo industries , inc. in the second quarter of 2015. looking at second half sales between 2015 and 2016 which included the impact of this acquisition in both periods , sales volume declined approximately 7 percent . total storage capacity at our wholesale nutrient and farm center facilities was approximately 489 thousand tons for dry nutrients and approximately 547 thousand tons for liquid nutrients at december 31 , 2016. during the fourth quarter of 2016 , the plant nutrient business closed one of its cob facilities in mt . pulaski , il and recorded an asset impairment charge of approximately $ 2.3 million . we have seen modest signs of improvement in fertilizer shipments in the early weeks of 2017 compared to the prior year and anticipate this trend will continue if current expectations for the planting season are met . tons shipped by product line ( including sales and service tons ) for the years ended december 31 , 2016 and 2015 were as follows : replace_table_token_8_th rail group the rail group experienced a decline in financial results from its base leasing business in 2016. this included the impact of higher than normal lease settlement activity in the previous year as well as decreases in lease utilization rates and higher storage costs on idle cars . rail group assets under management ( owned , leased or managed for financial institutions in non-recourse arrangements ) at december 31 , 2016 were 23,236 compared to 23,180 at december 31 , 2015. the average utilization rate ( rail group assets under management that are in lease service , exclusive of those managed for third-party investors ) is 87.8 % for the year ended december 31 , 2016 which is 4.6 percentage points lower than the prior year . for the year ended december 31 , 2016 , rail had gains on sales of rail group assets and related leases in the amount of $ 11.0 million compared to $ 13.3 million of gains on sales of rail group assets and related leases for the year ended december 31 , 2015. in 2017 , the group will continue to focus on ways to strategically grow the rail fleet in a challenged leasing environment and continue to look for opportunities to open new repair facilities and other adjacent businesses . we also anticipate future repair business related to new u.s. department of transportation rules affecting tank cars across the country . 21 retail group the retail industry is highly competitive . our stores compete with a variety of retail merchandisers , including home centers , department and hardware stores , as well as local and national grocers . in january 2017 , the company announced that the retail segment will be closed in the first half of 2017 and incurred asset impairment charges of $ 6.5 million in the fourth quarter of 2016. other our “ other ” represents corporate functions that provide support and services to the operating segments . the results contained within this group include expenses and benefits not allocated back to the operating segments , including a significant portion of our erp project and the settlement charges from the termination of our defined benefit pension plan in 2015. operating results the following discussion focuses on the operating results as shown in the consolidated statements of operations with a separate discussion by segment . additional segment information is included in note 13 to the company 's consolidated financial statements in item 8. replace_table_token_9_th comparison of 2016 with 2015 grain group replace_table_token_10_th 22 operating results for the grain group decreased $ 6.2 million compared to full year 2015 results . sales and merchandising revenues decreased $ 126.5 million compared to 2015. this was partially offset by a decrease of cost of sales and merchandising revenues of $ 110.9 million for a net unfavorable gross profit impact of approximately $ 15.6 million . the decrease was driven by $ 6.0 million in gross profit reduction from the 2016 sale of underperforming assets in iowa as well as $ 4.4 million of decrease in margins on sale of grain . we also saw a significant decline in opportunities for basis appreciation compared to 2015 for a negative gross profit variance of $ 14.2 million compared to the prior year . story_separator_special_tag an additional $ 158 million is estimated to be spent on the purchase and capitalized modifications of railcars and barges with related sales or financings of $ 133 million . financing arrangements net cash used in financing activities was $ 12.5 million in 2016 , compared to $ 33.4 million provided in 2015. the change in financing activity is primarily the result of significant debt issuance in the prior year to fund the kay flo acquisition which was partly offset by the 2015 completion of our $ 50 million share repurchase program . we have significant amounts of committed short-term lines of credit available to finance working capital , primarily inventories , margin calls on commodity contracts and accounts receivable . we are party to a borrowing arrangement with a syndicate of banks that provides a total of $ 871.3 million in borrowing capacity , including $ 21.3 million in non-recourse debt of the andersons denison ethanol llc . of that total , we had $ 779.6 million remaining available for borrowing at december 31 , 2016. peak short-term borrowings were $ 412.0 million on january 6 , 2016. typically , the company 's highest borrowing occurs in the first half of the year due to seasonal inventory requirements in the fertilizer and retail businesses . we paid $ 17.4 million in dividends in 2016 compared to $ 15.9 million in 2015. we paid $ 0.155 per common share for the dividends paid in january , april , july and october 2016 , and $ 0.14 per common share for the dividends paid in january , april , july and october 2015. on december 16 , 2016 , we declared a cash dividend of $ 0.16 per common share , payable on january 24 , 2017 to shareholders of record on january 3 , 2017. proceeds from the sale of treasury shares to employees and directors were $ 1.0 million and $ 0.5 million for 2016 and 2015 , respectively . certain of our long-term borrowings include covenants that , among other things , impose minimum levels of equity and limitations on additional debt . we are in compliance with all such covenants as of december 31 , 2016. in addition , certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets . our non-recourse long-term debt is collateralized by ethanol plant assets . because we are a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt , increases in interest rates could have a significant impact on our profitability . in addition , periods of high grain prices and / or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts . conversely , in periods of declining prices , we receive a return of cash . we believe our sources of liquidity will be adequate to fund our operations , capital expenditures and payments of dividends in the foreseeable future . sources and uses of cash 2015 compared to 2014 story_separator_special_tag replace_table_token_23_th ( a ) future interest obligations are calculated based on interest rates in effect as of december 31 , 2016 for the company 's variable rate debt and do not include any assumptions on expected borrowings , if any , under the short-term line of credit . ( b ) approximately 54 % of the operating lease commitments above relate to rail group assets that the company leases from financial intermediaries . see “ off-balance sheet transactions ” below . ( c ) includes the amounts related to purchase obligations in the company 's operating units , including $ 628 million for the purchase of grain from producers and $ 181 million for the purchase of ethanol from the ethanol joint ventures . there are also forward grain and ethanol sales contracts to consumers and traders and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts . see the narrative description of businesses for the grain and ethanol groups in item 1 of this annual report on form 10-k for further discussion . ( d ) other long-term liabilities include estimated obligations under our retiree healthcare programs and principal and interest payments for the financing arrangement on our new headquarters . obligations under the retiree healthcare programs are not fixed commitments and will vary depending on various factors , including the level of participant utilization and inflation . our estimates of postretirement payments through 2021 have considered recent payment trends and actuarial assumptions . at december 31 , 2016 , we had standby letters of credit outstanding of $ 32.5 million , as well as $ 0.2 million that was outstanding on a non-recourse basis . 32 off-balance sheet transactions our rail group utilizes leasing arrangements that provide off-balance sheet financing for its activities . we lease assets from financial intermediaries through sale-leaseback transactions , the majority of which involve operating leases . rail group assets we own or lease from a financial intermediary are generally leased to a customer under an operating lease . we also arrange non-recourse lease transactions under which we sell assets to a financial intermediary , and assign the related operating lease to the financial intermediary on a non-recourse basis . in such arrangements , we generally provide ongoing maintenance and management services for the financial intermediary , and receive a fee for such services . on most of the assets , we hold an option to purchase the assets at the end of the lease . the following table describes our rail group asset positions at december 31 , 2016. method of control financial statement units owned-railcars available for sale on balance sheet – current 551 owned-railcar assets leased to others on balance sheet – non-current 15,272 railcars leased from financial intermediaries off balance sheet 4,267 railcars – non-recourse arrangements off balance sheet 3,041 total railcars 23,131 locomotive

operating activities and liquidity our operating activities provided cash of $ 154.1 million in 2015 compared to cash used by operations of $ 10.1 million in 2014. the significant change in operating cash flows in 2015 relates primarily to the changes in working capital , particularly inventory , discussed above , partially offset by lower operating results . 30 in 2015 , the company paid income taxes , net of refunds received , of $ 4.9 million compared to $ 36.8 million in 2014. the company makes quarterly estimated tax payments based on year to date annualized taxable income . the decrease in income taxes paid in 2015 from 2014 is primarily due to decreased current income tax expense and overpayments related to 2014 taxes that were applied to 2015 estimated tax payments . investing activities investing activities used $ 238.5 million in 2015 compared to $ 89.7 million used in 2014. the increase in cash used for investing activities is primarily driven by the 2015 acquisition of kay flo industries , inc. for $ 128.5 million . in addition , a large portion of the remaining 2015 spending relates to purchases of rail group assets in the amount of $ 115.0 million . purchases of rail group assets was only partially offset in the current year by proceeds from the sale of rail group assets in the amount of $ 76.6 million .

we also serve a variety of commercial clients worldwide , including : airlines , airports , electric and gas utilities , oil companies , hospitals , health insurers and other health-related companies , banks and other financial services companies , transportation , travel and hospitality firms , non-profits/associations , law firms , manufacturing firms , retail chains , and distribution companies . our commercial clients , which include clients outside the u.s. , generated approximately 38 % , 35 % , and 35 % of our revenue in 2017 , 2016 , and 2015 , respectively . we report operating results and financial data as a single segment based on the consolidated information used by our chief operating decision-maker in evaluating the financial performance of our business and allocating resources . our single segment represents our core business—professional services for government and commercial clients . although we describe our multiple service offerings to clients that operate in four markets to provide a better understanding of the scope and scale of our business , we do not manage our business or allocate our resources based on those service offerings or client markets . in 2017 , we saw growth in commercial client revenue and international government revenue which was partially offset by lower u.s. federal and state and local government revenue . our total revenue increased to $ 1,229.2 million , an increase of $ 44.1 million , or 3.7 % , for the year ended december 31 , 2017 compared to the prior year . operating income decreased $ 0.4 million , or 0.5 % , to $ 82.4 million for the year ended december 31 , 2017 compared to the prior year due to the increase in indirect expenses , offset by lower amortization of intangible assets . indirect expenses increased compared to the prior year primarily due to the current year effect of cost-saving actions to drive long-term profitability and an increase in the portion of incentive compensation to be paid as cash bonus expense which enabled us to include this additional cash expense in the tax provision . net income increased $ 16.3 million , or 35.0 % , to $ 62.9 million , largely driven by a $ 16.8 million decrease in the tax provision due to the enactment in december 2017 the tax act . 32 we believe that demand for our services will continue to grow as government , industry , and other stakeholders seek to addr ess critical long-term societal and natural resource issues due to heightened concerns about clean energy and energy efficiency ; health promotion , treatment , and cost control ; and ongoing homeland security threats . we also see significant opportunity to fu rther leverage our digital and client engagement capabilities across our commercial and government client base . our future results will depend on the success of our strategy to enhance our client relationships and seek larger engagements that span the enti re program life cycle , and to complete and successfully integrate additional strategic acquisitions . we will continue to focus on broadening domain expertise and building scale in key client markets and geographies by developing business with existing and new government and commercial clients , and replicating our business model in selective geographies . in doing so , we will continue to evaluate strategic acquisition opportunities , seeking acquisitions that promote the achievement of strategic objectives lik e enhanc ing our subject matter knowledge , broaden ing our service offerings , and or provid ing scale in specific geographies , and from which we believe that we can earn an acceptable return . u.s. federal government revenue was 45 % of our total revenue for the year ended december 31 , 2017. while we continue to see favorable long-term market opportunities , there are certain near-term challenges facing all government service providers , including top-line legislative constraints on federal government discretionary spending ; actions by congress could result in a delay or reduction to our revenue , profit and cash flows and could have a negative impact on our business and results of operations . however , we believe we are well positioned in budget areas that will continue to be priorities to the federal government . we believe that the combination of internally-generated funds , available bank borrowings , and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund on-going operations , potential acquisitions , customary capital expenditures , and other working capital requirements . our results of operations and cash flows may vary significantly from quarter to quarter depending on a number of factors , including , but not limited to : progress of contract performance ; extraordinary economic events and natural disasters ; number of billable days in a quarter ; timing of client orders ; timing of award fee notices ; changes in the scope of contracts ; variations in purchasing patterns under our contracts ; u.s. federal and state and local governments ' and other clients ' spending levels ; timing of billings to , and payments by clients ; timing of receipt of invoices from , and payments to , employees and vendors ; commencement , completion , and termination of contracts ; strategic decisions , such as acquisitions , consolidations , divestments , spin-offs , joint ventures , strategic investments , and changes in business strategy ; timing of significant costs and investments ( such as bid and proposal costs and the costs involved in planning or making acquisitions ) ; timing of events related to discrete tax items ; our contract mix and use of subcontractors or the timing of other direct costs for which we may earn lower contract margin ; changes in contract margin performance due to performance risks ; additions to , and departures of , staff ; changes in staff utilization ; 33 p aid time off taken by ou r employees ; level and cost story_separator_special_tag similarly , our cumulative foreign tax credit carry forward balance as of december 31 , 2017 and any valuation allowance required ( as applicable ) may also change . no additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be permanently reinvested in foreign operations . although we have not yet completed a comprehensive analysis of the tax act and can not determine the full extent of its impact on our consolidated financial statements and related disclosures , we expect that the tax act will have some favorable impact on its annual effective income tax rate in fiscal year 2018. this expected favorable impact is due to the tax act 's lower corporate tax rate which will be effective for our fiscal year 2018 , as well as expected impacts resulting from one-time events required by the tax act in fiscal year 2018. the net impacts of these one-time events are primarily driven by the anticipated favorable impacts as a result of our revaluation of deferred tax assets and liabilities , which is expected to be offset by the unfavorable impacts of the transition tax . the impact of the transition tax is a preliminary estimate and will not be finalized until the later part of 2018. we continue to evaluate the impact of the tax act and anticipates that any material adjustment will be made with the completion of our extended tax return . 37 stock-based compensation the icf international , inc. 2010 omnibus incentive plan ( as amended , the “ omnibus plan ” ) provides for the granting of options , stock appreciation rights , restricted stock , restricted stock units ( “ rsus ” ) , performance shares , performance units , cash-based awards , and other stock-based awards to all officers , key employees , and non-employee directors . as of december 31 , 2017 , there were approximately 1.9 million shares available for grant under the omnibus plan . we utilize cash-settled rsus ( “ csrsus ” ) which are settled only in cash payments . the cash payment is calculated by multiplying the number of csrsus vested by our closing stock price on the vesting date , subject to a maximum payment cap and a minimum payment floor . csrsus have no impact on the shares available for grant under the omnibus plan , and have no impact on the calculated shares used in earnings per share ( “ eps ” ) calculations . we also grant awards of unregistered shares to non-employee directors under the annual equity election program . the awards are issued from treasury stock and have no impact on the shares available for grant under the omnibus plan . we recognized total compensation expense relating to stock-based compensation of $ 17.5 million , $ 15.9 million , and $ 14.7 million for the years ended december 31 , 2017 , 2016 , and 2015 , respectively . we recognize stock-based compensation expense for stock options , restricted stock awards , rsus and csrsus on a straight-line basis over the requisite service period , which is generally the vesting period , and adjusted for the stock price at the balance sheet date . we recognize expense for performance-based share awards ( “ psas ” ) , which are subject to a performance condition and a market condition , on a straight-line basis over the performance period . non-employee director awards do not include vesting conditions and are expensed over the performance period . stock-based compensation expense is based on the estimated fair value of these instruments and the estimated number of shares ultimately expected to vest . the calculation of the fair value of the awards requires certain inputs that are subjective and changes to the estimates used will cause the fair value of stock awards and related stock-based compensation expense to vary . the fair value of stock options , restricted stock awards , rsus , psas and non-employee director awards is estimated based on the fair value of a share of common stock at the grant date . we have elected to use the black-scholes-merton option pricing model to determine the fair value of stock options . the fair value of a stock option award is affected by the price of our stock on the date of grant , as well as other assumptions used as inputs in the valuation model . these assumptions include the estimated volatility of the price of our stock over the term of the awards , the estimated period of time that we expect employees will hold stock options , and the risk-free interest rate . the fair value of psas is estimated using a monte carlo simulation model . we treat csrsus as liability-classified awards , and accounts for them at fair value based on the closing price of our stock at the balance sheet date . we are required to adjust stock-based compensation expense for the effects of estimated forfeitures of awards over the expense recognition period . we estimate the rate of future forfeitures based on factors which include our historical experience , but the amount of actual forfeitures may differ from current estimates particularly if the rate of future forfeitures is different from previous experience . in addition , the estimation of psas that will ultimately vest requires judgment in terms of estimates of future performance . to the extent actual performance or updated performance estimates differ from current estimates , such expense amounts are recorded as a cumulative adjustment in the period the estimates are revised . see “ note 13—accounting for stock-based compensation ” in the “ notes to consolidated financial statements ” for further discussion . recent accounting pronouncements new accounting standards are discussed in “ note 2—summary of significant accounting policies ” in the “ notes to consolidated financial statements .

operating activities and liquidity our operating activities provided cash of $ 154.1 million in 2015 compared to cash used by operations of $ 10.1 million in 2014. the significant change in operating cash flows in 2015 relates primarily to the changes in working capital , particularly inventory , discussed above , partially offset by lower operating results . 30 in 2015 , the company paid income taxes , net of refunds received , of $ 4.9 million compared to $ 36.8 million in 2014. the company makes quarterly estimated tax payments based on year to date annualized taxable income . the decrease in income taxes paid in 2015 from 2014 is primarily due to decreased current income tax expense and overpayments related to 2014 taxes that were applied to 2015 estimated tax payments . investing activities investing activities used $ 238.5 million in 2015 compared to $ 89.7 million used in 2014. the increase in cash used for investing activities is primarily driven by the 2015 acquisition of kay flo industries , inc. for $ 128.5 million . in addition , a large portion of the remaining 2015 spending relates to purchases of rail group assets in the amount of $ 115.0 million . purchases of rail group assets was only partially offset in the current year by proceeds from the sale of rail group assets in the amount of $ 76.6 million .

we also serve a variety of commercial clients worldwide , including : airlines , airports , electric and gas utilities , oil companies , hospitals , health insurers and other health-related companies , banks and other financial services companies , transportation , travel and hospitality firms , non-profits/associations , law firms , manufacturing firms , retail chains , and distribution companies . our commercial clients , which include clients outside the u.s. , generated approximately 38 % , 35 % , and 35 % of our revenue in 2017 , 2016 , and 2015 , respectively . we report operating results and financial data as a single segment based on the consolidated information used by our chief operating decision-maker in evaluating the financial performance of our business and allocating resources . our single segment represents our core business—professional services for government and commercial clients . although we describe our multiple service offerings to clients that operate in four markets to provide a better understanding of the scope and scale of our business , we do not manage our business or allocate our resources based on those service offerings or client markets . in 2017 , we saw growth in commercial client revenue and international government revenue which was partially offset by lower u.s. federal and state and local government revenue . our total revenue increased to $ 1,229.2 million , an increase of $ 44.1 million , or 3.7 % , for the year ended december 31 , 2017 compared to the prior year . operating income decreased $ 0.4 million , or 0.5 % , to $ 82.4 million for the year ended december 31 , 2017 compared to the prior year due to the increase in indirect expenses , offset by lower amortization of intangible assets . indirect expenses increased compared to the prior year primarily due to the current year effect of cost-saving actions to drive long-term profitability and an increase in the portion of incentive compensation to be paid as cash bonus expense which enabled us to include this additional cash expense in the tax provision . net income increased $ 16.3 million , or 35.0 % , to $ 62.9 million , largely driven by a $ 16.8 million decrease in the tax provision due to the enactment in december 2017 the tax act . 32 we believe that demand for our services will continue to grow as government , industry , and other stakeholders seek to addr ess critical long-term societal and natural resource issues due to heightened concerns about clean energy and energy efficiency ; health promotion , treatment , and cost control ; and ongoing homeland security threats . we also see significant opportunity to fu rther leverage our digital and client engagement capabilities across our commercial and government client base . our future results will depend on the success of our strategy to enhance our client relationships and seek larger engagements that span the enti re program life cycle , and to complete and successfully integrate additional strategic acquisitions . we will continue to focus on broadening domain expertise and building scale in key client markets and geographies by developing business with existing and new government and commercial clients , and replicating our business model in selective geographies . in doing so , we will continue to evaluate strategic acquisition opportunities , seeking acquisitions that promote the achievement of strategic objectives lik e enhanc ing our subject matter knowledge , broaden ing our service offerings , and or provid ing scale in specific geographies , and from which we believe that we can earn an acceptable return . u.s. federal government revenue was 45 % of our total revenue for the year ended december 31 , 2017. while we continue to see favorable long-term market opportunities , there are certain near-term challenges facing all government service providers , including top-line legislative constraints on federal government discretionary spending ; actions by congress could result in a delay or reduction to our revenue , profit and cash flows and could have a negative impact on our business and results of operations . however , we believe we are well positioned in budget areas that will continue to be priorities to the federal government . we believe that the combination of internally-generated funds , available bank borrowings , and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund on-going operations , potential acquisitions , customary capital expenditures , and other working capital requirements . our results of operations and cash flows may vary significantly from quarter to quarter depending on a number of factors , including , but not limited to : progress of contract performance ; extraordinary economic events and natural disasters ; number of billable days in a quarter ; timing of client orders ; timing of award fee notices ; changes in the scope of contracts ; variations in purchasing patterns under our contracts ; u.s. federal and state and local governments ' and other clients ' spending levels ; timing of billings to , and payments by clients ; timing of receipt of invoices from , and payments to , employees and vendors ; commencement , completion , and termination of contracts ; strategic decisions , such as acquisitions , consolidations , divestments , spin-offs , joint ventures , strategic investments , and changes in business strategy ; timing of significant costs and investments ( such as bid and proposal costs and the costs involved in planning or making acquisitions ) ; timing of events related to discrete tax items ; our contract mix and use of subcontractors or the timing of other direct costs for which we may earn lower contract margin ; changes in contract margin performance due to performance risks ; additions to , and departures of , staff ; changes in staff utilization ; 33 p aid time off taken by ou r employees ; level and cost story_separator_special_tag similarly , our cumulative foreign tax credit carry forward balance as of december 31 , 2017 and any valuation allowance required ( as applicable ) may also change . no additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be permanently reinvested in foreign operations . although we have not yet completed a comprehensive analysis of the tax act and can not determine the full extent of its impact on our consolidated financial statements and related disclosures , we expect that the tax act will have some favorable impact on its annual effective income tax rate in fiscal year 2018. this expected favorable impact is due to the tax act 's lower corporate tax rate which will be effective for our fiscal year 2018 , as well as expected impacts resulting from one-time events required by the tax act in fiscal year 2018. the net impacts of these one-time events are primarily driven by the anticipated favorable impacts as a result of our revaluation of deferred tax assets and liabilities , which is expected to be offset by the unfavorable impacts of the transition tax . the impact of the transition tax is a preliminary estimate and will not be finalized until the later part of 2018. we continue to evaluate the impact of the tax act and anticipates that any material adjustment will be made with the completion of our extended tax return . 37 stock-based compensation the icf international , inc. 2010 omnibus incentive plan ( as amended , the “ omnibus plan ” ) provides for the granting of options , stock appreciation rights , restricted stock , restricted stock units ( “ rsus ” ) , performance shares , performance units , cash-based awards , and other stock-based awards to all officers , key employees , and non-employee directors . as of december 31 , 2017 , there were approximately 1.9 million shares available for grant under the omnibus plan . we utilize cash-settled rsus ( “ csrsus ” ) which are settled only in cash payments . the cash payment is calculated by multiplying the number of csrsus vested by our closing stock price on the vesting date , subject to a maximum payment cap and a minimum payment floor . csrsus have no impact on the shares available for grant under the omnibus plan , and have no impact on the calculated shares used in earnings per share ( “ eps ” ) calculations . we also grant awards of unregistered shares to non-employee directors under the annual equity election program . the awards are issued from treasury stock and have no impact on the shares available for grant under the omnibus plan . we recognized total compensation expense relating to stock-based compensation of $ 17.5 million , $ 15.9 million , and $ 14.7 million for the years ended december 31 , 2017 , 2016 , and 2015 , respectively . we recognize stock-based compensation expense for stock options , restricted stock awards , rsus and csrsus on a straight-line basis over the requisite service period , which is generally the vesting period , and adjusted for the stock price at the balance sheet date . we recognize expense for performance-based share awards ( “ psas ” ) , which are subject to a performance condition and a market condition , on a straight-line basis over the performance period . non-employee director awards do not include vesting conditions and are expensed over the performance period . stock-based compensation expense is based on the estimated fair value of these instruments and the estimated number of shares ultimately expected to vest . the calculation of the fair value of the awards requires certain inputs that are subjective and changes to the estimates used will cause the fair value of stock awards and related stock-based compensation expense to vary . the fair value of stock options , restricted stock awards , rsus , psas and non-employee director awards is estimated based on the fair value of a share of common stock at the grant date . we have elected to use the black-scholes-merton option pricing model to determine the fair value of stock options . the fair value of a stock option award is affected by the price of our stock on the date of grant , as well as other assumptions used as inputs in the valuation model . these assumptions include the estimated volatility of the price of our stock over the term of the awards , the estimated period of time that we expect employees will hold stock options , and the risk-free interest rate . the fair value of psas is estimated using a monte carlo simulation model . we treat csrsus as liability-classified awards , and accounts for them at fair value based on the closing price of our stock at the balance sheet date . we are required to adjust stock-based compensation expense for the effects of estimated forfeitures of awards over the expense recognition period . we estimate the rate of future forfeitures based on factors which include our historical experience , but the amount of actual forfeitures may differ from current estimates particularly if the rate of future forfeitures is different from previous experience . in addition , the estimation of psas that will ultimately vest requires judgment in terms of estimates of future performance . to the extent actual performance or updated performance estimates differ from current estimates , such expense amounts are recorded as a cumulative adjustment in the period the estimates are revised . see “ note 13—accounting for stock-based compensation ” in the “ notes to consolidated financial statements ” for further discussion . recent accounting pronouncements new accounting standards are discussed in “ note 2—summary of significant accounting policies ” in the “ notes to consolidated financial statements .

liquidity and capital resources liquidity and borrowing capacity . our business generally requires minimal infrastructure investment because we are primarily a service provider for which facilities requirements are provided for under operating leases or on client premises . short-term liquidity requirements are created by our use of funds for working capital , capital expenditures , and the need to provide any debt service . we expect to meet these requirements through a combination of cash flows from operations and borrowings under our fifth amended and restated business loan and security agreement with a syndicate of twelve commercial banks ( the “ credit facility ” ) . we anticipate that our long-term liquidity requirements , including any future acquisitions , will be funded through a combination of cash flows from operations , borrowings under our credit facility , additional secured or unsecured debt , or the issuance or repurchase of common stock , each of which may be initially funded through borrowings under our credit facility . we believe that the combination of internally generated funds , available bank borrowings under our credit facility , and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund on-going operations , customary capital expenditures , and other current working capital requirements . we are continuously analyzing our capital structure to ensure we have sufficient capital to fund future acquisitions and internal growth . we monitor the state of the financial markets on a regular basis to assess the availability and cost of additional capital resources both from debt and equity sources . we believe that we will be able to access these markets at commercially reasonable terms and conditions if we need additional borrowings or capital . financial condition .

our main products are : ● packaged products for retail sale to consumers for eyeglass and sunglass lens cleaning and conditioning , ● packaged products for retail sale to consumers for anti-fog and conditioning of masks and goggles , ● packaged products for sale to the military for safety anti-fogging and conditioning of lenses , masks , head gear and other applications such as head 's up displays , ● liquids for sale to industrial customers who resell to those who need porcelain coatings for restaurant dinnerware , and ● liquids for sale to suppliers to local governments and agencies for coatings for porcelain and other applications in mass transportation . in addition , we have developed a series of formulations used in the manufacture of precision casting and decorative architectural glass products which provides a barrier to soiling , helping keep decorative art-glass clean longer and making it easier to clean . separate from our historical business , we are also focused on creating products enabled by nanotechnology that tackle and solve big , global problems in growing markets . we have three primary areas of new product focus : 1. health ; 2. safety ; and 3. sustainability . the first new product is expected to be part of a family of cleaning products that clean and fortify surfaces at the nanoscale-level . this fortifier and protector can clean and protect many surfaces , both natural and man-made . after application , the product continues to fortify and protect , creating a healthy surface research and development segment this segment focuses its efforts on research and development of proof of concepts and prototypes for proposed pen products and on performing research and development services to government and private entities . we are developing technologies that generally fall under one of three technology platforms . these platforms are : 20 ● nanosensor technology ; ● nanoelectronics ; and ● submicron particle formulations for health and safety products . our research and development efforts are currently focused in these and emerging areas . recent developments pen is focused on the development of new products using the strong intellectual property portfolio acquired in the combination . the product segment will continue to grow its product sales and develop its product offerings . the research and development segment is working on product prototypes for new product offerings and is also continues to perform research and development for a fee from government and private customers . currently , our research and development segment includes research and development activities of our newly formed subsidiary , pen technology , llc . effective january 26 , 2016 we effected a 180 to 1 reverse split of our outstanding common stock . at the same time we reduced the number of our authorized shares of common stock to a total of 10,000,000 shares comprised of 7,200,000 shares of class a common stock , 2,500,000 shares of class b common stock , and 300,000 shares of class z common stock and set a par value of $ 0.0001 per share of all classes of our common stock upon the effectiveness of the reverse stock split . all share and per share data in this report have been retroactively restated to reflect the effect of the reverse split and authorized shares . results of operations the following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements , footnotes and related information for the periods identified below and should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report . the results discussed below are for the years ended december 31 , 2015 and 2014. for the 2014 period , substantially all of our results of operations relate to our product segment since the results of operations related to our research and development segment are only included in our results of operations for the period from august 27 , 2014 , ( the effective date of the merger ) to december 31 . 2014. the acquired research and development segment has a history of net losses and negative cash flow from operations . since the combination , we have made efforts to cut costs and have subleased excess space in order to reduce net losses and cash used in operations . we continue to monitor costs and to reduce costs in order to achieve positive or break-even cash flow from operations in this segment . comparison of results of operations for the year ended december 31 , 2015 and 2014 revenues : for the years ended december 31 , 2015 and 2014 , revenues consisted of the following : replace_table_token_2_th for the year ended december 31 , 2015 , sales from the product segment decreased by $ 1,257,420 or 13.7 % as compared to the year ended december 31 , 2014 and was primarily attributable to lower sales of anti-fog products . in 2013 , we experienced delays in the production of anti-fog cloths which resulted in heavier than normal sales in the first half of 2014 . 21 for the year ended december 31 , 2015 , sales from our research and development segment totaled $ 1,764,924. for the year ended december 31 , 2014 , we reported sales of this segment of $ 772,909 representing sales from august 27 , 2014 ( the date of combination ) to december 31 , 2014. cost of revenues . cost of revenues includes inventory costs , materials and supplies costs , internal labor and related benefits , subcontractor costs , depreciation , overhead and shipping and handling costs incurred including research and development costs related to government and private research contracts in our research and development segment . story_separator_special_tag types of revenue : ● net product sales by our subsidiary nanofilm . ● reimbursements under agreements to perform research and development for government agencies and others by our subsidiary , applied nanotech . we do not perform research contracts that are contingent upon successful results . larger projects are sometimes broken down in phases to allow the customer to determine at the end of each phase if they wish to move to the next phase . the agreements with federal government agencies generally provide that , upon completion of a technology development program , the funding agency is granted a royalty-free license to use any technology developed during the course of the program for its own purposes , but not any preexisting technology that we use in connection with the program . we retain all other rights to use , develop , and commercialize the technology . agreements with nongovernmental entities generally allow the entity the first opportunity to license the technology from us upon completion of the project . ● product sales and other miscellaneous revenues from our subsidiary , applied nanotech such as the sale of conductive inks and thermal management materials . 26 revenue recognition criteria : ● net product sales by our subsidiary nano , are recognized when the product is shipped to the customer and title is transferred . ● revenue from research and development government contracts is recognized when it is earned pursuant to the terms of the contract . these projects are usually billed monthly based on costs , hours , or some other measure of activity during the month and revenue is recognized as services are provided . if there is substantive acceptance terms then revenue will not be recognized until acceptance occurs . the recognition of revenue may not correspond with the billings allowable under the contract . to the extent that billings exceed revenue earned , a portion of the revenue is deferred until such time as it is earned . ● revenue from research and development non-governmental contracts is recognized when it is earned pursuant to the terms of the contract . each contract is unique and tailored to the needs of the customer and goals of the project . some contracts may call for a monthly payment for a fixed period of time . other contracts may be for a fixed dollar amount with an unspecified time period , although there is frequently a targeted completion date . these contracts generally involve some sort of up-front payment . some contracts may call for the delivery of samples , or may call for the transfer of equipment or other items developed during the project to the customer . these projects are usually billed monthly based on costs , hours , or some other measure of activity during the month and revenue is recognized as services are provided . if there is substantive acceptance terms then revenue will not be recognized until acceptance occurs . ● revenue from other product sales is recognized at the time the product shipped . the company 's subsidiary applied nanotech 's primary business is research and development and the licensing of its technology , not the sale of products . product sales are generally insignificant in number , and are generally limited to the sale of conductive inks , thermal management materials , samples , proofs of concepts , prototypes , or other items resulting from its research . ● other miscellaneous revenue is recognized as deemed appropriate given the facts of the situation and is generally not material . research and development research and development costs incurred in the development of our products and under other company sponsored research and development projects are expensed as incurred . costs such as direct labor , direct costs , and other allocated costs incurred to perform research and development service pursuant to government and private research projects are included in cost of sales . stock-based compensation stock-based compensation is accounted for based on the requirements of the share-based payment topic of asc 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award ( presumptively , the vesting period ) . the asc also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award . pursuant to asc topic 505-50 , for share-based payments to consultants and other third-parties , compensation expense is determined at the “ measurement date . ” the expense is recognized over the service period of the award . until the measurement date is reached , the total amount of compensation expense remains uncertain . we initially record compensation expense based on the fair value of the award at the reporting date . 27 segment reporting we use “ the management approach ” in determining reportable operating segments . the management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments . our chief operating decision maker is the chairman and chief executive officer ( “ ceo ” ) of the company , who reviews operating results to make decisions about allocating resources and assessing performance for the entire company . we classified the reportable operating segments into ( i ) the development , manufacture and sale of personal lens cleaners and accessories and ultra-thin films of organic or polymeric crystals ( the “ product segment ” ) and ( ii ) the performance of nanotechnology research and development services for government and private entities and any related sales of related products ( the “ research and development segment ” ) . recent accounting pronouncements there are no recent accounting pronouncements that we have not

liquidity and capital resources liquidity and borrowing capacity . our business generally requires minimal infrastructure investment because we are primarily a service provider for which facilities requirements are provided for under operating leases or on client premises . short-term liquidity requirements are created by our use of funds for working capital , capital expenditures , and the need to provide any debt service . we expect to meet these requirements through a combination of cash flows from operations and borrowings under our fifth amended and restated business loan and security agreement with a syndicate of twelve commercial banks ( the “ credit facility ” ) . we anticipate that our long-term liquidity requirements , including any future acquisitions , will be funded through a combination of cash flows from operations , borrowings under our credit facility , additional secured or unsecured debt , or the issuance or repurchase of common stock , each of which may be initially funded through borrowings under our credit facility . we believe that the combination of internally generated funds , available bank borrowings under our credit facility , and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund on-going operations , customary capital expenditures , and other current working capital requirements . we are continuously analyzing our capital structure to ensure we have sufficient capital to fund future acquisitions and internal growth . we monitor the state of the financial markets on a regular basis to assess the availability and cost of additional capital resources both from debt and equity sources . we believe that we will be able to access these markets at commercially reasonable terms and conditions if we need additional borrowings or capital . financial condition .

our main products are : ● packaged products for retail sale to consumers for eyeglass and sunglass lens cleaning and conditioning , ● packaged products for retail sale to consumers for anti-fog and conditioning of masks and goggles , ● packaged products for sale to the military for safety anti-fogging and conditioning of lenses , masks , head gear and other applications such as head 's up displays , ● liquids for sale to industrial customers who resell to those who need porcelain coatings for restaurant dinnerware , and ● liquids for sale to suppliers to local governments and agencies for coatings for porcelain and other applications in mass transportation . in addition , we have developed a series of formulations used in the manufacture of precision casting and decorative architectural glass products which provides a barrier to soiling , helping keep decorative art-glass clean longer and making it easier to clean . separate from our historical business , we are also focused on creating products enabled by nanotechnology that tackle and solve big , global problems in growing markets . we have three primary areas of new product focus : 1. health ; 2. safety ; and 3. sustainability . the first new product is expected to be part of a family of cleaning products that clean and fortify surfaces at the nanoscale-level . this fortifier and protector can clean and protect many surfaces , both natural and man-made . after application , the product continues to fortify and protect , creating a healthy surface research and development segment this segment focuses its efforts on research and development of proof of concepts and prototypes for proposed pen products and on performing research and development services to government and private entities . we are developing technologies that generally fall under one of three technology platforms . these platforms are : 20 ● nanosensor technology ; ● nanoelectronics ; and ● submicron particle formulations for health and safety products . our research and development efforts are currently focused in these and emerging areas . recent developments pen is focused on the development of new products using the strong intellectual property portfolio acquired in the combination . the product segment will continue to grow its product sales and develop its product offerings . the research and development segment is working on product prototypes for new product offerings and is also continues to perform research and development for a fee from government and private customers . currently , our research and development segment includes research and development activities of our newly formed subsidiary , pen technology , llc . effective january 26 , 2016 we effected a 180 to 1 reverse split of our outstanding common stock . at the same time we reduced the number of our authorized shares of common stock to a total of 10,000,000 shares comprised of 7,200,000 shares of class a common stock , 2,500,000 shares of class b common stock , and 300,000 shares of class z common stock and set a par value of $ 0.0001 per share of all classes of our common stock upon the effectiveness of the reverse stock split . all share and per share data in this report have been retroactively restated to reflect the effect of the reverse split and authorized shares . results of operations the following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements , footnotes and related information for the periods identified below and should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report . the results discussed below are for the years ended december 31 , 2015 and 2014. for the 2014 period , substantially all of our results of operations relate to our product segment since the results of operations related to our research and development segment are only included in our results of operations for the period from august 27 , 2014 , ( the effective date of the merger ) to december 31 . 2014. the acquired research and development segment has a history of net losses and negative cash flow from operations . since the combination , we have made efforts to cut costs and have subleased excess space in order to reduce net losses and cash used in operations . we continue to monitor costs and to reduce costs in order to achieve positive or break-even cash flow from operations in this segment . comparison of results of operations for the year ended december 31 , 2015 and 2014 revenues : for the years ended december 31 , 2015 and 2014 , revenues consisted of the following : replace_table_token_2_th for the year ended december 31 , 2015 , sales from the product segment decreased by $ 1,257,420 or 13.7 % as compared to the year ended december 31 , 2014 and was primarily attributable to lower sales of anti-fog products . in 2013 , we experienced delays in the production of anti-fog cloths which resulted in heavier than normal sales in the first half of 2014 . 21 for the year ended december 31 , 2015 , sales from our research and development segment totaled $ 1,764,924. for the year ended december 31 , 2014 , we reported sales of this segment of $ 772,909 representing sales from august 27 , 2014 ( the date of combination ) to december 31 , 2014. cost of revenues . cost of revenues includes inventory costs , materials and supplies costs , internal labor and related benefits , subcontractor costs , depreciation , overhead and shipping and handling costs incurred including research and development costs related to government and private research contracts in our research and development segment . story_separator_special_tag types of revenue : ● net product sales by our subsidiary nanofilm . ● reimbursements under agreements to perform research and development for government agencies and others by our subsidiary , applied nanotech . we do not perform research contracts that are contingent upon successful results . larger projects are sometimes broken down in phases to allow the customer to determine at the end of each phase if they wish to move to the next phase . the agreements with federal government agencies generally provide that , upon completion of a technology development program , the funding agency is granted a royalty-free license to use any technology developed during the course of the program for its own purposes , but not any preexisting technology that we use in connection with the program . we retain all other rights to use , develop , and commercialize the technology . agreements with nongovernmental entities generally allow the entity the first opportunity to license the technology from us upon completion of the project . ● product sales and other miscellaneous revenues from our subsidiary , applied nanotech such as the sale of conductive inks and thermal management materials . 26 revenue recognition criteria : ● net product sales by our subsidiary nano , are recognized when the product is shipped to the customer and title is transferred . ● revenue from research and development government contracts is recognized when it is earned pursuant to the terms of the contract . these projects are usually billed monthly based on costs , hours , or some other measure of activity during the month and revenue is recognized as services are provided . if there is substantive acceptance terms then revenue will not be recognized until acceptance occurs . the recognition of revenue may not correspond with the billings allowable under the contract . to the extent that billings exceed revenue earned , a portion of the revenue is deferred until such time as it is earned . ● revenue from research and development non-governmental contracts is recognized when it is earned pursuant to the terms of the contract . each contract is unique and tailored to the needs of the customer and goals of the project . some contracts may call for a monthly payment for a fixed period of time . other contracts may be for a fixed dollar amount with an unspecified time period , although there is frequently a targeted completion date . these contracts generally involve some sort of up-front payment . some contracts may call for the delivery of samples , or may call for the transfer of equipment or other items developed during the project to the customer . these projects are usually billed monthly based on costs , hours , or some other measure of activity during the month and revenue is recognized as services are provided . if there is substantive acceptance terms then revenue will not be recognized until acceptance occurs . ● revenue from other product sales is recognized at the time the product shipped . the company 's subsidiary applied nanotech 's primary business is research and development and the licensing of its technology , not the sale of products . product sales are generally insignificant in number , and are generally limited to the sale of conductive inks , thermal management materials , samples , proofs of concepts , prototypes , or other items resulting from its research . ● other miscellaneous revenue is recognized as deemed appropriate given the facts of the situation and is generally not material . research and development research and development costs incurred in the development of our products and under other company sponsored research and development projects are expensed as incurred . costs such as direct labor , direct costs , and other allocated costs incurred to perform research and development service pursuant to government and private research projects are included in cost of sales . stock-based compensation stock-based compensation is accounted for based on the requirements of the share-based payment topic of asc 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award ( presumptively , the vesting period ) . the asc also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award . pursuant to asc topic 505-50 , for share-based payments to consultants and other third-parties , compensation expense is determined at the “ measurement date . ” the expense is recognized over the service period of the award . until the measurement date is reached , the total amount of compensation expense remains uncertain . we initially record compensation expense based on the fair value of the award at the reporting date . 27 segment reporting we use “ the management approach ” in determining reportable operating segments . the management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments . our chief operating decision maker is the chairman and chief executive officer ( “ ceo ” ) of the company , who reviews operating results to make decisions about allocating resources and assessing performance for the entire company . we classified the reportable operating segments into ( i ) the development , manufacture and sale of personal lens cleaners and accessories and ultra-thin films of organic or polymeric crystals ( the “ product segment ” ) and ( ii ) the performance of nanotechnology research and development services for government and private entities and any related sales of related products ( the “ research and development segment ” ) . recent accounting pronouncements there are no recent accounting pronouncements that we have not

liquidity and capital resources liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements . we had working capital deficit of $ ( 889,657 ) and $ 262,519 of cash as of december 31 , 2015 and working capital of $ 86,636 and $ 464,735 of cash as of december 31 , 2014. the following table sets forth a summary of changes in our working capital from december 31 , 2014 to december 31 , 2015 : replace_table_token_6_th the decrease in working capital was primarily attributable to the decrease in cash of approximately $ 202,000 , a decrease in inventory of $ 474,000 , an increase in the bank revolving line of credit of $ 515,000 and an increase in current portion of notes payable of $ 74,000 offset by an increase in accounts receivable of approximately $ 41,000 , a decrease in accounts payable of approximately $ 140,000 and a decrease in accrued expenses of approximately $ 93,000. net cash flow used in operating activities was $ ( 804,208 ) for the year ended december 31 , 2015 as compared to net cash provided by operating activities of $ 547,647 for the year ended december 31 , 2014 , a decrease of $ 1,351,855 .

we believe our focus on developing clinically useful tests that change patient care is enabling the company to set new standards in genomic test reimbursement . our flagship product , the afirma gec , is now covered for more than 200 million people in the u.s. for use in thyroid cancer diagnosis and our second commercial product , the percepta classifier , is the first genomic test to gain medicare coverage for improved lung cancer screening and diagnosis . fourth quarter and full-year 2016 financial results revenue for the three- and twelve-month periods ended december 31 , 2016 was $ 18.3 million and $ 65.1 million , respectively , an increase of 30 % and 31 % over the prior year . afirma gene expression classifier ( gec ) reported volume for the three- and twelve-month periods ended december 31 , 2016 was 6,313 and 23,237 , respectively , an increase of 13 % and 20 % over the prior year . operating expenses for the three- and twelve-month periods ended december 31 , 2016 , were $ 21.9 million and $ 93.9 million , respectively , an increase of 0 % and 13 % over the prior year . 43 net loss and comprehensive loss for the three- and twelve-month periods ended december 31 , 2016 was ( $ 4.4 ) million and ( $ 31.4 ) million , respectively , a 45 % and 7 % reduction from the prior year . cash and cash equivalents was $ 59.2 million at december 31 , 2016. during the twelve-month period ended december 31 , 2016 , the company raised $ 51.1 million in capital , including $ 19.2 million in net proceeds from its march 2016 debt financing and $ 31.9 million in net proceeds from a public offering of common stock . cash burn for the three- and twelve-month periods ended december 31 , 2016 ( which is defined as net cash used in operating activities and purchases of property and equipment ) , was $ 4.7 million and $ 32.2 million , respectively , a 33 % and 3 % improvement compared to the prior year . 2016 and recent business highlights reimbursement : executed a blues group-purchasing agreement in april 2016 , accelerating blues plan in-network contracting and overall reimbursement for the afirma gec thyroid cancer test . as of february 28 , 2017 , the company has more than 70 million blues plan members under coverage and nearly 25 million under contract . expanded overall covered lives for the afirma gec by 50 million to nearly 225 million and overall contracted lives by 25 million to over 155 million as of february 28 , 2017. achieved draft medicare coverage policies for the percepta bronchial genomic classifier for use in lung cancer screening and diagnosis , leading to two final policies scheduled to become effective in march 2017. clinical evidence and commercial expansion : clinical utility and cost-effectiveness data for the percepta classifier were presented at the american thoracic society and the chest annual meetings , further suggesting that use of the percepta classifier changes patient care and reduces healthcare costs as intended . launched the envisia genomic classifier at the chest annual meeting in october 2016 , in conjunction with the presentation of new data suggesting the test 's ability to significantly improve the diagnosis of ipf without the need for risky , expensive surgery . pipeline advancements : presented data at the american thyroid association meeting in september 2016 , demonstrating the potential for a next-generation afirma gec , planned for 2017 introduction , to substantially increase the percentage of patients with benign thyroid nodules who may be able to avoid unnecessary surgery . data were published in the journal of the national cancer institute suggesting the potential for the “ field of injury ” technology behind veracyte 's percepta classifier to enable lung cancer detection using a simple , non-invasive nasal swab test . factors affecting our performance the number of fnas we receive and gecs performed the growth in our business is tied to the number of fnas we receive and the number of gecs performed . approximately 84 % of fnas we receive are for the afirma solution , which consists of services related to rendering a cytopathology diagnosis , and if the cytopathology result is indeterminate , the gec is performed . the remaining approximate 16 % of fnas are received from customers performing cytopathology and when the cytopathology result is indeterminate , the fna is sent to us for the gec only . the rate at which adoption occurs in these two settings will cause these two percentages to fluctuate over time . less than 1 % of the fna samples we receive for cytopathology have insufficient cellular material from which to render a cytopathology 44 diagnosis . we only bill the technical component , including slide preparation , for these tests . for results that are benign or suspicious/malignant by cytopathology , we bill for these services when we issue the report to the physician . if the cytopathology result is indeterminate , defined as atypia/follicular lesions of undetermined significance ( aus/flus ) or suspicious for fn/hcn , we perform the gec . historically , approximately 14 % -17 % of samples we have received for the afirma solution have yielded indeterminate results by cytopathology . approximately 5 % -10 % of the samples for gec testing have insufficient rna from which to render a result . the gec can be reported as benign , suspicious or no result . we bill for the gec benign and gec suspicious results only . after the gec is completed , we issue the cytopathology report for the indeterminate results as well as the gec report , and then bill for both of these tests . story_separator_special_tag the preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenue generated and expenses incurred during the reporting periods . our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions and any such differences may be material . we believe that the accounting policies discussed below are critical to understanding our historical and future performance , as these policies relate to the more significant areas involving management 's judgments and estimates . revenue recognition we recognize revenue in accordance with the provisions of accounting standards codification ( “ asc ” ) 954-605 , health care entities — revenue recognition . our revenue is generated from the provision of diagnostic services . the service is completed upon the delivery of test results to the prescribing physician , at which time we bill for the service . we recognize revenue related to billings for tests delivered on an accrual basis when amounts that will ultimately be realized can be reasonably estimated . the estimates of amounts that will ultimately be realized require significant judgment by management . until a contract has been negotiated with a commercial payer or governmental program , our tests may or may not be covered by these entities ' existing reimbursement policies . in addition , patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that their insurance declines to reimburse us . we may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans . in the absence of contracted reimbursement coverage or the ability to reasonably estimate the amount that will ultimately be realized for our services , revenue is recognized on the cash basis . we use judgment in determining if we are able to make a reasonable estimate of what will be ultimately realized . we also use judgment in estimating the amounts we expect to collect by payer . our judgments will continue to evolve in the future as we continue to gain payment experience . business combination we account for acquisitions using the acquisition method of accounting which requires the recognition of tangible and identifiable intangible assets acquired and liabilities assumed at their estimated fair values as of the business combination date . we allocate any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed to goodwill . transaction costs are expensed as incurred in general and administrative expenses . results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition . finite-lived intangible assets finite-lived intangible assets relates to intangible assets reclassified from indefinite-lived intangible assets , following the launch of percepta in april 2015. we amortize finite-lived intangible assets using the straight-line method , over their estimated useful life . the estimated useful life of 15 years was used for the intangible asset related to percepta based on management 's estimate of product life , product life of other diagnostic tests and patent life . we test this finite-lived intangible asset for impairment when events or circumstances indicate a reduction in the fair value below its carrying amount . there was no impairment for the years ended december 31 , 2016 and 2015. goodwill goodwill , derived from our acquisition of allegro , is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may be impaired . our goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value . we have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of diagnostic products . in the event we determine that it is more likely than not the carrying value of the reporting unit is higher than its fair value , quantitative testing is performed comparing recorded values to estimated fair values . if impairment is present , the impairment loss is measured as the 49 excess of the recorded goodwill over its implied fair value . we perform our annual evaluation of goodwill during the fourth quarter of each fiscal year . there was no impairment for the years ended december 31 , 2016 and 2015 . stock-based compensation we recognize stock-based compensation expense for only those shares underlying stock options and restricted stock units that we expect to vest on a straight-line basis over the requisite service period of the award . we estimate the fair value of stock options using a black-scholes option-pricing model , which requires the input of highly subjective assumptions , including the option 's expected term and stock price volatility . in addition , judgment is also required in estimating the number of stock-based awards that are expected to be forfeited . forfeitures are estimated based on historical experience at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from those estimates . the assumptions used in calculating the fair value of share-based payment awards represent management 's best estimates , but these estimates involve inherent uncertainties and the application of management 's judgment . as a result , if factors change and we use different assumptions , our stock-based compensation expense could be materially different in the future . results of

liquidity and capital resources liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements . we had working capital deficit of $ ( 889,657 ) and $ 262,519 of cash as of december 31 , 2015 and working capital of $ 86,636 and $ 464,735 of cash as of december 31 , 2014. the following table sets forth a summary of changes in our working capital from december 31 , 2014 to december 31 , 2015 : replace_table_token_6_th the decrease in working capital was primarily attributable to the decrease in cash of approximately $ 202,000 , a decrease in inventory of $ 474,000 , an increase in the bank revolving line of credit of $ 515,000 and an increase in current portion of notes payable of $ 74,000 offset by an increase in accounts receivable of approximately $ 41,000 , a decrease in accounts payable of approximately $ 140,000 and a decrease in accrued expenses of approximately $ 93,000. net cash flow used in operating activities was $ ( 804,208 ) for the year ended december 31 , 2015 as compared to net cash provided by operating activities of $ 547,647 for the year ended december 31 , 2014 , a decrease of $ 1,351,855 .

we believe our focus on developing clinically useful tests that change patient care is enabling the company to set new standards in genomic test reimbursement . our flagship product , the afirma gec , is now covered for more than 200 million people in the u.s. for use in thyroid cancer diagnosis and our second commercial product , the percepta classifier , is the first genomic test to gain medicare coverage for improved lung cancer screening and diagnosis . fourth quarter and full-year 2016 financial results revenue for the three- and twelve-month periods ended december 31 , 2016 was $ 18.3 million and $ 65.1 million , respectively , an increase of 30 % and 31 % over the prior year . afirma gene expression classifier ( gec ) reported volume for the three- and twelve-month periods ended december 31 , 2016 was 6,313 and 23,237 , respectively , an increase of 13 % and 20 % over the prior year . operating expenses for the three- and twelve-month periods ended december 31 , 2016 , were $ 21.9 million and $ 93.9 million , respectively , an increase of 0 % and 13 % over the prior year . 43 net loss and comprehensive loss for the three- and twelve-month periods ended december 31 , 2016 was ( $ 4.4 ) million and ( $ 31.4 ) million , respectively , a 45 % and 7 % reduction from the prior year . cash and cash equivalents was $ 59.2 million at december 31 , 2016. during the twelve-month period ended december 31 , 2016 , the company raised $ 51.1 million in capital , including $ 19.2 million in net proceeds from its march 2016 debt financing and $ 31.9 million in net proceeds from a public offering of common stock . cash burn for the three- and twelve-month periods ended december 31 , 2016 ( which is defined as net cash used in operating activities and purchases of property and equipment ) , was $ 4.7 million and $ 32.2 million , respectively , a 33 % and 3 % improvement compared to the prior year . 2016 and recent business highlights reimbursement : executed a blues group-purchasing agreement in april 2016 , accelerating blues plan in-network contracting and overall reimbursement for the afirma gec thyroid cancer test . as of february 28 , 2017 , the company has more than 70 million blues plan members under coverage and nearly 25 million under contract . expanded overall covered lives for the afirma gec by 50 million to nearly 225 million and overall contracted lives by 25 million to over 155 million as of february 28 , 2017. achieved draft medicare coverage policies for the percepta bronchial genomic classifier for use in lung cancer screening and diagnosis , leading to two final policies scheduled to become effective in march 2017. clinical evidence and commercial expansion : clinical utility and cost-effectiveness data for the percepta classifier were presented at the american thoracic society and the chest annual meetings , further suggesting that use of the percepta classifier changes patient care and reduces healthcare costs as intended . launched the envisia genomic classifier at the chest annual meeting in october 2016 , in conjunction with the presentation of new data suggesting the test 's ability to significantly improve the diagnosis of ipf without the need for risky , expensive surgery . pipeline advancements : presented data at the american thyroid association meeting in september 2016 , demonstrating the potential for a next-generation afirma gec , planned for 2017 introduction , to substantially increase the percentage of patients with benign thyroid nodules who may be able to avoid unnecessary surgery . data were published in the journal of the national cancer institute suggesting the potential for the “ field of injury ” technology behind veracyte 's percepta classifier to enable lung cancer detection using a simple , non-invasive nasal swab test . factors affecting our performance the number of fnas we receive and gecs performed the growth in our business is tied to the number of fnas we receive and the number of gecs performed . approximately 84 % of fnas we receive are for the afirma solution , which consists of services related to rendering a cytopathology diagnosis , and if the cytopathology result is indeterminate , the gec is performed . the remaining approximate 16 % of fnas are received from customers performing cytopathology and when the cytopathology result is indeterminate , the fna is sent to us for the gec only . the rate at which adoption occurs in these two settings will cause these two percentages to fluctuate over time . less than 1 % of the fna samples we receive for cytopathology have insufficient cellular material from which to render a cytopathology 44 diagnosis . we only bill the technical component , including slide preparation , for these tests . for results that are benign or suspicious/malignant by cytopathology , we bill for these services when we issue the report to the physician . if the cytopathology result is indeterminate , defined as atypia/follicular lesions of undetermined significance ( aus/flus ) or suspicious for fn/hcn , we perform the gec . historically , approximately 14 % -17 % of samples we have received for the afirma solution have yielded indeterminate results by cytopathology . approximately 5 % -10 % of the samples for gec testing have insufficient rna from which to render a result . the gec can be reported as benign , suspicious or no result . we bill for the gec benign and gec suspicious results only . after the gec is completed , we issue the cytopathology report for the indeterminate results as well as the gec report , and then bill for both of these tests . story_separator_special_tag the preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenue generated and expenses incurred during the reporting periods . our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions and any such differences may be material . we believe that the accounting policies discussed below are critical to understanding our historical and future performance , as these policies relate to the more significant areas involving management 's judgments and estimates . revenue recognition we recognize revenue in accordance with the provisions of accounting standards codification ( “ asc ” ) 954-605 , health care entities — revenue recognition . our revenue is generated from the provision of diagnostic services . the service is completed upon the delivery of test results to the prescribing physician , at which time we bill for the service . we recognize revenue related to billings for tests delivered on an accrual basis when amounts that will ultimately be realized can be reasonably estimated . the estimates of amounts that will ultimately be realized require significant judgment by management . until a contract has been negotiated with a commercial payer or governmental program , our tests may or may not be covered by these entities ' existing reimbursement policies . in addition , patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that their insurance declines to reimburse us . we may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans . in the absence of contracted reimbursement coverage or the ability to reasonably estimate the amount that will ultimately be realized for our services , revenue is recognized on the cash basis . we use judgment in determining if we are able to make a reasonable estimate of what will be ultimately realized . we also use judgment in estimating the amounts we expect to collect by payer . our judgments will continue to evolve in the future as we continue to gain payment experience . business combination we account for acquisitions using the acquisition method of accounting which requires the recognition of tangible and identifiable intangible assets acquired and liabilities assumed at their estimated fair values as of the business combination date . we allocate any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed to goodwill . transaction costs are expensed as incurred in general and administrative expenses . results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition . finite-lived intangible assets finite-lived intangible assets relates to intangible assets reclassified from indefinite-lived intangible assets , following the launch of percepta in april 2015. we amortize finite-lived intangible assets using the straight-line method , over their estimated useful life . the estimated useful life of 15 years was used for the intangible asset related to percepta based on management 's estimate of product life , product life of other diagnostic tests and patent life . we test this finite-lived intangible asset for impairment when events or circumstances indicate a reduction in the fair value below its carrying amount . there was no impairment for the years ended december 31 , 2016 and 2015. goodwill goodwill , derived from our acquisition of allegro , is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may be impaired . our goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value . we have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of diagnostic products . in the event we determine that it is more likely than not the carrying value of the reporting unit is higher than its fair value , quantitative testing is performed comparing recorded values to estimated fair values . if impairment is present , the impairment loss is measured as the 49 excess of the recorded goodwill over its implied fair value . we perform our annual evaluation of goodwill during the fourth quarter of each fiscal year . there was no impairment for the years ended december 31 , 2016 and 2015 . stock-based compensation we recognize stock-based compensation expense for only those shares underlying stock options and restricted stock units that we expect to vest on a straight-line basis over the requisite service period of the award . we estimate the fair value of stock options using a black-scholes option-pricing model , which requires the input of highly subjective assumptions , including the option 's expected term and stock price volatility . in addition , judgment is also required in estimating the number of stock-based awards that are expected to be forfeited . forfeitures are estimated based on historical experience at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from those estimates . the assumptions used in calculating the fair value of share-based payment awards represent management 's best estimates , but these estimates involve inherent uncertainties and the application of management 's judgment . as a result , if factors change and we use different assumptions , our stock-based compensation expense could be materially different in the future . results of

cash flows from operating activities cash used in operating activities for the year ended december 31 , 2016 was $ 28.0 million . the net loss of $ 31.4 million includes non-cash charges of $ 0.9 million in amortization of the deferred fee received from genzyme , offset primarily by $ 6.4 million of stock-based compensation expense , $ 3.5 million of depreciation and amortization , which includes $ 1.1 million of intangible asset amortization , $ 0.4 million from conversion of accrued interest to long-term debt and $ 0.3 million in interest and prepayment penalty relating to the repayment of our borrowings under our 2013 loan agreement . cash used as a result of changes in operating assets and liabilities of $ 6.4 million is primarily due to an increase in accounts receivable of $ 5.3 million and a decrease in accounts payable of $ 1.4 million . cash used in operating activities for the year ended december 31 , 2015 was $ 27.0 million . the net loss of $ 33.7 million includes non-cash charges of $ 1.9 million in amortization of the deferred fee received from genzyme , offset primarily by $ 5.6 million of stock-based compensation expense , $ 2.3 million of depreciation and amortization , which includes $ 0.8 million intangible asset amortization following the launch of percepta in april 2015 , $ 0.1 million in amortization of debt discount and issuance costs and debt balloon interest expense , and $ 0.1 million of bad debt expense . the increase in net operating assets of $ 0.5 million was due to an increase of $ 0.9 million in deferred rent , accounts payable and accrued liabilities primarily from deferred rent from the lease for our new south san francisco facility , offset by $ 0.4 million from an increase in accounts receivable due to increases in afirma adoption and additional payers meeting our revenue recognition criteria for accrual .

these statements represent projections , beliefs and expectations based on current circumstances and conditions and in light of recent events and trends , and you should not construe these statements either as assurances of performances or as promises of a given course of action . instead , various known and unknown factors are likely to cause our actual performance and management 's actions to vary , and the results of these variances may be both material and adverse . a list of the known material factors that may cause our results to vary , or may cause management to deviate from its current plans and expectations , is included in item 1a “ risk factors . ” the following discussion should also be read in conjunction with the consolidated financial statements and notes included herein . 37 going concern our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements included in this form 10-k which expressed doubt as to our ability to continue as a going concern . the accompanying financial statements have been prepared assuming that we will continue as a going concern , however , there can be no assurance that we will be able to do so . our recurring losses and difficulty in generating sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern , and our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty . business overview we are a medical device company developing and marketing filtration products for therapeutic applications , infection control , and water purification . our hemodiafiltration , or hdf , system is designed to improve the quality of life for the end-stage renal disease , or esrd , patient while addressing the critical financial and clinical needs of the care provider . esrd is a disease state characterized by the irreversible loss of kidney function . the nephros hdf system removes a range of harmful substances more effectively , and with greater capacity , than existing esrd treatment methods , particularly with respect to substances known collectively as “ middle molecules . ” these molecules have been found to contribute to such conditions as dialysis-related amyloidosis , carpal tunnel syndrome , degenerative bone disease and , ultimately , mortality in the esrd patient . nephros esrd products are sold and distributed throughout europe . we currently have three products in various stages of development in the hdf modality to deliver improved therapy to esrd patients : olpur mdhdf filter series ( which we sell in various countries in europe and currently consists of our md190 and md220 diafilters ) ; to our knowledge , it is the only filter designed expressly for hdf therapy and employs our proprietary mid-dilution diafiltration technology ; olpur h 2 h , our add-on module designed to allow the most common types of hemodialysis machines to be used for hdf therapy ; and olpur ns2000 system , our stand-alone hdf machine and associated filter technology . we have also developed our olpur hd 190 high-flux dialyzer cartridge , which incorporates the same materials as our olpur md series but does not employ our proprietary mid-dilution diafiltration technology . our olpur hd190 was designed for use with either hemodialysis or hemodiafiltration machines , and received its approval from the u.s. food and drug administration , or fda , under section 510 ( k ) of the food , drug and cosmetic act , or the fdc act , in june 2005. in january 2006 , we introduced our new dual stage ultrafilter , or dsu , water filtration system . our dsu represents a new and complementary product line to our existing esrd therapy business . the dsu incorporates our unique and proprietary dual stage filter architecture and is , to our knowledge , the only water filter that allows the user to sight-verify that the filter is properly performing its cleansing function . our research and development work on the olpur h 2 h and md mid-dilution filter technologies for esrd therapy provided the foundations for a proprietary multi-stage water filter that we believe is cost effective , extremely reliable , and long-lasting . the dsu is designed to remove a broad range of bacteria , viral agents and toxic substances , including salmonella , hepatitis , cholera , hiv , ebola virus , ricin toxin , legionella , fungi and e-coli . with over 5,800 registered hospitals in the united states alone ( as reported by the american hospital association in fast facts of january 3 , 2012 ) , we believe the hospital shower and faucet market can offer us a valuable opportunity as a first step in water filtration . the following trends , events and uncertainties may have a material impact on our potential sales , revenue and income from operations : 1 ) receiving regulatory approval for each of our esrd therapy products and our dsu product in our target territories ; 2 ) the completion and success of additional clinical trials ; 3 ) the market acceptance of hdf therapy in the united states and of our technologies and products in each of our target markets ; 4 ) our ability to effectively and efficiently manufacture , market and distribute our products ; 5 ) our ability to sell our products at competitive prices which exceed our per unit costs ; 6 ) the consolidation of dialysis clinics into larger clinical groups ; and 38 7 ) the current u.s. healthcare plan is to bundle reimbursement for dialysis treatmentwhich may force dialysis clinics to change therapies due to financial reasons . story_separator_special_tag the repayment of the $ 500,000 note , plus all accrued interest thereon , issued to lambda investors , llc , the payment of an 8 % sourcing/transaction fee ( $ 40,000 ) in respect of the note and an aggregate of $ 100,000 for reimbursement of lambda investors ' legal fees incurred in connection with the loan and the rights offering . on march 11 , 2011 , we effected a reverse stock split , in which every 20 shares of our common stock issued and outstanding immediately prior to the effective time , which was 5:00 p.m. on march 11 , 2011 , were converted into one share of common stock . fractional shares were not issued and stockholders who otherwise would have been entitled to receive a fractional share as a result of the reverse stock split received an amount in cash equal to $ 0.04 per pre-split share for such fractional interests . the number of shares of common stock issued and outstanding was reduced from approximately 201,300,000 pre-split to approximately 10,100,000 post-split . the reverse stock split was effected in connection with the rights offering and private placement . at december 31 , 2011 , we had an accumulated deficit of $ 94,268,000 , and we expect to incur additional losses in the foreseeable future at least until such time , if ever , that we are able to increase product sales or licensing revenue . we have financed our operations since inception primarily through the private placements of equity and debt securities and our initial public offering in september 2004 , from licensing revenue received from asahi kasei medical co. , ltd. ( “ asahi ” ) in march 2005 , a private placement of convertible debenture in june 2006 , a private investment in public equity in september 2007 , a private placement in july 2009 , and the october 2010 issuance of a senior secured note . in march 2011 , the rights offering and concurrent private placement to lambda investors provided additional capital . on june 27 , 2011 , the company entered into a license agreement , effective july 1 , 2011 , with bellco , as licensee . this agreement provides the company with payments of 500,000 , 750,000 , and 600,000 on july 1 , 2011 , january 15 , 2012 and january 15 , 2013 , respectively . the first two fixed payments have been received . the remaining fixed payment of 600,000 or approximately $ 778,000 , will take place in january 2013. beginning on january 1 , 2015 through and including december 31 , 2016 , bellco will pay to nephros a royalty based on the number of units of products sold per year in the territory as follows : for the first 103,000 units sold , 4.50 per unit ; thereafter , 4.00 per unit . anticipated payments from this license agreement will be a positive source of cash flow to the company . as of the date of this report , we estimate that these cash flows would allow us to keep operating only into the second quarter of 2013. our cash flow currently is not , and historically has not been , sufficient to meet our obligations and commitments . we must seek and obtain additional financing to fund our operations . if we can not raise sufficient capital , we will be forced to curtail our planned activities and operations or cease operations entirely and you will lose all of your investment in our company . there can be no assurance that we could raise sufficient capital on a timely basis or on satisfactory terms or at all . net cash used in operating activities was approximately $ 1,296,000 for the year ended december 31 , 2011 compared to approximately $ 1,292,000 for the year ended december 31 , 2010. the most significant items contributing to this net increase of approximately $ 4,000 in cash used in operating activities during the year ended december 31 , 2011 compared to the year ended december 31 , 2010 are highlighted below : · during 2011 , our net loss increased by approximately $ 427,000 , compared to 2010 ; · during 2011 , depreciation expense decreased by approximately $ 38,000 , compared to 2010 ; · our accounts receivable increased by approximately $ 832,000 during 2011 compared to 2010 ; 44 · our long-term assets increased by approximately $ 778,000 during 2011 compared to 2010 ; · our accounts payable and accrued expenses decreased by approximately $ 357,000 in the aggregate during 2011 compared to 2010 ; · during 2011 , we recorded amortization of debt issuance costs of $ 40,000 , whereas amortization of debt issuance costs in 2010 were $ 50,000 ; · during 2011 , we recorded non-cash interest of $ 12,000 , whereas non-cash interest was $ 15,000 in 2010 ; and · our inventory decreased by approximately $ 295,000 during 2011 compared to an increase of approximately $ 98,000 during 2010. offsetting the above changes are the following items : · during 2011 , our stock-based compensation expense , a non-cash expense , increased by approximately $ 164,000 compared to 2010 ; · during 2011 , our deferred revenue increased by approximately $ 2,061,000 compared to 2010 ; · our prepaid expenses and other assets decreased by approximately $ 76,000 during 2011 compared to 2010 ; and · during 2011 , we recorded an inventory reserve of $ 200,000 , whereas there was no inventory reserve in 2010. there was no cash used or provided by investing activities during the year ended december 31 , 2011. net cash used by investing activities was $ 30,000 for the year ended december 31 , 2010 , which was for the purchase of equipment . net cash provided by financing activities was approximately $ 2,723,000 for the year ended december 31 , 2011 , resulting from the issuance of stock and

cash flows from operating activities cash used in operating activities for the year ended december 31 , 2016 was $ 28.0 million . the net loss of $ 31.4 million includes non-cash charges of $ 0.9 million in amortization of the deferred fee received from genzyme , offset primarily by $ 6.4 million of stock-based compensation expense , $ 3.5 million of depreciation and amortization , which includes $ 1.1 million of intangible asset amortization , $ 0.4 million from conversion of accrued interest to long-term debt and $ 0.3 million in interest and prepayment penalty relating to the repayment of our borrowings under our 2013 loan agreement . cash used as a result of changes in operating assets and liabilities of $ 6.4 million is primarily due to an increase in accounts receivable of $ 5.3 million and a decrease in accounts payable of $ 1.4 million . cash used in operating activities for the year ended december 31 , 2015 was $ 27.0 million . the net loss of $ 33.7 million includes non-cash charges of $ 1.9 million in amortization of the deferred fee received from genzyme , offset primarily by $ 5.6 million of stock-based compensation expense , $ 2.3 million of depreciation and amortization , which includes $ 0.8 million intangible asset amortization following the launch of percepta in april 2015 , $ 0.1 million in amortization of debt discount and issuance costs and debt balloon interest expense , and $ 0.1 million of bad debt expense . the increase in net operating assets of $ 0.5 million was due to an increase of $ 0.9 million in deferred rent , accounts payable and accrued liabilities primarily from deferred rent from the lease for our new south san francisco facility , offset by $ 0.4 million from an increase in accounts receivable due to increases in afirma adoption and additional payers meeting our revenue recognition criteria for accrual .

these statements represent projections , beliefs and expectations based on current circumstances and conditions and in light of recent events and trends , and you should not construe these statements either as assurances of performances or as promises of a given course of action . instead , various known and unknown factors are likely to cause our actual performance and management 's actions to vary , and the results of these variances may be both material and adverse . a list of the known material factors that may cause our results to vary , or may cause management to deviate from its current plans and expectations , is included in item 1a “ risk factors . ” the following discussion should also be read in conjunction with the consolidated financial statements and notes included herein . 37 going concern our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements included in this form 10-k which expressed doubt as to our ability to continue as a going concern . the accompanying financial statements have been prepared assuming that we will continue as a going concern , however , there can be no assurance that we will be able to do so . our recurring losses and difficulty in generating sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern , and our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty . business overview we are a medical device company developing and marketing filtration products for therapeutic applications , infection control , and water purification . our hemodiafiltration , or hdf , system is designed to improve the quality of life for the end-stage renal disease , or esrd , patient while addressing the critical financial and clinical needs of the care provider . esrd is a disease state characterized by the irreversible loss of kidney function . the nephros hdf system removes a range of harmful substances more effectively , and with greater capacity , than existing esrd treatment methods , particularly with respect to substances known collectively as “ middle molecules . ” these molecules have been found to contribute to such conditions as dialysis-related amyloidosis , carpal tunnel syndrome , degenerative bone disease and , ultimately , mortality in the esrd patient . nephros esrd products are sold and distributed throughout europe . we currently have three products in various stages of development in the hdf modality to deliver improved therapy to esrd patients : olpur mdhdf filter series ( which we sell in various countries in europe and currently consists of our md190 and md220 diafilters ) ; to our knowledge , it is the only filter designed expressly for hdf therapy and employs our proprietary mid-dilution diafiltration technology ; olpur h 2 h , our add-on module designed to allow the most common types of hemodialysis machines to be used for hdf therapy ; and olpur ns2000 system , our stand-alone hdf machine and associated filter technology . we have also developed our olpur hd 190 high-flux dialyzer cartridge , which incorporates the same materials as our olpur md series but does not employ our proprietary mid-dilution diafiltration technology . our olpur hd190 was designed for use with either hemodialysis or hemodiafiltration machines , and received its approval from the u.s. food and drug administration , or fda , under section 510 ( k ) of the food , drug and cosmetic act , or the fdc act , in june 2005. in january 2006 , we introduced our new dual stage ultrafilter , or dsu , water filtration system . our dsu represents a new and complementary product line to our existing esrd therapy business . the dsu incorporates our unique and proprietary dual stage filter architecture and is , to our knowledge , the only water filter that allows the user to sight-verify that the filter is properly performing its cleansing function . our research and development work on the olpur h 2 h and md mid-dilution filter technologies for esrd therapy provided the foundations for a proprietary multi-stage water filter that we believe is cost effective , extremely reliable , and long-lasting . the dsu is designed to remove a broad range of bacteria , viral agents and toxic substances , including salmonella , hepatitis , cholera , hiv , ebola virus , ricin toxin , legionella , fungi and e-coli . with over 5,800 registered hospitals in the united states alone ( as reported by the american hospital association in fast facts of january 3 , 2012 ) , we believe the hospital shower and faucet market can offer us a valuable opportunity as a first step in water filtration . the following trends , events and uncertainties may have a material impact on our potential sales , revenue and income from operations : 1 ) receiving regulatory approval for each of our esrd therapy products and our dsu product in our target territories ; 2 ) the completion and success of additional clinical trials ; 3 ) the market acceptance of hdf therapy in the united states and of our technologies and products in each of our target markets ; 4 ) our ability to effectively and efficiently manufacture , market and distribute our products ; 5 ) our ability to sell our products at competitive prices which exceed our per unit costs ; 6 ) the consolidation of dialysis clinics into larger clinical groups ; and 38 7 ) the current u.s. healthcare plan is to bundle reimbursement for dialysis treatmentwhich may force dialysis clinics to change therapies due to financial reasons . story_separator_special_tag the repayment of the $ 500,000 note , plus all accrued interest thereon , issued to lambda investors , llc , the payment of an 8 % sourcing/transaction fee ( $ 40,000 ) in respect of the note and an aggregate of $ 100,000 for reimbursement of lambda investors ' legal fees incurred in connection with the loan and the rights offering . on march 11 , 2011 , we effected a reverse stock split , in which every 20 shares of our common stock issued and outstanding immediately prior to the effective time , which was 5:00 p.m. on march 11 , 2011 , were converted into one share of common stock . fractional shares were not issued and stockholders who otherwise would have been entitled to receive a fractional share as a result of the reverse stock split received an amount in cash equal to $ 0.04 per pre-split share for such fractional interests . the number of shares of common stock issued and outstanding was reduced from approximately 201,300,000 pre-split to approximately 10,100,000 post-split . the reverse stock split was effected in connection with the rights offering and private placement . at december 31 , 2011 , we had an accumulated deficit of $ 94,268,000 , and we expect to incur additional losses in the foreseeable future at least until such time , if ever , that we are able to increase product sales or licensing revenue . we have financed our operations since inception primarily through the private placements of equity and debt securities and our initial public offering in september 2004 , from licensing revenue received from asahi kasei medical co. , ltd. ( “ asahi ” ) in march 2005 , a private placement of convertible debenture in june 2006 , a private investment in public equity in september 2007 , a private placement in july 2009 , and the october 2010 issuance of a senior secured note . in march 2011 , the rights offering and concurrent private placement to lambda investors provided additional capital . on june 27 , 2011 , the company entered into a license agreement , effective july 1 , 2011 , with bellco , as licensee . this agreement provides the company with payments of 500,000 , 750,000 , and 600,000 on july 1 , 2011 , january 15 , 2012 and january 15 , 2013 , respectively . the first two fixed payments have been received . the remaining fixed payment of 600,000 or approximately $ 778,000 , will take place in january 2013. beginning on january 1 , 2015 through and including december 31 , 2016 , bellco will pay to nephros a royalty based on the number of units of products sold per year in the territory as follows : for the first 103,000 units sold , 4.50 per unit ; thereafter , 4.00 per unit . anticipated payments from this license agreement will be a positive source of cash flow to the company . as of the date of this report , we estimate that these cash flows would allow us to keep operating only into the second quarter of 2013. our cash flow currently is not , and historically has not been , sufficient to meet our obligations and commitments . we must seek and obtain additional financing to fund our operations . if we can not raise sufficient capital , we will be forced to curtail our planned activities and operations or cease operations entirely and you will lose all of your investment in our company . there can be no assurance that we could raise sufficient capital on a timely basis or on satisfactory terms or at all . net cash used in operating activities was approximately $ 1,296,000 for the year ended december 31 , 2011 compared to approximately $ 1,292,000 for the year ended december 31 , 2010. the most significant items contributing to this net increase of approximately $ 4,000 in cash used in operating activities during the year ended december 31 , 2011 compared to the year ended december 31 , 2010 are highlighted below : · during 2011 , our net loss increased by approximately $ 427,000 , compared to 2010 ; · during 2011 , depreciation expense decreased by approximately $ 38,000 , compared to 2010 ; · our accounts receivable increased by approximately $ 832,000 during 2011 compared to 2010 ; 44 · our long-term assets increased by approximately $ 778,000 during 2011 compared to 2010 ; · our accounts payable and accrued expenses decreased by approximately $ 357,000 in the aggregate during 2011 compared to 2010 ; · during 2011 , we recorded amortization of debt issuance costs of $ 40,000 , whereas amortization of debt issuance costs in 2010 were $ 50,000 ; · during 2011 , we recorded non-cash interest of $ 12,000 , whereas non-cash interest was $ 15,000 in 2010 ; and · our inventory decreased by approximately $ 295,000 during 2011 compared to an increase of approximately $ 98,000 during 2010. offsetting the above changes are the following items : · during 2011 , our stock-based compensation expense , a non-cash expense , increased by approximately $ 164,000 compared to 2010 ; · during 2011 , our deferred revenue increased by approximately $ 2,061,000 compared to 2010 ; · our prepaid expenses and other assets decreased by approximately $ 76,000 during 2011 compared to 2010 ; and · during 2011 , we recorded an inventory reserve of $ 200,000 , whereas there was no inventory reserve in 2010. there was no cash used or provided by investing activities during the year ended december 31 , 2011. net cash used by investing activities was $ 30,000 for the year ended december 31 , 2010 , which was for the purchase of equipment . net cash provided by financing activities was approximately $ 2,723,000 for the year ended december 31 , 2011 , resulting from the issuance of stock and

liquidity and capital resources our future liquidity sources and requirements will depend on many factors , including : · the cost , timing and results of our efforts to obtain regulatory approval of our products , including specifically our 510 ( k ) application for our hdf system ; · the availability of additional financing , through the sale of equity securities or otherwise , on commercially reasonable terms or at all ; · the market acceptance of our products , and our ability to effectively and efficiently produce and market our products ; · the timing and costs associated with obtaining united states regulatory approval or the conformité européene , or ce , mark , which demonstrates compliance with the relevant european union requirements and is a regulatory prerequisite for selling our esrd therapy products in the european union and certain other countries that recognize ce marking ( for products other than our olpur mdhdf filter series , for which the ce mark was obtained in july 2003 ) ; · the continued progress in and the costs of clinical studies and other research and development programs ; · the costs involved in filing and enforcing patent claims and the status of competitive products ; and · the cost of litigation , including potential patent litigation and any other actual or threatened litigation . we expect to put our current capital resources to the following uses : · for the marketing and sales of our products ; · to obtain appropriate regulatory approvals and expand our research and development with respect to our esrd therapy products ; · to continue our esrd therapy product engineering ; · to pursue business opportunities with respect to our dsu water-filtration product ; and · for working capital purposes . 42 in response to liquidity issues experienced with our auction rate securities , and in order to facilitate greater liquidity in our short-term investments , on march 27 , 2008 , our board of directors adopted an investment , risk management and accounting policy . such policy limits the types of instruments or securities in which we may invest our excess funds in the future to : u.s. treasury securities ; certificates of deposit issued by money center banks ; money funds by money center banks ; repurchase agreements ; and eurodollar certificates of deposit issued by money center banks .

we acquired an aggregate of approximately 3.0 million , 2.0 million and 2.7 million shares of bankatlantic bancorp 's class a common stock in connection with the rights offerings conducted by bankatlantic bancorp during 2009 , 2010 and 2011 , respectively . the aggregate purchase price paid by bfc for such shares was $ 29.9 million in the 2009 rights offering , $ 15.0 million in the 2010 rights offering and $ 10.0 million in the 2011 rights offering . the shares acquired in the rights offerings increased bfc 's ownership interest in bankatlantic bancorp in the aggregate by approximately 23 % to 53 % and increased bfc 's voting interest in bankatlantic bancorp in the aggregate by approximately 16 % to 75 % . we exited the land development business operated by core communities , llc ( “core” or “core communities” ) , a wholly owned subsidiary of woodbridge , and sold substantially all of the associated commercial assets . we also eliminated substantially all of the ongoing expenses associated with core . see real estate operations segment below for additional information . during april 2011 , woodbridge and one of its wholly owned subsidiaries , carolina oak homes , llc ( “carolina oak” ) , entered into a settlement agreement to resolve the disputes and litigation between them and a note holder relating to an approximately $ 37.2 million loan which was collateralized by property owned by carolina oak . see “real estate operations segment” below for additional information . 93 in 2011 , we converted all 800,000 shares of benihana 's series b convertible preferred stock ( “convertible preferred stock” ) held by us into an aggregate of 1,582,577 shares of benihana 's common stock . these conversions were effected to facilitate shareholder approval of benihana 's proposal to reclassify each share of its class a common stock into one share of its common stock . the reclassification was approved by benihana 's shareholders on november 17 , 2011 and effected by benihana on november 29 , 2011. the 1,582,577 shares of benihana 's common stock owned by us currently represent an approximately 9 % ownership and voting interest in benihana . we expect to consider other opportunities that could alter our ownership in our affiliates or seek to make opportunistic investments outside of our existing portfolio ; however , we do not currently have pre-determined parameters as to the industry or structure of any future investment . in furtherance of our goals , we will continue to evaluate various financing transactions , including raising additional debt ( subject , to the extent applicable , to our receipt of all required regulatory approvals ) or equity as well as other alternative sources of new capital . gaap requires that bfc consolidate the financial results of the entities in which it has controlling interest . as a consequence , the assets and liabilities of all such entities are presented on a consolidated basis in bfc 's financial statements . however , except as otherwise noted , the debts and obligations of the consolidated entities , including bankatlantic bancorp , bluegreen and woodbridge , are not direct obligations of bfc and are non-recourse to bfc . similarly , the assets of those entities are not available to bfc absent a dividend or distribution from those entities . the recognition by bfc of income from controlled entities is determined based on the total percent of economic ownership in those entities . at december 31 , 2011 , we had an approximately 53 % ownership interest and 75 % voting interest in bankatlantic bancorp . in addition , we currently directly or indirectly own approximately 54 % of the outstanding shares of bluegreen 's common stock . the company 's business activities currently consist of ( i ) real estate and other activities and ( ii ) financial services . we currently report the results of our business activities through five segments . three of the segments relate to our real estate and other business activities . these segments are : bfc activities ; real estate operations ; and bluegreen resorts . our other two segments – bankatlantic and bankatlantic bancorp parent company - relate to our financial services business activities and include bankatlantic bancorp 's results of operations . prior to june 30 , 2011 , our real estate and other business activities included a fourth reporting segment , bluegreen communities . as described herein , bluegreen communities has ceased to be a separate reporting segment and is accounted for as a discontinued operation for all periods subsequent to november 16 , 2009 , the date on which we acquired a controlling interest in bluegreen , as a result of the determination made by bluegreen 's board of directors on june 30 , 2011 to seek to sell bluegreen communities , or all or substantially all of its assets , and the purchase and sale agreement subsequently entered into with respect to substantially all of the assets which comprise bluegreen communities . any references to bluegreen 's results of operations in 2009 includes only 45 days of activity for bluegreen relating to the period from november 16 , 2009 , the date of the share purchase , through december 31 , 2009 ( the “bluegreen interim period” ) . discontinued operations also include cypress creek holdings with respect to the years ended december 31 , 2011 , 2010 and 2009 and , core communities with respect to the years ended december 31 , 2010 and 2009. see note 5 to the consolidated financial statements included herein for additional information regarding discontinued operations . recent events bfc and bluegreen merger agreement - on november 11 , 2011 , bfc and bluegreen entered into a definitive merger agreement , pursuant to which bluegreen , upon consummation of the merger contemplated by the merger agreement , will become a. wholly-owned subsidiary of bfc . story_separator_special_tag 98 the revenues of bluegreen communities , which include homesite sales , are included within the company 's results of discontinued operations for all periods presented subsequent to november 16 , 2009 , the date bfc acquired a controlling interest in bluegreen , as discussed above , in the company 's consolidated statements of operations contained in this document . fee-based sales commissions and other operations revenue in addition to sales of real estate , bluegreen also generate revenue from the activities listed below . the table provides a brief description of the applicable revenue recognition policy : activity revenue is recognized when : fee-based sales commissions the sale transaction with the voi purchaser is consummated in accordance with the terms of the agreement with the third-party developer and the related consumer rescission period has expired . resort management and service fees management services are rendered . ( 1 ) resort title fees escrow amounts are released and title documents are completed . rental and sampler program guests complete stays at the resorts . rental and sampler program proceeds are classified as a reduction to “cost of other resort operations.” ( 1 ) in connection with its management of the property owners ' associations , among other things , bluegreen acts as agent for the property owners ' association to operate the resort as provided under the management agreement . in certain cases , the personnel at the resorts are bluegreen employees . the property owners ' association bears all of the economic costs of such personnel and generally pays us in advance of , or simultaneously with , the payment of payroll . in accordance with asc 605-45 , overall considerations of reporting revenues gross as a principal versus net as an agent , reimbursements from the property owners ' associations relating to direct pass-through costs are recorded net of the related expenses . carrying value of voi completed inventory . completed vois are carried at the lower of i ) cost , including costs of improvements and amenities incurred subsequent to acquisition , capitalized interest , real estate taxes and other costs incurred during construction , or ii ) estimated fair value , less costs to sell . carrying value of voi held for development and under development and long-lived assets . bluegreen evaluates the recovery of its long-lived assets , and its undeveloped real estate properties or real estate properties under development , if certain trigger events occur . if the estimated undiscounted future cash flows are less than the carrying amount of the asset , the asset is written down to its estimated fair value . carrying value of assets held for sale . bluegreen 's purchase and sale agreement with southstar described above provides for the sale of virtually all of the inventory and fixed assets related to bluegreen communities . therefore , such assets are presented separately on the company 's consolidated statements of financial condition included in this document as “assets held for sale.” the carrying value of assets held for sale is based on the fair value of the assets less estimated costs to sell . the fair value of assets held for sale as of december 31 , 2011 was derived from the sale price under the purchase and sale agreement with southstar . during 2011 , a non-cash charges of $ 55.1 million was recorded to write down the value of bluegreen communities ' assets to estimated fair value less costs to sell . prior to bluegreen communities being classified as a discontinued operation , bluegreen communities ' inventory was accounted for based on its status of complete or undeveloped . during 2010 , an impairment of $ 14.9 million was recorded to write down the carrying amount of certain undeveloped phases of bluegreen communities ' properties to fair value , as it was determined that the carrying amounts of these properties would not be recovered by estimated future cash flows . the assessment consisted of determining recoverability of bluegreen 's costs based on our 99 plans and upon a combination of factors , including , among others , estimates of remaining life-of-project sales for each project , the probability of alternative outcomes , the period required to complete such sales , estimates of costs to complete each project , if needed , and relevant market data . allowance for loan losses on voi notes receivable . an estimate of expected uncollectibility is recorded on bluegreen 's voi notes receivable as a reduction of revenue at the time bluegreen recognizes a timeshare sale . bluegreen estimate uncollectible voi notes receivable based on historical uncollectibles for similar voi notes receivable over the applicable historical period , using a technique referred to as a static pool analysis , which tracks uncollectibles for each year 's sales over the entire life of those notes . certain qualitative data is also considered , including the aging of the respective receivables , current default trends by origination year , current economic conditions , and the fico ® scores of the borrowers . additionally , under timeshare accounting requirements , no consideration is given for future recoveries of defaulted inventory in the estimate of uncollectible voi notes receivable . bluegreen reviews its reserves for loan losses on at least a quarterly basis . if defaults increase , our results of operations could be materially adversely impacted . during 2011 and 2010 , in addition to recognizing an estimate of loan losses on current loan originations , $ 7.2 million and $ 21.2 million , respectively , of charges were recorded as a result of changing our estimate of future loan losses on loans originated prior to our implementation of fico ® score-based credit underwriting standards during december 2008. allowance for loan losses . the allowance for loan losses is maintained at an amount that bankatlantic bancorp believes to be a reasonable estimate of probable losses inherent in bankatlantic bancorp 's loan portfolio as of the date

liquidity and capital resources our future liquidity sources and requirements will depend on many factors , including : · the cost , timing and results of our efforts to obtain regulatory approval of our products , including specifically our 510 ( k ) application for our hdf system ; · the availability of additional financing , through the sale of equity securities or otherwise , on commercially reasonable terms or at all ; · the market acceptance of our products , and our ability to effectively and efficiently produce and market our products ; · the timing and costs associated with obtaining united states regulatory approval or the conformité européene , or ce , mark , which demonstrates compliance with the relevant european union requirements and is a regulatory prerequisite for selling our esrd therapy products in the european union and certain other countries that recognize ce marking ( for products other than our olpur mdhdf filter series , for which the ce mark was obtained in july 2003 ) ; · the continued progress in and the costs of clinical studies and other research and development programs ; · the costs involved in filing and enforcing patent claims and the status of competitive products ; and · the cost of litigation , including potential patent litigation and any other actual or threatened litigation . we expect to put our current capital resources to the following uses : · for the marketing and sales of our products ; · to obtain appropriate regulatory approvals and expand our research and development with respect to our esrd therapy products ; · to continue our esrd therapy product engineering ; · to pursue business opportunities with respect to our dsu water-filtration product ; and · for working capital purposes . 42 in response to liquidity issues experienced with our auction rate securities , and in order to facilitate greater liquidity in our short-term investments , on march 27 , 2008 , our board of directors adopted an investment , risk management and accounting policy . such policy limits the types of instruments or securities in which we may invest our excess funds in the future to : u.s. treasury securities ; certificates of deposit issued by money center banks ; money funds by money center banks ; repurchase agreements ; and eurodollar certificates of deposit issued by money center banks .

we acquired an aggregate of approximately 3.0 million , 2.0 million and 2.7 million shares of bankatlantic bancorp 's class a common stock in connection with the rights offerings conducted by bankatlantic bancorp during 2009 , 2010 and 2011 , respectively . the aggregate purchase price paid by bfc for such shares was $ 29.9 million in the 2009 rights offering , $ 15.0 million in the 2010 rights offering and $ 10.0 million in the 2011 rights offering . the shares acquired in the rights offerings increased bfc 's ownership interest in bankatlantic bancorp in the aggregate by approximately 23 % to 53 % and increased bfc 's voting interest in bankatlantic bancorp in the aggregate by approximately 16 % to 75 % . we exited the land development business operated by core communities , llc ( “core” or “core communities” ) , a wholly owned subsidiary of woodbridge , and sold substantially all of the associated commercial assets . we also eliminated substantially all of the ongoing expenses associated with core . see real estate operations segment below for additional information . during april 2011 , woodbridge and one of its wholly owned subsidiaries , carolina oak homes , llc ( “carolina oak” ) , entered into a settlement agreement to resolve the disputes and litigation between them and a note holder relating to an approximately $ 37.2 million loan which was collateralized by property owned by carolina oak . see “real estate operations segment” below for additional information . 93 in 2011 , we converted all 800,000 shares of benihana 's series b convertible preferred stock ( “convertible preferred stock” ) held by us into an aggregate of 1,582,577 shares of benihana 's common stock . these conversions were effected to facilitate shareholder approval of benihana 's proposal to reclassify each share of its class a common stock into one share of its common stock . the reclassification was approved by benihana 's shareholders on november 17 , 2011 and effected by benihana on november 29 , 2011. the 1,582,577 shares of benihana 's common stock owned by us currently represent an approximately 9 % ownership and voting interest in benihana . we expect to consider other opportunities that could alter our ownership in our affiliates or seek to make opportunistic investments outside of our existing portfolio ; however , we do not currently have pre-determined parameters as to the industry or structure of any future investment . in furtherance of our goals , we will continue to evaluate various financing transactions , including raising additional debt ( subject , to the extent applicable , to our receipt of all required regulatory approvals ) or equity as well as other alternative sources of new capital . gaap requires that bfc consolidate the financial results of the entities in which it has controlling interest . as a consequence , the assets and liabilities of all such entities are presented on a consolidated basis in bfc 's financial statements . however , except as otherwise noted , the debts and obligations of the consolidated entities , including bankatlantic bancorp , bluegreen and woodbridge , are not direct obligations of bfc and are non-recourse to bfc . similarly , the assets of those entities are not available to bfc absent a dividend or distribution from those entities . the recognition by bfc of income from controlled entities is determined based on the total percent of economic ownership in those entities . at december 31 , 2011 , we had an approximately 53 % ownership interest and 75 % voting interest in bankatlantic bancorp . in addition , we currently directly or indirectly own approximately 54 % of the outstanding shares of bluegreen 's common stock . the company 's business activities currently consist of ( i ) real estate and other activities and ( ii ) financial services . we currently report the results of our business activities through five segments . three of the segments relate to our real estate and other business activities . these segments are : bfc activities ; real estate operations ; and bluegreen resorts . our other two segments – bankatlantic and bankatlantic bancorp parent company - relate to our financial services business activities and include bankatlantic bancorp 's results of operations . prior to june 30 , 2011 , our real estate and other business activities included a fourth reporting segment , bluegreen communities . as described herein , bluegreen communities has ceased to be a separate reporting segment and is accounted for as a discontinued operation for all periods subsequent to november 16 , 2009 , the date on which we acquired a controlling interest in bluegreen , as a result of the determination made by bluegreen 's board of directors on june 30 , 2011 to seek to sell bluegreen communities , or all or substantially all of its assets , and the purchase and sale agreement subsequently entered into with respect to substantially all of the assets which comprise bluegreen communities . any references to bluegreen 's results of operations in 2009 includes only 45 days of activity for bluegreen relating to the period from november 16 , 2009 , the date of the share purchase , through december 31 , 2009 ( the “bluegreen interim period” ) . discontinued operations also include cypress creek holdings with respect to the years ended december 31 , 2011 , 2010 and 2009 and , core communities with respect to the years ended december 31 , 2010 and 2009. see note 5 to the consolidated financial statements included herein for additional information regarding discontinued operations . recent events bfc and bluegreen merger agreement - on november 11 , 2011 , bfc and bluegreen entered into a definitive merger agreement , pursuant to which bluegreen , upon consummation of the merger contemplated by the merger agreement , will become a. wholly-owned subsidiary of bfc . story_separator_special_tag 98 the revenues of bluegreen communities , which include homesite sales , are included within the company 's results of discontinued operations for all periods presented subsequent to november 16 , 2009 , the date bfc acquired a controlling interest in bluegreen , as discussed above , in the company 's consolidated statements of operations contained in this document . fee-based sales commissions and other operations revenue in addition to sales of real estate , bluegreen also generate revenue from the activities listed below . the table provides a brief description of the applicable revenue recognition policy : activity revenue is recognized when : fee-based sales commissions the sale transaction with the voi purchaser is consummated in accordance with the terms of the agreement with the third-party developer and the related consumer rescission period has expired . resort management and service fees management services are rendered . ( 1 ) resort title fees escrow amounts are released and title documents are completed . rental and sampler program guests complete stays at the resorts . rental and sampler program proceeds are classified as a reduction to “cost of other resort operations.” ( 1 ) in connection with its management of the property owners ' associations , among other things , bluegreen acts as agent for the property owners ' association to operate the resort as provided under the management agreement . in certain cases , the personnel at the resorts are bluegreen employees . the property owners ' association bears all of the economic costs of such personnel and generally pays us in advance of , or simultaneously with , the payment of payroll . in accordance with asc 605-45 , overall considerations of reporting revenues gross as a principal versus net as an agent , reimbursements from the property owners ' associations relating to direct pass-through costs are recorded net of the related expenses . carrying value of voi completed inventory . completed vois are carried at the lower of i ) cost , including costs of improvements and amenities incurred subsequent to acquisition , capitalized interest , real estate taxes and other costs incurred during construction , or ii ) estimated fair value , less costs to sell . carrying value of voi held for development and under development and long-lived assets . bluegreen evaluates the recovery of its long-lived assets , and its undeveloped real estate properties or real estate properties under development , if certain trigger events occur . if the estimated undiscounted future cash flows are less than the carrying amount of the asset , the asset is written down to its estimated fair value . carrying value of assets held for sale . bluegreen 's purchase and sale agreement with southstar described above provides for the sale of virtually all of the inventory and fixed assets related to bluegreen communities . therefore , such assets are presented separately on the company 's consolidated statements of financial condition included in this document as “assets held for sale.” the carrying value of assets held for sale is based on the fair value of the assets less estimated costs to sell . the fair value of assets held for sale as of december 31 , 2011 was derived from the sale price under the purchase and sale agreement with southstar . during 2011 , a non-cash charges of $ 55.1 million was recorded to write down the value of bluegreen communities ' assets to estimated fair value less costs to sell . prior to bluegreen communities being classified as a discontinued operation , bluegreen communities ' inventory was accounted for based on its status of complete or undeveloped . during 2010 , an impairment of $ 14.9 million was recorded to write down the carrying amount of certain undeveloped phases of bluegreen communities ' properties to fair value , as it was determined that the carrying amounts of these properties would not be recovered by estimated future cash flows . the assessment consisted of determining recoverability of bluegreen 's costs based on our 99 plans and upon a combination of factors , including , among others , estimates of remaining life-of-project sales for each project , the probability of alternative outcomes , the period required to complete such sales , estimates of costs to complete each project , if needed , and relevant market data . allowance for loan losses on voi notes receivable . an estimate of expected uncollectibility is recorded on bluegreen 's voi notes receivable as a reduction of revenue at the time bluegreen recognizes a timeshare sale . bluegreen estimate uncollectible voi notes receivable based on historical uncollectibles for similar voi notes receivable over the applicable historical period , using a technique referred to as a static pool analysis , which tracks uncollectibles for each year 's sales over the entire life of those notes . certain qualitative data is also considered , including the aging of the respective receivables , current default trends by origination year , current economic conditions , and the fico ® scores of the borrowers . additionally , under timeshare accounting requirements , no consideration is given for future recoveries of defaulted inventory in the estimate of uncollectible voi notes receivable . bluegreen reviews its reserves for loan losses on at least a quarterly basis . if defaults increase , our results of operations could be materially adversely impacted . during 2011 and 2010 , in addition to recognizing an estimate of loan losses on current loan originations , $ 7.2 million and $ 21.2 million , respectively , of charges were recorded as a result of changing our estimate of future loan losses on loans originated prior to our implementation of fico ® score-based credit underwriting standards during december 2008. allowance for loan losses . the allowance for loan losses is maintained at an amount that bankatlantic bancorp believes to be a reasonable estimate of probable losses inherent in bankatlantic bancorp 's loan portfolio as of the date

liquidity and capital resources bankatlantic bancorp , inc. currently , the parent company 's principal source of liquidity is its cash holdings and funds obtained from its wholly-owned work-out subsidiary . the parent company also may obtain funds through the issuance of equity and debt securities and through dividends , although no dividends from bankatlantic are anticipated or contemplated for the foreseeable future and the parent company is prohibited by the terms of the company order from issuing debt securities without receiving a prior non-objection from its regulators . the parent company has used its funds to contribute capital to its subsidiaries , and fund operations , including funding servicing costs and real estate owned operating expenses of its wholly-owned work-out subsidiary . at december 31 , 2011 , the parent company had approximately $ 337.1 million of junior subordinated debentures outstanding with maturities ranging from 2032 through 2037. the aggregate annual interest obligations on this indebtedness totaled approximately $ 15.7 million based on interest rates at december 31 , 2011 , which are generally indexed to three-month libor . in order to preserve liquidity , the parent company elected in february 2009 to commence deferring interest payments on all of its outstanding junior subordinated debentures and to cease paying cash dividends on its common stock . the terms of the junior subordinated debentures and the trust documents allow the parent company to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty . during the deferral period , the respective trusts have suspended the declaration and payment of dividends on the trust preferred securities . the deferral election began as of march 2009 , and regularly scheduled quarterly interest payments aggregating $ 42.9 million that would otherwise have been paid during the 36 months ended december 31 , 2011 were deferred . the parent company has the ability under the junior subordinated debentures to continue to defer interest payments for up to another 8 consecutive quarterly periods through ongoing appropriate notices to each of the trustees , and will make a decision each quarter as to whether to continue the deferral of interest .

our license agreements also require licensees to support the brands by either paying or spending contractually guaranteed minimum amounts for the marketing and advertising of the respective licensed brands . as of march 7 , 2017 we had contractual rights to receive an aggregate of $ 462.0 million in minimum royalty and marketing and advertising revenue from our licensees through the balance of the current terms of such licenses , excluding any renewals . items affecting comparability of periods presented we were formed on june 5 , 2015 , for the purpose of effecting the merger of singer merger sub , inc. with and into sqbg , inc. ( previously known as sequential brands group , inc. ) ( sec file no . 001-36082 ) ( “ old sequential ” ) and the merger of madeline merger sub , inc. with and into mslo ( sec file no . 001-15395 ) , with old sequential and mslo each surviving the merger as wholly owned subsidiaries of us ( the “ mergers ” ) . prior to the mergers , we did not conduct any activities other than those incidental to its formation and the matters contemplated in the agreement and plan of merger , dated as of june 22 , 2015 , as amended , by and among mslo , old sequential , us , singer merger sub , inc. , and madeline merger sub , inc. ( the “ merger agreement ” ) . on december 4 , 2015 , pursuant to the merger agreement , old sequential and mslo completed the strategic combination of their respective businesses and became wholly owned subsidiaries of the company . old sequential was the accounting acquirer in the mergers ; therefore , the historical consolidated financial statements for old sequential for period prior to the mergers are considered to be the historical financial statements of sequential brands group , inc. and thus , our consolidated financial statements for fiscal 2015 reflect old sequential 's consolidated financial statements for period from january 1 , 2015 through december 4 , 2015 and for fiscal year 2014 , and sequential brands group inc. 's thereafter . 23 recently issued accounting standards asu no . 2017-04 , “ simplifying the test for goodwill impairment ” in january 2017 , the fasb issued asu no . 2017-04 , “ simplifying the test for goodwill impairment ” ( “ asu 2017-04 ” ) . asu 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test . as a result , under asu 2017-04 , an entity should perform its annual , or interim , goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit 's fair value ; however , the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit . asu 2017-04 is effective prospectively for annual and interim periods beginning on or after december 15 , 2019 , and early adoption is permitted on testing dates after january 1 , 2017. we are currently evaluating the impact the adoption of asu 2017-04 will have on our consolidated financial statements . asu no . 2017-01 , “ fasb clarifies the definition of a business ” in january 2017 , the fasb issued asu no . 2017-01 , “ fasb clarifies the definition of a business ” ( “ asu 2017-01 ” ) . asu 2017-01 clarifies the definition of a business in asc 805. the amendments in asu 2017-01 are intended to make application of the guidance more consistent and cost-efficient . asu 2017-01 is effective for annual and interim periods beginning after december 15 , 2017 , with early adoption permitted for transactions that occurred before the issuance date of effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance . we do not expect the adoption of asu 2017-01 to have a material impact on our consolidated financial statements . asu no . 2016-18 , “ restricted cash – a consensus of the fasb emerging issues task force ” in november 2016 , the fasb issued asu no . 2016-18 , “ restricted cash – a consensus of the fasb emerging issues task force ” ( “ asu 2016-18 ” ) . asu 2016-18 amends asc 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows . upon adoption of asu 2016-18 , an entity should include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents . asu 2016-18 is effective for annual and interim periods beginning after december 15 , 2017 , and early adoption is permitted for all entities . we do not expect the adoption of asu 2016-18 to have a material impact on our consolidated financial statements . asu no . 2016-15 , “ classification of certain cash receipts and cash payments ” in august 2016 , the fasb issued asu no . 2016-15 , “ classification of certain cash receipts and cash payments ” ( “ asu 2016-15 ” ) . asu 2016-15 amends the guidance in asc 230 on the classification of certain cash receipts and payments in the statement of cash flows . the primary purpose of asu 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic . asu 2016-15 is effective for annual and interim periods beginning after december 15 , 2017 , and early adoption is permitted for all entities . story_separator_special_tag indefinite-lived intangible assets are not amortized , but instead are subject to impairment evaluation . the carrying value of intangible assets and other finite-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . indefinite-lived intangible assets are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that indicate that the carrying amount of the indefinite-lived intangible asset may not be recoverable . when conducting our impairment assessment , we initially perform a qualitative evaluation of whether it is more likely than not that the asset is impaired . if it is determined by a qualitative evaluation that it is more likely than not that the asset is impaired , we then test the asset for recoverability . recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its future undiscounted net cash flows . if the carrying amount of such assets are considered to be impaired , the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the recoverability of the assets . assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell . during the year ended december 31 , 2016 , we changed our annual impairment testing date from december 31 to october 1. we believe this new date is preferable because it allows for more timely completion of the annual impairment test prior to the end of our annual financial reporting period . this change in accounting principle does not delay , accelerate or avoid an impairment charge . we have determined that it would be impracticable to objectively determine projected cash flow and related valuation estimates that would have been used as of each october 1 of prior reporting periods without the use of hindsight . as such , we applied the change in annual impairment testing date prospectively beginning october 1 , 2016 . 27 income taxes . current income taxes are based on the respective periods ' taxable income for federal , foreign and state income tax reporting purposes . deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities , using statutory tax rates in effect for the year in which the differences are expected to reverse . in accordance with asu no . 2015-17 “ balance sheet classification of deferred taxes ” , all deferred income taxes are reported and classified as non-current . a valuation allowance is required if , based on the weight of available evidence , it is more likely than not that some portion or all of the deferred tax assets will not be realized . the company applies the fasb guidance on accounting for uncertainty in income taxes . the guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise 's financial statements in accordance with other authoritative gaap and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return . the guidance also addresses derecognition , classification , interest and penalties , accounting in interim periods , disclosure and transition . during the year ended december 31 , 2016 , the company released its $ 0.3 million reserve of certain unrecognized tax benefits along with $ 0.3 million of accrued interest and penalties through current income tax expense in accordance with asc 740 , income taxes ( “ asc 740 ” ) . at december 31 , 2015 , the company had $ 0.6 million of certain unrecognized tax benefits , included as a component of long-term liabilities held for disposition from discontinued operations of wholesale operations subsidiary . interest and penalties related to uncertain tax positions , if any , are recorded in income tax expense . tax years that remain open for assessment for federal and state tax purposes include the years ended december 31 , 2013 through december 31 , 2016. stock-based compensation . we account for stock-based compensation under asc topic 718 , compensation - stock compensation , which requires companies to measure and recognize compensation expense for all stock-based payments at fair value . compensation cost for restricted stock is measured using the quoted market price of our common stock at the date the common stock is granted . for restricted stock and restricted stock units , for which restrictions lapse with the passage of time ( “ time-based restricted stock ” ) , compensation cost is recognized on a straight-line basis over the period between the issue date and the date that restrictions lapse . time-based restricted stock is included in total shares of common stock outstanding upon the lapse of applicable restrictions . for restricted stock , for which restrictions are based on performance measures ( “ performance stock units ” or “ psu 's ” ) , restrictions lapse when those performance measures have been deemed achieved . compensation cost for psus is recognized on a straight-line basis during the period from the date on which the likelihood of the psus being earned is deemed probable and ( x ) the end of the fiscal year during which such psus are granted or ( y ) the date on which awards of such psus may be approved by the compensation committee of the company 's board of directors ( the “ compensation committee ” ) on a discretionary basis , as applicable . psus are included in total shares of common stock outstanding upon the lapse of applicable restrictions . psus are included in total diluted shares of common stock outstanding when the performance measures have been deemed achieved but the psus have not yet been issued . compensation cost

liquidity and capital resources bankatlantic bancorp , inc. currently , the parent company 's principal source of liquidity is its cash holdings and funds obtained from its wholly-owned work-out subsidiary . the parent company also may obtain funds through the issuance of equity and debt securities and through dividends , although no dividends from bankatlantic are anticipated or contemplated for the foreseeable future and the parent company is prohibited by the terms of the company order from issuing debt securities without receiving a prior non-objection from its regulators . the parent company has used its funds to contribute capital to its subsidiaries , and fund operations , including funding servicing costs and real estate owned operating expenses of its wholly-owned work-out subsidiary . at december 31 , 2011 , the parent company had approximately $ 337.1 million of junior subordinated debentures outstanding with maturities ranging from 2032 through 2037. the aggregate annual interest obligations on this indebtedness totaled approximately $ 15.7 million based on interest rates at december 31 , 2011 , which are generally indexed to three-month libor . in order to preserve liquidity , the parent company elected in february 2009 to commence deferring interest payments on all of its outstanding junior subordinated debentures and to cease paying cash dividends on its common stock . the terms of the junior subordinated debentures and the trust documents allow the parent company to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty . during the deferral period , the respective trusts have suspended the declaration and payment of dividends on the trust preferred securities . the deferral election began as of march 2009 , and regularly scheduled quarterly interest payments aggregating $ 42.9 million that would otherwise have been paid during the 36 months ended december 31 , 2011 were deferred . the parent company has the ability under the junior subordinated debentures to continue to defer interest payments for up to another 8 consecutive quarterly periods through ongoing appropriate notices to each of the trustees , and will make a decision each quarter as to whether to continue the deferral of interest .

our license agreements also require licensees to support the brands by either paying or spending contractually guaranteed minimum amounts for the marketing and advertising of the respective licensed brands . as of march 7 , 2017 we had contractual rights to receive an aggregate of $ 462.0 million in minimum royalty and marketing and advertising revenue from our licensees through the balance of the current terms of such licenses , excluding any renewals . items affecting comparability of periods presented we were formed on june 5 , 2015 , for the purpose of effecting the merger of singer merger sub , inc. with and into sqbg , inc. ( previously known as sequential brands group , inc. ) ( sec file no . 001-36082 ) ( “ old sequential ” ) and the merger of madeline merger sub , inc. with and into mslo ( sec file no . 001-15395 ) , with old sequential and mslo each surviving the merger as wholly owned subsidiaries of us ( the “ mergers ” ) . prior to the mergers , we did not conduct any activities other than those incidental to its formation and the matters contemplated in the agreement and plan of merger , dated as of june 22 , 2015 , as amended , by and among mslo , old sequential , us , singer merger sub , inc. , and madeline merger sub , inc. ( the “ merger agreement ” ) . on december 4 , 2015 , pursuant to the merger agreement , old sequential and mslo completed the strategic combination of their respective businesses and became wholly owned subsidiaries of the company . old sequential was the accounting acquirer in the mergers ; therefore , the historical consolidated financial statements for old sequential for period prior to the mergers are considered to be the historical financial statements of sequential brands group , inc. and thus , our consolidated financial statements for fiscal 2015 reflect old sequential 's consolidated financial statements for period from january 1 , 2015 through december 4 , 2015 and for fiscal year 2014 , and sequential brands group inc. 's thereafter . 23 recently issued accounting standards asu no . 2017-04 , “ simplifying the test for goodwill impairment ” in january 2017 , the fasb issued asu no . 2017-04 , “ simplifying the test for goodwill impairment ” ( “ asu 2017-04 ” ) . asu 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test . as a result , under asu 2017-04 , an entity should perform its annual , or interim , goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit 's fair value ; however , the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit . asu 2017-04 is effective prospectively for annual and interim periods beginning on or after december 15 , 2019 , and early adoption is permitted on testing dates after january 1 , 2017. we are currently evaluating the impact the adoption of asu 2017-04 will have on our consolidated financial statements . asu no . 2017-01 , “ fasb clarifies the definition of a business ” in january 2017 , the fasb issued asu no . 2017-01 , “ fasb clarifies the definition of a business ” ( “ asu 2017-01 ” ) . asu 2017-01 clarifies the definition of a business in asc 805. the amendments in asu 2017-01 are intended to make application of the guidance more consistent and cost-efficient . asu 2017-01 is effective for annual and interim periods beginning after december 15 , 2017 , with early adoption permitted for transactions that occurred before the issuance date of effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance . we do not expect the adoption of asu 2017-01 to have a material impact on our consolidated financial statements . asu no . 2016-18 , “ restricted cash – a consensus of the fasb emerging issues task force ” in november 2016 , the fasb issued asu no . 2016-18 , “ restricted cash – a consensus of the fasb emerging issues task force ” ( “ asu 2016-18 ” ) . asu 2016-18 amends asc 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows . upon adoption of asu 2016-18 , an entity should include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents . asu 2016-18 is effective for annual and interim periods beginning after december 15 , 2017 , and early adoption is permitted for all entities . we do not expect the adoption of asu 2016-18 to have a material impact on our consolidated financial statements . asu no . 2016-15 , “ classification of certain cash receipts and cash payments ” in august 2016 , the fasb issued asu no . 2016-15 , “ classification of certain cash receipts and cash payments ” ( “ asu 2016-15 ” ) . asu 2016-15 amends the guidance in asc 230 on the classification of certain cash receipts and payments in the statement of cash flows . the primary purpose of asu 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic . asu 2016-15 is effective for annual and interim periods beginning after december 15 , 2017 , and early adoption is permitted for all entities . story_separator_special_tag indefinite-lived intangible assets are not amortized , but instead are subject to impairment evaluation . the carrying value of intangible assets and other finite-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . indefinite-lived intangible assets are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that indicate that the carrying amount of the indefinite-lived intangible asset may not be recoverable . when conducting our impairment assessment , we initially perform a qualitative evaluation of whether it is more likely than not that the asset is impaired . if it is determined by a qualitative evaluation that it is more likely than not that the asset is impaired , we then test the asset for recoverability . recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its future undiscounted net cash flows . if the carrying amount of such assets are considered to be impaired , the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the recoverability of the assets . assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell . during the year ended december 31 , 2016 , we changed our annual impairment testing date from december 31 to october 1. we believe this new date is preferable because it allows for more timely completion of the annual impairment test prior to the end of our annual financial reporting period . this change in accounting principle does not delay , accelerate or avoid an impairment charge . we have determined that it would be impracticable to objectively determine projected cash flow and related valuation estimates that would have been used as of each october 1 of prior reporting periods without the use of hindsight . as such , we applied the change in annual impairment testing date prospectively beginning october 1 , 2016 . 27 income taxes . current income taxes are based on the respective periods ' taxable income for federal , foreign and state income tax reporting purposes . deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities , using statutory tax rates in effect for the year in which the differences are expected to reverse . in accordance with asu no . 2015-17 “ balance sheet classification of deferred taxes ” , all deferred income taxes are reported and classified as non-current . a valuation allowance is required if , based on the weight of available evidence , it is more likely than not that some portion or all of the deferred tax assets will not be realized . the company applies the fasb guidance on accounting for uncertainty in income taxes . the guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise 's financial statements in accordance with other authoritative gaap and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return . the guidance also addresses derecognition , classification , interest and penalties , accounting in interim periods , disclosure and transition . during the year ended december 31 , 2016 , the company released its $ 0.3 million reserve of certain unrecognized tax benefits along with $ 0.3 million of accrued interest and penalties through current income tax expense in accordance with asc 740 , income taxes ( “ asc 740 ” ) . at december 31 , 2015 , the company had $ 0.6 million of certain unrecognized tax benefits , included as a component of long-term liabilities held for disposition from discontinued operations of wholesale operations subsidiary . interest and penalties related to uncertain tax positions , if any , are recorded in income tax expense . tax years that remain open for assessment for federal and state tax purposes include the years ended december 31 , 2013 through december 31 , 2016. stock-based compensation . we account for stock-based compensation under asc topic 718 , compensation - stock compensation , which requires companies to measure and recognize compensation expense for all stock-based payments at fair value . compensation cost for restricted stock is measured using the quoted market price of our common stock at the date the common stock is granted . for restricted stock and restricted stock units , for which restrictions lapse with the passage of time ( “ time-based restricted stock ” ) , compensation cost is recognized on a straight-line basis over the period between the issue date and the date that restrictions lapse . time-based restricted stock is included in total shares of common stock outstanding upon the lapse of applicable restrictions . for restricted stock , for which restrictions are based on performance measures ( “ performance stock units ” or “ psu 's ” ) , restrictions lapse when those performance measures have been deemed achieved . compensation cost for psus is recognized on a straight-line basis during the period from the date on which the likelihood of the psus being earned is deemed probable and ( x ) the end of the fiscal year during which such psus are granted or ( y ) the date on which awards of such psus may be approved by the compensation committee of the company 's board of directors ( the “ compensation committee ” ) on a discretionary basis , as applicable . psus are included in total shares of common stock outstanding upon the lapse of applicable restrictions . psus are included in total diluted shares of common stock outstanding when the performance measures have been deemed achieved but the psus have not yet been issued . compensation cost

liquidity as of december 31 , 2016 , we had cash on hand , including restricted cash , of $ 20.7 million and a net working capital balance ( defined below ) of $ 26.8 million . additionally , we had outstanding debt obligations under our loan agreements of $ 663.0 million excluding $ 18.0 million of deferred financing fees . as of december 31 , 2015 , we had cash on hand of $ 41.6 million and a net working capital balance of $ 49.6 million . additionally , we had outstanding debt obligations under our loan agreements of $ 550.0 million excluding $ 7.9 million of deferred financing fees . net working capital is defined as current assets minus current liabilities , excluding restricted cash and discontinued operations . we believe that cash from continuing operations and our currently available cash ( including available borrowings under our existing financing arrangements and available-for-sale securities ) will be sufficient to satisfy our anticipated working capital requirements for the foreseeable future . overall , we do not expect any negative effects to our funding sources that would have a material effect on our liquidity . we intend to continue financing future brand acquisitions through a combination of cash from operations , bank financing and the issuance of additional equity and or debt securities . see note 9 to our consolidated financial statements for a description of certain financing transactions consummated by us . there are no material capital expenditure commitments as of december 31 , 2016 .

for the year ended december 31 , 2018 , we had no material lease renewals . 34 during 2019 , we will continue to invest funds toward the achievement of entitlements , permits , and maps for our land and for master project infrastructure and vertical development within our active commercial and industrial development . securing entitlements for our land is a long , arduous process that can take several years and often involves litigation . during the next few years , our net income will fluctuate from year-to-year based upon , among other factors , commodity prices , production within our farming segment , the timing of land sales and the leasing of land and or industrial space within our industrial developments , and equity in earnings realized from our unconsolidated joint ventures . this management 's discussion and analysis of financial condition and results of operations provides a narrative discussion of our results of operations . it contains the results of operations for each operating segment of the business and is followed by a discussion of our financial position . it is useful to read the business segment information in conjunction with note 16 ( reporting segments and related information ) of the notes to consolidated financial statements . critical accounting policies the preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the united states , or gaap , requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we consider an accounting estimate to be critical if : ( 1 ) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made , and ( 2 ) changes in the estimates that are likely to occur from period to period , or use of different estimates that we reasonably could have used in the current period , would have a material impact on our financial condition or results of operations . on an on-going basis , we evaluate our estimates , including those related to revenue recognition , impairment of long-lived assets , capitalization of costs , allocation of costs related to land sales and leases , stock compensation , our future ability to utilize deferred tax assets , and defined benefit retirement plans . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . management has discussed the development and selection of these critical accounting estimates with the audit committee of our board of directors and the audit committee has reviewed the foregoing disclosure . in addition , there are other items within our financial statements that require estimation , but are not deemed critical as defined above . changes in estimates used in these and other items could have a material impact on our financial statements . see also note 1 ( summary of significant accounting policies ) of the notes to consolidated financial statements , which discusses accounting policies that we have selected from acceptable alternatives . we believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements : revenue recognition – the company 's revenue is primarily derived from lease revenue from our rental portfolio , royalty revenue from mineral leases , sales of farm crops , sales of water , and land sales . revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease unless there is a considerable risk as to collectability . the financial terms of leases are contractually defined . lease revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy . royalty revenues are contractually defined as to the percentage of royalty and are tied to production and market prices . our royalty arrangements generally require payment on a monthly basis with the payment based on the previous month 's activity . we accrue monthly royalty revenues based upon estimates and adjust to actual as we receive payments . from time to time the company sells easements over its land . the easements are either in the form of rights of access granted for such things as utility corridors or are in the form of conservation easements that generally require the company to divest its rights to commercially develop a portion of its land , but do not result in a change in ownership of the land or restrict the company from continuing other revenue generating activities on the land . sales of conservation easements are accounted for in accordance with the five-step model under accounting standards codification topic 606 , or asc 606. the five-step model requires that we ( i ) identify the contract with the customer , ( ii ) identify the performance obligations in the contract , ( iii ) determine the transaction price , including variable consideration to the extent that it is probable that a significant future reversal will not occur , ( iv ) allocate the transaction price to the respective performance obligations in the contract , and ( v ) recognize revenue when ( or as ) we satisfy the performance obligation . since conservation easements generally do not impose any significant continuing performance obligations on the company , revenue from conservation easement sales are generally recognized in the period the sale has closed and consideration has been received . story_separator_special_tag the company and majestic have successfully leased 67 % of this distribution facility prior to its completion , with the tenant taking occupancy in q4 of 2019. this new construction is building on the success in 2018 of fully leasing a 480,000 square foot building in a partnership with majestic . a potential disadvantage to our development strategy is our distance from the ports of los angeles and long beach in comparison to the warehouse/distribution centers located in the inland empire , a large industrial area located east of los angeles , which continues its expansion eastward beyond riverside and san bernardino , to include perris , moreno valley , and beaumont . as development in the inland empire continues to move east and farther away from the ports , our potential disadvantage of our distance from the ports is being mitigated . strong demand for large distribution facilities is driving development farther east in a search for large entitled parcels . during 2018 , vacancy rates in the inland empire stayed flat at 3.9 % compared to 3.7 % in 2017. this industrial market continues to see available supply remain at historic low levels . construction declined slightly during the fourth quarter with 20.5 million square feet under construction compared to 20.7 million in 2017. this new supply is currently meeting growing industrial demand . the low vacancy rates have led to a year-over-year increase in lease rates of 7.3 % within the inland empire . as lease rates increase in the inland empire , we may begin to have greater pricing advantages due to our lower land basis . during 2018 , vacancy rates in the northern los angeles industrial market , which includes the san fernando valley and santa clarita valley , approximated 1.6 % . rents have been increasing for the past six years and will likely continue to rise in future years as the vacancy rate is at historic lows and quality industrial space remains hard to find . during 2018 , average asking rents increased 8.5 % compared with 2017 , which have surpassed the historical peak which was seen in late 2007. industrial demand remains high and infill industrial demand remains higher still . future quarters will likely see greater construction activity as rents hit new highs and vacancy rates are at historic lows . demand for industrial space in this market will also continue to be driven by domestic and global consumption levels . as industrial vacancy rates are at historic lows , industrial users seeking larger spaces are having to go further north into neighboring kern county and particularly , the trcc which has attracted increased attention as market conditions continue to tighten . in 2018 , the los angeles and long beach port container traffic recorded its highest container total ever with 17.54 million twenty-foot equivalent units , or teu 's , up 3.8 % from 2017. teu is a measure of a ship 's cargo carrying capacity . the dimensions of one teu are equal to that of a standard shipping container measuring 20 feet long by 8 feet tall . we expect the commercial/industrial segment to continue to experience costs , net of amounts capitalized , primarily related to professional service fees , marketing costs , commissions , planning costs , and staffing costs as we continue to pursue development opportunities . these costs are expected to remain consistent with current levels of expense with any variability in the future tied to specific absorption transactions in any given year . the actual timing and completion of development is difficult to predict due to the uncertainties of the market . infrastructure development and marketing activities and costs could continue over several years as we develop our land holdings . we will also continue to evaluate land resources to determine the highest and best uses for our land holdings . future sales of land are dependent on market circumstances and specific opportunities . our goal in the future is to increase land value and create future revenue growth through planning and development of commercial and industrial properties . 40 real estate – resort/residential we are in the preliminary stages of development ; hence , no revenues are attributed to this segment for these reporting periods . in 2018 , resort/residential segment expenses decreased $ 425,000 to $ 1,530,000 , or 22 % , when compared to $ 1,955,000 in 2017 . the reassignment of resources within the company translated to increases in qualifying costs , including payroll and overhead costs within resort/residential which in turn translated to an increase in costs being capitalized into our real estate development projects by $ 250,000 when compared to 2017. in addition , we experienced savings in professional services of $ 163,000 in 2018. in 2017 , resort/residential segment expenses increased $ 325,000 primarily due to reduced capitalization of payroll and overhead costs that in the prior years were identified to be incremental to our mixed use master plan development projects . our resort/residential segment activities in include land entitlement , land planning and pre-construction engineering and conservation activities . we have three major resort/residential communities within this segment : centennial , grapevine , and mv . for centennial , the board of supervisors in december 2018 , by a vote of 4-1 , affirmed the recommendation of the los angeles county regional planning commission and department of regional planning that centennial be approved . for grapevine , we are currently working with kern county to defend litigation related to the approved eir . for a more complete discussion of the litigation and approval process , please see note 14 ( commitments and contingencies ) to the notes to consolidated financial statements . for mv , we have a fully entitled project and received approval of tentative tract map 1 for our first four phases of development . the timing of mv development in the coming years will be dependent on the strength of

liquidity as of december 31 , 2016 , we had cash on hand , including restricted cash , of $ 20.7 million and a net working capital balance ( defined below ) of $ 26.8 million . additionally , we had outstanding debt obligations under our loan agreements of $ 663.0 million excluding $ 18.0 million of deferred financing fees . as of december 31 , 2015 , we had cash on hand of $ 41.6 million and a net working capital balance of $ 49.6 million . additionally , we had outstanding debt obligations under our loan agreements of $ 550.0 million excluding $ 7.9 million of deferred financing fees . net working capital is defined as current assets minus current liabilities , excluding restricted cash and discontinued operations . we believe that cash from continuing operations and our currently available cash ( including available borrowings under our existing financing arrangements and available-for-sale securities ) will be sufficient to satisfy our anticipated working capital requirements for the foreseeable future . overall , we do not expect any negative effects to our funding sources that would have a material effect on our liquidity . we intend to continue financing future brand acquisitions through a combination of cash from operations , bank financing and the issuance of additional equity and or debt securities . see note 9 to our consolidated financial statements for a description of certain financing transactions consummated by us . there are no material capital expenditure commitments as of december 31 , 2016 .

for the year ended december 31 , 2018 , we had no material lease renewals . 34 during 2019 , we will continue to invest funds toward the achievement of entitlements , permits , and maps for our land and for master project infrastructure and vertical development within our active commercial and industrial development . securing entitlements for our land is a long , arduous process that can take several years and often involves litigation . during the next few years , our net income will fluctuate from year-to-year based upon , among other factors , commodity prices , production within our farming segment , the timing of land sales and the leasing of land and or industrial space within our industrial developments , and equity in earnings realized from our unconsolidated joint ventures . this management 's discussion and analysis of financial condition and results of operations provides a narrative discussion of our results of operations . it contains the results of operations for each operating segment of the business and is followed by a discussion of our financial position . it is useful to read the business segment information in conjunction with note 16 ( reporting segments and related information ) of the notes to consolidated financial statements . critical accounting policies the preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the united states , or gaap , requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we consider an accounting estimate to be critical if : ( 1 ) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made , and ( 2 ) changes in the estimates that are likely to occur from period to period , or use of different estimates that we reasonably could have used in the current period , would have a material impact on our financial condition or results of operations . on an on-going basis , we evaluate our estimates , including those related to revenue recognition , impairment of long-lived assets , capitalization of costs , allocation of costs related to land sales and leases , stock compensation , our future ability to utilize deferred tax assets , and defined benefit retirement plans . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . management has discussed the development and selection of these critical accounting estimates with the audit committee of our board of directors and the audit committee has reviewed the foregoing disclosure . in addition , there are other items within our financial statements that require estimation , but are not deemed critical as defined above . changes in estimates used in these and other items could have a material impact on our financial statements . see also note 1 ( summary of significant accounting policies ) of the notes to consolidated financial statements , which discusses accounting policies that we have selected from acceptable alternatives . we believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements : revenue recognition – the company 's revenue is primarily derived from lease revenue from our rental portfolio , royalty revenue from mineral leases , sales of farm crops , sales of water , and land sales . revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease unless there is a considerable risk as to collectability . the financial terms of leases are contractually defined . lease revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy . royalty revenues are contractually defined as to the percentage of royalty and are tied to production and market prices . our royalty arrangements generally require payment on a monthly basis with the payment based on the previous month 's activity . we accrue monthly royalty revenues based upon estimates and adjust to actual as we receive payments . from time to time the company sells easements over its land . the easements are either in the form of rights of access granted for such things as utility corridors or are in the form of conservation easements that generally require the company to divest its rights to commercially develop a portion of its land , but do not result in a change in ownership of the land or restrict the company from continuing other revenue generating activities on the land . sales of conservation easements are accounted for in accordance with the five-step model under accounting standards codification topic 606 , or asc 606. the five-step model requires that we ( i ) identify the contract with the customer , ( ii ) identify the performance obligations in the contract , ( iii ) determine the transaction price , including variable consideration to the extent that it is probable that a significant future reversal will not occur , ( iv ) allocate the transaction price to the respective performance obligations in the contract , and ( v ) recognize revenue when ( or as ) we satisfy the performance obligation . since conservation easements generally do not impose any significant continuing performance obligations on the company , revenue from conservation easement sales are generally recognized in the period the sale has closed and consideration has been received . story_separator_special_tag the company and majestic have successfully leased 67 % of this distribution facility prior to its completion , with the tenant taking occupancy in q4 of 2019. this new construction is building on the success in 2018 of fully leasing a 480,000 square foot building in a partnership with majestic . a potential disadvantage to our development strategy is our distance from the ports of los angeles and long beach in comparison to the warehouse/distribution centers located in the inland empire , a large industrial area located east of los angeles , which continues its expansion eastward beyond riverside and san bernardino , to include perris , moreno valley , and beaumont . as development in the inland empire continues to move east and farther away from the ports , our potential disadvantage of our distance from the ports is being mitigated . strong demand for large distribution facilities is driving development farther east in a search for large entitled parcels . during 2018 , vacancy rates in the inland empire stayed flat at 3.9 % compared to 3.7 % in 2017. this industrial market continues to see available supply remain at historic low levels . construction declined slightly during the fourth quarter with 20.5 million square feet under construction compared to 20.7 million in 2017. this new supply is currently meeting growing industrial demand . the low vacancy rates have led to a year-over-year increase in lease rates of 7.3 % within the inland empire . as lease rates increase in the inland empire , we may begin to have greater pricing advantages due to our lower land basis . during 2018 , vacancy rates in the northern los angeles industrial market , which includes the san fernando valley and santa clarita valley , approximated 1.6 % . rents have been increasing for the past six years and will likely continue to rise in future years as the vacancy rate is at historic lows and quality industrial space remains hard to find . during 2018 , average asking rents increased 8.5 % compared with 2017 , which have surpassed the historical peak which was seen in late 2007. industrial demand remains high and infill industrial demand remains higher still . future quarters will likely see greater construction activity as rents hit new highs and vacancy rates are at historic lows . demand for industrial space in this market will also continue to be driven by domestic and global consumption levels . as industrial vacancy rates are at historic lows , industrial users seeking larger spaces are having to go further north into neighboring kern county and particularly , the trcc which has attracted increased attention as market conditions continue to tighten . in 2018 , the los angeles and long beach port container traffic recorded its highest container total ever with 17.54 million twenty-foot equivalent units , or teu 's , up 3.8 % from 2017. teu is a measure of a ship 's cargo carrying capacity . the dimensions of one teu are equal to that of a standard shipping container measuring 20 feet long by 8 feet tall . we expect the commercial/industrial segment to continue to experience costs , net of amounts capitalized , primarily related to professional service fees , marketing costs , commissions , planning costs , and staffing costs as we continue to pursue development opportunities . these costs are expected to remain consistent with current levels of expense with any variability in the future tied to specific absorption transactions in any given year . the actual timing and completion of development is difficult to predict due to the uncertainties of the market . infrastructure development and marketing activities and costs could continue over several years as we develop our land holdings . we will also continue to evaluate land resources to determine the highest and best uses for our land holdings . future sales of land are dependent on market circumstances and specific opportunities . our goal in the future is to increase land value and create future revenue growth through planning and development of commercial and industrial properties . 40 real estate – resort/residential we are in the preliminary stages of development ; hence , no revenues are attributed to this segment for these reporting periods . in 2018 , resort/residential segment expenses decreased $ 425,000 to $ 1,530,000 , or 22 % , when compared to $ 1,955,000 in 2017 . the reassignment of resources within the company translated to increases in qualifying costs , including payroll and overhead costs within resort/residential which in turn translated to an increase in costs being capitalized into our real estate development projects by $ 250,000 when compared to 2017. in addition , we experienced savings in professional services of $ 163,000 in 2018. in 2017 , resort/residential segment expenses increased $ 325,000 primarily due to reduced capitalization of payroll and overhead costs that in the prior years were identified to be incremental to our mixed use master plan development projects . our resort/residential segment activities in include land entitlement , land planning and pre-construction engineering and conservation activities . we have three major resort/residential communities within this segment : centennial , grapevine , and mv . for centennial , the board of supervisors in december 2018 , by a vote of 4-1 , affirmed the recommendation of the los angeles county regional planning commission and department of regional planning that centennial be approved . for grapevine , we are currently working with kern county to defend litigation related to the approved eir . for a more complete discussion of the litigation and approval process , please see note 14 ( commitments and contingencies ) to the notes to consolidated financial statements . for mv , we have a fully entitled project and received approval of tentative tract map 1 for our first four phases of development . the timing of mv development in the coming years will be dependent on the strength of

liquidity and capital resources cash flow and liquidity our financial position allows us to pursue our strategies of land entitlement , development , and conservation . accordingly , we have established well-defined priorities for our available cash , including investing in core operating segments to achieve profitable future growth . we have historically funded our operations with cash flows from operating activities , investment proceeds , and short-term borrowings from our bank credit facilities . in the past , we have also issued common stock and used the proceeds for capital investment activities . to enhance shareholder value , we will continue to make investments in our real estate segments to secure land entitlement approvals , build infrastructure for our developments , ensure adequate future water supplies , and provide funds for general land development activities . within our farming segment , we will make investments as needed to improve efficiency and add capacity to its operations when it is profitable to do so . on october 4 , 2017 , the company commenced a rights offering to common shareholders for additional working capital for general corporate purposes , including to fund general infrastructure costs and the development of buildings at trcc , to continue forward with entitlement and permitting programs for the centennial and grapevine communities and costs related to the preparation of the development of mv . the rights offering concluded on october 27 , 2017 , with the company raising $ 89,701,000 , net of offering costs , from the sale of 5,000,000 shares at $ 18.00 per share . our cash and cash equivalents and marketable securities totaled approximately $ 79,657,000 at december 31 , 2018 , a decrease of $ 11,318,000 , or 12 % , from the corresponding amount at the end of 2017 .

there is no assurance that we will be successful in obtaining sufficient funding on acceptable terms , if at all and we could be forced to delay , reduce or eliminate some or all of our research and development programs , product portfolio expansion or commercialization efforts , which could materially adversely affect our business prospects or our ability to continue operations . we will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates . if we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership , we expect to incur significant expenses related to developing our internal commercialization capability to support product sales , marketing and distribution . further , we expect to incur additional costs associated with our continued operation as a public company . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through a combination of equity offerings , debt financings , government funding arrangements , collaborations , strategic alliances and marketing , distribution or licensing arrangements . we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more of our product candidates . 71 because of the numerous risks and uncertainties associated with pharmaceutical product development , we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability . even if we are able to generate product sales , we may not become profitable . if we fail to become profitable or are unable to sustain profitability on a continuing basis , then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations . recent developments closing of rights offering for net proceeds of approximately $ 29.5 million on march 5 , 2020 , we closed our previously announced rights offering issuing 1,046,249 shares of common stock and 2,287 shares of series c preferred stock raising net proceeds of approximately $ 29.5 million . tebipenem hbr – positive recommendation from independent data review committee regarding pivotal phase 3 clinical trial and exercise of $ 15.9 million option by barda for tebipenem hbr development on october 3 , 2019 , we announced that an independent review committee evaluated interim pharmacokinetic plasma data following the first 70 patients enrolled in our ongoing adapt-po pivotal phase 3 clinical trial of tebipenem hbr , our oral carbapenem product candidate , and recommended that we continue the trial without modification of the protocol-defined dose . the independent review committee reviewed interim plasma concentration data from the first 33 patients who were randomized to tebipenem hbr in the phase 3 clinical trial for the treatment of complicated urinary tract infections , or cuti , and acute pyelonephritis , or ap . a primary objective of the independent review committee was to confirm that plasma levels of tebipenem hbr in patients in the phase 3 clinical trial support the selected treatment dose . the phase 3 trial remains blinded and will continue as planned . adapt-po is designed as a double-blind , double-dummy clinical trial to compare oral tebipenem hbr dosed as 600 mg administered three times per day , or tid , with a standard of care iv-administered antibiotic , ertapenem , in approximately 1,200 patients with cuti or ap , randomized 1:1 in each arm . we expect to report top-line data from the phase 3 clinical trial in the third quarter of 2020. on february 5 , 2020 , we announced that the biomedical advanced research and development authority ( barda ) exercised its first contract option for additional committed funding pursuant to its existing contract with spero . specifically , the option exercise provides us with $ 15.9 million in reimbursement for the further development of tebipenem hbr . the $ 15.9 million option exercise is expected to support the funding of specified manufacturing activities required for approval of tebipenem hbr including active pharmaceutical ingredient , or api , validation batch manufacturing and stability studies . additionally , the option is expected to support the funding of several non-clinical and clinical development activities including a phase 1 bronchoalveolar lavage , or bal , study in healthy subjects that we anticipate initiating in the third quarter of 2020 , as well as non-human primate efficacy studies in one or more models of biothreat disease . the option was exercised under spero 's existing 2018 contract with barda , which provides for reimbursement to us of up to $ 46.8 million for qualified expenses for tebipenem hbr development over a five-year period . total committed funding under the barda award to date is $ 34.1 million , inclusive of the first contract option exercised in 2020. there is a second option exercisable by barda for the remaining $ 12.7 million of funding , subject to specified milestones being achieved under the award agreement . furthermore , the defense threat reduction agency ( dtra ) provides up to $ 10.0 million , in addition to the total potential award from barda , to cover the cost of the nonclinical biodefense aspects of the collaboration program for tebipenem hbr . story_separator_special_tag we base our estimates on historical experience , known trends and events and various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . we evaluate our estimates and assumptions on an ongoing basis . our actual results may differ from these estimates under different assumptions or conditions . we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements . funding received from government contracts , tax incentives and collaborations since our inception , we have been able to obtain partial funding for our research and development activities from government contracts , government tax incentives and a collaboration arrangement . the classification within our statement of operations and comprehensive loss of the funding received under these arrangements is subject to management judgment based on the nature of the arrangements we enter into , the source of the funding and whether the funding is considered central to our business operations . government contracts we generate revenue from government contracts that reimburse us for certain allowable costs for funded projects . we have determined that government grant revenue is outside the scope of asc 606. for contracts with government agencies , when we have concluded that we are the principal in conducting the research and development expenses and where the funding arrangement is considered central to our ongoing operations , we classify the recognized funding received as revenue . we recognize funding received from the biomedical advanced research and development authority , or barda , the u.s. department of defense , or the dod , the national institute of allergy and infectious diseases , or niaid , of the national institutes of health , or nih , and combating antibiotic resistant bacteria biopharmaceutical accelerator , or carb-x , as revenue , rather than as a reduction of research and development expenses , because we are the principal in conducting the research and development activities and these contracts are central to our ongoing operations . we recognize revenue only after the qualifying expenses related to the contracts have been incurred and we are reasonably assured that the expenses will be reimbursed and of the collectability of the revenue . we record revenue recognized upon incurring qualifying expenses in advance of billing as unbilled revenue , which is included in other receivables in our consolidated balance sheet . the related costs incurred by us are included in research and development expense in our consolidated statements of operations and comprehensive loss . government tax incentives for available government tax incentives that we may earn without regard to the existence of taxable income and that require us to forego tax deductions or the use of future tax credits and net operating loss carryforwards , we classify the funding recognized as a reduction of the related qualifying research and development expenses incurred . since the fourth quarter of 2016 , our operating subsidiary in australia has met the eligibility requirements to receive a 43.5 % tax incentive for qualifying research and development activities . we recognize these incentives as a reduction of research and development expenses in our consolidated statements of operations in the same period that the related qualifying expenses are incurred . reductions of research and development expense recognized upon incurring qualifying expenses in advance of receipt of tax incentive payments are recorded in our consolidated balance sheet as tax incentive receivables . related to these incentives , we recognized reductions of research and development expense of $ 0.4 million and $ 1.2 million during the years ended december 31 , 2019 and 2018 , respectively . 76 collaboration agreements for collaboration agreements with a third party , to determine the appropriate statement of operations classification of the recognized funding , we first assess whether the collaboration arrangement is within the scope of the accounting guidance for collaboration arrangements . if it is , we evaluate the collaborative arrangement for proper classification in the statement of operations based on the nature of the underlying activity and we assess the payments to and from the collaborative partner . if the payments to and from the collaborative partner are not within the scope of other authoritative accounting guidance , we base the statement of operations classification for the payments received on a reasonable , rational analogy to authoritative accounting guidance , applied in a consistent manner . conversely , if the collaboration arrangement is not within the scope of accounting guidance for collaboration arrangements , we assess whether the collaboration arrangement represents a vendor/customer relationship . if the collaborative arrangement does not represent a vendor/customer relationship , we then classify the funding payments received in the statement of operations and comprehensive loss as a reduction of the related expense that is incurred . in june 2019 , we entered into a collaboration agreement with the gates mri and concluded that the agreement is within the scope of the accounting guidance for collaboration arrangements . due to the cost-funded nature of the payments and our assessment that we do not have a vendor/customer relationship with the gates mri , we will recognize the funding received under the agreement as a reduction to research and development expense as we incur the related expenses . accrued research and development expenses as part of the process of preparing our consolidated financial statements , we are required to estimate our accrued research and development expenses . this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs . the majority of our service providers invoice us in arrears

liquidity and capital resources cash flow and liquidity our financial position allows us to pursue our strategies of land entitlement , development , and conservation . accordingly , we have established well-defined priorities for our available cash , including investing in core operating segments to achieve profitable future growth . we have historically funded our operations with cash flows from operating activities , investment proceeds , and short-term borrowings from our bank credit facilities . in the past , we have also issued common stock and used the proceeds for capital investment activities . to enhance shareholder value , we will continue to make investments in our real estate segments to secure land entitlement approvals , build infrastructure for our developments , ensure adequate future water supplies , and provide funds for general land development activities . within our farming segment , we will make investments as needed to improve efficiency and add capacity to its operations when it is profitable to do so . on october 4 , 2017 , the company commenced a rights offering to common shareholders for additional working capital for general corporate purposes , including to fund general infrastructure costs and the development of buildings at trcc , to continue forward with entitlement and permitting programs for the centennial and grapevine communities and costs related to the preparation of the development of mv . the rights offering concluded on october 27 , 2017 , with the company raising $ 89,701,000 , net of offering costs , from the sale of 5,000,000 shares at $ 18.00 per share . our cash and cash equivalents and marketable securities totaled approximately $ 79,657,000 at december 31 , 2018 , a decrease of $ 11,318,000 , or 12 % , from the corresponding amount at the end of 2017 .

there is no assurance that we will be successful in obtaining sufficient funding on acceptable terms , if at all and we could be forced to delay , reduce or eliminate some or all of our research and development programs , product portfolio expansion or commercialization efforts , which could materially adversely affect our business prospects or our ability to continue operations . we will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates . if we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership , we expect to incur significant expenses related to developing our internal commercialization capability to support product sales , marketing and distribution . further , we expect to incur additional costs associated with our continued operation as a public company . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through a combination of equity offerings , debt financings , government funding arrangements , collaborations , strategic alliances and marketing , distribution or licensing arrangements . we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more of our product candidates . 71 because of the numerous risks and uncertainties associated with pharmaceutical product development , we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability . even if we are able to generate product sales , we may not become profitable . if we fail to become profitable or are unable to sustain profitability on a continuing basis , then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations . recent developments closing of rights offering for net proceeds of approximately $ 29.5 million on march 5 , 2020 , we closed our previously announced rights offering issuing 1,046,249 shares of common stock and 2,287 shares of series c preferred stock raising net proceeds of approximately $ 29.5 million . tebipenem hbr – positive recommendation from independent data review committee regarding pivotal phase 3 clinical trial and exercise of $ 15.9 million option by barda for tebipenem hbr development on october 3 , 2019 , we announced that an independent review committee evaluated interim pharmacokinetic plasma data following the first 70 patients enrolled in our ongoing adapt-po pivotal phase 3 clinical trial of tebipenem hbr , our oral carbapenem product candidate , and recommended that we continue the trial without modification of the protocol-defined dose . the independent review committee reviewed interim plasma concentration data from the first 33 patients who were randomized to tebipenem hbr in the phase 3 clinical trial for the treatment of complicated urinary tract infections , or cuti , and acute pyelonephritis , or ap . a primary objective of the independent review committee was to confirm that plasma levels of tebipenem hbr in patients in the phase 3 clinical trial support the selected treatment dose . the phase 3 trial remains blinded and will continue as planned . adapt-po is designed as a double-blind , double-dummy clinical trial to compare oral tebipenem hbr dosed as 600 mg administered three times per day , or tid , with a standard of care iv-administered antibiotic , ertapenem , in approximately 1,200 patients with cuti or ap , randomized 1:1 in each arm . we expect to report top-line data from the phase 3 clinical trial in the third quarter of 2020. on february 5 , 2020 , we announced that the biomedical advanced research and development authority ( barda ) exercised its first contract option for additional committed funding pursuant to its existing contract with spero . specifically , the option exercise provides us with $ 15.9 million in reimbursement for the further development of tebipenem hbr . the $ 15.9 million option exercise is expected to support the funding of specified manufacturing activities required for approval of tebipenem hbr including active pharmaceutical ingredient , or api , validation batch manufacturing and stability studies . additionally , the option is expected to support the funding of several non-clinical and clinical development activities including a phase 1 bronchoalveolar lavage , or bal , study in healthy subjects that we anticipate initiating in the third quarter of 2020 , as well as non-human primate efficacy studies in one or more models of biothreat disease . the option was exercised under spero 's existing 2018 contract with barda , which provides for reimbursement to us of up to $ 46.8 million for qualified expenses for tebipenem hbr development over a five-year period . total committed funding under the barda award to date is $ 34.1 million , inclusive of the first contract option exercised in 2020. there is a second option exercisable by barda for the remaining $ 12.7 million of funding , subject to specified milestones being achieved under the award agreement . furthermore , the defense threat reduction agency ( dtra ) provides up to $ 10.0 million , in addition to the total potential award from barda , to cover the cost of the nonclinical biodefense aspects of the collaboration program for tebipenem hbr . story_separator_special_tag we base our estimates on historical experience , known trends and events and various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . we evaluate our estimates and assumptions on an ongoing basis . our actual results may differ from these estimates under different assumptions or conditions . we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements . funding received from government contracts , tax incentives and collaborations since our inception , we have been able to obtain partial funding for our research and development activities from government contracts , government tax incentives and a collaboration arrangement . the classification within our statement of operations and comprehensive loss of the funding received under these arrangements is subject to management judgment based on the nature of the arrangements we enter into , the source of the funding and whether the funding is considered central to our business operations . government contracts we generate revenue from government contracts that reimburse us for certain allowable costs for funded projects . we have determined that government grant revenue is outside the scope of asc 606. for contracts with government agencies , when we have concluded that we are the principal in conducting the research and development expenses and where the funding arrangement is considered central to our ongoing operations , we classify the recognized funding received as revenue . we recognize funding received from the biomedical advanced research and development authority , or barda , the u.s. department of defense , or the dod , the national institute of allergy and infectious diseases , or niaid , of the national institutes of health , or nih , and combating antibiotic resistant bacteria biopharmaceutical accelerator , or carb-x , as revenue , rather than as a reduction of research and development expenses , because we are the principal in conducting the research and development activities and these contracts are central to our ongoing operations . we recognize revenue only after the qualifying expenses related to the contracts have been incurred and we are reasonably assured that the expenses will be reimbursed and of the collectability of the revenue . we record revenue recognized upon incurring qualifying expenses in advance of billing as unbilled revenue , which is included in other receivables in our consolidated balance sheet . the related costs incurred by us are included in research and development expense in our consolidated statements of operations and comprehensive loss . government tax incentives for available government tax incentives that we may earn without regard to the existence of taxable income and that require us to forego tax deductions or the use of future tax credits and net operating loss carryforwards , we classify the funding recognized as a reduction of the related qualifying research and development expenses incurred . since the fourth quarter of 2016 , our operating subsidiary in australia has met the eligibility requirements to receive a 43.5 % tax incentive for qualifying research and development activities . we recognize these incentives as a reduction of research and development expenses in our consolidated statements of operations in the same period that the related qualifying expenses are incurred . reductions of research and development expense recognized upon incurring qualifying expenses in advance of receipt of tax incentive payments are recorded in our consolidated balance sheet as tax incentive receivables . related to these incentives , we recognized reductions of research and development expense of $ 0.4 million and $ 1.2 million during the years ended december 31 , 2019 and 2018 , respectively . 76 collaboration agreements for collaboration agreements with a third party , to determine the appropriate statement of operations classification of the recognized funding , we first assess whether the collaboration arrangement is within the scope of the accounting guidance for collaboration arrangements . if it is , we evaluate the collaborative arrangement for proper classification in the statement of operations based on the nature of the underlying activity and we assess the payments to and from the collaborative partner . if the payments to and from the collaborative partner are not within the scope of other authoritative accounting guidance , we base the statement of operations classification for the payments received on a reasonable , rational analogy to authoritative accounting guidance , applied in a consistent manner . conversely , if the collaboration arrangement is not within the scope of accounting guidance for collaboration arrangements , we assess whether the collaboration arrangement represents a vendor/customer relationship . if the collaborative arrangement does not represent a vendor/customer relationship , we then classify the funding payments received in the statement of operations and comprehensive loss as a reduction of the related expense that is incurred . in june 2019 , we entered into a collaboration agreement with the gates mri and concluded that the agreement is within the scope of the accounting guidance for collaboration arrangements . due to the cost-funded nature of the payments and our assessment that we do not have a vendor/customer relationship with the gates mri , we will recognize the funding received under the agreement as a reduction to research and development expense as we incur the related expenses . accrued research and development expenses as part of the process of preparing our consolidated financial statements , we are required to estimate our accrued research and development expenses . this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs . the majority of our service providers invoice us in arrears

liquidity and capital resources since our inception , we have incurred significant operating losses . we have generated limited revenue to date from funding arrangements with the dod , niaid , carb-x and barda and our license agreement with everest medicines . we have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years , if at all . to date , we have funded our operations with proceeds from the sales of preferred units and bridge units , payments received under license and collaboration agreements and funding from government contracts , with proceeds from the ipo of our common stock , an underwritten public offering of our common and preferred stock in july 2018 , and subsequent sales of our common stock . as of december 31 , 2019 , we had cash , cash equivalents and marketable securities of $ 82.0 million . on december 3 , 2018 , we filed a universal shelf registration statement on form s-3 ( registration no . 333-228661 ) with the sec , which was declared effective on december 11 , 2018 , and pursuant to which we registered for sale up to $ 200.0 million of any combination of our common stock , preferred stock , debt securities , warrants , rights and or units from time to time and at prices and on terms that we may determine , including up to $ 50.0 million of our common stock available for issuance pursuant to an at-the-market offering program sales agreement that we entered into with cantor fitzgerald & co. under the sales agreement , cantor may sell shares of our common stock by any method permitted by law deemed to be an “ at the market ” offering as defined in rule 415 of the securities act , subject to the terms of the sales agreement .

comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of the impact of the company 's initiatives as well as local economic and consumer trends . increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions , respectively , from the same period in the prior year for all restaurants , whether operated by the company or franchisees , in operation at least thirteen months , including those temporarily closed . some of the reasons restaurants may be temporarily closed include reimaging or remodeling , rebuilding , road construction and natural disasters . comparable sales exclude the impact of currency translation , and , beginning in 2017 , also exclude sales from venezuela due to its hyper-inflation . management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100 % . comparable sales are driven by changes in guest counts and average check , which is affected by changes in pricing and product mix . typically , pricing has a greater impact on average check than product mix . the goal is to achieve a relatively balanced contribution from both guest counts and average check . systemwide sales include sales at all restaurants . while franchised sales are not recorded as revenues by the company , management believes the information is important in understanding the company 's financial performance because these sales are the basis on which the company calculates and records franchised revenues and are indicative of the financial health of the franchisee base . roiic is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the markets , the effectiveness of capital deployed and the future allocation of capital . the return is calculated by dividing the change in operating income plus 14 mcdonald 's corporation 2017 annual report depreciation and amortization ( numerator ) by the cash used for investing activities ( denominator ) , primarily capital expenditures . the calculation uses a constant average foreign exchange rate over the periods included in the calculation . free cash flow , defined as cash provided by operations less capital expenditures , and free cash flow conversion rate , defined as free cash flow divided by net income , are measures reviewed by management in order to evaluate the company 's ability to convert net profits into cash resources , after reinvesting in the core business , that can be used to pursue opportunities to enhance shareholder value . strategic direction and financial performance the strength of the alignment among the company , its franchisees and suppliers ( collectively referred to as the `` system `` ) is key to mcdonald 's long-term success . by leveraging the system , mcdonald 's is able to identify , implement and scale ideas that meet customers ' changing needs and preferences . mcdonald 's continually builds on its competitive advantages of system alignment and geographic diversification to deliver consistent , yet locally-relevant restaurant experiences to customers as an integral part of their communities . customer-centric growth strategy beginning in 2015 , the company made purposeful changes to execute against key elements of its turnaround plan including a renewed focus on running better restaurants , driving operational growth , returning excitement to the brand and enhancing financial value . the company 's current momentum is broad-based throughout the system and its recent performance demonstrates that mcdonald 's has completed the transition from turnaround to growth . in 2017 , the company shifted its focus to delivering long-term growth through accelerated execution of its customer-centric strategy - the velocity growth plan . this plan outlines actions to drive sustainable guest count growth , a reliable long-term measure of the company 's strength , that is vital to growing sales and shareholder value . the velocity growth plan is rooted in extensive customer research and insights , along with a deep understanding of the key drivers of the business . the company is targeting the tremendous opportunity at the core of its business - its food , value and customer experience . the strategy is built on the following three pillars , all focusing on building a better mcdonald 's : retaining existing customers - focusing on areas where it already has a strong foothold in the ieo category , including family occasions and food-led breakfast . regaining lost customers - recommitting to areas of historic strength , namely food taste and quality , convenience and value . converting casual to committed customers - building stronger relationships with customers so they visit more often , by elevating and leveraging the mccafé coffee brand and enhancing snack and treat offerings . in each pillar , mcdonald 's has established sustainable platforms that enable execution of the plan with greater speed , efficiency and impact while remaining relentlessly focused on the fundamentals of running great restaurants . additionally , through three identified growth accelerators - experience of the future ( “ eotf ” ) , digital and delivery - mcdonald 's is enhancing the overall customer experience with hospitable , friendly service and ever-improving convenience for customers on their terms . the company met aggressive deployment targets for each one of these accelerators in 2017 and continues further implementation in 2018 and beyond . experience of the future . the company continues to build upon its investments in eotf , focusing on restaurant modernization and technology , in order to transform the restaurant service experience and enhance the brand in the eyes of the customer . the modernization efforts are designed to drive incremental customer visits and higher average check . mcdonald 's currently has eotf deployed in about one-third of the restaurants globally , with half of the u.s. restaurants expected to be deployed by the end of 2018. digital . story_separator_special_tag international lead markets : in 2017 and 2016 , the increases in the company-operated margin percent were primarily due to positive comparable sales , partly offset by higher labor and occupancy costs . 2017 was also negatively impacted by higher commodity costs . high growth markets : in 2017 , the increase in the company-operated margin percent was primarily due to strong comparable sales and the benefit of lower depreciation in china and hong kong . this increase was partly offset by negative comparable sales in south korea and the impact of refranchising . in 2016 , the increase was primarily due to positive comparable sales and improved restaurant profitability in china , which benefited from value-added tax ( `` vat `` ) reform , partly offset by higher labor costs across the segment . 22 mcdonald 's corporation 2017 annual report selling , general & administrative expenses consolidated selling , general and administrative expenses decreased 6 % ( 7 % in constant currencies ) in 2017 and decreased 2 % ( 1 % in constant currencies ) in 2016 . the decrease in 2017 was due to lower employee-related costs , partly offset by higher restaurant technology spending . the decrease in 2016 was primarily due to lower employee-related costs , mostly offset by higher incentive-based compensation expenses . selling , general & administrative expenses replace_table_token_12_th ( 1 ) included in foundational markets & corporate are home office support costs in areas such as facilities , finance , human resources , information technology , legal , marketing , restaurant operations , supply chain and training . ( 2 ) includes all cash incentives and share-based compensation expense . ( 3 ) excludes $ 9.4 million of foreign currency cost . ( 4 ) excludes $ 24.8 million of foreign currency benefit . selling , general and administrative expenses as a percent of systemwide sales was 2.5 % in 2017 , 2.8 % in 2016 and 2.9 % in 2015 . management believes that analyzing selling , general and administrative expenses as a percent of systemwide sales is meaningful because these costs are incurred to support the overall mcdonald 's business . in connection with our turnaround plan , the company established a net selling , general and administrative savings target of $ 500 million from its g & a base of $ 2.6 billion at the beginning of 2015. the company expects to fully realize its targeted $ 500 million of net savings in 2019. other operating ( income ) expense , net other operating ( income ) expense , net replace_table_token_13_th gains on sales of restaurant businesses in 2017 , gains on sales of restaurant businesses remained relatively flat . in 2016 , the company realized higher gains on sales of restaurant businesses , primarily in the u.s. equity in ( earnings ) losses of unconsolidated affiliates equity in earnings of unconsolidated affiliates improved in 2017 and 2016 mainly due to improved performance in japan . 2017 results also benefited from the reversal of a valuation allowance on a deferred tax asset in japan . asset dispositions and other ( income ) expense , net in 2017 , results benefited due to a property disposition gain in australia . in 2015 , results included a gain of $ 135 million on the strategic sale of a unique restaurant property in the u.s. , mostly offset by asset write-offs of $ 72 million resulting from the decision to close under-performing restaurants , primarily in the u.s. and china . impairment and other charges ( gains ) , net in 2017 , results reflected the gain on the company 's sale of its businesses in china and hong kong of approximately $ 850 million , partly offset by $ 111 million of unrelated non-cash impairment charges . the results for all three years included restructuring and impairment charges related to the company 's global refranchising and g & a initiatives . mcdonald 's corporation 2017 annual report 23 operating income operating income replace_table_token_14_th u.s. : in 2017 , the increase in operating income reflected higher franchised margin dollars and g & a savings , partly offset by lower company-operated margin dollars . in 2016 , the increase reflected higher franchised margin dollars and higher gains from sales of restaurant businesses , partly offset by the negative impact from lapping the 2015 gain on the strategic sale of a unique restaurant property . international lead markets : in 2017 and 2016 , the constant currency operating income increase was primarily due to sales-driven improvements in franchised margin dollars . in addition , 2017 benefited from a property disposition gain in australia . high growth markets : in 2017 , the constant currency operating income increase reflected higher franchise margin dollars due to sales-driven performance , the impact of refranchising and g & a savings . in addition , results benefited from lower depreciation expense in china and hong kong , and also includes the gain on the sale of the company 's businesses in china and hong kong as well as unrelated non-cash impairment charges . excluding these items , operating income increased 17 % ( 15 % in constant currencies ) . in 2016 , the increase was driven primarily by improved restaurant profitability in china . foundational markets and corporate : in 2017 , the constant currency operating income increase reflected the company 's refranchising initiatives , higher g & a costs at the corporate level due to restaurant technology expenditures , and improved performance in japan , which enabled the reversal of a valuation allowance on a deferred tax asset in japan . results also reflected the benefit from comparison to the prior year 's strategic charges . in 2016 , the increase reflected japan 's strong performance , partly offset by the net impact of the current and prior year impairment and restructuring charges from the company 's global refranchising and restructuring initiatives . operating margin operating

liquidity and capital resources since our inception , we have incurred significant operating losses . we have generated limited revenue to date from funding arrangements with the dod , niaid , carb-x and barda and our license agreement with everest medicines . we have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years , if at all . to date , we have funded our operations with proceeds from the sales of preferred units and bridge units , payments received under license and collaboration agreements and funding from government contracts , with proceeds from the ipo of our common stock , an underwritten public offering of our common and preferred stock in july 2018 , and subsequent sales of our common stock . as of december 31 , 2019 , we had cash , cash equivalents and marketable securities of $ 82.0 million . on december 3 , 2018 , we filed a universal shelf registration statement on form s-3 ( registration no . 333-228661 ) with the sec , which was declared effective on december 11 , 2018 , and pursuant to which we registered for sale up to $ 200.0 million of any combination of our common stock , preferred stock , debt securities , warrants , rights and or units from time to time and at prices and on terms that we may determine , including up to $ 50.0 million of our common stock available for issuance pursuant to an at-the-market offering program sales agreement that we entered into with cantor fitzgerald & co. under the sales agreement , cantor may sell shares of our common stock by any method permitted by law deemed to be an “ at the market ” offering as defined in rule 415 of the securities act , subject to the terms of the sales agreement .

comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of the impact of the company 's initiatives as well as local economic and consumer trends . increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions , respectively , from the same period in the prior year for all restaurants , whether operated by the company or franchisees , in operation at least thirteen months , including those temporarily closed . some of the reasons restaurants may be temporarily closed include reimaging or remodeling , rebuilding , road construction and natural disasters . comparable sales exclude the impact of currency translation , and , beginning in 2017 , also exclude sales from venezuela due to its hyper-inflation . management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100 % . comparable sales are driven by changes in guest counts and average check , which is affected by changes in pricing and product mix . typically , pricing has a greater impact on average check than product mix . the goal is to achieve a relatively balanced contribution from both guest counts and average check . systemwide sales include sales at all restaurants . while franchised sales are not recorded as revenues by the company , management believes the information is important in understanding the company 's financial performance because these sales are the basis on which the company calculates and records franchised revenues and are indicative of the financial health of the franchisee base . roiic is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the markets , the effectiveness of capital deployed and the future allocation of capital . the return is calculated by dividing the change in operating income plus 14 mcdonald 's corporation 2017 annual report depreciation and amortization ( numerator ) by the cash used for investing activities ( denominator ) , primarily capital expenditures . the calculation uses a constant average foreign exchange rate over the periods included in the calculation . free cash flow , defined as cash provided by operations less capital expenditures , and free cash flow conversion rate , defined as free cash flow divided by net income , are measures reviewed by management in order to evaluate the company 's ability to convert net profits into cash resources , after reinvesting in the core business , that can be used to pursue opportunities to enhance shareholder value . strategic direction and financial performance the strength of the alignment among the company , its franchisees and suppliers ( collectively referred to as the `` system `` ) is key to mcdonald 's long-term success . by leveraging the system , mcdonald 's is able to identify , implement and scale ideas that meet customers ' changing needs and preferences . mcdonald 's continually builds on its competitive advantages of system alignment and geographic diversification to deliver consistent , yet locally-relevant restaurant experiences to customers as an integral part of their communities . customer-centric growth strategy beginning in 2015 , the company made purposeful changes to execute against key elements of its turnaround plan including a renewed focus on running better restaurants , driving operational growth , returning excitement to the brand and enhancing financial value . the company 's current momentum is broad-based throughout the system and its recent performance demonstrates that mcdonald 's has completed the transition from turnaround to growth . in 2017 , the company shifted its focus to delivering long-term growth through accelerated execution of its customer-centric strategy - the velocity growth plan . this plan outlines actions to drive sustainable guest count growth , a reliable long-term measure of the company 's strength , that is vital to growing sales and shareholder value . the velocity growth plan is rooted in extensive customer research and insights , along with a deep understanding of the key drivers of the business . the company is targeting the tremendous opportunity at the core of its business - its food , value and customer experience . the strategy is built on the following three pillars , all focusing on building a better mcdonald 's : retaining existing customers - focusing on areas where it already has a strong foothold in the ieo category , including family occasions and food-led breakfast . regaining lost customers - recommitting to areas of historic strength , namely food taste and quality , convenience and value . converting casual to committed customers - building stronger relationships with customers so they visit more often , by elevating and leveraging the mccafé coffee brand and enhancing snack and treat offerings . in each pillar , mcdonald 's has established sustainable platforms that enable execution of the plan with greater speed , efficiency and impact while remaining relentlessly focused on the fundamentals of running great restaurants . additionally , through three identified growth accelerators - experience of the future ( “ eotf ” ) , digital and delivery - mcdonald 's is enhancing the overall customer experience with hospitable , friendly service and ever-improving convenience for customers on their terms . the company met aggressive deployment targets for each one of these accelerators in 2017 and continues further implementation in 2018 and beyond . experience of the future . the company continues to build upon its investments in eotf , focusing on restaurant modernization and technology , in order to transform the restaurant service experience and enhance the brand in the eyes of the customer . the modernization efforts are designed to drive incremental customer visits and higher average check . mcdonald 's currently has eotf deployed in about one-third of the restaurants globally , with half of the u.s. restaurants expected to be deployed by the end of 2018. digital . story_separator_special_tag international lead markets : in 2017 and 2016 , the increases in the company-operated margin percent were primarily due to positive comparable sales , partly offset by higher labor and occupancy costs . 2017 was also negatively impacted by higher commodity costs . high growth markets : in 2017 , the increase in the company-operated margin percent was primarily due to strong comparable sales and the benefit of lower depreciation in china and hong kong . this increase was partly offset by negative comparable sales in south korea and the impact of refranchising . in 2016 , the increase was primarily due to positive comparable sales and improved restaurant profitability in china , which benefited from value-added tax ( `` vat `` ) reform , partly offset by higher labor costs across the segment . 22 mcdonald 's corporation 2017 annual report selling , general & administrative expenses consolidated selling , general and administrative expenses decreased 6 % ( 7 % in constant currencies ) in 2017 and decreased 2 % ( 1 % in constant currencies ) in 2016 . the decrease in 2017 was due to lower employee-related costs , partly offset by higher restaurant technology spending . the decrease in 2016 was primarily due to lower employee-related costs , mostly offset by higher incentive-based compensation expenses . selling , general & administrative expenses replace_table_token_12_th ( 1 ) included in foundational markets & corporate are home office support costs in areas such as facilities , finance , human resources , information technology , legal , marketing , restaurant operations , supply chain and training . ( 2 ) includes all cash incentives and share-based compensation expense . ( 3 ) excludes $ 9.4 million of foreign currency cost . ( 4 ) excludes $ 24.8 million of foreign currency benefit . selling , general and administrative expenses as a percent of systemwide sales was 2.5 % in 2017 , 2.8 % in 2016 and 2.9 % in 2015 . management believes that analyzing selling , general and administrative expenses as a percent of systemwide sales is meaningful because these costs are incurred to support the overall mcdonald 's business . in connection with our turnaround plan , the company established a net selling , general and administrative savings target of $ 500 million from its g & a base of $ 2.6 billion at the beginning of 2015. the company expects to fully realize its targeted $ 500 million of net savings in 2019. other operating ( income ) expense , net other operating ( income ) expense , net replace_table_token_13_th gains on sales of restaurant businesses in 2017 , gains on sales of restaurant businesses remained relatively flat . in 2016 , the company realized higher gains on sales of restaurant businesses , primarily in the u.s. equity in ( earnings ) losses of unconsolidated affiliates equity in earnings of unconsolidated affiliates improved in 2017 and 2016 mainly due to improved performance in japan . 2017 results also benefited from the reversal of a valuation allowance on a deferred tax asset in japan . asset dispositions and other ( income ) expense , net in 2017 , results benefited due to a property disposition gain in australia . in 2015 , results included a gain of $ 135 million on the strategic sale of a unique restaurant property in the u.s. , mostly offset by asset write-offs of $ 72 million resulting from the decision to close under-performing restaurants , primarily in the u.s. and china . impairment and other charges ( gains ) , net in 2017 , results reflected the gain on the company 's sale of its businesses in china and hong kong of approximately $ 850 million , partly offset by $ 111 million of unrelated non-cash impairment charges . the results for all three years included restructuring and impairment charges related to the company 's global refranchising and g & a initiatives . mcdonald 's corporation 2017 annual report 23 operating income operating income replace_table_token_14_th u.s. : in 2017 , the increase in operating income reflected higher franchised margin dollars and g & a savings , partly offset by lower company-operated margin dollars . in 2016 , the increase reflected higher franchised margin dollars and higher gains from sales of restaurant businesses , partly offset by the negative impact from lapping the 2015 gain on the strategic sale of a unique restaurant property . international lead markets : in 2017 and 2016 , the constant currency operating income increase was primarily due to sales-driven improvements in franchised margin dollars . in addition , 2017 benefited from a property disposition gain in australia . high growth markets : in 2017 , the constant currency operating income increase reflected higher franchise margin dollars due to sales-driven performance , the impact of refranchising and g & a savings . in addition , results benefited from lower depreciation expense in china and hong kong , and also includes the gain on the sale of the company 's businesses in china and hong kong as well as unrelated non-cash impairment charges . excluding these items , operating income increased 17 % ( 15 % in constant currencies ) . in 2016 , the increase was driven primarily by improved restaurant profitability in china . foundational markets and corporate : in 2017 , the constant currency operating income increase reflected the company 's refranchising initiatives , higher g & a costs at the corporate level due to restaurant technology expenditures , and improved performance in japan , which enabled the reversal of a valuation allowance on a deferred tax asset in japan . results also reflected the benefit from comparison to the prior year 's strategic charges . in 2016 , the increase reflected japan 's strong performance , partly offset by the net impact of the current and prior year impairment and restructuring charges from the company 's global refranchising and restructuring initiatives . operating margin operating

cash provided by operations was $ 5.6 billion . capital expenditures of $ 1.9 billion were allocated mainly to reinvestment in existing restaurants and , to a lesser extent , to new restaurant openings . across the system , about 900 restaurants ( including those in our developmental licensee and affiliated markets ) were opened . free cash flow was $ 3.7 billion ( see reconciliation in exhibit 12 ) . one-year roiic was 1,671.8 % and three-year roiic was 93.1 % for the period ended december 31 , 2017 . excluding the gain from the sale of businesses in china and hong kong , as well as significant investing cash inflows from strategic refranchising initiatives , one year and three year roiic were 48.3 % and 43.6 % , respectively ( see reconciliation in exhibit 12 ) . the company increased its quarterly cash dividend per share by 7 % to $ 1.01 for the fourth quarter , equivalent to an annual dividend of $ 4.04 per share . the company returned $ 7.7 billion to shareholders through share repurchases and dividends for the year . 16 mcdonald 's corporation 2017 annual report areas of focus by segment u.s. the u.s. remains diligent in driving guest count growth momentum in 2018 by continuing to focus on actions that collectively transform the customer experience . with the launch of the $ 1 $ 2 $ 3 dollar menu in january 2018 , the company is offering a compelling , national value program that resonates with customers . additionally , an emphasis on food taste and quality will remain a key priority . in 2018 , the u.s. is planning to introduce fresh beef across the majority of its restaurants , cooked right when ordered and served hot off the grill for all quarter pounder burgers . the u.s. will also offer new seasonal flavors to further expand the mccafé espresso line in 2018 , following its successful relaunch of mccafé in 2017. the pace of activity in the u.s. remains accelerated with a focus on increasing customer awareness of its global mobile application , mobile order and pay functionality as well as its delivery platform .

in particular , we implemented a work-from-home policy for all employees and have restricted on-site activities to certain chemical , manufacturing and control ( “ cmc ” ) and clinical trial activities . we continue to assess the impact of the covid-19 pandemic to best mitigate risk and continue the operations of our business . beginning late in the second quarter of 2020 , we began to slowly bring our staff , in very limited numbers , back to our office . this modified return-to-work approach is expected to continue into 2021. we have taken steps to protect our workforce and have instituted strict work rules to protect our employees . we continue to work closely with our clinical sites to monitor the potential impact of the evolving covid-19 pandemic . we remain committed to our clinical programs and development plans . through december 31 , 2020 , we have not experienced any significant delays to our ongoing or planned clinical trials , except for challenges in accessing elderly care facilities ; however , this could rapidly change . 87 our clinical programs the following is a summary of the status of our clinical development programs as of the date of this annual report on form 10-k : ​ ​ our novel drug re-innovation approach our ai-based discovery and development process is the foundation of our drug re-innovation model for identifying the next wave of medicines . our therapeutic area experts have over 60 years of experience across the drug discovery and development value chain . we believe evolverai is a novel method of finding potential product candidates because it combines the comprehensiveness and efficiency of machine learning and big data analytics with the expertise and intuition of human experience in drug development . we believe the combination of our therapeutic area expertise and our ability to generate therapeutic candidates in neuroscience and immuno-oncology through our exclusive collaborative relationship in those areas with bioxcel gives us a significant competitive advantage . the pharmacological space spans more than 27,000 active pharmaceutical agents , and only approximately 4,000 are approved and marketed drugs benefiting patients . these marketed drugs may be applied to other indications , including rare diseases , and represent an untapped potential for meeting significant unmet medical need and recoupment of research and development investments . a large number of the remaining agents are clinical candidates that are active , shelved , or have failed for reasons other than toxicity and can potentially be re-engineered for different indications or patient segments . they potentially represent an unrealized investment of billions of research and development dollars by the private and public sectors , resulting in an immeasurable amount of patient suffering and sacrificing during clinical development . traditional drug development is plagued with low success rates ( 13.8 % , according to an mit study of 186,000 trials from january 2000 to october 2015 ) , long drug development cycles ( 10-15 years , according to phrma key facts 2016 ) , and exorbitant development costs ( $ 2.6 billion per drug , according to phrma key facts ) . furthermore , many serious diseases continue to go unaddressed due to limitations of the current drug discovery paradigm . the recent advent of numerous ‘ omics ' technologies ( genomics , proteomics ) and rapid advances in science and medicine are generating terabytes of valuable unexploited knowledge that is widely distributed in multiple big data lakes with several orders of complexity and variety . much of this data is not being systematically applied to the development of next generation therapeutics , thus preventing the optimization of drug development utilizing the understanding of technology , science , medicine , markets , and commercial opportunities . the efficient and intuitive use of big data remains a bottleneck and a challenge to the pharmaceutical industry . taken together , these factors underscore the need for fundamental new 88 approaches to drug discovery and development . the market opportunity to identify new uses for existing pharmacological agents remains substantial due to the lack of technology driven insights . our parent , bioxcel , has created a proprietary r & d engine , evolverai , for drug re-innovation that provides a proprietary systems-based approach designed to unlock the hidden value in drugs . the combination of our therapeutic area expertise and our exclusive collaborative relationship with bioxcel enables us to screen , analyze , and identify the product candidates that we believe have a high likelihood of benefiting patients . the compounds in our pipeline have been identified using this proprietary platform . evolverai is designed to eliminate human bias by scanning millions of data points from disparate data sources to create network maps . the nodes and connections in the network map are weighted and ranked based on the validity of supporting evidence using disease specific algorithms . they are then further analyzed using artificial intelligence and machine learning approaches supplemented by human domain-based expertise to uncover novel connections between disease parameters , molecular targets , mechanisms of actions and product candidates . this drug re-innovation model has been exemplified by the successful development and commercialization of drugs such as tecfidera ( biogen , inc. ) , thalomid ( celgene corporation ) and viagra ( pfizer , inc. , or pfizer ) . all of these drugs were identified by insights in biology and disease pathophysiology . the successful business models of biotech companies like axsome-therapeutics , inc. and karuna therapeutics , inc. are based on the re-innovation and combination of existing clinical candidates or marketed drugs to provide novel solutions for patients . unfortunately , such discoveries have been severely limited in scope due to the lack of a genuinely integrated big data analytics-based approach . we believe that only evolverai allows a comprehensive and unbiased evaluation of the complete pharmacological space . story_separator_special_tag if we are unable to raise capital when needed or on attractive terms , we could be forced to significantly delay , scale back or discontinue the development or commercialization of bxcl501 , bxcl701 or other product candidates , seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available , and relinquish or license , potentially on unfavorable terms , our rights to bxcl501 , bxcl701 or other product candidates that we otherwise would seek to develop or commercialize ourselves . critical accounting policies and estimates the preparation of our financial statements in conformity with gaap requires management to exercise its judgment . we exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities , our recognition of revenues and expenses , and disclosure of commitments and contingencies at the date of the financial statements . on an ongoing basis , we evaluate our estimates and judgments . we base our estimates and judgments on a variety of factors including our historical experience , knowledge of our business and industry , current and expected economic conditions , the attributes of our products , the regulatory environment , and in certain cases , the results of outside appraisals . we periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary . while we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies , we can not guarantee that the results will always be accurate . since the determination of these estimates requires the exercise of judgment , actual results could differ from such estimates . 95 a description of significant accounting policies that require us to make estimates and assumptions in the preparation of our financial statements is as follows : stock-based compensation the company accounts for stock-based compensation in accordance with asc 718 , “ compensation—stock compensation , ” which requires the measurement and recognition of compensation expense based on estimated fair market values for all share-based awards made to employees and non-employee service providers , including stock options . the company 's 2017 equity incentive plan ( the “ 2017 plan ” ) became effective in august 2017. the company 's 2020 incentive award plan ( the “ 2020 plan ” ) became effective in may 2020. following the effective date of the company 's 2020 plan , the company ceased granting awards under the 2017 plan ; however the terms and conditions of the 2017 plan continue to govern any outstanding awards granted thereunder . the company 's stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period . the company utilizes the black-scholes option pricing model for determining the estimated fair value for stock-based awards . the black-scholes model requires the use of assumptions which determine the fair value of the stock-based awards . determining the fair value of stock-based awards at the grant date requires significant judgment , including estimating the expected term of the stock options , the expected volatility of our stock and expected dividends . prior to the ipo , significant judgement and estimates were used to estimate the fair value of these awards , as the shares of common stock underlying these awards were not then publicly traded . stock awards granted by the company subsequent to its ipo are valued using market prices at the date of grant . the company has elected to account for forfeitures as they occur , by reversing compensation cost when the award is forfeited . the company adopted fasb asu 2018-07 as of january 1 , 2019 which allowed non-employee options to be expensed using the adoption date fair value . accrued expenses ​ as part of the process of preparing our financial statements , we are required to estimate our accrued expenses . this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost . the majority of our service providers invoice us monthly in arrears for services performed . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time . we periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary . ​ we base our expenses on our estimates of the services received and level of effort in each period . the financial terms of these agreements are subject to negotiation , vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones . ​ in accruing expenses , we estimate the time period over which services will be performed and the level of effort to be expended in each period . the date on which some services commence , the level of services performed on or before a given dates and the cost of such services are often subjective determinations . if the actual timing of the performance of services or the level of effort varies from our estimate , we adjust the accrual accordingly . although we do not expect our estimates to be materially different from amounts actually incurred , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high

cash provided by operations was $ 5.6 billion . capital expenditures of $ 1.9 billion were allocated mainly to reinvestment in existing restaurants and , to a lesser extent , to new restaurant openings . across the system , about 900 restaurants ( including those in our developmental licensee and affiliated markets ) were opened . free cash flow was $ 3.7 billion ( see reconciliation in exhibit 12 ) . one-year roiic was 1,671.8 % and three-year roiic was 93.1 % for the period ended december 31 , 2017 . excluding the gain from the sale of businesses in china and hong kong , as well as significant investing cash inflows from strategic refranchising initiatives , one year and three year roiic were 48.3 % and 43.6 % , respectively ( see reconciliation in exhibit 12 ) . the company increased its quarterly cash dividend per share by 7 % to $ 1.01 for the fourth quarter , equivalent to an annual dividend of $ 4.04 per share . the company returned $ 7.7 billion to shareholders through share repurchases and dividends for the year . 16 mcdonald 's corporation 2017 annual report areas of focus by segment u.s. the u.s. remains diligent in driving guest count growth momentum in 2018 by continuing to focus on actions that collectively transform the customer experience . with the launch of the $ 1 $ 2 $ 3 dollar menu in january 2018 , the company is offering a compelling , national value program that resonates with customers . additionally , an emphasis on food taste and quality will remain a key priority . in 2018 , the u.s. is planning to introduce fresh beef across the majority of its restaurants , cooked right when ordered and served hot off the grill for all quarter pounder burgers . the u.s. will also offer new seasonal flavors to further expand the mccafé espresso line in 2018 , following its successful relaunch of mccafé in 2017. the pace of activity in the u.s. remains accelerated with a focus on increasing customer awareness of its global mobile application , mobile order and pay functionality as well as its delivery platform .

in particular , we implemented a work-from-home policy for all employees and have restricted on-site activities to certain chemical , manufacturing and control ( “ cmc ” ) and clinical trial activities . we continue to assess the impact of the covid-19 pandemic to best mitigate risk and continue the operations of our business . beginning late in the second quarter of 2020 , we began to slowly bring our staff , in very limited numbers , back to our office . this modified return-to-work approach is expected to continue into 2021. we have taken steps to protect our workforce and have instituted strict work rules to protect our employees . we continue to work closely with our clinical sites to monitor the potential impact of the evolving covid-19 pandemic . we remain committed to our clinical programs and development plans . through december 31 , 2020 , we have not experienced any significant delays to our ongoing or planned clinical trials , except for challenges in accessing elderly care facilities ; however , this could rapidly change . 87 our clinical programs the following is a summary of the status of our clinical development programs as of the date of this annual report on form 10-k : ​ ​ our novel drug re-innovation approach our ai-based discovery and development process is the foundation of our drug re-innovation model for identifying the next wave of medicines . our therapeutic area experts have over 60 years of experience across the drug discovery and development value chain . we believe evolverai is a novel method of finding potential product candidates because it combines the comprehensiveness and efficiency of machine learning and big data analytics with the expertise and intuition of human experience in drug development . we believe the combination of our therapeutic area expertise and our ability to generate therapeutic candidates in neuroscience and immuno-oncology through our exclusive collaborative relationship in those areas with bioxcel gives us a significant competitive advantage . the pharmacological space spans more than 27,000 active pharmaceutical agents , and only approximately 4,000 are approved and marketed drugs benefiting patients . these marketed drugs may be applied to other indications , including rare diseases , and represent an untapped potential for meeting significant unmet medical need and recoupment of research and development investments . a large number of the remaining agents are clinical candidates that are active , shelved , or have failed for reasons other than toxicity and can potentially be re-engineered for different indications or patient segments . they potentially represent an unrealized investment of billions of research and development dollars by the private and public sectors , resulting in an immeasurable amount of patient suffering and sacrificing during clinical development . traditional drug development is plagued with low success rates ( 13.8 % , according to an mit study of 186,000 trials from january 2000 to october 2015 ) , long drug development cycles ( 10-15 years , according to phrma key facts 2016 ) , and exorbitant development costs ( $ 2.6 billion per drug , according to phrma key facts ) . furthermore , many serious diseases continue to go unaddressed due to limitations of the current drug discovery paradigm . the recent advent of numerous ‘ omics ' technologies ( genomics , proteomics ) and rapid advances in science and medicine are generating terabytes of valuable unexploited knowledge that is widely distributed in multiple big data lakes with several orders of complexity and variety . much of this data is not being systematically applied to the development of next generation therapeutics , thus preventing the optimization of drug development utilizing the understanding of technology , science , medicine , markets , and commercial opportunities . the efficient and intuitive use of big data remains a bottleneck and a challenge to the pharmaceutical industry . taken together , these factors underscore the need for fundamental new 88 approaches to drug discovery and development . the market opportunity to identify new uses for existing pharmacological agents remains substantial due to the lack of technology driven insights . our parent , bioxcel , has created a proprietary r & d engine , evolverai , for drug re-innovation that provides a proprietary systems-based approach designed to unlock the hidden value in drugs . the combination of our therapeutic area expertise and our exclusive collaborative relationship with bioxcel enables us to screen , analyze , and identify the product candidates that we believe have a high likelihood of benefiting patients . the compounds in our pipeline have been identified using this proprietary platform . evolverai is designed to eliminate human bias by scanning millions of data points from disparate data sources to create network maps . the nodes and connections in the network map are weighted and ranked based on the validity of supporting evidence using disease specific algorithms . they are then further analyzed using artificial intelligence and machine learning approaches supplemented by human domain-based expertise to uncover novel connections between disease parameters , molecular targets , mechanisms of actions and product candidates . this drug re-innovation model has been exemplified by the successful development and commercialization of drugs such as tecfidera ( biogen , inc. ) , thalomid ( celgene corporation ) and viagra ( pfizer , inc. , or pfizer ) . all of these drugs were identified by insights in biology and disease pathophysiology . the successful business models of biotech companies like axsome-therapeutics , inc. and karuna therapeutics , inc. are based on the re-innovation and combination of existing clinical candidates or marketed drugs to provide novel solutions for patients . unfortunately , such discoveries have been severely limited in scope due to the lack of a genuinely integrated big data analytics-based approach . we believe that only evolverai allows a comprehensive and unbiased evaluation of the complete pharmacological space . story_separator_special_tag if we are unable to raise capital when needed or on attractive terms , we could be forced to significantly delay , scale back or discontinue the development or commercialization of bxcl501 , bxcl701 or other product candidates , seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available , and relinquish or license , potentially on unfavorable terms , our rights to bxcl501 , bxcl701 or other product candidates that we otherwise would seek to develop or commercialize ourselves . critical accounting policies and estimates the preparation of our financial statements in conformity with gaap requires management to exercise its judgment . we exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities , our recognition of revenues and expenses , and disclosure of commitments and contingencies at the date of the financial statements . on an ongoing basis , we evaluate our estimates and judgments . we base our estimates and judgments on a variety of factors including our historical experience , knowledge of our business and industry , current and expected economic conditions , the attributes of our products , the regulatory environment , and in certain cases , the results of outside appraisals . we periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary . while we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies , we can not guarantee that the results will always be accurate . since the determination of these estimates requires the exercise of judgment , actual results could differ from such estimates . 95 a description of significant accounting policies that require us to make estimates and assumptions in the preparation of our financial statements is as follows : stock-based compensation the company accounts for stock-based compensation in accordance with asc 718 , “ compensation—stock compensation , ” which requires the measurement and recognition of compensation expense based on estimated fair market values for all share-based awards made to employees and non-employee service providers , including stock options . the company 's 2017 equity incentive plan ( the “ 2017 plan ” ) became effective in august 2017. the company 's 2020 incentive award plan ( the “ 2020 plan ” ) became effective in may 2020. following the effective date of the company 's 2020 plan , the company ceased granting awards under the 2017 plan ; however the terms and conditions of the 2017 plan continue to govern any outstanding awards granted thereunder . the company 's stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period . the company utilizes the black-scholes option pricing model for determining the estimated fair value for stock-based awards . the black-scholes model requires the use of assumptions which determine the fair value of the stock-based awards . determining the fair value of stock-based awards at the grant date requires significant judgment , including estimating the expected term of the stock options , the expected volatility of our stock and expected dividends . prior to the ipo , significant judgement and estimates were used to estimate the fair value of these awards , as the shares of common stock underlying these awards were not then publicly traded . stock awards granted by the company subsequent to its ipo are valued using market prices at the date of grant . the company has elected to account for forfeitures as they occur , by reversing compensation cost when the award is forfeited . the company adopted fasb asu 2018-07 as of january 1 , 2019 which allowed non-employee options to be expensed using the adoption date fair value . accrued expenses ​ as part of the process of preparing our financial statements , we are required to estimate our accrued expenses . this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost . the majority of our service providers invoice us monthly in arrears for services performed . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time . we periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary . ​ we base our expenses on our estimates of the services received and level of effort in each period . the financial terms of these agreements are subject to negotiation , vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones . ​ in accruing expenses , we estimate the time period over which services will be performed and the level of effort to be expended in each period . the date on which some services commence , the level of services performed on or before a given dates and the cost of such services are often subjective determinations . if the actual timing of the performance of services or the level of effort varies from our estimate , we adjust the accrual accordingly . although we do not expect our estimates to be materially different from amounts actually incurred , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high

liquidity and capital resources as of december 31 , 2020 , we had cash and cash equivalents of $ 213,119 , working capital of $ 205,223 and stockholders ' equity of $ 206,696. net cash used in operating activities was $ 66,350 and $ 27,101 for the years ended december 31 , 2020 and 2019. we incurred losses of approximately $ 82,169 and $ 32,968 for the years ended december 31 , 2020 and 2019. we have not yet generated any revenues and we have not yet achieved profitability . we expect that our research and development and general and administrative expenses will continue to increase and , as a result , we will need to generate significant product revenues to achieve profitability . we believe that our existing cash and cash equivalents as of december 31 , 2020 will enable us to fund our operating expenses and capital expenditure requirements for at least one year from the date of this annual report on form 10-k. 92 we may obtain additional financing through sales of the company 's equity securities , entering into strategic partnership arrangements and or short-term borrowings from banks , stockholders or other related parties , if needed , or a combination of any of the foregoing . there are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all , particularly in light of the economic downturn and ongoing uncertainty related to the covid-19 pandemic . if we are unable to secure adequate additional funding as and when needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more product candidates . in addition , the magnitude and duration of the covid-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this annual report on form 10-k , as the pandemic continues to evolve globally .

we continuously evaluate the marketplace for strategic acquisition opportunities . a fundamental component of our profitable growth strategy is to pursue acquisitions that will expand our platform in key u.s. markets . where the impact of acquisitions is noted in discussing results , it refers to acquisitions effected within the last twelve months of the end of the relevant period . fiscal year 2016 acquisition on november 30 , 2015 , we acquired the professional services business ( `` pipeline services `` ) of willbros group ( `` willbros `` ) in an all cash transaction . the $ 124.5 million purchase price consisted of ( i ) an initial cash payment of $ 120.0 million paid at closing , and , ( ii ) a second cash payment due of $ 7.5 million payable at the earlier of certain willbros contract novations ( or written approval of a subcontract ) and willbros obtaining certain consents , or march 15 , 2016 , net of a preliminary estimate working capital adjustment due from willbros . the second cash payment was made in two tranches , with $ 2.4 million paid in march 2016 and the remaining balance paid in july 2016 in conjunction with the final net working capital settlement . goodwill of $ 60.3 million was initially recorded prior to impairment , all of which is expected to be tax deductible , and other intangible assets of $ 44.5 million were recorded as a result of this acquisition . the goodwill recognized is attributable to the future strategic growth opportunities arising from the acquisition , pipeline service 's highly skilled assembled workforce , which does not qualify for separate recognition , and the expected cost synergies of the combined operations . the pipeline services operating segment has contributed $ 60.7 million in gross revenue , $ 48.4 million in net service revenue , and an operating loss of $ ( 7.5 ) million to our results for the period from november 30 , 2015 through june 30 , 2016 . fiscal year 2015 acquisition on september 29 , 2014 , we acquired all of the outstanding stock of nova training inc. and all of the outstanding membership interests of nova earthworks , llc ( collectively `` nova `` ) based in midland , texas . nova provides safety training and environmental services as well as oil spill response , remediation and general oil field construction services to customers in the oil and gas industry . the initial purchase price consisted of ( i ) a cash payment of $ 7.2 million payable at closing , ( ii ) a second cash payment of $ 2.6 million placed into escrow , of which $ 0.5 million was paid in six months and the remaining $ 2.1 million was paid in 18 months , ( iii ) 50 thousand shares of our common stock valued at $ 0.3 million on the closing date , and ( iv ) a $ 0.6 million net working capital adjustment . the sellers are also entitled to up to $ 1.5 million in contingent cash consideration through an earn-out provision based on the nsr performance of the acquired firm over the 24 month period following closing . we estimated the fair value of the remaining contingent earn-out liability to be $ 0.3 million based on the projections and probabilities of reaching the performance goals through september 2016. goodwill of $ 3.7 million , none of which is expected to be tax deductible , and other intangible assets of $ 3.6 million were recorded as a result of this acquisition . the goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition . the fair values of assets and liabilities of the nova acquisition have been recorded in the environmental operating segment . the impact of this acquisition was not material to our condensed consolidated balance sheets and results of operations . 22 fiscal year 2014 acquisitions on january 2 , 2014 , we acquired all of the outstanding stock of emcor energy services , inc. ( `` ees `` ) , a subsidiary of emcor group , inc. , headquartered in san francisco , california . ees provides engineering and related consulting services to utilities to support their energy programs in california . services include engineering , technical review , verification , and administration of utilities ' energy efficiency programs . the purchase price of $ 1.6 million consisted of a cash payment of $ 1.4 million , and a $ 0.2 million net working capital adjustment . goodwill of $ 0.2 million , none of which is expected to be tax deductible , and other intangible assets of $ 0.9 million were recorded as a result of this acquisition . the ees acquisition has been recorded in the energy operating segment . the impact of this acquisition was not material to our consolidated balance sheets and results of operations . on july 22 , 2013 , we acquired all of the outstanding stock of utility support systems , inc. ( `` uss `` ) , headquartered in douglasville , georgia . uss provides engineering and related services primarily supporting the power/utility market . the purchase price of $ 5.0 million consisted of : ( i ) cash of $ 2.5 million payable at closing , ( ii ) a second cash payment of $ 1.8 million payable on the one-year anniversary of the closing date subject to withholding for various contractual issues , and ( iii ) 34 thousand shares of our common stock valued at $ 0.3 million on the closing date . the selling shareholders were also entitled to contingent cash consideration through an earn-out provision based on nsr performance of the acquired firm over the twelve month period following closing . story_separator_special_tag claims are amounts in excess of the agreed contract price that we seek to collect from our clients or others for delays , errors in specifications and designs , contract terminations , change orders that are either in dispute or are unapproved as to both scope and price , or other causes . costs related to change orders and claims are recognized when they are incurred . change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated . claims are included in total estimated contract revenues only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value which can be reliably estimated . no profit is recognized on claims until final settlement occurs . for the fiscal years ended june 30 , 2016 , 2015 and 2014 , we did not recognize any revenue related to claims . other contract matters federal acquisition regulations ( `` far `` ) , which are applicable to our federal government contracts and may be incorporated in many local and state agency contracts , limit the recovery of certain specified indirect costs on contracts . cost-plus contracts covered by far or with certain state and local agencies also require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs . most of our federal government contracts are subject to termination at the discretion of the client . contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination . contracts with the federal government are subject to audit , primarily by the defense contract audit agency ( `` dcaa `` ) , which reviews our overhead rates , operating systems and cost proposals . during the course of its audits , the dcaa may disallow costs if it determines that we have accounted for such costs in a manner inconsistent with cost accounting standards or far . our last incurred cost audit was for fiscal year 2004 and resulted in an immaterial adjustment . dcaa determined that an audit of incurred 26 cost proposals submitted to dcaa for fiscal years 2005 through 2013 was not required . historically , we have not had any material cost disallowances by the dcaa as a result of audit , however there can be no assurance that dcaa audits will not result in material cost disallowances in the future . allowance for doubtful accounts —an allowance for doubtful accounts is maintained for estimated losses resulting from the failure of our clients to make required payments . the allowance for doubtful accounts has been determined through reviews of specific amounts deemed to be uncollectible and estimated write-offs as a result of clients who have filed for bankruptcy protection plus an allowance for other amounts for which some loss is determined to be probable based on current circumstances . if the financial condition of clients or our assessment as to collectability were to change , adjustments to the allowances may be required . income taxes —we are required to estimate the provision for income taxes , including the current tax expense together with assessing temporary differences resulting from differing treatments of assets and liabilities for tax and financial accounting purposes . these differences between the financial statement and tax bases of assets and liabilities , together with net operating loss ( `` nol `` ) carryforwards and tax credits are recorded as deferred tax assets or liabilities on the consolidated balance sheets . an assessment is required to be made of the likelihood that the deferred tax assets will be recovered from future taxable income . to the extent that we determine that it is more likely than not that the deferred asset will not be utilized , a valuation allowance is established . taxable income in future periods significantly above or below that projected will cause adjustments to the valuation allowance that could materially decrease or increase future income tax expense . we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement . accounting literature also provides guidance on derecognition of income tax assets and liabilities , classification of current and deferred income tax assets and liabilities , accounting for interest and penalties associated with tax positions , and income tax disclosures . judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns . variations in the actual outcome of these future tax consequences could materially impact our financial statements . acquisitions —we account for acquisitions using the acquisition method of accounting , which requires that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date . the purchase price of acquisitions is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values , and any excess purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill . goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings . we may use independent valuation specialists to assist in determining the estimated fair values of assets acquired and liabilities assumed , which could require certain significant management assumptions and estimates . transaction costs associated with acquisitions are expensed as they are incurred . goodwill and other intangible assets —in accordance with

liquidity and capital resources as of december 31 , 2020 , we had cash and cash equivalents of $ 213,119 , working capital of $ 205,223 and stockholders ' equity of $ 206,696. net cash used in operating activities was $ 66,350 and $ 27,101 for the years ended december 31 , 2020 and 2019. we incurred losses of approximately $ 82,169 and $ 32,968 for the years ended december 31 , 2020 and 2019. we have not yet generated any revenues and we have not yet achieved profitability . we expect that our research and development and general and administrative expenses will continue to increase and , as a result , we will need to generate significant product revenues to achieve profitability . we believe that our existing cash and cash equivalents as of december 31 , 2020 will enable us to fund our operating expenses and capital expenditure requirements for at least one year from the date of this annual report on form 10-k. 92 we may obtain additional financing through sales of the company 's equity securities , entering into strategic partnership arrangements and or short-term borrowings from banks , stockholders or other related parties , if needed , or a combination of any of the foregoing . there are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all , particularly in light of the economic downturn and ongoing uncertainty related to the covid-19 pandemic . if we are unable to secure adequate additional funding as and when needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more product candidates . in addition , the magnitude and duration of the covid-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this annual report on form 10-k , as the pandemic continues to evolve globally .

we continuously evaluate the marketplace for strategic acquisition opportunities . a fundamental component of our profitable growth strategy is to pursue acquisitions that will expand our platform in key u.s. markets . where the impact of acquisitions is noted in discussing results , it refers to acquisitions effected within the last twelve months of the end of the relevant period . fiscal year 2016 acquisition on november 30 , 2015 , we acquired the professional services business ( `` pipeline services `` ) of willbros group ( `` willbros `` ) in an all cash transaction . the $ 124.5 million purchase price consisted of ( i ) an initial cash payment of $ 120.0 million paid at closing , and , ( ii ) a second cash payment due of $ 7.5 million payable at the earlier of certain willbros contract novations ( or written approval of a subcontract ) and willbros obtaining certain consents , or march 15 , 2016 , net of a preliminary estimate working capital adjustment due from willbros . the second cash payment was made in two tranches , with $ 2.4 million paid in march 2016 and the remaining balance paid in july 2016 in conjunction with the final net working capital settlement . goodwill of $ 60.3 million was initially recorded prior to impairment , all of which is expected to be tax deductible , and other intangible assets of $ 44.5 million were recorded as a result of this acquisition . the goodwill recognized is attributable to the future strategic growth opportunities arising from the acquisition , pipeline service 's highly skilled assembled workforce , which does not qualify for separate recognition , and the expected cost synergies of the combined operations . the pipeline services operating segment has contributed $ 60.7 million in gross revenue , $ 48.4 million in net service revenue , and an operating loss of $ ( 7.5 ) million to our results for the period from november 30 , 2015 through june 30 , 2016 . fiscal year 2015 acquisition on september 29 , 2014 , we acquired all of the outstanding stock of nova training inc. and all of the outstanding membership interests of nova earthworks , llc ( collectively `` nova `` ) based in midland , texas . nova provides safety training and environmental services as well as oil spill response , remediation and general oil field construction services to customers in the oil and gas industry . the initial purchase price consisted of ( i ) a cash payment of $ 7.2 million payable at closing , ( ii ) a second cash payment of $ 2.6 million placed into escrow , of which $ 0.5 million was paid in six months and the remaining $ 2.1 million was paid in 18 months , ( iii ) 50 thousand shares of our common stock valued at $ 0.3 million on the closing date , and ( iv ) a $ 0.6 million net working capital adjustment . the sellers are also entitled to up to $ 1.5 million in contingent cash consideration through an earn-out provision based on the nsr performance of the acquired firm over the 24 month period following closing . we estimated the fair value of the remaining contingent earn-out liability to be $ 0.3 million based on the projections and probabilities of reaching the performance goals through september 2016. goodwill of $ 3.7 million , none of which is expected to be tax deductible , and other intangible assets of $ 3.6 million were recorded as a result of this acquisition . the goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition . the fair values of assets and liabilities of the nova acquisition have been recorded in the environmental operating segment . the impact of this acquisition was not material to our condensed consolidated balance sheets and results of operations . 22 fiscal year 2014 acquisitions on january 2 , 2014 , we acquired all of the outstanding stock of emcor energy services , inc. ( `` ees `` ) , a subsidiary of emcor group , inc. , headquartered in san francisco , california . ees provides engineering and related consulting services to utilities to support their energy programs in california . services include engineering , technical review , verification , and administration of utilities ' energy efficiency programs . the purchase price of $ 1.6 million consisted of a cash payment of $ 1.4 million , and a $ 0.2 million net working capital adjustment . goodwill of $ 0.2 million , none of which is expected to be tax deductible , and other intangible assets of $ 0.9 million were recorded as a result of this acquisition . the ees acquisition has been recorded in the energy operating segment . the impact of this acquisition was not material to our consolidated balance sheets and results of operations . on july 22 , 2013 , we acquired all of the outstanding stock of utility support systems , inc. ( `` uss `` ) , headquartered in douglasville , georgia . uss provides engineering and related services primarily supporting the power/utility market . the purchase price of $ 5.0 million consisted of : ( i ) cash of $ 2.5 million payable at closing , ( ii ) a second cash payment of $ 1.8 million payable on the one-year anniversary of the closing date subject to withholding for various contractual issues , and ( iii ) 34 thousand shares of our common stock valued at $ 0.3 million on the closing date . the selling shareholders were also entitled to contingent cash consideration through an earn-out provision based on nsr performance of the acquired firm over the twelve month period following closing . story_separator_special_tag claims are amounts in excess of the agreed contract price that we seek to collect from our clients or others for delays , errors in specifications and designs , contract terminations , change orders that are either in dispute or are unapproved as to both scope and price , or other causes . costs related to change orders and claims are recognized when they are incurred . change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated . claims are included in total estimated contract revenues only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value which can be reliably estimated . no profit is recognized on claims until final settlement occurs . for the fiscal years ended june 30 , 2016 , 2015 and 2014 , we did not recognize any revenue related to claims . other contract matters federal acquisition regulations ( `` far `` ) , which are applicable to our federal government contracts and may be incorporated in many local and state agency contracts , limit the recovery of certain specified indirect costs on contracts . cost-plus contracts covered by far or with certain state and local agencies also require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs . most of our federal government contracts are subject to termination at the discretion of the client . contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination . contracts with the federal government are subject to audit , primarily by the defense contract audit agency ( `` dcaa `` ) , which reviews our overhead rates , operating systems and cost proposals . during the course of its audits , the dcaa may disallow costs if it determines that we have accounted for such costs in a manner inconsistent with cost accounting standards or far . our last incurred cost audit was for fiscal year 2004 and resulted in an immaterial adjustment . dcaa determined that an audit of incurred 26 cost proposals submitted to dcaa for fiscal years 2005 through 2013 was not required . historically , we have not had any material cost disallowances by the dcaa as a result of audit , however there can be no assurance that dcaa audits will not result in material cost disallowances in the future . allowance for doubtful accounts —an allowance for doubtful accounts is maintained for estimated losses resulting from the failure of our clients to make required payments . the allowance for doubtful accounts has been determined through reviews of specific amounts deemed to be uncollectible and estimated write-offs as a result of clients who have filed for bankruptcy protection plus an allowance for other amounts for which some loss is determined to be probable based on current circumstances . if the financial condition of clients or our assessment as to collectability were to change , adjustments to the allowances may be required . income taxes —we are required to estimate the provision for income taxes , including the current tax expense together with assessing temporary differences resulting from differing treatments of assets and liabilities for tax and financial accounting purposes . these differences between the financial statement and tax bases of assets and liabilities , together with net operating loss ( `` nol `` ) carryforwards and tax credits are recorded as deferred tax assets or liabilities on the consolidated balance sheets . an assessment is required to be made of the likelihood that the deferred tax assets will be recovered from future taxable income . to the extent that we determine that it is more likely than not that the deferred asset will not be utilized , a valuation allowance is established . taxable income in future periods significantly above or below that projected will cause adjustments to the valuation allowance that could materially decrease or increase future income tax expense . we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement . accounting literature also provides guidance on derecognition of income tax assets and liabilities , classification of current and deferred income tax assets and liabilities , accounting for interest and penalties associated with tax positions , and income tax disclosures . judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns . variations in the actual outcome of these future tax consequences could materially impact our financial statements . acquisitions —we account for acquisitions using the acquisition method of accounting , which requires that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date . the purchase price of acquisitions is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values , and any excess purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill . goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings . we may use independent valuation specialists to assist in determining the estimated fair values of assets acquired and liabilities assumed , which could require certain significant management assumptions and estimates . transaction costs associated with acquisitions are expensed as they are incurred . goodwill and other intangible assets —in accordance with

liquidity and capital resources overview we primarily rely on cash from operations and financing activities , including borrowings under our revolving credit facility , to fund our operations . our liquidity is assessed in terms of our overall ability to generate cash to fund our operating and investing activities and to service debt . we believe that our available cash , cash flows from operations and available borrowing under our revolving credit facility , discussed under `` revolving credit facility '' below , will be sufficient to fund our operations for at least the next twelve months . the following table provides summarized information with respect to our cash balances and cash flows as of and for the fiscal years ended june 30 , 2016 , 2015 and 2014 ( in thousands ) : replace_table_token_17_th fiscal year 2016 compared to fiscal year 2015 as of june 30 , 2016 , cash and cash equivalents decreased by $ ( 18.5 ) million , or ( 49.6 ) % , to $ 18.8 million compared to $ 37.3 million as of june 30 , 2015 . this decline is primarily the result of cash utilized for the acquisition of pipeline services on november 30 , 2015. net cash provided by operating activities increased by $ 16.0 million , or 49.9 % , to $ 48.1 million for the fiscal year ended june 30 , 2016 , compared to $ 32.1 million of cash provided in the prior year . the increase was attributable to the favorable timing of collections activity with respect to accounts receivable in the fiscal year ended june 30 , 2016 compared to the same period of the prior year . these favorable results were offset by higher cash payments made primarily with respect to accounts payable and employee related compensation in the fiscal year ended june 30 , 2016 compared to the same period of the prior year .

non-interest income was $ 68.1 million compared to non-interest income of $ 66.3 million and $ 30.6 million for the fiscal years ended june 30 , 2017 , 2016 and 2015 . the increase from fiscal year 2016 to fiscal year 2017 was primarily the result of an increase of $ 5.9 million in banking service fees due to increased fees from h & r block-branded products , a mortgage banking income increase of $ 3.2 million , an increase in realized gain from sale of securities of $ 2.5 million , and increased levels of prepayment penalty fee income of $ 1.7 million partially offset by a decrease of $ 11.1 million in gain on sale-other primarily from reduced sales of structured settlements . the increase from 2015 to 2016 was primarily due to increased banking service fees due to increased fees from h & r block-branded products and gain on sale-other primarily from sales of structured settlements . 32 non-interest expense for the fiscal year ended june 30 , 2017 was $ 137.6 million compared to $ 112.8 million and $ 77.5 million for the years ended june 30 , 2016 and 2015 , respectively . the increase was primarily due to an increase in the bank 's staffing for lending , information technology infrastructure development and regulatory compliance . our staffing rose to 681 full-time equivalents compared to 647 and 467 at june 30 , 2017 , 2016 and 2015 , respectively . total assets were $ 8,501.7 million at june 30 , 2017 compared to $ 7,599.3 million at june 30 , 2016 . assets grew $ 902.4 million or 11.9 % during the last fiscal year , primarily due to an increase in the origination of single family mortgage loans and c & i loans . these loans were funded primarily with growth in deposits . our future performance will depend on many factors : changes in interest rates , competition for deposits and quality loans , the credit performance of our assets , regulatory actions , strategic transactions , and our ability to improve operating efficiencies . see “ item 1a . risk factors . ” mergers and acquisitions from time to time we undertake acquisitions or similar transactions consistent with the bank 's operating and growth strategies . during the fiscal years ended june 30 , 2015 and june 30 , 2016 , there were three acquisitions , which are discussed below . no acquisitions occurred during the fiscal year ended june 30 , 2017. union federal deposit acquisition in september 2014 , the bank completed the acquisition of approximately $ 42 million in deposits consisting of individual checking , money market savings , and cd accounts from union federal savings bank ( “ union ” ) and its parent company , the first marblehead corporation . h & r block bank deposit acquisition on august 31 , 2015 , our bank completed the acquisition of approximately $ 419 million in deposits consisting of checking , individual retirement savings , and cd accounts from h & r block bank and its parent company , h & r block , inc. ( “ h & r block ” ) . in connection with the closing of this transaction : ( i ) our bank and emerald financial services , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block ( “ efs ” ) , entered into the program management agreement ( “ pma ” ) , dated august 31 , 2015 ; ( ii ) our bank and h & r block , efs , hrb participant i , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block , entered into the emerald receivables participation agreement , dated august 31 , 2015 ; and ( iii ) our bank and h & r block entered into the guaranty agreement ( together , the “ pma and related agreements ” ) , dated august 31 , 2015. through the pma and related agreements our bank will provide h & r block-branded financial services products and services . the three products and services that represent the primary focus and the majority of transactional volume that our bank will process are described in detail below . the first product is emerald prepaid mastercard ® services ( “ epc ” ) , which is under schedule a of the pma . our bank is responsible for the primary oversight and control of the prepaid card programs of a wholly owned subsidiary of h & r block . under the pma and related agreements , our bank holds the prepaid card customer deposits for those cards issued under the prepaid programs in non-interest bearing accounts and earns a fixed fee paid by h & r block 's subsidiary for each automated clearing house ( “ ach ” ) transaction processed through the prepaid card customer accounts . a portion of h & r block 's customers use the emerald card as an option to receive federal and state income tax refunds . the prepaid customer deposits are included in non-interest bearing deposit liabilities on our balance sheet and the ach fee income is included in our income statement under the line banking service fees and other income . the second product is refund transfer ( “ rt ” ) , which is under schedule b of the pma . our bank is responsible for the primary oversight and control of the refund transfer program of a wholly owned subsidiary of h & r block . under the pma and related agreements , our bank opens a temporary bank account for each h & r block customer who is receiving an income tax refund and elects to defer payment of his or her tax preparations fees . story_separator_special_tag we are subject to federal and state income taxes , and our effective tax rates were 42.10 % , 41.78 % and 41.30 % for the fiscal years ended june 30 , 2017 , 2016 , and 2015 , respectively . other factors that affect our results of operations include expenses relating to professional services , occupancy , data processing , advertising and other miscellaneous expenses . comparison of the fiscal year ended june 30 , 2017 and june 30 , 2016 net interest income . net interest income totaled $ 313.2 million for the fiscal year ended june 30 , 2017 compared to $ 261.0 million for the fiscal year ended june 30 , 2016 . the following table sets forth the effects of changing rates and volumes on our net interest income . information is provided with respect to ( i ) effects on interest income and interest expense attributable to changes in volume ( changes in volume multiplied by prior rate ) ; ( ii ) effects on interest income and interest expense attributable to changes in rate ( changes in rate multiplied by prior volume ) ; and ( iii ) changes in rate/volume ( change in rate multiplied by change in volume ) : replace_table_token_17_th interest income . interest income for the fiscal year ended june 30 , 2017 totaled $ 387.3 million , an increase of $ 69.6 million , or 21.9 % , compared to $ 317.7 million in interest income for the fiscal year ended june 30 , 2016 primarily due to growth in volume of interest-earning assets . average interest-earning assets for the fiscal year ended june 30 , 2017 increased by $ 1,243.8 million compared to the fiscal year ended june 30 , 2016 primarily due to loan and lease originations for investment which increased $ 548.8 million and loan and lease purchases for investment which increased $ 136.4 million during the year ended june 30 , 2017 . yields on loans and leases increased by 14 basis points to 5.26 % for the fiscal year ended june 30 , 2017 , primarily due to increased yields in the single family , commercial & industrial and h & r block-branded loan products . for the fiscal year ended june 30 , 2017 , the growth in average balances contributed additional interest income of $ 56.3 million , which was supplemented by a $ 11.3 million increase in interest income due to the increase in average rate . the average yield earned on our interest-earning assets increased to 4.89 % for the fiscal year ended june 30 , 2017 , up from 4.75 % for the same period in 2016 primarily due to the increase in rate from loans and leases . 38 interest expense . interest expense totaled $ 74.1 million for the fiscal year ended june 30 , 2017 , an increase of $ 17.4 million , or 30.6 % compared to $ 56.7 million in interest expense during the fiscal year ended june 30 , 2016 , due primarily to increased volumes of deposits and other borrowings as well as increased rates on deposits and advances . the average rate paid on all of our interest-bearing liabilities increased to 1.15 % for the fiscal year ended june 30 , 2017 from 1.05 % for the fiscal year ended june 30 , 2016 , due primarily to increased rates on deposits and advances from fhlb . average interest-bearing liabilities for the fiscal year ended june 30 , 2017 increased $ 1,035.5 million compared to fiscal 2016 . the average interest-bearing balances of demand and savings increased $ 970.3 million and the average interest-bearing balances increased $ 1,035.5 million due to increased deposits and the full year impact of our subordinated notes issued in march 2016. the average rate on interest-bearing deposits increased to 0.75 % from 0.67 % due to increases in prevailing deposit rates across the industry . the rates on advances from the fhlb also increased to 1.55 % from 1.31 % due primarily to the fed rate increases . the average rate on time deposits increased to 2.33 % for the fiscal year ended june 30 , 2017 from 2.12 % for the fiscal year ended june 30 , 2016 , due to issuance of longer term time deposits . the average non-interest-bearing demand deposits were $ 774.4 million for the fiscal year ended june 30 , 2017 , representing an increase of $ 34.6 million . provision for loan and lease losses . provision for loan and lease losses was $ 11.1 million for the fiscal year ended june 30 , 2017 and $ 9.7 million for fiscal 2016 . the provisions are made to maintain our allowance for loan and lease losses at levels which management believes to be adequate . the assessment of the adequacy of our allowance for loan and lease losses is based upon a number of quantitative and qualitative factors , including levels and trends of past due and nonaccrual loans , loss history and changes in the volume and mix of loans and collateral values . see “ asset quality and allowance for loan and lease losses ” for discussion of our allowance for loan and lease losses and the related loss provisions . non-interest income . the following table sets forth information regarding our non-interest income : replace_table_token_18_th non-interest income totaled $ 68.1 million for the fiscal year ended june 30 , 2017 compared to non-interest income of $ 66.3 million for fiscal 2016 . the increase was primarily the result of an increase of $ 5.9 million in banking service fees due to h & r block-branded products and service fee income , an increase in mortgage banking income of $ 3.2 million , an increase in realized gain from sale of securities of $ 2.5 million , and increased levels of prepayment penalty fee income of $ 1.7 million , partially offset by a $ 11.1

liquidity and capital resources overview we primarily rely on cash from operations and financing activities , including borrowings under our revolving credit facility , to fund our operations . our liquidity is assessed in terms of our overall ability to generate cash to fund our operating and investing activities and to service debt . we believe that our available cash , cash flows from operations and available borrowing under our revolving credit facility , discussed under `` revolving credit facility '' below , will be sufficient to fund our operations for at least the next twelve months . the following table provides summarized information with respect to our cash balances and cash flows as of and for the fiscal years ended june 30 , 2016 , 2015 and 2014 ( in thousands ) : replace_table_token_17_th fiscal year 2016 compared to fiscal year 2015 as of june 30 , 2016 , cash and cash equivalents decreased by $ ( 18.5 ) million , or ( 49.6 ) % , to $ 18.8 million compared to $ 37.3 million as of june 30 , 2015 . this decline is primarily the result of cash utilized for the acquisition of pipeline services on november 30 , 2015. net cash provided by operating activities increased by $ 16.0 million , or 49.9 % , to $ 48.1 million for the fiscal year ended june 30 , 2016 , compared to $ 32.1 million of cash provided in the prior year . the increase was attributable to the favorable timing of collections activity with respect to accounts receivable in the fiscal year ended june 30 , 2016 compared to the same period of the prior year . these favorable results were offset by higher cash payments made primarily with respect to accounts payable and employee related compensation in the fiscal year ended june 30 , 2016 compared to the same period of the prior year .

non-interest income was $ 68.1 million compared to non-interest income of $ 66.3 million and $ 30.6 million for the fiscal years ended june 30 , 2017 , 2016 and 2015 . the increase from fiscal year 2016 to fiscal year 2017 was primarily the result of an increase of $ 5.9 million in banking service fees due to increased fees from h & r block-branded products , a mortgage banking income increase of $ 3.2 million , an increase in realized gain from sale of securities of $ 2.5 million , and increased levels of prepayment penalty fee income of $ 1.7 million partially offset by a decrease of $ 11.1 million in gain on sale-other primarily from reduced sales of structured settlements . the increase from 2015 to 2016 was primarily due to increased banking service fees due to increased fees from h & r block-branded products and gain on sale-other primarily from sales of structured settlements . 32 non-interest expense for the fiscal year ended june 30 , 2017 was $ 137.6 million compared to $ 112.8 million and $ 77.5 million for the years ended june 30 , 2016 and 2015 , respectively . the increase was primarily due to an increase in the bank 's staffing for lending , information technology infrastructure development and regulatory compliance . our staffing rose to 681 full-time equivalents compared to 647 and 467 at june 30 , 2017 , 2016 and 2015 , respectively . total assets were $ 8,501.7 million at june 30 , 2017 compared to $ 7,599.3 million at june 30 , 2016 . assets grew $ 902.4 million or 11.9 % during the last fiscal year , primarily due to an increase in the origination of single family mortgage loans and c & i loans . these loans were funded primarily with growth in deposits . our future performance will depend on many factors : changes in interest rates , competition for deposits and quality loans , the credit performance of our assets , regulatory actions , strategic transactions , and our ability to improve operating efficiencies . see “ item 1a . risk factors . ” mergers and acquisitions from time to time we undertake acquisitions or similar transactions consistent with the bank 's operating and growth strategies . during the fiscal years ended june 30 , 2015 and june 30 , 2016 , there were three acquisitions , which are discussed below . no acquisitions occurred during the fiscal year ended june 30 , 2017. union federal deposit acquisition in september 2014 , the bank completed the acquisition of approximately $ 42 million in deposits consisting of individual checking , money market savings , and cd accounts from union federal savings bank ( “ union ” ) and its parent company , the first marblehead corporation . h & r block bank deposit acquisition on august 31 , 2015 , our bank completed the acquisition of approximately $ 419 million in deposits consisting of checking , individual retirement savings , and cd accounts from h & r block bank and its parent company , h & r block , inc. ( “ h & r block ” ) . in connection with the closing of this transaction : ( i ) our bank and emerald financial services , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block ( “ efs ” ) , entered into the program management agreement ( “ pma ” ) , dated august 31 , 2015 ; ( ii ) our bank and h & r block , efs , hrb participant i , llc , a delaware limited liability company and wholly-owned subsidiary of h & r block , entered into the emerald receivables participation agreement , dated august 31 , 2015 ; and ( iii ) our bank and h & r block entered into the guaranty agreement ( together , the “ pma and related agreements ” ) , dated august 31 , 2015. through the pma and related agreements our bank will provide h & r block-branded financial services products and services . the three products and services that represent the primary focus and the majority of transactional volume that our bank will process are described in detail below . the first product is emerald prepaid mastercard ® services ( “ epc ” ) , which is under schedule a of the pma . our bank is responsible for the primary oversight and control of the prepaid card programs of a wholly owned subsidiary of h & r block . under the pma and related agreements , our bank holds the prepaid card customer deposits for those cards issued under the prepaid programs in non-interest bearing accounts and earns a fixed fee paid by h & r block 's subsidiary for each automated clearing house ( “ ach ” ) transaction processed through the prepaid card customer accounts . a portion of h & r block 's customers use the emerald card as an option to receive federal and state income tax refunds . the prepaid customer deposits are included in non-interest bearing deposit liabilities on our balance sheet and the ach fee income is included in our income statement under the line banking service fees and other income . the second product is refund transfer ( “ rt ” ) , which is under schedule b of the pma . our bank is responsible for the primary oversight and control of the refund transfer program of a wholly owned subsidiary of h & r block . under the pma and related agreements , our bank opens a temporary bank account for each h & r block customer who is receiving an income tax refund and elects to defer payment of his or her tax preparations fees . story_separator_special_tag we are subject to federal and state income taxes , and our effective tax rates were 42.10 % , 41.78 % and 41.30 % for the fiscal years ended june 30 , 2017 , 2016 , and 2015 , respectively . other factors that affect our results of operations include expenses relating to professional services , occupancy , data processing , advertising and other miscellaneous expenses . comparison of the fiscal year ended june 30 , 2017 and june 30 , 2016 net interest income . net interest income totaled $ 313.2 million for the fiscal year ended june 30 , 2017 compared to $ 261.0 million for the fiscal year ended june 30 , 2016 . the following table sets forth the effects of changing rates and volumes on our net interest income . information is provided with respect to ( i ) effects on interest income and interest expense attributable to changes in volume ( changes in volume multiplied by prior rate ) ; ( ii ) effects on interest income and interest expense attributable to changes in rate ( changes in rate multiplied by prior volume ) ; and ( iii ) changes in rate/volume ( change in rate multiplied by change in volume ) : replace_table_token_17_th interest income . interest income for the fiscal year ended june 30 , 2017 totaled $ 387.3 million , an increase of $ 69.6 million , or 21.9 % , compared to $ 317.7 million in interest income for the fiscal year ended june 30 , 2016 primarily due to growth in volume of interest-earning assets . average interest-earning assets for the fiscal year ended june 30 , 2017 increased by $ 1,243.8 million compared to the fiscal year ended june 30 , 2016 primarily due to loan and lease originations for investment which increased $ 548.8 million and loan and lease purchases for investment which increased $ 136.4 million during the year ended june 30 , 2017 . yields on loans and leases increased by 14 basis points to 5.26 % for the fiscal year ended june 30 , 2017 , primarily due to increased yields in the single family , commercial & industrial and h & r block-branded loan products . for the fiscal year ended june 30 , 2017 , the growth in average balances contributed additional interest income of $ 56.3 million , which was supplemented by a $ 11.3 million increase in interest income due to the increase in average rate . the average yield earned on our interest-earning assets increased to 4.89 % for the fiscal year ended june 30 , 2017 , up from 4.75 % for the same period in 2016 primarily due to the increase in rate from loans and leases . 38 interest expense . interest expense totaled $ 74.1 million for the fiscal year ended june 30 , 2017 , an increase of $ 17.4 million , or 30.6 % compared to $ 56.7 million in interest expense during the fiscal year ended june 30 , 2016 , due primarily to increased volumes of deposits and other borrowings as well as increased rates on deposits and advances . the average rate paid on all of our interest-bearing liabilities increased to 1.15 % for the fiscal year ended june 30 , 2017 from 1.05 % for the fiscal year ended june 30 , 2016 , due primarily to increased rates on deposits and advances from fhlb . average interest-bearing liabilities for the fiscal year ended june 30 , 2017 increased $ 1,035.5 million compared to fiscal 2016 . the average interest-bearing balances of demand and savings increased $ 970.3 million and the average interest-bearing balances increased $ 1,035.5 million due to increased deposits and the full year impact of our subordinated notes issued in march 2016. the average rate on interest-bearing deposits increased to 0.75 % from 0.67 % due to increases in prevailing deposit rates across the industry . the rates on advances from the fhlb also increased to 1.55 % from 1.31 % due primarily to the fed rate increases . the average rate on time deposits increased to 2.33 % for the fiscal year ended june 30 , 2017 from 2.12 % for the fiscal year ended june 30 , 2016 , due to issuance of longer term time deposits . the average non-interest-bearing demand deposits were $ 774.4 million for the fiscal year ended june 30 , 2017 , representing an increase of $ 34.6 million . provision for loan and lease losses . provision for loan and lease losses was $ 11.1 million for the fiscal year ended june 30 , 2017 and $ 9.7 million for fiscal 2016 . the provisions are made to maintain our allowance for loan and lease losses at levels which management believes to be adequate . the assessment of the adequacy of our allowance for loan and lease losses is based upon a number of quantitative and qualitative factors , including levels and trends of past due and nonaccrual loans , loss history and changes in the volume and mix of loans and collateral values . see “ asset quality and allowance for loan and lease losses ” for discussion of our allowance for loan and lease losses and the related loss provisions . non-interest income . the following table sets forth information regarding our non-interest income : replace_table_token_18_th non-interest income totaled $ 68.1 million for the fiscal year ended june 30 , 2017 compared to non-interest income of $ 66.3 million for fiscal 2016 . the increase was primarily the result of an increase of $ 5.9 million in banking service fees due to h & r block-branded products and service fee income , an increase in mortgage banking income of $ 3.2 million , an increase in realized gain from sale of securities of $ 2.5 million , and increased levels of prepayment penalty fee income of $ 1.7 million , partially offset by a $ 11.1

liquidity . our sources of liquidity include deposits , borrowings , payments and maturities of outstanding loans , sales of loans , maturities or gains on sales of investment securities and other short-term investments . while scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds , deposit flows and loan prepayments are greatly influenced by general interest rates , economic conditions and competition . we generally invest excess funds in overnight deposits and other short-term interest-earning assets . we use cash generated through retail deposits , our largest funding source , to offset the cash utilized in lending and investing activities . our short-term interest-earning investment securities are also used to provide liquidity for lending and other operational requirements . as an additional source of funds , we have two credit agreements . bofi federal bank can borrow up to 40 % of its total assets from the fhlb . borrowings are collateralized by pledging certain mortgage loans and investment securities to the fhlb . based on loans and securities pledged at june 30 , 2017 , we had a total borrowing availability of approximately $ 1.2 billion and an additional $ 157.6 million available with additional collateral . the bank can also borrow from the discount window at the frb . frb borrowings are collateralized by commercial loans , consumer loans and mortgage-backed securities pledged to the frb . based on loans and securities pledged at june 30 , 2017 , we had a total borrowing capacity of approximately $ 1.3 million , all of which was available for use . at june 30 , 2017 , we also had $ 35.0 million in unsecured fed funds purchase lines with two major banks under which there were no borrowings outstanding . in the past , we have used long-term borrowings to fund our loans and to minimize our interest rate risk . our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk . we expect to continue to use deposits and advances from the fhlb as the primary sources of funding our future asset growth .

the decrease in revenues was primarily driven by fewer transaction completions compared to the prior year period , partially offset by higher average fees earned per completed transaction . in the u.s. , which has been a particularly strong driver of our revenues , we are observing many companies pursue m & a as they seek to obtain a competitive advantage in their business models . in addition , based on historical experience , we believe the current economic backdrop ( technological disruption , shareholder activism , record pools of capital being deployed by private equity firms and sovereign wealth funds , high corporate cash balances , relatively low interest rates and availability of credit ) , provides a solid foundation for sustained m & a activity . however , the global m & a market slowed during 2019 with completions down 8 % versus the prior year period as equity market volatility and trade-war tensions impacted the deal-making environment . in addition , the number of u.s. financial sponsor m & a completions greater than $ 100 million declined 14 % versus the prior year , which also negatively impacted our 2019 results . in europe , we continue to see slower activity , partially attributable to geo-political issues such as the u.k. 's exit from the eu . lastly , restructuring activity continues to be a steady contributor to our business despite the low default environment . our team of investment banking professionals continues to gain traction and we expect global collaboration among them to deepen and the advice provided to resonate with clients . our current conversations with clients remain strong , and we continue to experience demand for independent advice as clients evaluate their strategic alternatives . 32 results of operations the following is a discussion of our results of operations for the years ended december 31 , 2019 and 2018. for a discussion of our results of operations for the year ended december 31 , 2017 , refer to “ item 7- management 's discussion and analysis of financial condition and results of operations ” of our annual report on form 10-k for the year ended december 31 , 2018. replace_table_token_2_th n/m = not meaningful revenues we operate in a highly competitive environment . each revenue‑generating engagement is separately solicited , awarded and negotiated , and there are usually no long‑term contracted sources of revenue . as a consequence , our fee‑paying client engagements are not predictable , and high levels of revenues in one period are not necessarily predictive of continued high levels of revenues in future periods . to develop new business , our professionals maintain an active dialogue with a large number of existing and potential clients . we add new clients each year as our bankers continue to expand their relationships , as we hire senior bankers who bring their client relationships and as we receive introductions from our relationship network of senior executives , board members , attorneys and other third parties . we also lose clients each year as a result of the sale or merger of clients , changes in clients ' senior management , competition from other financial services firms and other causes . we earn substantially all of our revenues from advisory engagements , and , in many cases , we are not paid until the completion of an underlying transaction . the vast majority of our advisory revenues are recognized over time , although the recognition of our transaction fees are constrained until the engagement is substantially complete . complications that may terminate or delay a transaction include failure to agree upon final terms with the counterparty , failure to obtain required regulatory consents , failure to obtain board or stockholder approvals , failure to secure financing , adverse market conditions or unexpected operating or financial problems related to either party to the transaction . in these circumstances , we often do not receive advisory fees that would have been received if the transaction had been completed , despite the fact that we may have devoted considerable time and resources to the transaction . barriers to the completion of a restructuring transaction may include a lack of anticipated bidders for the assets of our client or the inability of our client to restructure its operations or indebtedness due to a failure to reach agreement with its creditors . in these circumstances , our fees are generally limited to monthly retainer fees and reimbursement of certain out‑of‑pocket expenses . we do not allocate our revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue and our holistic approach to client service . for example , a restructuring engagement may evolve to require a sale of all or a portion of the client , m & a assignments can develop from relationships established on prior restructuring engagements , and capital markets expertise can be instrumental on both m & a and restructuring assignments . 33 year ended december 31 , 2019 versus 2018 revenues were $ 746.5 million for the year ended december 31 , 2019 compared with $ 885.8 million for the same period in 2018 , representing a decrease of 16 % . the decrease in revenues was primarily driven by fewer transaction completions during the period , partially offset by higher average fees earned per completed transaction . story_separator_special_tag revenue and expense recognition we earn substantially all of our revenues from advisory engagements , and , in many cases , we are not paid until the completion of an underlying transaction . the company recognizes revenues from providing advisory services when or as our obligations are fulfilled and collection is reasonably assured . the vast majority of our advisory revenues , which include reimbursements for certain out-of-pocket expenses , are recognized over time ; however , a small number of transactions may be recognized at a point in time . we provide our advisory service on an ongoing basis which , for example , may include evaluating and selecting one of multiple strategies . during such engagements , our clients are continuously benefitting from our counsel and the over time recognition matches the transfer of such benefits . however , the recognition of transaction fees is constrained until substantially all services have been provided , specified conditions have been met and it is probable that a significant reversal of revenue will not occur in a future period . upfront fees and retainers specified in our engagement letters that meet the over time criteria will be recognized on a systematic basis over the estimated period where the related services are performed . revenues may be recognized at a point in time if the engagement represents a singular objective that does not transfer any notable value until formally completed , such as when issuing a fairness opinion . in these instances , the point in time recognition appropriately matches the transfer and consumption of our services . incremental costs of obtaining a contract are expensed as incurred since such costs are generally not recoverable and the typical duration of our advisory contracts is less than one year . costs to fulfill contracts consist of out-of-pocket expenses that are part of performing our advisory services and are typically expensed as incurred , except where the transfer and consumption of our services occurs at a point in time . for engagements recognized at a point in time , out-of-pocket expenses are capitalized and subsequently expensed in the consolidated statement of operations upon completion of the engagement . the company records deferred revenues when it receives fees from clients that have not yet been earned ( e.g . an upfront fee ) or when the company has an unconditional right to consideration before all performance obligations are complete ( e.g . upon satisfying conditions to earn an announcement fee , but before the transaction is consummated ) . accounts receivable and allowance for doubtful accounts the accompanying consolidated statements of financial condition present accounts receivable balances net of allowance for doubtful accounts based on the company 's assessment of the collectability of customer accounts . the company maintains an allowance for doubtful accounts that , in management 's opinion , provides for an adequate reserve to cover losses that may be incurred . the company regularly reviews the allowance by considering factors such as historical experience , credit quality , age of the accounts receivable , and the current economic conditions that may affect a customer 's ability to pay such amounts owed to the company . after concluding that a reserved accounts receivable is no longer collectible , the company will charge‑off the receivable . this is determined based on several factors including the age of the accounts receivable and the credit worthiness of the customer . this has the effect of reducing both the gross receivable and the allowance for doubtful accounts . equity‑based compensation the company recognizes the cost of services received in exchange for equity instrument awards . the cost is based on its grant-date fair value using quoted market prices at the time of grant amortized over the service period required by the award 's vesting terms . for the purposes of calculating diluted net income ( loss ) per share to holders of class a common stock , unvested service‑based awards are included in the diluted weighted average shares of class a common stock outstanding using the treasury stock method . 40 the company has a retirement plan whereby a retiring employee generally will not forfeit certain qualifying incentive rsus granted during employment if at retirement the employee meets certain requirements . for qualifying awards issued prior to december 1 , 2016 , the employee must ( i ) be at least 54 years old and ( ii ) have provided at least 8 consecutive years of service to the company . for qualifying awards issued on or after december 1 , 2016 , ( i ) the employee must be at least 56 years old , ( ii ) the employee must have provided at least 5 consecutive years of service to the company and ( iii ) the total of ( i ) and ( ii ) must be equal to at least 65 years . any such rsus will continue to vest on their applicable vesting schedule , subject to noncompetition and other terms . over time a greater number of employees may become retirement eligible and the related requisite service period over which we will expense these awards will be shorter than the stated vesting period . any unvested rsus are eligible to receive dividends in kind ; however , the right to dividends in kind will be forfeited if the underlying award does not vest . income taxes the company accounts for income taxes in accordance with asc 740 , “ accounting for income taxes ” ( “ asc 740 ” ) , which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse . such net tax effects on temporary differences are reflected on the company 's consolidated statements of financial condition as deferred tax assets . deferred tax assets

liquidity . our sources of liquidity include deposits , borrowings , payments and maturities of outstanding loans , sales of loans , maturities or gains on sales of investment securities and other short-term investments . while scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds , deposit flows and loan prepayments are greatly influenced by general interest rates , economic conditions and competition . we generally invest excess funds in overnight deposits and other short-term interest-earning assets . we use cash generated through retail deposits , our largest funding source , to offset the cash utilized in lending and investing activities . our short-term interest-earning investment securities are also used to provide liquidity for lending and other operational requirements . as an additional source of funds , we have two credit agreements . bofi federal bank can borrow up to 40 % of its total assets from the fhlb . borrowings are collateralized by pledging certain mortgage loans and investment securities to the fhlb . based on loans and securities pledged at june 30 , 2017 , we had a total borrowing availability of approximately $ 1.2 billion and an additional $ 157.6 million available with additional collateral . the bank can also borrow from the discount window at the frb . frb borrowings are collateralized by commercial loans , consumer loans and mortgage-backed securities pledged to the frb . based on loans and securities pledged at june 30 , 2017 , we had a total borrowing capacity of approximately $ 1.3 million , all of which was available for use . at june 30 , 2017 , we also had $ 35.0 million in unsecured fed funds purchase lines with two major banks under which there were no borrowings outstanding . in the past , we have used long-term borrowings to fund our loans and to minimize our interest rate risk . our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk . we expect to continue to use deposits and advances from the fhlb as the primary sources of funding our future asset growth .

the decrease in revenues was primarily driven by fewer transaction completions compared to the prior year period , partially offset by higher average fees earned per completed transaction . in the u.s. , which has been a particularly strong driver of our revenues , we are observing many companies pursue m & a as they seek to obtain a competitive advantage in their business models . in addition , based on historical experience , we believe the current economic backdrop ( technological disruption , shareholder activism , record pools of capital being deployed by private equity firms and sovereign wealth funds , high corporate cash balances , relatively low interest rates and availability of credit ) , provides a solid foundation for sustained m & a activity . however , the global m & a market slowed during 2019 with completions down 8 % versus the prior year period as equity market volatility and trade-war tensions impacted the deal-making environment . in addition , the number of u.s. financial sponsor m & a completions greater than $ 100 million declined 14 % versus the prior year , which also negatively impacted our 2019 results . in europe , we continue to see slower activity , partially attributable to geo-political issues such as the u.k. 's exit from the eu . lastly , restructuring activity continues to be a steady contributor to our business despite the low default environment . our team of investment banking professionals continues to gain traction and we expect global collaboration among them to deepen and the advice provided to resonate with clients . our current conversations with clients remain strong , and we continue to experience demand for independent advice as clients evaluate their strategic alternatives . 32 results of operations the following is a discussion of our results of operations for the years ended december 31 , 2019 and 2018. for a discussion of our results of operations for the year ended december 31 , 2017 , refer to “ item 7- management 's discussion and analysis of financial condition and results of operations ” of our annual report on form 10-k for the year ended december 31 , 2018. replace_table_token_2_th n/m = not meaningful revenues we operate in a highly competitive environment . each revenue‑generating engagement is separately solicited , awarded and negotiated , and there are usually no long‑term contracted sources of revenue . as a consequence , our fee‑paying client engagements are not predictable , and high levels of revenues in one period are not necessarily predictive of continued high levels of revenues in future periods . to develop new business , our professionals maintain an active dialogue with a large number of existing and potential clients . we add new clients each year as our bankers continue to expand their relationships , as we hire senior bankers who bring their client relationships and as we receive introductions from our relationship network of senior executives , board members , attorneys and other third parties . we also lose clients each year as a result of the sale or merger of clients , changes in clients ' senior management , competition from other financial services firms and other causes . we earn substantially all of our revenues from advisory engagements , and , in many cases , we are not paid until the completion of an underlying transaction . the vast majority of our advisory revenues are recognized over time , although the recognition of our transaction fees are constrained until the engagement is substantially complete . complications that may terminate or delay a transaction include failure to agree upon final terms with the counterparty , failure to obtain required regulatory consents , failure to obtain board or stockholder approvals , failure to secure financing , adverse market conditions or unexpected operating or financial problems related to either party to the transaction . in these circumstances , we often do not receive advisory fees that would have been received if the transaction had been completed , despite the fact that we may have devoted considerable time and resources to the transaction . barriers to the completion of a restructuring transaction may include a lack of anticipated bidders for the assets of our client or the inability of our client to restructure its operations or indebtedness due to a failure to reach agreement with its creditors . in these circumstances , our fees are generally limited to monthly retainer fees and reimbursement of certain out‑of‑pocket expenses . we do not allocate our revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue and our holistic approach to client service . for example , a restructuring engagement may evolve to require a sale of all or a portion of the client , m & a assignments can develop from relationships established on prior restructuring engagements , and capital markets expertise can be instrumental on both m & a and restructuring assignments . 33 year ended december 31 , 2019 versus 2018 revenues were $ 746.5 million for the year ended december 31 , 2019 compared with $ 885.8 million for the same period in 2018 , representing a decrease of 16 % . the decrease in revenues was primarily driven by fewer transaction completions during the period , partially offset by higher average fees earned per completed transaction . story_separator_special_tag revenue and expense recognition we earn substantially all of our revenues from advisory engagements , and , in many cases , we are not paid until the completion of an underlying transaction . the company recognizes revenues from providing advisory services when or as our obligations are fulfilled and collection is reasonably assured . the vast majority of our advisory revenues , which include reimbursements for certain out-of-pocket expenses , are recognized over time ; however , a small number of transactions may be recognized at a point in time . we provide our advisory service on an ongoing basis which , for example , may include evaluating and selecting one of multiple strategies . during such engagements , our clients are continuously benefitting from our counsel and the over time recognition matches the transfer of such benefits . however , the recognition of transaction fees is constrained until substantially all services have been provided , specified conditions have been met and it is probable that a significant reversal of revenue will not occur in a future period . upfront fees and retainers specified in our engagement letters that meet the over time criteria will be recognized on a systematic basis over the estimated period where the related services are performed . revenues may be recognized at a point in time if the engagement represents a singular objective that does not transfer any notable value until formally completed , such as when issuing a fairness opinion . in these instances , the point in time recognition appropriately matches the transfer and consumption of our services . incremental costs of obtaining a contract are expensed as incurred since such costs are generally not recoverable and the typical duration of our advisory contracts is less than one year . costs to fulfill contracts consist of out-of-pocket expenses that are part of performing our advisory services and are typically expensed as incurred , except where the transfer and consumption of our services occurs at a point in time . for engagements recognized at a point in time , out-of-pocket expenses are capitalized and subsequently expensed in the consolidated statement of operations upon completion of the engagement . the company records deferred revenues when it receives fees from clients that have not yet been earned ( e.g . an upfront fee ) or when the company has an unconditional right to consideration before all performance obligations are complete ( e.g . upon satisfying conditions to earn an announcement fee , but before the transaction is consummated ) . accounts receivable and allowance for doubtful accounts the accompanying consolidated statements of financial condition present accounts receivable balances net of allowance for doubtful accounts based on the company 's assessment of the collectability of customer accounts . the company maintains an allowance for doubtful accounts that , in management 's opinion , provides for an adequate reserve to cover losses that may be incurred . the company regularly reviews the allowance by considering factors such as historical experience , credit quality , age of the accounts receivable , and the current economic conditions that may affect a customer 's ability to pay such amounts owed to the company . after concluding that a reserved accounts receivable is no longer collectible , the company will charge‑off the receivable . this is determined based on several factors including the age of the accounts receivable and the credit worthiness of the customer . this has the effect of reducing both the gross receivable and the allowance for doubtful accounts . equity‑based compensation the company recognizes the cost of services received in exchange for equity instrument awards . the cost is based on its grant-date fair value using quoted market prices at the time of grant amortized over the service period required by the award 's vesting terms . for the purposes of calculating diluted net income ( loss ) per share to holders of class a common stock , unvested service‑based awards are included in the diluted weighted average shares of class a common stock outstanding using the treasury stock method . 40 the company has a retirement plan whereby a retiring employee generally will not forfeit certain qualifying incentive rsus granted during employment if at retirement the employee meets certain requirements . for qualifying awards issued prior to december 1 , 2016 , the employee must ( i ) be at least 54 years old and ( ii ) have provided at least 8 consecutive years of service to the company . for qualifying awards issued on or after december 1 , 2016 , ( i ) the employee must be at least 56 years old , ( ii ) the employee must have provided at least 5 consecutive years of service to the company and ( iii ) the total of ( i ) and ( ii ) must be equal to at least 65 years . any such rsus will continue to vest on their applicable vesting schedule , subject to noncompetition and other terms . over time a greater number of employees may become retirement eligible and the related requisite service period over which we will expense these awards will be shorter than the stated vesting period . any unvested rsus are eligible to receive dividends in kind ; however , the right to dividends in kind will be forfeited if the underlying award does not vest . income taxes the company accounts for income taxes in accordance with asc 740 , “ accounting for income taxes ” ( “ asc 740 ” ) , which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse . such net tax effects on temporary differences are reflected on the company 's consolidated statements of financial condition as deferred tax assets . deferred tax assets

liquidity and capital resources our current assets have historically been comprised of cash , short term liquid investments and receivables related to fees earned from providing advisory services . our current liabilities are primarily comprised of accrued expenses , including accrued employee compensation . we pay a significant portion of incentive compensation during the first two months of each calendar year with respect to the prior year 's results . we also distribute estimated partner tax payments primarily in the first quarter of each year with respect to the prior year 's operating results . therefore , levels of cash generally decline during the first quarter of each year after incentive compensation has been paid to our employees and estimated tax payments have been distributed to partners . cash before dividends and share buybacks then typically builds over the remainder of the year . we evaluate our cash needs on a regular basis in light of current market conditions . cash and cash equivalents include all short‑term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase . as of december 31 , 2019 and december 31 , 2018 , the company had cash equivalents of $ 96.0 million and $ 201.4 million , respectively , invested in u.s. treasury instruments and government securities money market . additionally , as of december 31 , 2019 and december 31 , 2018 , the company had cash of $ 71.8 million and $ 59.7 million , respectively , maintained in u.s. and non‑u.s . bank accounts , of which most bank account balances exceeded the u.s. federal deposit insurance corporation ( “ fdic ” ) and u.k. financial services compensation scheme ( “ fscs ” ) coverage limits . in addition to cash and cash equivalents , we hold various types of government debt securities that are classified as investments on our consolidated statements of financial condition as they have original maturities of three months or more from the date of purchase .

million , $ 21.9 million and $ 29.6 million of 2018 , 2017 and 2016 revenue , respectively . digital radiography is the largest product offering in this area , which also includes ultrasound instruments . digital radiography solutions typically consist of a combination of hardware and software placed with a customer , often combined with an ongoing service and support contract . we sell our imaging solutions both in the u.s. and internationally . our experience has been that most of the revenue is generated at the time of sale in this area , in contrast to the point of care diagnostics laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used . other cca revenue , including single use diagnostic and other tests , pharmaceuticals and biologicals , as well as research and development , licensing and royalty revenue , represented $ 28.7 million , $ 28.4 million and $ 29.0 million of our 2018 , 2017 and 2016 revenue , respectively . since items in this area are often single use by their nature , our typical aim is to build customer satisfaction and loyalty for each product , generate repeat annual sales from existing customers and expand our customer base in the future . products in this area are both supplied by third parties and provided by us . major products and services in this area include heartworm diagnostic tests and preventives , and allergy test kits , allergy immunotherapy and testing . of our annual revenue , heartworm produced primarily for private-label accounted for approximately $ 16.8 million in both 2018 and 2017 , and $ 16.7 million in 2016. we consider the cca segment to be our core business and devote most of our management time and other resources to improving the prospects for this segment . maintaining a continuing , reliable and economic supply of products we currently obtain from third parties is critical to our success in this area . virtually all of our sales and marketing expenses occur in the cca segment . the majority of our research and development spending is dedicated to this segment as well . all of our cca products are ultimately sold primarily to or through veterinarians . in many cases , veterinarians will mark up their costs to their customer . the acceptance of our products by veterinarians is critical to our success . cca products are sold directly to end users by us as well as through distribution relationships , such as the sale of kits to conduct blood testing to third party veterinary diagnostic laboratories and independent third party distributors . revenue from direct sales and distribution relationships represented approximately 57 % and 43 % , respectively , of cca 2018 revenue , 58 % and 42 % , respectively , of cca 2017 revenue and 61 % and 39 % , respectively , of cca 2016 revenue . ovp segment the ovp segment includes our approximately 160,000 square foot usda and fda licensed production facility in des moines , iowa . we view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may commercialize in the future . we have increased integration of this facility with our operations elsewhere . for example , virtually all our u.s. inventory , excluding our imaging products , is now stored at this facility and related fulfillment logistics are managed there . cca segment products manufactured at this facility are transferred at cost and are not recorded as revenue for our ovp segment . we view ovp reported revenue as revenue primarily to cover the overhead costs of the facility and to generate incremental cash flow to fund our cca segment . - 33 - historically , a significant portion of our ovp segment 's revenue has been generated from the sale of certain bovine vaccines , which have been sold primarily under the titanium® and masterguard® brands . we have an agreement with eli lilly and company and its affiliates operating through elanco for the production of these vaccines ( the `` elanco agreement `` ) . our ovp segment also produces vaccines and pharmaceuticals for other third parties . critical accounting estimates the discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with gaap . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we evaluate our estimates on an ongoing basis . we base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates . `` part ii , item 8. note 1 summary of significant accounting policies `` to the consolidated financial statements included in this annual report on form 10-k describes the significant accounting policies used in preparation of these consolidated financial statements . we believe the following critical accounting estimates and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change . revenue recognition effective january 1 , 2018 , we adopted fasb accounting standards codification ( `` asc `` ) topic 606 , revenue from contracts with customers ( the `` new revenue standard `` ) , using the modified retrospective method for all contracts not completed as of the date of adoption . story_separator_special_tag - 39 - income tax ( benefit ) expense in 2018 , we had total income tax benefit of $ 2.1 million , including approximately $ 1.9 million related to employee share-based payment awards which are recorded in the income statement . in 2017 and 2016 respectively , we had total income tax expense of $ 8.9 million and $ 4.3 million . in 2017 , our deferred income tax expense was increased by $ 5.9 million ( i.e . the write down of deferred tax asset balances and the valuation allowance ) for tax reform legislation and our current income tax expense was reduced by $ 5.5 million for employee share-based payment awards . see `` part ii , item 8. financial statements and supplementary data , note 4. income taxes `` in the accompanying notes to the consolidated financial statements for additional information regarding our income taxes . net income attributable to heska corporation net income attributable to heska corporation was $ 5.9 million in 2018 , compared to net income attributable to heska corporation of $ 10.0 million in 2017 and net income attributable to heska corporation of $ 10.5 million in 2016 . the difference between this line item and `` net income , after equity in losses of unconsolidated affiliates `` is the net income or loss attributable to our minority interest in u.s. imaging , which we purchased on may 31 , 2017. as a result of the purchase , there was no difference between these line items for 2018 . the difference between these line items was a gain of $ 0.5 million in 2017 , and a loss of $ 1.7 million in 2016 . - 40 - non-gaap financial measures the following tables provide a summary of our results for the year ended december 31 , 2018 , after adjusting for one-time non-recurring expenses associated with the pending settlement arrangement ( see `` part ii , item 8. financial statements and supplementary data , note 13. commitments and contingencies `` ) and other legal and consulting fees described elsewhere herein , and our results for the year ended december 31 , 2017 , after adjusting for the impact of the act . the following tables reconcile our adjusted non-gaap financial measures to our most directly comparable as-reported financial measures calculated in accordance with gaap . these adjusted results are non-gaap financial measures that have been included for the reasons discussed below . replace_table_token_6_th replace_table_token_7_th a non-gaap financial measure includes a numerical measure of a company 's financial performance , financial position or cash flows that excludes amounts , or is subject to adjustments that have the effect of excluding amounts , that are included in the most directly comparable measure calculated and presented in accordance with gaap in the statement of income , balance sheet or statement of cash flows ( or equivalent statements ) of the company . the non-gaap financial measures included in the table above exclude the impact of the following one-time items . we exclude these one-time items and the related tax effects as management monitors litigation judgments , settlements and distinct extraordinary items separately from ongoing operations and evaluates ongoing performance without these amounts . - 41 - during the year ended december 31 , 2018 , we recorded a one-time settlement charge of $ 6.75 million and approximately $ 0.3 million in related legal fees in general and administrative expenses , relating to the pending settlement of the shaun fauley complaint filed on march 12 , 2015. see `` part ii , item 8. financial statements and supplementary data , note 13. commitments and contingencies `` in the accompanying notes to the consolidated financial statements for further discussion of the settlement . other one-time costs were approximately $ 0.4 million for the year ended december 31 , 2018 . during the year ended december 31 , 2017 , our deferred income tax expense was increased by $ 5.9 million due to the revaluation of our deferred tax assets as a result of the act . our management believes that the non-gaap financial measures presented facilitate an understanding of our operating performance and provide a more meaningful comparison of our results between periods . our management uses non-gaap financial measures to , among other things , evaluate our ongoing operations in relation to historical results and for internal planning and forecasting purposes . operating expenses , operating income , income tax ( benefit ) expense , net income attributable to heska and basic and diluted earnings per share , adjusted for one-time items , are non-gaap financial measures and should not be relied upon as substitutes for measures calculated in accordance with gaap . impact of inflation in recent years , inflation has not had a significant impact on our operations . liquidity , capital resources and financial condition we believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives . our ability to fund our operations , acquisitions , capital expenditures and product development efforts may depend on our ability to generate cash from operating activities , which is subject to future operating performance , as well as general economic , financial , competitive , legislative , regulatory and other conditions , some of which may be beyond our control . our primary sources of liquidity are our available cash , cash generated from current operations and availability under our credit facility noted below . for the year ended december 31 , 2018 , we had net income of $ 5.9 million and net cash provided by operations of $ 13.3 million . at december 31 , 2018 , we had $ 13.4 million of cash and cash equivalents , working capital of $ 42.0 million and $ 6.0 million outstanding borrowings under our revolving line of credit , discussed below . on july 27 , 2017 , and as subsequently amended in may and december of 2018 ,

liquidity and capital resources our current assets have historically been comprised of cash , short term liquid investments and receivables related to fees earned from providing advisory services . our current liabilities are primarily comprised of accrued expenses , including accrued employee compensation . we pay a significant portion of incentive compensation during the first two months of each calendar year with respect to the prior year 's results . we also distribute estimated partner tax payments primarily in the first quarter of each year with respect to the prior year 's operating results . therefore , levels of cash generally decline during the first quarter of each year after incentive compensation has been paid to our employees and estimated tax payments have been distributed to partners . cash before dividends and share buybacks then typically builds over the remainder of the year . we evaluate our cash needs on a regular basis in light of current market conditions . cash and cash equivalents include all short‑term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase . as of december 31 , 2019 and december 31 , 2018 , the company had cash equivalents of $ 96.0 million and $ 201.4 million , respectively , invested in u.s. treasury instruments and government securities money market . additionally , as of december 31 , 2019 and december 31 , 2018 , the company had cash of $ 71.8 million and $ 59.7 million , respectively , maintained in u.s. and non‑u.s . bank accounts , of which most bank account balances exceeded the u.s. federal deposit insurance corporation ( “ fdic ” ) and u.k. financial services compensation scheme ( “ fscs ” ) coverage limits . in addition to cash and cash equivalents , we hold various types of government debt securities that are classified as investments on our consolidated statements of financial condition as they have original maturities of three months or more from the date of purchase .

million , $ 21.9 million and $ 29.6 million of 2018 , 2017 and 2016 revenue , respectively . digital radiography is the largest product offering in this area , which also includes ultrasound instruments . digital radiography solutions typically consist of a combination of hardware and software placed with a customer , often combined with an ongoing service and support contract . we sell our imaging solutions both in the u.s. and internationally . our experience has been that most of the revenue is generated at the time of sale in this area , in contrast to the point of care diagnostics laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used . other cca revenue , including single use diagnostic and other tests , pharmaceuticals and biologicals , as well as research and development , licensing and royalty revenue , represented $ 28.7 million , $ 28.4 million and $ 29.0 million of our 2018 , 2017 and 2016 revenue , respectively . since items in this area are often single use by their nature , our typical aim is to build customer satisfaction and loyalty for each product , generate repeat annual sales from existing customers and expand our customer base in the future . products in this area are both supplied by third parties and provided by us . major products and services in this area include heartworm diagnostic tests and preventives , and allergy test kits , allergy immunotherapy and testing . of our annual revenue , heartworm produced primarily for private-label accounted for approximately $ 16.8 million in both 2018 and 2017 , and $ 16.7 million in 2016. we consider the cca segment to be our core business and devote most of our management time and other resources to improving the prospects for this segment . maintaining a continuing , reliable and economic supply of products we currently obtain from third parties is critical to our success in this area . virtually all of our sales and marketing expenses occur in the cca segment . the majority of our research and development spending is dedicated to this segment as well . all of our cca products are ultimately sold primarily to or through veterinarians . in many cases , veterinarians will mark up their costs to their customer . the acceptance of our products by veterinarians is critical to our success . cca products are sold directly to end users by us as well as through distribution relationships , such as the sale of kits to conduct blood testing to third party veterinary diagnostic laboratories and independent third party distributors . revenue from direct sales and distribution relationships represented approximately 57 % and 43 % , respectively , of cca 2018 revenue , 58 % and 42 % , respectively , of cca 2017 revenue and 61 % and 39 % , respectively , of cca 2016 revenue . ovp segment the ovp segment includes our approximately 160,000 square foot usda and fda licensed production facility in des moines , iowa . we view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may commercialize in the future . we have increased integration of this facility with our operations elsewhere . for example , virtually all our u.s. inventory , excluding our imaging products , is now stored at this facility and related fulfillment logistics are managed there . cca segment products manufactured at this facility are transferred at cost and are not recorded as revenue for our ovp segment . we view ovp reported revenue as revenue primarily to cover the overhead costs of the facility and to generate incremental cash flow to fund our cca segment . - 33 - historically , a significant portion of our ovp segment 's revenue has been generated from the sale of certain bovine vaccines , which have been sold primarily under the titanium® and masterguard® brands . we have an agreement with eli lilly and company and its affiliates operating through elanco for the production of these vaccines ( the `` elanco agreement `` ) . our ovp segment also produces vaccines and pharmaceuticals for other third parties . critical accounting estimates the discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with gaap . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we evaluate our estimates on an ongoing basis . we base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates . `` part ii , item 8. note 1 summary of significant accounting policies `` to the consolidated financial statements included in this annual report on form 10-k describes the significant accounting policies used in preparation of these consolidated financial statements . we believe the following critical accounting estimates and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change . revenue recognition effective january 1 , 2018 , we adopted fasb accounting standards codification ( `` asc `` ) topic 606 , revenue from contracts with customers ( the `` new revenue standard `` ) , using the modified retrospective method for all contracts not completed as of the date of adoption . story_separator_special_tag - 39 - income tax ( benefit ) expense in 2018 , we had total income tax benefit of $ 2.1 million , including approximately $ 1.9 million related to employee share-based payment awards which are recorded in the income statement . in 2017 and 2016 respectively , we had total income tax expense of $ 8.9 million and $ 4.3 million . in 2017 , our deferred income tax expense was increased by $ 5.9 million ( i.e . the write down of deferred tax asset balances and the valuation allowance ) for tax reform legislation and our current income tax expense was reduced by $ 5.5 million for employee share-based payment awards . see `` part ii , item 8. financial statements and supplementary data , note 4. income taxes `` in the accompanying notes to the consolidated financial statements for additional information regarding our income taxes . net income attributable to heska corporation net income attributable to heska corporation was $ 5.9 million in 2018 , compared to net income attributable to heska corporation of $ 10.0 million in 2017 and net income attributable to heska corporation of $ 10.5 million in 2016 . the difference between this line item and `` net income , after equity in losses of unconsolidated affiliates `` is the net income or loss attributable to our minority interest in u.s. imaging , which we purchased on may 31 , 2017. as a result of the purchase , there was no difference between these line items for 2018 . the difference between these line items was a gain of $ 0.5 million in 2017 , and a loss of $ 1.7 million in 2016 . - 40 - non-gaap financial measures the following tables provide a summary of our results for the year ended december 31 , 2018 , after adjusting for one-time non-recurring expenses associated with the pending settlement arrangement ( see `` part ii , item 8. financial statements and supplementary data , note 13. commitments and contingencies `` ) and other legal and consulting fees described elsewhere herein , and our results for the year ended december 31 , 2017 , after adjusting for the impact of the act . the following tables reconcile our adjusted non-gaap financial measures to our most directly comparable as-reported financial measures calculated in accordance with gaap . these adjusted results are non-gaap financial measures that have been included for the reasons discussed below . replace_table_token_6_th replace_table_token_7_th a non-gaap financial measure includes a numerical measure of a company 's financial performance , financial position or cash flows that excludes amounts , or is subject to adjustments that have the effect of excluding amounts , that are included in the most directly comparable measure calculated and presented in accordance with gaap in the statement of income , balance sheet or statement of cash flows ( or equivalent statements ) of the company . the non-gaap financial measures included in the table above exclude the impact of the following one-time items . we exclude these one-time items and the related tax effects as management monitors litigation judgments , settlements and distinct extraordinary items separately from ongoing operations and evaluates ongoing performance without these amounts . - 41 - during the year ended december 31 , 2018 , we recorded a one-time settlement charge of $ 6.75 million and approximately $ 0.3 million in related legal fees in general and administrative expenses , relating to the pending settlement of the shaun fauley complaint filed on march 12 , 2015. see `` part ii , item 8. financial statements and supplementary data , note 13. commitments and contingencies `` in the accompanying notes to the consolidated financial statements for further discussion of the settlement . other one-time costs were approximately $ 0.4 million for the year ended december 31 , 2018 . during the year ended december 31 , 2017 , our deferred income tax expense was increased by $ 5.9 million due to the revaluation of our deferred tax assets as a result of the act . our management believes that the non-gaap financial measures presented facilitate an understanding of our operating performance and provide a more meaningful comparison of our results between periods . our management uses non-gaap financial measures to , among other things , evaluate our ongoing operations in relation to historical results and for internal planning and forecasting purposes . operating expenses , operating income , income tax ( benefit ) expense , net income attributable to heska and basic and diluted earnings per share , adjusted for one-time items , are non-gaap financial measures and should not be relied upon as substitutes for measures calculated in accordance with gaap . impact of inflation in recent years , inflation has not had a significant impact on our operations . liquidity , capital resources and financial condition we believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives . our ability to fund our operations , acquisitions , capital expenditures and product development efforts may depend on our ability to generate cash from operating activities , which is subject to future operating performance , as well as general economic , financial , competitive , legislative , regulatory and other conditions , some of which may be beyond our control . our primary sources of liquidity are our available cash , cash generated from current operations and availability under our credit facility noted below . for the year ended december 31 , 2018 , we had net income of $ 5.9 million and net cash provided by operations of $ 13.3 million . at december 31 , 2018 , we had $ 13.4 million of cash and cash equivalents , working capital of $ 42.0 million and $ 6.0 million outstanding borrowings under our revolving line of credit , discussed below . on july 27 , 2017 , and as subsequently amended in may and december of 2018 ,

net cash provided by operating activities was $ 13.3 million in 2018 , compared to net cash provided by operating activities of $ 10.4 million in 2017 , an increase of approximately $ 2.9 million . net cash provided by operating activities increased due to significant working capital fluctuations such as a $ 19.9 million increase in cash provided by inventories , due to the timing of inventory purchases in 2017 ; a $ 7.5 million increase in cash provided by accrued liabilities , largely due to a preliminary settlement agreement relating to outstanding litigation in the amount of $ 6.75 million which we expect to pay in the first half of 2019 ( see note 13 -commitments and contingencies in our consolidated financial statements included in item 8 of this form 10-k ) ; and a $ 2.8 million increase in cash provided by current and non-current lease receivables due to a lower level of capital lease placements and timing of collections on existing leases . these factors were partially offset by a $ 3.6 million decrease in net income , as well as a $ 15.2 million increase in cash used by the aggregate of accounts receivable , accounts payable , related party balances , deferred revenue and other current assets , due to the timing of collections and payments in the ordinary course of business . non-cash transactions impacting cash provided by operating activities included a $ 11.1 million increase in our deferred tax benefit , net , offset by a $ 2.5 million increase in stock-based compensation . net cash provided by operating activities was $ 10.4 million in 2017 , compared to net cash provided by operating activities of $ 5.9 million in 2016 , an increase of approximately $ 4.6 million .

aided by rate increases and favorable weather in the northeast and midwest regions of the united states , most notably in june and july , for the year ended december 31 , 2012 , we generated $ 2,876.9 million in total operating revenue , and $ 358.1 million in net income compared to total operating revenue of $ 2,666.2 million , and $ 309.6 million in net income in 2011. our regulated businesses , our largest operating segment , generated $ 2,564.4 million in operating revenue , representing 89.1 % of our consolidated operating revenue compared to $ 2,368.9 million in operating revenues representing 88.8 % of our consolidated operating revenue in 2011. this increase of 8.3 % in operating revenues , when compared to 2011 , was primarily due to rate increases and increased sales volume in all customer classes in 2012. additionally , for the year ended december 31 , 2012 , our market-based operations generated $ 330.3 million in operating revenue , compared to $ 327.8 million in operating revenues in 2011 , an increase of 0.8 % . net income from continuing operations was $ 374.3 million for the year ended december 31 , 2012 compared to net income from continuing operations of $ 304.9 million for the year ended december 31 , 2011. diluted earnings from continuing operations per average common share was $ 2.11 for the year ended december 31 , 2012 as compared to $ 1.73 for year ended december 31 , 2011. for the year ended december 31 , 2012 , we reported net income of $ 358.1 million , or diluted earnings per share of $ 2.01 compared to net income of $ 309.6 million , or diluted eps of $ 1.75 for the comparable period in 2011. net income for 2012 includes income tax charges of $ 6.5 million , or $ 0.04 diluted loss per share , resulting from the divestiture of our arizona , new mexico and ohio subsidiaries . in addition , we generated increased cash flows from operations during 2012 of $ 955.6 million , compared to $ 808.4 million in 2011. the primary factors contributing to the increase in net income from continuing operations for the year ended december 31 , 2012 were increased revenues resulting from rate increases and higher customer usage as well as slightly higher revenues in our market-based operations segment partially offset by higher operation and maintenance expense , depreciation and amortization expense and general taxes . see “consolidated results of operations and variances” and “segment results” below for further detailed discussion of the consolidated results of operations , as well as our business segments . implementation of portfolio optimization initiative in 2012 , we continued to execute our plan for optimizing our portfolio . in january 2012 , we completed the sale of regulated operations in arizona and new mexico . net proceeds , after all post-close adjustments , amounted to $ 458.9 million . in may 2012 , we completed the divestiture of our ohio subsidiary . the net proceeds , after all post-close adjustments , totaled $ 102.2 million . during 2012 , the company closed on ten acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $ 44.6 million . included in this amount is the acquisition of seven regulated water systems in new york for a purchase price of $ 36.7 million plus assumed liabilities . this acquisition added approximately 50,000 water customers to our regulated operations . effective august 17 , 2012 , the new york state public service commission approved a plan to merge these seven regulated water systems with and into our long island subsidiary , which was then renamed new york american water company . capital investments we invested approximately $ 929 million and $ 925 million in company-funded capital improvements in 2012 and 2011 , respectively . these capital investments are needed on an ongoing basis to comply with existing and new regulations , renew aging treatment and network assets , provide capacity for new growth and ensure 43 system reliability , security and quality of service . the need for continuous investment presents a challenge due to the potential for regulatory lag , or the delay in recovering our operating expenses and earning an appropriate rate of return on our invested capital and a return of our invested capital . in conjunction with our capital program , management continued its focus on reducing regulatory lag during 2012. for 2013 we anticipate spending approximately $ 950 million on company-funded capital investments , including expenditures associated with our business transformation project . on august 1 , 2012 , our new business systems associated with phase i of our business transformation project became operational . phase i consisted of the roll-out of the enterprise resource planning systems ( “erp” ) , which encompasses applications that handle human resources , finance , and supply chain/procurement management activities . phase ii consists of the roll-out of a new enterprise asset management system , which will manage an asset 's lifecycle , and a customer information system , which will contain all billing and data pertaining to american water 's customers for our regulated segment . phase ii is expected to be substantially complete by december 31 , 2013. through december 31 , 2012 , we have spent $ 257.8 million including afudc on this business transformation project with $ 118.1 of that amount spent in 2012. rate cases and regulatory matters in 2012 , we received authorizations for additional annualized revenues from general rate cases , totaling $ 123.1 million . during 2012 , rate cases were approved for our california , illinois , indiana , iowa , missouri , new jersey , new york , tennessee and virginia subsidiaries . story_separator_special_tag this charge was offset by a benefit of $ 15.1 million related to the cessation of depreciation for our arizona , new mexico , texas and ohio subsidiaries in accordance with gaap for the year ended december 31 , 2011. net income . net income for 2011 was $ 309.6 million compared to $ 267.8 million for 2010. the variation between the periods is the result of the aforementioned changes . segment results of operations we have two operating segments , which are also our reportable segments : the regulated businesses and the market-based operations . these segments are determined based on how we assess performance and allocate resources . we evaluate the performance of our segments and allocated resources based on several factors , with the primary measure being income from continuing operations before income taxes . certain 2011 and 2010 operations and maintenance expense categories have been reclassified to conform to the 2012 presentation . 49 regulated businesses segment the following table summarizes certain financial information for our regulated businesses for the periods indicated : replace_table_token_11_th operating revenues . our primary business involves the ownership of water and wastewater utilities that provide services to residential , commercial , industrial and other customers . this business is subject to state regulation and our results of operations can be impacted significantly by rates authorized by the state regulatory commissions in the states in which we operate . the table below details additional annualized revenues awarded , including step increases and assuming a constant volume , resulting from rate authorizations granted in 2012 , 2011 and 2010. replace_table_token_12_th ( 1 ) 2010 amount includes additional increases of $ 3.2 million in 2011 and $ 2.6 million in 2012 . ( 2 ) the new rates provided for additional annualized revenue of $ 2.3 million in 2012 and $ 4.3 million in 2011 for jurisdictional customers , and a $ 0.3 million in 2012 and $ 0.5 million in 2011 increase for non-jurisdictional customers , which are not subject to commission filing . ( 3 ) amount includes $ 3.0 million increase effective april 1 , 2012. with the remainder of $ 1.4 million and $ 1.2 million becoming effective april 1 , 2013 and april 1 , 2014 , respectively . the effective dates for the more significant increases granted in 2012 were january 1 , 2012 , april 1 , 2012 , may 1 , 2012 and october 1 , 2012 for our california , missouri , new jersey , and illinois subsidiaries , respectively . the effective date for the 2011 pennsylvania rate increase was november 11 , 2011. the 2011 increase in virginia was effective in march 2011 while the tennessee and west virginia increases were effective in april 2011. the effective dates for the larger rate increases granted in 2010 were october 1 , 2010 , july 1 , 2010 , april 23 , 2010 and may 3 , 2010 , in kentucky , missouri , illinois and indiana , respectively . rate increases granted in 2010 for pennsylvania and new jersey were not effective until january 1 , 2011 . 50 as previously noted , an increasing number of states are permitting rates to be adjusted outside of a general rate case for certain costs , such as mechanisms that permit a return on capital investments to replace aging infrastructure . the following table details additional annualized revenue authorized through infrastructure surcharge mechanisms which were granted in 2012 , 2011 and 2010. as these surcharges are typically rolled into the new base rates and therefore are reset to zero when new base rates are effective , certain of these charges may also be reflected in the total general rate case amounts awarded in the table above if the order date was following the infrastructure surcharge filing date : replace_table_token_13_th comparison of results of operations for the years ended december 31 , 2012 and 2011 operating revenues increased by $ 195.5 million , or 8.3 % , for the year ended december 31 , 2012 compared to the same period in 2011. the increase in revenues was primarily due to rate increases obtained through rate authorizations for a number of our operating companies of which the impact was approximately $ 128.7 million , and higher consumption in our midwest and certain northeastern states in 2012 compared to 2011 , which amounted to an increase of approximately $ 39.1 million . the increased consumption is primarily attributable to the warmer/drier weather in our midwestern and certain of our northeastern states in the second and third quarters of 2012. lastly , revenues were higher by $ 26.7 million as a result revenues from newly acquired systems , with the most significant being our new york acquisition in the second quarter of 2012. the following table sets forth the amounts and percentages of regulated businesses ' revenues and billed water sales volume by customer class : replace_table_token_14_th the following discussion related to water services indicates the increase or decrease in the regulated businesses ' revenues and associated billed water sales volumes in gallons by customer class . 51 water services —water service operating revenues from residential customers for the year ended december 31 , 2012 totaled $ 1,468.6 million , a $ 129.2 million increase , or 9.6 % , over the same period of 2011 , mainly due to rate increases as well as increased sales volume . the volume of water sold to residential customers increased by 5.0 % for the year ended december 31 , 2012 to 189.9 billion gallons , from 180.9 billion gallons for the same period in 2011. we believe this higher consumption is attributable to the warmer/drier weather in our northeastern and midwestern operating states as compared to the prior year . also contributing to the increased sales volume was the additional consumption resulting from our new york acquisition . water service operating revenues from commercial water customers for the year ended december

net cash provided by operating activities was $ 13.3 million in 2018 , compared to net cash provided by operating activities of $ 10.4 million in 2017 , an increase of approximately $ 2.9 million . net cash provided by operating activities increased due to significant working capital fluctuations such as a $ 19.9 million increase in cash provided by inventories , due to the timing of inventory purchases in 2017 ; a $ 7.5 million increase in cash provided by accrued liabilities , largely due to a preliminary settlement agreement relating to outstanding litigation in the amount of $ 6.75 million which we expect to pay in the first half of 2019 ( see note 13 -commitments and contingencies in our consolidated financial statements included in item 8 of this form 10-k ) ; and a $ 2.8 million increase in cash provided by current and non-current lease receivables due to a lower level of capital lease placements and timing of collections on existing leases . these factors were partially offset by a $ 3.6 million decrease in net income , as well as a $ 15.2 million increase in cash used by the aggregate of accounts receivable , accounts payable , related party balances , deferred revenue and other current assets , due to the timing of collections and payments in the ordinary course of business . non-cash transactions impacting cash provided by operating activities included a $ 11.1 million increase in our deferred tax benefit , net , offset by a $ 2.5 million increase in stock-based compensation . net cash provided by operating activities was $ 10.4 million in 2017 , compared to net cash provided by operating activities of $ 5.9 million in 2016 , an increase of approximately $ 4.6 million .

aided by rate increases and favorable weather in the northeast and midwest regions of the united states , most notably in june and july , for the year ended december 31 , 2012 , we generated $ 2,876.9 million in total operating revenue , and $ 358.1 million in net income compared to total operating revenue of $ 2,666.2 million , and $ 309.6 million in net income in 2011. our regulated businesses , our largest operating segment , generated $ 2,564.4 million in operating revenue , representing 89.1 % of our consolidated operating revenue compared to $ 2,368.9 million in operating revenues representing 88.8 % of our consolidated operating revenue in 2011. this increase of 8.3 % in operating revenues , when compared to 2011 , was primarily due to rate increases and increased sales volume in all customer classes in 2012. additionally , for the year ended december 31 , 2012 , our market-based operations generated $ 330.3 million in operating revenue , compared to $ 327.8 million in operating revenues in 2011 , an increase of 0.8 % . net income from continuing operations was $ 374.3 million for the year ended december 31 , 2012 compared to net income from continuing operations of $ 304.9 million for the year ended december 31 , 2011. diluted earnings from continuing operations per average common share was $ 2.11 for the year ended december 31 , 2012 as compared to $ 1.73 for year ended december 31 , 2011. for the year ended december 31 , 2012 , we reported net income of $ 358.1 million , or diluted earnings per share of $ 2.01 compared to net income of $ 309.6 million , or diluted eps of $ 1.75 for the comparable period in 2011. net income for 2012 includes income tax charges of $ 6.5 million , or $ 0.04 diluted loss per share , resulting from the divestiture of our arizona , new mexico and ohio subsidiaries . in addition , we generated increased cash flows from operations during 2012 of $ 955.6 million , compared to $ 808.4 million in 2011. the primary factors contributing to the increase in net income from continuing operations for the year ended december 31 , 2012 were increased revenues resulting from rate increases and higher customer usage as well as slightly higher revenues in our market-based operations segment partially offset by higher operation and maintenance expense , depreciation and amortization expense and general taxes . see “consolidated results of operations and variances” and “segment results” below for further detailed discussion of the consolidated results of operations , as well as our business segments . implementation of portfolio optimization initiative in 2012 , we continued to execute our plan for optimizing our portfolio . in january 2012 , we completed the sale of regulated operations in arizona and new mexico . net proceeds , after all post-close adjustments , amounted to $ 458.9 million . in may 2012 , we completed the divestiture of our ohio subsidiary . the net proceeds , after all post-close adjustments , totaled $ 102.2 million . during 2012 , the company closed on ten acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $ 44.6 million . included in this amount is the acquisition of seven regulated water systems in new york for a purchase price of $ 36.7 million plus assumed liabilities . this acquisition added approximately 50,000 water customers to our regulated operations . effective august 17 , 2012 , the new york state public service commission approved a plan to merge these seven regulated water systems with and into our long island subsidiary , which was then renamed new york american water company . capital investments we invested approximately $ 929 million and $ 925 million in company-funded capital improvements in 2012 and 2011 , respectively . these capital investments are needed on an ongoing basis to comply with existing and new regulations , renew aging treatment and network assets , provide capacity for new growth and ensure 43 system reliability , security and quality of service . the need for continuous investment presents a challenge due to the potential for regulatory lag , or the delay in recovering our operating expenses and earning an appropriate rate of return on our invested capital and a return of our invested capital . in conjunction with our capital program , management continued its focus on reducing regulatory lag during 2012. for 2013 we anticipate spending approximately $ 950 million on company-funded capital investments , including expenditures associated with our business transformation project . on august 1 , 2012 , our new business systems associated with phase i of our business transformation project became operational . phase i consisted of the roll-out of the enterprise resource planning systems ( “erp” ) , which encompasses applications that handle human resources , finance , and supply chain/procurement management activities . phase ii consists of the roll-out of a new enterprise asset management system , which will manage an asset 's lifecycle , and a customer information system , which will contain all billing and data pertaining to american water 's customers for our regulated segment . phase ii is expected to be substantially complete by december 31 , 2013. through december 31 , 2012 , we have spent $ 257.8 million including afudc on this business transformation project with $ 118.1 of that amount spent in 2012. rate cases and regulatory matters in 2012 , we received authorizations for additional annualized revenues from general rate cases , totaling $ 123.1 million . during 2012 , rate cases were approved for our california , illinois , indiana , iowa , missouri , new jersey , new york , tennessee and virginia subsidiaries . story_separator_special_tag this charge was offset by a benefit of $ 15.1 million related to the cessation of depreciation for our arizona , new mexico , texas and ohio subsidiaries in accordance with gaap for the year ended december 31 , 2011. net income . net income for 2011 was $ 309.6 million compared to $ 267.8 million for 2010. the variation between the periods is the result of the aforementioned changes . segment results of operations we have two operating segments , which are also our reportable segments : the regulated businesses and the market-based operations . these segments are determined based on how we assess performance and allocate resources . we evaluate the performance of our segments and allocated resources based on several factors , with the primary measure being income from continuing operations before income taxes . certain 2011 and 2010 operations and maintenance expense categories have been reclassified to conform to the 2012 presentation . 49 regulated businesses segment the following table summarizes certain financial information for our regulated businesses for the periods indicated : replace_table_token_11_th operating revenues . our primary business involves the ownership of water and wastewater utilities that provide services to residential , commercial , industrial and other customers . this business is subject to state regulation and our results of operations can be impacted significantly by rates authorized by the state regulatory commissions in the states in which we operate . the table below details additional annualized revenues awarded , including step increases and assuming a constant volume , resulting from rate authorizations granted in 2012 , 2011 and 2010. replace_table_token_12_th ( 1 ) 2010 amount includes additional increases of $ 3.2 million in 2011 and $ 2.6 million in 2012 . ( 2 ) the new rates provided for additional annualized revenue of $ 2.3 million in 2012 and $ 4.3 million in 2011 for jurisdictional customers , and a $ 0.3 million in 2012 and $ 0.5 million in 2011 increase for non-jurisdictional customers , which are not subject to commission filing . ( 3 ) amount includes $ 3.0 million increase effective april 1 , 2012. with the remainder of $ 1.4 million and $ 1.2 million becoming effective april 1 , 2013 and april 1 , 2014 , respectively . the effective dates for the more significant increases granted in 2012 were january 1 , 2012 , april 1 , 2012 , may 1 , 2012 and october 1 , 2012 for our california , missouri , new jersey , and illinois subsidiaries , respectively . the effective date for the 2011 pennsylvania rate increase was november 11 , 2011. the 2011 increase in virginia was effective in march 2011 while the tennessee and west virginia increases were effective in april 2011. the effective dates for the larger rate increases granted in 2010 were october 1 , 2010 , july 1 , 2010 , april 23 , 2010 and may 3 , 2010 , in kentucky , missouri , illinois and indiana , respectively . rate increases granted in 2010 for pennsylvania and new jersey were not effective until january 1 , 2011 . 50 as previously noted , an increasing number of states are permitting rates to be adjusted outside of a general rate case for certain costs , such as mechanisms that permit a return on capital investments to replace aging infrastructure . the following table details additional annualized revenue authorized through infrastructure surcharge mechanisms which were granted in 2012 , 2011 and 2010. as these surcharges are typically rolled into the new base rates and therefore are reset to zero when new base rates are effective , certain of these charges may also be reflected in the total general rate case amounts awarded in the table above if the order date was following the infrastructure surcharge filing date : replace_table_token_13_th comparison of results of operations for the years ended december 31 , 2012 and 2011 operating revenues increased by $ 195.5 million , or 8.3 % , for the year ended december 31 , 2012 compared to the same period in 2011. the increase in revenues was primarily due to rate increases obtained through rate authorizations for a number of our operating companies of which the impact was approximately $ 128.7 million , and higher consumption in our midwest and certain northeastern states in 2012 compared to 2011 , which amounted to an increase of approximately $ 39.1 million . the increased consumption is primarily attributable to the warmer/drier weather in our midwestern and certain of our northeastern states in the second and third quarters of 2012. lastly , revenues were higher by $ 26.7 million as a result revenues from newly acquired systems , with the most significant being our new york acquisition in the second quarter of 2012. the following table sets forth the amounts and percentages of regulated businesses ' revenues and billed water sales volume by customer class : replace_table_token_14_th the following discussion related to water services indicates the increase or decrease in the regulated businesses ' revenues and associated billed water sales volumes in gallons by customer class . 51 water services —water service operating revenues from residential customers for the year ended december 31 , 2012 totaled $ 1,468.6 million , a $ 129.2 million increase , or 9.6 % , over the same period of 2011 , mainly due to rate increases as well as increased sales volume . the volume of water sold to residential customers increased by 5.0 % for the year ended december 31 , 2012 to 189.9 billion gallons , from 180.9 billion gallons for the same period in 2011. we believe this higher consumption is attributable to the warmer/drier weather in our northeastern and midwestern operating states as compared to the prior year . also contributing to the increased sales volume was the additional consumption resulting from our new york acquisition . water service operating revenues from commercial water customers for the year ended december

cash flows from financing activities our financing activities , primarily focused on funding construction expenditures , include the issuance of long-term and short-term debt , primarily through awcc . we intend to access capital markets on a regular basis , subject to market conditions . in addition , new infrastructure may be funded with customer advances and contributions for construction ( net of refunds ) . this amounted to $ 31.9 million , $ 22.3 million and $ 7.0 million for the years ended december 31 , 2012 , 2011 and 2010 , respectively . on may 4 , 2012 , we and awcc filed a universal shelf registration statement that enabled us to offer and sell from time to time various types of securities , including common stock , preferred stock and debt securities , all subject to market demand and ratings status . during 2012 , $ 300 million of debt securities were issued pursuant to this filing . in regards to debt financings , the following long-term debt was issued in 2012 : replace_table_token_34_th ( a ) the net proceeds from this issuance were used to finance certain redemptions of long-term debt and to fund the repayment of short-term debt .

( 4 ) average daily and year-end europe brent crude spot price as reported by the u.s. energy information administration . ( 5 ) average daily and year-end henry hub natural gas spot price as reported by the u.s. energy information administration . the prices for both wti and brent crude oil showed improvement during 2017 and continued to strengthen through most of 2018 ; however , they decreased significantly during the last quarter of 2018. in 2019 , crude-oil prices improved during the first few months , and became more stable during the second half of the year . the end result was the average price for crude oil in 2019 was approximately 10 % lower than the average price for 2018. in general , activities associated with the exploration of oil and gas in the u.s. onshore market are more sensitive to changes in the crude-oil commodity prices , as opposed to larger international and offshore projects which take multiple years to plan and develop , and once announced and started , will continue through completion , despite changes in the current price of crude oil . the improvement in crude-oil prices in 2017 and 17 most of 2018 led to elevated levels in u.s. onshore activities associated with both the exploration and production of crude oil . additionally , during this time period , public announcements of investments in larger international and offshore projects were elevated and activity levels began to improve in 2018 and continued to improve into 2019. however , the continued vola tility and lower level of crude- oil prices in the last quarter of 2018 and during 2019 did negatively impact the activity levels in the u.s. onshore market which decreased in 2019. information published by the u.s. energy information administration ( “ eia ” ) , shows that the inventory of wells drilled but uncompleted ( a “ duc ” well ) was 6,566 as of december 31 , 2017 , increasing to a peak in february 2019 at approximately 8,500 , and ending 2019 at 7,573. this data indicates that during the period of higher activity in 2018 , operators were drilling wells but not completing them as the duc inventory grew . however , as activity levels began to fall in late 2018 and into 2019 , and operators began to drill fewer new wells , they were also completing some of the wells that had been previously drilled , which is reflected in the lower duc inventory at december 2019. in north america , the land-based rig count increased 45 % during 2017 and another 19 % during 2018 , which had a positive impact for both services and product sales to this market over this time period . the build in levels of activities on development projects and producing fields in the u.s. unconventional reservoirs during 2017 continued to strengthen during most of 2018 , until october 2018 when the commodity price weakened significantly and activity levels decreased . the lower commodity prices in 2019 led to a 10 % decrease in the annual average land-based rig count and a decline in u.s. based activities in 2019. outside of north america , activities associated with the exploration for and production of oil dropped to current lower levels during the industry downturn which began at the end of 2014. although activities have not yet increased , we believe these markets have shown signs of recovery for 2020 and beyond as our clients have announced new capital investment projects throughout 2017 , 2018 and 2019. results of operations operating results for the year ended december 31 , 2019 compared to the years ended december 31 , 2018 and 2017 we evaluate our operating results by analyzing revenue , operating income and operating income margin ( defined as operating income divided by total revenue ) . since we have a relatively fixed cost structure , decreases in revenue generally translate into lower operating income results . results for the years ended december 31 , 2019 , 2018 and 2017 are summarized in the following chart : 18 results of operations as a percentage of applicable revenue for the years ended december 31 , 2019 , 2018 and 2017 are as follows ( in thousands , except for per share information ) : 2019 / 2018 2018 / 2017 revenue : 2019 2018 2017 % change services $ 474,193 71.0 % $ 486,820 69.5 % $ 480,264 74.1 % ( 2.6 ) % 1.4 % product sales 194,017 29.0 % 214,026 30.5 % 167,555 25.9 % ( 9.3 ) % 27.7 % total revenue 668,210 100.0 % 700,846 100.0 % 647,819 100.0 % ( 4.7 ) % 8.2 % operating expenses : cost of services * ( 1 ) 345,641 72.9 % 343,833 70.6 % 333,365 69.4 % 0.5 % 3.1 % cost of product sales * ( 1 ) 149,938 77.3 % 153,131 71.5 % 131,593 78.5 % ( 2.1 ) % 16.4 % total cost of services and product sales 495,579 74.2 % 496,964 70.9 % 464,958 71.8 % ( 0.3 ) % 6.9 % general and administrative expenses ( 1 ) 48,023 7.2 % 62,910 9.0 % 47,737 7.4 % ( 23.7 ) % 31.8 % depreciation and amortization 22,605 3.4 % 23,087 3.3 % 24,524 3.8 % ( 2.1 ) % ( 5.9 ) % other ( income ) expense , net 5,319 0.8 % ( 737 ) ( 0.1 ) % 632 0.1 % nm nm operating income 96,684 14.5 % 118,622 16.9 % 109,968 17.0 % ( 18.5 ) % 7.9 % interest expense 14,690 2.2 % 13,328 1.9 % 10,734 1.7 % 10.2 % 24.2 % income before income tax expense 81,994 12.3 % 105,294 15.0 % 99,234 15.3 % ( 22.1 ) % 6.1 % income tax expense ( benefit ) ( 12,290 ) ( 1.8 ) % 25,447 3.6 % 18,249 2.8 % nm 39.4 % income from continuing operations 94,284 14.1 % story_separator_special_tag our ability to continue these initiatives depends on , among other things , market conditions and our ability to generate free cash flow . our ability to maintain and increase our operating income and cash flows is largely dependent upon continued investing activities . we are a netherlands holding company and substantially all of our operations are conducted through subsidiaries . consequently , our cash flow depends upon the ability of our subsidiaries to pay cash dividends or otherwise distribute or advance funds to us . we believe our future cash flows from operating activities , supplemented by our borrowing capacity under existing facilities and our ability to issue additional equity should be sufficient to meet our contractual obligations , capital expenditures , working capital needs , dividend payments , debt requirements and to finance future acquisitions . outlook as part of our long-term growth strategy , we continue our efforts to expand our market presence by opening or expanding facilities in strategic areas and realizing synergies within our business lines subject to client demand and market conditions . we believe our market presence provides us a unique opportunity to service clients who have global operations whether they are international oil companies , national oil companies , or independent oil companies . our major clients continue to focus on capital management , return on invested capital ( “ roic ” ) , free cash flow , and returning capital back to their shareholders , as opposed to a focus on production growth at any cost . the companies adopting value versus volume metrics tend to be the more technologically sophisticated operators and form the foundation of core lab 's worldwide client base . we expect to benefit from our clients ' shift in focus from strictly production growth to employing higher technological solutions in their efforts to maximize economic production growth and estimated ultimate recovery ( `` eur `` ) . during the fourth quarter of 2019 , as reported by the international energy agency ( “ iea ” ) , the organization of the petroleum exporting countries ( “ opec ” ) determined additional crude-oil production cuts were required in order to support a more balanced market for crude-oil supply market . additional crude-oil supply will likely come from guyana , brazil , norway and the u.s. although crude-oil production in the u.s. has grown over the past several years , the rate of growth has declined over the past two years . 25 these factors associated with the global crude - oil market are proj ected to create a tighter crude- oil market into the second half of 2020 . a stronger crude - oil market will continue to support current pricing levels for crude oil and a more sustained level of capital investment in long-term international projects . these international investments are critical , as new field development is required to replace the decline in production from mature fields . as mentioned above , we believe operators will continue to manage their capital spending within approved budgets and maintain their focus on generating free cash flow . this was apparent during the fourth quarter of 2019 with the notable declines in both the u.s. onshore rig count and completion activity . as a result , core believes the u.s. onshore activity in 2020 will continue to be constrained by these factors . core lab expects international field development spending will be funded largely from operating budgets . international recovery on a more broad-based scope is expected to improve as 2020 unfolds . reservoir description continues to discuss international projects with clients , which are in alignment with final investment decisions ( “ fids ” ) previously announced . the revenue opportunity for reservoir description occurs once the well has been drilled and core and fluid samples are recovered from the well and analyzed . activity levels and revenue opportunities from these fids and the emerging international recovery are expected to have a positive impact on financial performance in 2020. critical accounting estimates the preparation of financial statements in accordance with u.s. gaap requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period . we evaluate our estimates on an ongoing basis and determine the adequacy of our estimates based on our historical experience and various other assumptions that we believe are reasonable under the circumstances . by nature , these judgments are subject to an inherent degree of uncertainty . we consider an accounting estimate to be critical if it is highly subjective and if changes in the estimate under different assumptions would result in a material impact on our financial condition and results of operations . the following transaction types require significant judgment and , therefore , are considered critical accounting policies as of december 31 , 2019. income taxes our income tax expense includes income taxes of the netherlands , the u.s. and other foreign countries as well as local , state and provincial income taxes . we recognize deferred tax assets or liabilities for the differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the asset is recovered or the liability is settled . we estimate the likelihood of the recoverability of our deferred tax assets ( particularly , net operating loss carry-forwards ) . any valuation allowance recorded is based on estimates and assumptions of taxable income into the future and a determination is made of the magnitude of deferred tax assets which are more likely than not to be realized . valuation allowances of our net deferred tax assets aggregated to $ 6.2 million and $ 9.7 million at december 31 , 2019 and 2018 , respectively . if these estimates and related assumptions

cash flows from financing activities our financing activities , primarily focused on funding construction expenditures , include the issuance of long-term and short-term debt , primarily through awcc . we intend to access capital markets on a regular basis , subject to market conditions . in addition , new infrastructure may be funded with customer advances and contributions for construction ( net of refunds ) . this amounted to $ 31.9 million , $ 22.3 million and $ 7.0 million for the years ended december 31 , 2012 , 2011 and 2010 , respectively . on may 4 , 2012 , we and awcc filed a universal shelf registration statement that enabled us to offer and sell from time to time various types of securities , including common stock , preferred stock and debt securities , all subject to market demand and ratings status . during 2012 , $ 300 million of debt securities were issued pursuant to this filing . in regards to debt financings , the following long-term debt was issued in 2012 : replace_table_token_34_th ( a ) the net proceeds from this issuance were used to finance certain redemptions of long-term debt and to fund the repayment of short-term debt .

( 4 ) average daily and year-end europe brent crude spot price as reported by the u.s. energy information administration . ( 5 ) average daily and year-end henry hub natural gas spot price as reported by the u.s. energy information administration . the prices for both wti and brent crude oil showed improvement during 2017 and continued to strengthen through most of 2018 ; however , they decreased significantly during the last quarter of 2018. in 2019 , crude-oil prices improved during the first few months , and became more stable during the second half of the year . the end result was the average price for crude oil in 2019 was approximately 10 % lower than the average price for 2018. in general , activities associated with the exploration of oil and gas in the u.s. onshore market are more sensitive to changes in the crude-oil commodity prices , as opposed to larger international and offshore projects which take multiple years to plan and develop , and once announced and started , will continue through completion , despite changes in the current price of crude oil . the improvement in crude-oil prices in 2017 and 17 most of 2018 led to elevated levels in u.s. onshore activities associated with both the exploration and production of crude oil . additionally , during this time period , public announcements of investments in larger international and offshore projects were elevated and activity levels began to improve in 2018 and continued to improve into 2019. however , the continued vola tility and lower level of crude- oil prices in the last quarter of 2018 and during 2019 did negatively impact the activity levels in the u.s. onshore market which decreased in 2019. information published by the u.s. energy information administration ( “ eia ” ) , shows that the inventory of wells drilled but uncompleted ( a “ duc ” well ) was 6,566 as of december 31 , 2017 , increasing to a peak in february 2019 at approximately 8,500 , and ending 2019 at 7,573. this data indicates that during the period of higher activity in 2018 , operators were drilling wells but not completing them as the duc inventory grew . however , as activity levels began to fall in late 2018 and into 2019 , and operators began to drill fewer new wells , they were also completing some of the wells that had been previously drilled , which is reflected in the lower duc inventory at december 2019. in north america , the land-based rig count increased 45 % during 2017 and another 19 % during 2018 , which had a positive impact for both services and product sales to this market over this time period . the build in levels of activities on development projects and producing fields in the u.s. unconventional reservoirs during 2017 continued to strengthen during most of 2018 , until october 2018 when the commodity price weakened significantly and activity levels decreased . the lower commodity prices in 2019 led to a 10 % decrease in the annual average land-based rig count and a decline in u.s. based activities in 2019. outside of north america , activities associated with the exploration for and production of oil dropped to current lower levels during the industry downturn which began at the end of 2014. although activities have not yet increased , we believe these markets have shown signs of recovery for 2020 and beyond as our clients have announced new capital investment projects throughout 2017 , 2018 and 2019. results of operations operating results for the year ended december 31 , 2019 compared to the years ended december 31 , 2018 and 2017 we evaluate our operating results by analyzing revenue , operating income and operating income margin ( defined as operating income divided by total revenue ) . since we have a relatively fixed cost structure , decreases in revenue generally translate into lower operating income results . results for the years ended december 31 , 2019 , 2018 and 2017 are summarized in the following chart : 18 results of operations as a percentage of applicable revenue for the years ended december 31 , 2019 , 2018 and 2017 are as follows ( in thousands , except for per share information ) : 2019 / 2018 2018 / 2017 revenue : 2019 2018 2017 % change services $ 474,193 71.0 % $ 486,820 69.5 % $ 480,264 74.1 % ( 2.6 ) % 1.4 % product sales 194,017 29.0 % 214,026 30.5 % 167,555 25.9 % ( 9.3 ) % 27.7 % total revenue 668,210 100.0 % 700,846 100.0 % 647,819 100.0 % ( 4.7 ) % 8.2 % operating expenses : cost of services * ( 1 ) 345,641 72.9 % 343,833 70.6 % 333,365 69.4 % 0.5 % 3.1 % cost of product sales * ( 1 ) 149,938 77.3 % 153,131 71.5 % 131,593 78.5 % ( 2.1 ) % 16.4 % total cost of services and product sales 495,579 74.2 % 496,964 70.9 % 464,958 71.8 % ( 0.3 ) % 6.9 % general and administrative expenses ( 1 ) 48,023 7.2 % 62,910 9.0 % 47,737 7.4 % ( 23.7 ) % 31.8 % depreciation and amortization 22,605 3.4 % 23,087 3.3 % 24,524 3.8 % ( 2.1 ) % ( 5.9 ) % other ( income ) expense , net 5,319 0.8 % ( 737 ) ( 0.1 ) % 632 0.1 % nm nm operating income 96,684 14.5 % 118,622 16.9 % 109,968 17.0 % ( 18.5 ) % 7.9 % interest expense 14,690 2.2 % 13,328 1.9 % 10,734 1.7 % 10.2 % 24.2 % income before income tax expense 81,994 12.3 % 105,294 15.0 % 99,234 15.3 % ( 22.1 ) % 6.1 % income tax expense ( benefit ) ( 12,290 ) ( 1.8 ) % 25,447 3.6 % 18,249 2.8 % nm 39.4 % income from continuing operations 94,284 14.1 % story_separator_special_tag our ability to continue these initiatives depends on , among other things , market conditions and our ability to generate free cash flow . our ability to maintain and increase our operating income and cash flows is largely dependent upon continued investing activities . we are a netherlands holding company and substantially all of our operations are conducted through subsidiaries . consequently , our cash flow depends upon the ability of our subsidiaries to pay cash dividends or otherwise distribute or advance funds to us . we believe our future cash flows from operating activities , supplemented by our borrowing capacity under existing facilities and our ability to issue additional equity should be sufficient to meet our contractual obligations , capital expenditures , working capital needs , dividend payments , debt requirements and to finance future acquisitions . outlook as part of our long-term growth strategy , we continue our efforts to expand our market presence by opening or expanding facilities in strategic areas and realizing synergies within our business lines subject to client demand and market conditions . we believe our market presence provides us a unique opportunity to service clients who have global operations whether they are international oil companies , national oil companies , or independent oil companies . our major clients continue to focus on capital management , return on invested capital ( “ roic ” ) , free cash flow , and returning capital back to their shareholders , as opposed to a focus on production growth at any cost . the companies adopting value versus volume metrics tend to be the more technologically sophisticated operators and form the foundation of core lab 's worldwide client base . we expect to benefit from our clients ' shift in focus from strictly production growth to employing higher technological solutions in their efforts to maximize economic production growth and estimated ultimate recovery ( `` eur `` ) . during the fourth quarter of 2019 , as reported by the international energy agency ( “ iea ” ) , the organization of the petroleum exporting countries ( “ opec ” ) determined additional crude-oil production cuts were required in order to support a more balanced market for crude-oil supply market . additional crude-oil supply will likely come from guyana , brazil , norway and the u.s. although crude-oil production in the u.s. has grown over the past several years , the rate of growth has declined over the past two years . 25 these factors associated with the global crude - oil market are proj ected to create a tighter crude- oil market into the second half of 2020 . a stronger crude - oil market will continue to support current pricing levels for crude oil and a more sustained level of capital investment in long-term international projects . these international investments are critical , as new field development is required to replace the decline in production from mature fields . as mentioned above , we believe operators will continue to manage their capital spending within approved budgets and maintain their focus on generating free cash flow . this was apparent during the fourth quarter of 2019 with the notable declines in both the u.s. onshore rig count and completion activity . as a result , core believes the u.s. onshore activity in 2020 will continue to be constrained by these factors . core lab expects international field development spending will be funded largely from operating budgets . international recovery on a more broad-based scope is expected to improve as 2020 unfolds . reservoir description continues to discuss international projects with clients , which are in alignment with final investment decisions ( “ fids ” ) previously announced . the revenue opportunity for reservoir description occurs once the well has been drilled and core and fluid samples are recovered from the well and analyzed . activity levels and revenue opportunities from these fids and the emerging international recovery are expected to have a positive impact on financial performance in 2020. critical accounting estimates the preparation of financial statements in accordance with u.s. gaap requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period . we evaluate our estimates on an ongoing basis and determine the adequacy of our estimates based on our historical experience and various other assumptions that we believe are reasonable under the circumstances . by nature , these judgments are subject to an inherent degree of uncertainty . we consider an accounting estimate to be critical if it is highly subjective and if changes in the estimate under different assumptions would result in a material impact on our financial condition and results of operations . the following transaction types require significant judgment and , therefore , are considered critical accounting policies as of december 31 , 2019. income taxes our income tax expense includes income taxes of the netherlands , the u.s. and other foreign countries as well as local , state and provincial income taxes . we recognize deferred tax assets or liabilities for the differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the asset is recovered or the liability is settled . we estimate the likelihood of the recoverability of our deferred tax assets ( particularly , net operating loss carry-forwards ) . any valuation allowance recorded is based on estimates and assumptions of taxable income into the future and a determination is made of the magnitude of deferred tax assets which are more likely than not to be realized . valuation allowances of our net deferred tax assets aggregated to $ 6.2 million and $ 9.7 million at december 31 , 2019 and 2018 , respectively . if these estimates and related assumptions

cash flows the following table summarizes cash flows for the years ended december 31 , 2019 , 2018 and 2017 ( in thousands ) : replace_table_token_6_th the decreases in cash provided by operating activities in 2019 compared to 2018 was primarily due to decreased operating income as the activity levels for the u.s. onshore oil and gas market declined . the decrease in cash flow from operations during 2018 was primarily due to an increase in working capital , which was impacted by the increase in inventory to support the expansion of new product lines associated with the acquisition of guardian . 23 cash used in investing activities in 2019 decreased $ 65.0 million compared to 2018. capital expenditures were comparable for 2019 and 2018 at approximately $ 22 million each year . however , 2018 included an acquisition increasing the cash used in investing activities by $ 48.9 million , and 2019 included proceeds from the divestiture of two businesses that decreased the cash used in investing activities by $ 17.8 million . cash used in investing activities in 2018 increased $ 50.1 million compared to 2017 primarily as a result of an acquisition for $ 48.9 million in 2018. cash used in financing activities in 2019 increased $ 43.4 million compared to 2018 , and decreased $ 61.6 million in 2018 compared to 2017. during 2019 , we used $ 3.3 million to repurchase our common shares , $ 97.6 million to pay dividends , and increased our debt balance by $ 15 million . during 2018 , we used $ 7.5 million to repurchase our common shares , $ 97.3 million to pay dividends , and increased our debt balance by $ 64 million , primarily to fund the acquisition of a business in 2018 for $ 48.9 million . during 2017 , we used $ 16.9 million to repurchase our common shares , $ 97.1 million to pay dividends , and increased our debt balance by $ 10 million . during 2019 , we repurchased 71,700 shares of our common stock for an aggregate amount of $ 3.3 million , or an average price of $ 46.14 per share .

we believe our expanding application of an omni-channel sales strategy across the jewelry trade and to the end consumer with gemstones and branded finished jewelry featuring charles & colvard moissanite positions our goods at the many touchpoints where consumers are when they are making their buying decisions – thereby creating greater exposure for our brand and increasing consumer demand . highlights of the fiscal year ended june 30 , 2019 during the fiscal year ended june 30 , 2019 , we delivered on several key initiatives , which we believe further solidified the charles & colvard brand . we also believe that we are well poised for future growth as we move forward into the fiscal year ending june 30 , 2020. these accomplishments in fiscal year ended june 30 , 2019 , include the following : completed an underwritten public offering of our common stock – in june 2019 , we completed an underwritten public offering of 6,250,000 shares of our common stock at a price of $ 1.60 per share , which , together with the partial exercise of the underwriters ' over-allotment option for an additional 630,500 shares in july , resulted in aggregate net proceeds of approximately $ 9.99 million , net of the underwriting discount and fees and expenses , which we intend to use for marketing and for general corporate and working capital purposes . accordingly , with these funds we plan to expand our brand 's reach primarily through digital marketing efforts . we believe that investments in top-of-funnel marketing activities , such as social media advertising , influencer marketing programs , and international campaigns , will increase the overall awareness of charles & colvard . we also intend to expand our opted-in target market and drive top line growth . we believe that with these funds being secured in the june and july timeframe , this opportunity provides us the ability to positively impact the 2019 calendar year-end holiday season and ultimately accelerate our growth potential . achieved four consecutive quarters of net income – with four consecutive quarters of profitability during the fiscal year ended june 2019 , we believe our financial performance for this fiscal year was strong . we believe that we have right-sized our operations , balanced our resources , and understand the puts and takes of running a healthy business . we believe that this performance positions us with a strong foundation on which to apply and achieve the maximum benefit from the net proceeds of our recent public offering . established our position as a direct-to-consumer brand – our legacy is that of a moissanite gemstone manufacturer . this traditional business was our focus until october 2016 , when we re-launched the business model with the intent to establish a direct-to-consumer , or dtc , presence . we finished our fiscal year-end 2019 with more than half of our business derived from our online channels segment , which serves our dtc customer . more than half of our online channels segment 's business is generated from our own transactional website , charlesandcolvard.com , where we can offer an exceptional and direct customer experience while controlling our brand and commanding high product margins . delivering on our direct-to-consumer vision and our online channels segment eclipsing our traditional segment in less than three years is one of our most significant recent accomplishments . 32 forged new inroads into international markets – one of our key growth opportunities is in international markets . in fiscal 2019 , we leaned into this opportunity with the launch of several marketplaces including but not limited to amazon sites in australia , germany , italy , france , spain , and japan . we believe that the use of marketplaces as a low-cost market research opportunity provides less expensive exposure into new markets . while leveraging the significant subscribers of these established online retail outlets , we have the opportunity to test products and price points to identify whether we have a customer in a given region and which products that customer has a propensity to buy . this allows us to then curate the right selection of products for a region and only then will we begin to invest significant digital marketing resources in order to grow a regional presence . concurrently , we continued to support cbt efforts to drive international customers to our u.s.-based website with enhanced international shopping features . and lastly , we leveraged regional distributors to act as our ‘ boots on the ground ' for certain regions , such as china , that require a significant local presence and investment of resources . with international sales increasing to $ 4.26 million , or 106 % , in the fiscal year ended june 30 , 2019 from $ 2.07 million in the twelve months ended june 30 , 2018 ( unaudited ) , we feel confident in our agile international growth model and plan to continue these efforts into fiscal 2020. expanded our product selection to meet market demand – in may 2018 we introduced moissanite by charles & colvard ® , which is a value line of gemstones that offers cost-conscious consumers a competitively-priced option for moissanite jewels . throughout fiscal 2019 , we expanded the footprint of this new product line , closing the year with 6 % of all sales attributable to this line of gemstones . in september of 2018 we announced our signature collection , a patent-pending line of exclusive jewelry featuring our unique floret logo . by the end of fiscal 2019 , our signature collection represented 7 % of our charlesandcolvard.com sales . we believe this is an indication of the significant recognition and adoption of our brand by consumers . story_separator_special_tag we also have a variable consideration element related to most of our contracts in the form of product return rights . at the time revenue is recognized , an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period . for our traditional segment and online channels segment customers ( excluding those of charlesandcolvard.com ) , the returns policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment . our charlesandcolvard.com customers may return purchases for any reason within 60 days in accordance with our returns policy as disclosed on the charlesandcolvard.com website . periodically , we ship loose jewel goods and finished goods to traditional segment customers on consignment terms . under these consignment terms , the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year . our online channels segment and traditional segment customers are generally required to make payments on consignment shipments within 30 days upon the customer informing us that such inventory will be kept by the customer . accordingly , we do not recognize revenue on these consignment transactions until the earlier of ( i ) the customer informing us that the inventory will be kept by the customer ; ( ii ) the expiration of the right of returns period ; or ( iii ) the customer informing us that the inventory has been sold . see note 2 to our consolidated financial statements in item 8 , “ financial statements and supplementary data ” , of this annual report on form 10-k under the change in accounting policy and revenue recognition captions for additional information regarding the adoption of the new revenue recognition accounting standard as of january 1 , 2018 , and the underlying required disclosures arising from contracts with customers as well as a more detailed description of our revenue recognition accounting policy . recent accounting pronouncements - see note 2 to our consolidated financial statements in item 8 , “ financial statements and supplementary data ” , of this annual report on form 10-k under the recently adopted/issued accounting pronouncements caption for the description of recent accounting pronouncements , including the expected date of adoption and estimated effects , on our consolidated financial statements . 36 certain operating metrics the following operating metrics are based on financial results and customer-related data for charlesandcolvard.com , llc , a wholly-owned subsidiary of charles & colvard , ltd. , for the fiscal year ended june 30 , 2019 : average order value , or aov , is estimated to be approximately $ 1,000 , based on charlesandcolvard.com revenue , net of returns , divided by the total number of customer orders . average ad spend per new customer is estimated to be approximately $ 220 , based on the total advertising spend focused on charlesandcolvard.com traffic divided by the number of first-time customer orders . repeat customers represent approximately 28 % of charlesandcolvard.com 's total customer orders , based on customer email addresses . our calculation for aov is sensitive to volume and product mix . therefore , we believe that our aov may vary widely going forward as we respond to ever changing consumer demand and provide the products – that may have widely variable price points – our audiences are looking for . likewise , as we continue to invest in our advertising and marketing communication channels and broaden the underlying content types , we expect our average ad spend per customer to increase substantially going forward . finally , as our loyalty program is revived , we expect the percentage of people enrolled in our program to continue increasing substantially over time . the following operating metrics are based on financial results and customer-related data for charlesandcolvard.com , llc , for the fiscal year ended june 30 , 2019 compared to prior twelve-month period ended june 30 , 2108 ( unaudited ) : 51 % year-over-year growth in charlesandcolvard.com revenue . 5.5 % year-over-year growth in social media followers ; 21 % year-over-year growth in opt-in email subscribers . for the fiscal year ended june 30 , 2019 , gross margin ( defined as net sales less product line cost of goods sold ) for our online channels segment was 58 % of online channels net sales compared to 52 % gross margin for the twelve-month period ended june 30 , 2018 ( unaudited ) . summary financial results for the fiscal year ended june 30 , 2019 the following is a summary of key financial results achieved for the fiscal year ended june 30 , 2019 compared with the twelve months ended june 30 , 2018 ( unaudited ) : our total consolidated net sales increased by $ 4.34 million , or 16 % , to $ 32.24 million in the fiscal year ended june 30 , 2019 from $ 27.91 million in the twelve-month period ended june 30 , 2018 ( unaudited ) . the increase in consolidated net sales for the fiscal year ended june 30 , 2019 was due primarily to strong seasonal sales for both valentine 's day and the calendar year-end 2018 holidays coupled with increased demand for our forever one tm gemstones over the comparable period in the twelve months ended june 30 , 2018 ( unaudited ) , reflecting higher finished jewelry net sales . online channels segment net sales during the fiscal year ended june 30 , 2019 of $ 16.34 million were 25 % higher than online channels segment net sales during the twelve months ended june 30 , 2018 ( unaudited ) . expanded jewelry selections resulted in higher finished jewelry sales and ongoing increased demand for our forever one tm and moissanite by charles & colvard ® gemstones during the fiscal year ended june 30 ,

cash flows the following table summarizes cash flows for the years ended december 31 , 2019 , 2018 and 2017 ( in thousands ) : replace_table_token_6_th the decreases in cash provided by operating activities in 2019 compared to 2018 was primarily due to decreased operating income as the activity levels for the u.s. onshore oil and gas market declined . the decrease in cash flow from operations during 2018 was primarily due to an increase in working capital , which was impacted by the increase in inventory to support the expansion of new product lines associated with the acquisition of guardian . 23 cash used in investing activities in 2019 decreased $ 65.0 million compared to 2018. capital expenditures were comparable for 2019 and 2018 at approximately $ 22 million each year . however , 2018 included an acquisition increasing the cash used in investing activities by $ 48.9 million , and 2019 included proceeds from the divestiture of two businesses that decreased the cash used in investing activities by $ 17.8 million . cash used in investing activities in 2018 increased $ 50.1 million compared to 2017 primarily as a result of an acquisition for $ 48.9 million in 2018. cash used in financing activities in 2019 increased $ 43.4 million compared to 2018 , and decreased $ 61.6 million in 2018 compared to 2017. during 2019 , we used $ 3.3 million to repurchase our common shares , $ 97.6 million to pay dividends , and increased our debt balance by $ 15 million . during 2018 , we used $ 7.5 million to repurchase our common shares , $ 97.3 million to pay dividends , and increased our debt balance by $ 64 million , primarily to fund the acquisition of a business in 2018 for $ 48.9 million . during 2017 , we used $ 16.9 million to repurchase our common shares , $ 97.1 million to pay dividends , and increased our debt balance by $ 10 million . during 2019 , we repurchased 71,700 shares of our common stock for an aggregate amount of $ 3.3 million , or an average price of $ 46.14 per share .

we believe our expanding application of an omni-channel sales strategy across the jewelry trade and to the end consumer with gemstones and branded finished jewelry featuring charles & colvard moissanite positions our goods at the many touchpoints where consumers are when they are making their buying decisions – thereby creating greater exposure for our brand and increasing consumer demand . highlights of the fiscal year ended june 30 , 2019 during the fiscal year ended june 30 , 2019 , we delivered on several key initiatives , which we believe further solidified the charles & colvard brand . we also believe that we are well poised for future growth as we move forward into the fiscal year ending june 30 , 2020. these accomplishments in fiscal year ended june 30 , 2019 , include the following : completed an underwritten public offering of our common stock – in june 2019 , we completed an underwritten public offering of 6,250,000 shares of our common stock at a price of $ 1.60 per share , which , together with the partial exercise of the underwriters ' over-allotment option for an additional 630,500 shares in july , resulted in aggregate net proceeds of approximately $ 9.99 million , net of the underwriting discount and fees and expenses , which we intend to use for marketing and for general corporate and working capital purposes . accordingly , with these funds we plan to expand our brand 's reach primarily through digital marketing efforts . we believe that investments in top-of-funnel marketing activities , such as social media advertising , influencer marketing programs , and international campaigns , will increase the overall awareness of charles & colvard . we also intend to expand our opted-in target market and drive top line growth . we believe that with these funds being secured in the june and july timeframe , this opportunity provides us the ability to positively impact the 2019 calendar year-end holiday season and ultimately accelerate our growth potential . achieved four consecutive quarters of net income – with four consecutive quarters of profitability during the fiscal year ended june 2019 , we believe our financial performance for this fiscal year was strong . we believe that we have right-sized our operations , balanced our resources , and understand the puts and takes of running a healthy business . we believe that this performance positions us with a strong foundation on which to apply and achieve the maximum benefit from the net proceeds of our recent public offering . established our position as a direct-to-consumer brand – our legacy is that of a moissanite gemstone manufacturer . this traditional business was our focus until october 2016 , when we re-launched the business model with the intent to establish a direct-to-consumer , or dtc , presence . we finished our fiscal year-end 2019 with more than half of our business derived from our online channels segment , which serves our dtc customer . more than half of our online channels segment 's business is generated from our own transactional website , charlesandcolvard.com , where we can offer an exceptional and direct customer experience while controlling our brand and commanding high product margins . delivering on our direct-to-consumer vision and our online channels segment eclipsing our traditional segment in less than three years is one of our most significant recent accomplishments . 32 forged new inroads into international markets – one of our key growth opportunities is in international markets . in fiscal 2019 , we leaned into this opportunity with the launch of several marketplaces including but not limited to amazon sites in australia , germany , italy , france , spain , and japan . we believe that the use of marketplaces as a low-cost market research opportunity provides less expensive exposure into new markets . while leveraging the significant subscribers of these established online retail outlets , we have the opportunity to test products and price points to identify whether we have a customer in a given region and which products that customer has a propensity to buy . this allows us to then curate the right selection of products for a region and only then will we begin to invest significant digital marketing resources in order to grow a regional presence . concurrently , we continued to support cbt efforts to drive international customers to our u.s.-based website with enhanced international shopping features . and lastly , we leveraged regional distributors to act as our ‘ boots on the ground ' for certain regions , such as china , that require a significant local presence and investment of resources . with international sales increasing to $ 4.26 million , or 106 % , in the fiscal year ended june 30 , 2019 from $ 2.07 million in the twelve months ended june 30 , 2018 ( unaudited ) , we feel confident in our agile international growth model and plan to continue these efforts into fiscal 2020. expanded our product selection to meet market demand – in may 2018 we introduced moissanite by charles & colvard ® , which is a value line of gemstones that offers cost-conscious consumers a competitively-priced option for moissanite jewels . throughout fiscal 2019 , we expanded the footprint of this new product line , closing the year with 6 % of all sales attributable to this line of gemstones . in september of 2018 we announced our signature collection , a patent-pending line of exclusive jewelry featuring our unique floret logo . by the end of fiscal 2019 , our signature collection represented 7 % of our charlesandcolvard.com sales . we believe this is an indication of the significant recognition and adoption of our brand by consumers . story_separator_special_tag we also have a variable consideration element related to most of our contracts in the form of product return rights . at the time revenue is recognized , an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period . for our traditional segment and online channels segment customers ( excluding those of charlesandcolvard.com ) , the returns policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment . our charlesandcolvard.com customers may return purchases for any reason within 60 days in accordance with our returns policy as disclosed on the charlesandcolvard.com website . periodically , we ship loose jewel goods and finished goods to traditional segment customers on consignment terms . under these consignment terms , the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year . our online channels segment and traditional segment customers are generally required to make payments on consignment shipments within 30 days upon the customer informing us that such inventory will be kept by the customer . accordingly , we do not recognize revenue on these consignment transactions until the earlier of ( i ) the customer informing us that the inventory will be kept by the customer ; ( ii ) the expiration of the right of returns period ; or ( iii ) the customer informing us that the inventory has been sold . see note 2 to our consolidated financial statements in item 8 , “ financial statements and supplementary data ” , of this annual report on form 10-k under the change in accounting policy and revenue recognition captions for additional information regarding the adoption of the new revenue recognition accounting standard as of january 1 , 2018 , and the underlying required disclosures arising from contracts with customers as well as a more detailed description of our revenue recognition accounting policy . recent accounting pronouncements - see note 2 to our consolidated financial statements in item 8 , “ financial statements and supplementary data ” , of this annual report on form 10-k under the recently adopted/issued accounting pronouncements caption for the description of recent accounting pronouncements , including the expected date of adoption and estimated effects , on our consolidated financial statements . 36 certain operating metrics the following operating metrics are based on financial results and customer-related data for charlesandcolvard.com , llc , a wholly-owned subsidiary of charles & colvard , ltd. , for the fiscal year ended june 30 , 2019 : average order value , or aov , is estimated to be approximately $ 1,000 , based on charlesandcolvard.com revenue , net of returns , divided by the total number of customer orders . average ad spend per new customer is estimated to be approximately $ 220 , based on the total advertising spend focused on charlesandcolvard.com traffic divided by the number of first-time customer orders . repeat customers represent approximately 28 % of charlesandcolvard.com 's total customer orders , based on customer email addresses . our calculation for aov is sensitive to volume and product mix . therefore , we believe that our aov may vary widely going forward as we respond to ever changing consumer demand and provide the products – that may have widely variable price points – our audiences are looking for . likewise , as we continue to invest in our advertising and marketing communication channels and broaden the underlying content types , we expect our average ad spend per customer to increase substantially going forward . finally , as our loyalty program is revived , we expect the percentage of people enrolled in our program to continue increasing substantially over time . the following operating metrics are based on financial results and customer-related data for charlesandcolvard.com , llc , for the fiscal year ended june 30 , 2019 compared to prior twelve-month period ended june 30 , 2108 ( unaudited ) : 51 % year-over-year growth in charlesandcolvard.com revenue . 5.5 % year-over-year growth in social media followers ; 21 % year-over-year growth in opt-in email subscribers . for the fiscal year ended june 30 , 2019 , gross margin ( defined as net sales less product line cost of goods sold ) for our online channels segment was 58 % of online channels net sales compared to 52 % gross margin for the twelve-month period ended june 30 , 2018 ( unaudited ) . summary financial results for the fiscal year ended june 30 , 2019 the following is a summary of key financial results achieved for the fiscal year ended june 30 , 2019 compared with the twelve months ended june 30 , 2018 ( unaudited ) : our total consolidated net sales increased by $ 4.34 million , or 16 % , to $ 32.24 million in the fiscal year ended june 30 , 2019 from $ 27.91 million in the twelve-month period ended june 30 , 2018 ( unaudited ) . the increase in consolidated net sales for the fiscal year ended june 30 , 2019 was due primarily to strong seasonal sales for both valentine 's day and the calendar year-end 2018 holidays coupled with increased demand for our forever one tm gemstones over the comparable period in the twelve months ended june 30 , 2018 ( unaudited ) , reflecting higher finished jewelry net sales . online channels segment net sales during the fiscal year ended june 30 , 2019 of $ 16.34 million were 25 % higher than online channels segment net sales during the twelve months ended june 30 , 2018 ( unaudited ) . expanded jewelry selections resulted in higher finished jewelry sales and ongoing increased demand for our forever one tm and moissanite by charles & colvard ® gemstones during the fiscal year ended june 30 ,

liquidity and capital resources we require cash to fund our operating expenses and working capital requirements , including outlays for capital expenditures . as of june 30 , 2019 , our principal sources of liquidity were cash , cash equivalents and restricted cash totaling $ 13.00 million , trade accounts receivable of $ 1.96 million , and net current inventory of $ 11.91 million , as compared to cash and cash equivalents totaling $ 3.39 million , trade accounts receivable of $ 1.77 million , and net current inventory of $ 10.98 million as of june 30 , 2018 ; and cash and cash equivalents totaling $ 4.59 million , trade accounts receivable of $ 3.38 million , and net current inventory of $ 11.21 million as of december 31 , 2017. as described more fully below , the cash , cash equivalents and restricted cash as of june 30 , 2019 , includes the net proceeds of approximately $ 9.06 million from the recent offering of our common stock and we also have access to our $ 5.00 million white oak credit facility . we have an effective shelf registration statement on form s-3 on file with the sec which allows us to periodically offer and sell , individually or in any combination , shares of common stock , shares of preferred stock , warrants to purchase shares of common stock or preferred stock , and units consisting of any combination of the foregoing types of securities , up to a total of $ 25.00 million , of which approximately $ 13.99 million remains available after giving effect to our june 2019 public offering , including the impact of the partial exercise of the underwriters ' over-allotment option , described below . our ability to issue equity securities under its effective shelf registration statement is subject to market conditions . on june 11 , 2019 , we completed an underwritten public offering of 6,250,000 newly issued shares of common stock , at a price to the public of $ 1.60 per share , pursuant to our effective shelf registration statement on form s-3 .

we believe we are competitively positioned in the market with the strongest product portfolio that we have offered in several years . 25 we increased sales traction with the var channel during fiscal 2011 as evidenced by an increase in our branded revenue for the year . this was the result of both increased sales by certain existing partners and expanding our partner base . our sales and marketing teams implemented a number of initiatives and efforts to provide our channel partners with support ranging from lead generation to customer references as well as product education and other training programs . we have noted those partners that are more closely technically aligned with regard to our product portfolio are the partners with stronger results . in addition , we continued to work with our channel partners to take advantage of opportunities to reach end customers that have historically chosen competitor products , but due to consolidation in the market and resulting actions by competitors , purchased quantum products . we continued to improve our capital structure in fiscal 2011 by significantly reducing our senior term debt , making the final payment on the convertible subordinated debt issued in 2003 and refinancing the 12 % subordinated term debt with proceeds from the issuance of 3.5 % convertible subordinated debt . at march 31 , 2011 , we had $ 104.3 million of senior term debt and $ 135 million of convertible subordinated debt . we plan to continue making principal prepayments on the senior term debt during fiscal 2012. we view fiscal 2011 as a year that we shifted our focus from repositioning and restructuring quantum to a focus on growth . we had expected revenue declines in oem and royalty revenue this year ; however , we delivered revenue growth in those areas where we were focused , which were total branded revenue and both branded disk systems and branded software solutions revenue . we made significant progress adding new customers that sell our disk systems and software solutions as well as tape automation systems and increased our alignment with existing and new channel partners . we focused our development efforts on launching quantum branded products that provide end user customers with unique solutions and value to meet their backup , recovery and archive needs . evaluating the growth in the markets for our products and their associated impact to our fiscal 2012 plans , we participate in a tape market that is mature , a disk backup market that is growing and a file system and archive market that is also growing with significant potential for innovation and new solutions . as a result , in fiscal 2012 we expect total revenue to increase due to growth in branded disk systems and software solutions revenue , and we expect branded tape automation systems revenue to remain similar in fiscal 2012 compared to fiscal 2011 due to our continued efforts to increase market share by acquiring new customers in this declining market . we anticipate declines in oem , royalty and branded devices and media revenue consistent with overall market expectations for the tape market . although our strategy , opportunity and goals for fiscal 2012 are not significantly different than fiscal 2011 , we believe we are better positioned to execute on our growth plan . we have made changes in our sales and marketing organization to support growth in fiscal 2012 , including restructuring our sales resources based on end user requirements , increasing our efforts to achieve tighter technical alignment on our complete product portfolio with our channel partners as well as actively pursuing opportunities to expand the market reach for our products . another key area of focus for fiscal 2012 is continuing to expand and improve our products and solutions , with emphasis on branded disk systems and software solutions as well as introducing our initial stornext appliance and expanding professional services and custom engineering . we believe our current tape automation systems , disk systems and software solutions provide excellent value propositions for customers and we plan to continue to expand the breadth and depth of our product and service offerings in fiscal 2012. we are focused on advancing these objectives to take advantage of our improved position in the markets in which we participate to grow revenue in fiscal 2012 and create shareholder value . results in fiscal 2011 , we saw improved revenue momentum with our partners , especially for midrange disk systems , and our continued efforts to increase revenue from disk systems and software solutions resulted in a 33 % increase in disk systems and software solutions revenue in fiscal 2011 compared to a 5 % decrease in fiscal 2010 from fiscal 2009. in fiscal 2011 , we invested significantly in our product portfolio and continued to develop new technologies that will be the framework for future new product introductions . we had our second consecutive fiscal year of net income and continued to improve gross margins . in addition , we generated $ 52.3 million in cash from operations . we had total revenue of $ 672.3 million in fiscal 2011 , a 1 % decrease from fiscal 2010 primarily due to expected reductions in oem revenue , including devices and media and tape automation systems . our product revenue from oem customers decreased 16 % while revenue from branded products increased 7 % from fiscal 2010 primarily due to increased disk systems and software solutions revenue . service revenue decreased primarily due to lower oem repair revenue . our focus on growing the branded business during the fiscal year is reflected in the greater proportion of non-royalty revenue from our branded business , at 79 % in fiscal 2011 compared to 74 % in fiscal 2010 and 67 % in fiscal 2009. royalty revenue decreased 7 % primarily due to declining royalties from older dlt media , partially offset by growth in lto royalties . story_separator_special_tag in addition , branded service revenue comprised a larger proportion of service revenue in fiscal 2011 than in fiscal 2010 primarily due to declines in repairs for oem customers . product repairs and service for oem customers typically have a lower service margin than similar services for branded products . we have reduced expense in our service delivery model by repairing certain product lines in our facilities at a lower cost in fiscal 2011 than we incurred with external service providers in prior years . fiscal 2010 compared to fiscal 2009 service gross margin dollars increased $ 16.1 million , or approximately 41 % , despite a 5 % reduction in service revenue in fiscal 2010 compared to the prior year . additionally , our service gross margin percentage increased to 35.6 % in fiscal 2010 from 24.0 % in fiscal 2009. these increases were primarily due to cost reductions in our service delivery model and reduced lower-margin oem repair activities . efficiencies in our service delivery model that contributed to the increased service gross margin percentage included streamlining processes , consolidating service inventory locations , reducing headcount and decreasing third party external service providers and freight vendors as well as related expenses . in addition , we had decreased lower of cost or market inventory charges related to imminent end of service life dates on certain product families and planned product roadmap transitions compared to fiscal 2009. looking forward in fiscal 2012 , we expect the projected growth in overall revenue to increase the gross margin rate due to the increased percentage of revenue from branded sales which typically have a higher gross margin . tempering this anticipated increase is the absence of the majority of the oem deduplication software revenue that was included in our fiscal 2011 results as well as expected declines in royalty revenue in fiscal 2012. oem deduplication software revenue and royalty revenue both provide some of our highest gross margins . in addition , we continue to closely manage our manufacturing , service and repair costs . research and development expenses replace_table_token_2_th fiscal 2011 compared to fiscal 2010 the increase in research and development expenses for fiscal 2011 was primarily due to a $ 3.7 million increase in salaries and benefits from investment in our disk systems and software engineering teams to support new product development efforts . partially offsetting this increase was a $ 0.8 million decrease in project materials due to the types of products under development and related testing material requirements compared to the prior year . 31 fiscal 2010 compared to fiscal 2009 research and development expenses decreased slightly during fiscal 2010 compared to fiscal 2009 largely due to cost-cutting initiatives and efforts to streamline processes that reduced expenses . these cost reductions were largely offset by increased research and development activities in strategic areas of our business , including the release of several new products in fiscal 2010. depreciation expense decreased $ 1.0 million due to a number of assets supporting our research and development efforts becoming fully depreciated during fiscal 2010. salaries and benefits decreased $ 0.4 million primarily due to lower headcount compared to fiscal 2009. a $ 0.3 million decrease in project materials was primarily due to reduced tape automation system development material needs compared to fiscal 2009. these decreases were partially offset by a $ 1.2 million increase in external service provider expense in support of a number of new products under development in fiscal 2010. looking forward in fiscal 2012 , we anticipate increased research and development expenses from additional investments in development efforts to expand our disk systems and software solutions offerings , including the launch of our initial stornext appliance . sales and marketing expenses replace_table_token_3_th fiscal 2011 compared to fiscal 2010 sales and marketing expenses increased in fiscal 2011 primarily due to a $ 5.4 million increase in salaries and benefits from growing our branded sales force and marketing team . in addition , advertising and marketing expenditures increased by $ 1.8 million from supporting new product introductions and efforts to expand our position with existing and new channel partners to drive future growth . fiscal 2010 compared to fiscal 2009 sales and marketing expenses decreased during fiscal 2010 compared to fiscal 2009 due to continued cost-saving initiatives and efforts to continue to align our sales and marketing resources with market conditions and opportunities . salaries and benefits decreased $ 13.6 million due to reduced headcount in fiscal 2010. marketing-related expenses , such as marketing materials and trade shows , decreased $ 4.7 million , travel expenses decreased $ 3.1 million and external service provider expense decreased $ 1.1 million in fiscal 2010 compared to the prior year . in addition , amortization expense decreased $ 1.5 million during fiscal 2010 compared to fiscal 2009 due to certain intangible assets becoming fully amortized during fiscal 2009. looking forward in fiscal 2012 , we anticipate similar sales and marketing expenses as in fiscal 2011 ; however , we have implemented changes to our sales and marketing organization to apply sales resources based on end user requirements and to deploy our marketing resources with increased emphasis on expanding technical alignment across our product portfolio with our existing and new channel partners , including increasing the breadth and depth of technical resources and training for our partners . 32 general and administrative expenses replace_table_token_4_th fiscal 2011 compared to fiscal 2010 the decrease in general and administrative expenses was primarily due to a $ 1.0 million decrease in net vat expense primarily due to provisions for vat audits during fiscal 2010 that were not repeated in fiscal 2011. in addition , we had a $ 0.8 million decrease in legal expenses compared to fiscal 2010. fiscal 2010 compared to fiscal 2009 the $ 15.3 million decrease in general and administrative expenses during fiscal 2010 compared to fiscal 2009 was primarily due to decreases of $ 6.1 million in legal expenses , $ 3.4 million in

liquidity and capital resources we require cash to fund our operating expenses and working capital requirements , including outlays for capital expenditures . as of june 30 , 2019 , our principal sources of liquidity were cash , cash equivalents and restricted cash totaling $ 13.00 million , trade accounts receivable of $ 1.96 million , and net current inventory of $ 11.91 million , as compared to cash and cash equivalents totaling $ 3.39 million , trade accounts receivable of $ 1.77 million , and net current inventory of $ 10.98 million as of june 30 , 2018 ; and cash and cash equivalents totaling $ 4.59 million , trade accounts receivable of $ 3.38 million , and net current inventory of $ 11.21 million as of december 31 , 2017. as described more fully below , the cash , cash equivalents and restricted cash as of june 30 , 2019 , includes the net proceeds of approximately $ 9.06 million from the recent offering of our common stock and we also have access to our $ 5.00 million white oak credit facility . we have an effective shelf registration statement on form s-3 on file with the sec which allows us to periodically offer and sell , individually or in any combination , shares of common stock , shares of preferred stock , warrants to purchase shares of common stock or preferred stock , and units consisting of any combination of the foregoing types of securities , up to a total of $ 25.00 million , of which approximately $ 13.99 million remains available after giving effect to our june 2019 public offering , including the impact of the partial exercise of the underwriters ' over-allotment option , described below . our ability to issue equity securities under its effective shelf registration statement is subject to market conditions . on june 11 , 2019 , we completed an underwritten public offering of 6,250,000 newly issued shares of common stock , at a price to the public of $ 1.60 per share , pursuant to our effective shelf registration statement on form s-3 .

we believe we are competitively positioned in the market with the strongest product portfolio that we have offered in several years . 25 we increased sales traction with the var channel during fiscal 2011 as evidenced by an increase in our branded revenue for the year . this was the result of both increased sales by certain existing partners and expanding our partner base . our sales and marketing teams implemented a number of initiatives and efforts to provide our channel partners with support ranging from lead generation to customer references as well as product education and other training programs . we have noted those partners that are more closely technically aligned with regard to our product portfolio are the partners with stronger results . in addition , we continued to work with our channel partners to take advantage of opportunities to reach end customers that have historically chosen competitor products , but due to consolidation in the market and resulting actions by competitors , purchased quantum products . we continued to improve our capital structure in fiscal 2011 by significantly reducing our senior term debt , making the final payment on the convertible subordinated debt issued in 2003 and refinancing the 12 % subordinated term debt with proceeds from the issuance of 3.5 % convertible subordinated debt . at march 31 , 2011 , we had $ 104.3 million of senior term debt and $ 135 million of convertible subordinated debt . we plan to continue making principal prepayments on the senior term debt during fiscal 2012. we view fiscal 2011 as a year that we shifted our focus from repositioning and restructuring quantum to a focus on growth . we had expected revenue declines in oem and royalty revenue this year ; however , we delivered revenue growth in those areas where we were focused , which were total branded revenue and both branded disk systems and branded software solutions revenue . we made significant progress adding new customers that sell our disk systems and software solutions as well as tape automation systems and increased our alignment with existing and new channel partners . we focused our development efforts on launching quantum branded products that provide end user customers with unique solutions and value to meet their backup , recovery and archive needs . evaluating the growth in the markets for our products and their associated impact to our fiscal 2012 plans , we participate in a tape market that is mature , a disk backup market that is growing and a file system and archive market that is also growing with significant potential for innovation and new solutions . as a result , in fiscal 2012 we expect total revenue to increase due to growth in branded disk systems and software solutions revenue , and we expect branded tape automation systems revenue to remain similar in fiscal 2012 compared to fiscal 2011 due to our continued efforts to increase market share by acquiring new customers in this declining market . we anticipate declines in oem , royalty and branded devices and media revenue consistent with overall market expectations for the tape market . although our strategy , opportunity and goals for fiscal 2012 are not significantly different than fiscal 2011 , we believe we are better positioned to execute on our growth plan . we have made changes in our sales and marketing organization to support growth in fiscal 2012 , including restructuring our sales resources based on end user requirements , increasing our efforts to achieve tighter technical alignment on our complete product portfolio with our channel partners as well as actively pursuing opportunities to expand the market reach for our products . another key area of focus for fiscal 2012 is continuing to expand and improve our products and solutions , with emphasis on branded disk systems and software solutions as well as introducing our initial stornext appliance and expanding professional services and custom engineering . we believe our current tape automation systems , disk systems and software solutions provide excellent value propositions for customers and we plan to continue to expand the breadth and depth of our product and service offerings in fiscal 2012. we are focused on advancing these objectives to take advantage of our improved position in the markets in which we participate to grow revenue in fiscal 2012 and create shareholder value . results in fiscal 2011 , we saw improved revenue momentum with our partners , especially for midrange disk systems , and our continued efforts to increase revenue from disk systems and software solutions resulted in a 33 % increase in disk systems and software solutions revenue in fiscal 2011 compared to a 5 % decrease in fiscal 2010 from fiscal 2009. in fiscal 2011 , we invested significantly in our product portfolio and continued to develop new technologies that will be the framework for future new product introductions . we had our second consecutive fiscal year of net income and continued to improve gross margins . in addition , we generated $ 52.3 million in cash from operations . we had total revenue of $ 672.3 million in fiscal 2011 , a 1 % decrease from fiscal 2010 primarily due to expected reductions in oem revenue , including devices and media and tape automation systems . our product revenue from oem customers decreased 16 % while revenue from branded products increased 7 % from fiscal 2010 primarily due to increased disk systems and software solutions revenue . service revenue decreased primarily due to lower oem repair revenue . our focus on growing the branded business during the fiscal year is reflected in the greater proportion of non-royalty revenue from our branded business , at 79 % in fiscal 2011 compared to 74 % in fiscal 2010 and 67 % in fiscal 2009. royalty revenue decreased 7 % primarily due to declining royalties from older dlt media , partially offset by growth in lto royalties . story_separator_special_tag in addition , branded service revenue comprised a larger proportion of service revenue in fiscal 2011 than in fiscal 2010 primarily due to declines in repairs for oem customers . product repairs and service for oem customers typically have a lower service margin than similar services for branded products . we have reduced expense in our service delivery model by repairing certain product lines in our facilities at a lower cost in fiscal 2011 than we incurred with external service providers in prior years . fiscal 2010 compared to fiscal 2009 service gross margin dollars increased $ 16.1 million , or approximately 41 % , despite a 5 % reduction in service revenue in fiscal 2010 compared to the prior year . additionally , our service gross margin percentage increased to 35.6 % in fiscal 2010 from 24.0 % in fiscal 2009. these increases were primarily due to cost reductions in our service delivery model and reduced lower-margin oem repair activities . efficiencies in our service delivery model that contributed to the increased service gross margin percentage included streamlining processes , consolidating service inventory locations , reducing headcount and decreasing third party external service providers and freight vendors as well as related expenses . in addition , we had decreased lower of cost or market inventory charges related to imminent end of service life dates on certain product families and planned product roadmap transitions compared to fiscal 2009. looking forward in fiscal 2012 , we expect the projected growth in overall revenue to increase the gross margin rate due to the increased percentage of revenue from branded sales which typically have a higher gross margin . tempering this anticipated increase is the absence of the majority of the oem deduplication software revenue that was included in our fiscal 2011 results as well as expected declines in royalty revenue in fiscal 2012. oem deduplication software revenue and royalty revenue both provide some of our highest gross margins . in addition , we continue to closely manage our manufacturing , service and repair costs . research and development expenses replace_table_token_2_th fiscal 2011 compared to fiscal 2010 the increase in research and development expenses for fiscal 2011 was primarily due to a $ 3.7 million increase in salaries and benefits from investment in our disk systems and software engineering teams to support new product development efforts . partially offsetting this increase was a $ 0.8 million decrease in project materials due to the types of products under development and related testing material requirements compared to the prior year . 31 fiscal 2010 compared to fiscal 2009 research and development expenses decreased slightly during fiscal 2010 compared to fiscal 2009 largely due to cost-cutting initiatives and efforts to streamline processes that reduced expenses . these cost reductions were largely offset by increased research and development activities in strategic areas of our business , including the release of several new products in fiscal 2010. depreciation expense decreased $ 1.0 million due to a number of assets supporting our research and development efforts becoming fully depreciated during fiscal 2010. salaries and benefits decreased $ 0.4 million primarily due to lower headcount compared to fiscal 2009. a $ 0.3 million decrease in project materials was primarily due to reduced tape automation system development material needs compared to fiscal 2009. these decreases were partially offset by a $ 1.2 million increase in external service provider expense in support of a number of new products under development in fiscal 2010. looking forward in fiscal 2012 , we anticipate increased research and development expenses from additional investments in development efforts to expand our disk systems and software solutions offerings , including the launch of our initial stornext appliance . sales and marketing expenses replace_table_token_3_th fiscal 2011 compared to fiscal 2010 sales and marketing expenses increased in fiscal 2011 primarily due to a $ 5.4 million increase in salaries and benefits from growing our branded sales force and marketing team . in addition , advertising and marketing expenditures increased by $ 1.8 million from supporting new product introductions and efforts to expand our position with existing and new channel partners to drive future growth . fiscal 2010 compared to fiscal 2009 sales and marketing expenses decreased during fiscal 2010 compared to fiscal 2009 due to continued cost-saving initiatives and efforts to continue to align our sales and marketing resources with market conditions and opportunities . salaries and benefits decreased $ 13.6 million due to reduced headcount in fiscal 2010. marketing-related expenses , such as marketing materials and trade shows , decreased $ 4.7 million , travel expenses decreased $ 3.1 million and external service provider expense decreased $ 1.1 million in fiscal 2010 compared to the prior year . in addition , amortization expense decreased $ 1.5 million during fiscal 2010 compared to fiscal 2009 due to certain intangible assets becoming fully amortized during fiscal 2009. looking forward in fiscal 2012 , we anticipate similar sales and marketing expenses as in fiscal 2011 ; however , we have implemented changes to our sales and marketing organization to apply sales resources based on end user requirements and to deploy our marketing resources with increased emphasis on expanding technical alignment across our product portfolio with our existing and new channel partners , including increasing the breadth and depth of technical resources and training for our partners . 32 general and administrative expenses replace_table_token_4_th fiscal 2011 compared to fiscal 2010 the decrease in general and administrative expenses was primarily due to a $ 1.0 million decrease in net vat expense primarily due to provisions for vat audits during fiscal 2010 that were not repeated in fiscal 2011. in addition , we had a $ 0.8 million decrease in legal expenses compared to fiscal 2010. fiscal 2010 compared to fiscal 2009 the $ 15.3 million decrease in general and administrative expenses during fiscal 2010 compared to fiscal 2009 was primarily due to decreases of $ 6.1 million in legal expenses , $ 3.4 million in

liquidity and capital resources replace_table_token_11_th 37 fiscal 2011 the $ 47.8 million difference between reported net income and cash provided by operating activities in fiscal 2011 was primarily due to $ 67.5 million of non-cash expenses , including $ 30.3 million in amortization , $ 13.8 million in service parts lower of cost or market adjustment , $ 11.7 million in depreciation and $ 10.4 million in share-based compensation . these noncash expenses were partially offset by a $ 14.9 million increase in accounts receivable primarily due to increased sales of products and service billings in the fourth quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. cash used in investing activities during fiscal 2011 was primarily due to $ 12.3 million in purchases of property and equipment . equipment purchases were primarily for engineering test equipment to support product development activities . cash used in financing activities during fiscal 2011 was primarily due to net debt repayments of $ 95.5 million , including $ 81.7 million of principal on the senior secured term debt . we refinanced the subordinated term loans with 3.50 % convertible subordinated debt in fiscal 2011 , and the repayment of this long-term debt was offset by borrowings of convertible subordinated debt , net . for additional information regarding this refinancing , see note 7 “ convertible subordinated debt and long-term debt ” to the consolidated financial statements . in addition , we received $ 16.5 million from the issuance of common stock . fiscal 2010 the $ 83.5 million difference between reported net income and cash provided by operating activities in fiscal 2010 was primarily due to $ 71.3 million of non-cash expenses comprised of $ 38.5 million in amortization , $ 12.1 million in depreciation , $ 11.4 million in service parts lower of cost or market adjustment and $ 9.8 million in share-based compensation . these non-cash expenses were partially offset by a $ 15.6 million non-cash gain on debt extinguishment .

realized net investment losses during 2013 of $ 0.3 million were recognized as $ 0.4 million of losses was recorded on sales of two equity mutual fund issuers , offset by gains of $ 0.1 million on calls of bond securities . in 2012 and 2011 gains resulted primarily from sales of securities that had been previously impaired due to declines in market values . these gains were partially offset by other-than-temporary impairments on investment securities and other long-term assets that were recorded in 2012 and 2011 of $ 1,319,000 and $ 631,000 , respectively , reported as realized losses . during 2013 , claims and surrenders expense decreased 0.4 % from the comparable period in 2012 as the home service segment was impacted in 2012 by hurricane isaac which hit the louisiana coast on august 29 , 2012 and caused increased property claims . in addition , death claims expense in 2012 was higher compared to 2011 due to the release of incurred but unreported death claims liability in 2011 of $ 0.7 million . 2013 changes in reserves resulted in liability increases resulting from increased sales of endowment products that build up reserves at a faster pace than whole life longer term mortality based products . additionally , the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions over the past several years . life insurance . for over thirty-five years , cica and its predecessors have accepted policy applications from foreign nationals for u.s. dollar-denominated ordinary whole life insurance and endowment policies . we make our insurance products available using third-party marketing organizations and independent marketing consultants . endowment product sales have been on the rise and represented approximately 73 % of new sales . the company offers a ten , fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five . we also introduced a new product in 2011 that is an endowment at age eighteen with a payout over four or five years . through the domestic market of our life insurance segment , we provide ordinary whole life , credit life insurance , and final expense policies to middle and lower income families and individuals in certain markets in the mountain west , mid-west and southern u.s. the majority of our domestic revenues are generated by the operations of domestic life insurance companies we have acquired since 1987. home service insurance . we provide final expense ordinary life insurance to middle and lower income individuals in louisiana , mississippi and arkansas . our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders , and through networks of funeral homes that collect premiums and provide personal policyholder service . 23 citizens , inc. and consolidated subsidiaries economic and insurance industry developments significant economic issues impacting our business and industry currently and into the future are discussed below . it is predicted that the interest rate environment will remain low for the foreseeable future , which translates into lower profit margins for insurers . we have been impacted by the historically low interest rate environment over the past several years as our fixed income investment portfolio , primarily invested in callable securities , has been reinvested at lower yields . the company 's conservative investment strategy has not changed but we have focused new purchases into holding of state municipalities and essential service issuers compared to our historical investment in u.s. government holdings . our investment earnings also impact the reserve and deferred acquisition costs ( “ dac ” ) balances , as assumptions are used in the development of the balances . due to the recent decline in investment yields on our portfolio , our projection of long-term investment returns has declined . this has resulted in increasing the reserves on policies issued in the current year , as well as reducing the dac asset . as an increasing percentage of the world population reaches retirement age , we believe we will benefit from increased demand for living benefit products rather than death products , as aging baby boomers will require cash accumulation to pay expenses to meet their lifetime income needs . our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner 's later years , while continuously providing a death benefit . we believe there is a trend toward consolidation of domestic life insurance companies , due to significant losses incurred by the life insurance industry as a result of the credit crisis and recent economic pressures , as well as increasing costs of regulatory compliance for domestic life insurance companies . we believe this trend should be a benefit to our acquisition strategy as more complementary acquisition candidates may become available for us to consider . many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry . these events have led to a decline in the availability of reinsurance . while we currently cede a limited amount of our primary insurance business to reinsurers , we may find it difficult to obtain reinsurance in the future , forcing us to seek reinsurers who are more expensive to us . if we can not obtain affordable reinsurance coverage , either our net exposures will increase or we will have to reduce our underwriting commitments . while our management has more than 40 years of experience in writing life insurance policies for foreign residents , changes related to foreign government laws and regulations and application of them , along with currency controls affecting our foreign resident insureds could adversely impact our revenues , results of operations and financial condition . story_separator_special_tag we have ceded this business to puritan life insurance company ( `` puritan `` ) , an unaffiliated insurance company under a coinsurance agreement , under which it assumes substantially all of our accident and health policies . the premium amounts ceded under the coinsurance agreement in the years ended december 31 , 2013 , 2012 , and 2011 were $ 56 thousand , $ 3.9 million and $ 4.5 million , respectively . the coinsurance agreement allows for full assumption by puritan of this business upon approval by state insurance authorities . the decrease in premiums ceded for 2013 was due to the fact that puritan received state approval in many states and has obtained over 95 % assumption of all policies during 2013 . net investment income . net investment income has increased as the annual yield has increased 44 basis points in this segment from 2012 , as discussed in the consolidated results of operations above . replace_table_token_16_th realized investment gains , net . realized losses of $ 0.2 million and gains of $ 0.5 million and $ 1.3 million were recognized in 2013 , 2012 and 2011 , due to the sale of two bond mutual fund holdings in 2013 and due to disposals in 2012 and 2011 of previously impaired equity mutual funds . claims and surrenders . a breakout of claims and surrender benefits is detailed below . replace_table_token_17_th death claims expense decreased 21.1 % in 2013 due to favorable experience in the current year and increased 5.3 % in 2012 compared to 2011 due to more reported claims . in addition , 2011 results included a $ 0.2 million release of incurred but not reported liability related to our claim experience calculation . mortality experience is closely monitored by the company as a key performance indicator and these amounts were within expected levels . the increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business . the majority of policy surrender benefits paid is attributable to our international business and was related to policies that have been in force over fifteen years , where surrender charges are no longer applicable . endowment benefit expense results from the election by policyholders of a product feature that provides an annual benefit . this is a fixed benefit over the life of the contract , and this expense will increase with new sales and improved persistency . other policy benefits increased in the current year due primarily to interest paid on premium deposits and dividend accumulations , as these policyholder liability accounts have increased . 33 citizens , inc. and consolidated subsidiaries increase in future policy benefit reserves . policy benefit reserves in 2013 increased compared to the same period in 2012 , primarily from the effect of the current low interest rate environment on reserve development for policies issued in the last few years which have higher reserve build up compared to prior issue years . the accounting guidance of long duration contracts we sell requires the company to “ lock in ” the original assumptions such as mortality , interest , surrenders and expenses at the time the initial policies are written , therefore gains or losses attributable to actual experience that differs from the original assumptions flows through the income statement in the period where in the differences occur . in addition , reserves have risen year over year for all periods presented due to the increased sales of endowment products , which build up reserve balances more quickly compared to other life product sales . endowment sales totaled approximately $ 14.3 million , $ 14.3 million and $ 12.3 million , representing approximately 73.0 % , 76.0 % and 69.4 % of total new first year premium in 2013 , 2012 , and 2011 , respectively . policyholder dividends . policyholder dividends have risen at a rate that corresponds with the growth rate in new international life insurance premiums . the company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience . policyholder dividends are factored into the premiums and have no impact on profitability . capitalization and amortization of deferred policy acquisition costs . capitalized costs increased , as commission related costs have increased in the current year compared to 2012 . amortization of dac increased in the current year by 4.1 % from 2012 as the asset balance has increased and our persistency was lower in the current year . commissions . commission expense increase is directly related to the increase in premiums as noted above . first year policy premiums pay a higher commission rate than renewal policy premiums . other general expenses . the expenses are allocated by segment , based upon an annual expense study performed by the company , and were up due to employee health claims , as we are self-insured , and employee costs associated with temporary employees assisting on operations projects . 34 citizens , inc. and consolidated subsidiaries home service insurance our home service insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in louisiana , mississippi and arkansas . our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 350 employees and independent agents . replace_table_token_18_th premiums . the premiums in this segment were flat for the year . in 2012 , there was an increase of approximately $ 180,000 of single premium revenues related to a system error in recording increasing policy benefits that are used to pay for paid up additions and were reflected as a one time adjustment as noted below under policyholders ' dividends . the following table sets forth our direct premiums by state for the periods indicated . replace_table_token_19_th net investment income . net investment income

liquidity and capital resources replace_table_token_11_th 37 fiscal 2011 the $ 47.8 million difference between reported net income and cash provided by operating activities in fiscal 2011 was primarily due to $ 67.5 million of non-cash expenses , including $ 30.3 million in amortization , $ 13.8 million in service parts lower of cost or market adjustment , $ 11.7 million in depreciation and $ 10.4 million in share-based compensation . these noncash expenses were partially offset by a $ 14.9 million increase in accounts receivable primarily due to increased sales of products and service billings in the fourth quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. cash used in investing activities during fiscal 2011 was primarily due to $ 12.3 million in purchases of property and equipment . equipment purchases were primarily for engineering test equipment to support product development activities . cash used in financing activities during fiscal 2011 was primarily due to net debt repayments of $ 95.5 million , including $ 81.7 million of principal on the senior secured term debt . we refinanced the subordinated term loans with 3.50 % convertible subordinated debt in fiscal 2011 , and the repayment of this long-term debt was offset by borrowings of convertible subordinated debt , net . for additional information regarding this refinancing , see note 7 “ convertible subordinated debt and long-term debt ” to the consolidated financial statements . in addition , we received $ 16.5 million from the issuance of common stock . fiscal 2010 the $ 83.5 million difference between reported net income and cash provided by operating activities in fiscal 2010 was primarily due to $ 71.3 million of non-cash expenses comprised of $ 38.5 million in amortization , $ 12.1 million in depreciation , $ 11.4 million in service parts lower of cost or market adjustment and $ 9.8 million in share-based compensation . these non-cash expenses were partially offset by a $ 15.6 million non-cash gain on debt extinguishment .

realized net investment losses during 2013 of $ 0.3 million were recognized as $ 0.4 million of losses was recorded on sales of two equity mutual fund issuers , offset by gains of $ 0.1 million on calls of bond securities . in 2012 and 2011 gains resulted primarily from sales of securities that had been previously impaired due to declines in market values . these gains were partially offset by other-than-temporary impairments on investment securities and other long-term assets that were recorded in 2012 and 2011 of $ 1,319,000 and $ 631,000 , respectively , reported as realized losses . during 2013 , claims and surrenders expense decreased 0.4 % from the comparable period in 2012 as the home service segment was impacted in 2012 by hurricane isaac which hit the louisiana coast on august 29 , 2012 and caused increased property claims . in addition , death claims expense in 2012 was higher compared to 2011 due to the release of incurred but unreported death claims liability in 2011 of $ 0.7 million . 2013 changes in reserves resulted in liability increases resulting from increased sales of endowment products that build up reserves at a faster pace than whole life longer term mortality based products . additionally , the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions over the past several years . life insurance . for over thirty-five years , cica and its predecessors have accepted policy applications from foreign nationals for u.s. dollar-denominated ordinary whole life insurance and endowment policies . we make our insurance products available using third-party marketing organizations and independent marketing consultants . endowment product sales have been on the rise and represented approximately 73 % of new sales . the company offers a ten , fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five . we also introduced a new product in 2011 that is an endowment at age eighteen with a payout over four or five years . through the domestic market of our life insurance segment , we provide ordinary whole life , credit life insurance , and final expense policies to middle and lower income families and individuals in certain markets in the mountain west , mid-west and southern u.s. the majority of our domestic revenues are generated by the operations of domestic life insurance companies we have acquired since 1987. home service insurance . we provide final expense ordinary life insurance to middle and lower income individuals in louisiana , mississippi and arkansas . our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders , and through networks of funeral homes that collect premiums and provide personal policyholder service . 23 citizens , inc. and consolidated subsidiaries economic and insurance industry developments significant economic issues impacting our business and industry currently and into the future are discussed below . it is predicted that the interest rate environment will remain low for the foreseeable future , which translates into lower profit margins for insurers . we have been impacted by the historically low interest rate environment over the past several years as our fixed income investment portfolio , primarily invested in callable securities , has been reinvested at lower yields . the company 's conservative investment strategy has not changed but we have focused new purchases into holding of state municipalities and essential service issuers compared to our historical investment in u.s. government holdings . our investment earnings also impact the reserve and deferred acquisition costs ( “ dac ” ) balances , as assumptions are used in the development of the balances . due to the recent decline in investment yields on our portfolio , our projection of long-term investment returns has declined . this has resulted in increasing the reserves on policies issued in the current year , as well as reducing the dac asset . as an increasing percentage of the world population reaches retirement age , we believe we will benefit from increased demand for living benefit products rather than death products , as aging baby boomers will require cash accumulation to pay expenses to meet their lifetime income needs . our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner 's later years , while continuously providing a death benefit . we believe there is a trend toward consolidation of domestic life insurance companies , due to significant losses incurred by the life insurance industry as a result of the credit crisis and recent economic pressures , as well as increasing costs of regulatory compliance for domestic life insurance companies . we believe this trend should be a benefit to our acquisition strategy as more complementary acquisition candidates may become available for us to consider . many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry . these events have led to a decline in the availability of reinsurance . while we currently cede a limited amount of our primary insurance business to reinsurers , we may find it difficult to obtain reinsurance in the future , forcing us to seek reinsurers who are more expensive to us . if we can not obtain affordable reinsurance coverage , either our net exposures will increase or we will have to reduce our underwriting commitments . while our management has more than 40 years of experience in writing life insurance policies for foreign residents , changes related to foreign government laws and regulations and application of them , along with currency controls affecting our foreign resident insureds could adversely impact our revenues , results of operations and financial condition . story_separator_special_tag we have ceded this business to puritan life insurance company ( `` puritan `` ) , an unaffiliated insurance company under a coinsurance agreement , under which it assumes substantially all of our accident and health policies . the premium amounts ceded under the coinsurance agreement in the years ended december 31 , 2013 , 2012 , and 2011 were $ 56 thousand , $ 3.9 million and $ 4.5 million , respectively . the coinsurance agreement allows for full assumption by puritan of this business upon approval by state insurance authorities . the decrease in premiums ceded for 2013 was due to the fact that puritan received state approval in many states and has obtained over 95 % assumption of all policies during 2013 . net investment income . net investment income has increased as the annual yield has increased 44 basis points in this segment from 2012 , as discussed in the consolidated results of operations above . replace_table_token_16_th realized investment gains , net . realized losses of $ 0.2 million and gains of $ 0.5 million and $ 1.3 million were recognized in 2013 , 2012 and 2011 , due to the sale of two bond mutual fund holdings in 2013 and due to disposals in 2012 and 2011 of previously impaired equity mutual funds . claims and surrenders . a breakout of claims and surrender benefits is detailed below . replace_table_token_17_th death claims expense decreased 21.1 % in 2013 due to favorable experience in the current year and increased 5.3 % in 2012 compared to 2011 due to more reported claims . in addition , 2011 results included a $ 0.2 million release of incurred but not reported liability related to our claim experience calculation . mortality experience is closely monitored by the company as a key performance indicator and these amounts were within expected levels . the increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business . the majority of policy surrender benefits paid is attributable to our international business and was related to policies that have been in force over fifteen years , where surrender charges are no longer applicable . endowment benefit expense results from the election by policyholders of a product feature that provides an annual benefit . this is a fixed benefit over the life of the contract , and this expense will increase with new sales and improved persistency . other policy benefits increased in the current year due primarily to interest paid on premium deposits and dividend accumulations , as these policyholder liability accounts have increased . 33 citizens , inc. and consolidated subsidiaries increase in future policy benefit reserves . policy benefit reserves in 2013 increased compared to the same period in 2012 , primarily from the effect of the current low interest rate environment on reserve development for policies issued in the last few years which have higher reserve build up compared to prior issue years . the accounting guidance of long duration contracts we sell requires the company to “ lock in ” the original assumptions such as mortality , interest , surrenders and expenses at the time the initial policies are written , therefore gains or losses attributable to actual experience that differs from the original assumptions flows through the income statement in the period where in the differences occur . in addition , reserves have risen year over year for all periods presented due to the increased sales of endowment products , which build up reserve balances more quickly compared to other life product sales . endowment sales totaled approximately $ 14.3 million , $ 14.3 million and $ 12.3 million , representing approximately 73.0 % , 76.0 % and 69.4 % of total new first year premium in 2013 , 2012 , and 2011 , respectively . policyholder dividends . policyholder dividends have risen at a rate that corresponds with the growth rate in new international life insurance premiums . the company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience . policyholder dividends are factored into the premiums and have no impact on profitability . capitalization and amortization of deferred policy acquisition costs . capitalized costs increased , as commission related costs have increased in the current year compared to 2012 . amortization of dac increased in the current year by 4.1 % from 2012 as the asset balance has increased and our persistency was lower in the current year . commissions . commission expense increase is directly related to the increase in premiums as noted above . first year policy premiums pay a higher commission rate than renewal policy premiums . other general expenses . the expenses are allocated by segment , based upon an annual expense study performed by the company , and were up due to employee health claims , as we are self-insured , and employee costs associated with temporary employees assisting on operations projects . 34 citizens , inc. and consolidated subsidiaries home service insurance our home service insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in louisiana , mississippi and arkansas . our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 350 employees and independent agents . replace_table_token_18_th premiums . the premiums in this segment were flat for the year . in 2012 , there was an increase of approximately $ 180,000 of single premium revenues related to a system error in recording increasing policy benefits that are used to pay for paid up additions and were reflected as a one time adjustment as noted below under policyholders ' dividends . the following table sets forth our direct premiums by state for the periods indicated . replace_table_token_19_th net investment income . net investment income

liquidity and capital resources liquidity refers to a company 's ability to generate sufficient cash flows to meet the needs of its operations . liquidity is managed on insurance operations to ensure stable and reliable sources of cash flows to meet obligations and is provided by a variety of sources . our liquidity requirements are met primarily by funds provided from operations . premium deposits and revenues , investment income and investment maturities are the primary sources of funds , while investment purchases , policy benefits , and operating expenses are the primary uses of funds . we historically have not had to liquidate investments to provide cash flow , and there were no liquidity issues in 2013 or 2012 . our investments consist of 88.8 % of marketable debt securities and 6.0 % of equity securities classified as available-for-sale that could be readily converted to cash for liquidity needs . a primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals . we include provisions within our insurance policies , such as surrender charges , that help limit and discourage early withdrawals . since these contractual withdrawals , as well as the level of surrenders experienced , have been largely consistent with our assumptions in asset liability management , our associated cash outflows have , historically , not had an adverse impact on our overall liquidity . individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy . cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy .

under the original terms of the credit facility , borrowings bore interest at a per annum rate equal to , at the option of the company , either ( i ) a london interbank offered rate ( “ libor ” ) , subject to a 0 % libor floor plus a margin of 1.75 % to 2.75 % , based on the utilization of the credit facility ( the “ eurodollar rate ” ) or ( ii ) a fluctuating interest rate per annum equal to the greatest of ( a ) the rate of interest publicly announced by jpmorgan chase bank , n.a . as its prime rate , ( b ) the rate of interest published by the federal reserve bank of new york as the federal funds effective rate , ( c ) the rate of interest published by the federal reserve bank of new york as the overnight bank funding rate , or ( d ) a libor offered rate for a one month interest period , subject to a 0 % libor floor plus a margin of 0.75 % to 1.75 % , based on the utilization of the credit facility ( the “ reference rate ” ) . interest on borrowings that bear interest at the eurodollar rate shall be payable on the last day of the applicable interest period selected by the company , which shall be one , two , three , or six months , and interest on borrowings that bear interest at the reference rate shall be payable quarterly in arrears . the credit facility contains customary representations and affirmative covenants . the credit facility also contains customary negative covenants , which , among other things , and subject to certain exceptions , include restrictions on ( i ) liens , ( ii ) indebtedness , guarantees and other obligations , ( iii ) restrictions in agreements on liens and distributions , ( iv ) mergers or consolidations , ( v ) asset sales , ( vi ) restricted payments , ( vii ) investments , ( viii ) affiliate transactions , ( ix ) change of business , ( x ) foreign operations or subsidiaries , ( xi ) name changes , ( xii ) use of proceeds , letters of credit , ( xiii ) gas imbalances , ( xiv ) hedging transactions , ( xv ) additional subsidiaries , ( xvi ) changes in fiscal year or fiscal quarter , ( xvii ) operating leases , ( xviii ) prepayments of certain debt and other obligations , ( xix ) sales or discounts of receivables , and ( xx ) dividend payments . the credit parties are subject to certain financial covenants under the credit facility , as tested on the last day of each fiscal quarter , including , without limitation , ( i ) a maximum ratio of the company 's consolidated indebtedness ( subject to certain exclusions ) to earnings before interest , income taxes , depreciation , depletion , and amortization , exploration expense , and other non-cash charges ( “ ebitdax ” ) and ( ii ) a current ratio , as defined in the agreement , inclusive of the unused commitments then available to be borrowed , to not be less than 1.00 to 1.00 . 68 table of contents on june 18 , 2020 , in conjunction with the borrowing base redetermination , the company , together with certain of its subsidiaries , entered into the first amendment ( the “ first amendment ” ) to the credit facility ( as amended , restated , supplemented or otherwise modified ) to , among other things : ( i ) implement certain anti-cash hoarding provisions , including a weekly mandatory prepayment requirement with respect to the excess of the company 's consolidated cash balance over $ 35.0 million ; ( ii ) require that , in order to borrow or issue a letter of credit under the credit agreement , the consolidated cash balance not exceed the greater of $ 35.0 million ( both before and after giving effect to such borrowing or letter of credit issuance ) , or expenditures in respect of oil and gas properties in the ordinary course of business ( as agreed to by the administrative agent ) ; ( iii ) decrease the maximum permitted net leverage ratio from 4.00 to 3.50 and the maximum permitted leverage ratio for purposes of making a restricted payment , restricted investment or optional or voluntary redemption from 3.25 to 2.75 ; ( iv ) increase the eurodollar rate margin to 2.00 % to 3.00 % ; ( v ) increase the reference rate margin to 1.00 % to 2.00 % ; and ( vi ) amend certain other covenants and provisions . the company was in compliance with all covenants as of december 31 , 2020 and through the filing date of this report . our weighted-average interest rates on borrowings from the credit facility were 3.1 % and 4.4 % for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 and as of the date of filing , we had a zero balance on our credit facility . non-gaap financial measures adjusted ebitdax represents earnings before interest , income taxes , depreciation , depletion , and amortization , exploration expense , and other non-cash and non-recurring charges . adjusted ebitdax excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and or amount can not be reasonably estimated . adjusted ebitdax is a non-gaap measure that we present because we believe it provides useful additional information to investors and analysts , as a performance measure , for analysis of our ability to internally generate funds for exploration , development , acquisitions , and to service debt . story_separator_special_tag for sales of entire working interests in unproved properties , gain or loss is recognized to the extent of the difference between the proceeds received and the net carrying value of the property . proceeds from sales of partial interests in unproved properties are accounted for as a recovery of costs unless the proceeds exceed the entire cost of the property . oil and natural gas reserve quantities and standardized measure our third-party petroleum consultant prepared our estimates of oil and natural gas reserves and associated future net revenues . while the sec has adopted rules which allow us to disclose proved , probable , and possible reserves , we have elected to disclose only proved reserves in this annual report on form 10-k. the sec 's revised rules define proved reserves as the quantities of oil and gas , which , by analysis of geoscience and engineering data , can be estimated with reasonable certainty to be economically producible - from a given date forward , from known reservoirs , and under existing economic conditions , operating methods , and government regulations - prior to the time at which contracts providing the right to operate expire , unless evidence indicates that renewal is reasonably certain , regardless of whether deterministic or probabilistic methods are used for the estimation . the project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time . our third party petroleum engineering consultant must make a number of subjective assumptions based on their professional judgment in developing reserve estimates . reserve estimates are updated annually and consider recent production levels and other technical information about each field . oil and natural gas reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that can not be precisely measured . the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment . periodic revisions to the estimated reserves and future cash flows may be necessary as a result of a number of factors , including reservoir performance , oil and natural gas prices , cost changes , technological advances , new geological or geophysical data , or other economic factors . accordingly , reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered . we can not predict the amounts or timing of future reserve revisions . if such revisions are significant , they could significantly affect future amortization of capitalized costs and result in impairment of assets that may be material . revenue recognition sales of oil , natural gas , and ngls are recognized when performance obligations are satisfied at the point control of the product is transferred to the customer . the company 's contracts ' pricing provisions are tied to a market index , with certain adjustments based on , among other factors , whether a well delivers to a gathering or transmission line , quality of the oil or natural gas , and prevailing supply and demand conditions . as a result , the price of the oil , natural gas , and ngls fluctuates to remain competitive with other available oil , natural gas , and ngls supplies . please refer to part ii , item 8 , note 1 - summary of significant accounting policies for more information . we record revenue in the month production is delivered to the purchaser . payment is generally received within 30 to 60 days after the date of production . however , settlement statements for certain natural gas and ngls sales may not be received for 30 to 60 days after the date production is delivered , and as a result , we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product . we record the differences between our estimates and the actual amounts received for product sales in the month in which payment is received from the purchaser . for the period from january 1 , 2020 through december 31 , 2020 , revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material . the company has interests with other producers in certain properties , in which case the company uses the entitlement method to account for gas imbalances . the company had no material gas imbalances as of december 31 , 2020 and 2019 . 71 table of contents impairment of proved properties we review our proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred and at least annually . we estimate the expected undiscounted future cash flows of our oil and natural gas properties and compare such undiscounted future cash flows to the carrying amount of the oil and natural gas properties to determine if the carrying amount is recoverable . if the carrying amount exceeds the estimated undiscounted future cash flows , we will adjust the carrying amount of the oil and natural gas properties to fair value . the factors used to determine fair value are subject to our judgment and expertise and include , but are not limited to , recent sales prices of comparable properties , the present value of future cash flows , net of estimated operating and development costs , using estimates of proved reserves , future commodity pricing , future production estimates , anticipated capital expenditures , and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected . because of the uncertainty inherent in these factors , we can not predict when or if future impairment charges for proved properties will be recorded . impairment of unproved properties the unproved property balance

liquidity and capital resources liquidity refers to a company 's ability to generate sufficient cash flows to meet the needs of its operations . liquidity is managed on insurance operations to ensure stable and reliable sources of cash flows to meet obligations and is provided by a variety of sources . our liquidity requirements are met primarily by funds provided from operations . premium deposits and revenues , investment income and investment maturities are the primary sources of funds , while investment purchases , policy benefits , and operating expenses are the primary uses of funds . we historically have not had to liquidate investments to provide cash flow , and there were no liquidity issues in 2013 or 2012 . our investments consist of 88.8 % of marketable debt securities and 6.0 % of equity securities classified as available-for-sale that could be readily converted to cash for liquidity needs . a primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals . we include provisions within our insurance policies , such as surrender charges , that help limit and discourage early withdrawals . since these contractual withdrawals , as well as the level of surrenders experienced , have been largely consistent with our assumptions in asset liability management , our associated cash outflows have , historically , not had an adverse impact on our overall liquidity . individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy . cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy .

under the original terms of the credit facility , borrowings bore interest at a per annum rate equal to , at the option of the company , either ( i ) a london interbank offered rate ( “ libor ” ) , subject to a 0 % libor floor plus a margin of 1.75 % to 2.75 % , based on the utilization of the credit facility ( the “ eurodollar rate ” ) or ( ii ) a fluctuating interest rate per annum equal to the greatest of ( a ) the rate of interest publicly announced by jpmorgan chase bank , n.a . as its prime rate , ( b ) the rate of interest published by the federal reserve bank of new york as the federal funds effective rate , ( c ) the rate of interest published by the federal reserve bank of new york as the overnight bank funding rate , or ( d ) a libor offered rate for a one month interest period , subject to a 0 % libor floor plus a margin of 0.75 % to 1.75 % , based on the utilization of the credit facility ( the “ reference rate ” ) . interest on borrowings that bear interest at the eurodollar rate shall be payable on the last day of the applicable interest period selected by the company , which shall be one , two , three , or six months , and interest on borrowings that bear interest at the reference rate shall be payable quarterly in arrears . the credit facility contains customary representations and affirmative covenants . the credit facility also contains customary negative covenants , which , among other things , and subject to certain exceptions , include restrictions on ( i ) liens , ( ii ) indebtedness , guarantees and other obligations , ( iii ) restrictions in agreements on liens and distributions , ( iv ) mergers or consolidations , ( v ) asset sales , ( vi ) restricted payments , ( vii ) investments , ( viii ) affiliate transactions , ( ix ) change of business , ( x ) foreign operations or subsidiaries , ( xi ) name changes , ( xii ) use of proceeds , letters of credit , ( xiii ) gas imbalances , ( xiv ) hedging transactions , ( xv ) additional subsidiaries , ( xvi ) changes in fiscal year or fiscal quarter , ( xvii ) operating leases , ( xviii ) prepayments of certain debt and other obligations , ( xix ) sales or discounts of receivables , and ( xx ) dividend payments . the credit parties are subject to certain financial covenants under the credit facility , as tested on the last day of each fiscal quarter , including , without limitation , ( i ) a maximum ratio of the company 's consolidated indebtedness ( subject to certain exclusions ) to earnings before interest , income taxes , depreciation , depletion , and amortization , exploration expense , and other non-cash charges ( “ ebitdax ” ) and ( ii ) a current ratio , as defined in the agreement , inclusive of the unused commitments then available to be borrowed , to not be less than 1.00 to 1.00 . 68 table of contents on june 18 , 2020 , in conjunction with the borrowing base redetermination , the company , together with certain of its subsidiaries , entered into the first amendment ( the “ first amendment ” ) to the credit facility ( as amended , restated , supplemented or otherwise modified ) to , among other things : ( i ) implement certain anti-cash hoarding provisions , including a weekly mandatory prepayment requirement with respect to the excess of the company 's consolidated cash balance over $ 35.0 million ; ( ii ) require that , in order to borrow or issue a letter of credit under the credit agreement , the consolidated cash balance not exceed the greater of $ 35.0 million ( both before and after giving effect to such borrowing or letter of credit issuance ) , or expenditures in respect of oil and gas properties in the ordinary course of business ( as agreed to by the administrative agent ) ; ( iii ) decrease the maximum permitted net leverage ratio from 4.00 to 3.50 and the maximum permitted leverage ratio for purposes of making a restricted payment , restricted investment or optional or voluntary redemption from 3.25 to 2.75 ; ( iv ) increase the eurodollar rate margin to 2.00 % to 3.00 % ; ( v ) increase the reference rate margin to 1.00 % to 2.00 % ; and ( vi ) amend certain other covenants and provisions . the company was in compliance with all covenants as of december 31 , 2020 and through the filing date of this report . our weighted-average interest rates on borrowings from the credit facility were 3.1 % and 4.4 % for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 and as of the date of filing , we had a zero balance on our credit facility . non-gaap financial measures adjusted ebitdax represents earnings before interest , income taxes , depreciation , depletion , and amortization , exploration expense , and other non-cash and non-recurring charges . adjusted ebitdax excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and or amount can not be reasonably estimated . adjusted ebitdax is a non-gaap measure that we present because we believe it provides useful additional information to investors and analysts , as a performance measure , for analysis of our ability to internally generate funds for exploration , development , acquisitions , and to service debt . story_separator_special_tag for sales of entire working interests in unproved properties , gain or loss is recognized to the extent of the difference between the proceeds received and the net carrying value of the property . proceeds from sales of partial interests in unproved properties are accounted for as a recovery of costs unless the proceeds exceed the entire cost of the property . oil and natural gas reserve quantities and standardized measure our third-party petroleum consultant prepared our estimates of oil and natural gas reserves and associated future net revenues . while the sec has adopted rules which allow us to disclose proved , probable , and possible reserves , we have elected to disclose only proved reserves in this annual report on form 10-k. the sec 's revised rules define proved reserves as the quantities of oil and gas , which , by analysis of geoscience and engineering data , can be estimated with reasonable certainty to be economically producible - from a given date forward , from known reservoirs , and under existing economic conditions , operating methods , and government regulations - prior to the time at which contracts providing the right to operate expire , unless evidence indicates that renewal is reasonably certain , regardless of whether deterministic or probabilistic methods are used for the estimation . the project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time . our third party petroleum engineering consultant must make a number of subjective assumptions based on their professional judgment in developing reserve estimates . reserve estimates are updated annually and consider recent production levels and other technical information about each field . oil and natural gas reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that can not be precisely measured . the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment . periodic revisions to the estimated reserves and future cash flows may be necessary as a result of a number of factors , including reservoir performance , oil and natural gas prices , cost changes , technological advances , new geological or geophysical data , or other economic factors . accordingly , reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered . we can not predict the amounts or timing of future reserve revisions . if such revisions are significant , they could significantly affect future amortization of capitalized costs and result in impairment of assets that may be material . revenue recognition sales of oil , natural gas , and ngls are recognized when performance obligations are satisfied at the point control of the product is transferred to the customer . the company 's contracts ' pricing provisions are tied to a market index , with certain adjustments based on , among other factors , whether a well delivers to a gathering or transmission line , quality of the oil or natural gas , and prevailing supply and demand conditions . as a result , the price of the oil , natural gas , and ngls fluctuates to remain competitive with other available oil , natural gas , and ngls supplies . please refer to part ii , item 8 , note 1 - summary of significant accounting policies for more information . we record revenue in the month production is delivered to the purchaser . payment is generally received within 30 to 60 days after the date of production . however , settlement statements for certain natural gas and ngls sales may not be received for 30 to 60 days after the date production is delivered , and as a result , we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product . we record the differences between our estimates and the actual amounts received for product sales in the month in which payment is received from the purchaser . for the period from january 1 , 2020 through december 31 , 2020 , revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material . the company has interests with other producers in certain properties , in which case the company uses the entitlement method to account for gas imbalances . the company had no material gas imbalances as of december 31 , 2020 and 2019 . 71 table of contents impairment of proved properties we review our proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred and at least annually . we estimate the expected undiscounted future cash flows of our oil and natural gas properties and compare such undiscounted future cash flows to the carrying amount of the oil and natural gas properties to determine if the carrying amount is recoverable . if the carrying amount exceeds the estimated undiscounted future cash flows , we will adjust the carrying amount of the oil and natural gas properties to fair value . the factors used to determine fair value are subject to our judgment and expertise and include , but are not limited to , recent sales prices of comparable properties , the present value of future cash flows , net of estimated operating and development costs , using estimates of proved reserves , future commodity pricing , future production estimates , anticipated capital expenditures , and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected . because of the uncertainty inherent in these factors , we can not predict when or if future impairment charges for proved properties will be recorded . impairment of unproved properties the unproved property balance

liquidity and capital resources below for additional discussion ; cash flows provided by operating activities for the year ended december 31 , 2020 was $ 158.8 million , as compared to cash flows provided by operating activities of $ 224.6 million during the year ended december 31 , 2019. please refer to liquidity and capital resources below for additional discussion ; proved reserves of 118.2 mmboe as of december 31 , 2020 decreased by 3 % when compared to proved reserves as of december 31 , 2019 ; and capital expenditures , inclusive of accruals , were $ 67.7 million during the year ended december 31 , 2020 , which was within guidance . 62 table of contents rocky mountain infrastructure the company 's gathering , treating , and production facilities , maintained under its rocky mountain infrastructure , llc ( “ rmi ” ) subsidiary , provide many operational benefits to the company and provide cost economies of a centralized system . the rmi facilities reduce gathering system pressures at the wellhead , thereby improving hydrocarbon recovery . additionally , with eleven interconnects to four different natural gas processors , rmi helps ensure that the company 's production is not constrained by any single midstream service provider . furthermore , in 2019 , the company installed a new oil gathering line to riverside terminal ( on the grand mesa pipeline ) , which resulted in a corresponding $ 1.25 to $ 1.50 per barrel reduction to our oil differentials for barrels transported on such gathering line . the total value of reduced oil differentials during the year ended december 31 , 2020 was approximately $ 6.2 million .

through the use of our standex value creation system , we have developed a balanced approach to value creation . while we intend to continue investing acquisition capital in high margin and growth segments such as electronics and engraving , we will continue to support all of our businesses as they enhance value through deployment of our gdp+ and opex playbooks . it is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions . we seek to identify and implement organic growth initiatives such as new product development , geographic expansion , and the introduction of products and technologies into new markets , key accounts and strategic sales channel partners . also , we have a long-term objective to create sizable business platforms by adding strategically aligned or “ bolt on ” acquisitions to strengthen the individual businesses , create both sales and cost synergies with our core business platforms , and accelerate their growth and margin improvement . we look to create both sales and cost synergies within our core business platforms , accelerate growth and improve margins . we have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses . from time to time , we have divested , and likely will continue to divest , businesses that we feel are not strategic or do not meet our growth and return expectations . as part of our ongoing strategy : o subsequent to the end of the fiscal year , during july of 2020 , we acquired renco electronics , a designer and manufacturer of customized standard magnetics components and products including transformers , inductors , chokes and coils for power and rf applications . renco 's end markets and customer base in areas such as consumer and industrial applications are highly complementary to our existing business with the potential to further expand key account relationships and capitalize on cross selling opportunities between the two companies . renco operates one manufacturing facility in florida and is supported by contract manufacturers in asia . renco 's results will be reported within our electronics segment beginning in fiscal year 2021. o during the third quarter of fiscal year 2020 , we initiated a program and signed an agreement to divest our master-bilt and norlake businesses ( together our refrigerated solutions group or rsg ) . this divestiture allows us to continue the simplification of our portfolio and enables us to focus more clearly on those of our businesses that sell differentiated products and which have higher growth and margin profiles . the divestiture was finalized and consideration was exchanged in the fourth quarter of 2020. results of rsg in current and prior periods have been classified as discontinued operations in the consolidated financial statements . the divestiture impacts the consolidated company results as follows : replace_table_token_6_th 20 o during the first quarter of 2019 , the company decided to divest its cooking solutions group , which consisted of three operating segments , associated american industries , bki , and ultrafryer , along with a minority interest investment . we completed this divestiture during the third quarter of 2019 and received proceeds for the sale on the first day of the fourth quarter of 2019. in connection with the divestiture efforts , we also sold our minority interest in a european oven manufacturer back to the majority owners . results of the cooking solutions group in current and prior periods have been classified as discontinued operations in the consolidated financial statements . o in april 2019 , we acquired ohio-based genius solutions engineering company ( d/b/a gs engineering ) , a provider of specialized “ soft surface ” skin texturized tooling , primarily serving the automotive end market . gs engineering brings us critical proprietary technologies that offer significant advantages in creating tools for “ soft surface ” components which are used increasingly in vehicle interiors . the tooling for soft surface products offered by gs is highly complementary to our current industry-leading capabilities in texturing molds and tools used to create “ hard surface ” components . this technology also complements and enables us to improve our existing nickel shell technology that produces soft surface tooling . gs operates one facility in ohio and its results are reported within our engraving segment . o in september 2018 , we acquired new hampshire-based regional mfg . specialists , inc. ( now named agile magnetics , inc. ) , a provider of high-reliability magnetics . the addition of agile magnetics is an important step forward in building out the high reliability magnetics business of standex electronics . as a result of this combination , we have broadened our exposure to several attractive end-markets and added a valuable manufacturing and sales base in the northeast . additionally , we can now offer complementary products from standex 's broader portfolio to agile 's customer base . agile magnetics products include transformers , inductors and coils for mission critical applications for blue chip oems in the semiconductor , military , aerospace , healthcare , and industrial markets . agile operates one manufacturing facility in new hampshire and its results are reported within our electronics segment . o in august 2018 , we acquired michigan-based tenibac-graphion , inc. , a provider of chemical and laser texturing services . the combination of tenibac and standex engraving expands services available to customers , increases responsiveness to customer demands , and drives innovative approaches to solving customer needs . the combined customer base now has access to the full line of mold and tool services , such as the architexture design consultancy , chemical and laser engraving , tool finishing , and tool enhancements . tenibac serves automotive , packaging , medical and consumer products customers , and operates three facilities , two in michigan and one in china . story_separator_special_tag the company 's income tax provision from continuing operations for the fiscal year ended june 30 , 2019 was impacted by the following items : ( i ) a tax benefit related to the impact of the sec . 965 toll tax of $ 0.8 million , ( ii ) a tax provision of $ 0.3 million related to the elimination of the performance based compensation exception for executive compensation under sec . 162 ( m ) of the internal revenue code , and ( iii ) a tax provision related to expected foreign withholding taxes on cash repatriation of $ 2.1 million . the company 's income tax provision from continuing operations for the fiscal year ended june 30 , 2018 was impacted by the following items : ( i ) a tax provision related to the impact of the sec . 965 toll tax of $ 11.7 million , ( ii ) a tax provision related to a revaluation of deferred taxes due to the federal rate reduction of $ 1.3 million , and ( iii ) a tax provision related to expected foreign withholding taxes on cash repatriation of $ 7.8 million . capital expenditures our capital spending is focused on growth initiatives , cost reduction activities , and upgrades to extend the capabilities of our capital assets . in general , we anticipate our capital expenditures over the long-term will be approximately 3 % to 4 % of net sales . during 2020 , capital expenditures decreased to $ 19.3 million or 3.2 % of net sales , as compared to $ 32.5 million , or 5.1 % , of net sales in the prior year . in response to reduced activity levels brought on by the covid-19 pandemic , beginning in the third quarter , we reduced our capital expenditures to only necessary maintenance , safety and the highest priority growth initiatives . capital spending in 2019 included $ 5.8 million for a new electronics facility in cincinnati which replaced a legacy facility sold for $ 1.4 million in fiscal year 2018. we expect 2021 capital spending to be between $ 28 million and $ 30 million which includes $ 3.7 million allocated to begin construction for a new electronics facility in germany to replace a legacy facility sold in fiscal year 2019. backlog backlog includes all active or open orders for goods and services . backlog also includes any future deliveries based on executed customer contracts , so long as such deliveries are based on agreed upon delivery schedules . with the exception of our engineering technologies group , backlog has limited value as an indicator for the company 's businesses because of our relatively short delivery periods and rapid inventory turnover . due to the nature of long-term agreements in the engineering technologies group , the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another . backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems . customers may delay delivery of products or cancel orders prior to shipment , subject to possible cancellation penalties . in general , the majority of net realizable backlog beyond one year comes from the engineering technologies group . 25 backlog orders in place at june 30 , 2020 and 2019 are as follows ( in thousands ) : replace_table_token_9_th backlog realizable within one year decreased $ 30.8 million , or 16.8 % to $ 152.3 million at june 30 , 2020 from $ 183.1 million at june 30 , 2019. we experienced backlog declines in all segments as a result of the general , global economic slowdown brought about by the covid-19 pandemic . segment analysis ( in thousands ) electronics replace_table_token_10_th net sales in fiscal year 2020 decreased $ 18.8 million , or 9.2 % , when compared to the prior year as organic sales declined $ 20.3 million , or 9.9 % . sales were slightly down in north america while down significantly in europe and asia . new sensor , switch and relay applications continued to offset some of the core business loss due to economic conditions and current covid-19 impact . the incremental sales impact of the agile magnetics acquisition , which was acquired in september of fiscal year 2019 , was $ 3.1 million during the year and foreign exchange rates unfavorably affected sales by $ 1.6 million or 0.8 % . given the diversity of markets and geographies served by the electronics business , the covid-19 pandemic could have differing impact on our future incoming order rate and sales performance in various regions . income from operations in the fiscal year 2020 decreased $ 11.5 million , or 27.8 % , when compared to the prior year . the operating income decline was due to the margin loss on the lower organic sales , inflationary cost increases , particularly rhodium costs , and incremental costs related to the current covid-19 environment , which more than offset cost saving initiatives implemented throughout the year . looking forward , we have fixed our most significant material cost for the first six months of fiscal year 2021 , and , for this portion of the year , we expect material costs in line with those experienced in the fourth quarter of 2020. net sales in fiscal year 2019 increased $ 7.8 million , or 4.0 % , when compared to the prior year with organic sales growth contributing $ 2.6 million , or 1.3 % . the sales impact of the agile magnetics acquisition was $ 9.3 million and foreign exchange rates unfavorably affected sales by $ 4.2 million or 2.1 % . income from operations in the fiscal year 2019 decreased $ 4.3 million , or 9.4 % , when compared to the prior year . the operating income decline was due to government mandated wage increases in our

liquidity and capital resources below for additional discussion ; cash flows provided by operating activities for the year ended december 31 , 2020 was $ 158.8 million , as compared to cash flows provided by operating activities of $ 224.6 million during the year ended december 31 , 2019. please refer to liquidity and capital resources below for additional discussion ; proved reserves of 118.2 mmboe as of december 31 , 2020 decreased by 3 % when compared to proved reserves as of december 31 , 2019 ; and capital expenditures , inclusive of accruals , were $ 67.7 million during the year ended december 31 , 2020 , which was within guidance . 62 table of contents rocky mountain infrastructure the company 's gathering , treating , and production facilities , maintained under its rocky mountain infrastructure , llc ( “ rmi ” ) subsidiary , provide many operational benefits to the company and provide cost economies of a centralized system . the rmi facilities reduce gathering system pressures at the wellhead , thereby improving hydrocarbon recovery . additionally , with eleven interconnects to four different natural gas processors , rmi helps ensure that the company 's production is not constrained by any single midstream service provider . furthermore , in 2019 , the company installed a new oil gathering line to riverside terminal ( on the grand mesa pipeline ) , which resulted in a corresponding $ 1.25 to $ 1.50 per barrel reduction to our oil differentials for barrels transported on such gathering line . the total value of reduced oil differentials during the year ended december 31 , 2020 was approximately $ 6.2 million .

through the use of our standex value creation system , we have developed a balanced approach to value creation . while we intend to continue investing acquisition capital in high margin and growth segments such as electronics and engraving , we will continue to support all of our businesses as they enhance value through deployment of our gdp+ and opex playbooks . it is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions . we seek to identify and implement organic growth initiatives such as new product development , geographic expansion , and the introduction of products and technologies into new markets , key accounts and strategic sales channel partners . also , we have a long-term objective to create sizable business platforms by adding strategically aligned or “ bolt on ” acquisitions to strengthen the individual businesses , create both sales and cost synergies with our core business platforms , and accelerate their growth and margin improvement . we look to create both sales and cost synergies within our core business platforms , accelerate growth and improve margins . we have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses . from time to time , we have divested , and likely will continue to divest , businesses that we feel are not strategic or do not meet our growth and return expectations . as part of our ongoing strategy : o subsequent to the end of the fiscal year , during july of 2020 , we acquired renco electronics , a designer and manufacturer of customized standard magnetics components and products including transformers , inductors , chokes and coils for power and rf applications . renco 's end markets and customer base in areas such as consumer and industrial applications are highly complementary to our existing business with the potential to further expand key account relationships and capitalize on cross selling opportunities between the two companies . renco operates one manufacturing facility in florida and is supported by contract manufacturers in asia . renco 's results will be reported within our electronics segment beginning in fiscal year 2021. o during the third quarter of fiscal year 2020 , we initiated a program and signed an agreement to divest our master-bilt and norlake businesses ( together our refrigerated solutions group or rsg ) . this divestiture allows us to continue the simplification of our portfolio and enables us to focus more clearly on those of our businesses that sell differentiated products and which have higher growth and margin profiles . the divestiture was finalized and consideration was exchanged in the fourth quarter of 2020. results of rsg in current and prior periods have been classified as discontinued operations in the consolidated financial statements . the divestiture impacts the consolidated company results as follows : replace_table_token_6_th 20 o during the first quarter of 2019 , the company decided to divest its cooking solutions group , which consisted of three operating segments , associated american industries , bki , and ultrafryer , along with a minority interest investment . we completed this divestiture during the third quarter of 2019 and received proceeds for the sale on the first day of the fourth quarter of 2019. in connection with the divestiture efforts , we also sold our minority interest in a european oven manufacturer back to the majority owners . results of the cooking solutions group in current and prior periods have been classified as discontinued operations in the consolidated financial statements . o in april 2019 , we acquired ohio-based genius solutions engineering company ( d/b/a gs engineering ) , a provider of specialized “ soft surface ” skin texturized tooling , primarily serving the automotive end market . gs engineering brings us critical proprietary technologies that offer significant advantages in creating tools for “ soft surface ” components which are used increasingly in vehicle interiors . the tooling for soft surface products offered by gs is highly complementary to our current industry-leading capabilities in texturing molds and tools used to create “ hard surface ” components . this technology also complements and enables us to improve our existing nickel shell technology that produces soft surface tooling . gs operates one facility in ohio and its results are reported within our engraving segment . o in september 2018 , we acquired new hampshire-based regional mfg . specialists , inc. ( now named agile magnetics , inc. ) , a provider of high-reliability magnetics . the addition of agile magnetics is an important step forward in building out the high reliability magnetics business of standex electronics . as a result of this combination , we have broadened our exposure to several attractive end-markets and added a valuable manufacturing and sales base in the northeast . additionally , we can now offer complementary products from standex 's broader portfolio to agile 's customer base . agile magnetics products include transformers , inductors and coils for mission critical applications for blue chip oems in the semiconductor , military , aerospace , healthcare , and industrial markets . agile operates one manufacturing facility in new hampshire and its results are reported within our electronics segment . o in august 2018 , we acquired michigan-based tenibac-graphion , inc. , a provider of chemical and laser texturing services . the combination of tenibac and standex engraving expands services available to customers , increases responsiveness to customer demands , and drives innovative approaches to solving customer needs . the combined customer base now has access to the full line of mold and tool services , such as the architexture design consultancy , chemical and laser engraving , tool finishing , and tool enhancements . tenibac serves automotive , packaging , medical and consumer products customers , and operates three facilities , two in michigan and one in china . story_separator_special_tag the company 's income tax provision from continuing operations for the fiscal year ended june 30 , 2019 was impacted by the following items : ( i ) a tax benefit related to the impact of the sec . 965 toll tax of $ 0.8 million , ( ii ) a tax provision of $ 0.3 million related to the elimination of the performance based compensation exception for executive compensation under sec . 162 ( m ) of the internal revenue code , and ( iii ) a tax provision related to expected foreign withholding taxes on cash repatriation of $ 2.1 million . the company 's income tax provision from continuing operations for the fiscal year ended june 30 , 2018 was impacted by the following items : ( i ) a tax provision related to the impact of the sec . 965 toll tax of $ 11.7 million , ( ii ) a tax provision related to a revaluation of deferred taxes due to the federal rate reduction of $ 1.3 million , and ( iii ) a tax provision related to expected foreign withholding taxes on cash repatriation of $ 7.8 million . capital expenditures our capital spending is focused on growth initiatives , cost reduction activities , and upgrades to extend the capabilities of our capital assets . in general , we anticipate our capital expenditures over the long-term will be approximately 3 % to 4 % of net sales . during 2020 , capital expenditures decreased to $ 19.3 million or 3.2 % of net sales , as compared to $ 32.5 million , or 5.1 % , of net sales in the prior year . in response to reduced activity levels brought on by the covid-19 pandemic , beginning in the third quarter , we reduced our capital expenditures to only necessary maintenance , safety and the highest priority growth initiatives . capital spending in 2019 included $ 5.8 million for a new electronics facility in cincinnati which replaced a legacy facility sold for $ 1.4 million in fiscal year 2018. we expect 2021 capital spending to be between $ 28 million and $ 30 million which includes $ 3.7 million allocated to begin construction for a new electronics facility in germany to replace a legacy facility sold in fiscal year 2019. backlog backlog includes all active or open orders for goods and services . backlog also includes any future deliveries based on executed customer contracts , so long as such deliveries are based on agreed upon delivery schedules . with the exception of our engineering technologies group , backlog has limited value as an indicator for the company 's businesses because of our relatively short delivery periods and rapid inventory turnover . due to the nature of long-term agreements in the engineering technologies group , the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another . backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems . customers may delay delivery of products or cancel orders prior to shipment , subject to possible cancellation penalties . in general , the majority of net realizable backlog beyond one year comes from the engineering technologies group . 25 backlog orders in place at june 30 , 2020 and 2019 are as follows ( in thousands ) : replace_table_token_9_th backlog realizable within one year decreased $ 30.8 million , or 16.8 % to $ 152.3 million at june 30 , 2020 from $ 183.1 million at june 30 , 2019. we experienced backlog declines in all segments as a result of the general , global economic slowdown brought about by the covid-19 pandemic . segment analysis ( in thousands ) electronics replace_table_token_10_th net sales in fiscal year 2020 decreased $ 18.8 million , or 9.2 % , when compared to the prior year as organic sales declined $ 20.3 million , or 9.9 % . sales were slightly down in north america while down significantly in europe and asia . new sensor , switch and relay applications continued to offset some of the core business loss due to economic conditions and current covid-19 impact . the incremental sales impact of the agile magnetics acquisition , which was acquired in september of fiscal year 2019 , was $ 3.1 million during the year and foreign exchange rates unfavorably affected sales by $ 1.6 million or 0.8 % . given the diversity of markets and geographies served by the electronics business , the covid-19 pandemic could have differing impact on our future incoming order rate and sales performance in various regions . income from operations in the fiscal year 2020 decreased $ 11.5 million , or 27.8 % , when compared to the prior year . the operating income decline was due to the margin loss on the lower organic sales , inflationary cost increases , particularly rhodium costs , and incremental costs related to the current covid-19 environment , which more than offset cost saving initiatives implemented throughout the year . looking forward , we have fixed our most significant material cost for the first six months of fiscal year 2021 , and , for this portion of the year , we expect material costs in line with those experienced in the fourth quarter of 2020. net sales in fiscal year 2019 increased $ 7.8 million , or 4.0 % , when compared to the prior year with organic sales growth contributing $ 2.6 million , or 1.3 % . the sales impact of the agile magnetics acquisition was $ 9.3 million and foreign exchange rates unfavorably affected sales by $ 4.2 million or 2.1 % . income from operations in the fiscal year 2019 decreased $ 4.3 million , or 9.4 % , when compared to the prior year . the operating income decline was due to government mandated wage increases in our

cash flow net cash provided by continuing operating activities for the year ended june 30 , 2020 was $ 56.5 million compared to net cash provided by continuing operating activities of $ 72.9 million in the prior year . we generated $ 88.6 million from income statement activities and used $ 32.1 million of cash to fund working capital increases . cash flow used in investing activities for the year ended june 30 , 2020 totaled $ 20.6 million . uses of investing cash consisted primarily of capital expenditures of $ 21.5 million . cash used by financing activities for the year ended june 30 , 2020 were $ 19.0 million and included cash paid for dividends of $ 10.6 million and stock repurchases of $ 10.4 million offset by net borrowings of $ 1.2 million . net cash provided by continuing operating activities for the year ended june 30 , 2019 was $ 72.9 million compared to net cash provided by continuing operating activities of $ 48.6 million in the prior year . we generated $ 78.1 million from income statement activities and used $ 5.2 million of cash to fund working capital increases . cash flow used in investing activities for the year ended june 30 , 2019 totaled $ 157.6 million . uses of investing cash consisted primarily of capital expenditures of $ 32.5 million along with $ 127.9 million for the acquisition of tenibac , agile magnetics , and gs engineering . cash used by financing activities for the year ended june 30 , 2019 were $ 38.2 million and included cash paid for dividends of $ 9.8 million and stock repurchases of $ 33.4 million offset by net borrowings of $ 4.8 million . we sponsor a number of defined benefit and defined contribution retirement plans . the u.s. pension plan is frozen for all participants . we have evaluated the current and long-term cash requirements of these plans , and our existing sources of liquidity are expected to be sufficient to cover required contributions under erisa and other governing regulations .

33 key business measures we track our results of operations and manage our business using the following key business measures , which include non-gaap financial measures : same-restaurant sales - we report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen . this methodology is consistent with the metric used by our management for internal reporting and analysis . the table summarizing same-restaurant sales below in “ results of operations ” provides the same-restaurant sales percent changes . same-restaurant sales exclude the impact of currency translation . restaurant margin - we define restaurant margin as sales from company-operated restaurants less cost of sales divided by sales from company-operated restaurants . cost of sales includes food and paper , restaurant labor and occupancy , advertising and other operating costs . restaurant margin is influenced by factors such as price increases , the effectiveness of our advertising and marketing initiatives , featured products , product mix , fluctuations in food and labor costs , restaurant openings , remodels and closures and the level of our fixed and semi-variable costs . systemwide sales - systemwide sales is a non-gaap financial measure , which includes sales by both company-operated restaurants and franchised restaurants . franchised restaurants ' sales are reported by our franchisees and represent their revenues from sales at franchised wendy 's restaurants . the company 's consolidated financial statements do not include sales by franchised restaurants to their customers . the company believes systemwide sales data is useful in assessing consumer demand for the company 's products , the overall success of the wendy 's brand and , ultimately , the performance of the company . the company 's royalty revenues are computed as percentages of sales made by wendy 's franchisees . as a result , sales by wendy 's franchisees have a direct effect on the company 's royalty revenues and therefore on the company 's profitability . average unit volumes - we calculate company-operated restaurant average unit volumes by summing the average weekly sales of all company-operated restaurants which reported sales during the week . franchised restaurant average unit volumes is a non-gaap financial measure , which includes sales by franchised restaurants , which are reported by our franchisees and represent their revenues from sales at franchised wendy 's restaurants . the company 's consolidated financial statements do not include sales by franchised restaurants to their customers . the company believes franchised restaurant average unit volumes is useful information for the same reasons described above for “ systemwide sales . ” we calculate franchised restaurant average unit volumes by summing the average weekly sales of all franchised restaurants which reported sales during the week . the company calculates same-restaurant sales and systemwide sales on a constant currency basis . constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates . the company believes excluding the impact of foreign currency translation provides better year over year comparability . the non-gaap financial measures discussed above do not replace the presentation of the company 's financial results in accordance with gaap . because all companies do not calculate non-gaap financial measures in the same way , these measures as used by other companies may not be consistent with the way the company calculates such measures . system optimization initiative in july 2013 , the company announced a system optimization initiative , as part of its brand transformation , which includes a shift from company-operated restaurants to franchised restaurants over time , through acquisitions and dispositions , as well as facilitating franchisee-to-franchisee restaurant transfers . in february 2015 , the company announced plans to reduce its ongoing company-operated restaurant ownership to approximately 5 % of the total system , which the company completed as of january 1 , 2017 . in 2017 , the company facilitated the transfer of 400 restaurants between franchisees ( excluding the davco and npc transactions discussed below ) . while the company has no plans to reduce its ownership below the 5 % level , wendy 's will continue to optimize its system by facilitating franchisee-to-franchisee restaurant transfers , as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of company-operated restaurants to existing and new franchisees , to further strengthen the franchisee base and drive new restaurant development and accelerate reimages in the image activation format . 34 davco and npc transactions as part of our system optimization initiative , the company acquired 140 wendy 's restaurants on may 31 , 2017 from davco restaurants , llc ( “ davco ” ) for total net cash consideration of $ 86.8 million , which were immediately sold to npc international , inc. ( “ npc ” ) , an existing franchisee of the company , for cash proceeds of $ 70.7 million ( the “ davco and npc transactions ” ) . as part of the transaction , npc has agreed to remodel 90 acquired restaurants in the image activation format by the end of 2021 and build 15 new wendy 's restaurants by the end of 2022. prior to closing the davco transaction , seven davco restaurants were closed . the acquisition of wendy 's restaurants from davco was not contingent on executing the sale agreement with npc ; as such , the company accounted for the transactions as an acquisition and subsequent disposition of a business . as part of the transactions , the company retained leases for purposes of subleasing such properties to npc . as a result of the transactions , the company recognized a loss of $ 43.6 million during 2017. costs related to dispositions under our system optimization initiative are recorded to “ reorganization and realignment costs . story_separator_special_tag net income , which resulted in a benefit of $ 5.2 million in 2017 ( see note 1 of the financial statements and supplementary data contained in item 8 herein for further discussion ) . in our initial analysis of the impact of the tax act , we have recorded a discrete net tax benefit of $ 140.4 million for the year ended december 31 , 2017. this net benefit primarily consists of a benefit of $ 164.9 million for the impact of the corporate rate reduction on our net deferred tax liabilities , partially offset by a net expense of $ 22.2 million for the international-related provisions , including the transition tax ( and the related impact to our recorded valuation allowance ) and deferred taxes recorded on foreign earnings previously considered permanently reinvested . the company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the transition tax and included these amounts in its consolidated financial statements for the year ended december 31 , 2017. the ultimate impact may differ from these provisional amounts , possibly materially , due to , among other things , additional analysis , changes in interpretations and assumptions the company has made and additional regulatory guidance that may be issued . the company is not able to determine a provisional estimate for the global intangible low-taxed income ( “ gilti ” ) tax and , therefore , has not provided any deferred tax impacts of gilti in its consolidated financial statements for the year ended december 31 , 2017. the impact of our system optimization initiative on the provision for income taxes included the effects of the disposition of non-deductible goodwill , and changes to our state deferred taxes and valuation allowances on state net operating losses caused by the shifting relative taxable presence in the various states as our system optimization initiative is executed . these items , which are non-recurring , increased the provision for income taxes by $ 15.0 million , $ 2.8 million and $ 15.1 million during 2017 , 2016 and 2015 , respectively . based on certain provisions contained in the tax act , the unrepatriated earnings of foreign subsidiaries , primarily canadian , are no longer considered permanently invested outside of the u.s. as of december 31 , 2017 , we have provided a deferred foreign tax provision of $ 1.8 million on these unrepatriated earnings . net income from discontinued operations year ended 2015 income from discontinued operations before income taxes $ 14.9 provision for income taxes ( 4.4 ) income from discontinued operations , net of income taxes 10.5 gain on disposal of discontinued operations before income taxes 25.5 provision for income taxes on gain on disposal ( 14.9 ) gain on disposal of discontinued operations , net of income taxes 10.6 net income from discontinued operations $ 21.1 on may 31 , 2015 , wendy 's completed the sale of 100 % of its membership interest in the new bakery company , llc and its subsidiaries ( collectively , the “ bakery ” ) to east balt us , llc ( the “ buyer ” ) for $ 78.5 million in cash ( subject to customary purchase price adjustments ) . as a result of the sale , the bakery 's results of operations for the period from december 29 , 2014 through may 31 , 2015 have been included in “ income from discontinued operations , net of income taxes ” in the table above . the company recognized a gain on the disposal of the bakery of $ 10.6 million , net of income tax expense of $ 14.9 million which has been included in net income from discontinued operations . the provision for income taxes on the gain on disposal includes the impact of non-deductible goodwill disposed of as a result of the sale . 43 outlook for 2018 sales we expect sales will be favorably impacted primarily by improving our north america business through continuing core menu improvement , product innovation , strategic price increases on our menu items and focused execution of operational excellence and brand positioning . in addition , sales are expected to benefit from new restaurant openings and higher sales growth at our new and remodeled image activation restaurants . franchise royalty revenue and fees we expect that the sales trends for franchised restaurants will continue to be generally benefited by the factors described above under “ sales ” related to the improvements in the north america business . franchise fees will be negatively impacted by fewer franchisee-to-franchisee restaurant transfers under our system optimization initiative . beginning in 2018 , franchisee-to-franchisee restaurant transfers will be referred to as franchise flips . in addition , the company plans to be more selectively involved in the related real estate in these transactions . lastly , franchise fees in 2018 will be negatively impacted by the new revenue recognition guidance . see “ item 8. financial statements and supplementary data , ” note 1 to the consolidated financial statements , for further information on the new revenue recognition guidance . franchise rental income the impact of facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative during 2017 will continue to result in increased franchise rental income . cost of sales we expect cost of sales , as a percent of sales , will be favorably impacted by the same factors described above for sales . we expect these favorable impacts on cost of sales , as a percent of sales , to be partially offset by higher restaurant labor due to increases in wages , as well as an increase in commodity costs . general and administrative we expect general and administrative expense will be favorably impacted by the may 2017 g & a realignment plan . depreciation and amortization the impact of capital leases resulting from facilitating franchisee-to-franchisee restaurant transfers during 2017 will result in a slight increase in

cash flow net cash provided by continuing operating activities for the year ended june 30 , 2020 was $ 56.5 million compared to net cash provided by continuing operating activities of $ 72.9 million in the prior year . we generated $ 88.6 million from income statement activities and used $ 32.1 million of cash to fund working capital increases . cash flow used in investing activities for the year ended june 30 , 2020 totaled $ 20.6 million . uses of investing cash consisted primarily of capital expenditures of $ 21.5 million . cash used by financing activities for the year ended june 30 , 2020 were $ 19.0 million and included cash paid for dividends of $ 10.6 million and stock repurchases of $ 10.4 million offset by net borrowings of $ 1.2 million . net cash provided by continuing operating activities for the year ended june 30 , 2019 was $ 72.9 million compared to net cash provided by continuing operating activities of $ 48.6 million in the prior year . we generated $ 78.1 million from income statement activities and used $ 5.2 million of cash to fund working capital increases . cash flow used in investing activities for the year ended june 30 , 2019 totaled $ 157.6 million . uses of investing cash consisted primarily of capital expenditures of $ 32.5 million along with $ 127.9 million for the acquisition of tenibac , agile magnetics , and gs engineering . cash used by financing activities for the year ended june 30 , 2019 were $ 38.2 million and included cash paid for dividends of $ 9.8 million and stock repurchases of $ 33.4 million offset by net borrowings of $ 4.8 million . we sponsor a number of defined benefit and defined contribution retirement plans . the u.s. pension plan is frozen for all participants . we have evaluated the current and long-term cash requirements of these plans , and our existing sources of liquidity are expected to be sufficient to cover required contributions under erisa and other governing regulations .

33 key business measures we track our results of operations and manage our business using the following key business measures , which include non-gaap financial measures : same-restaurant sales - we report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen . this methodology is consistent with the metric used by our management for internal reporting and analysis . the table summarizing same-restaurant sales below in “ results of operations ” provides the same-restaurant sales percent changes . same-restaurant sales exclude the impact of currency translation . restaurant margin - we define restaurant margin as sales from company-operated restaurants less cost of sales divided by sales from company-operated restaurants . cost of sales includes food and paper , restaurant labor and occupancy , advertising and other operating costs . restaurant margin is influenced by factors such as price increases , the effectiveness of our advertising and marketing initiatives , featured products , product mix , fluctuations in food and labor costs , restaurant openings , remodels and closures and the level of our fixed and semi-variable costs . systemwide sales - systemwide sales is a non-gaap financial measure , which includes sales by both company-operated restaurants and franchised restaurants . franchised restaurants ' sales are reported by our franchisees and represent their revenues from sales at franchised wendy 's restaurants . the company 's consolidated financial statements do not include sales by franchised restaurants to their customers . the company believes systemwide sales data is useful in assessing consumer demand for the company 's products , the overall success of the wendy 's brand and , ultimately , the performance of the company . the company 's royalty revenues are computed as percentages of sales made by wendy 's franchisees . as a result , sales by wendy 's franchisees have a direct effect on the company 's royalty revenues and therefore on the company 's profitability . average unit volumes - we calculate company-operated restaurant average unit volumes by summing the average weekly sales of all company-operated restaurants which reported sales during the week . franchised restaurant average unit volumes is a non-gaap financial measure , which includes sales by franchised restaurants , which are reported by our franchisees and represent their revenues from sales at franchised wendy 's restaurants . the company 's consolidated financial statements do not include sales by franchised restaurants to their customers . the company believes franchised restaurant average unit volumes is useful information for the same reasons described above for “ systemwide sales . ” we calculate franchised restaurant average unit volumes by summing the average weekly sales of all franchised restaurants which reported sales during the week . the company calculates same-restaurant sales and systemwide sales on a constant currency basis . constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates . the company believes excluding the impact of foreign currency translation provides better year over year comparability . the non-gaap financial measures discussed above do not replace the presentation of the company 's financial results in accordance with gaap . because all companies do not calculate non-gaap financial measures in the same way , these measures as used by other companies may not be consistent with the way the company calculates such measures . system optimization initiative in july 2013 , the company announced a system optimization initiative , as part of its brand transformation , which includes a shift from company-operated restaurants to franchised restaurants over time , through acquisitions and dispositions , as well as facilitating franchisee-to-franchisee restaurant transfers . in february 2015 , the company announced plans to reduce its ongoing company-operated restaurant ownership to approximately 5 % of the total system , which the company completed as of january 1 , 2017 . in 2017 , the company facilitated the transfer of 400 restaurants between franchisees ( excluding the davco and npc transactions discussed below ) . while the company has no plans to reduce its ownership below the 5 % level , wendy 's will continue to optimize its system by facilitating franchisee-to-franchisee restaurant transfers , as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of company-operated restaurants to existing and new franchisees , to further strengthen the franchisee base and drive new restaurant development and accelerate reimages in the image activation format . 34 davco and npc transactions as part of our system optimization initiative , the company acquired 140 wendy 's restaurants on may 31 , 2017 from davco restaurants , llc ( “ davco ” ) for total net cash consideration of $ 86.8 million , which were immediately sold to npc international , inc. ( “ npc ” ) , an existing franchisee of the company , for cash proceeds of $ 70.7 million ( the “ davco and npc transactions ” ) . as part of the transaction , npc has agreed to remodel 90 acquired restaurants in the image activation format by the end of 2021 and build 15 new wendy 's restaurants by the end of 2022. prior to closing the davco transaction , seven davco restaurants were closed . the acquisition of wendy 's restaurants from davco was not contingent on executing the sale agreement with npc ; as such , the company accounted for the transactions as an acquisition and subsequent disposition of a business . as part of the transactions , the company retained leases for purposes of subleasing such properties to npc . as a result of the transactions , the company recognized a loss of $ 43.6 million during 2017. costs related to dispositions under our system optimization initiative are recorded to “ reorganization and realignment costs . story_separator_special_tag net income , which resulted in a benefit of $ 5.2 million in 2017 ( see note 1 of the financial statements and supplementary data contained in item 8 herein for further discussion ) . in our initial analysis of the impact of the tax act , we have recorded a discrete net tax benefit of $ 140.4 million for the year ended december 31 , 2017. this net benefit primarily consists of a benefit of $ 164.9 million for the impact of the corporate rate reduction on our net deferred tax liabilities , partially offset by a net expense of $ 22.2 million for the international-related provisions , including the transition tax ( and the related impact to our recorded valuation allowance ) and deferred taxes recorded on foreign earnings previously considered permanently reinvested . the company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the transition tax and included these amounts in its consolidated financial statements for the year ended december 31 , 2017. the ultimate impact may differ from these provisional amounts , possibly materially , due to , among other things , additional analysis , changes in interpretations and assumptions the company has made and additional regulatory guidance that may be issued . the company is not able to determine a provisional estimate for the global intangible low-taxed income ( “ gilti ” ) tax and , therefore , has not provided any deferred tax impacts of gilti in its consolidated financial statements for the year ended december 31 , 2017. the impact of our system optimization initiative on the provision for income taxes included the effects of the disposition of non-deductible goodwill , and changes to our state deferred taxes and valuation allowances on state net operating losses caused by the shifting relative taxable presence in the various states as our system optimization initiative is executed . these items , which are non-recurring , increased the provision for income taxes by $ 15.0 million , $ 2.8 million and $ 15.1 million during 2017 , 2016 and 2015 , respectively . based on certain provisions contained in the tax act , the unrepatriated earnings of foreign subsidiaries , primarily canadian , are no longer considered permanently invested outside of the u.s. as of december 31 , 2017 , we have provided a deferred foreign tax provision of $ 1.8 million on these unrepatriated earnings . net income from discontinued operations year ended 2015 income from discontinued operations before income taxes $ 14.9 provision for income taxes ( 4.4 ) income from discontinued operations , net of income taxes 10.5 gain on disposal of discontinued operations before income taxes 25.5 provision for income taxes on gain on disposal ( 14.9 ) gain on disposal of discontinued operations , net of income taxes 10.6 net income from discontinued operations $ 21.1 on may 31 , 2015 , wendy 's completed the sale of 100 % of its membership interest in the new bakery company , llc and its subsidiaries ( collectively , the “ bakery ” ) to east balt us , llc ( the “ buyer ” ) for $ 78.5 million in cash ( subject to customary purchase price adjustments ) . as a result of the sale , the bakery 's results of operations for the period from december 29 , 2014 through may 31 , 2015 have been included in “ income from discontinued operations , net of income taxes ” in the table above . the company recognized a gain on the disposal of the bakery of $ 10.6 million , net of income tax expense of $ 14.9 million which has been included in net income from discontinued operations . the provision for income taxes on the gain on disposal includes the impact of non-deductible goodwill disposed of as a result of the sale . 43 outlook for 2018 sales we expect sales will be favorably impacted primarily by improving our north america business through continuing core menu improvement , product innovation , strategic price increases on our menu items and focused execution of operational excellence and brand positioning . in addition , sales are expected to benefit from new restaurant openings and higher sales growth at our new and remodeled image activation restaurants . franchise royalty revenue and fees we expect that the sales trends for franchised restaurants will continue to be generally benefited by the factors described above under “ sales ” related to the improvements in the north america business . franchise fees will be negatively impacted by fewer franchisee-to-franchisee restaurant transfers under our system optimization initiative . beginning in 2018 , franchisee-to-franchisee restaurant transfers will be referred to as franchise flips . in addition , the company plans to be more selectively involved in the related real estate in these transactions . lastly , franchise fees in 2018 will be negatively impacted by the new revenue recognition guidance . see “ item 8. financial statements and supplementary data , ” note 1 to the consolidated financial statements , for further information on the new revenue recognition guidance . franchise rental income the impact of facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative during 2017 will continue to result in increased franchise rental income . cost of sales we expect cost of sales , as a percent of sales , will be favorably impacted by the same factors described above for sales . we expect these favorable impacts on cost of sales , as a percent of sales , to be partially offset by higher restaurant labor due to increases in wages , as well as an increase in commodity costs . general and administrative we expect general and administrative expense will be favorably impacted by the may 2017 g & a realignment plan . depreciation and amortization the impact of capital leases resulting from facilitating franchisee-to-franchisee restaurant transfers during 2017 will result in a slight increase in

cash provided by operating activities increased $ 62.7 million during 2017 as compared to 2016 , due to an increase of $ 55.8 million in net income adjusted for non-cash expenses and a favorable change in operating assets and liabilities of $ 6.9 million . the favorable change in operating assets and liabilities resulted primarily from a decrease in income tax payments , net of refunds and a decrease in payments for incentive compensation for the 2016 fiscal year . cash provided by operating activities decreased $ 85.4 million during 2016 as compared to 2015 , due to a decrease of $ 145.9 million in net income adjusted for non-cash expenses , partially offset by a favorable change in operating assets and liabilities of $ 60.5 million . the favorable change in operating assets and liabilities resulted from ( 1 ) an increase as a result of cash restricted for the payment of interest under our securitized financing facility during the second quarter of 2015 , ( 2 ) an increase in real estate and property tax receivables in 2015 as a result of an increase in franchise restaurants in connection with our system optimization initiative and ( 3 ) a decrease in receivables for income tax refunds . these favorable changes were partially offset by the unfavorable impact of a decrease in the incentive compensation accrual for the 2016 fiscal year due to weaker operating performance as compared to plan in 2016 versus 2015 , as well as an increase in payments for the 2015 fiscal year . 45 investing activities cash used in investing activities increased $ 159.4 million during 2017 as compared to 2016 , primarily due to ( 1 ) a decrease in proceeds from dispositions of company-operated restaurants and other assets of $ 251.3 million and ( 2 ) net cash used in the davco and npc transactions of $ 16.1 million . these unfavorable changes were partially offset by ( 1 ) a decrease of $ 68.3 million in capital expenditures and ( 2 ) a decrease of $ 39.9 million in restricted cash primarily for the reinvestment in capital assets under our securitized financing facility . cash provided by investing activities increased $ 56.7

​ ​ ​ 417.5 % ​ ​ voyage revenue ​ ​ ​ ​ 579,784 ​ ​ ​ ​ ​ 275,473 ​ ​ ​ ​ ​ 304,311 ​ ​ ​ ​ ​ 110.5 % ​ ​ operating expenses : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ voyage expenses ​ ​ ​ ​ 230,675 ​ ​ ​ ​ ​ 137,774 ​ ​ ​ ​ ​ 92,901 ​ ​ ​ ​ ​ 67.4 % ​ ​ vessel expenses ​ ​ ​ ​ 153,662 ​ ​ ​ ​ ​ 85,206 ​ ​ ​ ​ ​ 68,456 ​ ​ ​ ​ ​ 80.3 % ​ ​ depreciation and amortization expense ​ ​ ​ ​ 108,703 ​ ​ ​ ​ ​ 66,101 ​ ​ ​ ​ ​ 42,602 ​ ​ ​ ​ ​ 64.4 % ​ ​ loss on sale of vessels ​ ​ ​ ​ 18,344 ​ ​ ​ ​ ​ 19,970 ​ ​ ​ ​ ​ ( 1,626 ) ​ ​ ​ ​ ​ ( 8.1 ) % ​ ​ general and administrative expenses ​ ​ ​ ​ 26,794 ​ ​ ​ ​ ​ 11,384 ​ ​ ​ ​ ​ 15,410 ​ ​ ​ ​ ​ 135.4 % ​ ​ other corporate expense ​ ​ ​ ​ 2,657 ​ ​ ​ ​ ​ 678 ​ ​ ​ ​ ​ 1,979 ​ ​ ​ ​ ​ 291.9 % ​ ​ total operating expenses ​ ​ ​ ​ 540,835 ​ ​ ​ ​ ​ 321,113 ​ ​ ​ ​ ​ 219,722 ​ ​ ​ ​ ​ 68.4 % ​ ​ operating income ( loss ) ​ ​ ​ ​ 38,949 ​ ​ ​ ​ ​ ( 45,640 ) ​ ​ ​ ​ ​ 84,589 ​ ​ ​ ​ ​ ( 185.3 ) % ​ ​ other ( expense ) income : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ total other expense – net ​ ​ ​ ​ ( 49,031 ) ​ ​ ​ ​ ​ ( 26,874 ) ​ ​ ​ ​ ​ ( 22,157 ) ​ ​ ​ ​ ​ 82.4 % ​ ​ net loss ​ ​ ​ ​ ( 10,082 ) ​ ​ ​ ​ ​ ( 72,514 ) ​ ​ ​ ​ ​ 62,432 ​ ​ ​ ​ ​ ( 86.1 ) % ​ ​ less : net loss attributable to noncontrolling interest ​ ​ ​ ​ ( 776 ) ​ ​ ​ ​ ​ ( 135 ) ​ ​ ​ ​ ​ ( 641 ) ​ ​ ​ ​ ​ 474.8 % ​ ​ net loss attributable to diamond s shipping inc. ​ ​ ​ $ ( 9,306 ) ​ ​ ​ ​ $ ( 72,379 ) ​ ​ ​ ​ $ 63,073 ​ ​ ​ ​ ​ ( 87.1 ) % ​ ​ net loss per share – basic ​ ​ ​ $ ( 0.25 ) ​ ​ ​ ​ $ ( 2.66 ) ​ ​ ​ ​ $ 2.41 ​ ​ ​ ​ ​ ( 90.6 ) % ​ ​ net loss per share – diluted ​ ​ ​ $ ( 0.25 ) ​ ​ ​ ​ $ ( 2.66 ) ​ ​ ​ ​ $ 2.41 ​ ​ ​ ​ ​ ( 90.6 ) % ​ ​ weighted average common shares outstanding – basic ​ ​ ​ ​ 36,857,615 ​ ​ ​ ​ ​ 27,165,696 ​ ​ ​ ​ ​ 9,691,919 ​ ​ ​ ​ ​ 35.7 % ​ ​ weighted average common shares outstanding – diluted ​ ​ ​ ​ 36,857,615 ​ ​ ​ ​ ​ 27,165,696 ​ ​ ​ ​ ​ 9,691,919 ​ ​ ​ ​ ​ 35.7 % ​ ​ ​ 73 results of operations voyage revenue voyage revenue increased by $ 304.3 million to $ 579.8 million during the year ended december 31 , 2019 as compared to the nine months ended december 31 , 2018. the $ 304.3 million increase was principally driven by a 75.8 % increase in revenue days due to an additional 9,134 revenue days during the year ended december 31 , 2019 , primarily driven by the impact of the acquisition of the athena vessels and the additional fiscal quarter of data for the year ended december 31 , 2019 compared to the nine months ended december 31 , 2018 , which only includes three fiscal quarters . further , freight rates in the crude oil transportation market improved in the fourth quarter of 2019. voyage expenses voyage expenses increased by $ 92.9 million to $ 230.7 million during the year ended december 31 , 2019 as compared to $ 137.8 million for the nine months ended december 31 , 2018. the $ 92.9 million increase in voyage expenses was driven by a 52.5 % increase in spot revenue days due to the merger and change in year-end , offset by an increase in short-term time charter activity in the suezmax fleet during the year ended december 31 , 2019 , as the bunker and port costs were borne by the charterer . vessel expenses vessel expenses increased by $ 68.5 million to $ 153.7 million during the year ended december 31 , 2019 as compared to $ 85.2 million for the nine months ended december 31 , 2018. the $ 68.5 million increase in vessel expenses was driven by an 84.8 % increase in vessel operating days , which consists of an increase of 4,177 vessel operating days due to the merger and an increase of 6,975 vessel operating days due to the change in year-end , offset by a decrease of 198 vessel operating days as a result of the four vessel sales that occurred in december 2018 story_separator_special_tag passage of environmental legislation or other regulatory initiatives have in the past had , and may in the future may have , a significant impact on our operations . regulatory measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels with new equipment to comply with new or existing regulations . among other capital expenditures , in connection with imo 2020 , we contracted for the purchase and installation of scrubbers on five of our suezmax vessels . two of these scrubbers have been installed and the remaining three are expected to be installed during the first half of 2020. the total aggregate capital expenditures for these five scrubbers is approximately $ 15.7 million , of which $ 6.9 million has been paid as of december 31 , 2019. we may , in the future , determine to purchase additional scrubbers for installation on other vessels that we own or operate . in addition , with respect to vessels that are not retrofitted with scrubbers , we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel , which expenditures are not expected to be significant or which have not yet been determined . we entered into contracts to install ballast water treatment systems on 15 of our vessels for a total estimated cost of $ 16.9 million , of which $ 12.6 million has been paid as of december 31 , 2019. these vessels have compliance dates which require such installations to be completed in 2019 and 2020. we completed drydocking of eight vessels in 2019. the total cost of drydocking as of december 31 , 2019 was $ 11.8 million . in september 2019 , we sold two of our 2008-built mr product carriers , the atlantic aquarius and atlantic leo . the vessels were delivered to the purchaser in september 2019 , generating gross cash proceeds to us of $ 31.8 million before our repayment of the related debt of $ 20.4 million on the two vessels . 78 we believe that we have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months . however , should market conditions deteriorate beyond third-party forecasts , we would consider a number of liquidity enhancing measures , which could include refinancing a portion of our senior debt , exploring unsecured debt instruments , asset sales and sale-leaseback transactions on certain of our assets . story_separator_special_tag text-align : center ; width:456pt ; line-height:12pt ; `` > 80 revenue recognition during the year ended december 31 , 2019 , the nine months ended december 31 , 2018 and the year ended march 31 , 2018 , revenues were generated from time charters , pool arrangements and voyage charters . we recognize revenues over the term of the time charter when there is a time charter agreement , where the rate is fixed or determinable , service is provided and collection of the related revenue is reasonably assured . we do not recognize revenue during days the vessel is off-hire . revenues from pool arrangements are recognized based on our portion of the net distributions reported by the relevant pool , which represents the net voyage revenue of the pool after voyage expenses and pool manager fees . for the year ended december 31 , 2018 , under a voyage charter agreement , the revenues are recognized on a pro rata basis based on the relative transit time in each period . the period over which voyage revenues are recognized commences at the time the vessel departs from its last discharge port and ends at the time the discharge of cargo at the next discharge port is completed . we do not begin recognizing revenue until a charter has been agreed to by us and the customer , even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage . we do not recognize revenue when a vessel is off-hire . estimated losses on voyages are provided for in full at the time such losses become evident . for the year ended december 31 , 2019 , pursuant to the new revenue recognition guidance , which was adopted as of january 1 , 2019 , and is disclosed in note 14 — voyage revenue of our consolidated financial statements , revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage , which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port . previously , revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer , and ended at the time the discharge of cargo was completed at the discharge port . in time charters , operating costs including crews , maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer . these voyage expenses are borne by us when the vessels are engaged in spot market voyage charters . as such , there are significantly higher voyage expenses for spot market voyage charters as compared to time charters . vessel lives and impairment we follow accounting standards codification ( “ asc ” ) subtopic 360-10-05 , “ accounting for the impairment or disposal of long-lived assets , ” which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . we evaluate the carrying amounts and periods over which long-lived assets are depreciated to determine if events have occurred that would require modification to the carrying values or their

cash provided by operating activities increased $ 62.7 million during 2017 as compared to 2016 , due to an increase of $ 55.8 million in net income adjusted for non-cash expenses and a favorable change in operating assets and liabilities of $ 6.9 million . the favorable change in operating assets and liabilities resulted primarily from a decrease in income tax payments , net of refunds and a decrease in payments for incentive compensation for the 2016 fiscal year . cash provided by operating activities decreased $ 85.4 million during 2016 as compared to 2015 , due to a decrease of $ 145.9 million in net income adjusted for non-cash expenses , partially offset by a favorable change in operating assets and liabilities of $ 60.5 million . the favorable change in operating assets and liabilities resulted from ( 1 ) an increase as a result of cash restricted for the payment of interest under our securitized financing facility during the second quarter of 2015 , ( 2 ) an increase in real estate and property tax receivables in 2015 as a result of an increase in franchise restaurants in connection with our system optimization initiative and ( 3 ) a decrease in receivables for income tax refunds . these favorable changes were partially offset by the unfavorable impact of a decrease in the incentive compensation accrual for the 2016 fiscal year due to weaker operating performance as compared to plan in 2016 versus 2015 , as well as an increase in payments for the 2015 fiscal year . 45 investing activities cash used in investing activities increased $ 159.4 million during 2017 as compared to 2016 , primarily due to ( 1 ) a decrease in proceeds from dispositions of company-operated restaurants and other assets of $ 251.3 million and ( 2 ) net cash used in the davco and npc transactions of $ 16.1 million . these unfavorable changes were partially offset by ( 1 ) a decrease of $ 68.3 million in capital expenditures and ( 2 ) a decrease of $ 39.9 million in restricted cash primarily for the reinvestment in capital assets under our securitized financing facility . cash provided by investing activities increased $ 56.7

​ ​ ​ 417.5 % ​ ​ voyage revenue ​ ​ ​ ​ 579,784 ​ ​ ​ ​ ​ 275,473 ​ ​ ​ ​ ​ 304,311 ​ ​ ​ ​ ​ 110.5 % ​ ​ operating expenses : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ voyage expenses ​ ​ ​ ​ 230,675 ​ ​ ​ ​ ​ 137,774 ​ ​ ​ ​ ​ 92,901 ​ ​ ​ ​ ​ 67.4 % ​ ​ vessel expenses ​ ​ ​ ​ 153,662 ​ ​ ​ ​ ​ 85,206 ​ ​ ​ ​ ​ 68,456 ​ ​ ​ ​ ​ 80.3 % ​ ​ depreciation and amortization expense ​ ​ ​ ​ 108,703 ​ ​ ​ ​ ​ 66,101 ​ ​ ​ ​ ​ 42,602 ​ ​ ​ ​ ​ 64.4 % ​ ​ loss on sale of vessels ​ ​ ​ ​ 18,344 ​ ​ ​ ​ ​ 19,970 ​ ​ ​ ​ ​ ( 1,626 ) ​ ​ ​ ​ ​ ( 8.1 ) % ​ ​ general and administrative expenses ​ ​ ​ ​ 26,794 ​ ​ ​ ​ ​ 11,384 ​ ​ ​ ​ ​ 15,410 ​ ​ ​ ​ ​ 135.4 % ​ ​ other corporate expense ​ ​ ​ ​ 2,657 ​ ​ ​ ​ ​ 678 ​ ​ ​ ​ ​ 1,979 ​ ​ ​ ​ ​ 291.9 % ​ ​ total operating expenses ​ ​ ​ ​ 540,835 ​ ​ ​ ​ ​ 321,113 ​ ​ ​ ​ ​ 219,722 ​ ​ ​ ​ ​ 68.4 % ​ ​ operating income ( loss ) ​ ​ ​ ​ 38,949 ​ ​ ​ ​ ​ ( 45,640 ) ​ ​ ​ ​ ​ 84,589 ​ ​ ​ ​ ​ ( 185.3 ) % ​ ​ other ( expense ) income : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ total other expense – net ​ ​ ​ ​ ( 49,031 ) ​ ​ ​ ​ ​ ( 26,874 ) ​ ​ ​ ​ ​ ( 22,157 ) ​ ​ ​ ​ ​ 82.4 % ​ ​ net loss ​ ​ ​ ​ ( 10,082 ) ​ ​ ​ ​ ​ ( 72,514 ) ​ ​ ​ ​ ​ 62,432 ​ ​ ​ ​ ​ ( 86.1 ) % ​ ​ less : net loss attributable to noncontrolling interest ​ ​ ​ ​ ( 776 ) ​ ​ ​ ​ ​ ( 135 ) ​ ​ ​ ​ ​ ( 641 ) ​ ​ ​ ​ ​ 474.8 % ​ ​ net loss attributable to diamond s shipping inc. ​ ​ ​ $ ( 9,306 ) ​ ​ ​ ​ $ ( 72,379 ) ​ ​ ​ ​ $ 63,073 ​ ​ ​ ​ ​ ( 87.1 ) % ​ ​ net loss per share – basic ​ ​ ​ $ ( 0.25 ) ​ ​ ​ ​ $ ( 2.66 ) ​ ​ ​ ​ $ 2.41 ​ ​ ​ ​ ​ ( 90.6 ) % ​ ​ net loss per share – diluted ​ ​ ​ $ ( 0.25 ) ​ ​ ​ ​ $ ( 2.66 ) ​ ​ ​ ​ $ 2.41 ​ ​ ​ ​ ​ ( 90.6 ) % ​ ​ weighted average common shares outstanding – basic ​ ​ ​ ​ 36,857,615 ​ ​ ​ ​ ​ 27,165,696 ​ ​ ​ ​ ​ 9,691,919 ​ ​ ​ ​ ​ 35.7 % ​ ​ weighted average common shares outstanding – diluted ​ ​ ​ ​ 36,857,615 ​ ​ ​ ​ ​ 27,165,696 ​ ​ ​ ​ ​ 9,691,919 ​ ​ ​ ​ ​ 35.7 % ​ ​ ​ 73 results of operations voyage revenue voyage revenue increased by $ 304.3 million to $ 579.8 million during the year ended december 31 , 2019 as compared to the nine months ended december 31 , 2018. the $ 304.3 million increase was principally driven by a 75.8 % increase in revenue days due to an additional 9,134 revenue days during the year ended december 31 , 2019 , primarily driven by the impact of the acquisition of the athena vessels and the additional fiscal quarter of data for the year ended december 31 , 2019 compared to the nine months ended december 31 , 2018 , which only includes three fiscal quarters . further , freight rates in the crude oil transportation market improved in the fourth quarter of 2019. voyage expenses voyage expenses increased by $ 92.9 million to $ 230.7 million during the year ended december 31 , 2019 as compared to $ 137.8 million for the nine months ended december 31 , 2018. the $ 92.9 million increase in voyage expenses was driven by a 52.5 % increase in spot revenue days due to the merger and change in year-end , offset by an increase in short-term time charter activity in the suezmax fleet during the year ended december 31 , 2019 , as the bunker and port costs were borne by the charterer . vessel expenses vessel expenses increased by $ 68.5 million to $ 153.7 million during the year ended december 31 , 2019 as compared to $ 85.2 million for the nine months ended december 31 , 2018. the $ 68.5 million increase in vessel expenses was driven by an 84.8 % increase in vessel operating days , which consists of an increase of 4,177 vessel operating days due to the merger and an increase of 6,975 vessel operating days due to the change in year-end , offset by a decrease of 198 vessel operating days as a result of the four vessel sales that occurred in december 2018 story_separator_special_tag passage of environmental legislation or other regulatory initiatives have in the past had , and may in the future may have , a significant impact on our operations . regulatory measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels with new equipment to comply with new or existing regulations . among other capital expenditures , in connection with imo 2020 , we contracted for the purchase and installation of scrubbers on five of our suezmax vessels . two of these scrubbers have been installed and the remaining three are expected to be installed during the first half of 2020. the total aggregate capital expenditures for these five scrubbers is approximately $ 15.7 million , of which $ 6.9 million has been paid as of december 31 , 2019. we may , in the future , determine to purchase additional scrubbers for installation on other vessels that we own or operate . in addition , with respect to vessels that are not retrofitted with scrubbers , we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel , which expenditures are not expected to be significant or which have not yet been determined . we entered into contracts to install ballast water treatment systems on 15 of our vessels for a total estimated cost of $ 16.9 million , of which $ 12.6 million has been paid as of december 31 , 2019. these vessels have compliance dates which require such installations to be completed in 2019 and 2020. we completed drydocking of eight vessels in 2019. the total cost of drydocking as of december 31 , 2019 was $ 11.8 million . in september 2019 , we sold two of our 2008-built mr product carriers , the atlantic aquarius and atlantic leo . the vessels were delivered to the purchaser in september 2019 , generating gross cash proceeds to us of $ 31.8 million before our repayment of the related debt of $ 20.4 million on the two vessels . 78 we believe that we have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months . however , should market conditions deteriorate beyond third-party forecasts , we would consider a number of liquidity enhancing measures , which could include refinancing a portion of our senior debt , exploring unsecured debt instruments , asset sales and sale-leaseback transactions on certain of our assets . story_separator_special_tag text-align : center ; width:456pt ; line-height:12pt ; `` > 80 revenue recognition during the year ended december 31 , 2019 , the nine months ended december 31 , 2018 and the year ended march 31 , 2018 , revenues were generated from time charters , pool arrangements and voyage charters . we recognize revenues over the term of the time charter when there is a time charter agreement , where the rate is fixed or determinable , service is provided and collection of the related revenue is reasonably assured . we do not recognize revenue during days the vessel is off-hire . revenues from pool arrangements are recognized based on our portion of the net distributions reported by the relevant pool , which represents the net voyage revenue of the pool after voyage expenses and pool manager fees . for the year ended december 31 , 2018 , under a voyage charter agreement , the revenues are recognized on a pro rata basis based on the relative transit time in each period . the period over which voyage revenues are recognized commences at the time the vessel departs from its last discharge port and ends at the time the discharge of cargo at the next discharge port is completed . we do not begin recognizing revenue until a charter has been agreed to by us and the customer , even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage . we do not recognize revenue when a vessel is off-hire . estimated losses on voyages are provided for in full at the time such losses become evident . for the year ended december 31 , 2019 , pursuant to the new revenue recognition guidance , which was adopted as of january 1 , 2019 , and is disclosed in note 14 — voyage revenue of our consolidated financial statements , revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage , which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port . previously , revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer , and ended at the time the discharge of cargo was completed at the discharge port . in time charters , operating costs including crews , maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer . these voyage expenses are borne by us when the vessels are engaged in spot market voyage charters . as such , there are significantly higher voyage expenses for spot market voyage charters as compared to time charters . vessel lives and impairment we follow accounting standards codification ( “ asc ” ) subtopic 360-10-05 , “ accounting for the impairment or disposal of long-lived assets , ” which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . we evaluate the carrying amounts and periods over which long-lived assets are depreciated to determine if events have occurred that would require modification to the carrying values or their

cash flows the following table summarizes our cash and cash equivalents provided by or used in operating , financing and investing activities for the periods presented below ( presented in millions ) : replace_table_token_10_th net cash provided by operating activities net cash provided by operating activities during the year ended december 31 , 2019 and the nine months ended december 31 , 2018 was $ 63.4 million and $ 23.5 million , respectively . the increase of $ 39.9 million was mainly attributable to , among other factors , higher charter rates increasing our revenues offset by the negative effect of the changes in our operating assets and liabilities of $ 61.7 million . the changes in operating assets and liabilities were driven mainly by increases in trade accounts receivable during the year ended december 31 , 2019. net cash provided by operating activities was $ 23.5 million for the nine months ended december 31 , 2018 , compared to $ 34.0 million for the year ended march 31 , 2018. the decrease of $ 10.5 million was mainly attributable to , among other factors , lower charter rates affecting our revenues offset by the positive effect of the changes in our operating assets and liabilities amounting of $ 32.7 million . changes in our operating assets and liabilities were driven mainly by decreases in trade accounts receivable and pool working capital as a result of the change from pool employment to voyage charters . net cash ( used in ) provided by investing activities net cash used in investing activities refers primarily to cash used for vessel acquisitions or dispositions and improvements . net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements , and the merger . net cash ( used in ) provided by investing activities during the year ended december 31 , 2019 and the nine months ended december 31 , 2018 was ( $ 294.5 ) million and $ 28.0 million , respectively .

37 the historical results , discussion and presentation of our business segments as set forth in this report reflect the impact of these changes for all periods presented in order to present all segment information on a comparable basis . there is no impact on our previously reported consolidated statements of income , balance sheet or statements of cash flows resulting from these changes financial information with respect to all of our other activities , including corporate costs not allocated to our business segments or discontinued operations , is reported as part of the “ engineering , selling and administrative expenses , ” “ non-operating income ( loss ) , ” “ interest income , ” “ interest expense ” or “ discontinued operations , net of income taxes ” line items in our consolidated financial statements and accompanying notes . value drivers of our business in fiscal 2016 , our ability to drive our business ' performance in the near-term and position the company to create long-term value centered upon successfully integrating exelis to maximize the benefits of the transformative acquisition while continuing to focus on our core values of operational excellence and leading through innovation , both of which are embedded in everything we do at harris . our strategic focus includes : capture exelis synergies ; drive operational excellence ; optimize our portfolio to focus where technology differentiates ; grow our core franchises and extend into close adjacencies ; invest in research and development ( “ r & d ” ) to drive discriminating technology ; and balance capital deployment . our first priority is the successful integration of exelis and we are capturing synergy savings . as a result of our disciplined execution , our synergy savings are a full year ahead of our original plan . as our integration efforts focus on driving greater cost and operational efficiencies and capturing opportunities to drive revenue growth , we continue to execute against our strategic priorities and focus on maintaining our deep customer relationships , commercializing our technology and driving operational excellence . our operational excellence program , harris business excellence ( “ hbx ” ) , is focused on streamlining processes , optimizing program execution , and increasing customer satisfaction . hbx incorporates standardized , industry-proven processes and tools based on the principles of lean and six sigma . since implementation , we have made significant strides in customer satisfaction , productivity and asset velocity through our efforts to optimize processes , eliminate waste , reduce costs and enhance quality across our company , including in manufacturing , field operations , direct and indirect material sourcing and other supply chain areas , overhead functions and working capital initiatives . one method we use to drive continuous improvement is “ value engineering ” — continuously evaluating new materials , processes and technologies to insert into products already in production , helping to reduce costs and improve both quality and customer satisfaction . an important part of our strategy to drive shareholder value is optimizing our business portfolio by focusing on investments in which technology provides differentiation . we dispassionately , objectively and aggressively assess which businesses strategically fit and are a better value to harris , as well as which businesses may be a better value on their own or with a third party . as part of this continuous portfolio shaping in order to best position harris to capture value , we completed the divestitures of hcs in the fourth quarter of fiscal 2015 and of aerostructures ( part of our company as a result of our acquisition of exelis ) in the fourth quarter of fiscal 2016. we utilized proceeds from the aerostructures divestiture to pay down debt . going forward , we will continue to assess our portfolio with the goal of enhancing shareholder value creation . after the integration of exelis , we now have greater scale , complementary technologies and breadth in capabilities that enable our core franchises to enhance and expand our offerings across the value chain . we form close partnerships with our expanded customer base to enable us to deliver the highest quality products and solutions to solve our customers ' most complex challenges . we intend to grow our core franchises and capabilities by collaborating with our customers to address their evolving and growing needs through innovation . innovation is at the core of our success , and r & d investment represents the foundation for innovation . our r & d investments are focused on leveraging our existing technology portfolio to introduce new solutions or expand customer-centric features and functions on existing solutions . innovation also leads to natural extensions of our core capabilities for capturing new opportunities in adjacent markets . innovation provides differentiation and is a key competitive advantage for our business . in order to maximize efficiency while maintaining our technological edge , we have adopted a portfolio management approach to optimize investment in r & d at the company level rather than the business unit level and ensure our investment is cost-effective and supports innovation across the entire company . we introduced standardized processes and common metrics 38 to track progress and gauge success , and established core technology centers to more fully leverage r & d investment across our company . during fiscal 2016 , we succeeded in deleveraging our balance sheet with debt prepayments , retiring $ 650 million of debt , approximately one-third of our three-year debt reduction goal . story_separator_special_tag 42 fiscal 2015 compared with fiscal 2014 : non-operating loss in fiscal 2015 was primarily due to the same reasons as noted above for fiscal 2015 non-operating loss . non-operating income in fiscal 2014 was due to net income related to intellectual property matters . see note 21 : non-operating income ( loss ) in the notes for further information . net interest expense fiscal 2016 compared with fiscal 2015 : our net interest expense increased in fiscal 2016 compared with fiscal 2015 primarily due to higher average debt levels as a result of our issuance of $ 2.4 billion of debt securities and our borrowing of $ 1.3 billion under a term loan agreement to finance our acquisition of exelis in fourth quarter of fiscal 2015. fiscal 2015 compared with fiscal 2014 : our net interest expense increased in fiscal 2015 compared with fiscal 2014 primarily due to higher overall debt levels as a result of our issuance of $ 2.4 billion of debt securities and our borrowing of $ 1.3 billion under a term loan agreement to finance our acquisition of exelis in the fourth quarter of fiscal 2015. net interest expense in fiscal 2015 also included $ 18 million of debt issuance costs related to financing commitments for a senior unsecured bridge loan facility in connection with our acquisition of exelis and $ 3 million of interest expense on debt securities issued by exelis that remained outstanding . see note 18 : interest expense in the notes for further information . income taxes fiscal 2016 compared with fiscal 2015 : in fiscal 2016 , our effective tax rate ( income taxes as a percentage of income from continuing operations before income taxes ) was negatively impacted by the non-deductibility for tax purposes of portions of the impairment charge described in note 8 : goodwill in the notes . this negative impact was partially offset by the favorable impact of : settlement of several items for amounts that were lower than previously recorded estimates ; legislation enacted in the second quarter of fiscal 2016 that restored the u.s. federal income tax credit for qualifying r & d expenses for calendar year 2015 and made the credit permanent for the periods following december 31 , 2015 ; recognition of a tax loss , net of valuation allowances , upon the divestiture of aerostructures ; state tax reductions resulting from our integration of exelis operations ; and several differences between gaap and tax accounting related to investments . in fiscal 2015 , our effective tax rate benefited from foreign tax credits resulting from a dividend paid by a foreign subsidiary , finalizing issues with various foreign and domestic tax authorities for amounts lower than estimates previously recorded , additional deductions ( primarily related to manufacturing ) and additional research credits claimed on our fiscal 2014 tax return compared with our recorded estimates at the end of fiscal 2014. these benefits were partially offset in the fourth quarter by the tax cost of repatriating offshore funds , the impact of non-deductible goodwill on our divestiture of hcs and the non-deductibility of some acquisition-related costs . fiscal 2015 compared with fiscal 2014 : the major discrete items from which our fiscal 2015 effective tax rate benefited are those noted for fiscal 2015 in the discussion above regarding fiscal 2016 compared with fiscal 2015. in fiscal 2014 , our effective tax rate benefited from additional deductions ( primarily related to manufacturing ) and additional research credits claimed on our fiscal 2013 tax return compared with our recorded estimates at the end of fiscal 2013 , the settlement of a state tax audit and additional permanent deductions based on recent tax litigation unrelated to us . see note 23 : income taxes in the notes for further information . discontinued operations , net of income taxes fiscal 2016 compared with fiscal 2015 : discontinued operations in fiscal 2016 consisted of a $ 21 million after-tax increase in the loss on sale of broadcast communications from the final determination rendered in a dispute over the amount of the post-closing working capital adjustment to the purchase price and third-party costs related to the dispute . we did not have discontinued operations in fiscal 2015. fiscal 2015 compared with fiscal 2014 : we did not record any amounts in discontinued operations in fiscal 2015. discontinued operations in fiscal 2014 consisted of a $ 7 million after-tax increase in the loss on sale of broadcast communications from miscellaneous adjustments for contingencies related to the disposition , partially offset by a $ 2 million after-tax gain on sale of the remaining assets of cis . see note 3 : discontinued operations in the notes for further information . 43 income from continuing operations per diluted common share attributable to harris corporation common shareholders fiscal 2016 compared with fiscal 2015 : the decrease in income from continuing operations per diluted common share in fiscal 2016 compared with the fiscal 2015 was primarily due to the same reasons noted in the discussions above in this md & a regarding fiscal 2016 compared with fiscal 2015 and by the increase in average common shares outstanding as a result of the issuance of shares in connection with the acquisition of exelis . fiscal 2015 compared with fiscal 2014 : the decrease in income from continuing operations per diluted common share in fiscal 2015 compared with the fiscal 2014 was primarily due to the same reasons noted in the discussions above in this md & a regarding fiscal 2015 compared with fiscal 2014 and by the increase in average common shares outstanding as a result of shares issued related to the acquisition of exelis . see the “ common stock repurchases ” discussion and the “ common stock ” paragraph of the “ capital structure and resources ” discussion below in this md & a for further information . discussion of business segment results of operations communication systems segment replace_table_token_6_th fiscal 2016 compared with

cash flows the following table summarizes our cash and cash equivalents provided by or used in operating , financing and investing activities for the periods presented below ( presented in millions ) : replace_table_token_10_th net cash provided by operating activities net cash provided by operating activities during the year ended december 31 , 2019 and the nine months ended december 31 , 2018 was $ 63.4 million and $ 23.5 million , respectively . the increase of $ 39.9 million was mainly attributable to , among other factors , higher charter rates increasing our revenues offset by the negative effect of the changes in our operating assets and liabilities of $ 61.7 million . the changes in operating assets and liabilities were driven mainly by increases in trade accounts receivable during the year ended december 31 , 2019. net cash provided by operating activities was $ 23.5 million for the nine months ended december 31 , 2018 , compared to $ 34.0 million for the year ended march 31 , 2018. the decrease of $ 10.5 million was mainly attributable to , among other factors , lower charter rates affecting our revenues offset by the positive effect of the changes in our operating assets and liabilities amounting of $ 32.7 million . changes in our operating assets and liabilities were driven mainly by decreases in trade accounts receivable and pool working capital as a result of the change from pool employment to voyage charters . net cash ( used in ) provided by investing activities net cash used in investing activities refers primarily to cash used for vessel acquisitions or dispositions and improvements . net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements , and the merger . net cash ( used in ) provided by investing activities during the year ended december 31 , 2019 and the nine months ended december 31 , 2018 was ( $ 294.5 ) million and $ 28.0 million , respectively .

37 the historical results , discussion and presentation of our business segments as set forth in this report reflect the impact of these changes for all periods presented in order to present all segment information on a comparable basis . there is no impact on our previously reported consolidated statements of income , balance sheet or statements of cash flows resulting from these changes financial information with respect to all of our other activities , including corporate costs not allocated to our business segments or discontinued operations , is reported as part of the “ engineering , selling and administrative expenses , ” “ non-operating income ( loss ) , ” “ interest income , ” “ interest expense ” or “ discontinued operations , net of income taxes ” line items in our consolidated financial statements and accompanying notes . value drivers of our business in fiscal 2016 , our ability to drive our business ' performance in the near-term and position the company to create long-term value centered upon successfully integrating exelis to maximize the benefits of the transformative acquisition while continuing to focus on our core values of operational excellence and leading through innovation , both of which are embedded in everything we do at harris . our strategic focus includes : capture exelis synergies ; drive operational excellence ; optimize our portfolio to focus where technology differentiates ; grow our core franchises and extend into close adjacencies ; invest in research and development ( “ r & d ” ) to drive discriminating technology ; and balance capital deployment . our first priority is the successful integration of exelis and we are capturing synergy savings . as a result of our disciplined execution , our synergy savings are a full year ahead of our original plan . as our integration efforts focus on driving greater cost and operational efficiencies and capturing opportunities to drive revenue growth , we continue to execute against our strategic priorities and focus on maintaining our deep customer relationships , commercializing our technology and driving operational excellence . our operational excellence program , harris business excellence ( “ hbx ” ) , is focused on streamlining processes , optimizing program execution , and increasing customer satisfaction . hbx incorporates standardized , industry-proven processes and tools based on the principles of lean and six sigma . since implementation , we have made significant strides in customer satisfaction , productivity and asset velocity through our efforts to optimize processes , eliminate waste , reduce costs and enhance quality across our company , including in manufacturing , field operations , direct and indirect material sourcing and other supply chain areas , overhead functions and working capital initiatives . one method we use to drive continuous improvement is “ value engineering ” — continuously evaluating new materials , processes and technologies to insert into products already in production , helping to reduce costs and improve both quality and customer satisfaction . an important part of our strategy to drive shareholder value is optimizing our business portfolio by focusing on investments in which technology provides differentiation . we dispassionately , objectively and aggressively assess which businesses strategically fit and are a better value to harris , as well as which businesses may be a better value on their own or with a third party . as part of this continuous portfolio shaping in order to best position harris to capture value , we completed the divestitures of hcs in the fourth quarter of fiscal 2015 and of aerostructures ( part of our company as a result of our acquisition of exelis ) in the fourth quarter of fiscal 2016. we utilized proceeds from the aerostructures divestiture to pay down debt . going forward , we will continue to assess our portfolio with the goal of enhancing shareholder value creation . after the integration of exelis , we now have greater scale , complementary technologies and breadth in capabilities that enable our core franchises to enhance and expand our offerings across the value chain . we form close partnerships with our expanded customer base to enable us to deliver the highest quality products and solutions to solve our customers ' most complex challenges . we intend to grow our core franchises and capabilities by collaborating with our customers to address their evolving and growing needs through innovation . innovation is at the core of our success , and r & d investment represents the foundation for innovation . our r & d investments are focused on leveraging our existing technology portfolio to introduce new solutions or expand customer-centric features and functions on existing solutions . innovation also leads to natural extensions of our core capabilities for capturing new opportunities in adjacent markets . innovation provides differentiation and is a key competitive advantage for our business . in order to maximize efficiency while maintaining our technological edge , we have adopted a portfolio management approach to optimize investment in r & d at the company level rather than the business unit level and ensure our investment is cost-effective and supports innovation across the entire company . we introduced standardized processes and common metrics 38 to track progress and gauge success , and established core technology centers to more fully leverage r & d investment across our company . during fiscal 2016 , we succeeded in deleveraging our balance sheet with debt prepayments , retiring $ 650 million of debt , approximately one-third of our three-year debt reduction goal . story_separator_special_tag 42 fiscal 2015 compared with fiscal 2014 : non-operating loss in fiscal 2015 was primarily due to the same reasons as noted above for fiscal 2015 non-operating loss . non-operating income in fiscal 2014 was due to net income related to intellectual property matters . see note 21 : non-operating income ( loss ) in the notes for further information . net interest expense fiscal 2016 compared with fiscal 2015 : our net interest expense increased in fiscal 2016 compared with fiscal 2015 primarily due to higher average debt levels as a result of our issuance of $ 2.4 billion of debt securities and our borrowing of $ 1.3 billion under a term loan agreement to finance our acquisition of exelis in fourth quarter of fiscal 2015. fiscal 2015 compared with fiscal 2014 : our net interest expense increased in fiscal 2015 compared with fiscal 2014 primarily due to higher overall debt levels as a result of our issuance of $ 2.4 billion of debt securities and our borrowing of $ 1.3 billion under a term loan agreement to finance our acquisition of exelis in the fourth quarter of fiscal 2015. net interest expense in fiscal 2015 also included $ 18 million of debt issuance costs related to financing commitments for a senior unsecured bridge loan facility in connection with our acquisition of exelis and $ 3 million of interest expense on debt securities issued by exelis that remained outstanding . see note 18 : interest expense in the notes for further information . income taxes fiscal 2016 compared with fiscal 2015 : in fiscal 2016 , our effective tax rate ( income taxes as a percentage of income from continuing operations before income taxes ) was negatively impacted by the non-deductibility for tax purposes of portions of the impairment charge described in note 8 : goodwill in the notes . this negative impact was partially offset by the favorable impact of : settlement of several items for amounts that were lower than previously recorded estimates ; legislation enacted in the second quarter of fiscal 2016 that restored the u.s. federal income tax credit for qualifying r & d expenses for calendar year 2015 and made the credit permanent for the periods following december 31 , 2015 ; recognition of a tax loss , net of valuation allowances , upon the divestiture of aerostructures ; state tax reductions resulting from our integration of exelis operations ; and several differences between gaap and tax accounting related to investments . in fiscal 2015 , our effective tax rate benefited from foreign tax credits resulting from a dividend paid by a foreign subsidiary , finalizing issues with various foreign and domestic tax authorities for amounts lower than estimates previously recorded , additional deductions ( primarily related to manufacturing ) and additional research credits claimed on our fiscal 2014 tax return compared with our recorded estimates at the end of fiscal 2014. these benefits were partially offset in the fourth quarter by the tax cost of repatriating offshore funds , the impact of non-deductible goodwill on our divestiture of hcs and the non-deductibility of some acquisition-related costs . fiscal 2015 compared with fiscal 2014 : the major discrete items from which our fiscal 2015 effective tax rate benefited are those noted for fiscal 2015 in the discussion above regarding fiscal 2016 compared with fiscal 2015. in fiscal 2014 , our effective tax rate benefited from additional deductions ( primarily related to manufacturing ) and additional research credits claimed on our fiscal 2013 tax return compared with our recorded estimates at the end of fiscal 2013 , the settlement of a state tax audit and additional permanent deductions based on recent tax litigation unrelated to us . see note 23 : income taxes in the notes for further information . discontinued operations , net of income taxes fiscal 2016 compared with fiscal 2015 : discontinued operations in fiscal 2016 consisted of a $ 21 million after-tax increase in the loss on sale of broadcast communications from the final determination rendered in a dispute over the amount of the post-closing working capital adjustment to the purchase price and third-party costs related to the dispute . we did not have discontinued operations in fiscal 2015. fiscal 2015 compared with fiscal 2014 : we did not record any amounts in discontinued operations in fiscal 2015. discontinued operations in fiscal 2014 consisted of a $ 7 million after-tax increase in the loss on sale of broadcast communications from miscellaneous adjustments for contingencies related to the disposition , partially offset by a $ 2 million after-tax gain on sale of the remaining assets of cis . see note 3 : discontinued operations in the notes for further information . 43 income from continuing operations per diluted common share attributable to harris corporation common shareholders fiscal 2016 compared with fiscal 2015 : the decrease in income from continuing operations per diluted common share in fiscal 2016 compared with the fiscal 2015 was primarily due to the same reasons noted in the discussions above in this md & a regarding fiscal 2016 compared with fiscal 2015 and by the increase in average common shares outstanding as a result of the issuance of shares in connection with the acquisition of exelis . fiscal 2015 compared with fiscal 2014 : the decrease in income from continuing operations per diluted common share in fiscal 2015 compared with the fiscal 2014 was primarily due to the same reasons noted in the discussions above in this md & a regarding fiscal 2015 compared with fiscal 2014 and by the increase in average common shares outstanding as a result of shares issued related to the acquisition of exelis . see the “ common stock repurchases ” discussion and the “ common stock ” paragraph of the “ capital structure and resources ” discussion below in this md & a for further information . discussion of business segment results of operations communication systems segment replace_table_token_6_th fiscal 2016 compared with

net cash used in investing activities : the $ 3.3 billion decrease in net cash used in investing activities in fiscal 2016 compared with fiscal 2015 was primarily due to $ 3.2 billion in net cash used to acquire exelis in fourth quarter of fiscal 2015. the $ 3.1 billion increase in net cash used in investing activities in fiscal 2015 compared with fiscal 2014 was primarily due to $ 3.2 billion in net cash used to acquire exelis . net cash provided by ( used in ) financing activities : the $ 3.3 billion increase in net cash flows used in financing activities in fiscal 2016 compared with fiscal 2015 was primarily due to $ 3.6 billion less proceeds from borrowings ( primarily reflecting the debt issued in connection of our acquisition of exelis in the fourth quarter of fiscal 2015 ) and $ 54 million more net cash used to pay dividends , partially offset by : ( i ) $ 224 million less net cash used to repay borrowings ( reflecting $ 730 million of net cash used to repay borrowings in fiscal 2016 compared with $ 954 million of net cash used to repay borrowings in fiscal 2015 including the redemption of two series of our notes ) , ( ii ) $ 150 million less net cash used to repurchase common stock , and ( iii ) $ 39 million less net cash used in other financing activities . net cash provided by financing activities in fiscal 2015 was $ 2.4 billion compared with $ 448 million of net cash used in financing activities in fiscal 2014. this difference of approximately $ 2.8 billion is primarily due to $ 3.7 billion in proceeds from debt issued in connection with our acquisition of exelis , less approximately $ 0.9 billion of cash used to redeem our notes ( as described above ) . funding of pension plans funding requirements under applicable laws and regulations are a major consideration in making contributions to our u.s. pension plans .

we serve a broad range of end consumers , including outdoor enthusiasts , hunters and recreational shooters , athletes , as well as law enforcement and military professionals . our products are sold through a wide variety of mass , specialty and independent retailers , such as walmart , cabela 's , gander mountain , bass pro shops , dick 's sporting goods , sportsman 's warehouse and recreational equipment , inc. we have a scalable , integrated portfolio of brands that allows us to leverage our deep customer knowledge , product development and innovation , supply chain and distribution , and sales and marketing functions across product categories to better serve our retail partners and end users . as of march 31 , 2015 , we operated in two business segments . these operating segments are defined based on the reporting and review process used by the chief operating decision maker , vista outdoor 's chief executive officer . as of march 31 , 2015 , vista outdoor 's two operating segments were : shooting sports , which generated 65 % of our sales in fiscal 2015 . shooting sports products include pistol , rifle , rimfire and shotshell ammunition and primers , centerfire rifles , rimfire rifles , shotguns and range systems . outdoor products , which generated 35 % of our sales in fiscal 2015 . the outdoor products product lines are optics , accessories and eyewear . optics products include binoculars , laser range finders , riflescopes and trail cameras . accessories products include archery accessories , blinds , decoys , game calls , gun care products , mounts , powder , reloading equipment , targets and target systems . eyewear products include safety and protective eyewear , as well as fashion and sports eyewear . financial highlights and notable events certain notable events or activities affecting our fiscal 2015 financial results included the following : financial highlights for fiscal 2015 annual sales of $ 2,083,414 . diluted earnings per share of $ 1.25 . total orders of $ 1,791,411 . orders consist of purchase orders received during the current period . orders received which have not been shipped are cancelable . gross profit as a percentage of annual sales was 25.4 % and 24.9 % for the fiscal years ended march 31 , 2015 and 2014 , respectively . the increase was driven by the bushnell acquisition in the prior year . a $ 52,220 pre-tax non-cash impairment charge ( $ 41,020 impairment to goodwill and $ 11,200 impairment to tradename ) was recorded during the fiscal year . the increase in the effective tax rate to 48.4 % in fiscal 2015 from 39.0 % in fiscal 2014 is primarily due to the nondeductible goodwill impairment and nondeductible transaction costs partially offset by a true-up of prior-year taxes . on december 19 , 2014 , we entered into a credit agreement ( the “ credit agreement ” ) in connection with the spin-off and the atk/orbital merger . the credit agreement is comprised of a senior secured term loan of $ 350,000 ( the “ term loan ” ) and a senior secured revolving credit facility of $ 400,000 ( the “ revolving credit facility ” ) , both of which mature on february 9 , 2020. the term loan was not drawn upon until the close of the spin-off on february 9 , 2015 . 31 substantially all domestic tangible and intangible assets of vista outdoor inc. and its subsidiaries are pledged as collateral under the credit agreement . we used a portion of the term loan to pay the $ 214,000 dividend to orbital atk as required under the transaction agreement . notable events during fiscal 2015 , we repurchased 162,000 shares of our common stock for $ 6,870.certain balances within the consolidated and combined balance sheet and statement of cashflows have been adjusted from the unaudited consolidated and combined balance sheet and statement of cashflows which were included within form 8-k filed on may 14 , 2015. these adjustments reflect adjustments to comply with us gaap regulations . outlook following the spin-off , our results of operations and cash flows may be subject to greater variability as a result of becoming a standalone , publicly-traded company . for example , we expect to incur one-time expenditures consisting primarily of employee-related costs , costs to start up certain standalone functions and information technology systems , and other one-time transaction-related costs . recurring standalone costs include establishing the internal audit , treasury , investor relations , tax and corporate secretary functions as well as the annual expenses associated with running an independent publicly-traded company . as a standalone public company , we expect the recurring standalone corporate costs to be higher than the expenses historically allocated by orbital atk . for example , if the spin-off had occurred on april 1 , 2014 , we estimate that for the fiscal year ended march 31 , 2015 , we would have incurred approximately $ 15,000 of additional costs associated with such activities . we believe that our cash flow from operations will be sufficient to fund these corporate expenses . in addition , following the spin-off , we will procure certain products on arm 's length commercial terms rather than the internal transfer pricing experienced as part of orbital atk . for example , we will rely on orbital atk for certain ammunition and gun powder products pursuant to an arm 's length supply agreement , and if the production capabilities of orbital atk ( including its lake city ammunition plant or radford gunpowder plant ) change such that orbital atk fails to maintain an adequate supply of ammunition and gun powder products , we may need to procure such products from a third party , either of which would likely result in higher operating costs than we faced as part of orbital atk . story_separator_special_tag in the second step , we must determine the implied fair value of the reporting unit 's goodwill , which is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation . the implied fair value is compared to the carrying amount and if the carrying amount of the reporting unit 's goodwill exceeds the implied fair value of its goodwill , an impairment loss must be recognized for the excess . the fair value of each reporting unit is determined using both an income and market approach . the value estimated using a discounted cash flow model is weighted against the estimated value derived from two separate market approaches : the guideline company and transaction methods . these market approach methods estimate the price reasonably expected to be realized from the sale of the company based on comparable companies and recent transactional data . in developing the discounted cash flow analysis , our assumptions about future revenues and expenses , capital expenditures , and changes in working capital are based on our plan , as approved by the board of directors , and assume a terminal growth rate thereafter . a separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit . our identifiable intangibles with indefinite lives consist of certain trademarks and trade names ( `` tradenames `` ) . the impairment test consists of a comparison of the fair value of the specific tradename with its carrying value . the fair value of these assets are measured using the relief-from-royalty method which assumes that the asset has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them . this method requires that we estimate the future revenue for the related brands and technology , the appropriate royalty rate , and the weighted average cost of capital . we base our fair values and estimates on assumptions we believe to be reasonable , but which are unpredictable and inherently uncertain . if the carrying amount of a tradename is higher than its fair value , an impairment exists and the asset would be recorded at the fair value . projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses , projected capital expenditures , changes in working capital , and the appropriate discount rate . the projections also take into account several factors including current and estimated economic trends and outlook , costs of raw materials and other factors which are beyond our control . if the current economic conditions were to deteriorate , or if we were to lose a significant contract or business , causing a reduction in estimated discounted cash flows , it is possible that the estimated fair value of certain reporting units or tradenames could fall below their carrying value resulting in the necessity to conduct additional impairment tests in future periods . we continually monitor the reporting units and tradenames for impairment indicators and update assumptions used in the most recent calculation of the estimated fair value of a reporting unit or tradenames as appropriate . results of our fiscal 2015 impairment test for the fiscal 2015 goodwill impairment assessment performed as of december 29 , 2014 , we utilized estimated cash flows from our plan and assumed a terminal growth rate thereafter of 3 % . the cash flows were then discounted using a separate discount rate for each reporting unit which ranged from 10 % to 12.5 % . an assumed value was also determined using multiples from recent transactions in the industry and by comparing operating results from guideline companies . the results of our fiscal 2015 goodwill impairment test indicated that there was a goodwill impairment in the firearms reporting unit , as noted below . the estimated fair value of the ammunition reporting unit exceeded its carrying value by more than 10 % , which we deem to be a sufficient excess . although there is no indication of impairment for the other reporting units , based on the annual test , we determined that the accessories reporting unit had estimated fair values that exceeded their carrying values by less than 10 % , which we do not deem to be a significant excess and is discussed in further detail below . during the quarter ended december 29 , 2014 , we performed an interim test for goodwill impairment and we recorded a $ 41,020 impairment of goodwill related to the firearms reporting unit , reported within the shooting sports segment . as such , the fair value of the reporting unit no longer exceeds the carrying value by more than 10 % and therefore has less than a significant excess over carrying value . the fair value of the firearms reporting unit was determined using both an income and market approach . the value estimated using a discounted cash flow model requires us to make significant estimates regarding future revenues and expenses , projected capital expenditures , changes in working capital and the appropriate discount rate and is weighted against the estimated value derived from the guideline company market approach method . we used a discount rate of 12.5 % and a 3 % terminal growth rate . the market approach method estimates the price reasonably expected to be realized from the sale of the company using comparable company multiples and a control premium of 25 % . 36 the accessories reporting unit had an estimated fair value that exceeded its carrying value by approximately 5 % . this reporting unit had approximately $ 573,000 of goodwill recorded at march 31 , 2015. a majority of the goodwill recorded within this reporting unit , approximately $ 495,000 , relates to goodwill acquired in the fiscal 2014 acquisition of bushnell . we would not expect to

net cash used in investing activities : the $ 3.3 billion decrease in net cash used in investing activities in fiscal 2016 compared with fiscal 2015 was primarily due to $ 3.2 billion in net cash used to acquire exelis in fourth quarter of fiscal 2015. the $ 3.1 billion increase in net cash used in investing activities in fiscal 2015 compared with fiscal 2014 was primarily due to $ 3.2 billion in net cash used to acquire exelis . net cash provided by ( used in ) financing activities : the $ 3.3 billion increase in net cash flows used in financing activities in fiscal 2016 compared with fiscal 2015 was primarily due to $ 3.6 billion less proceeds from borrowings ( primarily reflecting the debt issued in connection of our acquisition of exelis in the fourth quarter of fiscal 2015 ) and $ 54 million more net cash used to pay dividends , partially offset by : ( i ) $ 224 million less net cash used to repay borrowings ( reflecting $ 730 million of net cash used to repay borrowings in fiscal 2016 compared with $ 954 million of net cash used to repay borrowings in fiscal 2015 including the redemption of two series of our notes ) , ( ii ) $ 150 million less net cash used to repurchase common stock , and ( iii ) $ 39 million less net cash used in other financing activities . net cash provided by financing activities in fiscal 2015 was $ 2.4 billion compared with $ 448 million of net cash used in financing activities in fiscal 2014. this difference of approximately $ 2.8 billion is primarily due to $ 3.7 billion in proceeds from debt issued in connection with our acquisition of exelis , less approximately $ 0.9 billion of cash used to redeem our notes ( as described above ) . funding of pension plans funding requirements under applicable laws and regulations are a major consideration in making contributions to our u.s. pension plans .

we serve a broad range of end consumers , including outdoor enthusiasts , hunters and recreational shooters , athletes , as well as law enforcement and military professionals . our products are sold through a wide variety of mass , specialty and independent retailers , such as walmart , cabela 's , gander mountain , bass pro shops , dick 's sporting goods , sportsman 's warehouse and recreational equipment , inc. we have a scalable , integrated portfolio of brands that allows us to leverage our deep customer knowledge , product development and innovation , supply chain and distribution , and sales and marketing functions across product categories to better serve our retail partners and end users . as of march 31 , 2015 , we operated in two business segments . these operating segments are defined based on the reporting and review process used by the chief operating decision maker , vista outdoor 's chief executive officer . as of march 31 , 2015 , vista outdoor 's two operating segments were : shooting sports , which generated 65 % of our sales in fiscal 2015 . shooting sports products include pistol , rifle , rimfire and shotshell ammunition and primers , centerfire rifles , rimfire rifles , shotguns and range systems . outdoor products , which generated 35 % of our sales in fiscal 2015 . the outdoor products product lines are optics , accessories and eyewear . optics products include binoculars , laser range finders , riflescopes and trail cameras . accessories products include archery accessories , blinds , decoys , game calls , gun care products , mounts , powder , reloading equipment , targets and target systems . eyewear products include safety and protective eyewear , as well as fashion and sports eyewear . financial highlights and notable events certain notable events or activities affecting our fiscal 2015 financial results included the following : financial highlights for fiscal 2015 annual sales of $ 2,083,414 . diluted earnings per share of $ 1.25 . total orders of $ 1,791,411 . orders consist of purchase orders received during the current period . orders received which have not been shipped are cancelable . gross profit as a percentage of annual sales was 25.4 % and 24.9 % for the fiscal years ended march 31 , 2015 and 2014 , respectively . the increase was driven by the bushnell acquisition in the prior year . a $ 52,220 pre-tax non-cash impairment charge ( $ 41,020 impairment to goodwill and $ 11,200 impairment to tradename ) was recorded during the fiscal year . the increase in the effective tax rate to 48.4 % in fiscal 2015 from 39.0 % in fiscal 2014 is primarily due to the nondeductible goodwill impairment and nondeductible transaction costs partially offset by a true-up of prior-year taxes . on december 19 , 2014 , we entered into a credit agreement ( the “ credit agreement ” ) in connection with the spin-off and the atk/orbital merger . the credit agreement is comprised of a senior secured term loan of $ 350,000 ( the “ term loan ” ) and a senior secured revolving credit facility of $ 400,000 ( the “ revolving credit facility ” ) , both of which mature on february 9 , 2020. the term loan was not drawn upon until the close of the spin-off on february 9 , 2015 . 31 substantially all domestic tangible and intangible assets of vista outdoor inc. and its subsidiaries are pledged as collateral under the credit agreement . we used a portion of the term loan to pay the $ 214,000 dividend to orbital atk as required under the transaction agreement . notable events during fiscal 2015 , we repurchased 162,000 shares of our common stock for $ 6,870.certain balances within the consolidated and combined balance sheet and statement of cashflows have been adjusted from the unaudited consolidated and combined balance sheet and statement of cashflows which were included within form 8-k filed on may 14 , 2015. these adjustments reflect adjustments to comply with us gaap regulations . outlook following the spin-off , our results of operations and cash flows may be subject to greater variability as a result of becoming a standalone , publicly-traded company . for example , we expect to incur one-time expenditures consisting primarily of employee-related costs , costs to start up certain standalone functions and information technology systems , and other one-time transaction-related costs . recurring standalone costs include establishing the internal audit , treasury , investor relations , tax and corporate secretary functions as well as the annual expenses associated with running an independent publicly-traded company . as a standalone public company , we expect the recurring standalone corporate costs to be higher than the expenses historically allocated by orbital atk . for example , if the spin-off had occurred on april 1 , 2014 , we estimate that for the fiscal year ended march 31 , 2015 , we would have incurred approximately $ 15,000 of additional costs associated with such activities . we believe that our cash flow from operations will be sufficient to fund these corporate expenses . in addition , following the spin-off , we will procure certain products on arm 's length commercial terms rather than the internal transfer pricing experienced as part of orbital atk . for example , we will rely on orbital atk for certain ammunition and gun powder products pursuant to an arm 's length supply agreement , and if the production capabilities of orbital atk ( including its lake city ammunition plant or radford gunpowder plant ) change such that orbital atk fails to maintain an adequate supply of ammunition and gun powder products , we may need to procure such products from a third party , either of which would likely result in higher operating costs than we faced as part of orbital atk . story_separator_special_tag in the second step , we must determine the implied fair value of the reporting unit 's goodwill , which is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation . the implied fair value is compared to the carrying amount and if the carrying amount of the reporting unit 's goodwill exceeds the implied fair value of its goodwill , an impairment loss must be recognized for the excess . the fair value of each reporting unit is determined using both an income and market approach . the value estimated using a discounted cash flow model is weighted against the estimated value derived from two separate market approaches : the guideline company and transaction methods . these market approach methods estimate the price reasonably expected to be realized from the sale of the company based on comparable companies and recent transactional data . in developing the discounted cash flow analysis , our assumptions about future revenues and expenses , capital expenditures , and changes in working capital are based on our plan , as approved by the board of directors , and assume a terminal growth rate thereafter . a separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit . our identifiable intangibles with indefinite lives consist of certain trademarks and trade names ( `` tradenames `` ) . the impairment test consists of a comparison of the fair value of the specific tradename with its carrying value . the fair value of these assets are measured using the relief-from-royalty method which assumes that the asset has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them . this method requires that we estimate the future revenue for the related brands and technology , the appropriate royalty rate , and the weighted average cost of capital . we base our fair values and estimates on assumptions we believe to be reasonable , but which are unpredictable and inherently uncertain . if the carrying amount of a tradename is higher than its fair value , an impairment exists and the asset would be recorded at the fair value . projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses , projected capital expenditures , changes in working capital , and the appropriate discount rate . the projections also take into account several factors including current and estimated economic trends and outlook , costs of raw materials and other factors which are beyond our control . if the current economic conditions were to deteriorate , or if we were to lose a significant contract or business , causing a reduction in estimated discounted cash flows , it is possible that the estimated fair value of certain reporting units or tradenames could fall below their carrying value resulting in the necessity to conduct additional impairment tests in future periods . we continually monitor the reporting units and tradenames for impairment indicators and update assumptions used in the most recent calculation of the estimated fair value of a reporting unit or tradenames as appropriate . results of our fiscal 2015 impairment test for the fiscal 2015 goodwill impairment assessment performed as of december 29 , 2014 , we utilized estimated cash flows from our plan and assumed a terminal growth rate thereafter of 3 % . the cash flows were then discounted using a separate discount rate for each reporting unit which ranged from 10 % to 12.5 % . an assumed value was also determined using multiples from recent transactions in the industry and by comparing operating results from guideline companies . the results of our fiscal 2015 goodwill impairment test indicated that there was a goodwill impairment in the firearms reporting unit , as noted below . the estimated fair value of the ammunition reporting unit exceeded its carrying value by more than 10 % , which we deem to be a sufficient excess . although there is no indication of impairment for the other reporting units , based on the annual test , we determined that the accessories reporting unit had estimated fair values that exceeded their carrying values by less than 10 % , which we do not deem to be a significant excess and is discussed in further detail below . during the quarter ended december 29 , 2014 , we performed an interim test for goodwill impairment and we recorded a $ 41,020 impairment of goodwill related to the firearms reporting unit , reported within the shooting sports segment . as such , the fair value of the reporting unit no longer exceeds the carrying value by more than 10 % and therefore has less than a significant excess over carrying value . the fair value of the firearms reporting unit was determined using both an income and market approach . the value estimated using a discounted cash flow model requires us to make significant estimates regarding future revenues and expenses , projected capital expenditures , changes in working capital and the appropriate discount rate and is weighted against the estimated value derived from the guideline company market approach method . we used a discount rate of 12.5 % and a 3 % terminal growth rate . the market approach method estimates the price reasonably expected to be realized from the sale of the company using comparable company multiples and a control premium of 25 % . 36 the accessories reporting unit had an estimated fair value that exceeded its carrying value by approximately 5 % . this reporting unit had approximately $ 573,000 of goodwill recorded at march 31 , 2015. a majority of the goodwill recorded within this reporting unit , approximately $ 495,000 , relates to goodwill acquired in the fiscal 2014 acquisition of bushnell . we would not expect to

liquidity in addition to our normal operating cash requirements , our principal future cash requirements will be to fund capital expenditures , debt repayments , employee benefit obligations , share repurchases , and any strategic acquisitions . our short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements . our debt service requirements over the next two years consist of principal payments due under the credit agreement , as discussed further below . based on our current financial condition , management believes that our cash position , combined with anticipated generation of cash flows and the availability of funding , if needed , through our credit agreement , access to debt and equity markets , as well as potential future sources of funding including additional bank financing and debt markets , will be adequate to fund future growth as well as to service our currently anticipated long-term debt and pension obligations , make capital expenditures , and payment of dividends over the next 12 months . capital expenditures for fiscal 2016 are expected to be approximately $ 40,000. we do not expect that our access to liquidity sources will be materially impacted in the near future . there can be no assurance , however , that the cost or availability of future borrowings , if any , will not be materially impacted by capital market conditions . long-term debt and credit agreement as of march 31 , 2015 , we had actual total indebtedness of $ 350,000 , which consisted of the following : replace_table_token_15_th our total debt ( current portion of debt and long-term debt ) as a percentage of total capitalization ( total debt and stockholders ' equity ) was 18 % as of march 31 , 2015 . see note 10 `` long-term debt '' to the consolidated and combined financial statements in part ii , item 8 for a detailed discussion of these borrowings .

we plan to continue frequent discussions with these regulators in order to initiate clinical studies using the accelerated paths . our intention is to initiate the cli studies during calendar year 2016 with the aim of obtaining initial approval in calendar year 2018. we plan to continue developing multiple placenta-derived cell therapy products that we anticipate will lead to significant improvement in the lives of patients , and expect to demonstrate the real-world impact and value of our pipeline , technology platform and commercial-scale manufacturing capacity . we made progress in our phase ii intermittent claudication , or ic , trial , a randomized , double blind , placebo controlled , multinational clinical trial . we currently have active clinical sites in the united states , israel , germany and south korea . we also anticipate that united therapeutics corporation , or united , will complete an ongoing phase i clinical trial of plx-pad cells in pulmonary arterial hypertension in australia , which will potentially lay the groundwork for a phase ii clinical trial . we plan to initiate a phase i/ii incomplete engraftment study in the united states , and we are currently in discussions with the fda before submitting an ind application . currently , we plan to continue working in partnership with the nih in developing plx-r18 as a potential treatment for acute radiation syndrome , or ars . in the upcoming months , we expect to receive fda guidance on the additional animal studies that would be required to approve plx-r18 for use in ars under the animal rule regulatory pathway , which does not require human efficacy trials . we plan to evaluate in coming months the timing to initiate our advanced orthopedic indications , based on potential partnering interest as well as regulatory approvals for early access to the market . results of operations – year ended june 30 , 2015 compared to year ended june 30 , 2014 and year ended june 30 , 2014 compared to year ended june 30 , 2013. revenues revenues for each of the years ended june 30 , 2015 and june 30 , 2014 were $ 379,000. all such revenues were derived from the united agreement . revenues decreased by 44 % from $ 679,000 for the year ended june 30 , 2013 to $ 379,000 for the year ended june 30 , 2014. all such revenues were derived from the united agreement . the reduction from the year ended june 30 , 2013 to 2014 is due to a re-evaluation we did for the development period under the united agreement in light of the clinical hold . in june 2013 , we received notification from the fda that our united states phase ii ic study had been placed on clinical hold due to a serious allergic reaction in a case which required hospitalization . in september 2013 , the fda lifted the clinical hold . in june 2013 , following the clinical hold , we extended the development period for which we received funds from united from 6.5 years to 11.5 years . the license fee will be recognized on a straight line basis as revenue over the estimated development period . 30 we estimated the remaining performance period of the development to be approximately 7.5 years as of june 30 , 2015. the license fee will continue to be recognized on a straight-line basis as revenue over the estimated remaining development period . cost of revenues cost of revenues increased by 17 % from $ 11,000 for the year ended june 30 , 2014 to $ 13,000 for the year ended june 30 , 2015. this increase is related to the royalties we are obligated to pay to the ocs , which reflects 3.5 % of the revenues derived from the united agreement in fiscal 2015 compared to 3 % of the revenues derived from the united agreement in fiscal 2014. cost of revenues decreased by 45 % from $ 20,000 for the year ended june 30 , 2013 to $ 11,000 for the year ended june 30 , 2014. the reductions in the years ended june 30 , 2013 and 2014 are a result of the re-evaluation we did for the development period under the united agreement . as described above , following the clinical hold we extended the development period for which we received funds from united from 6.5 years to 11.5 years . research and development net research and development net costs ( costs less participation and grants by the ocs and other parties ) for the year ended june 30 , 2015 decreased in 2 % to $ 19,173,000 from $ 19,542,000 for the year ended june 30 , 2014. this decrease is attributed to improved planning of our production process , which resulted in a decrease in materials consumption , offset by an increase in subcontractors and consultants fees which related to regulatory and preclinical activities , and a decrease in the ocs participation . the decrease in the ocs participation is attributable to a delay in the approval of the ocs grant for 2013 with resulted a higher participation in 2014 , and a lower grant approved by the ocs in 2015 compared to 2014. the decrease in research and development expenses , net , is also attributed to the fluctuations in the exchange rates of the u.s. dollar and the nis . the average exchange rate during the year ended june 30 , 2014 was 3.518 while the average exchange rate during the year ended june 30 , 2015 was 3.778. the strength of the u.s. dollar against the nis during the year ended june 30 , 2015 caused lower expenses in u.s. dollars , for the same amount of expenses that are dominated in nis . story_separator_special_tag we believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations . the discussion and analysis of our financial condition and results of operations is based on our financial statements , which we prepared in accordance with u.s. generally accepted accounting principles . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , as well as the reported revenues and expenses during the reporting periods . on an ongoing basis , we evaluate such estimates and judgments , including those described in greater detail below . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions . revenue recognition from the united agreement we recognize revenue pursuant to the license agreement with united in accordance with asc 605-25 , `` revenue recognition , multiple-element arrangements `` . pursuant to asc 605-25 , each deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “ stand-alone value ” to the customer . the arrangement 's consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable . in general , the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered , limited to the consideration that is not contingent upon future deliverables . 35 we received an up-front , non-refundable license payment of $ 5,000,000. additional payments totaling $ 37,500,000 are subject to the achievement of certain regulatory milestones by united . since the deliverables in the united agreement do not have stand-alone value , none of them qualifies as a separate unit of accounting . accordingly , the non-refundable upfront license fee of $ 5,000,000 is deferred and recognized on a straight line basis over the related performance period which is the development period in accordance with staff accounting bulletin , or sab , no . 104 , `` revenue recognition `` . we assessed the remaining performance period under the united agreement at 7.5 years as of june 30 , 2015. the additional regulatory milestones payments will be recognized upon the achievement of futures events by united , in accordance with asc 450-30-25 , “ gain contingencies `` . as of june 30 , 2015 , no regulatory milestones were achieved . we also received an advance payment for the development of $ 2,000,000 that will be deductible against development expenses as it accrued . the upfront payment which was received and has not yet fully recognized in the statement of operations , is included in the balance sheet as advance payment . part of the expenses related to the development , on a cost basis , shall be repaid to the company by united according to the applicable license agreement . we are deducting the payments from research and development expenses in accordance with asc 730-20 , `` research and development agreements `` . as of june 30 , 2015 , we deducted an amount of approximately $ 1,907,000. stock-based compensation stock-based compensation is considered critical accounting policy due to the significant expenses of restricted stock units which were granted to our employees , directors and consultants . in fiscal year 2015 , we recorded stock-based compensation expenses related to restricted stock units in the amount of $ 4,050,000. in accordance with asc 718 , `` compensation-stock compensation `` , or asc 718 , restricted shares units to employees and directors are measured at their fair value on the grant date . all restricted shares units granted in 2015 and 2014 were granted for no consideration ; therefore their fair value was equal to the share price at the date of grant , based on the close trading price of our shares known at the grant date . the restricted shares units to non-employees consultants are remeasured in any future vesting period for the unvested portion of the grants . the value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of operations . we have graded vesting based on the accelerated method over the requisite service period of each of the awards . the expected pre-vesting forfeiture rate affects the number of the shares . based on our historical experience , the pre-vesting forfeiture rate per grant is 7 % for the shares granted to employees and 0 % for the shares granted to our directors , officers and non-employees consultants . marketable securities marketable securities consist of corporate bonds , government bonds and stocks . we determine the appropriate classification of marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date . in accordance with asc no . 320 , `` investment debt and equity securities , `` we classify marketable securities as available-for-sale . available-for-sale securities are stated at fair value , with unrealized gains and losses reported in accumulated other comprehensive income ( loss ) , a separate component of stockholders ' equity . realized gains and losses on sales of marketable securities , as determined on a specific identification basis , are included in financial income . the amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity , both of which , together with interest , are included in financial income . 36 marketable securities are classified within level 1 or level 2 because marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs . we recognize an impairment charge when a decline in the fair value of our investments is below the cost basis

liquidity in addition to our normal operating cash requirements , our principal future cash requirements will be to fund capital expenditures , debt repayments , employee benefit obligations , share repurchases , and any strategic acquisitions . our short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements . our debt service requirements over the next two years consist of principal payments due under the credit agreement , as discussed further below . based on our current financial condition , management believes that our cash position , combined with anticipated generation of cash flows and the availability of funding , if needed , through our credit agreement , access to debt and equity markets , as well as potential future sources of funding including additional bank financing and debt markets , will be adequate to fund future growth as well as to service our currently anticipated long-term debt and pension obligations , make capital expenditures , and payment of dividends over the next 12 months . capital expenditures for fiscal 2016 are expected to be approximately $ 40,000. we do not expect that our access to liquidity sources will be materially impacted in the near future . there can be no assurance , however , that the cost or availability of future borrowings , if any , will not be materially impacted by capital market conditions . long-term debt and credit agreement as of march 31 , 2015 , we had actual total indebtedness of $ 350,000 , which consisted of the following : replace_table_token_15_th our total debt ( current portion of debt and long-term debt ) as a percentage of total capitalization ( total debt and stockholders ' equity ) was 18 % as of march 31 , 2015 . see note 10 `` long-term debt '' to the consolidated and combined financial statements in part ii , item 8 for a detailed discussion of these borrowings .

we plan to continue frequent discussions with these regulators in order to initiate clinical studies using the accelerated paths . our intention is to initiate the cli studies during calendar year 2016 with the aim of obtaining initial approval in calendar year 2018. we plan to continue developing multiple placenta-derived cell therapy products that we anticipate will lead to significant improvement in the lives of patients , and expect to demonstrate the real-world impact and value of our pipeline , technology platform and commercial-scale manufacturing capacity . we made progress in our phase ii intermittent claudication , or ic , trial , a randomized , double blind , placebo controlled , multinational clinical trial . we currently have active clinical sites in the united states , israel , germany and south korea . we also anticipate that united therapeutics corporation , or united , will complete an ongoing phase i clinical trial of plx-pad cells in pulmonary arterial hypertension in australia , which will potentially lay the groundwork for a phase ii clinical trial . we plan to initiate a phase i/ii incomplete engraftment study in the united states , and we are currently in discussions with the fda before submitting an ind application . currently , we plan to continue working in partnership with the nih in developing plx-r18 as a potential treatment for acute radiation syndrome , or ars . in the upcoming months , we expect to receive fda guidance on the additional animal studies that would be required to approve plx-r18 for use in ars under the animal rule regulatory pathway , which does not require human efficacy trials . we plan to evaluate in coming months the timing to initiate our advanced orthopedic indications , based on potential partnering interest as well as regulatory approvals for early access to the market . results of operations – year ended june 30 , 2015 compared to year ended june 30 , 2014 and year ended june 30 , 2014 compared to year ended june 30 , 2013. revenues revenues for each of the years ended june 30 , 2015 and june 30 , 2014 were $ 379,000. all such revenues were derived from the united agreement . revenues decreased by 44 % from $ 679,000 for the year ended june 30 , 2013 to $ 379,000 for the year ended june 30 , 2014. all such revenues were derived from the united agreement . the reduction from the year ended june 30 , 2013 to 2014 is due to a re-evaluation we did for the development period under the united agreement in light of the clinical hold . in june 2013 , we received notification from the fda that our united states phase ii ic study had been placed on clinical hold due to a serious allergic reaction in a case which required hospitalization . in september 2013 , the fda lifted the clinical hold . in june 2013 , following the clinical hold , we extended the development period for which we received funds from united from 6.5 years to 11.5 years . the license fee will be recognized on a straight line basis as revenue over the estimated development period . 30 we estimated the remaining performance period of the development to be approximately 7.5 years as of june 30 , 2015. the license fee will continue to be recognized on a straight-line basis as revenue over the estimated remaining development period . cost of revenues cost of revenues increased by 17 % from $ 11,000 for the year ended june 30 , 2014 to $ 13,000 for the year ended june 30 , 2015. this increase is related to the royalties we are obligated to pay to the ocs , which reflects 3.5 % of the revenues derived from the united agreement in fiscal 2015 compared to 3 % of the revenues derived from the united agreement in fiscal 2014. cost of revenues decreased by 45 % from $ 20,000 for the year ended june 30 , 2013 to $ 11,000 for the year ended june 30 , 2014. the reductions in the years ended june 30 , 2013 and 2014 are a result of the re-evaluation we did for the development period under the united agreement . as described above , following the clinical hold we extended the development period for which we received funds from united from 6.5 years to 11.5 years . research and development net research and development net costs ( costs less participation and grants by the ocs and other parties ) for the year ended june 30 , 2015 decreased in 2 % to $ 19,173,000 from $ 19,542,000 for the year ended june 30 , 2014. this decrease is attributed to improved planning of our production process , which resulted in a decrease in materials consumption , offset by an increase in subcontractors and consultants fees which related to regulatory and preclinical activities , and a decrease in the ocs participation . the decrease in the ocs participation is attributable to a delay in the approval of the ocs grant for 2013 with resulted a higher participation in 2014 , and a lower grant approved by the ocs in 2015 compared to 2014. the decrease in research and development expenses , net , is also attributed to the fluctuations in the exchange rates of the u.s. dollar and the nis . the average exchange rate during the year ended june 30 , 2014 was 3.518 while the average exchange rate during the year ended june 30 , 2015 was 3.778. the strength of the u.s. dollar against the nis during the year ended june 30 , 2015 caused lower expenses in u.s. dollars , for the same amount of expenses that are dominated in nis . story_separator_special_tag we believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations . the discussion and analysis of our financial condition and results of operations is based on our financial statements , which we prepared in accordance with u.s. generally accepted accounting principles . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , as well as the reported revenues and expenses during the reporting periods . on an ongoing basis , we evaluate such estimates and judgments , including those described in greater detail below . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions . revenue recognition from the united agreement we recognize revenue pursuant to the license agreement with united in accordance with asc 605-25 , `` revenue recognition , multiple-element arrangements `` . pursuant to asc 605-25 , each deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “ stand-alone value ” to the customer . the arrangement 's consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable . in general , the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered , limited to the consideration that is not contingent upon future deliverables . 35 we received an up-front , non-refundable license payment of $ 5,000,000. additional payments totaling $ 37,500,000 are subject to the achievement of certain regulatory milestones by united . since the deliverables in the united agreement do not have stand-alone value , none of them qualifies as a separate unit of accounting . accordingly , the non-refundable upfront license fee of $ 5,000,000 is deferred and recognized on a straight line basis over the related performance period which is the development period in accordance with staff accounting bulletin , or sab , no . 104 , `` revenue recognition `` . we assessed the remaining performance period under the united agreement at 7.5 years as of june 30 , 2015. the additional regulatory milestones payments will be recognized upon the achievement of futures events by united , in accordance with asc 450-30-25 , “ gain contingencies `` . as of june 30 , 2015 , no regulatory milestones were achieved . we also received an advance payment for the development of $ 2,000,000 that will be deductible against development expenses as it accrued . the upfront payment which was received and has not yet fully recognized in the statement of operations , is included in the balance sheet as advance payment . part of the expenses related to the development , on a cost basis , shall be repaid to the company by united according to the applicable license agreement . we are deducting the payments from research and development expenses in accordance with asc 730-20 , `` research and development agreements `` . as of june 30 , 2015 , we deducted an amount of approximately $ 1,907,000. stock-based compensation stock-based compensation is considered critical accounting policy due to the significant expenses of restricted stock units which were granted to our employees , directors and consultants . in fiscal year 2015 , we recorded stock-based compensation expenses related to restricted stock units in the amount of $ 4,050,000. in accordance with asc 718 , `` compensation-stock compensation `` , or asc 718 , restricted shares units to employees and directors are measured at their fair value on the grant date . all restricted shares units granted in 2015 and 2014 were granted for no consideration ; therefore their fair value was equal to the share price at the date of grant , based on the close trading price of our shares known at the grant date . the restricted shares units to non-employees consultants are remeasured in any future vesting period for the unvested portion of the grants . the value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of operations . we have graded vesting based on the accelerated method over the requisite service period of each of the awards . the expected pre-vesting forfeiture rate affects the number of the shares . based on our historical experience , the pre-vesting forfeiture rate per grant is 7 % for the shares granted to employees and 0 % for the shares granted to our directors , officers and non-employees consultants . marketable securities marketable securities consist of corporate bonds , government bonds and stocks . we determine the appropriate classification of marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date . in accordance with asc no . 320 , `` investment debt and equity securities , `` we classify marketable securities as available-for-sale . available-for-sale securities are stated at fair value , with unrealized gains and losses reported in accumulated other comprehensive income ( loss ) , a separate component of stockholders ' equity . realized gains and losses on sales of marketable securities , as determined on a specific identification basis , are included in financial income . the amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity , both of which , together with interest , are included in financial income . 36 marketable securities are classified within level 1 or level 2 because marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs . we recognize an impairment charge when a decline in the fair value of our investments is below the cost basis

liquidity and capital resources as of june 30 , 2015 , our total current assets were $ 56,868,000 and our total current liabilities were $ 6,183,000. on june 30 , 2015 , we had a working capital surplus of $ 50,685,000 and an accumulated deficit of $ 138,511,000. as of june 30 , 2014 , our total current assets were $ 61,987,000 and our total current liabilities were $ 7,397,000. on june 30 , 2014 , we had a working capital surplus of $ 54,590,000 and an accumulated deficit of $ 113,834,000. our cash and cash equivalents as of june 30 , 2015 amounted to $ 22,626,000. this is an increase of $ 18,133,000 from the $ 4,493,000 reported as of june 30 , 2014. cash balances increased in the year ended june 30 , 2015 for the reasons presented below : operating activities used cash of $ 20,605,000 in the year ended june 30 , 2015. cash used by operating activities in the year ended june 30 , 2015 primarily consisted of payments of salaries to our employees , and payments of fees to our consultants , suppliers , subcontractors , and professional services providers including the costs of clinical studies , offset by an ocs grant . investing activities provided cash of $ 21,537,000 in the year ended june 30 , 2015. the investing activities consisted primarily of withdrawal of $ 16,061,000 of short-term deposits and proceeds of $ 11,269,000 from the sale and redemption of marketable securities , offset by investing $ 4,903,000 in marketable securities and the purchase of property and equipment for $ 831,000 .

over 15 million fans attended our amphitheater shows throughout the year which is a record for live nation where kid rock , luke bryan and 5 seconds of summer played to sold out audiences over the summer . our efforts to enhance our amphitheater onsite business got off to a great start in 2015 with our new food and beverage and point of sale partners offering more selections and a faster transaction process . in our international business , we saw growth in our new asian markets - thailand , taiwan and indonesia - while large tours by the popular korean act bigbang as well as fleetwood mac in australia grew ticket revenue in our pan-asian business . this growth more than offset a decline in stadium activity in both north america and europe which is a function of the mix of artists touring in the year . our operating income for the year improved over 2014 largely due to the impact of the goodwill impairment in 2014 which was partially offset by higher depreciation and amortization in 2015. we will continue to look for expansion opportunities , both domestically and internationally , as well as ways to market our events more effectively , in order to continue to expand our fan base and geographic reach and to sell more tickets and onsite products . our ticketing segment revenue for the year increased by $ 82.3 million on a reported basis as compared to last year , or $ 156.3 million , a 10 % increase , without the impact of changes in foreign exchange rates . this increase was largely due to a 4 % growth in primary ticket sales globally , driven by increased sales for concert and sporting events . as we continued to improve our platform and provide consumers with a broader range of secure ticketing options , visits to our websites increased by 10 % in 2015 with nearly 60 % of these visits occurring on mobile devices . our resale business also grew during the year in north america , europe and australia , with gross transaction value , or gtv , improving by 32 % on a reported basis year-over-year . mobile continues to be an area of focus and innovation for us and in 2015 , 21 % of our total tickets were sold via mobile and tablet devices and our total mobile ticket sales increased by 20 % year-over-year . operating results for the year increased over 2015 , largely as a result of strong primary ticket sales as well as our growing resale ticketing business . we will continue to implement new features to drive further expansion of mobile ticket transactions and invest in initiatives aimed at improving the ticket search , purchase and transfer process . as a result , we expect to attract more ticket buyers and enhance the overall fan and venue client experience . our artist nation segment revenue for the year increased by $ 44.8 million on a reported basis as compared to last year , or $ 51.4 million , a 13 % increase , without the impact of changes in foreign exchange rates driven by higher management commissions and sports-related revenue . artist nation 's operating results were flat to 2014 as the impact of the goodwill impairment in 2014 was largely offset by higher investment in new business lines in 2015 as well as higher amortization associated with recent acquisitions . our artist nation segment is focused on managing its existing clients as well as developing new relationships with top artists and extending the various services it provides . our sponsorship & advertising segment revenue for the year was up $ 33.4 million on a reported basis as compared to last year , or $ 51.6 million , a 17 % increase , without the impact of changes in foreign exchange rates . higher revenue resulted from new clients , increased festival sponsorships , and expansion of our business in australia and asia , all of which also increased our operating income . our growth has been driven by the expansion of our festival footprint and engaging new sponsor clients with both our existing events and new brands added to our festival family . operating income for the year improved by 5 % on a reported basis which was driven by higher revenue , partially offset by the impact of changes in foreign exchange rates . we believe that our extensive on-site and online reach , global venue distribution network , artist relationships , ticketing operations and live entertainment content are the key to securing long-term sponsorship agreements with major brands , and we plan to expand these assets while extending further into new markets internationally . 27 we continue to be optimistic about the long-term potential of our company and are focused on the key elements of our business model : expand our concert platform , sell more tickets and invest in product improvements , grow resale ticket volume , grow sponsorship and advertising and drive artist management through our other core businesses . segment overview our reportable segments are concerts , ticketing , artist nation and sponsorship & advertising . concerts our concerts segment principally involves the global promotion of live music events in our owned or operated venues and in rented third-party venues , the operation and management of music venues , the production of music festivals across the world and the creation of associated content . while our concerts segment operates year-round , we experience higher revenue during the second and third quarters due to the seasonal nature of shows at our outdoor amphitheaters and festivals , which primarily occur from may through october . revenue and related costs for events are generally deferred and recognized when the event occurs . all advertising costs incurred during the year for shows in future years are expensed at the end of the year . story_separator_special_tag excluding the decrease of $ 223.4 million related to the impact of changes in foreign exchange rates , direct operating expenses increased $ 427.8 million , or 11 % , primarily due to the show activity discussed above and incremental direct operating expenses of $ 169.9 million from the acquisitions discussed above . concerts selling , general and administrative expenses increased $ 23.9 million , or 4 % , during the year ended december 31 , 2015 as compared to the prior year . excluding the decrease of $ 30.3 million related to the impact of changes in foreign exchange rates , selling , general and administrative expenses increased $ 54.2 million , or 8 % , primarily due to compensation costs associated with annual salary increases and higher headcount , higher valuation allowances and incremental expenses of $ 30.0 million from the acquisitions discussed above . these increases were partially offset by a reduction in rent expense . concerts depreciation and amortization increased $ 31.7 million , or 28 % , during the year ended december 31 , 2015 as compared to the prior year . excluding the decrease of $ 5.0 million related to the impact of changes in foreign exchange rates , depreciation and amortization increased $ 36.7 million , or 32 % , primarily due to higher amortization associated with certain revenue generating contracts due to the timing of artists touring , acceleration of depreciation and amortization associated with a change in the estimated useful lives of certain intangible assets , and leasehold improvements and incremental depreciation and amortization of $ 18.5 million from the acquisitions discussed above . concerts recorded a goodwill impairment of $ 117.0 million related to our international concerts business in the fourth quarter of 2014 in connection with our annual impairment test . there was no impairment charge recorded during 2015. concerts acquisition transaction expenses increased $ 6.6 million during the year ended december 31 , 2015 as compared to the prior year primarily due to an increase in the fair value of a put option held by a third party to sell its noncontrolling interest in one of our subsidiaries to us . the decreased operating loss for concerts for the year ended december 31 , 2015 was primarily driven by the 2014 goodwill impairment and higher bad debt reserves . 34 year ended 2014 compared to year ended 2013 concerts revenue increased $ 209.7 million , or 5 % , during the year ended december 31 , 2014 as compared to the prior year . excluding the increase of $ 8.2 million related to the impact of changes in foreign exchange rates , revenue increased $ 201.5 million , or 4 % , primarily due to more shows at north america stadiums and amphitheaters and increased north america festival activity offset by fewer events in international arenas and stadiums driven by less available touring content . revenue was also impacted by incremental revenue of $ 48.1 million primarily from the acquisition of festival promoter businesses . concerts direct operating expenses increased $ 186.5 million , or 5 % , during the year ended december 31 , 2014 as compared to the prior year . excluding the increase of $ 9.3 million related to the impact of changes in foreign exchange rates , direct operating expenses increased $ 177.2 million , or 5 % , primarily due to higher expenses associated with the increased show activity discussed above . in addition , we incurred incremental expenses of $ 50.6 million from the acquisitions noted above . concerts selling , general and administrative expenses increased $ 33.9 million , or 5 % , during the year ended december 31 , 2014 as compared to the prior year primarily due to higher compensation costs driven by annual salary increases and additional headcount along with a reduction in rent expense during 2013 due to the recognition of an incentive payment for early termination of a venue lease . in addition , we incurred incremental expenses of $ 8.6 million from the acquisitions noted above . concerts depreciation and amortization decreased $ 17.3 million , or 13 % , during the year ended december 31 , 2014 as compared to the prior year primarily due to higher impairment charges and amortization acceleration of certain intangible assets recorded during 2013. we recorded impairment charges of $ 8.6 million in 2013 primarily associated with venue management and leasehold intangible assets when it was determined that the estimated undiscounted cash flows associated with the respective intangible asset was less than its carrying value . in addition , in 2013 we accelerated $ 6.7 million of amortization associated with a change in the estimated useful lives of certain venue management and leasehold intangible assets . we did not record any significant impairment charges or accelerated amortization of long-lived assets during 2014. concerts recorded a goodwill impairment of $ 117.0 million related to our international concerts business . the impairment was recorded in the fourth quarter of 2014 in connection with our annual impairment test . concerts gain on disposal of operating assets of $ 3.0 million for the year ended december 31 , 2014 consists primarily of the final insurance recovery for storm damage to an amphitheater in new york during hurricane sandy in 2012. concerts gain on disposal of operating assets of $ 38.9 million for the year ended december 31 , 2013 was primarily due to a $ 24.8 million gain on the sale of a theater in new york and $ 14.1 million related to insurance recoveries from the storm damage discussed above . concerts acquisition transaction expenses increased $ 4.4 million for the year ended december 31 , 2014 as compared to the prior year primarily due to costs associated with our acquisition of a festival and concert promoter in the united states . the increased operating loss for concerts for the year ended december 31 , 2014 was primarily driven by the goodwill

liquidity and capital resources as of june 30 , 2015 , our total current assets were $ 56,868,000 and our total current liabilities were $ 6,183,000. on june 30 , 2015 , we had a working capital surplus of $ 50,685,000 and an accumulated deficit of $ 138,511,000. as of june 30 , 2014 , our total current assets were $ 61,987,000 and our total current liabilities were $ 7,397,000. on june 30 , 2014 , we had a working capital surplus of $ 54,590,000 and an accumulated deficit of $ 113,834,000. our cash and cash equivalents as of june 30 , 2015 amounted to $ 22,626,000. this is an increase of $ 18,133,000 from the $ 4,493,000 reported as of june 30 , 2014. cash balances increased in the year ended june 30 , 2015 for the reasons presented below : operating activities used cash of $ 20,605,000 in the year ended june 30 , 2015. cash used by operating activities in the year ended june 30 , 2015 primarily consisted of payments of salaries to our employees , and payments of fees to our consultants , suppliers , subcontractors , and professional services providers including the costs of clinical studies , offset by an ocs grant . investing activities provided cash of $ 21,537,000 in the year ended june 30 , 2015. the investing activities consisted primarily of withdrawal of $ 16,061,000 of short-term deposits and proceeds of $ 11,269,000 from the sale and redemption of marketable securities , offset by investing $ 4,903,000 in marketable securities and the purchase of property and equipment for $ 831,000 .