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accordingly , the assets acquired , including goodwill and intangible assets of approximately $ 1.1 million and $ 2.6 million , respectively , and liabilities assumed of topotarget were recorded as of the acquisition date at their respective fair values . the results of this business were included in the pharmaceuticals segment as of the acquisition date . in december 2012 , the company made the strategic decision to divest apricus pharmaceuticals resulting in the assets and liabilities and results of the apricus pharmaceuticals operations being classified as discontinued operations in the company 's consolidated financial statements as of the and for the year ended december 31 , 2012. in connection with the company 's annual goodwill impairment assessment , the company reassessed the fair value of this reporting unit during the fourth quarter of 2012. the company performed a step 1 goodwill impairment analysis which uses significant judgments including estimation of future cash flows , which is dependent on internal forecasts , estimation of the long-term rate of growth for the businesses , the useful life over which cash flows will occur , and determination of the company 's weighted average cost of capital . story_separator_special_tag disclosures regarding forward-looking statements this report includes “ forward-looking statements ” within the meaning of section 21e of the exchange act . those statements include statements regarding the intent , belief or current expectations of apricus biosciences , inc. and subsidiaries ( “ we , ” “ us , ” “ our , ” the “ company ” or “ apricus ” ) and our management team . any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties , and actual results may differ materially from those projected in the forward-looking statements . these risks and uncertainties include but are not limited to those risks and uncertainties set forth in item 1a of this report . in light of the significant risks and uncertainties inherent in the forward-looking statements included in this report , the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved . further , these forward-looking statements reflect our view only as of the date of this report . except as required by law , we undertake no obligations to update any forward-looking statements and we disclaim any intent to update forward-looking statements after the date of this report to reflect subsequent developments . accordingly , you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the securities and exchange commission . results of operations revenues and gross profit from continuing operations were as follows ( in thousands , except percentages ) : replace_table_token_3_th 23 revenue the $ 5.4 million decrease in total revenue during the year ended december 31 , 2013 as compared to the prior year is primarily due to the non-recurrence of $ 4.3 million in upfront license fees from our commercial partners sandoz , abbott and takeda , received during the year ended december 31 , 2012 . this was partially offset by $ 0.6 million in license fee revenue in 2013 from bracco and $ 0.3 million in license fee revenue from sandoz as a result of substantive milestones received upon regulatory approvals in italy and germany , respectively . this decrease was also due to decreased contract service revenue in 2013 as compared to the prior year due to the loss of certain contract service customers in france in 2013 as compared to 2012 , following the deconsolidation of our former french subsidiaries in april 2013. we expect our cash inflows from operations during 2014 will be from licensing and milestone revenues received from commercial partners for our vitaros ® product . the timing of these revenues are uncertain , as such our revenue will vary significantly between periods . the $ 4.3 million increase in total revenue during the year ended december 31 , 2012 as compared to the prior year was primarily attributable to recognizing $ 4.3 million in upfront license fees during 2012 from sandoz , abbott and takeda compared to a total of $ 0.9 million recognized in 2011 from bracco , elis and neopharm . additionally , we recognized $ 2.9 million of revenue from contract services related to our former french subsidiaries , which were included in our statements of operations beginning in july 2012 , as well as service revenue from warner chilcott in the amount of $ 0.5 million in 2012. these increases were partially offset by the $ 2.1 decrease in contract service revenue resulting from the sale of our subsidiary , bio-quant , in june 2011 and for a $ 0.5 million reduction in grant revenue from government grants awarded to us during 2011 under the qtdp program . we did not apply for grants during 2012. cost of service revenue our cost of service revenue includes compensation , related personnel expenses and contract services to support our contract service revenue . the $ 1.6 million decrease in cost of service revenue during the year ended december 31 , 2013 , as compared to the prior year , is primarily due to contract services related to our former french subsidiaries , which were included in our statements of operations beginning july 2012 and deconsolidated in april 2013. accordingly , the 2013 results include approximately four months of expenses for the french operations and 2012 includes approximately five and one-half months of expenses . additionally , we had comparable contract service expenses in 2013 as compared to 2012 related to our warner chilcott service revenue . story_separator_special_tag as a result , the $ 2.8 million liability reflected on our consolidated balance sheet as of december 31 , 2013 will be released during 2014. impairment on goodwill and intangible assets 25 during 2012 , we determined that the value of our apricus pharmaceuticals ' goodwill of $ 1.1 million and the trade name for totect ® , the technology license for totect ® and the intangible asset associated with the rights to co-promote granisol ® equaling $ 1.8 million , were impaired and charges were recorded to write off the entire value of goodwill and write down the intangible assets to its estimated fair value of $ 1.9 million . these impairments are presented within the loss from discontinued operations in our consolidated statement of operations . also in 2012 , we determined that the goodwill associated with nexmed europe sas ( formerly finesco sas ) was impaired due to changes in reimbursement policy in france that now heavily favors generic drugs . this resulted in scomedica experiencing a loss and interruption in certain key contract agreements related to this policy change . accordingly we recorded a charge of $ 8.3 million to write down the entire balance of goodwill as of december 31 , 2012. this impairment is presented in impairment of goodwill and intangible assets on the consolidated statements of operations and comprehensive loss . as of december 31 , 2013 , we had no goodwill or intangible assets on our consolidated balance sheet . other income and expense other income and expense were as follows ( in thousands , except percentages ) : replace_table_token_5_th interest expense , net interest expense increased $ 0.4 million during 2013 as compared to the prior year , primarily due to non-cash interest expense in 2013 as a result of amortization of the discount related to the 2012 convertible notes ( see note 7 in the notes to the consolidated financial statements ) as well as non-cash interest expense related to contingent consideration , which has since been removed from our balance sheet following the settlement agreement with topotarget during the third quarter of 2013. interest expense during 2012 was comparable to interest expense during 2011 and was mainly due to the interest paid on our $ 4.0 million convertible notes payable . gain on sale of investment we previously held a restricted investment in a privately-held biotechnology company , which was valued at zero in our consolidated financial statements as of december 31 , 2012. in 2013 , we sold our investment in the entity and realized net proceeds of approximately $ 2.6 million , which was reflected as a gain on sale of investment during the fourth quarter of 2013 in our consolidated statement of operations . other expense , net other expense , net , increased $ 0.6 million during 2013 as compared to the prior year primarily due to $ 0.3 million of expense associated with the change in the market value of the derivative liability related to the 2012 convertible notes ( see note 7 in the notes to the consolidated financial statements ) as well as higher rental income of $ 0.4 million in 2012. other expense , net , increased $ 0.3 million during 2012 as compared to the prior year as a result of the sale of fixed assets in 2012 of $ 0.3 million . 26 liquidity , capital resources and financial condition we have experienced net losses and negative cash flows from operations each year since our inception . through december 31 , 2013 , we had an accumulated deficit of $ 268.1 million , recorded a net loss of approximately $ 16.9 million for the year ended december 31 , 2013 , and have been principally financed through the public offering of our common stock and other equity securities , private placements of equity securities , debt financing and up-front payments received from commercial partners for our products under development . funds raised in recent periods include approximately $ 15.8 million from our may 2013 follow-on public offering and approximately $ 18.4 million from our february 2012 follow-on public offering . additionally , we raised approximately $ 0.8 million during the year ended december 31 , 2013 , from the sale of common stock via our atm stock selling facility and approximately $ 2.0 million from this facility in 2012. in march 2013 , we completed the sale of our new jersey facility to a third party resulting in net proceeds to us of approximately $ 3.6 million ( see note 5 in the notes to the consolidated financial statements ) . also in march 2013 , we received $ 1.5 million in cash as consideration for the sale of our totect ® assets ( see note 4 in the notes to the consolidated financial statements ) . in november 2013 , we received $ 2.6 million in cash upon sale of securities from an investment previously held and in december 2013 , we received $ 1.8 million as an upfront payment for a license agreement signed with majorelle . these cash-generating activities should not necessarily be considered an indication of our ability to raise additional funds in any future periods due to the uncertainty associated with raising capital . our cash and cash equivalents as of december 31 , 2013 were approximately $ 21.4 million . in january 2014 , we received an up-front license payment of $ 2.0 million from sandoz and a regulatory milestone payment of $ 0.2 million from majorelle for approval of vitaros ® in france . we expect to require additional external financing to fund our long-term operations . based upon our current business plan , we believe we have sufficient cash reserves to fund our on-going operations through mid-2015 . we expect to have net cash outflows from operations in 2014 as we support the market approvals where not already obtained and partner commercialization plans for vitaros ® , further develop room temperature vitaros ® , and seek to develop new product candidates using our existing technology .

cash flow summary the following table summarizes selected items in our consolidated statements of cash flows ( in thousands ) : 27 replace_table_token_6_th operating activities from continuing operations cash used in operating activities was $ 15.1 million in 2013 , compared to $ 12.4 million in 2012 . the $ 2.7 million decrease in cash provided by operating activities in 2013 as compared to 2012 is due to a decrease in net loss from continuing operations of $ 9.8 million from 2012 to 2013 , adjusted for non-cash items including stock based compensation expense of $ 2.0 million , a benefit of $ 0.6 million related to the deconsolidation of our former french subsidiaries , and a $ 0.5 million gain on contract settlement . the change in net operating assets resulted mainly from a decrease in accounts payable and a decrease in accrued compensation offset by an increase in deferred revenue . cash used in operating activities was $ 12.4 million in 2012 , compared to $ 9.8 million in 2011 . the $ 2.6 million decrease in cash provided by operating activities in 2012 as compared to 2011 is due to a decrease in net loss from continuing operations of $ 7.5 million from 2011 to 2012 , adjusted for non-cash items including $ 8.3 million of impairment charges to goodwill and intangible assets , stock based compensation expense of $ 2.9 million as well as a $ 1.3 million deferred tax provision charge . the change in net operating assets resulted mainly from a decrease in prepaid expenses and other current assets offset by an increase in accounts payable .

all intercompany accounts story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements , the notes thereto , and the other financial information appearing elsewhere in this 2017 form 10-k. the following discussion includes forward-looking statements that involve certain risks and uncertainties . see part i ( “ disclosure regarding forward-looking statements ” ) and part i , item 1a ( “ risk factors ” ) in this 2017 form 10-k. overview we are a pure play u.s. natural gas contract operations services business and the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the u.s. and a leading supplier of aftermarket services to customers that own compression equipment in the u.s. our services are essential to the production , processing , transportation and storage of natural gas and are provided primarily to producers and distributors of oil and natural gas . our geographic business unit operating structure , technically experienced personnel and large fleet of natural gas compression equipment enable us to provide reliable contract operations services to our customers throughout the u.s. our revenues and income are derived from two primary business segments : contract operations . our contract operations business is largely comprised of our significant equity investment in the partnership and its subsidiaries , in addition to our owned fleet of natural gas compression equipment that we use to provide operations services to our customers . aftermarket services . our aftermarket services business provides a full range of services to support the compression needs of customers . we sell parts and components and provide operations , maintenance , overhaul and reconfiguration services to customers who own compression equipment . archrock partners , l.p. we have a significant equity interest in the partnership , a master limited partnership that provides natural gas contract operations services to customers throughout the u.s. as of december 31 , 2017 , public unitholders held an approximate 57 % ownership interest in the partnership and we owned the remaining equity interest , including all of the general partner interest and incentive distribution rights . we consolidate the financial position and results of operations of the partnership . on january 1 , 2018 , we entered into the merger agreement , pursuant to which merger sub will be merged with and into the partnership with the partnership surviving as our indirect wholly-owned subsidiary . at the effective time of the proposed merger , we will acquire all of the partnership 's outstanding common units not already owned by us and the common units of the partnership will no longer be publicly traded . see “ recent business developments ” below . it is our intention for the partnership to be the primary vehicle for the growth of our contract operations business , and we may grow the partnership through third-party acquisitions and organic growth . spin-off transaction in november 2015 , we completed the spin-off of our international contract operations , international aftermarket services and global fabrication businesses into a standalone public company operating as exterran corporation , and we were renamed “ archrock , inc. ” following the completion of the spin-off , we and exterran corporation are independent , publicly-traded companies with separate public ownership , board of directors and management , and we continue to own and operate the u.s. contract operations and u.s. aftermarket services businesses that we previously owned . additionally , we continue to hold our interests in the partnership , which was renamed “ archrock partners , l.p. , ” including the sole general partner interest , certain limited partner interests and all of the incentive distribution rights in the partnership . results of operations for exterran corporation have been classified as discontinued operations in all periods presented in this 2017 form 10-k. for additional information , see note 3 ( “ discontinued operations ” ) to our financial statements . 42 recent business developments proposed merger on january 1 , 2018 , we entered into the merger agreement pursuant to which merger sub will be merged with and into the partnership with the partnership surviving as our indirect wholly-owned subsidiary . under the terms of the merger agreement , at the effective time of the proposed merger , each common unit of the partnership not owned by us will be converted into the right to receive 1.40 shares of our common stock and all of the partnership 's incentive distribution rights , which are owned indirectly by us , will be canceled and will cease to exist . completion of the merger is subject to certain customary conditions , including , among others : ( i ) approval of the merger agreement by holders of a majority of the outstanding common units of the partnership ; ( ii ) approval of the archrock share issuance by a majority of the shares of archrock common stock present in person or represented by proxy at the special meeting of archrock stockholders ; ( iii ) expiration or termination of applicable waiting periods under the hsr act ( early termination of the waiting period under the hsr act was granted february 9,2018 ) ; ( iv ) there being no law or injunction prohibiting consummation of the transactions contemplated under the merger agreement ; ( v ) the effectiveness of a registration statement on form s-4 relating to the archrock share issuance ; ( vi ) approval for listing on the new york stock exchange of the shares of archrock common stock issuable pursuant to the archrock share issuance ; ( vii ) subject to specified materiality standards , the accuracy of certain representations and warranties of the other party ; and ( viii ) compliance by the other party in all material respects with its covenants . as a result of the completion of the proposed merger , common units of the partnership will no longer be publicly traded . all of the partnership 's outstanding debt is expected to remain outstanding . story_separator_special_tag the eia forecasts that total u.s. natural gas marketed production will increase 10 % in 2018 compared to 2017 . the eia estimates that the u.s. natural gas production level will be approximately 38 tcf in 2040 , or 21 % of the projected worldwide total of approximately 177 tcf . historically , oil and natural gas prices and the level of drilling and exploration activity in the u.s. have been volatile . for example , the average price for natural gas ( per mmbtu ) , based on daily henry hub spot prices , in 2017 was 19 % higher than the average price in 2016 , despite the spot price at december 29 , 2017 being 1 % lower than the spot price at december 30 , 2016 . the u.s. natural gas liquid composite price was 21 % higher in november 2017 than in december 2016 , and the average price , based on monthly pricing , in 2017 was 36 % higher than the average price in 2016. the west texas intermediate crude oil spot price was 12 % higher at december 29 , 2017 than at december 30 , 2016 , and the average crude oil price , based on daily spot prices , in 2017 was 17 % higher than the average price in 2016. lower natural gas and natural gas liquids prices during 2015 and the first half of 2016 caused many companies to reduce their natural gas drilling and production activities during 2015 and further reduce those activities during 2016 in select shale plays and in more mature and predominantly dry gas areas in the u.s. , where we provide a significant amount of contract operations services . in addition , lower west texas intermediate crude oil prices during 2015 and 2016 resulted in a continued decrease in capital investment and in the number of new oil wells drilled by exploration and production companies in 2016 compared to 2015. because we provide a significant amount of contract operations services related to the production of associated gas from oil wells and the use of gas lift to enhance production of oil from oil wells , our operations and our levels of operating horsepower were also impacted by crude oil drilling and production activity in 2015 and 2016 . 44 as a result of the reduction in capital spending and drilling activity by u.s. producers in 2016 , our contract operations business experienced a decline in revenue and operating horsepower and an increase in pricing pressure during 2016 compared to 2015. the reduction in capital spending by our customers in 2016 , as well as their delaying maintenance activity on their equipment and in some cases using internal resources to perform work they have historically outsourced , also caused our aftermarket services business to decline in 2016 compared to 2015. increased stability of oil and natural gas prices in the second half of 2016 and throughout 2017 , compared to the declines experienced in 2015 and the first half of 2016 , contributed to increased new orders for our compression services in 2017 compared to 2016. average operating horsepower declined only 3 % in 2017 compared to the decline of 11 % that we experienced in 2016. although new orders for compression services were strong in 2017 , given the operating horsepower declines and pricing pressure experienced in 2016 , our 2017 contract operations revenue declined by 6 % compared to 2016. additionally , we invested more capital in new fleet units in 2017 than we did in 2016 to take advantage of improved market conditions during 2017. our aftermarket services business , which was also impacted by the decline in market conditions in 2016 , experienced a moderate recovery in 2017 and showed a 15 % increase in 2017 revenue compared to 2016. according to the barclays 2018 global e & p spending outlook , north america upstream spending is expected to increase by 21 % in 2018. due to this forecasted increase in customer spending in 2018 , the significant increase in new orders for compression services in 2017 and our increased investment in new fleet units in 2017 , we anticipate an increase in operating horsepower during 2018 compared to 2017 as well as increased revenue in our contract operations and aftermarket services businesses . according to drillinginfo , natural gas production is expected to increase approximately 18 % through 2022 , with further increases anticipated beyond then . we believe that significantly improved quantities , accessibility and price stability of natural gas in the u.s. will continue to drive higher levels of demand for liquid natural gas export , pipeline exports to mexico , power generation and use as a petrochemical feedstock , which will in turn lead to a significant increase in demand for compression services . certain key challenges and uncertainties in addition to general market conditions in the oil and natural gas industry and competition in the natural gas compression industry , we believe the following represent some of the key challenges and uncertainties we will face in the future . dependence on the partnership . to generate the funds necessary to meet our obligations , fund our business and pay dividends , we depend heavily on the distributions attributable to our ownership interest in the partnership . our ownership interest in the partnership , including our limited partner interest , general partner interest and incentive distribution rights in the partnership , is a significant cash-generating asset for us . as a result , our cash flow is heavily dependent upon the ability of the partnership to make distributions to its partners . a decline in the partnership 's business or revenues or increases in its expenses , principal and interest payments under existing and future debt instruments , working capital requirements or other cash needs could limit the amount of cash the partnership has available to distribute to its unitholders , including us .

summary of results revenue . revenue was $ 794.7 million , $ 807.1 million and $ 998.1 million during the years ended december 31 , 2017 , december 31 , 2016 and december 31 , 2015 , respectively . the decrease in revenue during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 was due to a decrease in revenue in our contract operations segment , partially offset by an increase in revenue in our aftermarket services segment . the decrease in revenue during the year ended december 31 , 2016 compared to the year ended december 31 , 2015 was due to decreases in revenue in our contract operations and aftermarket services segments . 46 see “ contract operations ” and “ aftermarket services ” below for further details . net income ( loss ) attributable to archrock stockholders . we generated net income attributable to archrock stockholders of $ 19.0 million and net loss attributable to archrock stockholders of $ 54.6 million and $ 132.5 million during the years ended december 31 , 2017 , 2016 and 2015 , respectively . the change in net income ( loss ) attributable to archrock stockholders during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 was primarily driven by the increase in benefit from income taxes and decreases in long-lived asset impairment , depreciation and amortization , restructuring and other charges and restatement and other charges , partially offset by the decrease in gross margin in our contract operations segment , a decrease in the net loss attributable to noncontrolling interest and an increase in interest expense .

general overview china automotive systems , inc. , including , when the context so requires , its subsidiaries and the subsidiaries ' interests in the sino-foreign joint ventures described below , is referred to herein as the “ company. ” the company , through its sino-foreign joint ventures , engages in the manufacture and sales of automotive systems and components in the people 's republic of china , the “ prc , ” or “ china. ” genesis , a company incorporated on january 3 , 2003 under the companies ordinance of hong kong as a limited liability company , is a wholly-owned subsidiary of the company . henglong usa corporation , “ hlusa , ” which was incorporated on january 8 , 2007 in troy , michigan , is a wholly-owned subsidiary of the company , and mainly engages in marketing of automotive parts in north america , and provides after sales service and research and development support accordingly . furthermore , the company owns the following aggregate net interests in the subsidiaries incorporated in the prc and brazil as of december 31 , 2019 and 2018. replace_table_token_3_th 30 | page story_separator_special_tag — henglong kyb mainly engages in providing passenger eps products . net sales for henglong kyb were $ 71.0 million for the year ended december 31 , 2019 , compared with $ 23.4 million for the year ended december 31 , 2018 , representing an increase of $ 47.6 million . an increase in sales volume led to a sales increase of $ 50.1 million , a decrease in selling price led to a sales decrease of $ 1.7 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 0.8 million . — net sales for other entities were $ 64.6 million for the year ended december 31 , 2019 , compared with $ 72.4 million for the year ended december 31 , 2018 , representing a decrease of $ 7.8 million , or 10.8 % , mainly contributed by jielong , which manufactures automobile steering columns for both hydraulic power steering ( “ hps ” ) and eps . 32 | page cost of products sold for the year ended december 31 , 2019 , the cost of sales was $ 368.1 million , compared with $ 430.7 million for the year ended december 31 , 2018 , representing a decrease of $ 62.6 million , or 14.5 % . the decrease in cost of sales was mainly due to the effect of the following major factors : ( i ) the change in product mix , i.e . the increase in high margin products as a portion of our sales ; ( ii ) the decrease in sales volumes with a cost of sales decrease of $ 31.7 million ; ( iii ) the decrease in unit cost with a cost of sales decrease of $ 9.6 million ; and ( iv ) the depreciation of the rmb against the u.s. dollar with a cost of sales decrease of $ 21.3 million . further analysis is as follows : — cost of sales for henglong was $ 155.7 million for the year ended december 31 , 2019 , compared to $ 235.9 million for the year ended december 31 , 2018 , representing a decrease of $ 80.2 million , or 34.0 % . a decrease in sales volumes resulted in a cost of sales decrease of $ 57.8 million , a decrease in unit material and subcomponents costs led to a cost of sales decrease of $ 11.8 million and the effect of foreign currency translation of the rmb against the u.s. dollar led to a cost of sales decrease of $ 10.6 million . — cost of sales for jiulong was $ 81.2 million for the year ended december 31 , 2019 , compared to $ 93.5 million for the year ended december 31 , 2018 , representing a decrease of $ 12.3 million , or 13.2 % . the decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $ 9.3 million , an increase in unit cost resulting in a cost of sales increase of $ 1.0 million , and the depreciation of the rmb against the u.s. dollar resulting in a cost of sales decrease of $ 4.0 million . — cost of sales for shenyang was $ 16.6 million for the year ended december 31 , 2019 , compared with $ 23.4 million for the year ended december 31 , 2018 , representing a decrease of $ 6.8 million , or 29.1 % . the decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $ 2.8 million , a decrease in unit cost resulting in a cost of sales decrease of $ 3.3 million , and the effect of foreign currency translation of the rmb against the u.s. dollar resulting in a cost of sales decrease of $ 0.7 million . — cost of sales for wuhu was $ 19.3 million for the year ended december 31 , 2019 , compared to $ 29.6 million for the year ended december 31 , 2018 , representing a decrease of $ 10.3 million , or 34.8 % . the decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $ 7.9 million , a decrease in unit cost resulting in a cost of sales decrease of $ 1.5 million , and the effect of foreign currency translation of the rmb against the u.s. dollar resulting in a cost of sales decrease of $ 0.9 million . — cost of sales for hubei henglong was $ 94.5 million for the year ended december 31 , 2019 , compared with $ 97.8 million for the year ended december 31 , 2018 , representing a decrease of $ 3.3 million , or 3.4 % . story_separator_special_tag % . net income attributable to parent company 's common shareholders net income attributable to parent company was $ 10.0 million for the year ended december 31 , 2019 , compared to $ 2.4 million for the year ended december 31 , 2018 , representing an increase of $ 7.6 million . 35 | page liquidity and capital resources capital resources and use of cash the company has historically financed its liquidity requirements from a variety of sources , including short-term borrowings under bank credit agreements , bankers ' acceptances , issuances of capital stock and notes and internally generated cash . as of december 31 , 2019 , the company had cash and cash equivalents and short-term investments of $ 82.5 million , compared with $ 103.9 million as of december 31 , 2018 , a decrease of $ 21.4 million , or 20.6 % . the company had working capital ( current assets less current liabilities ) of $ 137.4 million as of december 31 , 2019 , compared with $ 154.1 million as of december 31 , 2018 , representing a decrease of $ 16.7 million , or 10.8 % . except for the expected distribution of dividends from the company 's prc subsidiaries to the company in order to fund the payment of the one-time transition tax due to the u.s. tax reform , the company intends to indefinitely reinvest the funds in subsidiaries established in the prc . the pandemic of covid-19 has had material and adverse impacts on our cash flow for the first quarter of 2020 with potential continuing impacts on subsequent periods . however , based on our liquidity assessment , we believe that our current cash position , cash flow from operations and proceeds from our financing activities will be sufficient to meet our anticipated cash needs , including our cash needs for working capital and capital expenditures , for the foreseeable future and for at least 12 months subsequent to the filing of this annual report . capital source the company 's capital source is multifaceted , such as bank loans and banks ' acceptance facilities . in financing activities and operating activities , the company 's banks require the company to sign line of credit agreements and repay such facilities within one to two years . on the condition that the company can provide adequate mortgage security and has not violated the terms of the line of credit agreement , such facilities can be extended for another one to two years . the company had short-term loans of $ 46.6 million , long-term loans of $ 7.2 million and bankers ' acceptance notes of $ 69.9 million as of december 31 , 2019. the company currently expects to be able to obtain similar bank loans , i.e. , rmb loans , and bankers ' acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements , see the table under “ bank arrangements ” below for more information . if the company is not able to do so , it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock . due to a depreciation of assets , the value of the mortgages securing the above-mentioned bank loans and banker 's acceptances is expected to be reduced by approximately $ 12.5 million over the next 12 months . if the company wishes to obtain the same amount of bank loans and banker 's acceptances , it will have to provide additional mortgages of $ 12.5 million as of the maturity date of such line of credit agreements , see the table under “ bank arrangements ” below for more information . the company can still obtain a reduced line of credit with a reduction of $ 8.5 million , which is 68.2 % , the mortgage ratio , of $ 12.5 million , if it can not provide additional mortgages . the company expects that the reduction in bank loans will not have a material adverse effect on its liquidity . 36 | page bank facilities as of december 31 , 2019 , the principal outstanding under the company 's credit facilities and lines of credit was as follows ( figures are in thousands of usd ) . replace_table_token_8_th ( 1 ) these facilities have expired . the comprehensive credit facility with china everbright bank was extended to march 11 , 2021 with an available amount of rmb 30.0 million ( equivalent to $ 4.3 million as of december 31 , 2019 ) . the comprehensive credit facility with agriculture bank of china was extended to march 27 , 2021. the company is currently in the process of negotiating with the rest of these banks to renew the credit facilities . ( 2 ) the comprehensive credit facilities with shanghai pudong development bank are guaranteed by jielong and huibei henglong in addition to the above pledged assets . the comprehensive credit facilities with china citic bank are guaranteed by henglong and hubei henglong in addition to the above pledged assets . the comprehensive credit facilities with bank of china are guaranteed by hubei henglong . the comprehensive credit facilities with hankou bank are guaranteed by henglong . the comprehensive credit facilities with china merchants bank are guaranteed by hubei henglong . ( 3 ) “ amount available ” is used for the drawdown of bank loans and issuance of bank notes at the company 's discretion . if the company elects to utilize the facility by issuance of bank notes , additional collateral is requested to be pledged to the bank . ( 4 ) “ amount used ” represents the credit facilities used by the company for the purpose of bank loans or notes payable during the facility contract period . the loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities until the separate loans or notes payable expire .

results of operations selected highlights from our operations ( in thousands of u.s. dollars ) : replace_table_token_4_th net product sales and cost of products sold for the years ended december 31 , 2019 and 2018 , net sales and cost of sales are summarized as follows ( figures are in thousands of usd ) : replace_table_token_5_th net product sales net product sales were $ 431.4 million for the year ended december 31 , 2019 , as compared to $ 496.2 million for the year ended december 31 , 2018 , representing a decrease of $ 64.8 million , or 13.1 % . 31 | page net sales of traditional steering products were $ 348.9 million for the year ended december 31 , 2019 , compared to $ 388.3 million for 2018 , representing a decrease of $ 39.4 million , or 10.1 % . net sales of eps were $ 82.5 million for the year ended december 31 , 2019 , compared to $ 107.9 million for 2018 , representing a decrease of $ 25.4 million , or 23.5 % . as a percentage of net sales , the sales of eps were 19.1 % for the year ended december 31 , 2019 , compared to 21.7 % for 2018. the decrease in net product sales was due to the effects of three major factors : ( i ) the decrease in sales volume led to a sales decrease of $ 33.3 million due to the soft demand in the china domestic brand automobile market ; ( ii ) the decrease in average selling price led to a sales decrease of $ 6.8 million ; and ( iii ) the depreciation of the rmb against the u.s. dollar in 2019 led to a sales decrease of $ 24.7 million . further analysis is as follows : — henglong mainly engages in providing passenger vehicle steering systems .

the company matches each employee 's contributions at a rate of 100 % on the first 3 % of salary deferrals and 50 % on the next 2 % of salary deferrals , with a maximum company-paid match of $ 10,600 . all executive officers participated and had contributions to the 401 ( k ) plan matched at the maximum amount . change in control employment agreements the company entered into agreements with messrs. elich and vaughn in april 2011 and with mr. blotz in june 2015 that provide for severance benefits in the event that the officer 's employment is terminated by the company without cause ( as defined ) or by the officer for good reason ( as defined ) following a change in control of the company , as described in greater detail under “potential payments upon certain terminations following a change in control” below . the committee approved the agreements with the goal of providing the company 's stockholders with greater assurance of stability within senior management . death benefit agreements the company entered into agreements with messrs. elich and vaughn in january 2014 and with mr. blotz in july 2015 that provide , in the event of the executive officer 's death , for the company to make a lump sum payment to the executive officer 's designated story_separator_special_tag overview the company is a leading provider of business management solutions for small and mid-sized companies . the company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry . this platform , through the effective leveraging of human capital , helps our business owner clients run their businesses more effectively . we report revenues in our financial results in two categories of services : professional employer services ( “peo” ) and staffing . with our peo clients we enter into a co-employment arrangement in which we become the administrative employer and the client maintains physical care , custody and control of their workforce . we generate staffing services revenues primarily from short-term staffing , contract staffing , on-site management and direct placement services . we recognize revenues from our staffing services for all amounts invoiced , including direct payroll , employer payroll-related taxes , workers ' compensation coverage and a service fee ( equivalent to a mark-up percentage ) . through centralized operations at our headquarters in vancouver , washington , we prepare invoices weekly for our staffing customers and following the end of each payroll processing cycle for peo clients under a client services agreement . we invoice our customers and clients as each payroll is processed . payment terms for staffing customers are generally 30 days , while peo clients ' invoices are generally due on the invoice date . our business is concentrated in california , and we expect to continue to derive a majority of our revenues from this market in the future . revenues generated in our california offices accounted for 78 % of our total net revenues in 2015 , 77 % in 2014 and 74 % in 2013. consequently , any weakness in economic conditions or changes in the regulatory or insurance environment in california could have a material adverse effect on our financial results . - 34 - our cost of revenues for staffing services is comprised of direct payroll costs , employer payroll-related taxes , employee benefits , and workers ' compensation . our cost of revenues for peo services includes only employer payroll-related taxes and workers ' compensation . direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages . payroll taxes and employee benefits consist of the employer 's portion of social security and medicare taxes , federal and state unemployment taxes , and staffing services employee reimbursements for materials , supplies and other expenses , which are paid by our customer . workers ' compensation costs consist primarily of the costs associated with our workers ' compensation program , including claims reserves , claims administration fees , legal fees , mcc expense , state administrative agency fees , third party broker commission , risk manager payroll and excess insurance premiums for catastrophic injuries . we maintain separate workers ' compensation insurance policies for employees working in states where the company is not self-insured . the largest portion of workers ' compensation expense is the cost of workplace injury claims . when an injury occurs and is reported to us , our respective independent third-party administrator for workers ' compensation claims ( “tpa” ) or our internal claims management personnel analyzes the details of the injury and develops a case reserve , which becomes the estimate of the cost of the claim based on similar injuries and their professional judgment . we then record an expense and a corresponding liability based on our estimate of the ultimate claim cost . as cash payments are made by our tpa against specific case reserves , the accrued liability is reduced by the corresponding payment amount . the tpa and our in-house claims administrators also review existing injury claims on an on-going basis and adjust the case reserves as new or additional information for each claim becomes available . our reserve includes a provision both for future anticipated increases in costs ( “adverse loss development” ) of the claims for open claims and for claims incurred but not reported related to prior and current periods ( together , “ibnr” ) . this provision for ibnr is based on an actuarial estimate provided by our independent actuary . we believe our operational policies and internal claims reporting system help to limit the amount of incurred but unreported claims . beginning in the first quarter of 2015 , we began offering healthcare coverage to eligible staffing employees in compliance with the employer mandate provision of the patient protection and affordable care act and the health care and education reconciliation act of 2010 ( collectively , the “acts” ) . story_separator_special_tag ibnr primarily covers costs relating to : future claim payments in excess of case reserves on recorded open claims ; additional claim payments on closed claims ; and claims that have occurred but have not yet been reported to us . our workers ' compensation claims liabilities do not represent an exact calculation of liability , but instead represent management 's best estimate , utilizing actuarial expertise and projection techniques , at a given reporting date . the process of estimating unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events , including changes in claims handling practices , modifications in reserve estimation procedures , changes in individuals involved in the reserve estimation process , inflation , trends in the litigation and settlement of pending claims , and legislative changes . our estimates are based on informed judgment , derived from individual experiences and expertise applied to multiple sets of data and analyses . we consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known . due to the inherent uncertainty underlying loss reserve estimates , the expenses incurred through final resolution of our liability for our workers ' compensation claims will likely vary from the related loss reserves at the reporting date . therefore , as specific claims are paid out in the future , actual paid losses may be materially different from our current loss reserves . a basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes , absent a material change . significant structural changes to the available data can materially impact the reserve estimation process . to the extent a material change affecting the ultimate claim liability becomes known , such change is quantified to the - 37 - extent possible through an analysis of internal company data and , if available and when appropriate , external data . actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties . we believe that the amounts recorded for our estimated liabilities for workers ' compensation claims , which are based on informed judgement , analysis of data , actuarial estimates , and analysis of other trends associated with the company 's historical universe of claims data , are reasonable . nevertheless , adjustments to such estimates will be required in future periods if the development of claim costs varies materially from our estimates and such future adjustments may be material to our results of operations . safety incentives liability . our accrued safety incentives represent cash incentives paid to certain peo clients under our client services agreement for maintaining safe-work practices and minimizing workplace injuries . the incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers ' compensation claims cost objectives . safety incentive payments are made only after closure of all workers ' compensation claims incurred during the customer 's contract period . the safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer 's estimated workers ' compensation claims reserves as established by us and our third party administrator and the expected payout as determined by historical incentive payment trends . the safety incentive expense is netted against peo services revenue in our consolidated statements of operations . allowance for doubtful accounts . we make estimates of the collectability of accounts receivables . management analyzes historical bad debts , customer concentrations , customer creditworthiness , current economic trends and changes in the customers ' payment tendencies when evaluating the adequacy of the allowance for doubtful accounts . if the financial condition of our customers deteriorates , resulting in an impairment of their ability to make payments , additional allowances may be required . goodwill . we assess the recoverability of goodwill annually for potential impairment for the company 's one reporting unit . management uses the traditional two step approach to determine if the fair value of the reporting unit 's goodwill does not exceed its carrying value , thus resulting in impairment . management defines the fair value of the reporting unit as the market value of common shares outstanding as of the reporting period end date . management defines the reporting unit 's carrying value as the value of its net assets . management 's current assessment of the carrying value of goodwill indicates there was no impairment as of december 31 , 2015. investments in marketable securities . we consider available evidence in evaluating potential impairment of our investments , including the duration and extent to which fair value is less than cost and our ability and intent to hold the investment . investments in securities classified as trading are reported at fair value , with unrealized gains or losses reported in other income in our consolidated statements of operations . investments in securities classified as held-to-maturity are reported at amortized cost . the company did not have investments in securities classified as trading or held-to-maturity as of december 31 , 2015. investments in securities classified as available-for-sale are reported at fair value , with unrealized gains or losses reported net of tax in accumulated other comprehensive income - 38 - ( loss ) in stockholders ' equity . in the event a loss on our available-for-sale investments is determined to be other-than-temporary , the loss will be recognized in our statement of operations . the company held investments in equity securities classified as available-for-sale as of december 31 , 2015. for discussion of fair value measurement of these investments , refer to note 4 in the notes to the consolidated financial statements incorporated into item 8 of part ii of this report . income taxes .

fluctuations in quarterly operating results we have historically experienced significant fluctuations in our quarterly operating results , including losses in the first quarter of each year , and expect such fluctuations to continue in the future . our operating results may fluctuate due to a number of factors such as seasonality , wage limits on statutory payroll taxes , claims experience for workers ' compensation , demand for our services and competition . payroll taxes , as a component of cost of revenues , generally decline throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes and social security taxes are exceeded on a per employee basis . our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers ' businesses in the agriculture , - 46 - food processing and forest products-related industries . in addition , revenues in the fourth quarter may be reduced by many customers ' practice of operating on holiday-shortened schedules . workers ' compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims . in addition , adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the company 's estimated workers ' compensation expense .

our technology‑enabled solutions allow global organizations to address critical challenges resulting from the massive amounts of data obtained and created through their daily operations . our solutions address the life cycle of transaction processing and enterprise information management , from enabling payment gateways and data exchanges across multiple systems , to matching inputs against contracts and handling exceptions , to ultimately depositing payments and distributing communications . we believe our process expertise , information technology capabilities and operational insights enable our customers ' organizations to more efficiently and effectively execute transactions , make decisions , drive revenue and profitability , and communicate critical information to their employees , customers , partners , and vendors . history we are a former blank check company that completed our initial public offering on january 22 , 2015. in july 2017 , exela technologies , inc. ( “ exela ” ) , formerly known as quinpario acquisition corp. 2 ( “ quinpario ” ) , completed its acquisition of sourcehov holdings , inc. ( “ sourcehov ” ) and novitex holdings , inc. ( “ novitex ” ) pursuant to the business combination agreement dated february 21 , 2017 ( “ novitex business combination ” ) . in conjunction with the completion of the novitex business combination , quinpario was renamed exela technologies , inc. the novitex business combination was accounted for as a reverse merger for which sourcehov was determined to be the accounting acquirer . outstanding shares of sourcehov were converted into our common stock , presented as a recapitalization , and the net assets of quinpario were acquired at historical cost , with no goodwill or other intangible assets recorded . the acquisition of novitex was treated as a business combination under asc 805 and was accounted for using the acquisition method . the strategic combination of sourcehov and novitex formed exela , which is one of the largest global providers of information processing solutions based on revenues . basis of presentation this analysis is presented on a consolidated basis . in addition , a description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed . due to our specific situation , the presented financial information for the years ended december 31 , 2018 and 2017 is only partially comparable to the financial information for the year ended december 31 , 2017 and 2016. since sourcehov was deemed the accounting acquirer in the novitex business combination consummated on july 12 , 2017 , the presented financial information for the year ended december 31 , 2016 reflects the financial information and activities of sourcehov only . the presented financial information for the year ended december 31 , 2017 includes the financial information and activities for sourcehov for the period january 1 , 2017 to december 31 , 2017 ( 365 days ) as well as the financial information and activities of novitex for the period july 13 , 2017 to december 31 , 2017 ( 172 days ) . this lack of comparability needs to be taken into account when reading the discussion and analysis of our results of operations and cash flows . furthermore , the presented financial information for the year ended december 31 , 2017 also contains other costs that are directly associated with the novitex business combination , such as professional fees , to support the our new and complex legal , tax , statutory and reporting requirements following the novitex business combination . 47 our segments our three reportable segments are information & transaction processing solutions ( “ itps ” ) , healthcare solutions ( “ hs ” ) , and legal & loss prevention services ( “ llps ” ) . these segments are comprised of significant strategic business units that align our tps and eim products and services with how we manage our business , approach our key markets and interact with our customers based on their respective industries . itps : our largest segment , itps , provides a wide range of solutions and services designed to aid businesses in information capture , processing , decisioning and distribution to customers primarily in the financial services , commercial , public sector and legal industries . our major customers include 9 of the top 10 u.s. banks , 7 of the top 10 u.s. insurance companies , 5 of the top u.s. telecom companies , over 40 utility companies , over 30 state and county departments , and over 80 government entities . our itps offerings enable companies to increase availability of working capital , reduce turnaround times for application processes , increase regulatory compliance and enhance consumer engagement . hs : hs operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets . we serve the top 5 healthcare insurance payers and over 900 healthcare providers . llps : our llps segment provides a broad and active array of support services in connection with class action , bankruptcy labor , claims adjudication and employment and other legal matters . our customer base consists of corporate counsel , government attorneys , and law firms . acquisitions in april 2018 exela completed the acquisition of asterion international group ( “ asterion , ” the “ asterion business combination ” ) , a well-established provider of technology driven business process outsourcing , document management and business process automation across europe . the acquisition comes with minimal customer overlap and is strategic to expanding exela 's european business . through the acquisition of asterion , we expect to leverage brand awareness , strengthen margins , and expand the existing asterion sales channels . in july 2017 , we completed the novitex business combination . sourcehov was deemed to be the accounting acquirer , and is a leading provider of platform‑based enterprise information management and transaction processing solutions primarily for the healthcare , banking and financial services , commercial , public sector and legal industries . story_separator_special_tag the decrease is directly related to the restructuring and novitex business combination in 2017. sundry expense ( income ) sundry expense increased by $ 5.6 million to $ ( 3.3 ) million for the year ended december 31 , 2018 compared to $ 2.3 million for the year ended december 31 , 2017. the increase was mainly attributable to foreign currency transaction losses associated with exchange rate fluctuations . other income other income for the year ended december 31 , 2018 and 2017 was $ 2.9 million and $ 1.3 million . the interest rate swap was not designated as a hedge . as such , changes in the fair value of the derivative of $ 2.5 million are recorded directly in earnings . income tax ( expense ) benefit income tax benefit decreased $ 68.7 million to $ ( 8.4 ) million for the year ended december 31 , 2018 compared to $ 60.2 million for the year ended december 31 , 2017. the december 31 , 2018 federal tax expense is primarily due to the impact of the tcja . 52 results of operations year ended december 31 , 2017 , compared to year ended december 31 , 2016 replace_table_token_4_th revenue our revenue increased $ 362.4 million , or 45.9 % , to $ 1,152.3 million for the year ended december 31 , 2017 compared to $ 789.9 million for the year ended december 31 , 2016. this increase is primarily related to an increase in our itps segment revenues of $ 387.2 million , which was primarily attributable to the acquisition of transcentra in 2016 and novitex in 2017. the increase was partially offset by a decrease in revenues in the hs segment and llps segment of $ 14.2 million and $ 10.6 million , respectively . our itps , hs , and llps segments constituted 71.8 % , 20.3 % , and 7.9 % of our total revenue , respectively , for the year ended december 31 , 2017 , compared to 55.7 % , 31.4 % , and 12.9 % , respectively , for the year ended december 31 , 2016. the revenue changes by reporting segment was as follows : itps—revenues increased $ 387.2 million , or 88.0 % , to $ 827.1 million for the year ended december 31 , 2017 compared to $ 439.9 million for the year ended december 31 , 2016. the increase was primarily attributable to the acquisition of novitex , which contributed $ 292.1 million of the increase . additionally , the acquisition of transcentra contributed $ 94.1 million of the increase . the remaining increase in revenue was the result of net increases in services provided to itps customers . hs—revenues decreased $ 14.2 million , or 5.7 % , to $ 233.6 million for the year ended december 31 , 2017 compared to $ 247.8 million for the year ended december 31 , 2016. the decrease was primarily attributable to a surge in demand from healthcare provider customers in early 2016 as a result of a change in regulatory coding requirements beginning in the fourth quarter of 2015 , resulting in a decline in revenue of $ 17.9 million for the year ended december 31 , 2017 compared to the year ended december 31 , 2016. we have since experienced a normalization of demand as healthcare provider customers have reduced outsourcing of the service . the decrease was partially offset by an increase in revenues of $ 3.7 million from the payer business during the period . 53 llps—revenues decreased $ 10.6 million , or 10.4 % , to $ 91.6 million for the year ended december 31 , 2017 compared to $ 102.2 million for the year ended december 31 , 2016. the decrease was primarily attributable to lower revenue resulting from the sale of meridian consulting group , llc of approximately $ 4.4 million , lower revenue from the legal claims administration services of $ 4.3 million , and lower revenue from labor and employment practice of $ 1.9 million , during the year ended december 31 , 2017 , compared to the year ended december 31 , 2016. cost of revenue cost of revenue increased $ 310.0 million , or 59.7 % , to $ 829.1 million for the year ended december 31 , 2017 compared to $ 519.1 million for year ended december 31 , 2016. the increase was primarily attributable to an increase in the itps segment of $ 323.9 million , offset by decreases in the hs and llps segments of $ 5.9 million and $ 7.9 million , respectively . the cost of revenue decrease by operating segment was as follows : itps—cost of revenue increased $ 323.9 million , or 109.1 % , to $ 620.7 million for the year ended december 31 , 2017 compared to $ 296.8 million for year ended december 31 , 2016. the increase was primarily attributable to the acquisition of novitex , which contributed $ 248.6 million . the acquisition of transcentra contributed approximately $ 75.4 million . the increase was partially offset by various cost savings initiatives implemented during the year ended december 31 , 2017. hs—cost of revenue decreased $ 5.9 million , or 3.7 % , to $ 152.9 million for the year ended december 31 , 2017 compared to $ 158.8 million for year ended december 31 , 2016. this was primarily attributable to normalization of demand for coding during the year ended december 31 , 2017 after the surge we experienced in early 2016 as a result of the increased healthcare coding requirements , resulting in a decrease of $ 4.5 million , along with an associated decrease in revenue .

results of operations year ended december 31 , 2018 , compared to year ended december 31 , 2017 replace_table_token_3_th revenue our revenue increased $ 433.9 million , or 37.7 % , to $ 1,586.2 million for the year ended december 31 , 2018 compared to $ 1,152.3 million for the year ended december 31 , 2017. this increase is primarily related to an increase in our itps segment revenues of $ 446.5 million , which was primarily attributable to the acquisition of novitex in 2017. the increase was partially offset by a decrease in revenues in the hs segment and llps segment of $ 5.6 million and $ 7.1 million , respectively . our itps , hs , and llps segments constituted 80.3 % , 14.4 % , and 5.3 % of our total revenue , respectively , for the year ended december 31 , 2018 , compared to 71.8 % , 20.3 % , and 7.9 % , respectively , for the year ended december 31 , 2017. the revenue changes by reporting segment was as follows : itps—revenues increased $ 446.5 million , or 54.0 % , to $ 1,273.6 million for the year ended december 31 , 2018 compared to $ 827.1 million for the year ended december 31 , 2017. the increase was primarily attributable to acquisitions in 2017 and 2018 which contributed $ 445.0 million of the increase . the remaining increase in revenue was the result of net increases in services provided to itps customers . hs—revenues decreased $ 5.6 million , or 2.4 % , to $ 228.0 million for the year ended december 31 , 2018 compared to $ 233.6 million for the year ended december 31 , 2017. the decrease was primarily attributable to a decline in volume from a single customer who lost a contract from one of its customers .

the term of the sublease began on january 1 , 2013 and ends on december 30 , 2015. the monthly rent payable story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included in this annual report . in addition to historical information , the following discussion contains forward-looking statements that involve risks , uncertainties and assumptions . our actual results , performance or experience could differ materially from what is indicated by any forward-looking statement due to various important factors , risks and uncertainties , including , but not limited to , those set forth under “cautionary note regarding forward-looking statements , ” which precedes part i of this annual report , and under “risk factors” in item 1a of part i of this annual report . overview background we are a biopharmaceutical company engaged in the development of novel nnr therapeutics for the treatment of diseases and disorders of the nervous system . our nnr therapeutics selectively target a class of receptors known as neuronal nicotinic receptors , which we refer to as nnrs . nnrs are found on nerve cells throughout the nervous system and serve as key regulators of nervous system activity . our most advanced product candidates are tc-5619 , tc-5214 , tc-1734 , azd1446 ( tc-6683 ) , tc-6987 and tc-6499 and they are discussed under the caption “business” in item 1 of part i of this annual report . we have an ongoing collaboration agreement with astrazeneca focused on compounds that act on the a 4ß2 nnr . previously , we had a second collaboration agreement with astrazeneca that we entered into in december 2009 for the global development and commercialization of tc-5214 as a treatment for major depressive disorder ( mdd ) , and we refer to that agreement in this annual report as our “mdd agreement with astrazeneca.” our mdd agreement with astrazeneca was terminated effective in may 2012. under our ongoing collaboration agreement with astrazeneca : astrazeneca has an exclusive license to azd1446 and earlier-stage compounds that arose from the preclinical research collaboration conducted under the agreement ; astrazeneca is responsible for substantially all current and future development costs for azd1446 and each other compound arising from the preclinical research collaboration described below that it elects to advance ; and from january 2006 to january 2010 , we and astrazeneca conducted a preclinical research collaboration under the agreement to discover and develop compounds that act on the a 4ß2 nnr as treatments for conditions characterized by cognitive impairment ; astrazeneca paid us research fees , based on a reimbursement rate specified under the agreement , for research services rendered in the preclinical research collaboration . our ongoing collaboration agreement with astrazeneca can be terminated by astrazeneca for an uncured material breach by us or upon 90 days ' notice given at any time . under our mdd agreement with astrazeneca , we received a $ 200.0 million upfront payment . thereafter , astrazeneca was responsible for 80 % and we were responsible for 20 % of the cost of the completed clinical program for tc-5214 in mdd , except that astrazeneca was responsible for 100 % of development costs that were required only for countries outside the united states and the european union . in addition , for each of us and astrazeneca , costs that were not contemplated at execution to be part of the program were in some cases excluded from the cost-sharing arrangement . in addition to our agreements with astrazeneca , we previously had a product development and commercialization agreement with glaxosmithkline . this agreement was terminated effective in may 2011 . 57 since our inception , we have had limited revenue from product sales and have funded our operations principally through public and private offerings of equity securities , payments under collaboration and alliance agreements , grants and equipment financing . we have historically devoted substantially all of our resources to the discovery and development of our product candidates and technologies , including the design , conduct and management of preclinical and clinical studies and related manufacturing , regulatory and clinical affairs , as well as intellectual property prosecution . in the second quarter of 2012 , we completed a reduction in force as part of a plan to focus our resources on our more advanced programs . in october 2012 , we announced a second reduction in force , as well as our plan to close our laboratory operations . we completed the second reduction in force and the laboratory closings in december 2012. following completion of the second workforce reduction , we are no longer devoting resources to drug discovery or preclinical research activities . except for a small number of periods in which we generated net income due primarily to the recognition into revenue of amounts received under collaboration agreements , we have not been profitable . as of december 31 , 2012 , we had an accumulated deficit of $ 233.9 million . we expect that we may incur losses in future periods as our product candidates advance into later-stage development and as we progress our programs and invest in additional product opportunities . drug development , including clinical trials in particular , is time-consuming , expensive and may never yield a product that will generate revenue . as a clinical-stage company , our revenues , expenses and results of operations are likely to fluctuate significantly from quarter to quarter and year to year . we believe that period-to-period comparisons of our results of operations should not be relied upon as indicative of our future performance . revenue in january 2010 , we received the $ 200.0 million upfront payment under our mdd agreement with astrazeneca , which we recorded as deferred revenue and began recognizing into revenue on a straight-line basis over the estimated period of our substantive performance obligations under the agreement . story_separator_special_tag there were no reduction in force charges for 2011 or 2010. research and development expenses include costs associated with : the employment of personnel involved in drug discovery , research and development activities ; research and development facilities , equipment and supplies ; clinical trials , including fees paid to contract research organizations to monitor and oversee some of our trials ; the screening , identification and optimization of product candidates ; formulation and chemical development ; production of clinical trial materials , including fees paid to contract manufacturers ; 59 preclinical animal studies , including the costs to engage third-party research organizations ; quality assurance activities ; compliance with fda regulatory requirements ; consulting , license and sponsored research fees paid to third parties ; the development and enhancement of our drug discovery technologies that we refer to as pentad ; depreciation of capital assets used to develop our products ; and stock options granted to personnel in research and development functions . we utilize our research and development personnel and infrastructure resources across several programs , and many of our costs historically have not been specifically attributable to a single program . accordingly , we can not state precisely our total costs incurred on a program-by-program basis . we have not received fda or foreign regulatory marketing approval for any of our product candidates . our current and future expenditures on development programs are subject to numerous uncertainties in timing and cost to completion . our compounds are tested in numerous preclinical studies for safety , toxicology and efficacy . we then conduct clinical trials for those product candidates that are determined to be the most promising . if we do not establish an alliance or collaboration in which our collaborator assumes responsibility for funding the development of a particular product candidate , we fund these trials ourselves . as we obtain results from clinical trials , we or the collaborator may elect to discontinue or delay trials for some product candidates in order to focus resources on more promising product candidates . completion of clinical trials may take several years or more , and the length of time generally varies substantially according to the type , complexity , novelty and intended use of a product candidate . the cost of clinical trials for a particular product candidate may vary significantly as a result of a variety of factors , including : the number of subjects who participate in the trials ; the number and locations of sites included in the trials ; the length of time required to enroll trial subjects ; the therapeutic areas being investigated ; the duration of the trials and subject follow-up ; the costs of producing supplies of the product candidate needed for trials and regulatory submissions ; the efficacy and safety profile of the product candidate ; and the costs and timing of , and the ability to secure , regulatory approvals . in addition , our strategy includes entering into alliances and collaborations with third parties to participate in the development and commercialization of some of our product candidates . where a third party has responsibility for or authority over any or all of the non-clinical or clinical development of a particular product candidate , the estimated completion date may be largely under control of that third party and not under our control . we can not forecast with any degree of certainty whether any of our product candidates will be subject to future alliances or collaborations or how any such arrangement would affect our development plans or capital requirements . because of this uncertainty , and because of the numerous uncertainties related to clinical trials and drug development generally , we are unable to determine the duration and completion costs of our development programs or whether or when we will generate revenue from the commercialization and sale of any of our product candidates . 60 general and administrative expenses general and administrative expenses consist principally of salaries and other related costs for personnel in executive , finance , business development , legal and human resource functions . other general and administrative expenses include expenses associated with stock options granted to personnel in those functions , depreciation and other facility costs not otherwise included in research and development expenses , patent-related costs , insurance costs and professional fees for consulting , legal , accounting and public and investor relations services . income taxes we have incurred cumulative operating losses through december 31 , 2012 and have not paid federal , state or foreign income taxes for any period . the application of u.s. generally accepted accounting principles , or gaap , may for some periods result in non-cash income tax expense or benefit being reflected in our statement of comprehensive income . for the year ended december 31 , 2012 , we recognized $ 101,000 of income tax benefit as a result of the application of accounting guidance for intraperiod tax allocation , under which we are required to consider all items ( including items recorded in other comprehensive income ) in determining the amount of tax benefit that should be allocated to net loss . the non-cash income tax benefit for 2012 was offset in full by income tax expense recorded in other comprehensive income . for the year ended december 31 , 2010 , we recorded $ 3.5 million of income tax expense , primarily as a result of the application of accounting guidance for income tax related to stock-based compensation . exercises of stock options in periods of net income may result in tax deductions for stock-based compensation in excess of expense recorded for the stock options under gaap . this results in an income tax benefit that is recognized as an increase to capital in excess of par value and , based on accounting standards codification topic 740 , income taxes , an offsetting charge in the same amount to income tax expense .

results of operations years ended december 31 , 2012 and december 31 , 2011 net operating revenues replace_table_token_5_th net operating revenues for the year ended december 31 , 2012 decreased by $ 39.8 million as compared to the year ended december 31 , 2011. the lower net operating revenues for 2012 were primarily attributable to a decrease of $ 39.6 million in license fees and milestones from collaborations . the lower license fees and milestones from collaborations principally resulted from decreases in recognition of deferred revenue of : $ 18.4 million related to our now concluded strategic alliance with glaxosmithkline , as all remaining deferred revenue was recognized in the 2011 period in connection with termination of the alliance ; $ 18.1 million associated with our now concluded mdd agreement with astrazeneca due to the completion of our performance obligations in mid-2012 ; and 64 $ 4.8 million related to the development of tc-5619 under our ongoing collaboration agreement with astrazeneca , as the tc-5619-related payments became fully recognized in the second quarter of 2011. these decreases were partially offset by an increase of $ 1.8 million in recognition of deferred revenue related to the development of tc-1734 under our ongoing collaboration agreement with astrazeneca . we expect our net operating revenues for 2013 to be substantially lower than 2012 , primarily due to the upfront payment received under our mdd agreement with astrazeneca becoming fully recognized in the second quarter of 2012. in future periods , we are eligible to receive additional milestone payments under our ongoing collaboration agreement with astrazeneca . the amount of milestone payments will depend on whether we achieve development , regulatory and commercial milestone events that are inherently uncertain and , if so , when . we expect that the amount of our milestone-based revenue , if any , will continue to vary from period to period .

in this discussion and analysis , we discuss and explain the consolidated financial condition and results of operations for the years ended december 31 , 2012 , 2011 and 2010 , including the following topics : ● an overview of our business and strategy ; ● an overview of the sealy acquisition ; ● our net sales and costs in the periods presented as well as changes between periods ; ● discussion of new initiatives that may affect our future results of operations and financial condition ; ● expected future expenditures for capital projects and sources of liquidity for future operations ; and ● the effect of the foregoing on our overall financial performance and condition , as well as factors that could affect our future performance . business overview general . we are the leading manufacturer , marketer and distributor of premium mattresses and pillows , which we sell in approximately 80 countries under the tempur ® and tempur-pedic ® brands . we believe our premium mattresses and pillows are more comfortable than standard bedding products because our proprietary pressure-relieving tempur ® material is temperature sensitive and continuously conforms to the body . we sell our premium mattresses and pillows through four distribution channels in each operating business segment : retail ( furniture , bedding and department stores ) ; direct ( direct response , internet and company-owned stores ) ; healthcare ( hospitals , nursing homes , healthcare professionals and medical retailers ) ; and third party distributors in countries where we do not sell directly through our own subsidiaries . in our international segment certain of our subsidiaries sell directly through company-owned stores . prior to 2011 , these sales have not been material and were reported through our retail channel . in 2011 , and consistent with our growth initiatives , we are reporting company-owned stores in the international segment within the direct channel . prior period amounts have been reclassified to conform to the 2011 presentation of net sales , by channel and by segment . these changes do not impact previously reported international segment net sales totals . business segments . we have two reportable business segments : north america and international . these reportable segments are strategic business units that are managed separately based on the fundamental differences in their geographies . the north american operating segment consists of two u.s. manufacturing facilities , our north american distribution subsidiaries and company-owned stores . the international segment consists of our manufacturing facility in denmark , whose customers include all of our distribution subsidiaries and third party distributors outside the north american operating segment and company-owned stores . we evaluate segment performance based on net sales and operating income . for a further discussion of factors that could impact operating results , including the current economic environment and the steps we are taking to address this environment , see the section entitled “ factors that may affect future performance ” included within this section and in item 1a under part i of this report . 33 strategy our goal is to become the world 's favorite mattress and pillow brand . in order to achieve this long-term goal while managing through the current economic and competitive environment , we plan to complete the proposed acquisition of sealy , and to continue to pursue certain key tempur-pedic ® strategic goals using the related strategies discussed below . ● make sure everyone knows that they would sleep better on a tempur-pedic ® mattress – we plan to continue to invest in our global brand awareness through advertising campaigns that further associate our brand name with overall sleep and premium quality products . ● make sure there is a tempur-pedic ® bed and pillow that appeals to everyone – we plan to continue to maintain our focus on premium products at the high end of the category price range that are preferred by consumers . ● make sure that tempur-pedic ® products are available to everyone – we plan to expand our points of distribution and the effectiveness of our distribution channels by ensuring our retailers are provided attractive incentives to sell our products . ● make sure that tempur-pedic ® bedding products continue to deliver the best sleep – we plan to continue to invest in product research and development to systematically innovate and improve our products in consumer relevant ways . in pursuing these strategic goals , we expect to continue to optimize our cost structure in order to enable these marketing and product development investments . on september 27 , 2012 , we announced we had entered into an agreement and plan of merger ( “ merger agreement ” ) to acquire sealy corporation ( “ sealy ” ) , by merging sealy with a newly-formed subsidiary of the company ( the “ merger ” ) ( collectively , the “ sealy acquisition ” ) . sealy , headquartered in trinity , north carolina , owns one of the largest bedding brands in the world , and manufactures and markets a complete line of bedding products . subject to the terms and conditions of the merger agreement , at the effective time and as a result of the merger , each share of common stock of sealy issued and outstanding immediately prior to the effective time of the merger will be cancelled and ( other than shares held by sealy or tempur-pedic or their subsidiaries or sealy stockholders who properly exercise appraisal rights ) converted into the right to receive $ 2.20 in cash . the company anticipates that the total consideration to be paid , including payments on account of existing sealy options and equity share units and the assumption of outstanding indebtedness of sealy less cash assumed , will be approximately $ 1,300.0 million . the transaction is expected to be completed in the first half of calendar 2013 and is subject to regulatory clearance under the hart-scott-rodino antitrust improvements act of 1976 and other customary conditions . story_separator_special_tag if the sealy acquisition is consummated on or prior to september 26 , 2013 , the amounts held in escrow will be released to tempur-pedic international to finance a portion of the cash purchase price of the sealy acquisition . if the sealy acquisition is not consummated on or prior to september 26 , 2013 , the senior notes will be subject to a special mandatory redemption at a redemption price of 100.0 % of the principal amount plus accrued and unpaid interest , if any , and the amounts held in the escrow account will be used to fund the redemption . also in conjunction with the issuance and sale of the senior notes , tempur-pedic international and the guarantors have agreed through a registration rights agreement to exchange the senior notes for a new issue of substantially identical registered notes under the securities act . tempur-pedic international and the guarantors are required to pay additional interest if the senior notes are not registered within the specified time periods outlined within the registration rights agreement . we expect to use the net proceeds of the senior notes offering , together with cash on hand and borrowings under the 2012 credit agreement , to finance the sealy acquisition and to pay related fees and expenses , as well as payoff our existing credit facility and sealy 's outstanding debt . story_separator_special_tag these processes . the principal factors that impacted gross profit margin during the year are identified and discussed below in the respective segment discussions . north america . north american gross profit for the year ended december 31 , 2012 decreased to $ 449.3 million from $ 499.8 million for the same period in 2011 , a decrease of $ 50.5 million , or 10.1 % . the gross profit margin in our north american segment was 46.6 % and 49.7 % for the year ended december 31 , 2012 and 2011 , respectively . our north american gross profit margin was most significantly impacted by a 1.7 % decrease related to additional promotions and discounts and new product introductions , a 1.4 % decrease related to unfavorable mix and a 0.5 % decrease due to fixed cost de-leverage related to lower production volumes . these decreases were partially offset by a 0.5 % increase related to lower commodity prices . our north american cost of sales increased to $ 515.0 million for the year ended december 31 , 2012 as compared to $ 504.9 million for the year ended december 31 , 2011 , an increase of $ 10.1 million , or 2.0 % . international . international gross profit for the year ended december 31 , 2012 increased to $ 265.3 million from $ 243.3 million for the same period in 2011 , an increase of $ 22.0 million , or 9.0 % . the gross profit margin in our international segment was 60.5 % and 58.9 % for the years ended december 31 , 2012 and 2011 , respectively . our international gross profit margin was most significantly impacted by a 1.3 % increase driven by efficiencies in manufacturing and fixed cost leverage related to higher production volumes , as well as a 0.3 % increase driven by costs associated with an information technology upgrade at our manufacturing facility in demark during 2011 that did not recur in 2012. our international cost of sales for the year ended december 31 , 2012 increased to $ 173.3 million , as compared to $ 169.9 million for the year ended december 31 , 2011 , an increase of $ 3.4 million , or 2.0 % . selling and marketing expenses . selling and marketing expenses include advertising and media production associated with our direct channel , other marketing materials such as catalogs , brochures , videos , product samples , direct customer mailings and point of purchase materials , and sales force compensation . we also include in selling and marketing expense certain new product development costs , including market research and new product testing . selling and marketing expenses increased to $ 319.1 million for the year ended december 31 , 2012 as compared to $ 276.9 million for the year ended december 31 , 2011 , an increase of $ 42.2 million , or 15.2 % . selling and marketing expenses as a percentage of net sales increased to 22.7 % in 2012 , compared to 19.5 % for 2011. our advertising expense for the year ended december 31 , 2012 was $ 164.5 million , or 11.7 % of net sales , compared to $ 148.8 million , or 10.5 % , for the same period in 2011 , an increase of $ 15.7 million , or 10.6 % . our objective is to align advertising expenses with our sales expectations . during 2012 , consistent with our strategy , we made additional investments in advertising to increase brand awareness to drive future growth in certain key north american and international markets . all other selling and marketing expenses as a percentage of net sales were approximately 11.0 % and 9.0 % for the years ended december 31 , 2012 and 2011 , respectively . all other selling and marketing expenses increased $ 26.5 million , or 20.7 % , due to increases in promotional related expenses of $ 11.8 million , costs associated with opening additional company-owned stores of $ 5.0 million , salaries and associated expense of $ 4.5 million related to additional headcount , and $ 1.1 million of restructuring charges related to severance . this was offset by a benefit recorded for our performance restricted share units ( “ prsus ” ) of $ 2.3 million following our re-evaluation of the probability of meeting certain required financial metrics related to the grants . 38 general , administrative and other expenses . general , administrative and other expenses include management salaries , information technology , professional fees , depreciation of furniture and fixtures , leasehold improvements and computer equipment , expenses for administrative functions , and research and development costs .

results of operations a summary of our results for the year ended december 31 , 2012 include : ● earnings per diluted common share ( eps ) were $ 1.70 compared to $ 3.18 per diluted share for the full year 2011 . ● adjusted eps were $ 2.61 for the year ended december 31 , 2012 compared to $ 3.18 per diluted share for the same period in 2011. for a discussion and reconciliation of adjusted eps to gaap eps refer to the non-gaap financial information set forth below under the heading “ non-gaap financial information ” . ● net sales decreased to $ 1,402.9 million compared to $ 1,417.9 million for the full year ended 2011 . ● our gross profit margin was 50.9 % compared to 52.4 % for the year ended december 31 , 2011 . ● our operating income margin was 17.7 % compared to 24.0 % for the year ended december 31 , 2011 . 35 the following table sets forth the various components of our consolidated statements of income , and expresses each component as a percentage of net sales : replace_table_token_4_th year ended december 31 , 2012 compared with year ended december 31 , 2011 a summary of net sales , by channel and by segment , is set forth below : replace_table_token_5_th a summary of net sales , by product and by segment , is set forth below : replace_table_token_6_th 36 net sales . net sales for the year ended december 31 , 2012 decreased to $ 1,402.9 million from $ 1,417.9 million , a decrease of $ 15.0 million , or 1.1 % .

the following table sets forth , for the period indicated , certain financial data expressed for the three years ended december 31 , 2014 : ( dollars in millions ) revenues replace_table_token_4_th in our cs segment we recognize revenues based on the quantity delivered or resources utilized , and the period in which services are performed and delivered . revenues for contracts billed on a time-and-materials basis are recognized as services are performed . revenues under fixed-fee contracts , which are not significant to the overall revenues , are recognized on the percentage of completion method of accounting , as services are performed or milestones are achieved . in our iads segment we recognize revenues primarily based on the quantity delivered , and the period in which services are performed and deliverables are made as per contracts . our mis segment derives its revenues primarily from subscription arrangements . revenue from subscriptions are recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations , persuasive evidence of an arrangement exists , the fees are fixed or determinable and collection is reasonably assured . we consider standard accounting criteria for determining whether to report revenue gross as a principal versus net as an agent . factors considered include whether we are the primary obligor , have risks and rewards of ownership , and bear the risk that a client may not pay for the services performed . if there are circumstances where the above criteria are not met and therefore we are not the principal in providing services , amounts received from clients are presented net of payments in the consolidated statements of operations and comprehensive income ( loss ) . 26 revenues include reimbursement of out-of-pocket expenses , with the corresponding out-of-pocket expenses included in direct operating costs . direct operating costs direct operating costs consist of direct payroll , occupancy costs , data center hosting fees , content acquisition costs , depreciation and amortization , travel , telecommunications , computer services and supplies , realized gain ( loss ) on forward contracts , foreign currency revaluation gain ( loss ) , and other direct expenses that are incurred in providing services to our clients . selling and administrative expenses selling and administrative expenses consist of management and administrative salaries , sales and marketing costs including commissions , new services research and related software development , third party software , advertising and trade conferences , professional fees and consultant costs , and other administrative overhead costs . adjusted ebitda performance metric in addition to measures of financial performance presented in our consolidated financial statements , we monitor “ adjusted ebitda ” to help us evaluate our ongoing operating performance , including our ability to operate the business effectively . we define adjusted ebitda as net income ( loss ) attributable to innodata inc. and subsidiaries in accordance with gaap before income taxes , depreciation , amortization of intangible assets , impairment charges , stock-based compensation , loss attributable to non-controlling interests and interest income ( expense ) . we believe adjusted ebitda is useful to our management and investors in evaluating our operating performance and for financial and operational decision-making purposes . in particular , it facilitates comparisons of the core operating performance of our company from period to period on a consistent basis and helps us to identify underlying trends in our business . we believe it provides useful information about our operating results , enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to key metrics used by the management in our financial and operational decision-making . we use this measure to establish operational goals for managing our business and evaluating our performance . adjusted ebitda has limitations as an analytical tool and should not be considered in isolation or as a substitute for results reported under gaap . some of these limitations are : · adjusted ebitda does not reflect tax payments and such payments reflect a reduction in cash available to us ; · adjusted ebitda does not reflect changes in , or cash requirements for , our working capital needs and for our cash expenditures or future requirements for capital expenditures or contractual commitments ; · adjusted ebitda excludes the potential dilutive impact of stock-based compensation expense related to our workforce , interest income ( expense ) and net loss attributable to noncontrolling interests , and these items may represent a reduction or increase in cash available to us ; 27 · although depreciation and amortization are non-cash charges , the assets being depreciated and amortized may have to be replaced in the future , and adjusted ebitda does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements ; and · other companies , including companies in our own industry , may calculate adjusted ebitda differently from our calculation , limiting its usefulness as a comparative measure . adjusted ebitda should be considered as a supplement to , and not as a substitute for , or superior to , gaap net income . the following table shows a reconciliation from net income ( loss ) to adjusted ebitda for the periods presented ( in thousands ) : replace_table_token_5_th story_separator_special_tag times new roman , times , serif ; margin : 0pt 0 ; text-align : justify ; text-indent : 0.5in '' > we continued to restructure our operations in 2014 which resulted in cost savings . this led to a decline in selling and administrative expenses for the cs segment during the year ended december 31 , 2014 compared to the year ended december 31 , 2013 . 29 selling and administrative expenses for the cs segment , as a percentage of cs segment revenues was 24 % for the years ended december 31 , 2014 and 2013. a significant portion of our selling and administrative expenses is fixed in nature . story_separator_special_tag fiscal year ended march 31 , 2011 can not be determined at this time . as we are continually subject to tax audits by the indian bureau of taxation , we continuously assesses the likelihood of an unfavorable assessment for all fiscal years for we have not been audited , and as of december 31 , 2014 , we recorded a tax provision amounting to $ 146,000 including interest for such year . 30 from time to time we are also subject to various other tax proceedings and claims for our philippines subsidiaries . we have recorded a tax provision amounting to $ 300,000 including interest through december 31 , 2014 , for several ongoing tax proceedings in the philippines . although the ultimate outcome can not be determined at this time , we continue to contest these claims vigorously . we had unrecognized tax benefits of $ 1.8 million and $ 2.2 million at december 31 , 2014 and 2013 , respectively . the portion of unrecognized tax benefits relating to interest and penalties was $ 0.6 million and $ 0.8 million at december 31 , 2014 and 2013 , respectively . the unrecognized tax benefits as of december 31 , 2014 and 2013 , if recognized , would have an impact on our effective tax rate . we are subject to various tax audits and claims which arise in the ordinary course of business . management currently believes that the ultimate outcome of these audits and claims will not have a material adverse effect on our consolidated financial position , results of operations or cash flows . net loss we generated a net loss of $ 1.0 million in the year december 31 , 2014 compared to net loss of $ 10.6 million in the year ended december 31 , 2013 . the decline in net loss in 2014 is primarily attributable to the $ 7.1 million valuation allowance referred to in “ income taxes ” recorded during the year ended december 31 , 2013 and all of which we allocated to the cs segment , and the $ 5.5 million impairment charge referred to in “ impairment charge ” that we recorded in 2013 and all of which we allocated to the iads segment . in addition , losses attributable to non-controlling interests in iads declined by $ 1.3 million for the year ended december 31 , 2014 compared to the year ended december 31 , 2013. net income for the cs segment was $ 4.9 million for the year ended december 31 , 2014 , compared to net income of $ 1.2 million for the year ended december 31 , 2013 , net of intersegment profits . net loss for the iads segment was $ 5.6 million for the year ended december 31 , 2014 compared to $ 11.8 million for the year ended december 31 , 2013 , net of intersegment profits . net loss for the mis segment was $ 0.3 million for the year ended december 31 , 2014. adjusted ebitda adjusted ebitda for the year ended december 31 , 2014 was $ 3.0 million compared to $ 2.4 million for the year ended december 31 , 2013 , an increase of $ 0.6 million or 25 % . adjusted ebitda for the cs segment was $ 8.5 million and $ 8.0 million for the years ended december 31 , 2014 and 2013 , respectively , an increase of $ 0.5 million or approximately 6 % . adjusted ebitda was a loss of $ 5.4 million and $ 5.6 million for the iads segment for the years ended december 31 , 2014 and 2013 , respectively . adjusted ebitda was a loss of $ 0.1 million for the mis segment for the year ended december 31 , 2014 . 31 year ended december 31 , 2013 compared to the year ended december 31 , 2012 revenues total revenues were $ 64.2 million for the year ended december 31 , 2013 , a 26 % decrease from $ 86.6 million for the year ended december 31 , 2012. revenues from the cs segment were $ 63.1 million and $ 85.4 million for the years ended december 31 , 2013 and 2012 , respectively . revenues from the iads segment were $ 1.1 million and $ 1.2 million for the years ended december 31 , 2013 and 2012 , respectively . the $ 22.3 million decrease in the cs segment is principally attributable to an $ 18.9 million decline in revenues from e-book related services that we perform for one of our significant clients , partly offset by a $ 3.4 million increase in revenues from our non-e-book related services . two clients generated approximately 26 % , 41 % and 30 % of our total revenues in the fiscal years ended december 31 , 2013 , 2012 and 2011 , respectively . another client accounted for 15 % of our total revenues for the year ended december 31 , 2013 , but accounted for less than 10 % for the years ended december 31 , 2012 and 2011. one other client accounted for 11 % of our total revenues for the year ended december 31 , 2013 but accounted for less than 10 % for the year ended december 31 , 2012 and 14 % for the year ended december 31 , 2011. no other client accounted for 10 % or more of total revenues during these periods . further , in the years ended december 31 , 2013 , 2012 and 2011 , revenues from non-us clients accounted for 35 % , 24 % and 30 % , respectively , of our revenues . direct operating costs direct operating costs were approximately $ 49.1 million and $ 57.4 million for the years ended december 31 , 2013 and 2012 , respectively , a decrease of $ 8.3 million or approximately 14 % .

results of operations we acquired mediamiser on july 28 , 2014. the results of operations reflect the operations of mediamiser only for the period beginning on july 29 , 2014 and ending on december 31 , 2014. we acquired bulldog reporter on december 23 , 2014. the results of operations reflect the operations of bulldog reporter only for the period beginning on december 24 , 2014 and ending on december 31 , 2014. year ended december 31 , 2014 compared to the year ended december 31 , 2013 revenues total revenues were $ 59.1 million for the year ended december 31 , 2014 , an 8 % decline from $ 64.2 million for the year ended december 31 , 2013. revenues from the cs segment were $ 56.8 million and $ 63.1 million for the years ended december 31 , 2014 and 2013 , respectively . revenues from the iads segment were $ 0.6 million and $ 1.1 million for the years ended december 31 , 2014 and 2013 , respectively . revenues from the mis segment were $ 1.7 million for the year ended december 31 , 2014. the $ 6.3 million revenue decrease in the cs segment is principally attributable to a $ 5.4 million decline in revenues from non e-book related services that we perform for one of our significant clients and by a $ 0.9 million decrease in revenues from our e-book related services . two clients generated approximately 27 % , 26 % and 41 % of our total revenues in the fiscal years ended december 31 , 2014 , 2013 and 2012 , respectively .

million ( $ 2.82 per diluted share ) . the results for 2018 included the effect of merger expenses associated with the acquisition of washingtonfirst bankshares totaling $ 11.8 million and $ 2.4 million in recovered interest income from previously acquired credit impaired loans . merger expenses , net of the interest recoveries , resulted in an after-tax reduction to earnings per share of approximately $ 0.19 per share for 2018. net income for 2017 , which included an additional $ 5.5 million income tax expense from the revaluation of the deferred tax assets as a result of the reduction of the corporate tax rate under the tax cuts and jobs act and $ 2.6 million in post-tax merger expenses , was $ 53.2 million ( $ 2.20 per share ) . these items reduced the prior year 's earnings per share by approximately $ 0.34 per share . these results reflect the impact of following events : the results of operations from the january 1 , 2018 , acquisition of washingtonfirst are included in the company 's consolidated results of operations for 2018. at the acquisition date , washingtonfirst had assets of $ 2.1 billion , loans of $ 1.7 billion and deposits of $ 1.6 billion . · total loans at december 31 , 2018 increased 52 % compared to the balance at december 31 , 2017 as a result of strong organic growth and the washingtonfirst acquisition . compared to the post-acquisition combined portfolio at the beginning of 2018 , the loan portfolio experienced 9 % growth . the net interest margin increased to 3.60 % in 2018 compared to 3.55 % in 2017. total deposits grew 49 % year over year and achieved 6 % post-acquisition growth . the provision for loan losses was $ 9.0 million for 2018 compared to $ 3.0 million for 2017 , reflecting the impact of organic growth in the loan portfolio year over year in addition to the impact of acquired loans being re-underwritten as they reached maturity under their original lending arrangements and cease to be accounted for as acquired loans . non-interest income increased 19 % for 2018 compared to 2017. the increase was driven primarily by increases in income from mortgage banking activities , wealth management and insurance mortality proceeds . non-interest expenses increased 39 % for 2018 compared to the prior year . the current year 's expenses included $ 11.8 million in merger expenses compared to $ 4.3 million for the prior year . excluding penalties due to the prepayment of fhlb advances in 2017 in addition to the merger expenses from both years , non-interest expense increased 36 % due to increases in compensation and benefit costs , occupancy costs and other operational expenses as a result of the acquisition of washingtonfirst . in 2018 , the mid-atlantic region in which the company operates continued to experience improved regional economic performance . the national economy improved as well throughout the year . consumer confidence has been bolstered by certain positive economic trends such as lower unemployment , increased housing prices and solid performance in the financial markets . these positive trends have been tempered by international economic concerns together with concerns over a lack of wage growth , national budgetary issues and the rise in interest rates . these factors can act to constrain economic activity on the part of both large and small businesses . despite the mixed business environment , the company has experienced healthy loan growth while maintaining strong levels of liquidity , capital and credit quality . liquidity continues to remain strong due to borrowing lines with the federal home loan bank of atlanta and the federal reserve and the size and composition of the investment portfolio . at december 31 , 2018 , the bank remained above all “ well-capitalized ” regulatory requirement levels . tangible book value per common share increased modestly by 1 % to $ 20.45 from $ 20.18 at december 31 , 2017 as the 28 % increase in book value per share was offset by the additional goodwill recorded from the washingtonfirst acquisition . the company 's credit quality remained strong as non-performing assets represented 0.46 % of total assets at december 31 , 2018 compared to 0.58 % at december 31 , 2017. the ratio of net charge-offs to average loans was 0.01 % for 2018 , compared to 0.04 % for the prior year . 30 total assets at december 31 , 2018 increased 51 % compared to december 31 , 2017. this increase was primarily the result of the acquisition of washingtonfirst 's $ 2.1 billion of assets . total loans at december 31 , 2018 , were $ 6.6 billion compared to $ 4.3 billion at december 31 , 2017. post-acquisition asset growth has been primarily the result of net loan growth in 2018. loan balances increased 52 % compared to the prior year end as a result of the acquisition with post-acquisition portfolio growth of 9 % driven by the 13 % post-acquisition growth in commercial loans . the growth in commercial loans was driven by double digit increases in all commercial lending categories . customer funding sources , which include deposits plus other short-term borrowings from core customers , increased 6 % compared to post-acquisition balances . the increase in customer funding sources was driven by increases of 17 % in certificates of deposit and 22 % in money market savings accounts . the company utilizes low cost fhlb borrowings to assist in the management of the net interest margin . the effect on the net interest margin partially mitigates the increased rates offered on certificates of deposit and money market accounts to retain these deposit relationships in the rising interest rate environment . during the same period , stockholders ' equity increased to $ 1.1 billion at december 31 , 2018 from $ 564 million at december 31 , 2017 primarily due to the issuance of common stock to effect the acquisition of washingtonfirst . story_separator_special_tag however , the determination of the allowance requires significant judgment , and estimates of probable losses in the lending portfolio can vary significantly from the amounts actually observed . while management uses available information to recognize probable losses , future additions or reductions to the allowance may be necessary based on changes in the composition of loans in the portfolio and changes in the financial condition of borrowers as a result of changes in economic conditions . in addition , various regulatory agencies , as an integral part of their examination process , and independent consultants engaged by the company periodically review the loan portfolio and the allowance . such reviews may result in additional provisions based on their judgments of information available at the time of each examination . the company 's allowance for loan losses has two basic components : a general allowance ( asc 450 reserves ) reflecting historical losses by loan category , as adjusted by several qualitative factors whose effects are not reflected in historical loss ratios , and specific allowances ( asc 310 reserves ) for individually identified impaired loans . each of these components , and the allowance methodology used to establish them , are described in detail in note 1 of the notes to the consolidated financial statements included in this report . the amount of the allowance is reviewed monthly by the risk committee of the board of directors and formally approved quarterly by that same committee of the board . general allowances are based upon historical loss experience by portfolio segment measured over the prior eight quarters and weighted equally . the historical loss experience is supplemented by the inclusion of qualitative risk factors to address various risk characteristics of the company 's loan portfolio including : trends in delinquencies and other non-performing loans ; changes in the risk profile related to large loans in the portfolio ; changes in the categories of loans comprising the loan portfolio ; concentrations of loans to specific industry segments ; changes in economic conditions on both a local , regional and national level ; changes in the company 's credit administration and loan portfolio management processes ; and quality of the company 's credit risk identification processes . the general allowance comprised 91 % of the total allowance at december 31 , 2018 and 2017 , respectively . the general allowance is calculated in two parts based on an internal risk classification of loans within each portfolio segment . allowances on loans considered to be “ criticized ” and “ classified ” under regulatory guidance are calculated separately from loans considered to be “ pass ” rated under the same guidance . this segregation allows the company to monitor the allowance applicable to higher risk loans separate from the remainder of the portfolio in order to better manage risk and ensure the sufficiency of the allowance for loan losses . 32 the portion of the allowance representing specific allowances is established on individually impaired loans . as a practical expedient , for collateral dependent loans , the company measures impairment based on the fair value of the collateral less costs to sell the underlying collateral . for loans on which the company has not elected to use a practical expedient to measure impairment , the company will measure impairment based on the present value of expected future cash flows discounted at the loan 's effective interest rate . in determining the cash flows to be included in the discount calculation the company considers the following factors that combine to estimate the probability and severity of potential losses : the borrower 's overall financial condition ; resources and payment record ; demonstrated or documented support available from financial guarantors ; and the adequacy of collateral value and the ultimate realization of that value at liquidation . the specific allowance accounted for 9 % of the total allowance at december 31 , 2018 and 2017 , respectively . the estimated losses on impaired loans can differ substantially from actual losses . goodwill and other intangible asset impairment goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination . goodwill is not amortized but is assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired . impairment assessment requires that the fair value of each of the company 's reporting units be compared to the carrying amount of the reporting unit 's net assets , including goodwill . the company 's reporting units were identified based upon an analysis of each of its individual operating segments . if the fair values of the reporting units exceed their book values , no write-down of recorded goodwill is required . if the fair value of a reporting unit is less than book value , an expense may be required to write-down the related goodwill to the proper carrying value . the company assesses for impairment of goodwill as of october 1 of each year using september 30 data and again at any quarter-end if any triggering events occur during a quarter that may affect goodwill . examples of such events include , but are not limited to , a significant deterioration in future operating results , adverse action by a regulator or a loss of key personnel . determining the fair value of a reporting unit requires the company to use a degree of subjectivity . under current accounting guidance , the company has the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount . based on the assessment of these qualitative factors , if it is determined that the fair value of a reporting unit is not less than the carrying value , then performing the two-step impairment process , previously required , is unnecessary .

summary of loan loss experience the following table presents the activity in the allowance for loan losses for the periods indicated : replace_table_token_13_th 54 analysis of credit risk the following table presents information with respect to non-performing assets and 90-day delinquencies for the years indicated : replace_table_token_14_th ( 1 ) gross interest income that would have been recorded in 2018 if non-accrual loans shown above had been current and in accordance with their original terms was $ 2.5 million . no interest income was accrued on these loans during the year . please see note 1 of the notes to consolidated financial statements for a description of the company 's policy for placing loans on non-accrual status . ( 2 ) performing loans considered potential problem loans , as defined and identified by management , amounted to $ 9.0 million at december 31 , 2018. although these are loans where known information about the borrowers ' possible credit problems causes management to have concerns as to the borrowers ' ability to comply with the loan repayment terms , most are current as to payment terms , well collateralized and are not believed to present significant risk of loss . loans classified for regulatory purposes not included in either non-performing or potential problem loans consist only of `` other loans especially mentioned '' and do not , in management 's opinion , represent or result from trends or uncertainties reasonably expected to materially impact future operating results , liquidity or capital resources , or represent material credits where known information about the borrowers ' possible credit problems causes management to have doubts as to the borrowers ' ability to comply with the loan repayment terms . ( 3 ) purchased credit impaired loans are not included in non-performing loans disclosure . as of december 31 , 2018 these loans totaled $ 26.0 million . 55 market risk management the company 's net income is largely dependent on its net interest income .

each director is fully indemnified by us for actions associated with being a director to the extent permitted under delaware law . the following table sets forth certain information concerning the compensation earned by our directors for the year ended december 31 , 2012 : ( i ) the aggregate dollar amount of all fees earned in cash for services as a director ( ii ) the aggregate grant date fair market value of unit awards , if any , awarded to each director , and ( iii ) the total compensation earned by each director . replace_table_token_14_th on january 17 story_separator_special_tag explanatory note on october 30 , 2012 ( `` closing date '' ) , the partnership completed its initial public offering of a total of 6,000,000 common units representing limited partner interests ( `` common units '' ) , and on november 9 , 2012 issued an additional 900,000 common units pursuant to the full exercise by the underwriters ( the `` underwriters '' ) of their over-allotment option , all at a price of $ 20.00 per unit ( the `` offering '' ) . the partnership received aggregate proceeds of $ 125.7 million from the sale , net of underwriting discounts and structuring fees , and $ 2.6 million of offering expenses . as previously disclosed , of this amount the net proceeds of approximately $ 16.7 million , pursuant to the over-allotment option , were distributed to joseph v. topper , jr. , the chief executive officer of the partnership , and to certain of mr. topper 's affiliates and family trusts , and john b. reilly , iii , a member of the board of directors of the general partner of the partnership . references in this annual report to `` our predecessor '' , or `` predecessor entity '' , refer to the portion of the business of lehigh gas corporation , or `` lgc , '' and its subsidiaries and affiliates that were contributed to lehigh gas partners lp in connection with the offering . unless the context requires otherwise , references in this annual report to `` lehigh gas partners lp , '' `` we , '' `` our , '' `` us , '' or like terms , when used in the context of the periods following the completion of the offering refer to lehigh gas partners lp and its subsidiaries and , when used in the context of the periods prior to the completion of the offering , refer to the portion of the business of our predecessor , the wholesale distribution business of lehigh gas—ohio , llc and real property and leasehold interests contributed to us in connection with the offering by joseph v. topper , jr. , the chief executive officer and the chairman of the board of directors of our general partner and or his affiliates . references to `` our general partner '' or `` lehigh gas gp '' refer to lehigh gas gp llc , the general partner of lehigh gas partners lp and a wholly owned subsidiary of lgc . references to `` lgo '' refer to lehigh gas—ohio , llc , an entity managed by joseph v. topper , jr. , the chief executive officer and the chairman of the board of directors of our general partner . all of lgo 's wholesale distribution business were contributed to us in connection with the offering . references to the `` topper group '' refer to joseph v. topper , jr. , collectively with those of his affiliates and family trusts that have ownership interests in our predecessor . a trust of which joseph v. topper , jr. is a trustee owns all of the outstanding stock of lgc . the topper group , including lgc , will hold a significant portion of the limited partner interests in us . through his control of lgc , joseph v. topper , jr. controls our general partner . unless otherwise indicated , 2012 full year-to-date financial results contained in this annual report contain the audited consolidated financial results of the partnership for the period october 31 , 2012 through december 31 , 2012 , and the audited combined financial results for the predecessor entity period for the period january 1 , 2012 through october 30 , 2012. references to `` lessee dealers '' refer to third parties who operate sites we own or lease and we , in turn , lease to the lessee dealers ; `` independent dealers '' refer to third parties that own their sites or lease their sites from a landlord other than us ; and `` sub-wholesalers '' refer to third parties that elect to purchase motor fuels from us , on a wholesale basis , instead of purchasing directly from major integrated oil companies and refiners . the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the partnership and predecessor entity audited consolidated and combined financial statements and notes thereto included elsewhere in this annual report . ebitda and adjusted ebitda are non-gaap financial measures of performance and or liquidity that have limitations and should not be considered as a substitute for net income or cash provided by ( used in ) operating activities which are us gaap . 51 overview we are a limited partnership formed to engage in the wholesale distribution of motor fuels , consisting of gasoline and diesel fuel , and to own and lease real estate used in the retail distribution of motor fuels . since our predecessor was founded in 1992 , we have generated revenues from the wholesale distribution of motor fuels to sites and from real estate leases . on the closing date , the partnership completed the offering . the partnership received aggregate proceeds of $ 125.7 million from the sale , net of underwriting discounts and structuring fees , and other offering expenses of $ 2.6 million . story_separator_special_tag as consideration for the dunmore assets , we paid ( i ) $ 28.0 million in cash to the dunmore sellers ; ( ii ) $ 0.5 million in cash to mr. gentile as consideration for his agreeing , for a period of five years following the dunmore closing , to not compete in the dunmore retail business , to not engage in the sale or distribution of branded motor fuels , and to not solicit or hire any of our , or our affiliates ' employees ; and ( iii ) $ 0.5 million in cash to be held in escrow and delivered to the dunmore sellers upon the partnership 's receipt of written evidence concerning the payment of certain of the dunmore sellers ' pre-closing tax liabilities ( collectively , the `` dunmore purchase price '' ) . all of the transactions between us and lgo that are described in the dunmore purchase agreement have been approved by the conflicts committee of the board of directors of the general partner . express lane stock purchase on december 21 , 2012 , lgws , entered into a stock purchase agreement ( the `` express lane stock purchase agreement '' ) with james e. lewis , jr. , lida n. lewis , james e. lewis , iii and reid d. lewis ( collectively , the `` express lane sellers '' ) , pursuant to which the express lane sellers agreed to sell to lgws all of the outstanding capital stock ( collectively , the `` express lane shares '' ) of express lane , inc. ( `` express lane '' ) , the owner and operator of various retail convenience stores , which include the retail sale of motor fuels and quick service restaurants , at various locations in florida . in connection with the purchase of the express lane shares , lehigh gas wholesale services , inc. ( `` lgws '' ) , a wholly owned subsidiary , agreed to acquire thirty-nine motor fuel service stations , one as a fee simple interest and thirty-eight as leasehold interests . in connection with the purchase of the express lane shares , on december 21 , 2012 , lgp realty holdings lp ( `` lgp-r '' ) , our wholly-owned subsidiary , entered into a purchase and sale agreement ( the `` express lane purchase and sale agreement '' and , together with the express lane stock purchase agreement , the `` express lane 53 agreements '' ) with express lane . under the express lane purchase and sale agreement , lgp-r agreed to acquire from express lane , prior to the express lane purchaser 's acquisition of the express lane shares , an additional fee simple interest in six properties and two fueling agreements ( collectively , the `` express lane property '' ) . on december 21 , 2012 , lgp-r completed the acquisition of the express lane property from the express lane sellers , as contemplated by the express lane purchase and sale agreement . in addition , on december 22 , 2012 , lgws completed ( the `` express lane closing '' ) the acquisition of the express lane shares from the express lane sellers , as contemplated by the express lane stock purchase agreement . as a result of the express lane acquisition , lgo leases sites from partnership and operates express lane 's gasoline and diesel retail outlet business and its related convenience store business ( the `` express lane retail business '' ) . in addition , certain of the non-qualified income generating assets related to the express lane retail business and certain non-qualified liabilities of the express lane sellers were assigned to lgo . lgo paid us the balance of the net working capital plus $ 1.0 million for up-front rent , subject to certain post-closing adjustments . pursuant to the franchise agreement , the partnership is the exclusive distributor of motor fuels to all sites operated by lgo in connection with the express lane retail business . in addition , the partnership leases these sites to lgo pursuant to property lease agreements . the partnership estimates it will receive from lgo aggregate rental income , net of expenses , of approximately $ 4.6 million per year from such sites . under the express lane agreements , the aggregate purchase price ( the `` express lane purchase price '' ) for the express lane property and the express lane shares is $ 45.4 million , inclusive of $ 1.8 million of certain preliminary post-closing adjustments . of the express lane purchase price , lgws paid an aggregate of $ 41.9 million to the express lane sellers and placed an aggregate of $ 1.1 million into escrow , of which $ 1.0 million has been placed into escrow to fund any indemnification or similar claims made under the express lane agreements by the parties thereto , and $ 0.1 million has been placed into escrow pending the completion by the express lane sellers of certain environmental remediation measures . in addition to the express lane purchase price , the express lane purchaser also placed $ 0.6 million ( the `` tax escrow '' ) into escrow to indemnify the express lane sellers for certain tax obligations resulting from the sale of the express lane property . all of the transactions between us and lgo related to the express lane agreements have been approved by the conflicts committee of the board of directors of the general partner . getty leases in may 2012 , we entered into master lease agreements to lease an aggregate of 120 sites from an affiliate of getty . of the 120 sites , 74 are located in massachusetts , 22 are located in new hampshire , 15 are located in pennsylvania and nine are located in maine . of these sites , seven are subleased to , and operated by , lessee dealers , 98 are company operated sites that are subleased to , and operated by , lgo following this offering and 15 currently are closed .

results of operations evaluating our results of operations the primary drivers of our operating results are the volume of motor fuel we distribute , the margin per gallon we are able to generate on the motor fuel we distribute and the rental income we earn on the sites we own or lease . for owned or leased sites , we seek to maximize the overall profitability of our operations , balancing the contributions to profitability of motor fuel distribution and rental income . our omnibus agreement , under which lgc provides management , administrative and operating services for us , enables us to manage a significant component of our operating expenses . our management relies on financial and operational metrics designed to track the key elements that contribute to our operating performance . to evaluate our operating performance , our management considers gross profit from fuel sales , motor fuel volumes , margin per gallon , rental income for sites we own or lease , ebitda and adjusted ebitda . gross profit , volume and margin per gallon . gross profit from fuel sales represents the excess of revenue from fuel sales , including revenue from fuel sales to affiliates , over cost of revenue from fuel sales , including cost of revenue from fuel sales to affiliates . volume of motor fuel represents the gallons of motor fuel we distribute to sites . margin per gallon represents gross profit from fuel sales divided by total gallons of motor fuels distributed . we use volumes of motor fuel we distribute to a site and margin per gallon to assess the effectiveness of our pricing strategies , the performance of a site as compared to other sites we own or lease , and our margins as compared to the margins of sites we seek to acquire or lease . 55 rental income .

the following table shows the fair values of our risk management assets and liabilities by segment at september 30 , 2012 and 2011 : replace_table_token_36_th ( 1 ) includes $ 23.7 million of cash held on deposit to story_separator_special_tag introduction this section provides management 's discussion of the financial condition , changes in financial condition and results of operations of atmos energy corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources . it includes management 's interpretation of our financial results , the factors affecting these results , the major factors expected to affect future operating results and future investment and financing plans . this discussion should be read in conjunction with our consolidated financial statements and notes thereto . several factors exist that could influence our future financial performance , some of which are described in item 1a above , “risk factors” . they should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements . cautionary statement for the purposes of the safe harbor under the private securities litigation reform act of 1995 the statements contained in this annual report on form 10-k may contain “forward-looking statements” within the meaning of section 27a of the securities act of 1933 and section 21e of the securities exchange act of 1934. all statements other than statements of historical fact included in this report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the private securities litigation reform act of 1995. when used in this report , or any other of our documents or oral presentations , the words “anticipate” , “believe” , “estimate” , “expect” , “forecast” , “goal” , “intend” , “objective” , “plan” , “projection” , “seek” , “strategy” or similar words are intended to identify forward-looking statements . such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy , operations , markets , services , rates , recovery of costs , availability of gas supply and other factors . these risks and uncertainties include the following : our ability to continue to access the credit markets to satisfy our liquidity requirements ; the impact of adverse economic conditions on our customers ; increased costs of providing pension and postretirement health care benefits and increased funding requirements along with increased costs of health care benefits ; market risks beyond our control affecting our risk management activities including market liquidity , commodity price volatility , increasing interest rates and counterparty creditworthiness ; regulatory trends and decisions , including the impact of rate proceedings before various state regulatory commissions ; possible increased federal , state and local regulation of the safety of our operations ; increased federal regulatory oversight and potential penalties ; the impact of environmental regulations on our business ; the impact of possible future additional regulatory and financial risks associated with global warming and climate change on our business ; the concentration of our distribution , pipeline and storage operations in texas ; adverse weather conditions ; the effects of inflation and changes in the availability and price of natural gas ; the capital-intensive nature of our gas distribution business ; increased competition from energy suppliers and alternative forms of energy ; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems ; the inherent hazards and risks involved in operating our gas distribution business , natural disasters , terrorist activities or other events and other risks and uncertainties discussed herein , all of which are difficult to predict and many of which are beyond our control . accordingly , while we believe these forward-looking statements to be reasonable , there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized . further , we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information , future events or otherwise . critical accounting policies our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the united states . preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses and the related disclosures of contingent assets and liabilities . we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances . actual results may differ from estimates . 28 our significant accounting policies are discussed in note 2 to our consolidated financial statements . the accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult , subjective or complex accounting estimates . accordingly , these critical accounting policies are reviewed periodically by the audit committee of the board of directors . regulation — our natural gas distribution and regulated transmission and storage operations are subject to regulation with respect to rates , service , maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate . we meet the criteria established within accounting principles generally accepted in the united states of a cost-based , rate-regulated entity , which requires us to reflect the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions in our financial statements in accordance with applicable authoritative accounting standards . story_separator_special_tag we utilize models and other valuation methods to determine fair value when external sources are not available . values are adjusted to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under then-current market conditions . fair-value estimates also consider our own creditworthiness and the creditworthiness of the counterparties involved . our counterparties consist primarily of financial institutions and major energy companies . this concentration of counterparties may materially impact our exposure to credit risk resulting from market , economic or regulatory conditions . we seek to minimize counterparty credit risk through an evaluation of their financial condition and credit ratings and the use of collateral requirements under certain circumstances . the fair value of our financial instruments is subject to potentially significant volatility based numerous considerations including , but not limited to changes in commodity prices , interest rates , maturity and settlement of these financial instruments , and our creditworthiness as well as the creditworthiness of our counterparties . we believe the market prices and models used to value these financial instruments represent the best information available with respect to closing exchange and over-the-counter quotations , time value and volatility factors underlying the contracts . impairment assessments — we review the carrying value of our long-lived assets , including goodwill and identifiable intangibles , whenever events or changes in circumstance indicate that such carrying values may not be recoverable , and at least annually for goodwill , as required by us accounting standards . the evaluation of our goodwill balances and other long-lived assets or identifiable assets for which uncertainty exists regarding the recoverability of the carrying value of such assets involves the assessment of future cash flows and external market conditions and other subjective factors that could impact the estimation of future cash flows including , but not limited to the commodity prices , the amount and timing of future cash flows , future growth rates and the discount rate . unforeseen events and changes in circumstances or market conditions could adversely affects these estimates , which could result in an impairment charge . 30 pension and other postretirement plans — pension and other postretirement plan costs and liabilities are determined on an actuarial basis using a september 30 measurement date and are affected by numerous assumptions and estimates including the market value of plan assets , estimates of the expected return on plan assets , assumed discount rates and current demographic and actuarial mortality data . the assumed discount rate and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities . the assumed discount rate , the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities . the discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligations and net periodic pension and postretirement benefit plan costs . when establishing our discount rate , we consider high quality corporate bond rates based on bonds available in the marketplace that are suitable for settling the obligations , changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with currently available high quality corporate bonds . the expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of our annual pension and postretirement plan costs . we estimate the expected return on plan assets by evaluating expected bond returns , equity risk premiums , asset allocations , the effects of active plan management , the impact of periodic plan asset rebalancing and historical performance . we also consider the guidance from our investment advisors in making a final determination of our expected rate of return on assets . to the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate , that year 's annual pension or postretirement plan costs are not affected . rather , this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years . the market-related value of our plan assets represents the fair market value of the plan assets , adjusted to smooth out short-term market fluctuations over a five-year period . the use of this calculation will delay the impact of current market fluctuations on the pension expense for the period . we estimate the assumed health care cost trend rate used in determining our postretirement net expense based upon our actual health care cost experience , the effects of recently enacted legislation and general economic conditions . our assumed rate of retirement is estimated based upon our annual review of our participant census information as of the measurement date . actual changes in the fair market value of plan assets and differences between the actual and expected return on plan assets could have a material effect on the amount of pension costs ultimately recognized . a 0.25 percent change in our discount rate would impact our pension and postretirement costs by approximately $ 2.3 million . a 0.25 percent change in our expected rate of return would impact our pension and postretirement costs by approximately $ 0.8 million . contingencies — in the normal course of business , we are confronted with issues or events that may result in a contingent liability . these generally relate to lawsuits , claims made by third parties or the action of various regulatory agencies . for such matters , we record liabilities when they are considered probable and reasonably estimable , based on currently available facts and our estimates of the ultimate outcome or resolution of the liability in the future . actual results may differ from estimates , depending on actual outcomes or changes in the facts or expectations surrounding each potential exposure .

consolidated results the following table presents our consolidated financial highlights for the fiscal years ended september 30 , 2012 , 2011 and 2010. replace_table_token_14_th regulated operations contributed 98 percent , 104 percent and 81 percent to our consolidated net income for fiscal years 2012 , 2011 and 2010. our consolidated net income during the last three fiscal years was earned across our business segments as follows : replace_table_token_15_th the following table segregates our consolidated net income and diluted earnings per share between our regulated and nonregulated operations : replace_table_token_16_th we reported net income of $ 216.7 million , or $ 2.37 per diluted share for the year ended september 30 , 2012 , compared with net income of $ 207.6 million or $ 2.27 per diluted share in the prior year . income from continuing operations was $ 192.2 million , or $ 2.10 per diluted share compared with $ 189.6 million , or $ 2.07 per diluted share in the prior-year period . income from discontinued operations was $ 24.5 million or $ 0.27 per diluted share for the year , which includes the gain on sale of substantially all our assets in missouri , illinois and 33 iowa of $ 6.3 million , compared with $ 18.0 million or $ 0.20 per diluted share in the prior year . unrealized losses in our nonregulated operations during the current year reduced net income by $ 5.0 million or $ 0.05 per diluted share compared with net losses recorded in the prior year of $ 6.6 million , or $ 0.07 per diluted share . additionally , net income in both periods was impacted by nonrecurring items . in fiscal 2011 , net income included the net positive impact of several one-time items totaling $ 3.2 million , or $ 0.03 per diluted share related to the pre-tax items , which are discussed in further detail below .

story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this annual report on form 10-k. the forward-looking statements included in this discussion and elsewhere in this annual report on form 10-k involve risks and uncertainties , including anticipated financial performance , business prospects , industry trends , shareholder returns , performance of leases by tenants , performance on loans to customers and other matters , which reflect management 's best judgment based on factors currently known . see “ cautionary statement concerning forward-looking statements. ” actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors , including but not limited to those discussed in this item and in item 1a - “ risk factors. ” overview business our principal business objective is to enhance shareholder value by achieving predictable and increasing ffo and dividends per share . our prevailing strategy is to focus on long-term investments in a limited number of categories in which we maintain a depth of knowledge and relationships , and which we believe offer sustained performance throughout all economic cycles . our investment portfolio includes ownership of and long-term mortgages on entertainment , education and recreation properties . substantially all of our owned single-tenant properties are leased pursuant to long-term , triple-net leases , under which the tenants typically pay all operating expenses of the property . tenants at our owned multi-tenant properties are typically required to pay common area maintenance charges to reimburse us for their pro-rata portion of these costs . it has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals or interest paid by our tenants . we have primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties that have a high occupancy rate . we have also entered into certain joint ventures and we have provided mortgage note financing . we intend to continue entering into some or all of these types of arrangements in the foreseeable future . historically , our primary challenges have been locating suitable properties , negotiating favorable lease or financing terms ( on new or existing properties ) , and managing our portfolio as we have continued to grow . we believe our management 's knowledge and industry relationships have facilitated opportunities for us to acquire , finance and lease properties . our business is subject to a number of risks and uncertainties , including those described in “ risk factors ” in item 1a of this report . as of december 31 , 2014 , our total assets were approximately $ 4.2 billion ( after accumulated depreciation of approximately $ 0.5 billion ) which included investments in each of our four operating segments with properties located in 37 states , the district of columbia and ontario , canada . our entertainment segment included investments in 126 megaplex theatre properties , nine entertainment retail centers ( which include eight additional megaplex theatre properties and one live performance venue ) and six family entertainment centers . our portfolio of owned entertainment properties consisted of 11.7 million square feet and was 99 % leased , including megaplex theaters that were 100 % leased . our education segment included investments in 62 public charter school properties , five early education centers and two private schools . our portfolio of owned education properties consisted of 3.3 million square feet and was 100 % leased . our recreation segment included investments in nine metro ski parks , four waterparks and ten golf entertainment complexes . our portfolio of owned recreation properties was 100 % leased . our other segment consisted primarily of the land held for development related to the adelaar casino and resort project in sullivan county , new york . the combined owned portfolio consisted of 15.9 million square feet and was 99 % leased . as of december 31 , 2014 , we also had invested approximately $ 181.8 million in property under development . 38 operating results our total revenue , net income available to common shareholders and funds from operations as adjusted ( `` ffoaa '' ) are detailed below for the years ended december 31 , 2014 and 2013 ( in millions , except per share information ) : replace_table_token_13_th year ended december 31 , 2014 our total revenue , net income available to common shareholders of epr properties and ffoaa per diluted share for the year ended december 31 , 2014 were favorably impacted by the results of investment spending in 2013 and 2014 , a $ 5.0 million prepayment fee , lower financing rates and lower bad debt expense . our net income available to common shareholders of epr properties for the year ended december 31 , 2014 was favorably impacted by a $ 3.4 million reversal of a liability that was established related to the acquisition of toronto dundas square ( now sold ) as well as gains from property dispositions of $ 1.4 million . our net income available to common shareholders of epr properties for the year ended december 31 , 2014 was unfavorably impacted by the sale of four public charter schools , the december payoff of various mortgage notes due from peak resorts , inc. ( `` peak '' ) , a $ 3.8 million provision for loan loss , higher general and administrative costs , as well as higher income tax expense related to our canadian operations . our per share results for the year ended december 31 , 2014 were also unfavorably impacted by lower average leverage ( measured by debt to gross assets ) than in the prior year . story_separator_special_tag critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states ( “ gaap ” ) requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes . in preparing these financial statements , management has made its best estimates and assumptions that affect the reported assets and liabilities . the most significant assumptions and estimates relate to consolidation , revenue recognition , depreciable lives of the real estate , the valuation of real estate , accounting for real estate acquisitions , estimating reserves for uncollectible receivables and the accounting for mortgage and other notes receivable . application of these assumptions requires the exercise of judgment as to future uncertainties and , as a result , actual results could differ from these estimates . 40 consolidation we consolidate certain entities if we are deemed to be the primary beneficiary in a variable interest entity ( `` vie '' ) , as defined in financial accounting standards board ( `` fasb '' ) accounting standards codification ( `` asc '' ) topic on consolidation . the topic on consolidation requires the consolidation of vies in which an enterprise has a controlling financial interest . a controlling financial interest will have both of the following characteristics : the power to direct the activities of a vie that most significantly impact the vie 's economic performance and the obligation to absorb losses of the vie that could potentially be significant to the vie or the right to receive benefits from the vie that could potentially be significant to the vie . this topic requires an ongoing reassessment . the equity method of accounting is applied to entities in which we are not the primary beneficiary as defined in the consolidation topic of the fasb asc , or do not have effective control , but can exercise influence over the entity with respect to its operations and major decisions . revenue recognition rents that are fixed and determinable are recognized on a straight-line basis over the expected terms of the leases . base rent escalation in other leases is dependent upon increases in the consumer price index ( “ cpi ” ) and accordingly , management does not include any future base rent escalation amounts on these leases in current revenue . most of our leases provide for percentage rents based upon the level of sales achieved by the tenant . these percentage rents are recognized once the required sales level is achieved . lease termination fees are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants . direct financing lease income is recognized on the effective interest method to produce a level yield on funds not yet recovered . estimated unguaranteed residual values at the date of lease inception represent management 's initial estimates of fair value of the leased assets at the expiration of the lease , not to exceed original cost . significant assumptions used in estimating residual values include estimated net cash flows over the remaining lease term and expected future real estate values . the estimated unguaranteed residual value is reviewed on an annual basis or more frequently if necessary . we evaluate the collectibility of our direct financing lease receivable to determine whether it is impaired . a direct financing lease receivable is considered to be impaired when , based on current information and events , it is probable that we will be unable to collect all amounts due according to the existing contractual terms . when a direct financing lease receivable is considered to be impaired , the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the direct financing lease receivable 's effective interest rate or to the value of the underlying collateral , less costs to sell , if such receivable is collateralized . real estate useful lives we are required to make subjective assessments as to the useful lives of our properties for the purpose of determining the amount of depreciation to reflect on an annual basis with respect to those properties . these assessments have a direct impact on our net income . depreciation and amortization are provided on the straight-line method over the useful lives of the assets , as follows : buildings 40 years tenant improvements base term of lease or useful life , whichever is shorter furniture , fixtures and equipment 3 to 25 years impairment of real estate values we are required to make subjective assessments as to whether there are impairments in the value of our rental properties . these estimates of impairment may have a direct impact on our consolidated financial statements . we assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable . certain factors that may occur and indicate that impairments may exist include , but are not limited to : underperformance relative to projected future operating results , tenant difficulties and significant adverse industry or market economic trends . if an indicator of possible impairment exists , a property that is held and used by the company is evaluated for impairment by comparing the carrying amount of the property to the estimated undiscounted future cash flows expected to be generated by the property . if the carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis , an impairment charge is 41 recognized in the amount by which the carrying amount of the property exceeds the fair value of the property . for assets and asset groups that are held for sale , an impairment loss is measured by comparing the fair value of the property , less costs to sell , to the asset ( group ) carrying value .

results of operations year ended december 31 , 2014 compared to year ended december 31 , 2013 rental revenue was $ 286.7 million for the year ended december 31 , 2014 compared to $ 248.7 million for the year ended december 31 , 2013 . rental revenue increased $ 38.0 million from the prior period , of which $ 39.6 million was 45 related to acquisitions or build-to-suit projects completed in 2014 and 2013 and was partially offset by a net decrease of $ 1.6 million in rental revenue on existing properties due in part by the impact of a weaker canadian exchange rate . percentage rents of $ 2.0 million and $ 2.6 million were recognized during the years ended december 31 , 2014 and 2013 , respectively . straight-line rents of $ 8.7 million and $ 4.8 million were recognized during the years ended december 31 , 2014 and 2013 , respectively . during the year ended december 31 , 2014 , we experienced an increase of approximately 4.1 % in rental rates on approximately 91,000 square feet with respect to two lease renewals . additionally , we have funded or have agreed to fund a weighted average of $ 10.09 per square foot in tenant improvements . there were no leasing commissions related to these renewals . tenant reimbursements totaled $ 17.7 million for the year ended december 31 , 2014 compared to $ 18.4 million for the year ended december 31 , 2013 . these tenant reimbursements related to the operations of our entertainment retail centers . the $ 0.7 million decrease was primarily due to the impact of a weaker canadian dollar exchange rate . other income was $ 1.0 million for the year ended december 31 , 2014 compared to $ 1.7 million for the year ended december 31 , 2013 .

each story_separator_special_tag the information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. this annual report on form 10-k contains forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities and exchange act of 1934 , as amended , or the exchange act , and are subject to the “safe harbor” created by those sections . in particular , statements contained in this annual report on form 10-k that are not historical facts , including , but not limited to statements concerning new product sales , product development and offerings , roomba , scooba , looj and verro products , packbot tactical military robots , the small unmanned ground vehicle , seaglider , negotiator , our home robot and government and industrial robots divisions , our competition , our strategy , our market position , market acceptance of our products , seasonal factors , revenue recognition , our profits , growth of our revenues , composition of our revenues , our cost of revenues , operating expenses , selling and marketing expenses , general and administrative expenses , research and development expenses , and compensation costs , our projected income tax rate , our credit facility and equipment facility , our valuations of investments , valuation and composition of our stock-based awards , and liquidity , constitute forward-looking statements and are made under these safe harbor provisions . some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes , ” “expects , ” “may , ” “will , ” “should , ” “could , ” “seek , ” “intends , ” “plans , ” “estimates , ” “anticipates , ” or other comparable terms . forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements . we urge you to consider the risks and uncertainties discussed in greater detail under the heading “risk factors” in evaluating our forward-looking statements . we have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report . we caution readers not to place undue reliance upon any such forward-looking statements , which speak only as of the date made . overview irobot designs and builds robots that make a difference . for over 20 years , we have developed proprietary technology incorporating advanced concepts in navigation , mobility , manipulation and artificial intelligence to build industry-leading robots . our roomba floor vacuuming robot and scooba floor washing robot perform time-consuming domestic chores in the home , while our looj gutter cleaning robot and verro pool cleaning robot perform tasks outside the home . our packbot and small unmanned ground vehicle ( sugv ) tactical ground military robots perform battlefield reconnaissance and bomb disposal . our negotiator ground robot performs multi-purpose tasks for local police and first responders . our 1ka seaglider unmanned underwater robot performs long endurance oceanic missions . we sell our robots to consumers through a variety of distribution channels , including chain stores and other national retailers , and through our on-line store , and to the u.s. military and other government agencies worldwide . we maintain certifications for as9100 and capability maturity model integration . these certifications enable us to service our military products and services . as of january 1 , 2011 , we had 657 full-time employees . we have developed expertise in the disciplines necessary to build durable , high-performance and cost-effective robots through the close integration of software , electronics and hardware . our core technologies serve as reusable building blocks that we adapt and expand to develop next generation and new products , reducing the time , cost and risk of product development . our significant expertise in robot design and engineering , combined with our management team 's experience in military and consumer markets , positions us to capitalize on the expected growth in the market for robots . although we have successfully launched consumer and government and industrial products , our continued success depends upon our ability to respond to a number of future challenges . we believe the most significant of these challenges include increasing competition in the markets for both our consumer and government and industrial products , our ability to obtain u.s. federal government funding for research and development programs , and our ability to successfully develop and introduce products and product enhancements . 28 revenue we currently derive revenue from product sales , government research and development contracts , and commercial research and development contracts . product revenue is derived from the sale of our various home cleaning robots and government and industrial robots and related accessories . research and development revenue is derived from the execution of contracts awarded by the u.s. federal government , other governments and a small number of other partners . in the future , we expect to derive increasing revenue from product maintenance and support services due to a focused effort to market these services to the expanding installed base of our robots . we currently derive a majority of our product revenue from the sale of our home cleaning robots , and our packbot and sugv tactical military robots . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , product revenues accounted for 89.9 % and 87.8 % of total revenue , respectively . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , our funded research and development contracts accounted for approximately 10.1 % and 12.2 % of our total revenue , respectively . we expect to continue to perform funded research and development work with the intent of leveraging the technology developed to advance our new product development efforts . story_separator_special_tag for the fiscal years ended january 1 , 2011 and january 2 , 2010 , these expenses amounted to $ 27.1 million and $ 30.8 million , respectively . in accordance with generally accepted accounting principles , these expenses have been classified as cost of revenue rather than research and development expense . for the years ended january 1 , 2011 , january 2 , 2010 and december 27 , 2008 , the combined investment in future technologies , classified as cost of revenue and research and development expense , was $ 51.9 million , $ 45.5 million and $ 41.5 million , respectively . selling , general and administrative expenses our selling , general and administrative expenses consist primarily of : salaries and related costs for sales and marketing personnel ; salaries and related costs for executives and administrative personnel ; advertising , marketing and other brand-building costs ; fulfillment costs associated with direct-to-consumer sales through our on-line store ; customer service costs ; professional services costs ; information systems and infrastructure costs ; 30 travel and related costs ; and occupancy and other overhead costs . we anticipate that selling , general and administrative expenses will increase in absolute dollars but remain relatively flat as a percentage of revenue in the foreseeable future as we continue to build the irobot brand and also maintain company profitability . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , selling , general and administrative expense was $ 87.2 million and $ 71.0 million , or 21.7 % and 23.8 % of total revenue , respectively . fiscal periods we operate and report using a 52-53 week fiscal year ending on the saturday closest to december 31. accordingly , our fiscal quarters will end on the saturday that falls closest to the last day of the third month of each quarter . critical accounting policies and estimates our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue , costs and expenses , and related disclosures . we evaluate our estimates and assumptions on an ongoing basis . our actual results may differ from these estimates . we believe that of our significant accounting policies , which are described in the notes to our consolidated financial statements , the following accounting policies involve a greater degree of judgment and complexity . accordingly , we believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations . revenue recognition we recognize revenue from sales of consumer products under the terms of the customer agreement upon transfer of title and risk of loss to the customer , provided the price is fixed or determinable , collection is determined to be reasonably assured and no significant obligations remain . sales to resellers are typically subject to agreements allowing for limited rights of return for defective products only , rebates and price protection . we have typically not taken product returns except for defective products . accordingly , we reduce revenue for our estimates of liabilities for these rights at the time the related sale is recorded . we establish a provision for sales returns for products sold by resellers directly based on historical return experience and other relevant data . our international distributor agreements do not currently allow for product returns and , as a result , no reserve for returns is established for this group of customers . we have aggregated and analyzed historical returns from resellers and end users which form the basis of our estimate of future sales returns by resellers or end users . when a right of return exists , the provision for these estimated returns is recorded as a reduction of revenue at the time that the related revenue is recorded . if actual returns from retailers differ significantly from our estimates , such differences could have a material impact on our results of operations for the period in which the actual returns become known . our returns reserve is calculated as a percentage of gross consumer product revenue . a one percentage point increase or decrease in our actual experience of returns would have a material impact on our quarterly and annual results of operations . the estimates for returns are adjusted periodically based upon historical rates of returns . the estimates and reserve for rebates and price protection are based on specific programs , expected usage and historical experience . actual results could differ from these estimates . if future trends or our ability to estimate were to change significantly from those experienced in the past , incremental reductions or increases to revenue may result based on this new experience . under cost-plus research and development contracts , we recognize revenue based on costs incurred plus a pro-rata portion of the total fixed fee . costs and estimated gross margins on contracts are recorded as work is performed based on the percentage that incurred costs bear to estimated total costs utilizing the most recent estimates of costs and funding . we recognize revenue on firm fixed price ( ffp ) contracts using the percentage-of-completion method . for government product ffp contracts revenue is recognized as the product is shipped or in accordance with the 31 contract terms . changes in job performance , job conditions and estimated profitability , including those arising from final contract settlements and government audit , may result in revisions to costs and income , and are recorded or recognized , as the case may be , in the period in which the revisions are determined . since many contracts extend over a long period of time , revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable to past performance in the current period .

overview of results of operations the following table sets forth our results of operations for the periods shown : replace_table_token_3_th ( 1 ) stock-based compensation recorded in 2010 , 2009 and 2008 breaks down by expense classification as follows . replace_table_token_4_th 34 the following table sets forth our results of operations as a percentage of revenue for the periods shown : replace_table_token_5_th comparison of years ended january 1 , 2011 and january 2 , 2010 revenue replace_table_token_6_th our revenue increased 34.3 % to $ 401.0 million in fiscal 2010 from $ 298.6 million in fiscal 2009. revenue increased approximately $ 63.5 million , or 38.3 % , in our home robots division and $ 38.8 million , or 29.3 % , in our government and industrial division . the $ 63.5 million increase in revenue from our home robots division was driven by a 28.4 % increase in units shipped and a 9.7 % increase in net average selling price . total home robots shipped in fiscal 2010 were 1,269,000 units compared to 988,000 units in fiscal 2009. the increase in home robot division revenue and units shipped was primarily attributable to increased international sales of our home robot products resulting from our efforts to increase our global presence .

the information in this section has been derived from the consolidated financial statements and footnotes thereto that appear in item 8 of this form 10-k. the information contained in this section should be read in conjunction with these consolidated financial statements and footnotes and the business and financial information provided in this form 10-k. overview fs bancorp , inc. and its subsidiary bank , 1st security bank of washington have been serving the puget sound area since 1936. originally chartered as a credit union , previously known as washington 's credit union , the credit union served various select employment groups . on april 1 , 2004 , the credit union converted to a washington state-chartered mutual savings bank . on july 9 , 2012 , the bank converted from mutual to stock ownership and became the wholly owned subsidiary of fs bancorp , inc. in connection with the conversion , fs bancorp , inc. issued an aggregate of 3,240,125 shares of common stock at an offering price of $ 10.00 per share for gross proceeds of $ 32.4 million . from the proceeds , the company made a capital contribution of $ 15.5 million to the bank . the bank is using this additional capital for lending and investment activities and for general and other corporate purposes subject to regulatory limitations . the cost of conversion and the issuance of capital stock was approximately $ 2.5 million , which was deducted from the proceeds of the offering . the company is relationship-driven delivering banking and financial services to local families , local and regional businesses and industry niches within distinct puget sound area communities , and one loan production office located in the tri-cities , washington . on january 22 , 2016 , the company completed the previously announced branch purchase of four retail bank branches from bank of america , n.a and acquired approximately $ 186.4 million in deposits and $ 417,000 in loans based on january 22 , 2016 financial information and subject to a post-closing confirmation and adjustment review . the four branches are located in the communities of port angeles , sequim , port townsend , and hadlock , washington . the branch purchase serves to expand our puget sound-focused retail footprint onto the olympic peninsula and provides an opportunity to extend our unique brand of community banking into those communities . the company also maintains its long-standing indirect consumer lending platform which operates throughout the west coast . the company emphasizes long-term relationships with families and businesses within the communities served , working with them to meet their financial needs . the company is also actively involved in community activities and events within these market areas , which further strengthens relationships within these markets . the company focuses on diversifying revenues , expanding lending channels , and growing the banking franchise . management remains focused on building diversified revenue streams based upon credit , interest rate , and concentration risks . our business plan includes : ▪ growing and diversifying our loan portfolio ; ▪ maintaining and improving asset quality ; ▪ emphasizing lower cost core deposits to reduce the costs of funding our loan growth ; and ▪ capturing our customers ' full relationship by offering a wide range of products and services by leveraging our well-established involvement in our communities and by selectively emphasizing products and services designed to meet our customers ' banking needs . the company is a diversified lender with a focus on the origination of indirect home improvement loans , also referred to as fixture secured loans , commercial real estate mortgage loans , home loans , commercial business loans and second mortgage/home equity loan products . consumer loans , in particular indirect home improvement loans to finance window replacement , gutter replacement , siding replacement , solar panels , and other improvement renovations , represent the largest portion of the loan portfolio and have traditionally been the mainstay of our lending strategy . at december 31 , 2015 , consumer loans represented 31.0 % of the company 's total gross loan portfolio , down from 34.7 % at december 31 , 2014 , as real estate loan originations have increased at a faster pace than consumer loan originations during the year ended december 31 , 2015 . 55 indirect home improvement lending is dependent on the company 's relationships with home improvement contractors and dealers . the company funded $ 67.3 million , or 4,000 loans during the year ended december 31 , 2015 , using its indirect home improvement contractor/dealer network located throughout washington , oregon , idaho , and california with four contractor/dealers responsible for 53.2 % of the funded loans dollar volume . the company began originating consumer indirect loans in the state of california in 2012 with $ 2.5 million in these loans originated during 2012. in 2015 , the company originated $ 22.6 million in the state of california and held $ 28.9 million in california originated consumer loans at december 31 , 2015. management has established a concentration limit of no more than 100 % of the bank 's total risk-based capital . at december 31 , 2015 , the limit would be $ 85.6 million . see item 1a , “ risk factors - our business could suffer if we are unsuccessful in making , continuing and growing relationships with home improvement contractors and dealers ” of this form 10-k. since 2012 , the company has had an emphasis on diversifying lending products by expanding commercial real estate , commercial business and residential lending , while maintaining the current size of the consumer loan portfolio . the company 's lending strategies are intended to take advantage of : ( 1 ) historical strength in indirect consumer lending , ( 2 ) recent market consolidation that has created new lending opportunities and the availability of experienced bankers , and ( 3 ) strength in relationship lending . retail deposits will continue to serve as an important funding source . story_separator_special_tag fair value is based on market prices for comparable mortgage , commercial , or consumer servicing contracts , when available , or alternatively , is based on a valuation model that calculates the present value of estimated future net servicing income . the valuation model incorporates assumptions that market participants would use in estimating future net servicing income , such as the cost to service , the discount rate , the custodial earnings rate , an inflation rate , ancillary income , prepayment speeds , and default rates and losses . servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to amortized cost . impairment is determined by stratifying rights into tranches based on predominant characteristics , such as interest rate , loan type , and investor type . impairment is recognized through a valuation allowance for an individual tranche , to the extent that fair value is less than the capitalized amount for the tranches . if the company later determines that all or a portion of the impairment no longer exists for a particular tranche , a reduction of the allowance may be recorded as a recovery and an increase to income . capitalized servicing rights are stated separately on the consolidated balance sheets and are amortized into noninterest income in proportion to , and over the period of , the estimated future net servicing income of the underlying financial assets . derivative and hedging activity . asc 815 , “ derivatives and hedging , ” requires that derivatives of the company be recorded in the consolidated financial statements at fair value . management considers its accounting policy for derivatives to be a critical accounting policy because these instruments have certain interest rate risk characteristics that change in value based upon changes in the capital markets . the company 's derivatives are primarily the result of its mortgage banking activities in the form of commitments to extend credit , commitments to sell loans , to-be-announced ( `` tba '' ) mortgage backed securities trades and option contracts to mitigate the risk of the commitments to extend credit . estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends . the fair value adjustments of the derivatives are recorded in the consolidated statements of income with offsets to other assets or other liabilities in the consolidated balance sheets . income taxes . income taxes are reflected in the company 's consolidated financial statements to show the tax effects of the operations and transactions reported in the consolidated financial statements and consist of taxes currently payable plus deferred taxes . accounting standards codification , asc 740 , “ accounting for income taxes , ” requires the asset and liability approach for financial accounting and reporting for deferred income taxes . deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities . they are reflected at currently enacted income tax rates applicable to the period in which the 57 deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting . the deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period . in formulating the deferred tax asset , the company is required to estimate income and taxes in the jurisdiction in which the company operates . this process involves estimating the actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items , such as depreciation and the provision for loan losses , for tax and financial reporting purposes . deferred tax liabilities occur when taxable income is smaller than reported income on the income statements due to accounting valuation methods that differ from tax , as well as tax rate estimates and payments made quarterly and adjusted to actual at the end of the year . deferred tax liabilities are temporary differences payable in future periods . the company had a net deferred tax liability of $ 1.3 million , and $ 809,000 , at december 31 , 2015 and 2014 , respectively . our business and operating strategy and goals the company 's primary objective is to operate 1st security bank of washington as a well capitalized , profitable , independent , community-oriented financial institution , serving customers in its primary market area defined generally as the greater puget sound market area . the company 's strategy is to provide innovative products and superior service to small businesses , industry and geographic niches , and individuals located in its primary market area . services are currently provided to communities through the main office and seven full-service banking centers . these banking centers are supported with 24/7 access to on-line banking and participation in a worldwide atm network . the company focuses on diversifying revenues , expanding lending channels , and growing the banking franchise . management remains focused on building diversified revenue streams based upon credit , interest rate , and concentration risks . the board of directors seeks to accomplish the company 's objectives through the adoption of a strategy designed to improve profitability and maintain a strong capital position and high asset quality . this strategy primarily involves : growing and diversifying the loan portfolio and revenue streams . the company intends to transition lending activities from a predominantly consumer-driven model to a more diversified consumer and business model by emphasizing three key lending initiatives : expansion of commercial business lending programs , increasing in-house originations of residential mortgage loans , primarily for sale into the secondary market through the mortgage banking program ; and commercial real estate lending . additionally , the company will seek to diversify the loan portfolio by increasing lending to small businesses in the market area , as well as residential construction lending . maintaining and improving asset quality .

general . net income for the year ended december 31 , 2015 , increased $ 4.3 million , or 95.5 % , to $ 8.9 million , from $ 4.5 million for the year ended december 31 , 2014. the increase in net income was primarily a result of a $ 7.6 million , or 75.4 % increase in noninterest income , and a $ 6.9 million , or 27.6 % increase in interest income , partially offset by a $ 5.7 million , or 24.0 % increase in noninterest expense , a $ 2.9 million , or 152.4 % increase in the provision for income tax expense and $ 1.0 million , or 35.4 % increase in interest expense . net interest income . net interest income increased $ 5.9 million , or 26.7 % , to $ 28.0 million for the year ended december 31 , 2015 , from $ 22.1million for the year ended december 31 , 2014. the increase in net interest income was primarily attributable to a $ 6.8 million , or 28.8 % increase in loan receivable interest income resulting from a $ 137.0 million increase in average loans receivable , net over the last year partially offset by a $ 956,000 , or 35.4 % increase in interest expense , primarily due to increases in the average balances of interest-bearing deposits , borrowings and the addition of the subordinated note as compared to the same period last year . 62 the net interest margin ( `` nim '' ) decreased 11 basis points to 5.01 % for the year ended december 31 , 2015 , from 5.12 % for the prior year . the decrease reflects an increase in lower yielding loans as part of our loan diversification strategy . the strategy to increase the loan portfolio through diversified lending channels has pressured the nim with the increase in lower yielding real estate and commercial business loans outpacing the growth in higher yielding consumer loans .

stockholder sponsored stock options on december 1 , 2005 , lipo and lipo usa each granted 10,592 class a options with an exercise price of cdn $ 0.000005 and an expiry story_separator_special_tag this discussion summarizes our consolidated operating results , financial condition and liquidity during the three-year period ending january 29 , 2012. our fiscal year ends on the sunday closest to january 31 of the following year , typically resulting in a 52 week year , but occasionally giving rise to an additional week , resulting in a 53 week year . fiscal 2011 , 2010 and 2009 ended on january 29 , 2012 , january 30 , 2011 and january 31 , 2010 , respectively . the following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. this discussion and analysis contains forward-looking statements based on current expectations that involve risks , uncertainties and assumptions , such as our plans , objectives , expectations and intentions set forth in the “special note regarding forward-looking statements.” our actual results and the timing of events may differ materially from those anticipated in these forward looking statements as a result of various factors , including those set forth in the “item 1a—risk factors” section and elsewhere in this annual report on form 10-k. overview our results for fiscal 2011 demonstrate the ongoing success of our efforts to overcome the instability in the economy for the last three fiscal years . at the end of last year , we set goals for fiscal 2011 which required continued investment in our stores and our people , making infrastructure enhancements and funding working capital requirements , while remaining conscious of our discretionary spending . these goals included growing revenue year-over-year while maintaining operating margins , as well as positioning the company for long-term growth . we continually assess the economic environment and market conditions when making decisions regarding timing of our investments . our investments in our stores and people were reflected in our comparable stores net revenue growth , which leveraged our fixed operating costs and in turn led to increased operating margins . we increased our store base through execution of our real estate strategy , when and where we saw opportunities for success . for example , we opened 41 new corporate-owned stores in north america , australia , and new zealand since fiscal 2010 , including our remaining four reacquired franchises . where we find opportunities for growth through opening showrooms , or other community presence efforts , we expect to expand our store base and therefore our business . 12 to 14 of our planned store openings in fiscal 2012 are expected to be in markets seeded by showrooms in fiscal 2012. throughout fiscal 2011 , we were able to grow our e-commerce business which has further increased our brand awareness and has made our product available in new markets , including those outside of north america . this sales channel offers a higher operating margin than our other segments and accounted for 13.5 % of total revenue in the fourth quarter of fiscal 2011 compared to 10.0 % of total revenue in the same period of the prior year . continuing increases in traffic and conversion rates on our e-commerce website lead us to believe that there is potential for our direct to consumer segment to become an increasingly substantial part of our business and we plan to continue to commit a portion of our resources to further developing this channel . we believe that our brand is recognized as premium in our offerings of run and yoga assortment , as well as a leader in technical fabrics and quality construction . this has made our product desirable to our consumers and has driven demand , which we are able to meet given our increased product depth in stores compared to last year . in fiscal 2012 , we plan on investing in new and legacy information technology systems to gain further efficiencies in our vertical retail strategy . we also plan on investing in international expansion opportunities where we have determined there is growth opportunity , including adding country-specific e-commerce websites and opening additional international showrooms . we believe our strong cash flow generation , solid balance sheet and healthy liquidity provide us with the financial flexibility to continue executing the initiatives which we believe will be beneficial for us . 25 operating segment overview lululemon is a designer and retailer of technical athletic apparel operating primarily in north america and australia . our yoga-inspired apparel is primarily marketed under the lululemon athletica and ivivva athletica brand names . we offer a comprehensive line of apparel and accessories including fitness pants , shorts , tops and jackets designed for athletic pursuits such as yoga , running and general fitness , and dance-inspired apparel for female youth . as of january 29 , 2012 , our branded apparel was principally sold through 174 corporate-owned and franchise stores that are located in canada , the united states , australia and new zealand and via our e-commerce website through our direct to consumer sales channel . we believe our vertical retail strategy allows us to interact more directly with and gain insights from our customers while providing us with greater control of our brand . in fiscal 2011 , 43 % of our net revenue was derived from sales of our products in canada , 53 % of our net revenue was derived from the sales of our products in the united states and 4 % of our net revenue was derived from sales of our products outside of north america . in fiscal 2010 , 52 % of our net revenue was derived from sales of our products in canada , 46 % of our net revenue was derived from the sales of our products in the united states and 2 % of our net revenue was derived from sales of our products outside of north america . story_separator_special_tag in each case , net of an estimated allowance for sales returns and discounts . in addition , we separately track comparable store sales , which reflect net revenue at corporate-owned stores that have been open for at least 12 months . therefore , net revenue from a store is included in comparable store sales beginning with the first month for which the store has a full month of comparable prior year sales . non-comparable store sales include sales from new stores that have not been open or otherwise not operated by us for 12 months or from stores which have been significantly remodeled or relocated . also included in non-comparable stores sales are sales from direct to consumer sales , wholesale , franchises , warehouse sales and showrooms , and sales from corporate-owned stores which we have closed . by measuring the change in year-over-year net revenue in stores that have been open for 12 months or more , comparable store sales allows us to evaluate how our core store base is performing . various factors affect comparable store sales , including : the location of new stores relative to existing stores ; consumer preferences , buying trends and overall economic trends ; our ability to anticipate and respond effectively to customer preferences for technical athletic apparel ; 27 competition ; changes in our merchandise mix ; pricing ; the timing of our releases of new merchandise and promotional events ; the effectiveness of our grassroots marketing efforts ; the level of customer service that we provide in our stores ; our ability to source and distribute products efficiently ; and the number of stores we open , close ( including for temporary renovations ) and expand in any period . opening new stores is an important part of our growth strategy . accordingly , comparable store sales has limited utility for assessing the success of our growth strategy insofar as comparable store sales do not reflect the performance of stores open less than 12 months . cost of goods sold includes : the cost of purchased merchandise , which includes acquisition and production costs including raw material and labor , as applicable ; the cost incurred to deliver inventory to our distribution centers including freight , non-refundable taxes , duty and other landing costs ; the cost of our distribution centers ( such as labor , rent and utilities ) and the depreciation and amortization related to our distribution centers ; the cost of our production , merchandise and design departments including salaries , stock-based compensation and benefits , and operating expenses ; the cost of occupancy related to store operations ( such as rent and utilities ) and the depreciation and amortization related to store-level capital expenditures ; hemming ; and shrink and valuation reserves . cost of goods sold also may change as we open or close stores because of the resulting change in related occupancy costs . the primary drivers of the costs of individual goods are the costs of raw materials and labor in the countries where we source our merchandise . selling , general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold and provision for impairment and lease exit costs . our selling , general and administrative expenses include marketing costs , accounting costs , information technology costs , human resource costs , professional fees , corporate facility costs , corporate and store-level payroll and benefits expenses , stock-based compensation and occupancy , depreciation and amortization expense for all assets other than depreciation and amortization expenses related to store-level capital expenditures and our distribution centers , each of which are included in cost of goods sold . we anticipate that our selling , general and administrative expenses will increase in absolute dollars due to anticipated continued growth of our corporate support staff and store-level employees . provision for impairment and lease exit costs consists of asset impairments , lease exit and other related costs associated with the relocation of our administrative offices and the closure of one canadian corporate-owned store in fiscal 2010 , as well as management 's evaluation of corporate-owned locations . also included in prior years are one us corporate-owned store in the first quarter of fiscal 2009 as well as an asset impairment provision based on management 's ongoing evaluation of its portfolio of corporate-owned store locations . long-lived assets are reviewed at the store-level periodically for impairment or whenever events or changes in 28 circumstances indicate that full recoverability of net assets through future cash flows is in question . factors used in the evaluation include , but are not limited to , management 's plans for future operations , recent operating results and projected cash flows . other income ( expense ) , net includes interest earned on our cash balances and our advances to franchise , interest costs associated with our credit facilities and with letters of credit drawn under these facilities for the purchase of merchandise and our share of the operations of our investment in lululemon athletica australia pty prior to obtaining control in fiscal 2010 , including the remeasurement of our investment immediately before obtaining control of the business . we expect to continue to generate interest income to the extent that our cash generated from operations exceeds our cash used for investment . we have maintained relatively small outstanding balances on our credit facilities and expect to continue to do so . provision for income taxes depends on the statutory tax rates in the countries where we sell our products . historically we had generated taxable income in canada and we had generated tax losses in the united states . in fiscal 2010 we earned taxable income in the united states and fully utilized any net operating losses available from prior periods . we anticipate continued growth in the united states and consequently foresee and increase in taxable income reported . we have recorded deferred tax assets in respect of deductible temporary differences of 8.6 million .

results of operations the following tables summarize key components of our results of operations for the periods indicated , both in dollars and as a percentage of net revenue : replace_table_token_8_th replace_table_token_9_th comparison of fiscal 2011 to fiscal 2010 net revenue net revenue increased $ 289.1 million , or 41 % , to $ 1,000.8 million in fiscal 2011 from $ 711.7 million in fiscal 2010. assuming the average exchange rate between the canadian and united states dollars and the australian and united states dollars in fiscal 2010 remained constant , our net revenue would have increased $ 274.7 million , or 39 % , in fiscal 2011 . 30 the net revenue increase was driven by increased sales at locations in our comparable stores base , sales from new stores opened , sales from franchised stores that were reacquired during fiscal 2011 and the growth of our direct to consumer segment . the constant dollar increase in comparable store sales was driven primarily by the strength of our existing product lines , successful introduction of new products and increasing recognition of the lululemon athletica brand name , especially at our u.s. stores . our net revenue on a segment basis for fiscal 2011 and fiscal 2010 are expressed in dollar amounts as well as relevant percentages , presented as a percentage of total net revenue below . replace_table_token_10_th corporate-owned stores . net revenue from our corporate-owned stores segment increased $ 226.3 million , or 38 % , to $ 817.3 million in fiscal 2011 from $ 591.0 million in fiscal 2010. the following contributed to the increase in net revenue from our corporate-owned stores segment : comparable store sales increase of 22 % in fiscal 2011 resulted in a $ 125.2 million increase to net revenue , including the effect of foreign currency fluctuations .

executive overview the following are factors that regularly affect our operating results and financial condition . in addition , our business is subject to the risks and uncertainties described in item 1a of this annual report . product costs and supply the level of profitability in the retail propane , fuel oil , natural gas and electricity businesses is largely dependent on the difference between retail sales price and our costs to acquire and transport products . the unit cost of our products , particularly propane , fuel oil and natural gas , is subject to volatility as a result of supply and demand dynamics or other market conditions , including , but not limited to , economic and political factors impacting crude oil and natural gas supply or pricing . we enter into product supply contracts that are generally one-year agreements subject to annual renewal , and also purchase product on the open market . we attempt to reduce price risk by pricing product on a short-term basis . our propane supply contracts typically provide for pricing based upon index formulas using the posted prices established at major supply points such as mont belvieu , texas , or conway , kansas ( plus transportation costs ) at the time of delivery . to supplement our annual purchase requirements , we may utilize forward fixed price purchase contracts to acquire a portion of the propane that we resell to our customers , which allows us to manage our exposure to unfavorable changes in commodity prices and to assure adequate physical supply . the percentage of contract purchases , and the amount of supply contracted for under forward contracts at fixed prices , will vary from year to year based on market conditions . changes in our costs to acquire and transport products can occur rapidly over a short period of time and can impact profitability . there is no assurance that we will be able to pass on product acquisition and transportation cost increases fully or immediately , particularly when such costs increase rapidly . therefore , average retail sales prices can vary significantly from year to year as our costs fluctuate with the propane , fuel oil , crude oil and natural gas commodity markets and infrastructure conditions . in addition , periods of sustained higher commodity and or transportation prices can lead to customer conservation , resulting in reduced demand for our product . seasonality the retail propane and fuel oil distribution businesses , as well as the natural gas marketing business , are seasonal because these fuels are primarily used for heating in residential and commercial buildings . historically , approximately two‑thirds of our retail propane volume is sold during the six-month peak heating season from october through march . the fuel oil business tends to experience greater seasonality given its more limited use for space heating and approximately three-fourths of our fuel oil volumes are sold between october and march . consequently , sales and operating profits are concentrated in our first and second fiscal quarters . cash flows from operations , therefore , are greatest during the second and third fiscal quarters when customers pay for product purchased during the winter heating season . we expect lower operating profits and either net losses or lower net income during the period from april through september ( our third and fourth fiscal quarters ) . to the extent necessary , we will reserve cash from the second and third quarters for distribution to holders of our common units in the fourth quarter and the following fiscal year first quarter . weather weather conditions have a significant impact on the demand for our products , in particular propane , fuel oil and natural gas , for both heating and agricultural purposes . many of our customers rely heavily on propane , fuel oil or natural gas as a heating source . accordingly , the volume sold is directly affected by the severity of the winter weather in our service areas , which can vary substantially from year to year . in any given area , sustained warmer than normal temperatures will tend to result in reduced propane , fuel oil and natural gas consumption , while sustained colder than normal temperatures will tend to result in greater consumption . 25 hedging and risk management activities we engage in hedging and risk management activities to reduce the effect of price volatility on our product costs and to ensure the availability of product during periods of short supply . we enter into propane forward , options and swap agreements with third parties , and use futures and options contracts traded on the new york mercantile exchange ( “ nymex ” ) to purchase and sell propane , fuel oil , crude oil and natural gas at fixed prices in the future . the majority of the futures , forward and options agreements are used to hedge price risk associated with propane and fuel oil physical inventory , as well as , in certain instances , forecasted purchases of propane or fuel oil . in addition , we sell propane and fuel oil to customers at fixed prices , and enter into derivative instruments to hedge a portion of our exposure to fluctuations in commodity prices as a result of selling the fixed price contracts . forward contracts are generally settled physically at the expiration of the contract whereas futures , options and swap contracts are generally settled at the expiration of the contract through a net settlement mechanism . although we use derivative instruments to reduce the effect of price volatility associated with priced physical inventory and forecasted transactions , we do not use derivative instruments for speculative trading purposes . risk management activities are monitored by an internal commodity risk management committee , made up of six members of management and reporting to our audit committee , through enforcement of our hedging and risk management policy . story_separator_special_tag as one of the many participating employers in these mepps , we are responsible with the other participating employers for any plan underfunding . due to the uncertainty regarding future factors that could impact the withdrawal liability , we are unable to determine the timing of the payment of the future withdrawal liability , or additional future withdrawal liability , if any . fair values of acquired assets and liabilities . from time to time , we enter into material business combinations . in accordance with accounting guidance associated with business combinations , the assets acquired and liabilities assumed are recorded at their estimated fair value as of the acquisition date . fair values of assets acquired and liabilities assumed are based upon available information and may involve us engaging an independent third party to perform an appraisal . estimating fair values can be complex and subject to significant business judgment . estimates most commonly impact property , plant and equipment and intangible assets , including goodwill . generally , we have , if necessary , up to one year from the acquisition date to finalize our estimates of acquisition date fair values . results of operations and financial condition net income for fiscal 2019 was $ 68.6 million , or $ 1.11 per common unit , compared to $ 76.5 million , or $ 1.24 per common unit , in fiscal 2018. net income and ebitda ( as defined and reconciled below ) for fiscal 2018 included a loss of $ 4.8 million from the sale of certain assets and operations in a non-strategic market of the propane segment . excluding the effects of the foregoing item in the prior year and unrealized ( non-cash ) mark-to-market adjustments on derivative instruments in both years , adjusted ebitda ( as defined and reconciled below ) amounted to $ 275.0 million for fiscal 2019 , compared to $ 283.0 million in the prior year . retail propane gallons sold in fiscal 2019 of 426.7 million gallons decreased 3 % compared to the prior year , primarily due to an erratic and inconsistent weather pattern throughout fiscal year 2019 that negatively impacted customer demand . while average temperatures ( as measured by heating degree days ) across all of our service territories for fiscal 2019 were 6 % warmer than normal and 1 % cooler than the prior year , average temperatures during the peak demand months of december and january were 4 % and 10 % warmer than the same months in the prior year , respectively . revenues for fiscal 2019 of $ 1,267.7 million decreased 5.7 % compared to the prior year , primarily due to lower propane volumes sold , combined with lower retail selling prices associated with lower wholesale costs . cost of products sold for fiscal 2019 of $ 522.0 million decreased 11.9 % compared to the prior year , primarily due to lower wholesale costs and lower volumes sold . average propane prices ( basis mont belvieu , texas ) decreased 32.8 % compared to the prior year . cost of products sold for fiscal 2019 included an $ 8.0 million unrealized ( non-cash ) loss attributable to the mark-to-market adjustment for derivative instruments used in risk management activities , compared to a $ 0.3 million unrealized ( non-cash ) gain in fiscal 2018. these unrealized items are excluded from adjusted ebitda for both periods in the table below . 27 combined operating and general and administrative expenses of $ 474.0 million for fiscal 2019 increased 2.2 % compared to the prior year , primarily due to higher payroll and benefit-related costs and higher vehicle repairs and maintenance costs , partially offset by lower bad debt expense . during fiscal 2019 , we succeeded in accomplishing many significant goals that will provide further support for our long-term strategic growth initiatives . the following highlights a few key accomplishments for fiscal 2019 : we made additional meaningful progress towards strengthening our balance sheet by reducing debt by $ 30.1 million with cash flows from operating activities . as a result of the debt reduction , our overall consolidated leverage ratio improved to 4.34x at the end of fiscal 2019 ; we acquired and successfully integrated three well-run propane businesses ; we extended our reach in certain strategic markets that were not previously served by our existing footprint ; we made investments in new handheld technology for drivers and service technicians to improve efficiency and enhance the customer experience ; and we launched a brand refresh called the three pillars of the suburban propane experience , which focuses on the key elements of our time-honored brand : suburban propane 's commitment to excellence , suburbancares and go green with suburban propane . on october 24 , 2019 , we announced that our board of supervisors had declared a quarterly distribution of $ 0.60 per common unit for the three months ended september 28 , 2019. this quarterly distribution rate equates to an annualized rate of $ 2.40 per common unit . the distribution was paid on november 12 , 2019 to common unitholders of record as of november 5 , 2019. as we look ahead to fiscal 2020 , our anticipated cash requirements include : ( i ) maintenance and growth capital expenditures of approximately $ 35.0 million ; ( ii ) approximately $ 72.1 million of interest and income tax payments ; and ( iii ) approximately $ 148.9 million of distributions to unitholders , based on the current annualized rate of $ 2.40 per common unit . based on our liquidity position , which includes availability of funds under the revolving credit facility and expected cash flow from operating activities , we expect to have sufficient funds to meet our current and future obligations .

resulted in de crease s in cost of products sold of $ 46.2 million and $ 14.5 million , respectively . cost of products sold from risk management activities de creased $ 11.3 million compared to the prior year , primarily due to a lower notional amount of hedging contracts that were settled physically . cost of products sold associated with our fuel oil and refined fuels segment of $ 63.1 million for fiscal 2019 decreased $ 1.2 million , or 1.9 % , compared to the prior year , primarily due to lower volumes sold , which was offset to an extent by higher average wholesale costs . lower volumes sold resulted in a decrease in cost of products sold of $ 2.5 million over the prior year . cost of products sold in our natural gas and electricity segment of $ 27.0 million for fiscal 2019 decreased $ 5.9 million , or 17.9 % , compared to the prior year , primarily due to lower electricity usage . total cost of products sold as a percent of total revenues decreased 2.9 percentage points to 41.2 % in fiscal 2019 from 44.1 % in the prior year , primarily due to the decline in wholesale costs outpacing the decline in average selling prices on a percentage basis , offset to an extent by an increase in propane costs resulting from risk management activities , net of the impact of mark-to-mark adjustments on derivative instruments . operating expenses replace_table_token_4_th all costs of operating our retail distribution and appliance sales and service operations are reported within operating expenses in the consolidated statements of operations . these operating expenses include the compensation and benefits of field and direct operating support personnel , costs of operating and maintaining our vehicle fleet , overhead and other costs of our purchasing , training and safety departments and other direct and indirect costs of operating our customer service centers .

in determining the useful lives of intangible assets , we consider the expected use of the assets and the effects of obsolescence , demand , competition , anticipated technological advances , changes in surgical techniques , market influences and other economic factors . for technology-based intangible assets , we consider the expected life cycles of products , absent unforeseen technological advances , which incorporate the corresponding technology . trademarks and trade names that do not have a wasting characteristic ( i.e . , there are no legal , regulatory , contractual , competitive , economic or other factors which limit the useful life ) are assigned an indefinite life . story_separator_special_tag the following discussion and analysis should be read in conjunction with the consolidated financial statements and the corresponding notes included elsewhere in this annual report on form 10-k. certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes . certain amounts in the 2014 and 2013 consolidated financial statements have been reclassified to conform to the 2015 presentation . additionally , as more fully described in note 2 of the consolidated financial statements included in part ii , item 8 of this report , due to accounting errors in prior periods , certain amounts in the 2014 and 2013 consolidated financial statements have been revised . on june 24 , 2015 , we completed our merger with biomet and its results of operations have been included in our results starting on that date . the biomet merger is a transformational event for us and has had significant effects on all aspects of our business . accordingly , our revenues and expenses increased significantly in the year ended december 31 , 2015. in portions of this discussion and analysis , we also present sales information on an unaudited , pro forma basis for the years ended december 31 , 2015 and 2014. this pro forma information includes zimmer and biomet sales in those periods as if the merger occurred on january 1 , 2014. accordingly , the pro forma net sales information for periods prior to the closing date includes the net sales of biomet , but does not include the impact of the divestiture of certain product line rights and assets . we believe this pro forma analysis is beneficial for investors because it represents how the merged companies may have performed on a combined basis in 2015 and 2014. such pro forma net sales information may not be indicative , however , of future operating performance . executive level overview 2015 results the last half of 2015 was significantly affected by our biomet integration activities . we made significant progress by accomplishing important commercial integration milestones across all geographies . we largely completed the appointment of our global sales leaders . we also began to execute our integration roadmaps designed to capture the net operating synergy opportunities presented by this merger . our results have been significantly impacted by the biomet merger . our sales for 2015 increased by 28.3 percent primarily due to the biomet merger . volume/mix growth from the merger was partially offset by the negative effects of changes in foreign currency exchange rates and continued , but stable , pricing pressure in all of our geographic regions . our net earnings decreased in 2015 compared to 2014. the primary driver of the lower net earnings was expense incurred in connection with the biomet merger . as a result of the merger , we recognized significant expenses due to stepping up the acquired inventory to fair value , intangible asset amortization , the acceleration of the vesting of unvested lvb stock options and lvb stock-based awards , retention bonuses paid to biomet employees and third-party sales agents who remained with biomet through the closing date , severance expense , contract termination expense related to agreements with independent agents , distributors , suppliers and lessors , a loss related to a call premium on biomet debt we redeemed , third party fees , and other acquisition and integration charges . interest expense also increased due to financing-related costs for the merger . 2016 outlook we expect our sales in the first half of 2016 to be higher than in the first half of 2015 , on a reported basis , since the biomet merger was completed midway through 2015. on a pro forma basis , we expect revenues to be approximately flat in 2016 compared to 2015. this estimate assumes foreign currency exchange rates will decrease revenues by approximately 2 percent , continued pricing pressure will decrease revenues by approximately 2 percent , and our volume/mix growth will be approximately 4 percent . we expect pro forma sales growth will improve in the last half of the year compared to the first half as our sales force stabilizes , we take advantage of cross-selling opportunities and we anniversary out of many sales force dissynergies caused by the merger . we expect cost of products sold to continue to realize significant expense related to stepping up acquired biomet inventory to fair value . similarly , our intangible asset amortization expense will increase significantly as we recognize a full year of intangible asset amortization from the biomet merger . we expect research and development ( “r & d” ) expense for the year to be in a range of 4.5 to 5.0 percent of sales . selling , general and administrative ( “sg & a” ) expense is expected to approximate 37 percent of sales , which is an improvement from 2015 as we realize synergies from the merger . we estimate special items expense will continue to be significant as we continue our integration activities . however , we expect special items expense will be less in 2016 compared to 2015 due to the significant , initial expenses incurred in 2015 for the integration . interest expense will increase in 2016 compared to 2015 due to the debt borrowed in 2015 to fund the biomet merger . story_separator_special_tag “special items” expense has significantly affected our etr as such expenses have generally been incurred within jurisdictions with higher tax rates , resulting in lower taxable income in these higher tax jurisdictions . the low 2015 tax rate results from operating losses in the u.s. caused by significant expenses incurred in connection with the merger . the u.s. has a higher tax rate compared to the majority of foreign operations where we realized operating income . we expect “special items , ” the outcome of various federal , state and foreign audits , as well as expiration of certain statutes of limitations , to impact our etr in future years . currently , we can not reasonably estimate the impact of these items on our financial results . segment operating profit similar to our consolidated results , our segment operating profit has been significantly impacted by the addition of biomet sales and expenses to these segments . in the americas , operating profit as a percentage of sales increased in 2015 compared to 2014 , as we started to realize synergies of the merger . in emea , operating profit as a percentage of sales declined in 2015 compared to 2014 due to the increased biomet expenses . this decline is expected to continue until we can realize the synergy benefits of the merger in this region . in the asia pacific segment , operating profit as a percentage of sales increased in 2015 compared to 2014 due to changes in foreign currency exchange rates and our hedging program . non-gaap operating performance measures we use financial measures that differ from financial measures determined in accordance with generally accepted accounting principles ( “gaap” ) to evaluate our operating performance . these non-gaap financial measures exclude the impact of inventory step-up , certain other inventory and manufacturing related charges connected to quality enhancement and remediation efforts , “certain claims , ” intangible asset amortization , “special items , ” other expenses related to financing obtained for the biomet merger , other expenses related to the call premium expense recognized to redeem the assumed biomet senior notes , the interest expense incurred on issued debt during the period prior to the consummation of the biomet merger and any related effects on 27 zimmer biomet holdings , inc. 2015 form 10-k annual report our income tax provision associated with these items and other certain tax adjustments . we use this information internally and believe it is helpful to investors because it provides useful period-to-period comparisons of our ongoing operating results , it helps to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by these types of items , and it provides additional transparency of certain items . certain of these non-gaap financial measures are used as metrics for our incentive compensation programs . our non-gaap adjusted net earnings used for internal management purposes for the years ended december 31 , 2015 , 2014 and 2013 were $ 1,310.5 million , $ 1,098.0 million , and $ 1,069.0 million , respectively , and our non-gaap adjusted diluted earnings per share were $ 6.90 , $ 6.40 , and $ 6.22 , respectively . the following are reconciliations from our gaap net earnings and diluted earnings per share to our non-gaap adjusted net earnings and non-gaap adjusted diluted earnings per share used for internal management purposes ( in millions , except per share amounts ) . replace_table_token_14_th * the tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred . year ended december 31 , 2015 2014 2013 diluted eps $ 0.77 $ 4.20 $ 4.54 inventory step-up and other inventory and manufacturing related charges 1.84 0.21 0.52 certain claims 0.04 0.13 0.27 intangible asset amortization 1.78 0.54 0.46 special items biomet merger-related 3.26 0.36 – other special items 1.12 1.63 1.22 other expense , net 0.12 0.23 – interest expense on biomet merger financing 0.37 – – taxes on above items and other certain tax adjustments * ( 2.40 ) ( 0.90 ) ( 0.79 ) adjusted diluted eps $ 6.90 $ 6.40 $ 6.22 * the tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred . liquidity and capital resources cash flows provided by operating activities declined to $ 816.7 million in 2015 , compared to $ 1,052.8 million in 2014. the decreased cash flows provided by operating activities in 2015 were primarily due to higher expenses related to the biomet merger , a $ 97.6 million loss on our forward starting interest rate swaps we settled in march 2015 when we issued senior notes for the biomet merger and inventory investments . these unfavorable items were partially offset by lower tax payments and the receipt of insurance proceeds related to durom cup product liability claims in the 2015 period . in 2014 , we made significant tax payments for certain unresolved matters in order to limit the potential impact of irs interest charges . in 2016 , we estimate operating cash flows to be in a range of $ 1,650.0 million to $ 1,750.0 million , inclusive of approximately $ 290.0 million of outflows related to integration expenses to drive synergies . cash flows used in investing activities were $ 7,557.9 million in 2015 compared to $ 469.4 million in 2014. the primary investing activity in 2015 was the biomet merger . we continued to invest in instruments for significant product launches , such as persona the personalized knee system , as we deploy that system around the world . in 2016 , we expect instrument investments to be in a range of $ 300.0 million to $ 325.0 million in support of our cross-sell initiatives as well as new product introductions . in 2015 , we continued to invest in other property , plant and equipment at levels necessary to complete new product-related investments and to replace older machinery and equipment .

results of operations we analyze sales by three geographies , the americas , emea and asia pacific , and by the following product 22 zimmer biomet holdings , inc. 2015 form 10-k annual report categories : knees , hips , s.e.t. , dental , spine & cmf and other . this sales analysis differs from our reportable operating segments , which are based upon our senior management organizational structure and how we allocate resources towards achieving operating profit goals . we analyze sales by geography because the underlying market trends in any particular geography tend to be similar across product categories and because we primarily sell the same products in all geographies . net sales by geography the following tables present net sales by geography and the components of the percentage changes ( dollars in millions ) : replace_table_token_4_th replace_table_token_5_th “foreign exchange” as used in the tables in this report represents the effect of changes in foreign currency exchange rates on sales growth . the following table presents our pro forma net sales by geography and the components of the percentage changes ( dollars in millions ) : replace_table_token_6_th 23 zimmer biomet holdings , inc. 2015 form 10-k annual report net sales by product category the following tables present net sales by product category and the components of the percentage changes ( dollars in millions ) : replace_table_token_7_th replace_table_token_8_th the following tables present our pro forma net sales by product category and the components of the percentage changes ( dollars in millions ) : replace_table_token_9_th 24 zimmer biomet holdings , inc. 2015 form 10-k annual report the following table presents net sales by product category by geography for our knees and hips product categories , which represent our most significant product categories ( dollars in millions ) : replace_table_token_10_th the following table presents our pro forma net sales by product category by geography for our knees and hips product categories , which represent our most significant product categories ( dollars

during this interim assessment , story_separator_special_tag overview we are a leading worldwide provider of instruments , subsystems and process control solutions that measure , control , power , monitor and analyze critical parameters of advanced manufacturing processes to improve process performance . we are managed as one operating segment . we group our products into three product groups : instruments and control systems , power and reactive gas products and vacuum products . our products are derived from our core competencies in pressure measurement and control , materials delivery , gas composition analysis , control and information technology , power and reactive gas generation and vacuum technology . our products are used in diverse markets , applications and processes . our primary served markets are manufacturers of capital equipment for semiconductor devices , and for other thin film applications including flat panel displays , leds , solar cells , data storage media and other advanced coatings . we also leverage our technology in other markets with advanced manufacturing applications including medical equipment , pharmaceutical manufacturing , energy generation and environmental monitoring . we have a diverse base of customers that includes manufacturers of semiconductor capital equipment and semiconductor devices , thin film capital equipment used in the manufacture of flat panel displays , leds , solar cells , data storage media and other coating applications ; and other industrial , medical , energy generation , environmental monitoring and manufacturing companies , and university , government and industrial research laboratories . during the years 2010 , 2009 and 2008 , we estimate that approximately 64 % , 52 % and 58 % of our net sales , respectively , were to semiconductor capital equipment manufacturers and semiconductor device manufacturers . we expect that sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers will continue to account for a substantial portion of our sales . during 2010 , we executed a plan to divest two product lines , as their growth potential no longer met our long-term strategic objectives . we completed the sale of ion systems , inc. ( “ion” ) during the second quarter of 2010 and the sale of the assets of the yield dynamics , llc ( “ydi” ) business during the third quarter of 2010 and received total net proceeds of $ 15.6 million . the results of operations of the two product lines have been classified as discontinued operations in the consolidated statements of operations for all periods presented . the assets and liabilities of these discontinued product lines have not been reclassified and segregated in the consolidated balance sheets or consolidated statements of cash flows due to their immaterial amounts . we believe an improvement in the global economy in 2010 , compared to 2009 , contributed to a significant increase in our business , financial condition and results of operations for 2010. as a result of the improved global economy , our net revenues to semiconductor capital equipment manufacturers and semiconductor device manufacturers increased 167 % for 2010 compared to 2009. the semiconductor capital equipment industry is subject to rapid demand shifts , which are difficult to predict , and we are uncertain as to the timing or extent of further increased demand or any future weakness in the semiconductor capital equipment industry . our net revenues sold to other advanced markets , which exclude semiconductor capital equipment and semiconductor device product applications , increased 64 % in 2010 compared to the prior year . these advanced and growing markets include led , medical , pharmaceutical , environmental , thin films , solar and other markets . approximately 36 % of our net sales for 2010 were to other advanced markets and we anticipate that these markets will continue to grow and will represent a larger portion of our revenue . a significant portion of our net sales is to operations in international markets . international net sales include sales by our foreign subsidiaries , but exclude direct export sales . during the years 2010 , 2009 and 2008 , international net sales accounted for approximately 43 % , 46 % and 44 % of our net sales , respectively . a significant portion of our international net sales were sales in japan . we expect that international net sales will continue to represent a significant percentage of our total net sales . 20 critical accounting policies and estimates management 's discussion and analysis of financial condition and results of operations discusses our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . on an on-going basis , we evaluate our estimates and judgments , including those related to revenue recognition and allowance for doubtful accounts , inventory , warranty costs , stock-based compensation expense , intangible assets , goodwill and other long-lived assets , in-process research and development and income taxes . we base our estimates and judgments on historical experience and on various other factors 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 . we believe the following critical accounting policies affect the most significant judgments , assumptions and estimates we use in preparing our consolidated financial statements : revenue recognition and accounts receivable allowances . revenue from product sales is recorded upon transfer of title and risk of loss to the customer provided that there is evidence of an arrangement , the sales price is fixed or determinable , and collection of the related receivable is reasonably assured . story_separator_special_tag management determined that blended volatility , a combination of historical and implied volatility , is more reflective of market conditions and a better indicator of expected volatility than historical or implied volatility alone . certain rsus involve stock to be issued upon the achievement of performance conditions ( performance shares ) under our stock incentive plans . such performance shares become available subject to time-based vesting conditions if , and to the extent that , financial or operational performance criteria for the applicable period are achieved . accordingly , the number of performance shares earned will vary based on the level of achievement of financial or operational performance objectives for the applicable period . until such time that our performance can ultimately be determined , each quarter we estimate the number of performance shares more likely than not to be earned based on an evaluation of the probability of achieving the performance objectives . such estimates are revised , if necessary , in subsequent periods when the underlying factors change our evaluation of the probability of achieving the performance objectives . accordingly , share-based compensation expense associated with performance shares may differ significantly from the amount recorded in the current period . the assumptions used in calculating the fair value of share-based payment awards represents 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 . intangible assets , goodwill and other long-lived assets . as a result of our acquisitions , we have identified intangible assets and generated significant goodwill . definite-lived intangible assets are valued based on estimates of future cash flows and amortized over their estimated useful life . goodwill and indefinite-lived intangible assets are subject to annual impairment testing as well as testing upon the occurrence of any event that indicates a potential impairment . intangible assets and other long-lived assets are also subject to an impairment test if there is an indicator of impairment . the carrying value and ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use . if our expectations of future results and cash flows are significantly diminished , intangible assets and goodwill may be impaired and the resulting charge to operations may be material . when we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment , we use the projected undiscounted cash flow method to determine whether an impairment exists , and then measure the impairment using discounted cash flows . to measure impairment for goodwill , we compare the fair value of our reporting units by 22 measuring discounted cash flows to the book value of the reporting units . goodwill would be impaired if the resulting implied fair value of goodwill was less than the recorded book value of the goodwill . the estimation of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control . changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations . we have elected to perform our annual goodwill impairment testing as of october 31 of each fiscal year , or more often if events or circumstances indicate that there may be impairment . reporting units are defined as operating segments or one level below an operating segment , referred to as a component . we have determined that our reporting units are components of our one operating segment . we allocate goodwill to reporting units at the time of acquisition and base that allocation on which reporting units will benefit from the acquired assets and liabilities . the estimated fair values of our reporting units were based on discounted cash flow models derived from internal earnings and internal and external market forecasts . assumptions in estimating future cash flows are subject to a high degree of judgment and complexity . we make every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed . goodwill impairment is determined using a two-step process . the first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount , including goodwill . in performing the first step , we determine the fair value of a reporting unit using a discounted cash flow ( “dcf” ) analysis . determining fair value requires the exercise of significant judgment , including judgments about appropriate discount rates , perpetual growth rates , and the amount and timing of expected future cash flows . discount rates are based on a weighted average cost of capital ( “wacc” ) , which represents the average rate a business must pay its providers of debt and equity . the wacc used to test goodwill is derived from a group of comparable companies . the cash flows employed in the dcf analysis are derived from internal earnings and forecasts and external market forecasts . if the estimated fair value of a reporting unit exceeds its carrying amount , goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary . if the carrying amount of a reporting unit exceeds its estimated fair value , then the second step of the goodwill impairment test must be performed . the second step of the goodwill impairment test compares the implied fair value of the reporting unit 's goodwill with its carrying amount of goodwill to measure the amount of impairment loss , if any .

results of operations the following table sets forth , for the periods indicated , the percentage of total net sales of certain line items included in our consolidated statements of operations data : replace_table_token_3_th year ended 2010 compared to 2009 and 2008 net revenues replace_table_token_4_th product revenues increased $ 438.5 million or 134.9 % during 2010 compared to 2009. during 2010 , we believe a recovery in the global economy has contributed to an increase in demand for our products in all of the markets we serve . our increase in overall product revenues is primarily due to the increase in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers . product revenues related to these customers increased $ 305.5 million or 175.2 % compared to the same period for the prior year . revenues related to other advanced markets increased $ 133.0 million or 88.3 % compared to the same period for the prior year . the increase in demand in our other advanced markets included the led , medical , 25 pharmaceutical , environmental , thin films , solar and other markets . our domestic product revenues increased by $ 262.5 million or 139.2 % mainly due to a high concentration of sales to the semiconductor capital equipment and device manufacturer customers . our international product revenues increased $ 176.0 million or 129.1 % during 2010. this increase consists of a $ 107.7 million increase in product revenues from our semiconductor customers and an increase in product revenues of $ 68.3 million related to other advanced markets . product revenues decreased $ 212.8 million or 39.6 % during 2009 compared to 2008 mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers . product revenues related to these customers decreased $ 132.3 million or 43.1 % compared to the same period for the prior year .

katz on october 2 , 2017 we acquired the katz networks for $ 292 million , which is net of a 5.33 % non-controlling interest we owned prior to the acquisition date . katz owns and operates four national television networks — bounce , grit , story_separator_special_tag the consolidated financial statements and notes to consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations . you should read this discussion in conjunction with those financial statements . forward-looking statements our annual report on form 10-k contains certain forward-looking statements related to the company 's businesses that are based on management 's current expectations . forward-looking statements are subject to certain risks , trends and uncertainties , including changes in advertising demand and other economic conditions that could cause actual results to differ materially from the expectations expressed in forward-looking statements . such forward-looking statements are made as of the date of this document and should be evaluated with the understanding of their inherent uncertainty . a detailed discussion of principal risks and uncertainties that may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “ risk factors. ” the company undertakes no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made . executive overview the e.w . scripps company ( “ scripps ” ) is a diverse media enterprise , serving audiences and businesses through a portfolio of local and national media brands . our local media division is one of the nation 's largest independent tv station ownership groups . following the completion of the raycom media acquisition in january 2019 and the anticipated closing of the cordillera communications , llc acquisition in the second quarter of 2019 , we will have 51 television stations in 36 markets and a reach of more than one in five u.s. television households . we have affiliations with all of the “ big four ” television networks . in our national media division , we operate national media brands including podcast industry-leader , stitcher , and its advertising network midroll media ; next-generation national news network , newsy ; four national broadcast networks , the katz networks ; and the global leader in digital audio technology and measurement services , triton . we also operate an award-winning investigative reporting newsroom in washington , d.c. , and serve as the longtime steward of one of the nation 's largest , most successful and longest-running educational programs , the scripps national spelling bee . in 2018 , management announced a comprehensive growth strategy for the company to improve short-term performance and position itself for long-term growth in the form of a five-point plan . the strategy began at the end of 2017 with a reorganization of our company into local media and national media divisions to better reflect how audiences and advertisers view our businesses . we performed an analysis of our operating divisions and corporate cost structure in order to reduce expenses and improve both operating performance and company cash flow . we have incurred restructuring charges totaling $ 13.3 million since the third quarter of 2017 and have completed our plan to achieve $ 30 million in annualized cost reductions . we executed on further optimizing our portfolio through the sale of our radio business . by the end of 2018 , all 34 radio stations had been sold through multiple transactions for total consideration of $ 83.5 million . we continue to pursue a television station acquisition strategy that allows us to assemble the best-performing portfolio possible . on january 1 , 2019 , we acquired abc-affiliated stations in waco , texas and tallahassee , florida for $ 55 million in cash . additionally , we have entered into a definitive agreement to acquire 15 top ranked and high performing television stations , serving 10 markets , for $ 521 million . completion of the acquisition , which is anticipated to close in the second quarter of 2019 , is subject to regulatory approvals and customary closing conditions . these acquisitions allow us to move into new markets that enhance our portfolio and will diversify our network affiliate mix . we also are committed to the continued investment in our national media businesses for long-term growth . on november 30 , 2018 , we acquired triton digital canada , inc. , a leading global digital audio infrastructure and audience measurement services company , for $ 150 million , net of cash acquired . we have increased our newsy cable subscribers , stitcher podcast listeners and katz u.s. household reach through our investment in and creation of quality content . additionally , during 2018 , we delivered value to shareholders through our share repurchase program and initiation of a quarterly dividend of 5 cents per share . f-3 results of operations the trends and underlying economic conditions affecting operating performance and future prospects differ for each of our business segments . accordingly , you should read the following discussion of our consolidated results of operations in conjunction with the discussion of the operating performance of our individual business segments that follows . story_separator_special_tag style= '' line-height:120 % ; text-align : left ; text-indent:30px ; font-size:10pt ; '' > miscellaneous , net increased in 2017 due to a $ 5.4 million gain on the change in control when we acquired katz , a $ 3.0 million gain from the sale of our newspaper syndication business and other income of $ 3.2 million resulting from an adjustment to the midroll media acquisition purchase price earn out . the effective income tax rate was 62.5 % and 35.7 % for 2017 and 2016 , respectively . state taxes and non-deductible expenses impacted our effective rate . story_separator_special_tag core advertising , which includes local and national spot revenues , as well as revenues from our digital sites , decreased by $ 6.6 million in 2017. the decrease was from weakness in our retail , food stores , media and auto categories , offset by improvement in communications , home improvement and services . political revenues decreased by $ 92 million year-over-year in a non-presidential election year . retransmission revenues increased by almost $ 39 million as a result of contractual rate increases , more than offsetting a slight decline in subscribers . retransmission contracts with cable and satellite television systems with 3 million subscribers were renewed in the fourth quarter of 2016. while we had not previously seen any significant declines in subscribers reported to us by cable and satellite television operators , we began to see declines as second quarter subscriber counts were reported to us in the third quarter . other revenues increased from an additional $ 3 million of fees we receive for a news production and services agreement . upon the acquisition of katz , we no longer receive carriage fees from the katz networks which accounted for $ 8 million of other revenue in 2017. costs and expenses employee compensation and benefits increased 2.1 % in 2017 . the increase was primarily from merit increases and higher benefit costs . programming expense , which includes our network affiliation fees and other programming costs , increased nearly 15 % in 2017 primarily due to $ 22 million of higher network affiliation license fees and the cost of producing our original programming show , pickler & ben , which aired for the first time in september 2017. network affiliation fees have been increasing industry-wide due to higher rates on renewals , as well as contractual rate increases , and we expect that they may continue to increase over the next several years . f-9 national media — our national media segment is comprised of the operations of our national media businesses including four national broadcast networks , the katz networks ; podcast industry-leader , stitcher , and its advertising network midroll media ; next-generation national news network , newsy ; the global leader in digital audio technology and measurement services , triton ; and other national brands . our national media group earns revenue primarily through the sale of advertising . operating results for our national media segment were as follows : replace_table_token_9_th our national media businesses , triton , katz and cracked , were acquired on november 30 , 2018 , october 2 , 2017 , and april 12 , 2016 , respectively . the inclusion of operating results from these businesses for the periods subsequent to the acquisitions impacts the comparability of our national media segment operating results . 2018 compared with 2017 revenues national media revenues increased $ 193 million in 2018 . the results of katz and triton accounted for $ 148.2 million of the increase in 2018 . the remainder of the increase is primarily driven by increased revenues from stitcher and newsy . increases in stitcher 's revenues reflect advertising growth from existing podcasts , as well as the addition of new titles to its portfolio of podcasts . newsy 's revenues increased primarily from the growth of advertising on over-the-top platforms , as well as revenues from its expansion into cable in the fourth quarter of 2017. cost and expenses employee compensation and benefits increased 86.5 % or $ 26.9 million in 2018 . katz and triton accounted for approximately $ 18 million of the increase . the remainder of the increase was attributable to the hiring of personnel to support the growth of our national brands , as well as higher bonus and commission expenses tied to revenue performance . programming expense includes the amortization of programming for katz , podcast production costs and other programming costs . the increase in 2018 is primarily due to the inclusion of a full year of programming costs for katz and additional programming costs for our podcast business . programming costs for katz were $ 92.7 million in 2018 compared to $ 22.9 million in 2017. other expenses increased $ 54.4 million in 2018 . katz and triton accounted for $ 26.5 million of the increase . the remaining increase in other expenses for the year is primarily attributed to marketing , promotion and occupancy costs incurred to support the growth of our national brands . f-10 2017 compared with 2016 revenues national media revenues increased $ 58.7 million in 2017 . the revenues from katz reflect the revenue earned during the three months of 2017 that we owned the business . excluding the results of katz , revenues increased over 50 % year-over-year , driven by stitcher and newsy . stitcher 's revenues increased from advertising growth from existing podcasts , as well as adding new titles to its portfolio . newsy 's revenues increased primarily from the growth of advertising of over-the-top platforms , as well as the new revenues from expansion into cable in the fourth quarter of 2017. the increase in other revenue is primarily from growth in our lifestyle brands . cost and expenses costs and expenses increased $ 57.8 million in 2017 , primarily due to the impact of katz . excluding the results of katz , expenses increased approximately 50 % for the year . employee compensation and benefits increased due to the impact of the katz acquisition , as well as hiring people for our other national media businesses . programming expense includes the amortization of programming for katz , podcast production costs and other programming costs . the increase is primarily due to katz 's programming costs since its acquisition and additional programming costs for our podcast business . shared services and corporate we centrally provide certain services to our business segments . such services include accounting , tax , cash management , procurement , human resources , employee benefits and information technology . the business segments are allocated costs for such services at amounts agreed upon by management .

consolidated results of operations consolidated results of operations were as follows : replace_table_token_6_th triton , katz and cracked were acquired on november 30 , 2018 , october 2 , 2017 , and april 12 , 2016 , respectively , and the inclusion of operating results from these businesses for the periods subsequent to their acquisitions impacts the comparability of our consolidated and segment operating results . 2018 compared with 2017 operating revenues increased 37.8 % in 2018 . higher retransmission and political revenues in our local media group and the inclusion of a full year of katz revenues within our national media group were the main contributors to the year-over-year revenue increases . revenues from katz were $ 186 million in 2018 compared to $ 41.0 million in 2017 . revenues from triton for december 2018 were $ 3.3 million . employee compensation and benefits increased 7.2 % in 2018 , primarily driven by the expansion of our national media group , including a full year of katz expenses and one month of triton expenses . this increase was partially offset by employee cost savings attributed to restructuring activities initiated in the fourth quarter of 2017. programming expense increased 53.4 % in 2018 , primarily due to higher network affiliation fees reflecting contractual rate increases , as well as a full year of programming costs for katz . f-4 in the fourth quarter of 2018 , we incurred a non-cash impairment charge of $ 8.9 million related to our original programming show , pickler & ben , which will not be renewed for a third season . other expenses increased 32.6 % in 2018 compared to the prior year , most of which was driven by a full year of expenses for katz . increases in marketing and promotion costs for our national brands , mainly newsy and stitcher , also contributed to the increase in other expenses in 2018 .

for right-to-develop agreements where the options to secure development and commercialization licenses to product programs are not considered substantive , the company considers the development and commercialization licenses to be a deliverable at the inception of the agreement and applies the multiple-element revenue recognition criteria to determine the appropriate revenue recognition . the company does not directly control when any collaborator will exercise its options story_separator_special_tag the following discussion of our financial condition and results of operations should be read together with our selected consolidated financial data and the consolidated financial statements and related notes included elsewhere herein . this discussion contains forward-looking statements that involve risks and uncertainties . as a result of many factors including , but not limited to , those set forth under the sections entitled `` risk factors '' and `` forward-looking statements '' , our actual results may differ materially from those anticipated in such forward-looking statements . overview we are a biopharmaceutical company focused on discovering and developing innovative antibody-based therapeutics to modulate the human immune response for the treatment of cancer . we currently have a pipeline of product candidates in human clinical testing that have been created primarily using our proprietary technology platforms , which also have broad applicability across other therapeutic domains , including autoimmune disorders and infectious disease . we believe our programs have the potential to have a meaningful effect on treating patients ' unmet medical needs as monotherapy or , in some cases , in combination with other therapeutic agents . we commenced active operations in 2000 , and have since devoted substantially all of our resources to staffing our company , developing our technology platforms , identifying potential product candidates , undertaking preclinical studies , conducting clinical trials , developing collaborations , business planning and raising capital . we have not generated any revenues from the sale of any products to date . we have financed our operations primarily through the public and private offerings of our securities , collaborations with other biopharmaceutical companies , and government grants and contracts . although it is difficult to predict our funding requirements , based upon our current operating plan , we anticipate that our cash , cash equivalents and marketable securities as of december 31 , 2017 , combined with collaboration payments we anticipate receiving , will enable us to fund our operations for approximately two years based on our current business plan . through december 31 , 2017 , we had an accumulated deficit of $ 312.3 million . we expect that over the next several years this deficit will increase as we increase our expenditures in research and development in connection with our ongoing activities with several clinical trials . strategic collaborations we pursue a balanced approach between product candidates that we develop ourselves and those that we develop with our collaborators . under our strategic collaborations to date , we have received significant non-dilutive funding and continue to have rights to additional funding upon completion of certain research , achievement of key product development milestones and royalties and other payments upon the commercial sale of products . currently , our most significant strategic collaborations include the following : incyte . in october 2017 , we entered into an exclusive global collaboration and license agreement with incyte corporation ( incyte ) for mga012 , an investigational monoclonal antibody that inhibits programmed cell death protein 1 ( pd-1 ) . incyte has obtained exclusive worldwide rights for the development and commercialization of mga012 in all indications , while we retain the right to develop our pipeline assets in combination with mga012 . the transaction closed in the fourth quarter of 2017 and we received a $ 150.0 million upfront payment from incyte upon the closing . under the terms of the collaboration , incyte will lead global development of mga012 . assuming successful development and commercialization by incyte , we could receive up to approximately $ 420.0 million in development and regulatory milestones , and up to $ 330.0 million in commercial milestones . if commercialized , we would be eligible to receive tiered royalties of 15 % to 24 % on any global net sales and we have the option to co-promote with incyte . we retain the right to develop our pipeline assets in combination with mga012 , with incyte commercializing mga012 and macrogenics commercializing our asset ( s ) , if any such potential combinations are approved . in addition , we retain the right to manufacture a portion of both companies ' global clinical and commercial supply needs of mga012 , through utilization of our commercial-scale gmp facility , which is expected to be fully operational in 2018. finally , incyte will fund our activities related to our ongoing monotherapy clinical study until such time as we can transfer the investigational new drug application ( ind ) to incyte . servier . in september 2012 , we entered into an agreement with les laboratoires servier and institut de recherches servier ( servier ) to develop and commercialize three dart® molecules in all countries other than 44 the united states , canada , mexico , japan , south korea and india . we received a $ 20.0 million upfront option fee . in addition , we will be eligible to receive up to approximately $ 700 million in additional license fees and clinical , development , regulatory and sales milestone payments if servier exercises its remaining options and successfully develops , obtains regulatory approval for , and commercializes a product under each license . additionally , assuming exercise of its options , servier may share phase 2 and phase 3 development costs and would be obligated to pay us low double-digit to mid-teen royalties on product sales in its territories . in february 2014 , servier exercised its option to develop and commercialize flotetuzumab , for which we received a $ 15.0 million license option fee . story_separator_special_tag while a summary of significant accounting policies is described fully in note 2 in our consolidated financial statements , we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our financial results and the effect of the estimates and judgments we used in preparing our consolidated financial statements . revenue recognition we enter into collaboration and license agreements with collaborators for the development of monoclonal antibody-based therapeutics to treat cancer and other complex diseases . the terms of these agreements contain multiple deliverables which may include ( i ) licenses , or options to obtain licenses , to our technological platforms , such as our fc engineering and dart technologies , ( ii ) rights to future technological improvements , ( iii ) research and development activities to be performed on behalf of the collaborator or as part of the collaboration , and ( iv ) the manufacture of preclinical or clinical materials for the collaborator . payments to us under these agreements may include nonrefundable license fees , option fees , exercise fees , payments for research and development activities , payments for the manufacture of preclinical or clinical materials , license maintenance payments , payments based upon the achievement of certain milestones and royalties on product sales . other benefits to us from these agreements include the right to sell products resulting from the collaborative efforts of the parties in specific geographic territories . we follow the provisions of the financial accounting standards board ( fasb ) accounting standards codification ( asc ) topic 605-25 , revenue recognition–multiple-element arrangements , and asc topic 605-28 , revenue recognition–milestone method , in accounting for these agreements . in order to account for these agreements , we must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on the achievement of certain criteria , including whether the delivered element has stand-alone value to the collaborator . the consideration received is allocated among the separate units of accounting , and the applicable revenue recognition criteria are applied to each of the separate units . as of december 31 , 2017 , we had two types of agreements : i ) exclusive development and commercialization licenses to use our technology and or certain other intellectual property to develop compounds against specified targets , which we refer to as exclusive licenses ; and ii ) option/research agreements to secure on established terms development and commercialization licenses to therapeutic product candidates to collaborator-selected targets developed by us during an option period , which we refer to as right-to-develop agreements . 46 exclusive licenses the deliverables under an exclusive license agreement generally include the exclusive license to our technology with respect to a specified antigen target , and may also include deliverables related to rights to future technological improvements , research and preclinical development activities to be performed on behalf of the collaborator . in some cases , we may have an option to participate in the co-development of product candidates that result from such agreements . generally , exclusive license agreements contain nonrefundable terms for payments and , depending on the terms of the agreement , provide that we will ( i ) at the collaborator 's request , provide research and preclinical development services at negotiated prices which are generally consistent with what other third parties would charge , ( ii ) earn payments upon the achievement of certain milestones , ( iii ) earn royalty payments , and ( iv ) in some cases , grant us an option to participate in the development and commercialization of products that result from such agreements . royalty rates may vary over the royalty term depending on our intellectual property rights and whether we exercise any co-development and co-commercialization rights . we do not directly control when any collaborator will achieve milestones or become liable for royalty payments . in determining the separate units of accounting , management evaluates whether the exclusive license has stand-alone value from the undelivered elements to the collaborator based on the consideration of the relevant facts and circumstances for each arrangement . factors considered in this determination include the research and development capabilities of the collaborator and the availability of technology platform and product research expertise in the general marketplace . in addition , we consider whether or not ( i ) the collaborator could use the license for its intended purpose without the receipt of the remaining deliverables , ( ii ) the value of the license was dependent on the undelivered items and ( iii ) the collaborator or other vendors could provide the undelivered items . if we conclude that the license has stand-alone value and therefore will be accounted for as a separate unit of accounting , we then determine the estimated selling prices of the license and all other units of accounting based on market conditions , similar arrangements entered into by third parties , and entity-specific factors such as the terms of our previous collaboration agreements , recent preclinical and clinical testing results of therapeutic product candidates that use our technology platforms , our pricing practices and pricing objectives , the likelihood that technological improvements will be made , the likelihood that technological improvements made will be used by our collaborators and the nature of the research services to be performed on behalf of our collaborators and market rates for similar services . the upfront payment is recognized upon delivery of the license if facts and circumstances dictate that the license has stand-alone value from the undelivered elements . upfront payments on exclusive licenses are deferred if facts and circumstances dictate that the license does not have stand-alone value , and revenue is then recognized throughout the period of performance . we reassess the period of performance over which we recognize deferred upfront license fees and make adjustments as appropriate .

results of operations for the years ended december 31 , 2017 and 2016 revenue the following represents a comparison of our research and development revenue for the years ended december 31 , 2017 and 2016 : replace_table_token_3_th revenue from collaborative agreements for the year ended december 31 , 2017 includes the $ 150.0 million upfront payment recognized under the incyte agreement . revenue from collaborative agreements for the year ended december 31 , 2016 includes the $ 75.0 million upfront payment recognized under our mgd015 agreement with janssen biotech , inc. 50 ( janssen ) . the remaining change in revenue from collaborative agreements is primarily due to a $ 2.0 million milestone payment from pfizer , inc. in 2016 and a decrease in revenue recognized under the our mgd010 agreement with takeda pharmaceutical company , limited ( takeda ) of $ 2.1 million for the year ended december 31 , 2017 compared to 2016 . revenue from government agreements decreased for the year ended december 31 , 2017 compared to 2016 primarily due to lower costs incurred under our cost plus fixed fee contract with the national institute of allergy and infectious diseases . research and development expense the following represents a comparison of our research and development expense for the years ended december 31 , 2017 and 2016 : replace_table_token_4_th ( a ) - expenses are shown net of reimbursements from collaborator . during the year ended december 31 , 2017 our research and development expense increased by $ 25.1 million compared to 2016 . this increase was primarily due to the continued enrollment in our various clinical trials , including two margetuximab studies , multiple enoblituzumab studies , and the flotetuzumab and mgd007 phase 1 studies . also contributing to the increase was the initiation of the phase 1 clinical trial of mga012 in late 2016 , as well as ind-enabling activities for both mgc018 and mgd019 .

41 mr. tomenson is a senior advisor to integro ltd. mr. tomenson was managing director and chairman of client development of marsh , inc. from 1998 until 2004. from 1993 to 1998 , he was chairman of finpro , the financial services division of marsh , inc. mr. tomenson is a director of the trinity college school fund , inc. he also serves on the executive council of the inner-city scholarship fund and holds a master professional director certification from the american college of directors . as a result of these and other professional experiences , mr. tomenson possesses particular knowledge and experience in marketing and distribution and human resources that strengthen the board 's collective qualifications , skills and experience . mr. tomenson has been a director of the company since 1999. mr. weinert is an entrepreneur whose current activities are concentrated in real estate and new business development . he has served on the business advisory council for the university of dayton for over 20 years . from 1973 until 1989 , mr. weinert held various executive positions in the finance and operations groups of waste management , inc. and its subsidiaries , including 6 years as the president of waste management international , inc. as a result of these and other professional experiences , mr. weinert possesses particular knowledge and experience in accounting , finance , capital structures , distribution and international operations that strengthen the board 's collective qualifications , skills and experience . mr. weinert has been a director of the company since 1991. the information required by item 405 of regulation s-k will be set forth in the proxy statement of the company relating to the 2011 annual meeting of stockholders to be held on may 24 , 2011 and is incorporated herein by reference . the company has a code of ethics that applies to all employees and non-employee directors . this code satisfies the requirements set forth in item 406 of regulation s-k and applies to all relevant persons set forth therein . the company will mail to interested parties a copy of the code of ethics upon written request and without charge . such request shall be made to our general counsel , 125 nagog park , story_separator_special_tag the management 's discussion and analysis of financial condition and results of operations should be read together with the more detailed business information and financial statements and related notes that appear elsewhere in this annual report on form 10-k. this annual report may contain certain “ forward-looking ” information within the meaning of the private securities litigation reform act of 1995. this information involves risks and uncertainties . actual results may differ materially from the results discussed in the forward-looking statements . factors that might cause such a difference include , but are not limited to , those discussed in “ item 1a — risk factors. ” overview psychemedics corporation is the world 's largest provider of hair testing for drugs of abuse , utilizing a patented hair analysis method involving radioimmunoassay technology and confirmation by mass spectrometry to analyze human hair to detect abused substances . the company 's customers include fortune 500 companies , as well as small to mid-size corporations , schools and governmental entities located primarily in the united states . during the year ended december 31 , 2010 , the company generated $ 20.1 million in revenue , while maintaining a gross margin of 60 % and pre-tax margins of 22 % . at december 31 , 2010 , the company had $ 5.7 million of cash , cash equivalents and short-term investments . during 2010 , the company had operating cash flow of $ 3.3 million and it distributed approximately $ 2.5 million or $ 0.48 per share of cash dividends to its shareholders . to date , the company has paid fifty-eight consecutive quarterly cash dividends . 15 the following table sets forth , for the periods indicated , the selected statements of operations data as a percentage of total revenue : replace_table_token_4_th results for the year ended december 31 , 2010 compared to results for the year ended december 31 , 2009 revenue increased $ 3.2 million or 19 % to $ 20.1 million in 2010 compared to $ 17.0 million in 2009. this increase was due to an increase in volume from new and existing clients . average revenue per sample increased 2 % between 2010 and 2009. gross profit increased $ 2.4 million to $ 12.0 million in 2010 compared to $ 9.6 million in 2009. direct costs increased by 10 % from 2009 to 2010 , mainly associated with the direct cost of materials resulting from higher volumes . the gross profit margin increased from 57 % in 2009 to 60 % in 2010 as revenue increased more than direct costs . general and administrative ( “ g & a ” ) expenses were $ 4.2 million for the year ended december 31 , 2010 compared to $ 3.6 million for the year ended december 31 , 2009 , representing an increase of 17 % . as a percentage of revenue , g & a expenses were 20.9 % and 21.2 % for the years ended december 31 , 2010 and 2009 , respectively . the increase in general and administrative expenses in 2010 was due to several factors : an increase in salary expense due to the reinstatement of salaries in 2010 following a salary cut in the second half of 2009 , an increase in accounting and audit fees , an increase in legal fees defending our technology on behalf of our customers , and bonuses earned in 2010 and not in 2009. marketing and selling expenses were $ 2.9 million for the year ended december 31 , 2010 , compared to $ 3.0 million for the year ended december 31 , 2009 , a decrease of less than 1 % . story_separator_special_tag estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states requires management to make estimates , including bad debts and income tax valuation , and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . allowance for doubtful accounts the allowance for doubtful accounts is based on management 's assessment of the ability to collect amounts owed to it by its customers . management reviews its accounts receivable aging for doubtful accounts and uses a methodology based on calculating the allowance using a combination of factors including the age of the receivable along with management 's judgment to identify accounts that may not be collectible . the company routinely assesses the financial strength of its customers and , as a consequence , believes that its accounts receivable credit risk exposure is limited . the company maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area . bad debt expense has been within management 's expectations . income taxes the company accounts for income taxes using the liability method , which requires the company to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial statement and tax reporting bases of assets and liabilities to the extent that they are realizable . deferred tax expense ( benefit ) results from the net change in deferred tax assets and liabilities during the year . a deferred tax valuation allowance is required if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized . 19 the company had net deferred tax assets in the amount of $ 240,000 at december 31 , 2010 , which the company believes are fully realizable based upon expected future taxable income , which the company 's believes is reasonably attainable in light of previous operating results during the past three years . the company operates within multiple taxing jurisdictions and could be subject to audit in these jurisdictions . these audits may involve complex issues , which may require an extended period of time to resolve . the company has provided for its estimated taxes payable in the accompanying financial statements . interest and penalties related to income tax matters are recognized as a general and administrative expense . the company did not have any unrecognized tax benefits and did not have any interest or penalties accrued as of december 31 , 2010 or 2009. the company does not expect the unrecognized tax benefits to change significantly over the next twelve months . the above listing is not intended to be a comprehensive list of all of the company 's accounting policies . in many cases , the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the united states , with no need for management 's judgment in their application . there are also areas in which management 's judgment in selecting any available alternative would not produce a materially different result . recent accounting pronouncements in april 2010 , the fasb issued accounting standards update , or , asu , no . 2010-17 , revenue recognition — milestone method ( topic 605 ) : milestone method of revenue recognition , or asu 2010-17. asu 2010-17 allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones . asu 2010-17 provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting . asu 2010-17 is limited to transactions involving milestones relating to research and development deliverables . asu 2010-17 also includes enhanced disclosure requirements about each arrangement , individual milestones and related contingent consideration , information about substantive milestones and factors considered in the determination . asu 2010-17 is effective on a prospective basis for milestones achieved in fiscal years , and interim periods within those years , beginning on or after june 15 , 2010 , with early adoption permitted . the adoption of this standard is not expected to have a material impact on the company 's financial position , results of operations or cash flows . in october 2009 , the fasb issued asu no . 2009-14 , software ( topic 985 ) : certain revenue arrangements that include software elements — a consensus of the fasb eitf , or asu 2009-14. asu 2009-14 changes the accounting model for revenue arrangements that include tangible products and software elements . the amendments of this update provide additional guidance on how to determine which software , if any , relating to the tangible product also would be excluded from the scope of the software revenue recognition guidance . the amendments in this update also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software , as well as arrangements that have deliverables both included and excluded from the scope of software revenue recognition guidance . this standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after june 15 , 2010. the adoption of this standard is not expected to have a material impact on the company 's financial position , results of operations or cash flows . in october 2009 , the fasb issued asu no . 2009-13 , revenue recognition ( topic 605 ) : multiple-deliverable revenue arrangements — a consensus of the fasb eitf , or asu 2009-13. asu 2009-13 will separate multiple-deliverable

general and administrative ( ‘ ‘ g & a '' ) expenses were $ 3.6 million for the year ended december 31 , 2009 compared to $ 4.5 million for the year ended december 31 , 2008 , representing a decrease of 20 % . as a percentage of revenue , g & a expenses were 21.2 % and 19.7 % for the years ended december 31 , 2009 and 2008 , respectively . the decrease in general and administrative expenses in 2009 was due primarily to a decrease in several categories : lower legal fees defending our technology on behalf of our customers , reduced salaries and stock compensation , decreased bad debt expense and lower consulting fees . marketing and selling expenses were $ 3.0 million for the year ended december 31 , 2009 , compared to $ 3.6 million for the year ended december 31 , 2008 , a decrease of 19 % . the variation in marketing and selling expenses was primarily due to lower staffing levels , salary expense and reduced benefit expense of approximately $ 289,000. total marketing and selling expenses represented 17.5 % and 15.9 % of revenue for the years ended december 31 , 2009 and 2008 , respectively . research and development ( ‘ ‘ r & d '' ) expenses for 2009 were $ 0.5 million compared to $ 0.5 million for 2008. r & d expenses represented 2.8 % and 2.1 % of revenue for the years ended december 31 , 2009 and 2008 , respectively . interest income decreased approximately $ 263,000 to approximately $ 45,000 for the year ended december 31 , 2009 compared to $ 308,000 for the year ended december 31 , 2008. interest income in both periods represented interest and dividends earned on cash equivalents and short-term investments . lower average investment balances along with a decrease in the yield on investment balances in 2009 as compared to 2008 caused the decrease in interest income .

during fiscal year 2019 , we sold two closed distribution facilities and an excess parcel of land for aggregate cash proceeds of $ 6 million , which approximated their aggregate carrying values . the changes in assets held for sale for fiscal years 2020 and 2019 were as follows : replace_table_token_20_th 53 10. property and equipment property and equipment as of january 2 , 2021 and december 28 , 2019 consisted of the following : replace_table_token_21_th transportation equipment included $ 530 million and $ 572 million of financing lease assets as of january 2 , 2021 and story_separator_special_tag the following discussion and analysis is intended to help the reader understand the company , our financial condition and results of operations and our present business environment . it should be read together with our consolidated financial statements and related notes contained elsewhere in this annual report . the following discussion and analysis contain certain financial measures that are not required by , or presented in accordance with , gaap . we believe these non-gaap financial measures provide meaningful supplemental information about our operating performance and liquidity . information regarding reconciliations of and the rationale for these measures is discussed in “ non-gaap reconciliations ” below . the following includes a comparison of our consolidated results of operations for fiscal years 2020 and 2019. for a comparison of our consolidated results of operations for fiscal years 2019 and 2018 , see item 7 of part ii , “ management 's discussion and analysis of financial condition and results of operations ” , of our annual report on form 10-k for the fiscal year ended december 28 , 2019 , filed with the sec on february 13 , 2020. covid-19 in march 2020 , the world health organization characterized a novel strain of coronavirus ( “ covid-19 ” ) as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide . since mid-march 2020 , our business has been significantly impacted . in march 2020 , many countries , including the united states , took steps to restrict travel , temporarily close or enforce capacity restrictions in businesses , schools and other public gathering spaces . restrictions on public gatherings and attendance at retail or other establishments , including restaurants and recreational , sporting and other similar venues , continue to evolve and are expected to continue to remain in effect in some capacity until the covid-19 pandemic has fully abated . these government mandates have forced many of our customers to seek government support in order to continue operating , to drastically curtail their dining options , to temporarily suspend operations or to cease operations entirely . in december 2020 , two vaccines for covid-19 were approved by the fda and , as of the date hereof , a limited number of doses have been made available in the united states to certain frontline workers and at-risk individuals . however , it remains unclear when either of these vaccines or others will be widely available to the general american public . as a result , it remains unclear when and to what extent the covid-19 pandemic will fully abate . impact of covid-19 on our business the covid-19 pandemic has and continues to adversely impact our sales and liquidity position due to the slowdown in total case volume ( and , in particular , restaurant , hospitality and education case volume ) . in mid-march 2020 , the operations of our restaurant , hospitality and education customers were suddenly and significantly disrupted by the spread of covid-19 and the corresponding decline in consumer demand for food prepared away from home . since that time , many of our customers were required by governmental authorities to temporarily close locations or only offer limited dining options such as carryout and delivery in an effort to reduce the spread of covid-19 , while others temporarily closed locations voluntarily or ceased operations entirely due to decreased consumer demand . many of these government mandates started to loosen in the summer of 2020 to varying degrees and our case volume decline improved accordingly . restrictions remain in place in many parts of the united states and , in some jurisdictions , governmental authorities have reinstituted heightened restrictions in response to recent increases in covid-19 cases . as a result of the covid-19 pandemic and measures implemented to mitigate its spread , we have experienced decreased demand for our products , resulting in lower than anticipated net sales and total case volumes beginning in mid-march 2020 through the second quarter of 2020. we saw some improvement in net sales and total case volumes during the third quarter of 2020 , as a result of loosened restrictions and shifts to outdoor dining ; however , demand remained lower than 2019 levels for the corresponding periods . in the fourth quarter of 2020 , increases in covid-19 cases and the implementation of heightened restrictions on in-person dining in many markets , as well as other factors , resulted in a slowdown in the total case volume recovery trend that we saw in the third quarter of 2020. total case volume decreased 11.0 % for the 53 weeks ended january 2 , 2021 compared to the 52 weeks ended december 28 , 2019. recent activity and sector perspectives we are optimistic about the long-term prospects for our business . us foods operates in a large and essential industry with a highly diversified set of end consumers . while some of our core customer groups ( such as restaurants , hospitality and education ) have been more significantly affected by the impacts of the covid-19 pandemic , other customer groups ( such as healthcare , government , retail and cash and carry ) have been less significantly affected . story_separator_special_tag operating metrics case growth —case growth , by customer type ( e.g. , independent restaurants ) is reported as of a point in time . customers periodically are reclassified , based on changes in size or other characteristics , and when those changes occur , the respective customer 's historical volume follows its new classification . organic growth —organic growth includes growth from operating business that has been reflected in our results of operations for at least 12 months . fiscal year 2020 highlights financial highlights —total case volume decreased 11.0 % in fiscal year 2020 , and independent restaurant case volume decreased 11.2 % in fiscal year 2020. excluding the impact of the extra week in fiscal year 2020 , total case volume decreased 12.5 % in fiscal year 2020 , and independent restaurant case volume decreased 12.7 % in fiscal year 2020. net sales decreased $ 3,054 million , or 11.8 % , in fiscal year 2020 primarily due to the negative impact of covid-19 on total case volumes , which was partially offset by contributions from the food group ( which is included in our results for the full fiscal year 2020 , and for fiscal year 2019 , but only 26 from and after september 13 , 2019 ) and smart foodservice ( which is included in our results for fiscal year 2020 , but only from and after april 24 , 2020 , and is not included in our results for fiscal year 2019 ) . the food group and smart foodservice contributed aggregate net sales of $ 3,112 million for fiscal year 2020. net sales for the food group and smart foodservice were also impacted by the covid-19 pandemic , albeit to different degrees . gross profit decreased $ 868 million , or 18.9 % , to $ 3,719 million in fiscal year 2020 , primarily as a result of the negative impact of covid-19 on net sales , higher logistics costs , and covid-19 related product donations and inventory adjustments , partially offset by contributions from the food group and smart foodservice . as a percentage of net sales , gross profit was 16.3 % in fiscal year 2020 , compared to 17.7 % in fiscal year 2019. total operating expenses decreased $ 92 million , or 2.4 % , to $ 3,796 million in fiscal year 2020. the decrease was primarily due to the negative impact of covid-19 on total case volume , the related impact of cost actions taken during fiscal year 2020 , and a $ 17 million gain on the sale of excess land . these decreases were partially offset by a higher provision for doubtful accounts of $ 47 million due to the impact of covid-19 , operating expenses from the food group and smart foodservice , $ 30 million of restructuring costs associated with work force reductions , and $ 9 million of asset impairment charges on certain trade names acquired as part of the food group acquisition . smart foodservice acquisition —on april 24 , 2020 , usf completed the acquisition of smart foodservice . total consideration paid at the closing of the acquisition was $ 972 million ( net of cash acquired ) . the acquisition of smart foodservice expands the company 's cash and carry business in the west and northwest parts of the u.s. the assets , liabilities and results of operations of smart foodservice have been included in our consolidated financial statements since the date the acquisition was completed . 27 results of operations the following table presents selected consolidated results of operations of our business for fiscal years 2020 , 2019 and 2018 : replace_table_token_4_th ( 1 ) ebitda is defined as net ( loss ) income , plus interest expense—net , income tax ( benefit ) provision , and depreciation and amortization . adjusted ebitda is defined as ebitda adjusted for ( 1 ) restructuring costs and asset impairment charges ; ( 2 ) share-based compensation expense ; ( 3 ) the non-cash impact of last-in first-out ( “ lifo ” ) reserve adjustments ; ( 4 ) pension settlements ; ( 5 ) business transformation costs ; and ( 6 ) other gains , losses , or costs as specified in the agreements governing our indebtedness . adjusted net income available to common shareholders is defined as net income excluding the items used to calculate adjusted ebitda listed above and further adjusted for the tax effect of the exclusions and discrete tax items and series a convertible preferred stock dividends . ebitda , adjusted ebitda , and adjusted net income available to common shareholders as presented in this annual report are supplemental measures of our performance that are not required by , or presented in accordance with , accounting principles generally accepted in the u.s. ( “ gaap ” ) . they are not measurements of our performance under gaap and should not be considered as alternatives to net income ( loss ) or any other performance measures derived in accordance with gaap . for additional information , see the discussion under the caption “ non-gaap reconciliations ” below . ( 2 ) free cash flow is defined as cash flows provided by operating activities less cash capital expenditures . free cash flow as presented in this annual report is a supplemental measure of our liquidity that is not required by , or presented in accordance with , gaap . it is not a measure of our liquidity 28 under gaap and should not be considered as an alternative to cash flows provided by operating activities , or any other liquidity measures derived in accordance with gaap . for additional information , see the discussion under the caption “ non-gaap reconciliations ” below . non-gaap reconciliations we provide ebitda , adjusted ebitda , adjusted net income available to common shareholders and free cash flow as supplemental measures to gaap financial measures regarding our operating performance and liquidity .

comparison of results fiscal years ended january 2 , 2021 and december 28 , 2019 highlights total case volume decreased 11.0 % in fiscal year 2020 , and independent restaurant case volume decreased 11.2 % in fiscal year 2020. excluding the impact of the extra week in fiscal year 2020 , total case volume decreased 12.5 % in fiscal year 2020 , and independent restaurant case volume decreased 12.7 % in fiscal year 2020. net sales decreased $ 3,054 million , or 11.8 % to $ 22,885 million in fiscal year 2020. operating loss was $ 77 million in fiscal year 2020 , compared to operating income of $ 699 million in fiscal year 2019. as a percentage of net sales , operating loss was 0.3 % in fiscal year 2020 , and operating income was 2.7 % in fiscal year 2019. net loss was $ 226 million in fiscal year 2020 , compared to net income of $ 385 million in fiscal year 2019. adjusted ebitda decreased $ 546 million , or 45.7 % , to $ 648 million in fiscal year 2020. as a percentage of net sales , adjusted ebitda was 2.8 % in fiscal year 2020 , as compared to 4.6 % in fiscal year 2019. net sales total case volume decreased 11.0 % in fiscal year 2020. excluding the impact of the extra week in fiscal year 2020 , total case volume decreased 12.5 % in fiscal year 2020. the decrease was due to the negative impact of covid-19 on total case volume which was partially offset by contributions from the food group and smart foodservice .

expected maturities may differ from contractual maturities for collateralized mortgage obligations and mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties . therefore , collateralized mortgage story_separator_special_tag ( dollars in thousands , except per share amounts ) introduction the company 's financial highlights and key performance measures are presented in the table below . replace_table_token_2_th definition of ratios : return on average assets - net income divided by average assets . return on average equity - net income divided by average equity . efficiency ratio - noninterest expense ( excluding other real estate owned expense and write-down of premises ) divided by noninterest income ( excluding net securities gains/losses and gains/losses on disposition of premises and equipment ) plus tax-equivalent net interest income . texas ratio - total nonperforming assets divided by tangible common equity plus the allowance for loan losses . dividend payout ratio - dividends paid to common stockholders divided by net income . dividend yield - dividends per share paid to common stockholders divided by closing year-end stock price . average equity to average assets ratio - average equity divided by average assets . ( 1 ) a lower ratio is better . ( 2 ) as presented , this is a non-gaap financial measure . for further information , refer to the section `` non-gaap financial measures '' of this item the company 's 2020 net income was $ 32,712 compared to $ 28,690 in 2019. net income for 2020 was a record for the company . basic and diluted earnings per common share for 2020 were $ 1.99 and $ 1.98 , respectively , compared to $ 1.75 and 1.74 , respectively , in 2019. during 2020 , we paid our common stockholders $ 13,815 ( $ 0.84 per common share ) in dividends compared to $ 13,578 ( $ 0.83 per common share ) in 2019. the dividend declared and paid in the first quarter of 2021 was $ 0.22 per common share compared to $ 0.21 per common share for the fourth quarter of 2020 , and was the highest quarterly dividend ever paid by the company . 31 ( dollars in thousands , except per share amounts ) our loan portfolio grew to $ 2,280,575 as of december 31 , 2020 , from $ 1,941,663 as of december 31 , 2019. this loan growth included $ 180,757 of ppp loans as of december 31 , 2020. deposits increased to $ 2,700,994 as of december 31 , 2020 , from $ 2,014,756 as of december 31 , 2019. the growth in deposit balances was primarily due to changes in customer behavior as a result of the covid-19 pandemic and our customers ' desire to retain liquidity , as well as a result of additional funds provided to individuals and businesses by government relief programs . the increase in deposit balances had a direct impact on our asset balances and liquidity position at year end as funds were deployed in loan originations , investment security purchases and federal funds sold . total assets were $ 3,185,744 at december 31 , 2020 , compared to $ 2,473,691 at december 31 , 2019 , a 28.8 percent increase . our balance sheet may decrease and the mix of assets and liabilities may change in 2021. loans and deposits may decrease as customer behavior adjusts to economic uncertainties created by the duration of the covid pandemic , reductions in broad-based government relief programs and the efficiency of the rollout of covid-19 vaccinations . the company has a quantitative peer analysis program in place for evaluating its results . the peer group is periodically reviewed , and was revised in the first quarter of 2020 after evaluating financial institutions that we believe better reflect our company , particularly in terms of market capitalization , asset size , employee headcount and loan portfolio composition . the company is in the middle of the group in terms of asset size . the group of 21 midwestern , publicly traded , peer financial institutions against which we compared our performance for 2020 consisted of bank first corporation , civista bancshares , inc. , crossfirst bankshares , inc. , equity bancshares , inc. , farmers national banc corp. , farmers & merchants bancorp , first business financial services , inc. , first financial corp. , first mid bancshares , inc. , german american bancorp , inc. , hills bancorporation , isabella bank corporation , lcnb corp. , level one bancorp , inc. , macatawa bank corporation , mackinac financial corporation , mercantile bank corporation , midwestone financial group , inc. , nicolet bankshares , inc. , peoples bancorp , inc. , and southern missouri bancorp , inc. the company 's goal is to perform at or near the top of this peer group relative to what we consider to be three key metrics : return on average equity , efficiency ratio and texas ratio . we believe these measures encompass the factors that define the performance of a community bank . company and peer results for the key financial performance measures are summarized below . replace_table_token_3_th ( 1 ) as presented , this is a non-gaap financial measure . for further information , refer to the section “ non-gaap financial measures ” of this item . ( 2 ) latest data available . our earnings outlook is positive , and we have strong capital resources . we anticipate the company will be profitable in 2021 at a level that compares with that of our peers . the amount of our future profit is dependent , in large part , on our ability to continue to grow the loan portfolio , the amount of loan losses we incur , fluctuations in market interest rates , the strength of the local and national economy , and the economic recovery from the covid-19 pandemic . the following discussion describes the consolidated operations and financial condition of the company , including its subsidiary west bank and west bank 's special purpose subsidiaries . story_separator_special_tag on august 3 , 2020 , the ffiec issued a joint statement on additional loan accommodations related to covid-19 , which , among other things , encouraged financial institutions to consider prudent additional loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges . accommodation options should be based on prudent risk management and consumer protection principles . 33 ( dollars in thousands , except per share amounts ) in addition to the policy responses described above , the federal bank regulatory agencies , along with their state counterparts , have issued a stream of guidance in response to the covid-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact . these include , without limitation : requiring banks to focus on business continuity and pandemic planning ; adding pandemic scenarios to stress testing ; encouraging bank use of capital buffers and reserves in lending programs ; permitting certain regulatory reporting extensions ; reducing margin requirements on swaps ; permitting certain otherwise prohibited investments in investment funds ; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts ; and providing credit under the cra for certain pandemic related loans , investments and public service . moreover , because of the need for social distancing measures , the agencies revamped the manner in which they conducted periodic examinations of their regular institutions , including making greater use of off-site reviews . the federal reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its reserve banks to help households and businesses impacted by the pandemic and announced numerous funding facilities . the fdic has also acted to mitigate the deposit insurance assessment effects of participating in the ppp and the federal reserve 's ppp liquidity facility and money market mutual fund liquidity facility . effects on our business . the covid-19 pandemic and the specific developments referred to above have had and will continue to have a significant impact on our business . in particular , we anticipate that a significant portion of the bank 's borrowers in the hotel , restaurant , retail and movie theater industries will continue to endure significant economic distress , which has caused , and may continue to cause , them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness , and may adversely impact the value of collateral . these developments , together with economic conditions generally , are also expected to impact our commercial real estate portfolio , particularly with respect to real estate with exposure to these industries , and the value of certain collateral securing our loans . as a result , our financial condition , capital levels and results of operations could be adversely affected , as described in further detail below . our response . we took numerous steps in 2020 in response to the covid-19 pandemic , including the following : we actively worked with loan customers to evaluate prudent loan modification terms . in 2020 , west bank provided loan modification for nearly 300 loans totaling over $ 550,000. as of december 31 , 2020 , 35 loans totaling $ 139,940 , or 6.1 percent of total loans , were in payment deferral status under covid-19-related modifications . the modifications included a deferral of principal and or interest payments . expiration of the deferrals range from january 2021 through june 2021. as of december 31 , 2020 , the modifications are for hotel loans totaling $ 64,449 , movie theater loans totaling $ 17,863 , mixed-use commercial real estate loans totaling $ 38,177 and other commercial and commercial real estate loans totaling $ 19,451. in 2020 , west bank originated 925 ppp loans totaling $ 224,489. as of december 31 , 2020 , total outstanding ppp loans were $ 180,757. borrowers are in the process of filing for forgiveness with the sba . when the borrower applies for loan forgiveness , the bank has 60 days to submit the application to the sba . the sba then has 90 days to approve the loan forgiveness . we expect the forgiveness process to extend into the second quarter of 2021. additionally , a second round of ppp loans began in january 2021 , and the company is a participating lender in this program . as of february 19 , 2021 , west bank has originated 256 loans totaling approximately $ 43,100 in the second round program . from mid-march through the end of june 2020 , we limited all branch activity to drive-up and appointment only services . we continue to promote our digital banking options through our website , and encourage customers to utilize our online and mobile banking services . our customer service and retail banking departments have remained fully staffed and available to assist customers through our various digital channels . as we reopened our lobbies for customer activity , we implemented various social distancing and cleaning protocols recommended by governmental health departments to protect the health and safety of our employees and customers . we have successfully deployed a modified working strategy , including emphasis on social distancing and remote work as necessary to emphasize the safety of our teams and continuity of our business processes . we continue to pay all employees according to their normal work schedule , even if their workload has been altered . no employees have been furloughed or laid off as a result of covid-19 . 34 ( dollars in thousands , except per share amounts ) liquidity and capital strength . we maintain access to multiple sources of liquidity and continually review these sources in preparation for any unforeseen funding needs due to covid-19 . the company has funding available from the fhlb , along with access to federal funds lines with various correspondent banks and access to the brokered certificate of deposit market .

overview net income for the year ended december 31 , 2020 , was $ 32,712 , compared to $ 28,690 for the year ended december 31 , 2019. basic and diluted earnings per common share for 2020 were $ 1.99 and $ 1.98 , respectively , and were $ 1.75 and 1.74 , respectively for 2019. the increase in 2020 net income compared to 2019 was primarily the result of higher net interest income and noninterest income , partially offset by an increase in provision for loan losses . net interest income grew $ 16,403 , or 24.7 percent , in 2020 compared to 2019. the increase in net interest income was primarily due to the decrease in interest expense on deposits and other borrowings . interest expense decreased $ 14,845 , or 46.0 percent , compared to 2019 , primarily due to the federal reserve 's reductions in the targeted federal funds rate that occurred in march 2020 in response to the covid-19 pandemic . in response to the economic conditions and reduction in market interest rates , west bank lowered its interest rates in march 2020 in almost all deposit categories . the company recorded a provision for loan losses of $ 12,000 in 2020 compared to a provision for loan losses of $ 600 in 2019. the increase in the provision for loan losses was due to the uncertainty surrounding economic conditions as a result of the covid-19 pandemic and slow economic recovery in the hotel and entertainment industries , and an increase in specific reserves on impaired loans .

you should read this discussion in conjunction with our consolidated financial statements and the related notes contained in this annual report on form 10-k. the statements in this discussion regarding industry outlook , our expectations regarding our future performance , liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements . these forward-looking statements are subject to numerous risks and uncertainties , including , but not limited to , the risks and uncertainties described under “risk factors” and in “special note regarding forward-looking statements” in this report . our actual results may differ materially from those contained in or implied by any forward-looking statements . our fiscal year ends december 31 and , unless otherwise noted , references to years or fiscal are for fiscal years ended december 31. see “—results of operations.” company overview gogo inc. is the world 's leading provider of in-flight connectivity with the largest number of online aircraft in service and a pioneer in wireless digital entertainment and other services in the commercial and business aviation markets . effective january 1 , 2013 , we realigned our business into the following three segments : commercial aviation north america , or “ca-na , ” commercial aviation rest of world , or “ca-row , ” and business aviation , or “ba.” we previously reported three segments : commercial aviation , or ca , international and ba . the realignment is intended to better align our reporting structure to the way in which we manage our business . the ba segment was not impacted by the realignment . prior period segment disclosures have been restated to conform to the current year presentation . services provided by our ca-na business include gogo connectivity , which allows passengers to connect to the internet from their personal wi-fi-enabled devices , gogo vision , which offers passengers the opportunity to enjoy a broad selection of in-flight entertainment options on their personal wi-fi enabled devices , and gogo signature services , which include a broad range of customizable , targeted content , advertising and e-commerce services . such services are provided by the ca-na business to commercial airline passengers flying routes that generally begin and end within north america , which for this purpose includes the continental united states ( including alaska ) , canada and mexico . through our ca-row business , we intend to provide in-flight connectivity and wireless digital entertainment solutions to passengers flying on foreign-based commercial airlines and international flights of north american based commercial airlines . this includes routes that begin and or end outside of north america ( as defined above ) for which our international service will be provided . our ca-row business is in the start-up phase as we initiated our international expansion efforts in the first quarter of 2012. our ba business sells equipment for in-flight connectivity and telecommunications and provides in-flight internet connectivity and other voice and data communications services to the business aviation market . ba services include gogo biz , our in-flight broadband service that utilizes both our atg network and our atg spectrum , and satellite-based voice and data services through our strategic alliances with satellite companies . recent developments on april 4 , 2013 , we borrowed $ 113.0 million ( the “new borrowing” ) under an amendment to the credit agreement governing our existing senior term facility , dated as of june 21 , 2012 , among gogo intermediate holdings llc ( “gih” ) , aircell business aviation services llc ( “abas” ) and gogo llc , as borrowers , the lenders named therein , and morgan stanley senior funding , inc. , as administrative agent and collateral agent . we refer to our existing senior term facility , as so amended , as the “amended senior term facility.” the amendment increased the size of our senior term facility from $ 135.0 million to $ 248.0 million . we received net cash proceeds from the new borrowing of $ 103.0 million following the payment of debt issuance fees of 56 $ 10.0 million . we are using the proceeds from the new borrowing for general corporate purposes , including upgrading certain of our airline partners to atg-4 technology and funding our international expansion to the extent permitted by the amended senior term facility . see “—liquidity and capital resources” for additional information regarding the amended senior term facility . on june 20 , 2013 , we priced our initial public offering ( “ipo” ) of 11,000,000 shares of our common stock , and such shares began trading on the nasdaq global select market on june 21 , 2013. the public offering price of the shares sold in the offering was $ 17.00 per share , which provided $ 173.9 million of proceeds , net of underwriter commissions and other costs associated with the ipo . in september 2013 , we amended our contract with virgin america inc. , pursuant to which we provide in-flight connectivity services on virgin america 's entire fleet of 53 aircraft , to extend the term of the contract to september 2018 and to provide for upgrades of certain aircraft from atg to atg-4 . in addition , the contract provides that virgin america will be our launch partner for the next step in our technology roadmap : a proprietary hybrid technology called gogo gto ( ground to orbit ) that uses satellite for receive only ( transmission to the aircraft ) and our atg network for the return link ( transmission to the ground ) . we expect gogo gto to be capable of delivering peak speeds of 70mbps to the aircraft and to be available in the second half of 2014. in october 2013 , we entered into a contract with japan airlines ( “jal” ) pursuant to which we will install our ku-satellite based equipment and provide in-flight connectivity services to passengers on jal 's entire domestic fleet of 77 aircraft . story_separator_special_tag load factors are provided to us by our airline partners and are based on historical data . total average revenue per passenger opportunity ( “arpp” ) . we define arpp as revenue from gogo connectivity , gogo vision , gogo signature services and other service revenue for the period , divided by gpo for the period . total average revenue per session ( “arps” ) . we define arps as revenue from gogo connectivity divided by the total number of sessions during the period . a session , or a “use” of gogo connectivity , is defined as the use by a unique passenger of gogo connectivity on a flight segment . multiple logins or purchases under the same user name during one flight segment count as only one session . connectivity take rate . we define connectivity take rate as the number of sessions during the period expressed as a percentage of gpo . included in our connectivity take-rate calculation are sessions for which we did not receive revenue , including those provided pursuant to free promotional campaigns and , to a lesser extent , as a result of complimentary passes distributed by our customer service representatives or unforeseen technical issues . for the periods listed above , the number of sessions for which we did not receive revenue was less than 3 % of the total number of sessions . business aviation replace_table_token_5_th ( 1 ) aircraft online and average monthly service revenue per aircraft online exclude the aircraft covered by contracts acquired from airfone and the related revenue for the year ended december 31 , 2013. with the exception of one customer whose airfone service will continue through march 10 , 2014 , we terminated the airfone service effective december 31 , 2013. satellite aircraft online . we define satellite aircraft online as the total number of business aircraft for which we provide satellite service as of the last day of each period presented . 59 atg aircraft online . we define atg aircraft online as the total number of business aircraft for which we provide atg service as of the last day of each period presented . average monthly service revenue per satellite aircraft online . we define average monthly service revenue per satellite aircraft online as the aggregate satellite service revenue for the period divided by the number of months in the period , divided by the number of satellite aircraft online during the period ( expressed as an average of the month end figures for each month in such period ) . average monthly service revenue per atg aircraft online . we define average monthly service revenue per atg aircraft online as the aggregate atg service revenue for the period divided by the number of months in the period , divided by the number of atg aircraft online during the period ( expressed as an average of the month end figures for each month in such period ) . units shipped . we define units shipped as the number of satellite or atg network equipment units , respectively , shipped during the period . average equipment revenue per satellite unit shipped . we define average equipment revenue per satellite unit shipped as the aggregate equipment revenue earned from all satellite shipments during the period , divided by the number of satellite units shipped . average equipment revenue per atg unit shipped . we define average equipment revenue per atg unit shipped as the aggregate equipment revenue from all atg shipments during the period , divided by the number of atg units shipped . key components of consolidated statements of operations as noted above , effective january 1 , 2013 , we realigned our reporting segments into the following three segments : ca-na , ca-row and ba . our ca-row business is in the start-up phase as we initiated our international expansion efforts in the first quarter of 2012 and , as of december 31 , 2013 , this segment had generated minimal revenues . the following briefly describes certain key components of revenue for the ca-na and ba segments and expenses for the ca-na , ba and ca-row segments , as presented in our consolidated statements of operations . revenue : we generate two types of revenue through each of our operating segments : service revenue and equipment revenue . commercial aviation north america : service revenue . service revenue for the ca-na segment , which currently represents substantially all of the ca-na segment revenue , is derived primarily from gogo connectivity related revenue through both retail and non-retail sales channels . retail revenue is derived from purchases of individual sessions ( which includes multiple individual session packages ) and subscriptions ( including both monthly and annual subscriptions ) . non-retail revenue includes sponsorship revenue ( gogo connectivity sold to third parties who sponsor free or discounted access to gogo connectivity to passengers ) , and revenue generated through our enterprise channel ( such as gogo connectivity sold to customers through travel management companies ) , our roaming channel ( gogo connectivity sold to ground based wi-fi internet providers or gateways who resell to their customers ) and our wholesale channel ( gogo connectivity sold to companies who in turn make gogo connectivity available through customer loyalty programs or as incentives for their direct customers ) . the ca-na segment also generates revenue from gogo signature services through third-party advertising fees and e-commerce revenue share arrangements . additionally , we generate revenue from fees paid by passengers for access to entertainment content on gogo vision . under the terms of agreements with each of our airline partners , we provide our gogo connectivity and gogo vision service directly to airline passengers and set the pricing for the service . our 60 customers remit payment directly to us and we remit a share of the revenue to the applicable airline .

results of operations the following table sets forth , for the periods presented , certain data from our consolidated statements of operations . the information contained in the table below should be read in conjunction with our consolidated financial statements and related notes . consolidated statement of operations data ( in thousands ) replace_table_token_6_th 68 years ended december 31 , 2013 and 2012 revenue : revenue by segment and percent change for the years ended december 31 , 2013 and 2012 were as follows ( in thousands , except for percent change ) : replace_table_token_7_th commercial aviation north america : ca-na revenue increased to $ 199.1 million for the year ended december 31 , 2013 as compared with $ 134.4 million for the prior year period primarily due to an increase in connectivity service revenue . passengers used gogo connectivity 18.2 million times for the year ended december 31 , 2013 as compared with 13.3 million for the prior year . the increase in ca-na connectivity service revenue was primarily due to increases in connectivity take rate and arps , which resulted in increases in arpa and arpp . arpa increased to $ 8,375 for the year ended december 31 , 2013 as compared with $ 6,981 for the prior year . arpp increased to $ 0.67 for the year ended december 31 , 2013 as compared with $ 0.53 for the prior year .

we generated revenues of $ 205.5 million and $ 185.6 million for the fiscal years ended september 30 , 2012 and 2013 , respectively , and net losses of $ 65.8 million and $ 116.0 million during the same periods , respectively . however , we believe that our accomplishments to date , as well as our strategic plan as described below , will yield long-term growth of revenues and positive net income . during fiscal year 2013 , we continued to explore and capitalize on opportunities to generate additional sources of revenue through new product offerings . we have been primarily seeking to increase the market share of our cylindrical cells and high-power lithium battery cells for electric bicycles and other electric vehicles in china , while battery cell production for cell phones is expected to decrease proportionally while remaining the company 's core business . demand for high-power lithium batteries from the electric car and bicycle market was continuing to increase , resulting in more sales volume of this product in fiscal year 2013.we supplied high-power lithium battery modules to domestic automakers such as chery , brilliance , changan , and faw for use in their electric vehicles , and also supply high-power battery cells to battery module manufacturers such as valence and pisen . we continued to provide high-power lithium battery modules to electric bicycle manufacturers , such as geoby , xds , fsd , and shenling . 35 we focused more on sales of our polymer cells as well . we supplied lithium polymer battery packs to major chinese smartphone brands such as coolpad , k-touch and tinno , and mp3 and other consumer audio electronic devices manufactures such as beautiful enterprise co. , ltd and shinning year co. , ltd , and chinese notebook computer manufacturers for use in tablet computers such as hanvon technology co. , ltd. , or hanvon . we also supplied lithium polymer battery cells to pack battery manufacturers such as shenzhen drn battery co. , ltd , sunwoda electronic co. , ltd , , and varta microbattery . the market demand for this product has been increasing because of the increasing popularity of ultra-thin smartphones and tablet computers . in addition , we continued to pursue opportunities to generate new sources of revenue and reduce costs of revenue . we continued to develop new products with higher selling prices for use in high-end market , and reduced manufacturing costs and purchase costs of raw materials . in the near-term , we anticipate continuing operating challenges due to a number of trends facing our business , including in particular declining demand for replacement battery cells and increasing competition from foreign and domestic battery cell manufacturers in china . these challenges may impede our primary strategy to increase our revenues and gross margin through product diversification and manufacturing efficiencies . in response , we will continue to take cost-cutting actions , including employee reductions . recent development we have net liabilities , a working capital deficiency , accumulated deficit from recurring net losses incurred for the current and prior years and significant short-term debt obligations maturing in less than one year as of september 30 , 2013. we have been suffering severe cash flow deficiencies . because we defaulted on repayment of loans from bank of china , we are experiencing and , we believe , will continue to experience significant difficulties to renew our credit facilities or refinance loans from banks . upon request of bank of china , shenzhen municipal intermediate court has ordered to freeze all of our properties in shenzhen bak industrial park and tianjin industrial park zone near the end of fiscal year 2013 whereby we may not transfer these assets or pledge these assets for any other borrowings . in order to extend the bank loans to various dates through may 2014 , we were required by bank of china to pledge 100 % equity interest in shenzhen bak and almost all of our assets in shenzhen and tianjin , including land use rights and property rights , equipment , accounts receivable and inventories . we repaid our defaulted loans from bank of china on january 9 , 2014 and we expect that our frozen properties will be released by the court shortly . as of september 30 , 2013 , we had access to $ 163.5 million in short-term credit facilities and $ 29.2 million in other lines of credit , all of which were utilized to the extent of short-term bank loans of $ 151.4 million and bills payable of $ 41.4 million . these factors raise substantial doubts about our ability to continue as a going concern . we intend to sell part of our low efficiency assets and appreciating land and properties to repay our short term debts and to provide cash for the development of more promising products such as high power batteries and electric vehicle batteries . we transferred our 100 % equity interest in tianjin meicai to an unrelated party on august 27 , 2013. we also have intention to sell 100 % equity interest in bak international and its subsidiaries ( including all their assets and liabilities ) , and the properties in tianjin . we are in negotiation with the potential buyers about contract terms and clauses . we intend to obtain the approval of our shareholders before we close the transactions . prior to the completion of these disposals , the potential buyers preliminarily agreed in november and december 2013 that they would lend sufficient money to us to help us repay past due and maturing bank loans , on the condition that we make certain pledges and guarantees , including pledging our 100 % equity interest in bak international . on december 17 , 2013 , shenzhen bak entered into a loan agreement , or the loan agreement , with mr. jinghui wang , the sole shareholder of a potential buyer , pursuant to which , mr. wang agreed to lend us in the aggregate amount of rmb370 million ( approximately $ 60.4 million ) initially . story_separator_special_tag government grant income . we present the government subsidies received as part of other income unless the subsidies received are earmarked to compensate a specific expense , which have been accounted for by offsetting the specific expense , such as research and development expense or interest expenses . unearned government subsidies received are deferred for recognition until the criteria for such recognition could be met . grants applicable to land are amortized over the life of the depreciable facilities constructed on it . for research and development expenses , we match and offset the government grants with the expenses of the research and development activities as specified in the grant approval document in the corresponding period when such expenses are incurred . finance costs , net . finance costs consist primarily of interest income , interest on bank loans and net of capitalized interest . income taxes . since shenzhen bak was acknowledged as a “new and high technology enterprise , ” it is entitled to a preferential tax rate of 15 % for each of the calendar years 2011 , 2012 and 2013. bak battery 's income tax rates were 11 % and 24 % for calendar years 2010 and 2011 , respectively , and starting in calendar year 2012 , it was subject to an income tax rate of 25 % . bak battery did not incur any enterprise income tax for the calendar year 2013 due to the current tax losses carried forward from calendar years 2011 and 2012. bak tianjin is currently paying no enterprise income tax due to cumulative tax losses . our canadian , german , indian , and hong kong subsidiaries—bak canada , bak europe , bak india and bak international—are subject to profits tax in their respective countries at rates of 38 % , 25 % , 30 % , and 16.5 % , respectively . however , because they do not have any assessable income derived from or arising in those countries , they have not paid any such tax . 37 pursuant to the provisional regulation of china on value added tax and its implementing rules , all entities and individuals that are engaged in the sale of goods , the provision of repairs and replacement services and the importation of goods in china are generally required to pay vat at a rate of 17 % of the gross sales proceeds received , less any deductible vat already paid or borne by the taxpayer . further , when exporting goods , the exporter is entitled to some or all of the refund of vat that it has already paid or borne . our imported raw materials that are used for manufacturing exported products and deposited in bonded warehouses are exempt from import vat . story_separator_special_tag fiscal year 2013. government grant income . government grant income was approximately $ 132,000 for the year ended september 30 , 2013 , as compared to $ 1.2 million for fiscal year 2012. government grant income for the year ended september 30 , 2013 mainly consisted of the energy conservation and an emission reduction subsidy of $ 113,000 granted by the china financial committee . income tax expense . income tax expense was $ 6.1 million for the year ended september 30 , 2013 , as compared to $ 2.4 million for fiscal year 2012. this was mainly due to the net valuation allowance totaling $ 5.8 million on deferred income tax assets arising on tax losses primarily before the fiscal year 2012. since we continued to experience significant losses for the year ended september 30 , 2013 , we are uncertain that we can generate sufficient profit to claim these deferred tax income benefits in the future . 40 net loss . as a result of the foregoing , we had a net loss of $ 116.0 million for the year ended september 30 , 2013 , compared to a net loss of $ 65.8 million for the year ended september 30 , 2012. liquidity and capital resources we have historically financed our liquidity requirements from a variety of sources , including short-term bank loans , other short-term loans , long-term bank loans and bills payable under bank credit agreements , factoring of bills receivable to banks and issuance of capital stock . due to the weak economic environment in china and stricter lending policy the chinese government placed on the china finance system , it is becoming more difficult for us to obtain new financing from banks . as of september 30 , 2013 , we had cash and cash equivalents of $ 14.0 million . in addition , we had pledged deposits amounting to $ 8.1 million . typically , banks will require borrowers to maintain deposits of approximately 18 % to 52 % of the outstanding bills payable . the individual bills have maturities ranging from six to twelve months which coincide with the periods the cash remains pledged to the banks . as of september 30 , 2013 , we had access to $ 163.5 million in short-term credit facilities and $ 29.2 million in other lines of credit , all of which were utilized . the following table sets forth a summary of our cash flows for the periods indicated : ( all amounts in thousands of u.s. dollars ) replace_table_token_8_th operating activities net cash provided by operating activities was $ 23.6 million in the year ended september 30 , 2013 , as compared with $ 5.2 million in fiscal year 2012. the increase of $ 18.4 million in net cash provided by operating activities was mainly attributable to a subsidy of $ 24.5 million from the management committee of dalian economic zone to finance moving of our production facilities from tianjin to dalian .

results of operations the following table sets forth key components of our results of operations for the years indicated , both in dollars and as a percentage of our revenue . ( all amounts , other than percentages , in thousands of u.s. dollars ) replace_table_token_5_th net revenues . net revenues were $ 185.6 million for the fiscal year ended september 30 , 2013 , as compared to $ 205.5 million for the fiscal year of 2012 , a decrease of $ 20.0 million , or 9.7 % . the following table sets forth the breakdown of our net revenues by battery cell type . ( all amounts in thousands of u.s. dollars ) replace_table_token_6_th 38 the following table sets forth the breakdown of our net revenues from reconditioned and normal products . ( all amounts in thousands of u.s. dollars ) replace_table_token_7_th net revenues from sales of aluminum-case cells decreased to $ 28.8 million in fiscal year 2013 , from $ 76.1 million in the fiscal year 2012 , a decrease of $ 47.3 million , or 62.2 % , resulting from a decrease of 42.0 % in sales volume as well as a decrease of 32.4 % in average selling price . the decrease of sales volume was because of the decrease in demand for aluminum-case cells in view of the popularity of polymer smartphone batteries . also , there was an intense competition in the aluminum-case cells market . we put more effort into developing a high ended aluminum-case product to sizable customers . in order to cope with the market change , we continued to aggressively clear our re-conditioned and low-end products in the year ended september 30 , 2013 , and focus on selling high end products with a high unit selling price . however , our margin was still adversely affected by our clearing of re-conditioned products resulting in a gross loss for this period .

you should read the risk factors set forth in item 1a of this annual report on form 10-k for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . our actual results and the timing of events could differ materially from those anticipated by these forward looking statements . overview we design , develop and manufacture innovative , high-performance aerogel insulation used primarily in the energy infrastructure and building materials markets . we believe our aerogel blankets deliver the best thermal performance of any widely used insulation product available on the market today and provide a combination of performance attributes unmatched by traditional insulation materials . our end-use customers select our products where thermal performance is critical and to save money , reduce energy use , preserve operating assets and protect workers . our insulation is used by oil producers and the owners and operators of refineries , petrochemical plants , lng facilities , power generating assets and other energy infrastructure . our pyrogel and cryogel product lines have undergone rigorous technical validation by industry leading end-users and achieved significant market adoption . we also derive product revenue from the building materials and other end markets . customers in these markets use our aerogels for applications as diverse as wall systems , military and commercial aircraft , trains , buses , appliances , apparel , footwear and outdoor gear . we generate product revenue through the sale of our line of aerogel blankets . we market and sell our products primarily through a sales force based in north america , europe and asia . the efforts of our sales force are supported by a small number of sales consultants with extensive knowledge of a particular market or region . our sales force is responsible for establishing and maintaining customer and partner relationships , delivering highly technical information and ensuring high-quality customer service . our salespeople work directly with end-use customers and engineering firms to promote the qualification , specification and acceptance of our products . we also rely on an existing and well-established channel of qualified insulation distributors and contractors in more than 30 countries around the world that ensures rapid delivery of our products and strong end-user support . our salespeople also work to educate insulation contractors about the technical and operating cost advantages of our aerogel blankets . we also perform research services under contracts with various agencies of the u.s. government , including the department of defense and the department of energy , and other institutions . research performed under contract with government agencies and other institutions enables us to develop and leverage technologies into broader commercial applications . we manufacture our products using our proprietary process and technology at our facility in east providence , rhode island . we completed the construction and start-up of a third production line in the east providence facility during 2015 with a total construction cost of $ 31.8 million . this third production line increased our annual nameplate capacity to approximately 50 million square feet of aerogel blankets . in february 2016 , we announced the planned construction of a second manufacturing facility in statesboro , georgia supported by a package of incentives including outright grants , free land , infrastructure support , tax credits and abatements , training programs and related benefits from the state of georgia and local governmental authorities . during the fourth quarter of 2016 , we 45 elect ed to temporarily delay construction of this facility to better align the capacity expansion with our assessment of demand for the 2018 to 2020 period . during 2016 , we entered into a multi-faceted strategic partnership with basf se to develop and commercialize a set of products optimized to meet the needs of the building materials markets . the strategic partnership offers a near-term commercial opportunity through the supply and sale of our spaceloft a2 product to basf and long-term commercial potential through our joint development efforts with basf focused on innovative products and technologies . 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 . story_separator_special_tag given fixed cost structures and lag times for implementing reductions of certain variable costs , the percentage increase in net loss and loss per share and decrease in adjusted ebitda could be significantly greater than any percentage decrease in revenue . emerging growth company status the jobs act permits an “ emerging growth company ” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies . we have opted out of this provision and , as a result , we comply with new or revised accounting standards as required when they are adopted . this decision to opt out of the extended transition period under the jobs act is irrevocable . components of our results of operations revenue we recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts with various agencies of the u.s. government and other institutions . product revenue is recognized upon transfer of title and risk of loss , which is upon shipment or delivery . the following table sets forth the total revenue for the periods presented : replace_table_token_8_th product revenue accounted for 98 % , 98 % and 97 % of total revenue for the years ended december 31 , 2016 , 2015 and 2014 , respectively . in the near term , 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 . however , we expect a resumption of growth in product revenue in the long term due to increasing market adoption of our line of aerogel blankets in the energy infrastructure market , particularly in the power generation and district energy markets , and increasing penetration of new markets , including the building materials market . we expect that research services revenue will remain a small percentage of total revenue due to limitations on our eligibility to receive contract awards under federal guidelines . a substantial majority of our revenue is generated from a limited number of direct customers , including distributors , contractors , oems , partners and end-use customers . our 10 largest customers accounted for approximately 67 % of our total revenue during the year ended december 31 , 2016 , and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future . in 2016 , sales to reliance industries limited and distribution international , inc. represented 25 % and 15 % of our total revenue , respectively . in 2015 , sales to distribution international , inc. and reliance industries limited represented 14 % and 12 % of our total revenue , respectively . in 2014 , sales to reliance industries limited and distribution 48 int ernational , inc. represented 13 % and 12 % of total revenue , respectively . for each of the periods discussed above , there were no other customers that represented 10 % or more of our total revenues . we conduct business across the globe and a substantial portion of our revenue is generated outside of the united states . total revenue from outside of the united states , based on shipment destination or services location , amounted to $ 82.0 million , or 70 % of our total revenue , $ 78.0 million , or 64 % of our total revenue , and $ 62.6 million or 61 % of our total revenue , in the years ended december 31 , 2016 , 2015 and 2014 , respectively . cost of revenue cost of revenue for our product revenue consists primarily of materials and manufacturing expense , including labor , utilities , maintenance expense and depreciation on manufacturing assets . cost of product revenue is recorded when the related product revenue is recognized . cost of product revenue also includes stock-based compensation of manufacturing employees and shipping costs . material is our most significant component of cost of product revenue and includes fibrous batting , silica materials and additives . material costs as a percentage of product revenue were 41 % , 45 % and 46 % for the years ended december 31 , 2016 , 2015 and 2014 , respectively . material costs as a percentage of product revenue vary from product to product due to differences in average selling prices , material requirements , blanket thicknesses and manufacturing yields . in addition , we provide warranties for our products and record the estimated cost within cost of sales in the period that the related revenue is recorded . as a result , material costs as a percentage of revenue will vary from period to period due to changes in the mix of aerogel products sold or the estimated cost of warranties . however , in general , we expect material costs in the aggregate to decline as a percentage of revenue as we seek to achieve higher selling prices , material sourcing improvements , quality improvements and manufacturing yield enhancements for our aerogel products . manufacturing expense is also a significant component of cost of revenue . manufacturing expense as a percentage of product revenue was 39 % , 36 % and 38 % for the years ended december 31 , 2016 , 2015 and 2014 , respectively . during 2016 , manufacturing expense increased as a percentage of product revenue as a result of the decline in product revenue in 2016 versus the comparable period in 2015 in combination with an increase in manufacturing expense associated with operation of the third production line in east providence for the full year .

results of operations the following tables set forth our results of operations for the periods presented : replace_table_token_9_th ( 1 ) for the years ended december 31 , 2016 and 2015 , interest expense , net consisted primarily of costs related to our revolving credit facility . for the year ended december 31 , 2014 , interest expense , net consisted primarily of fair market value adjustments related to our subordinated notes , senior convertible notes , convertible notes , debt issuance costs and imputed interest on prior obligations . 51 year ended d ecember 31 , 2016 compared to year ended december 31 , 2015 the following tables set forth our results of operations for the periods presented : replace_table_token_10_th revenue replace_table_token_11_th the following chart sets forth product shipments in square feet for the periods presented : year ended december 31 , change 2016 2015 amount percentage product shipments in square feet ( in thousands ) 44,286 42,246 2,040 5 % total revenue decreased by $ 4.8 million , or 4 % , in 2016 to $ 117.7 million from $ 122.5 million in 2015 due principally to a decrease in product revenue associated with the impact of constrained capital investment and low activity levels in the global energy infrastructure market . product revenue decreased by $ 5.0 million , or 4 % , to $ 115.5 million in 2016 from $ 120.5 million in 2015. this decrease was principally the result of a decrease in the sales of our aerogel products in the subsea market and the european energy market offset , in part , by an increase in sales in the asian energy market and the building materials market .

we acquired other businesses in 2016 , 2015 , and 2014 , which is described in note 2 — acquisitions in the notes to the consolidated financial statements included in this annual report on form 10-k. the operating results of these acquired businesses have been included in our consolidated and segment operating results beginning on their respective dates of acquisition . these results were not material to our consolidated or segment results . forward-looking statements in addition to historical information , this annual report on form 10-k contains certain forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 , as amended . forward-looking statements are any statements other than statements of historical fact , including statements regarding our expectations , beliefs , hopes , intentions or strategies regarding the future . in some cases , forward-looking statements can be identified by the use of words such as “ may , ” “ will , ” “ expect , ” “ should , ” “ could , ” “ believe , ” “ plan , ” “ anticipate , ” “ estimate , ” “ predict , ” “ potential , ” “ continue , ” or other words of similar meaning . forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in , or implied by , the forward-looking statements . factors that might cause such a difference include , but are not limited to , those discussed in part 1 , item 1a , risk factors included in this annual report on form 10-k. readers should not place undue reliance on these forward-looking statements , which reflect management 's opinion only as of the date on which they were made . except as required by law , we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur . business overview gartner is the world 's leading information technology research and advisory company . we deliver the technology-related insight necessary for our clients to make the right decisions , every day . from cios and senior information technology ( it ) leaders in corporations and government agencies , to business leaders in high-tech and telecom enterprises and professional services firms , to supply chain professionals , marketing professionals and technology investors , we are the valuable partner to clients in 11,122 distinct enterprises . we work with clients to research , analyze , and interpret the business of it within the context of their individual roles . gartner is headquartered in stamford , connecticut , u.s.a. , and as of december 31 , 2016 , we had 8,813 employees , including 1,922 research analysts and consultants , and clients in over 90 countries . the foundation for all gartner products and services is our independent research on it , supply chain , and digital marketing initiatives . the findings from this research are delivered through our three business segments – research , consulting and events : research provides objective insight on critical and timely technology and supply chain initiatives for cios , other it professionals , supply chain leaders , marketing and other professionals , as well as technology companies and the institutional investment community , through reports , briefings , proprietary tools , access to our analysts , peer networking services and membership programs that enable our clients to make better decisions about their it , supply chain and marketing investments . consulting provides customized solutions to unique client needs through on-site , day-to-day support , as well as proprietary tools for measuring and improving it performance with a focus on cost , performance , efficiency , and quality . events provides it , supply chain , marketing and business professionals the opportunity to attend various symposia , conferences and exhibitions to learn , contribute and network with their peers . from our flagship event symposium/itxpo , to summits focused on specific technologies and industries , to experimental workshop-style seminars , our events distill the latest gartner research into applicable insight and advice . for more information regarding gartner and our products and services , visit gartner.com . 18 19 business measurements we believe the following business measurements are important performance indicators for our business segments : business segment business measurements research total contract value represents the value attributable to all of our subscription-related contracts . it is calculated as the annualized value of all contracts in effect at a specific point in time , without regard to the duration of the contract . total contract value primarily includes research deliverables for which revenue is recognized on a ratable basis , as well as other deliverables ( primarily events tickets ) for which revenue is recognized when the deliverable is utilized . research contract value represents the value attributable to all of our subscription-related research products that recognize revenue on a ratable basis . contract value is calculated as the annualized value of all subscription research contracts in effect at a specific point in time , without regard to the duration of the contract . client retention rate represents a measure of client satisfaction and renewed business relationships at a specific point in time . client retention is calculated on a percentage basis by dividing our current clients , who were also clients a year ago , by all clients from a year ago . client retention is calculated at an enterprise level , which represents a single company or customer . wallet retention rate represents a measure of the amount of contract value we have retained with clients over a 12-month period . wallet retention is calculated on a percentage basis by dividing the contract value of clients , who were clients one year ago , by the total contract value from a year ago , excluding the impact of foreign currency exchange . story_separator_special_tag our significant accounting policies are described in note 1 in the notes to the consolidated financial statements included in this form 10-k. management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates . specific risks for these critical accounting policies are described below . 21 the preparation of our consolidated financial statements requires us to make estimates and assumptions about future events . we develop our estimates using both current and historical experience , as well as other factors , including the general economic environment and actions we may take in the future . we adjust such estimates when facts and circumstances dictate . however , our estimates may involve significant uncertainties and judgments and can not be determined with precision . in addition , these estimates are based on our best judgment at a point in time and as such these estimates may ultimately differ materially from actual results . on-going changes to our estimates could be material and would be reflected in the company 's consolidated financial statements in future periods . our critical accounting policies are as follows : revenue recognition — revenue is recognized in accordance with the requirements of u.s. gaap as well as sec staff accounting bulletin no . 104 , revenue recognition ( “ sab no . 104 ” ) . revenue is only recognized once all required criteria for revenue recognition have been met . revenue by significant source is accounted for as follows : research revenues are mainly derived from subscription contracts for research products . the related revenues are deferred and recognized ratably over the applicable contract term . fees derived from assisting organizations in selecting the right business software for their needs is recognized when the leads are provided to vendors . consulting revenues are principally generated from fixed fee and time and material engagements . revenues from fixed fee contracts are recognized on a proportional performance basis . revenues from time and materials engagements are recognized as work is delivered and or services are provided . revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all of the conditions related to their payment . events revenues are deferred and then recognized upon the completion of the related symposium , conference , summit , or exhibition . the majority of research contracts are billable upon signing , absent special terms granted on a limited basis from time to time . all research contracts are non-cancelable and non-refundable , except for government contracts that may have cancellation or fiscal funding clauses . it is our policy to record the amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue , since the contract represents a legally enforceable claim . uncollectible fees receivable — we maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve . provisions are charged against earnings , either as a reduction in revenues or an increase to expense . the determination of the allowance for losses is based on historical loss experience , an assessment of current economic conditions , the aging of outstanding receivables , the financial health of specific clients , and probable losses . this evaluation is inherently judgmental and requires estimates . these valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available . circumstances that could cause our valuation reserves to increase include changes in our clients ' liquidity and credit quality , other factors negatively impacting our clients ' ability to pay their obligations as they come due , and the effectiveness of our collection efforts . the following table provides our total fees receivable and the related allowance for losses ( in thousands ) as of : replace_table_token_3_th goodwill and other intangible assets — the company evaluates recorded goodwill in accordance with financial accounting standards board ( `` fasb '' ) accounting standards codification ( `` asc '' ) topic no . 350 , which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable . in addition , an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment . among the factors that could trigger an impairment review are our current operating results relative to our annual plan or historical performance ; changes in our strategic plan or use of our assets ; restructuring charges or other changes in our business segments ; competitive pressures and changes in the general economy or in the markets in which we operate ; and a significant decline in our stock price and our market capitalization relative to our net book value . 22 asc topic no . 350 requires an annual assessment of the recoverability of recorded goodwill , which can be either quantitative or qualitative in nature , or a combination of the two . both methods require the use of estimates which in turn contain judgments and assumptions regarding future trends and events . as a result , both the precision and reliability of the resulting estimates are subject to uncertainty . if our annual goodwill impairment evaluation determines that the fair value of a reporting unit is less than its related carrying amount , we may recognize an impairment charge against earnings . among the factors we consider in a qualitative assessment are general economic conditions and the competitive environment ; actual and projected reporting unit financial performance ; forward-looking business measurements ; and external market assessments .

segment results we evaluate reportable segment performance and allocate resources based on gross contribution margin . gross contribution is defined as operating income excluding certain cost of services and product development charges , sg & a , depreciation , acquisition and integration charges , and amortization of intangibles . gross contribution margin is defined as gross contribution as a percentage of revenues . research the following table presents the financial results and business measurements of our research segment as of and for the year ended december 31 : replace_table_token_10_th ( 1 ) in thousands . ( 2 ) total contract value represents the value attributable to all of our subscription-related contracts . it is calculated as the annualized value of all contracts in effect at a specific point in time , without regard to the duration of the contract . total contract value primarily includes research deliverables for which revenue is recognized on a ratable basis , as well as other deliverables ( primarily events tickets ) for which revenue is recognized when the deliverable is utilized . ( 3 ) research contract value represents the value attributable to all of our subscription-related research products that recognize revenue on a ratable basis . contract value is calculated as the annualized value of all subscription research contracts in effect at a specific point in time , without regard to the duration of the contract . 2016 versus 2015 research segment revenues increased 16 % in 2016 compared to 2015. excluding the impact of foreign currency exchange , research revenues increased 17 % in 2016. the segment gross contribution margin was 69 % in both annual periods . the contribution margin remained at 69 % in spite of a 14 % increase in segment headcount , mostly driven by new hires and to a lesser extent the additional employees resulting from our acquisitions . the headcount increase reflects our continuing investment in this business .

as you read the md & a , it may be helpful to refer to information in item 1 , “ business , ” item 6 , “ selected financial data , ” and our consolidated financial statements , which present the results of our operations for fiscal 2020 , 2019 and 2018 as well as part i , item 1a , “ risk factors ” and note 10 of our consolidated financial statements titled , `` commitments and contingencies '' for a discussion of some of the matters that can adversely affect our business and results of operations . this information , discussion , and disclosure may be important to you in making decisions about your investments in steris . information on our financial condition and results of our operations for our 2018 fiscal year period can be found in item 7 titled , “ management 's discussion and analysis of financial condition and results of operations '' , of our annual report on form 10-k for the fiscal year ended march 31 , 2019 , filed with the sec on may 30 , 2019. financial measures in the following sections of the md & a , we may , at times , refer to financial measures that are not required to be presented in the consolidated financial statements under u.s. gaap . we sometimes use the following financial measures in the context of this report : backlog ; debt-to-total capital ; and days sales outstanding . we define these financial measures as follows : backlog – we define backlog as the amount of unfilled capital equipment purchase orders at a point in time . we use this figure as a measure to assist in the projection of short-term financial results and inventory requirements . debt-to-total capital – we define debt-to-total capital as total debt divided by the sum of total debt and shareholders ' equity . we use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth . days sales outstanding ( “ dso ” ) – we define dso as the average collection period for accounts receivable . it is calculated as net accounts receivable divided by the trailing four quarters ' revenues , multiplied by 365 days . we use this figure to help gauge the quality of accounts receivable and expected time to collect . we , at times , may also refer to financial measures which are considered to be “ non-gaap financial measures ” under sec rules . we have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance . these financial measures should not be considered an alternative to measures required by accounting principles generally accepted in the united states . our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies . additional information regarding these financial measures , including reconciliations of each non- gaap financial measure , is available in the subsection of md & a titled , `` non-gaap financial measures . '' 22 revenues– defined as required by regulation s-x , we separately present revenues generated as either product revenues or service revenues on our consolidated statements of income for each period presented . when we discuss revenues , we may , at times , refer to revenues summarized differently than the regulation s-x requirements . the terminology , definitions , and applications of terms that we use to describe revenues may be different from terms used by other companies . we use the following terms to describe revenues : revenues – our revenues are presented net of sales returns and allowances . product revenues – we define product revenues as revenues generated from sales of consumable and capital equipment products . service revenues – we define service revenues as revenues generated from parts and labor associated with the maintenance , repair , and installation of our capital equipment . service revenues also include hospital sterilization services , instrument and scope repairs , and linen management as well as revenues generated from contract sterilization and laboratory services offered through our applied sterilization technologies segment . capital equipment revenues – we define capital equipment revenues as revenues generated from sales of capital equipment , which includes steam sterilizers , low temperature liquid chemical sterilant processing systems , including system 1 and 1e , washing systems , vhp ® technology , water stills , and pure steam generators ; surgical lights and tables ; and integrated or . consumable revenues – we define consumable revenues as revenues generated from sales of the consumable family of products , which includes system 1 and 1e consumables , v-pro consumables , gastrointestinal endoscopy accessories , sterility assurance products , skin care products , cleaning consumables , barrier product solutions and surgical instruments . recurring revenues – we define recurring revenues as revenues generated from sales of consumable products and service revenues . general overview and executive summary steris plc is a leading provider of infection prevention and other procedural products and services . our mission is to help our customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe . we offer our customers a unique mix of innovative consumable products , such as detergents , gastrointestinal ( `` gi '' ) endoscopy accessories , barrier product solutions , and other products and services , including : equipment installation and maintenance , microbial reduction of medical devices , instrument and scope repair solutions , laboratory testing services , on-site and off-site reprocessing , and capital equipment products , such as sterilizers and surgical tables , and connectivity solutions such as operating room ( “ or ” ) integration . story_separator_special_tag the increase in free cash flow is primarily due to the improvement in cash from operations . our debt-to-total capital ratio was 25.3 % at march 31 , 2020 . during the year , we increased our quarterly dividend for the fourteenth consecutive year to $ 0.37 per share per quarter . outlook . in fiscal 2021 and beyond , we expect to continue to manage our costs , grow our business with internal product and service development , invest in greater capacity , and augment these value creating methods with potential acquisitions of additional products and services . however , the covid-19 pandemic began to impact our business late in fiscal 2020. the coronavirus pandemic and related public health recommendations and mandated precautions to mitigate the spread of covid-19 , including deferral of medical procedures and treatments and shelter-in-place orders or similar measures , is negatively affecting , and is expected to continue to affect some of our operations which would impact our financial position and cash flows in fiscal 2021. we have experienced and expect to continue to experience unpredictable fluctuations in demand for certain of our products and services , including some products and services that are experiencing increased demand . we can not predict the ultimate impact that the covid-19 pandemic and related actions will have on our customers ' operations , financial position and cash flows and therefore , on the demand for our products and services . further , the broader economic impact of the covid-19 pandemic response could cause interest rate variability and generate unanticipated fluctuations in currency rates that impact our revenues and costs outside of the united states , creating variability in our results . as a result , we are unable to estimate the ultimate impact of the covid-19 pandemic to our consolidated results of operations , financial position and cash flows for fiscal 2021 and beyond . 24 non-gaap financial measures we , at times , refer to financial measures which are considered to be “ non-gaap financial measures ” under sec rules . we , at times , also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results , in order to provide meaningful comparisons between the periods presented . these non-gaap financial measures are not intended to be , and should not be , considered separately from or as an alternative to the most directly comparable gaap financial measures . these non-gaap financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the board of directors in their financial analysis and operational decision-making . these amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented . we believe that the presentation of these non-gaap financial measures , when considered along with our gaap financial measures and the reconciliation to the corresponding gaap financial measures , provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure . it is important for the reader to note that the non-gaap financial measure used may be calculated differently from , and therefore may not be comparable to , a similarly titled measure used by other companies . we define free cash flow as net cash provided by operating activities as presented in the consolidated statements of cash flows less purchases of property , plant , equipment , and intangibles plus proceeds from the sale of property , plant , equipment , and intangibles , which are also presented within investing activities in the consolidated statements of cash flows . we use this as a measure to gauge our ability to pay cash dividends , fund growth outside of core operations , fund future debt principal repayments , and repurchase shares . the following table summarizes the calculation of our free cash flow for the years ended march 31 , 2020 and 2019 : replace_table_token_3_th results of operations the covid-19 pandemic began to impact our business late in fiscal 2020 and therefore did not have a material impact on our fiscal 2020 results of operations . in the following subsections , we discuss our earnings and the factors affecting them . we begin with a general overview of our operating results and then separately discuss earnings for our operating segments . 25 fiscal 2020 as compared to fiscal 2019 revenues . the following table compares our revenues , in total and by type and geography , for the year ended march 31 , 2020 to the year ended march 31 , 2019 : replace_table_token_4_th revenues increased $ 248.7 million , or 8.9 % , to $ 3,030.9 million for the year ended march 31 , 2020 , as compared to $ 2,782.2 million for the year ended march 31 , 2019 . this increase reflects organic growth in all business segments and favorable pricing , which was partially offset by unfavorable fluctuations in currencies . service revenues for fiscal 2020 increased $ 142.0 million , or 9.6 % over fiscal 2019 , reflecting growth in all business segments . consumable revenues for fiscal 2020 increased $ 66.7 million , or 11.0 % , over fiscal 2019 , reflecting growth in the healthcare products and life sciences segments . capital equipment revenues for fiscal 2020 increased by $ 40.1 million , or 5.8 % , over fiscal 2019 , reflecting strong shipment volumes in the healthcare products and life science business segments . ireland revenues for fiscal 2020 were $ 63.8 million , representing an increase of $ 7.0 million , or 12.4 % , over fiscal 2019 revenues of $ 56.8 million , reflecting strong growth in service revenues .

business segment results of operations . we operate and report in four reportable business segments : healthcare products , healthcare specialty services , life sciences , and applied sterilization technologies . non-allocated operating costs that support the entire company and items not indicative of operating trends are excluded from segment operating income . our healthcare products segment offers infection prevention and procedural solutions for healthcare providers worldwide , including consumable products , equipment maintenance and installation services , and capital equipment . our healthcare specialty services segment provides a range of specialty services for healthcare providers including hospital sterilization services and instrument and scope repairs . our life sciences segment offers consumable products , equipment maintenance , specialty services and capital equipment primarily for pharmaceutical manufacturers . our applied sterilization technologies ( `` ast '' ) segment provides contract sterilization and testing services for medical device and pharmaceutical manufacturers . we disclose a measure of segment income that is consistent with the way management operates and views the business . the accounting policies for reportable segments are the same as those for the consolidated company . for more information regarding our segments please refer to note 11 to our consolidated financial statements titled “ business segment information , ” and item 1 , “ business ” . 28 the following table compares business segment and corporate and other revenues and operating income for the year ended march 31 , 2020 to the year ended march 31 , 2019 : replace_table_token_10_th ( 1 ) for more information regarding our recent acquisitions and divestitures see note 18 titled , `` business acquisitions and divestitures '' . amortization of purchased intangible assets fiscal 2019 total includes an impairment charge of $ 16.2 million , see note 3 titled , `` goodwill and intangible assets '' , for more information . ( 2 ) acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions . ( 3 ) costs incurred in connection with the redomiciliation and subsequent tax restructuring .

during 2000 , vist realty solutions , llc was formed as a subsidiary of vist bank for the purpose of providing title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry . on october 29 , 2008 , vist realty solutions , llc dissolved its operations by selling its partnership interest for an amount which approximated its initial capital contribution . in may 2002 , the company 's subsidiary , vist bank , jointly formed vist mortgage holdings , llc with another real estate company . vist bank 's initial investment was $ 15,000. in may 2004 , vist bank dissolved its investment with the real estate company . in may 2004 , vist bank formed vist mortgage holdings , llc to provide mortgage brokerage services , including , without limitation , any activity in which a mortgage broker may engage . it is operated as a permissible `` affiliated business arrangement '' within the meaning of the real estate settlement procedures act of 1974. vist mortgage holdings , llc is currently inactive . on september 1 , 2008 , the company paid cash of $ 1.8 million for fisher benefits consulting , an insurance agency specializing in group employee benefits , located in pottstown , pennsylvania . fisher benefits consulting has become a part vist insurance . as a result of the acquisition , vist insurance continues to expand its retail and commercial insurance presence in southeastern pennsylvania counties . the results of fisher benefits consulting operations have been included in the company 's consolidated financial statements since september 2 , 2008. included in the $ 1.8 million purchase price for fisher benefits consulting was goodwill of $ 0.2 million and identifiable intangible assets of $ 1.6 million . contingent payments totaling $ 750,000 , or $ 250,000 for each of the first three years following the acquisition , will be paid if certain predetermined revenue target ranges are met . these payments are expected to be added to goodwill when paid . the contingent payments could be higher or lower depending upon whether actual revenue earned in each of the three years following the acquisition is less than or exceeds the predetermined revenue goals . contingent payments totaling $ 250,000 were paid in 2009. on october 1 , 2004 , the company acquired 100 % of the outstanding voting shares of madison bancshares group , ltd. ( `` madison '' ) , the holding company for madison bank , a pennsylvania state-chartered commercial bank and its mortgage banking division , vist mortgage . madison bank has become a division of vist bank . for each share of madison common stock , the company exchanged 0.6028 shares of the company 's common stock resulting in the issuance of 1,311,010 shares of the company 's common stock and a cash payment of $ 11,790. the total purchase price was $ 34.6 million . the value of the common shares issued was determined based on the average market price of the company 's common shares five days before and five days after the date of the announcement . in connection with the transaction , madison paid cash of $ 7.1 million and recognized the expense for 699,122 madison options and warrants outstanding at september 30 , 2004. in addition , madison paid cash of $ 2.3 million and recognized the expense for the termination of existing contractual arrangements . critical accounting policies disclosure of the company 's significant accounting policies is included in note 1 to the consolidated financial statements . certain of these policies are particularly sensitive requiring significant judgments , estimates and assumptions to be made by management . additional information is contained in management 's discussion and analysis and the notes to the consolidated financial statements for the most sensitive of these issues . these include , the provision and allowance for loan losses , revenue recognition for insurance activities , stock based compensation , derivative financial instruments , goodwill 24 and intangible assets and investment securities other-than-temporary impairment evaluation . these discussions , analysis and disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the company and its results of operations . allowance for loan losses the provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio . management 's judgment is based on the evaluation of individual loans past experience , the assessment of current economic conditions , and other relevant factors . loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance . the allowance for loan losses has been established based on certain impaired loans where it is recognized that the cash flows are discounted or where the fair value of the collateral is lower than the carrying value of the loan . the company has also established an allowance on classified loans which are not impaired but are included in categories such as `` doubtful '' , `` substandard '' and `` special mention '' . though being classified to one of these categories does not necessarily mean that the loan is impaired , it does indicate that the loan has identified weaknesses that increase its credit risk of loss . the company has also established a general allowance on non-classified and non-impaired loans to recognize the probable losses that are associated with lending in general , though not due to a specific problem loan . management uses significant estimates to determine the allowance for loan losses . consideration is given to a variety of factors in establishing these estimates including current economic conditions , diversification of the loan portfolio , delinquency statistics , borrowers ' perceived financial and managerial strengths , the adequacy of underlying collateral , if collateral dependent , or present value of future cash flows , and other relevant factors . story_separator_special_tag the company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken . the company periodically measures this risk by using value-at-risk methodology . during 2002 , the company entered into an interest rate swap to convert its fixed rate trust preferred securities to floating rate debt . both the interest rate swap and the related debt are recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations ( see note 19 of the consolidated financial statements ) . during 2003 , the company also entered into an interest rate cap agreement to limit its exposure to the variable rate interest achieved through the interest rate swap . the interest rate cap was not designated as a cash flow hedge and thus , it is carried on the balance sheet in other assets at fair value 26 through adjustments to other income in the consolidated results of operations ( see note 19 of the consolidated financial statements ) . during 2008 , the company entered into two interest rate swaps to manage its exposure to interest rate risk . the interest rate swap transactions involved the exchange of the company 's floating rate interest rate payment on its $ 15 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount . notional principal amounts are often used to express the magnitude of these transactions , but the amounts due or payable are much smaller . these interest rate swaps are recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations ( see note 19 of the consolidated financial statements ) . goodwill and other intangible assets the company has goodwill and other intangible assets of $ 44.2 million at december 31 , 2009 related to the acquisition of its banking , insurance and wealth management companies . the company utilizes a third party valuation service to perform its annual goodwill impairment test in the fourth quarter of each calendar year . a fair value is determined for the banking and financial services , insurance services and investment services reporting units . if the fair value of the reporting business unit exceeds the book value , no write down of goodwill is necessary ( a step one evaluation ) . if the fair value is less than the book value , an additional test ( a step two evaluation ) is necessary to assess goodwill for potential impairment . as a result of the goodwill impairment valuation analysis , the company determined that no goodwill impairment write-off for any of its reporting units was necessary during 2009 , 2008 and 2007 , however a step two goodwill impairment evaluation test was required for the banking and financial services reporting unit . reporting unit valuation is inherently subjective , with a number of factors based on assumption and management judgments . among these are future growth rates , discount rates and earnings capitalization rates . changes in assumptions and results due to economic conditions , industry factors and reporting business unit performance could result in different assessments of the fair value and could result in impairment charges in the future . framework for interim impairment analysis the company utilizes the following framework from fasb asc 350 `` intangibles-goodwill & other '' ( `` asc 350 '' ) to evaluate whether an interim goodwill impairment test is required , given the occurrence of events or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount . examples of such events or circumstances include : a significant adverse change in legal factors or in the business climate ; an adverse action or assessment by a regulator ; unanticipated competition ; a loss of key personnel ; a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of ; the testing for recoverability under fasb asc 860 , `` accounting for transfers of financial assets and repurchase financing transactions , '' of a significant asset group within a reporting unit ; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit . when applying the framework above , management additionally considers that a decline in the company 's market capitalization could reflect an event or change in circumstances that would more likely than not reduce the fair value of reporting business unit below its carrying value . however , in considering potential impairment of our goodwill , management does not consider the fact that our 27 market capitalization is less than the carrying value of our company to be determinative that impairment exists . this is because there are factors , such as our small size and small market capitalization , which do not take into account important factors in evaluating the value of our company and each reporting business unit , such as the benefits of control or synergies . consequently , management 's annual process for evaluating potential impairment of our goodwill ( and evaluating subsequent interim period indicators of impairment ) involves a detailed level analysis and incorporates a more granular view of each reporting business unit than aggregate market capitalization , as well as significant valuation inputs . annual and interim impairment tests and results management estimates fair value annually utilizing multiple methodologies which include discounted cash flows , comparable companies and comparable transactions . each valuation technique requires management to make judgments about inputs and assumptions which form the basis for financial projections of future operating performance and the corresponding estimated cash flows . the analyses performed require the use of objective and subjective inputs which include market-price of non-distressed financial institutions , similar transaction multiples , and required rates of return .

results of operations net loss available to common shareholders for 2009 was $ 1,042,000 or ( $ 0.18 ) per share diluted compared to net income available to common shareholders of $ 565,000 or $ 0.10 per share diluted for 2008 and net income available to common shareholders of $ 7.5 million or $ 1.31 per share diluted for 2007. these changes are a result of preferred stock dividends and discount accretion , increased provision for loan losses , decreased investment securities losses and by changes in other income each year , net of changes in other expenses . details regarding changes in net income and diluted earnings per share follows . return on average assets was 0.05 % for 2009 , 0.05 % for 2008 and 0.70 % for 2007. return on average shareholders ' equity was 0.51 % for 2009 , 0.54 % for 2008 , and 7.15 % for 2007. included in the operating results for the twelve months ended december 31 , 2009 was a pre-tax loss of $ 2.5 million , or $ 1.6 million after-tax , relating to other-than-temporary impairment ( `` otti '' ) in the company 's available for sale investment portfolio . included in the operating results for the twelve months ended december 31 , 2008 were realized losses of approximately $ 7.3 million , or $ 4.8 million after-tax , relating to the company 's perpetual preferred stock associated with the federal takeover of fannie mae and freddie mac . 30 net interest income net interest income is a primary source of revenue for the company . this income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds , such as repurchase agreements and borrowings from the federal home loan bank and other correspondent banks .

all note references in this md & a refer to the notes to the consolidated and combined financial statements included in item 8. of this form 10-k. tabular amounts are displayed in millions of u.s. dollars except per share and unit count amounts , or as otherwise specifically identified . percentages may not recompute due to rounding . basis of presentation the company separated from yum on october 31 , 2016 , becoming an independent , publicly traded company as a result of a pro rata distribution of all outstanding shares of yum china common stock to shareholders of yum . accordingly , the financial statements presented in this form 10-k represent ( i ) for periods prior to october 31 , 2016 , the combined financial statements of yum 's china businesses and operations when yum china was a wholly owned subsidiary of yum ( referred to as “ combined financial statements ” ) and ( ii ) for periods subsequent to october 31 , 2016 , the consolidated financial statements of the company as a separate publicly traded company following its separation from yum ( referred to as “ consolidated financial statements ” ) . throughout this form 10-k when we refer to the “ financial statements , ” we are referring to the “ consolidated and combined financial statements , ” unless the context indicates otherwise . the combined financial statements have been prepared on a standalone basis and are derived from yum 's consolidated financial statements and underlying accounting records . transactions between the company and yum that were not cash settled were considered to be effectively settled at the time the transactions are recorded . the combined financial statements include all revenues , costs , assets and liabilities directly attributable to the company either through specific identification or allocation . the combined statements of income include allocations for certain of yum 's corporate functions which provide a direct benefit to the company . these costs have been allocated based on company system sales relative to yum 's global system sales . all allocated costs have been deemed to have been paid to yum in the period in which the costs were recorded . the company considers the cost allocation methodology and results to be reasonable for the periods prior to october 31 , 2016. however , the allocations may not be indicative of the actual expense that the company would have experienced had the company operated as an independent , publicly traded company for the periods prior to october 31 , 2016. upon the separation from yum , parent company investment was adjusted as a result of settlement of certain assets and liabilities with yum and formed yum china 's common stock and additional paid-in capital . see note 2 to the consolidated and combined financial statements for further information . overview we are the largest restaurant company in china , with over 7,500 restaurants as of year-end 2016 , and $ 6.8 billion of revenue , net income of $ 502 million and $ 1.13 billion of adjusted ebitda in 2016. our growing restaurant base consists of china 's leading restaurant concepts , including kfc , pizza hut casual dining , pizza hut home service , east dawning , little sheep and taco bell . following our separation from yum , we have the exclusive right to operate and sub-license the kfc , pizza hut and , subject to achieving certain agreed upon milestones , taco bell brands in china , excluding hong kong , taiwan and macau , and we own the east dawning and little sheep marks outright . we were the first major global restaurant brand to enter china in 1987 and we have developed deep operating experience in the market . we have since grown to become one of china 's largest retail developers covering over 1,100 cities and opening an average of approximately two new restaurants per day over the past five years . 57 2016 form 10-k our kfc restaurants are the leading qsr brand in the prc in terms of system sales and number of restaurants . as of december 31 , 2016 , kfc operated over 5 , 2 00 restaurants in over 1,100 cities across china . measured by number of restaurants , we believe kfc has a two-to-one lead over the nearest western qsr competitor in china and kfc continues to grow in both large and small cities . similarly , pizza hut casual dining is the leading cdr concept in china as measured by system sales and number of restaurants . we believe pizza hut casual dining , with over 1 , 7 00 restaurants in over 400 cities as of december 31 , 2016 , has an approximately six-to-one lead in terms of restaurants over its nearest western cdr competitor in china . the operations of each of the concept represent an operating segment of the company within these consolidated and combined financial statements . we have two reportable segments : kfc and pizza hut casual dining . our remaining operating segments , including the operations of pizza hut home service , east dawning , little sheep and taco bell , are combined and referred to as all other segments , as those operating segments are insignificant both individually and in the aggregate . we intend for this md & a to provide the reader with information that will assist in understanding our results of operations , including metrics that management uses to assess the company 's performance . throughout this md & a , we discuss the following performance metrics : the company provides certain percentage changes excluding the impact of foreign currency translation ( “ f/x ” ) . these amounts are derived by translating current year results at prior year average exchange rates . we believe the elimination of the f/x impact provides better year-to-year comparability without the distortion of foreign currency fluctuations . story_separator_special_tag franchise fees and income in 2016 , the increase in franchise fees and income , excluding the impact of f/x , was driven by t he impact of refranchising . in 2015 , the increase in franchise fees and income , excluding the impact of f/x , was driven by the impact of refranchising and net new unit growth , partially offset by franchise same-store sales declines of 9 % . g & a expenses in 2016 , the increase in g & a expenses , excluding the impact of f/x , was driven by higher compensation costs due to wage inflation and higher incentive compensation associated with better operating results of kfc . in 2015 , the increase in g & a expenses , excluding the impact of f/x , was driven by higher compensation costs due to wage inflation . 65 2016 form 10-k operating profit in 2016 , the increase in operating profit , excluding the impact of f/x , was driven by the impact of same-store sales growth , lower restaurant operating costs , including the favorable impact of the retail tax structure reform and net new unit growth , partially offset by higher g & a expenses . in addition , the leap year in 2016 added an extra day in february resulting in incremental operating profit of $ 5 million . in 2015 , the increase in operating profit , excluding the impact of f/x , was driven by net new unit growth and lower restaurant operating costs , partially offset by same-store sales declines and higher closure and impairment expenses . pizza hut casual dining replace_table_token_16_th replace_table_token_17_th replace_table_token_18_th replace_table_token_19_th replace_table_token_20_th 66 2016 form 10-k company sales and restaurant profit the changes in company sales and restaurant profit were as follows : replace_table_token_21_th replace_table_token_22_th in 2016 , the increase in company sales and restaurant profit associated with store portfolio actions was driven by net new unit growth . significant other factors impacting company sales and or restaurant profit were the favorable impact from retail tax structure reform ( primarily in cost of sales ) and commodity deflation of 3 % , partially offset by company same-store sales declines of 7 % and higher labor costs including wage inflation of 9 % . in 2015 , the increase in company sales and restaurant profit associated with store portfolio actions was driven by net new unit growth . significant other factors impacting company sales and or restaurant profit were wage rate inflation of 8 % and company same-store sales declines of 5 % , partially offset by labor efficiencies and lower utilities . g & a expenses in 2016 , the increase in g & a expenses , excluding the impact of f/x , was driven by higher compensation costs due to wage rate inflation and higher headcount . in 2015 , the increase in g & a expenses , excluding the impact of f/x , was driven by higher compensation costs due to wage rate inflation and higher headcount . operating profit in 2016 , the increase in operating profit , excluding the impact of f/x , was driven by lower restaurant operating costs , including the favorable impact of the retail tax structure reform , and net new unit growth , partially offset by same-store sales declines of 7 % and higher g & a expenses . in 2015 , the decrease in operating profit , excluding the impact of f/x , was driven by higher restaurant operating costs , same-store sales declines and higher g & a expenses , partially offset by net new unit growth . 67 2016 form 10-k all other segments all other segments includes pizza hut home service , east dawning , little sheep and taco bell . replace_table_token_23_th in 2016 , the decrease in total revenues , excluding the impact of f/x , was driven by same-store sales declines of 5 % and unit closures and refranchising related to little sheep , partially offset by net new unit growth . in 2015 , the decrease in total revenues , excluding the impact of f/x , was driven by unit closures , refranchising and same-store sales declines related to little sheep units , partially offset by net new unit growth and same-store sales growth for pizza hut home service . in 2016 , the decrease in operating loss , excluding the impact of f/x , was driven by lower operating losses at pizza hut home service and little sheep . in 2015 , the decrease in operating loss , excluding the impact of f/x , was driven by lower operating losses at little sheep . corporate & unallocated replace_table_token_24_th corporate g & a expenses in 2016 , the increase in corporate g & a expenses was driven by higher compensation costs due to higher incentive compensation associated with better operating results of the company and wage inflation , and the expenses associated with becoming an independent , publicly listed company . in 2015 , the increase in corporate g & a expenses was driven by higher compensation costs due to wage inflation and higher headcount . 68 2016 form 10-k unallocated closures and impairments in 2016 , unallocated closures and impairments represent the restaurant-level incremental impairment expense of $ 17 million associated with the 3 % license fee paid to yum which was not included in our restaurant impairment indicator and recoverability tests prior to the separation . see note 5. other unallocated in 2016 , other unallocated primarily includes the reversal of loss associated with the disposal of a corporate aircraft and insurance recoveries related to the 2012 poultry supply incident . see note 7. in 2015 , other unallocated primarily includes the write-down related to our decision to dispose of a corporate aircraft , partially offset by insurance recoveries related to the 2012 poultry supply incident . interest income , net the increase in interest income , net for 2016 was driven by higher returns on short-term investments and time deposits . the decrease in interest income , net for 2015 was driven by lower returns on short-term investments .

summary all comparisons within this summary are versus the same period a year ago and exclude the impact of special items . all system sales growth , same-store sales growth and operating profit comparisons exclude the impact of foreign currency . refer to item 1. business for a discussion on the seasonality of our operations . in 2014 , the company 's sales and profits were significantly impacted by adverse publicity surrounding improper food handling practices by a former supplier . specifically , on july 20 , 2014 , an undercover report was televised in china depicting improper food handling practices by supplier shanghai husi , a division of osi , which is a large , global supplier to many in the restaurant industry . this triggered extensive news coverage in china that shook consumer confidence and impacted brand usage . immediately following the incident , we experienced a significant , negative impact to sales and profits at both kfc and pizza hut casual dining . for further information about the potential impact of food safety risks on our business , see “ item 1a . risk factors—risks related to our business and industry—food safety and food-borne illness concerns may have an adverse effect on our reputation and business. ” in 2015 , our sales and profits continued to be negatively impacted by the adverse publicity in july 2014. sales initially turned significantly positive as we lapped the supplier incident , but overall sales in the second half of 2015 trailed our expectations , particularly at pizza hut casual dining . in the second half of 2015 , kfc grew same-store sales 3 % in the third quarter and 6 % in the fourth quarter , which was below our forecasts . over the same period , pizza hut casual dining experienced same-store sales declines of 1 % in the third quarter and 8 % in the fourth quarter .

growth assumptions - multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives , client service and retention standards , market share changes , historical performance , and industry and economic trends , among other considerations . discount rate assumptions - discount rates are estimated based on the wacc , which combines the required return on equity and considers the risk-free interest rate , market risk premium , small stock risk premium and a company specific risk premium , with the cost of debt , based on rated corporate bonds , adjusted using an income tax factor . estimated fair value and sensitivitie s - the estimated fair value of each reporting unit is derived from the valuation techniques described above . the estimated fair value of each reporting unit is analyzed in relation to numerous market and historical factors , including current economic and market conditions , company-specific growth opportunities and guideline company information . indefinite-lived intangible assets - indefinite-lived intangible assets are reviewed for potential impairment on an annual basis , in the fourth quarter , or more frequently when events or circumstances indicate that such assets may be impaired , by comparing their estimated fair values to their carrying values . an impairment charge is recognized when the carrying value of an indefinite-lived intangible asset exceeds its estimated fair value . the company uses the “ relief from royalty ” method to estimate the fair value of trade name intangible assets for impairment . the primary assumptions used to estimate the present value of cash flows from such assets include sales projections and growth rates being applied to a prevailing market-based royalty rate , the effects of which are then tax effected , and discounted using the wacc from the vantage point of a market participant . assumptions concerning sales projections are impacted by the uncertain nature of global and local economic conditions in the various markets it serves . finite-lived intangible assets – finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives , which currently range from 8 to 30 years for customer lists , 5 to 14 years for developed technology , 5 to 20 years for trade names and up to 5 years for non-compete agreements . if circumstances require a long-lived asset group to be tested for possible impairment , the company first determines if the estimated undiscounted future pre-tax cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset , story_separator_special_tag , under the heading `` our business , `` and note 23 , segment information , to our consolidated financial statements included in this 2017 annual report . 52 adjusted ebitda we utilize adjusted ebitda as one of the measures to evaluate the performance of our operating segments . adjusted ebitda for each segment includes an allocation of corporate costs , such as compensation expense and professional fees . see note 23 , segment information , to our consolidated financial statements included in this 2017 annual report , for more information and a reconciliation of adjusted ebitda to net income . replace_table_token_14_th for 2017 and 2016 , corporate costs allocated to each segment totaled $ 31.4 million and $ 32.8 million , respectively . performance solutions ' adjusted ebitda for 2017 increased 8 % on a reported and constant currency basis . the increase was primarily driven by growth of our assembly , industrial and electronic solutions businesses resulting in higher gross profits , as well as cost savings from integration synergies , partially offset by the impact of volume declines in our graphics solutions business . agricultural solutions ' adjusted ebitda for 2017 increased 5 % ( 6 % at constant currency ) . the constant currency increase was primarily driven by an increase from market expansion in europe and new product launches in asia and latin america , volume growth in higher-margin products and cost reduction initiatives in europe and latin america . these increases were partially offset by a change in our selling strategy of certain lower-margin businesses in west africa , and investments made in stg & a , as noted above . year ended december 31 , 2016 compared to year ended december 31 , 2015 net sales replace_table_token_15_th performance solutions ' net sales for 2016 increased by 121 % ( 123 % on a constant currency and 1 % on an organic basis ) compared to the prior period . the increase in organic net sales was driven by growth in global paste solder product demand in assembly solutions , share gains in industrial product offerings sold into the automotive supply chain in asia , specifically in china , and a recovery of product demand in electronic solutions in the second half of 2016. organic sales growth in these businesses was partially offset by under-performance in offshore solutions due to softness in the oil and gas end market as declines in oil prices resulted in reduced capital investment and project startup delays . the impact of oil prices was twofold : ( 1 ) reduced demand for offshore production control and drilling fluids , and ( 2 ) reduced demand for plating chemistry sold into the supply chain for onshore oil production rigs and stripping/cleaning chemistry utilized in polyethylene terephthalate recycling . agricultural solutions ' net sales for 2016 increased by 4 % ( 6 % on a constant currency and 3 % on an organic basis ) compared to the prior period . the increase in organic net sales was driven by volume growth in our insecticide and herbicide businesses in latin america and europe , our anti-malarial insecticides in africa , and our biosolutions business . the volume growth was primarily boosted by several new product launches and continued focus on promoting proprietary brands . story_separator_special_tag the year-over-year change is due primarily to the remeasurement of foreign denominated debt to u.s. dollar and transactional foreign exchange on intercompany balances . other income ( expense ) , net other income , net for 2016 totaled $ 88.3 million , as compared to other expense , net of $ 43.6 million for 2015 , representing an increase of $ 132 million . the increase was primarily driven by the recognition of a gain of $ 103 million from the settlement agreement with the arysta seller in 2016 , which was partially offset by a $ 5.0 million loss associated with the remeasurement of the series b convertible preferred stock redemption liability and $ 11.3 million of expense related to the write-off of deferred financing fees and original issuance discount from the refinancing of our term loans in the fourth quarter of 2016. additionally , during 2015 there was a $ 73.7 million loss associated with a deal-contingent forward contract settlement in 2015 , which was partially offset by a legal settlement gain totaling $ 17.7 million . income tax expense replace_table_token_22_th the income tax expense for 2016 totaled $ 28.6 million , as compared to $ 75.1 million for 2015 . our effective tax rate for 2016 was ( 59.5 ) % on pre-tax losses of $ 48.1 million . the difference between the statutory and effective tax rates for 2016 primarily related to $ 68.4 million of tax expense for an increase in valuation allowances , $ 29.0 million on tax expense for earnings of foreign subsidiaries taxable in the u.s. and $ 26.8 million of tax expense for undistributed foreign earnings . offsetting these items were $ 34.3 million of tax benefit related to the settlement gain of the series b convertible preferred stock , which was treated as a non-taxable purchase price adjustment , $ 24.5 million for the impact of transaction costs and a $ 24.1 million reduction in tax reserves for prior period positions based on a reassessment of the uncertainty . the difference between the statutory and effective tax rates 56 for 2015 primarily related to $ 72.6 million of tax expense for an increase in valuation allowances , non-deductible transaction-related costs of $ 40.5 million and $ 27.5 million of tax expense for an increase in tax reserves for tax uncertainties . the change in the effective tax rate from ( 32.8 ) % for 2015 to ( 59.5 ) % for 2016 was attributable to the disproportionate change in pre-tax income , the net change in tax uncertainties , the net change in valuation allowances , the settlement gain of the series b convertible preferred stock and the expense attributable to undistributed foreign earnings . other comprehensive ( loss ) income other comprehensive income for 2016 totaled $ 214 million , as compared to other comprehensive losses of $ 796 million in the prior year . the change was driven primarily by foreign currency translation gains associated with the brazilian real , british pound , and japanese yen , partially offset by adverse effects associated with changes in the mexican peso and chinese yuan . adjusted ebitda replace_table_token_23_th for 2016 , corporate costs allocated to each segment totaled $ 32.8 million . for 2015 , corporate allocations totaled $ 12.0 million for performance solutions and $ 36.0 million for agricultural solutions . performance solutions ' adjusted ebitda for 2016 increased by 79 % ( 86 % at constant currency and 9 % on an organic basis ) . the organic increase was driven primarily by gross margin expansion resulting from lower raw material costs , some of which were achieved through synergies , as well as favorable product mix , partially offset by lower sales volume from offshore solutions . agricultural solutions ' adjusted ebitda for 2016 increased by 7 % ( 7 % at constant currency and 6 % on an organic basis ) due primarily to volume growth in latin america and europe , including higher relative growth in our higher margin biosolutions products . the increase was also driven by favorable effects from improved procurement trends , product mix , the impact of our proprietary product portfolio , and growth in the certain niche markets . these increases were partially offset by lower demand in north america driven by weaker market conditions . liquidity and capital resources at december 31 , 2017 , our indebtedness totaled $ 5.48 billion , primarily as a result of our historical acquisition activity , with expected interest payments in the range of approximately $ 275 million per year over the next two years . our first significant principal debt payments , totaling $ 1.33 billion , are due in 2020 and represent principal payments at maturity associated with a portion of our outstanding term loans under our amended and restated credit agreement . our primary sources of liquidity during 2017 were periodic borrowings under our revolving credit facility and available cash generated from operations . our primary uses of cash and cash equivalents were to fund operations , working capital , capital expenditures , and debt service obligations . we believe that our cash and cash equivalents and cash generated from operations , supplemented by our availability under our lines of credit , including our revolving credit facility , will be sufficient to meet our working capital needs , interest payments , capital expenditures , and other business requirements for at least the next twelve months . however , working capital cycles and future acquisitions may require future debt and or equity offerings . our long-term liquidity may be influenced by our ability to borrow additional funds , renegotiate existing debt and raise equity under terms that are favorable to us . during 2017 , approximately 83 % of our revenue was generated from non-u.s. operations .

income taxes , to our consolidated financial statements for further discussion of income taxes on remaining undistributed foreign earnings . we may from time to time seek to retire or purchase our outstanding debt , including , but not limited to , our senior notes , through cash purchases and or exchanges for equity securities , in open market purchases , privately negotiated transactions or otherwise . such repurchases or exchanges , if any , will depend on prevailing market conditions , our liquidity requirements , contractual restrictions , applicable restrictions under our various financing arrangements , and other factors . the following is a summary of our cash flows provided by ( used in ) operating , investing and financing activities during the periods indicated : replace_table_token_24_th year ended december 31 , 2017 compared to the year ended december 31 , 2016 operating activities for 2017 , we generated cash flows from operating activities of $ 182 million , compared to $ 185 million in cash for 2016 . higher cash operating profits ( net loss adjusted for non-cash items ) , which included $ 43.7 million of cash outflows related to a tender offer premium on our 2017 notes offerings , were partially offset by higher working capital requirements . the increase in working capital was due , in part , to the buildup of inventory in connection with performance solution 's facility rationalization initiatives , as well as increases due to stronger fourth quarter sales in our agricultural solutions business in 2017 , partially offset by the impact of a new factoring program in europe . investing activities net cash flows used in investing activities for 2017 totaled $ 92.6 million , compared to $ 74.7 million for 2016 . the increase was driven primarily by capital expenditures related to our performance solutions ' facility integration initiatives and agricultural solutions ' investments in products registration rights , which , combined , increased by $ 7.2

f-16 net 1 ueps technologies , inc. notes to the consolidated financial statements for the years ended june 30 , 2013 , 2012 and 2011 ( story_separator_special_tag the following discussion and analysis should be read in conjunction with item 6—“selected financial data” and item 8—“financial statements and supplementary data.” in addition to historical consolidated financial information , the following discussion and analysis contains forward-looking statements that involve risks , uncertainties and assumptions . see item 1a— “risk factors” and “forward looking statements.” overview we are a leading provider of payment solutions and transaction processing services across multiple industries and in a number of emerging economies . we have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels . our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other , government agencies , employers , merchants and other financial service providers . our universal electronic payment system , or ueps , uses biometrically secure smart cards that operate in real-time but offline , unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer . this offline capability means that users of our system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader , which is often portable and battery powered , is available . our off-line systems also offer the highest level of availability and affordability by removing any elements that are costly and are prone to outages . our latest version of the ueps technology has now been certified by emv , which facilitates our traditionally proprietary ueps system to interoperate with the global emv standard and allows card holders to transact at any emv-enabled point of sale terminal or atm . the new ueps/emv technology has been deployed on an extensive scale in south africa through the issuance of mastercard-branded ueps/emv cards to our social welfare grant customers . in addition to effecting purchases , cash-backs and any form of payment , our system can be used for banking , health care management , international money transfers , voting and identification . we also provide secure transaction technology solutions and services , by offering transaction processing , financial and clinical risk management solutions to various industries . we have extensive expertise in secure online transaction processing , cryptography , mobile telephony and integrated circuit card ( chip/smart card ) technologies . our technology is widely used in south africa today , where we distribute pension and welfare payments , using our ueps/emv technology , to over nine million recipient cardholders across the entire country , process debit and credit card payment transactions on behalf of a wide range of retailers through our easypay system , process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in south africa , and provide mobile telephone top-up transactions for all of the south african mobile carriers . we are the largest provider of third-party and associated payroll payments in south africa through our fihrst service that processes monthly payments for approximately 1,300 employer groups representing over 900,000 employees . our medikredit service provides the majority of funders and providers of healthcare in south africa with an on-line real-time management system for healthcare transactions . we perform a similar service in the us through our xeohealth subsidiary . internationally , through ksnet , the second largest transaction processor by volume in korea , we offer card processing , payment gateway and banking value-added services in that country . our net1 mobile solutions business unit is responsible for the worldwide technical development and commercialization of our array of web and mobile applications and payment technologies , such as mvc , chip and gsm licensing and vtu and has deployed solutions in many countries , including south africa , namibia , nigeria , cameroon , the philippines and colombia . sources of revenue we generate our revenues by charging transaction fees to government agencies , merchants , financial service providers , utility providers , bill issuers , employers and healthcare providers ; by providing loans and insurance products and by selling hardware , licensing software and providing related technology services . we have structured our business and our business development efforts around four related but separate approaches to deploying our technology . in our most basic approach , we act as a supplier , selling our equipment , software , and related technology to a customer . as an example , in ghana , we sold a complete ueps to the central bank , which owns and operates the resulting transaction settlement system . the revenue and costs associated with this approach are reflected in our hardware , software and related technology sales segment . 36 we have found that we have greater revenue and profit opportunities , however , by acting as a service provider instead of a supplier . in this approach we own and operate the ueps ourselves , charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis . this is the case in south africa , where we distribute welfare grants on behalf of the south african government and wages on behalf of employers on a fixed fee basis , but charge a fee on an ad valorem basis for goods and services purchased using our smart card . the revenue and costs associated with this approach are reflected in our smart card accounts , south african transaction-based activities and financial services segments . because our smart cards are designed to enable the delivery of more advanced services and products , we are also willing to supply those services and products directly where the business case is compelling . story_separator_special_tag our revenue for fiscal 2014 will decline to the extent that these beneficiaries do not re-apply for their grants , but such decline may be offset by the amount of new grant recipient cardholders approved by sassa . the graph below presents our enrollment progress from inception to june 30 , 2013 : the enrollment statistics included in the graph above reflect the cumulative number of cardholder recipient and beneficiary enrollments since the inception of the new contract . the statistics therefore do not reflect any cardholder recipients and beneficiaries that may have been removed from the payment file subsequent to enrollment due to the suspension or disqualification of a social welfare grant or death . there is a time lag between when a current grant recipient cardholder is issued a ueps/emv card and when the recipient cardholder receives grants onto the ueps/emv smart card . for instance , recipient cardholders enrolled in march 2013 and issued a ueps/emv smart card were only paid onto that card in the april 2013 pay cycle . when a new grant recipient cardholder is approved by sassa , the recipient cardholder is enrolled , issued a ueps/emv smart card and immediately paid on this card . we are paid monthly by sassa for each recipient cardholder paid by us , regardless of the number of grants received by the recipient cardholder , the channel utilized and therefore for the month of june 2013 , we earned revenue from sassa based on the distribution of grants to 9,591,950 recipient cardholders . during fiscal 2013 , we incurred direct implementation expenses of approximately $ 56.2 million ( zar 488.3 million ) , including staff , travel , temporary infrastructure hire , fixed premises hire for enrollment and stationery costs . we are unable to quantify the value of time spent by our executives and pension and welfare operations managers and staff that service the five provinces in which we operated under the previous contract and that have assisted in the implementation of the national contract . during fiscal 2012 , we incurred direct implementation expenses of approximately $ 10.9 million ( zar 83.9 million ) . we also expensed $ 10.3 million ( zar 90.2 million ) related to the cost of the ueps/emv smart cards issued during fiscal 2013 , which is not included in the $ 56.2 million ( zar 488.3 million ) of direct implementation expenses described above . we did not expense any smart cards in fiscal 2012 . 38 we also incurred approximately $ 6.9 million in capital expenditures related to the implementation during fiscal 2013. since inception of the implementation we have incurred cumulative capital expenditures of $ 28.1 million . we have substantially completed the bulk enrollment of recipient cardholders and beneficiaries and do not expect any further significant capital expenditures related to this process . our total cash outlay through june 30 , 2013 has been $ 105.5 million for direct implementation expenses , smart card costs and capital expenditures . we would have been in-line with the mid-point of our initial total cash outlay range assuming the volume of enrollments had not changed . our revised estimate including the registration of the incremental beneficiaries was between $ 100 and $ 105 million and included expanding our temporary staff for longer . see part i , item 1a—“risk factors” and item 3—“legal proceedings” for more information and the risks associated with our sassa contract and for an update on litigation associated with our sassa contract . smart life long-term insurance license during january 2013 , the fsb suspended smart life 's long-term insurance license and prohibited it from writing any new long-term insurance policies in south africa . we have prepared a submission to the fsb to uplift the suspension and the fsb is currently conducting an investigation into the affairs of smart life , but we can not predict what the outcome will be . south african transaction processors , excluding pension and welfare fihrst continues to grow its market share in the employer and employee payment processing space via the offering of our expanded services and the acquisition of new employer and employee groups . medikredit signed agreements with new providers , including public hospitals , private hospitals and specialist doctors , and has commenced adjudication and processing activities for these providers . outside south africa ksnet our strategic marketing initiatives over the past two years , focusing on the small and medium merchant segment has had a positive impact on our transaction processing volumes and operating profit in korea . our processing volume and value growth rate continues to outpace the korean economic growth rate . the ksnet management team remains focused on the retention and expansion of our current market share and to grow into adjacent markets . the competitive value added network environment in korea has resulted in a nominal anticipated loss of operation margin , which we expect to stabilize during fiscal 2014. our payment gateway and banking van businesses continue to grow exponentially , albeit off a small base . xeohealth the commencement of the recovery audit contractor , or rac , services and desk review recovery referrals identified through our xeorulestm engine for cognosante in north dakota has been delivered and cognosante has commenced issuing recovery letters to providers . under our contract , we are compensated based on a percentage of the final recoveries identified by our xeorules claim re-adjudicating service for the audit period of five years , as well as the desk review recovery referrals identified through our xeorules engine . xeohealth has recently realized the first recoveries in but we are currently unable to quantify the value of rac service revenues to be recognized during any particular future quarter . xeohealth has also been subcontracted by cognosante to provide both the automated audit as well the analysis services as required by the rac for the state of missouri medicaid .

consolidated overall results of operations this discussion is based on the amounts which were prepared in accordance with us gaap . the following tables show the changes in the items comprising our statements of operations , both in us dollars and in zar : replace_table_token_14_th replace_table_token_15_th analyzed in zar , the increase in revenue was primarily due to the inclusion of ksnet , incremental revenue resulting from our new sassa contract award , higher prepaid airtime sales resulting from the eason acquisition , increase in the number of ueps-based loans made , and higher utilization of our ueps system in iraq , offset by lower hardware and software sales . analyzed in zar , cost of goods sold , it processing , servicing and support was higher primarily due to the inclusion of ksnet and incremental costs resulting from our new sassa contract award . 51 the increase in selling , general and administration expense is the result of the ksnet acquisition and sassa implementation costs of $ 10.9 million and cash bonuses of $ 5.4 million paid which was offset by lower stock-based compensation charge , primarily because the performance-based restricted stock granted in august 2007 was fully expensed in prior periods and due to the non-cash profit related to the liquidation of smartswitch nigeria of $ 4.0 million . during fiscal 2011 , selling , general and administration expense included transaction-related costs of $ 6.0 million ( zar 42.3 million ) , primarily for the ksnet acquisition . the grant date fair value of the equity instrument issued pursuant to our january 2012 bee transaction was $ 14.2 million ( zar 112.1 million ) and has been expensed in full in fiscal 2012. our operating income margin for fiscal 2012 and 2011 was 16 % and 11 % , respectively .

when sold , we story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and related notes included in this report . this discussion and analysis contains forward-looking statements that involve risk , uncertainties , and assumptions . see “ forward-looking statements ” included in this report for more information . our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors , including those discussed in “ risk factors ” included in this report . an index to our management 's discussion and analysis follows : replace_table_token_4_th overview we are a leading provider of responsible personal loan products , primarily to non-prime customers . our network of over 1,600 branch offices in 44 states as of december 31 , 2017 , is staffed with highly trained personnel and is complemented by our online personal loan origination capabilities and centralized operations , which allows us to reach customers located outside our branch footprint . our digital platform provides current and prospective customers the option of obtaining an unsecured personal loan via our website , www.onemainfinancial.com . ( the information on our website is not incorporated by reference into this report . ) in connection with our personal loan business , we offer our customers credit and non-credit insurance . in addition , we service loans owned by third-parties ; pursue strategic acquisitions and dispositions of assets and businesses , including loan portfolios or other financial assets ; and may establish joint ventures or enter into other strategic alliances or arrangements from time to time . our products our product offerings include : personal loans — we offer personal loans through our branch network and over the internet through our centralized operations to customers who generally need timely access to cash . our personal loans are typically non-revolving with a fixed-rate and a fixed , original term of three to six years and are secured by consumer goods , automobiles , or other personal property or are unsecured . at december 31 , 2017 , we had nearly 2.4 million personal loans representing $ 14.8 billion of net finance receivables , compared to 2.2 million personal loans totaling $ 13.6 billion at december 31 , 2016 . insurance products — we offer our customers credit insurance ( life insurance , disability insurance , and involuntary unemployment insurance ) and non-credit insurance through both our branch network and our centralized operations . credit insurance and non-credit insurance products are provided by our affiliated insurance companies , merit , yosemite , ahl and triton . we also offer auto membership plans of an unaffiliated company . 45 our non-originating legacy products include : real estate loans — in 2012 , we ceased originating real estate loans and the portfolio is in a liquidating status . during 2016 , we sold $ 308 million real estate loans held for sale . at december 31 , 2017 , we had $ 128 million of real estate loans held for investment , of which 91 % were secured by first mortgages , compared to $ 144 million at december 31 , 2016 , of which 93 % were secured by first mortgages . real estate loans held for sale totaled $ 132 million and $ 153 million at december 31 , 2017 and 2016 , respectively . retail sales finance — we ceased purchasing retail sales contracts and revolving retail accounts in january of 2013. we continue to service the liquidating retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts . our segments at december 31 , 2017 , we had two operating segments : consumer and insurance ; and acquisitions and servicing . beginning in 2017 , we include real estate , which was previously presented as a distinct reporting segment , in “ other. ” see note 22 of the notes to consolidated financial statements included in this report for further information on this change in our segment alignment and for more information about our segments . to conform to the new alignment of our segments , we have revised our prior period segment disclosures . how we assess our business performance we closely monitor the primary drivers of pretax operating income , which consist of the following : net interest income we track the spread between the interest income earned on our finance receivables and the interest expense incurred on our debt , and continually monitor the components of our yield and our cost of funds . net credit losses the credit quality of our loans is driven by our long-standing underwriting philosophy , which takes into account the prospective customer 's household budget , and his or her willingness and capacity to repay the proposed loan . we closely analyze credit performance because the profitability of our loan portfolio is directly connected to net credit losses . we define net credit losses as gross charge-offs minus recoveries in the portfolio . additionally , because delinquencies are an early indicator of future net credit losses , we analyze delinquency trends , adjusting for seasonality , to determine whether or not our loans are performing in line with our original estimates . we also monitor recovery rates because of their contribution to the reduction in the severity of our charge-offs . operating expenses we assess our operational efficiency using various metrics and conduct extensive analysis to determine whether fluctuations in cost and expense levels indicate operational trends that need to be addressed . our operating expense analysis also includes a review of origination and servicing costs to assist us in managing overall profitability . because loan volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings , we also closely monitor origination volume and annual percentage rate . story_separator_special_tag the assets that were pledged consist of a pool of non-revolving , fixed-rate loans secured by automobiles , light-duty trucks and other vehicles . at least 5 % of the initial note principal balance of each class of notes and the residual interest in the issuing entity were retained in satisfaction of the risk retention requirements of section 941 of the dodd-frank act . see note 13 of the notes to consolidated financial statements included in this report for further information on the december omfh securitization . maturity of sfc 's 6.90 % medium-term notes on december 15 , 2017 , the $ 557 million outstanding principal amount of sfc 's 6.90 % medium-term notes , series j became due and payable . see note 12 of the notes to consolidated financial statements included in this report for further information on the maturity of sfc 's 6.90 % medium-term notes . redemption of the omfh 2019 notes on december 8 , 2017 , omfh issued a notice of redemption to redeem all $ 700 million outstanding principal amount of its 6.75 % senior notes due 2019 at a redemption price equal to 103.375 % , plus accrued and unpaid interest to the redemption date . the notes were redeemed on january 8 , 2018. see notes 12 and 24 of the notes to consolidated financial statements included in this report for further information on the redemption of the omfh notes . the tax act on december 22 , 2017 , the president signed into law the tax act , which contains substantial changes to the internal revenue code effective january 1 , 2018 , including a reduction in the federal corporate tax rate from 35 % to 21 % . in the long-term , we anticipate that we will have an overall benefit from the reduction in the tax rate slightly offset by potential deductions disallowed under the current law . however , we recognized an $ 81 million tax charge in 2017. this charge is primarily the result of the lower corporate tax rate , which required us to remeasure our net deferred tax asset to reflect the lower corporate tax rate . for further information see note 18 of the notes to consolidated financial statements included in this report . impact of hurricanes harvey , irma and maria in august and september of 2017 , our customers in certain areas of the united states and puerto rico were impacted by hurricanes harvey , irma and maria . the estimated total hurricane-related impact recorded during 2017 was approximately $ 25 million , consisting primarily of increases in our loan loss reserve and borrower-related assistance programs . see additional discussion under “ results of operations ” and “ segment results ” below . 48 cost synergies as of december 31 , 2017 , we had incurred approximately $ 239 million of acquisition-related transaction and integration expenses ( $ 69 million incurred during 2017 ) from the onemain acquisition . we achieved our estimated cost synergies from the onemain acquisition , including approximately $ 200 million in lower operating expenses , which were fully realized by the end of the fourth quarter of 2017. furthermore , our transition services agreement with citigroup terminated on may 1 , 2017 in accordance with its terms , and we are no longer required to make any further payments under the agreement . outlook with our experienced management team , long track record of successfully accessing the capital markets , and strong demand for consumer credit , we believe we are well positioned to execute on our strategic priorities to strengthen our capital base through the following key initiatives : continuing the growth in receivables through enhanced marketing strategies and customer product options ; growing secured lending originations with a goal of enhancing credit performance ; leveraging our scale and cost discipline across the company to deliver improved operating leverage ; increasing tangible equity and reducing leverage ; and maintaining a strong liquidity level with diversified funding sources . we continue to execute our strategy to increase the proportion of our loan originations secured by titled collateral ( which typically have lower yields and credit losses relative to unsecured personal loans ) , particularly within the former onemain branches where secured loan originations have historically represented a smaller proportion of total originations than those of the former springleaf branches . as we continue to increase secured loans as a proportion of our total loan portfolio , our yields may be lower in future periods relative to our historical yields ; however , we also expect a proportional improvement in net credit losses over time as our portfolio matures and as secured loans become a greater proportion of our total loan portfolio . assuming the u.s. economy continues to experience slow to moderate growth , we expect to continue our long history of strong credit performance and believe the strong credit quality of our loan portfolio will continue as the result of our disciplined underwriting practices and ongoing collection efforts . we have continued to see some migration of customer activity away from traditional channels , such as direct mail , to online channels ( primarily serviced through our branch network ) , where we believe we are well suited to capture volume due to our scale , technology , and deployment of advanced analytics . 49 results of operations story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > when compared to 2016 due to the following : other operating expenses decreased $ 132 million primarily due to ( i ) a decrease in citigroup transition expenses of $ 55 million , ( ii ) lower professional and audit expenses of $ 33 million during the 2017 period , ( iii ) an increase in the deferral of origination costs of $ 22 million due to the increase in the number of loans originated in the 2017 period compared to prior year , and ( iv ) a decrease in amortization of other intangible assets of $ 18 million during the 2017 period .

consolidated results on november 15 , 2015 , we completed the onemain acquisition . the results of onemain are included in our consolidated operating results and selected financial statistics from november 1 , 2015 in the table below . a further discussion of our operating results for each of our operating segments is provided under “ segment results ” below . replace_table_token_5_th ( a ) see “ glossary ” at the beginning of this report for formulas and definitions of our key performance ratios . ( b ) includes personal loans held for sale , but excludes real estate loans held for sale in order to be comparable with our segment statistics disclosed in “ segment results. ” 50 comparison of consolidated results for 2017 and 2016 interest income increased $ 86 million in 2017 when compared to 2016 due to the net of the following : finance charges increased $ 147 million primarily due to the net of the following : yield on finance receivables held for investment increased primarily due to lower amortization of purchase premium on non-credit impaired finance receivables . this increase was partially offset by the continued shift of the portfolio towards secured personal loans and direct auto customers who tend to have loans with lower yields and lower charge-offs relative to our unsecured personal loans . average net receivables held for investment decreased primarily due to ( i ) the springcastle interests sale and ( ii ) our liquidating real estate loan portfolio , including transfers of $ 307 million of real estate loans to finance receivables held for sale during 2016. this decrease was partially offset by the continued growth in our personal loan portfolio .

” management 's discussion and analysis of financial condition and results of operations contains a number of forward-looking statements , all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this form 10-k , including the factors disclosed under “ item 1a . — risk factors. ” we believe that the assumptions underlying the consolidated and combined financial statements included in this annual report are reasonable . however , the consolidated and combined financial statements may not necessarily reflect our results of operations , financial position and cash flows for future periods or what they would have been had tribune publishing been a separate , stand-alone company during all the periods presented . overview tribune publishing company ( collectively with its subsidiaries , “ tribune publishing ” or the “ company ” ) is a multiplatform media and marketing solutions company that delivers innovative experiences for audiences and advertisers . the company 's diverse portfolio of iconic news and information brands includes award-winning daily and weekly titles , digital properties and verticals in major markets across the country . as discussed in part 1 , item 1 “ business ” of this annual report on form 10-k , on august 4 , 2014 ( “ distribution date ” ) , the company completed its separation from tribune media company , formerly tribune company ( “ tco ” ) . the company is a separately traded public company . prior to the distribution date , separate financial statements were not prepared for tribune publishing . the accompanying consolidated and combined financial statements were derived from the historical accounting records of tco and present tribune publishing 's consolidated and combined financial position , results of operations and cash flows as of and for the periods presented as if tribune publishing was a separate entity through the distribution date . management believes that assumptions and methodologies underlying the allocation of general corporate expenses are reasonable . however , such expenses prior to the distribution date may not be indicative of the actual level of expense that would have been incurred had tribune publishing operated as a separate stand-alone entity , and , accordingly , may not necessarily reflect tribune publishing 's consolidated and combined financial position , results of operations and cash flows had tribune publishing operated as a stand-alone entity during the periods presented . see note 5 in the consolidated and combined financial statements included elsewhere in this report for further information on costs allocated from tco . subsequent to the distribution date , tribune publishing 's financial statements are presented on a consolidated basis as the company became a separate consolidated entity . the company intends for the following discussion of its financial condition and results of operations to provide information that will assist in understanding the company 's financial statements , the changes in certain key items in those statements from period to period and the primary factors that accounted for those changes as well as how certain accounting principles , policies and estimates affect the company 's financial statements . 2015 highlights and recent events on may 21 , 2015 , the company completed the acquisition of the san diego union-tribune ( f/k/a the u-t san diego ) and nine community weeklies and related digital properties in san diego county , california . attracted more than 51.2 million unique visitors during december 2015 based on the comscore multi-platform media report . in august 2015 , the board of directors authorized $ 30 million to be used for stock repurchases for 24 months from the date of authorization . under this authorization the company repurchased 121,168 shares of common stock for an aggregate purchase price of $ 1.4 million in 2015. in the fourth quarter of 2015 , the company offered an employee voluntary separation program ( “ evsp ” ) , which provided enhanced separation benefits to eligible non-union employees with more than one year of service . the total charge expected to be recognized is $ 55.8 million with $ 45.6 million recognized in the year ended december 27 , 2015 . on february 3 , 2016 , the company completed a $ 44.4 million private placement of the company 's common stock to merrick media . 29 2016 private placement on february 3 , 2016 , the company completed a $ 44.4 million private placement , pursuant to which the company sold to merrick media 5,220,000 shares of the company 's common stock at a purchase price of $ 8.50 per share . the company intends to use the $ 42.5 million net proceeds from the sale to execute further on its growth strategy , including acquisitions and digital initiatives . the shares of common stock acquired by merrick media ( the “ shares ” ) are subject to certain lockup provisions that , subject to the terms and conditions set out in the purchase agreement dated february 3 , 2016 among the company , merrick media and michael w. ferro , jr. ( the “ purchase agreement ” ) , prohibit certain transfers of the shares for the first three years following the date of issuance and , thereafter , any transfers of the shares that would result in a transfer of more than 25 % of the shares purchased under the purchase agreement in any 12-month period . the purchase agreement also includes covenants prohibiting the transfer of the shares if the transfer would result in a person beneficially owning more than 4.9 % of the company 's then outstanding shares of common stock following the transfer , as well as transfers to a material competitor of the company in any of the company 's then-existing primary geographical markets . merrick media and mr. ferro and their respective affiliates , are also prohibited from acquiring additional equity if the acquisition could result in their beneficial ownership of more than 25 % of the company 's then outstanding shares of common stock . story_separator_special_tag under the tsa , the providing company was generally allowed to fully recover all out-of-pocket costs and expenses it actually incurred in connection with providing the services , plus , in some cases , the allocated direct costs of providing the services , generally without profit . pursuant to the tsa , tco provided tribune publishing with certain specified services on a transitional basis , including support in areas such as human resources , risk management , treasury , technology , legal , real estate , procurement and advertising and marketing in a single market . tribune publishing provided tco with certain specified services on a transitional basis , including in areas such as human resources , technology , legal , procurement , accounting , digital advertising operations , and advertising , marketing , event management and fleet maintenance in a single market . as of the end of 2015 , there were no longer any services being provided under the tsa . tco received a private letter ruling ( “ plr ” ) from the internal revenue service ( “ irs ” ) which provides that the distribution of tribune publishing stock and certain related transactions will qualify as tax-free to tco , tribune publishing and tco 's stockholders and warrantholders for u.s. federal income tax purposes . although a plr from the irs generally is binding on the irs , the plr does not rule that the distribution satisfies every requirement for a tax-free distribution , and the parties will rely solely on the opinion of the tco 's special tax counsel that such additional requirements have been satisfied . 31 story_separator_special_tag revenue recognition to gross revenue recognition on certain contracts , and increases related to the san diego union-tribune , offset by lower print circulation volumes for the daily newspapers and a decrease in commercial delivery of third party publications . total daily net paid print circulation in the year ended december 27 , 2015 averaged 1.4 million copies , up 9.0 % . total sunday net paid print circulation in the year ended december 27 , 2015 averaged 2.4 million copies , up 3 % . the increase in daily and sunday net paid print circulation is generated by acquired businesses . newsprint and ink expense —newsprint and ink expense declined 12.4 % , or $ 17.3 million , in the year ended december 27 , 2015 due mainly to an 8.7 % decrease in the average cost per ton of newsprint and a 10.7 % decline in commercial printing revenue . outside services expense —outside services expense increased 37.5 % , or $ 47.2 million , in the year ended december 27 , 2015 due primarily to expenses associated with the san diego union-tribune , inclusion of technology costs subsequent to 34 the distribution that were previously included in corporate allocations , corporate post-spin initiatives and internal control remediation efforts . occupancy expense —occupancy expense increased 4.1 % , or $ 2.5 million , in the year ended december 27 , 2015 , primarily due to expenses associated with the san diego union-tribune . promotion and marketing expense —promotion and marketing expense increased 5.9 % , or $ 3.3 million , in the year ended december 27 , 2015 primarily due to increased digital-focused marketing and general advertising . outside printing and production expense —outside printing and production expense includes costs related to niche publications , direct mail and certain preprints . this expense decreased 3.7 % , or $ 1.8 million , in the year ended december 27 , 2015 primarily due to decreased activity from client direct mail campaigns , partially offset by expenses associated with the san diego union-tribune . affiliate fees expense —affiliate fees expense includes fees paid to classified ventures and careerbuilder . affiliate fees expense increased 20.2 % , or $ 8.6 million , in the year ended december 27 , 2015 due primarily to an increase in classified ventures auto fees beginning in the fourth quarter of 2014. other general and administrative expense —other general and administrative expense includes repairs and maintenance , bad debt expense , insurance costs and miscellaneous expense . other general and administrative expense decreased 2.8 % , or $ 3.9 million , in the year ended december 27 , 2015 primarily due to a $ 4.2 million decrease in bad debt expense resulting from the company recording a reserve for certain commercial delivery defaults in the year ended december 28 , 2014 . depreciation and amortization expense —depreciation and amortization expense increased 70.3 % , or $ 22.5 million , for the year ended december 27 , 2015 primarily as a result of depreciation generated from technology assets that were transferred to the company as part of the distribution . non-operating income and expenses —total non-operating expenses for the years ended december 27 , 2015 and december 28 , 2014 were as follows ( in thousands ) : replace_table_token_6_th * represents positive or negative change in excess of 100 % loss on equity investments , net —loss on equity investments was flat for the year ended december 27 , 2015 compared to the year ended december 28 , 2014 as the company 's investments have remained relatively stable . interest expense— interest expense for the years ended december 27 , 2015 and december 28 , 2014 is due to interest on the senior term facility described under “ liquidity and capital resources ” below . income tax expense ( benefit ) — income tax expense decreased $ 34.9 million for the year ended december 27 , 2015 , over the prior year period , primarily due to a decrease in taxable income . additionally , d uring the year ended december 27 , 2015 , the company increased the estimated deferred tax rate on net deferred tax assets from 39.5 % to 40.0 % , which resulted in a decrease in the current period income tax expense of $ 0.5 million .

results of operations year ended december 27 , 2015 compared to the year ended december 28 , 2014 in the fourth quarter of 2015 , the company determined digital marketing services had evolved over time and more appropriately should be reflected in advertising revenue instead of other revenue . this change has been applied retroactively to all periods covered in this report and are included in the amounts below . see note 1 in notes to the consolidated and combined financial statements for more information on this reclassification . consolidated —operating results for the years ended december 27 , 2015 and december 28 , 2014 are shown in the table below ( in thousands ) . references in this discussion to individual markets include daily newspapers in those markets and their related businesses . replace_table_token_3_th operating revenues decreased 2.1 % , or $ 35.2 million , in the year ended december 27 , 2015 compared to the prior year period due to a $ 31.7 million decline in advertising revenues and a $ 35.1 million decrease in other revenues , partially offset by an increase of $ 31.7 million in circulation revenues . operating revenues include revenues from acquisitions . operating expenses increased 1.6 % , or $ 26.6 million , in the year ended december 27 , 2015 compared to the prior year period due to a $ 45.6 million charge related to the evsp , partially offset by lower newsprint and ink expenses . income from operations decreased 71.2 % , or $ 61.7 million , in the year ended december 27 , 2015 due mainly to lower revenues and the charge related to the evsp .

management 's discussion and analysis is provided as a supplement to , and should be read in conjunction with , our consolidated financial statements and the accompanying notes to the consolidated financial statements . trends in our business we are a leading provider of voice and language solutions for businesses and consumers around the world . our solutions are used in the healthcare , mobile , consumer , enterprise customer service , and imaging markets . we are seeing several trends in our markets , including ( i ) the growing adoption of cloud-based , connected services and highly interactive mobile applications , ( ii ) deeper integration of virtual assistant capabilities and services , and ( iii ) the continued expansion of our core technology portfolio from speech recognition to natural language understanding , semantic processing , domain-specific reasoning , dialog management capabilities and biometric speaker identification . healthcare . trends in our healthcare business include continuing customer preference for hosted solutions and other time-based licenses , and increasing interest in the use of mobile devices to access healthcare systems and records . we continue to see strong demand for transactions which involve the sale and delivery of both software and non-software related services or products , as well as transactions which involve the sale of multiple solutions , such as both hosted 17 transcription services and dragon medical licenses . although the volume processed in our hosted transcription services has steadily increased due to the expanding customer base , we have experienced some erosion in lines processed when customers adopt electronic medical record ( emr ) systems , and when in some cases customers use our licensed dragon medical product to support input into the emr . we believe an important trend in the healthcare market is the desire to improve efficiency in the coding and revenue cycle management process . our solutions reduce costs by increasing automation of this important workflow , and also enable hospitals to improve documentation used to support billings . in addition to improved efficiency , there is an impending change in the industry coding standard from icd-9 to icd-10 , which will significantly increase the number of possible codes , and therefore , increase the complexity of this process , which in turn reinforces our customers ' desire for improved efficiency . we are investing to expand our product set to address the various healthcare opportunities , including deeper integration with our clinical documentation solutions , as well as expand our international capabilities , and reduce our time from contract signing to initiation of billable services . mobile and consumer . trends in our mobile and consumer segment include device manufacturers requiring custom applications to deliver unique and differentiated products such as virtual assistants , broadening keyboard technologies to take advantage of touch screens , increasing hands-free capabilities on cell phones and in automobiles , the adoption of our technology on a broadening scope of devices , such as televisions , set-top boxes , e-book readers , tablet and laptop computers , cameras and third-party applications and away from consumer software . the more powerful capabilities of mobile devices require us to supply a broader set of technologies to support the increasing scope and complexity of the solutions . these technologies include cloud-based speech recognition , natural language understanding , dialog management , text-to-speech and enhanced text input , where the complexity of the technologies allow us to charge a higher price . within given levels of our technology set , we have seen pricing pressures from our oem partners in our mobile handset business . we continue to see strong demand involving the sale and delivery of both software and non-software related services , as well as products to help customers define , design and implement increasingly robust and complex custom solutions such as virtual assistants . we continue to see an increasing proportion of revenue from on-demand and transactional arrangements as opposed to traditional upfront licensing of our mobile products and solutions . although this has a negative impact on near-term revenue , we believe this model will build stronger and more predictable revenues over time . we are investing to increase our capabilities and capacity to help device manufacturers build custom applications , to increase the capacity of our data centers , to increase the number , kinds and capacity of network services , to enable developers to access our technology , and to expand both awareness and channels for our direct-to-consumer products . enterprise . trends in our enterprise business include increasing interest in the use of mobile applications and web sites to access customer care systems and records , voice-based authentication of users , increasing interest in coordinating actions and data across customer care channels , and the ability of a broader set of hardware providers and systems integrators to serve the market . in fiscal 2014 , revenues and bookings from on-demand solutions increased significantly , as a growing proportion of customers chose our cloud-based solutions for call center , web and mobile customer care solutions . we expect these trends to continue in fiscal 2015. we are investing to expand our product set to address these opportunities , to increase efficiency of our hosted applications , expand our capabilities and capacity to help customers build custom applications , and broaden our relationships with new hardware and systems integrator partners serving the market . imaging . the imaging market is evolving to include more networked solutions , mobile access to networked solutions , multi-function devices , and away from packaged software . we expect to expand our traditional packaged software sales with subscription versions . we are investing to improve mobile access to our networked products , expand our distribution channels and embedding relationships , and expand our language coverage . confronted by dramatic increases in electronic information , consumers , business personnel and healthcare professionals must use a variety of resources to retrieve information , transcribe patient records , conduct transactions and perform other job-related functions . story_separator_special_tag because of the inherent estimates required to determine bookings and the fact that the actual resultant revenue may differ from our initial bookings estimates , we consider bookings one indicator of potential future revenue and not as an arithmetic measure of backlog ; estimated three-year value of on-demand contracts increased 8 % from one year ago to approximately $ 2.2 billion . we expect that an increasing portion of our revenue will come from on-demand services . we determine this value as of the end of the period reported , by using our best estimate of three years of anticipated future revenue streams under signed on-demand contracts then in place , whether or not they are guaranteed through a minimum commitment clause . our best estimate is based on estimates used in evaluating the contracts and determining sales compensation , adjusted for changes in estimated launch dates , actual volumes achieved and other factors deemed relevant . for contracts with an expiration date beyond three years , we include only the value expected within three years . for other contracts , we assume renewal consistent with historic renewal rates unless there is a known cancellation . contracts are generally priced by volume of usage and typically have no or low minimum commitments . actual revenue could vary from our estimates due to factors such as cancellations , non-renewals or volume fluctuations ; and total recurring revenue represented 63.9 % and 58.6 % of total revenue in fiscal 2014 and 2013 , respectively . total recurring revenue represents the sum of recurring product and licensing , on-demand , and maintenance and support revenues as well as the portion of professional services revenue that is delivered under ongoing subscription contracts . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-style : italic ; font-weight : bold ; '' > fiscal 2014 compared to fiscal 2013 professional services and hosting revenue for fiscal 2014 increased $ 78.5 million , as compared to fiscal 2013. the increase included a $ 42.6 million increase in enterprise revenue primarily driven by our recent acquisitions . healthcare revenue increased $ 18.6 million driven by a $ 12.1 million increase in revenues from our clintegrity product line and a $ 6.4 million increase in revenues from our clinical documentation solutions . the revenue increase in our clinical documentation solutions included $ 18.1 million of revenues from acquisitions , partially offset by the negative impact from the continued erosion resulting from customers ' migration to electronic medical records . 21 as a percentage of total revenue , professional services and hosting revenue increased from 44.9 % to 47.3 % for the year ended september 30 , 2014. this increase was driven by our recent healthcare and enterprise acquisitions , which have a higher proportion of professional services and hosting revenue . the increase also includes the continuing shift toward on-demand and hosting services in our mobile and consumer segment . fiscal 2013 compared to fiscal 2012 professional services and hosting revenue for fiscal 2013 increased $ 158.4 million , as compared to fiscal 2012. the increase consisted of a $ 135.4 million increase in healthcare revenue primarily driven by transactional volume growth in our on-demand solutions , of which $ 126.9 million was due to our acquisitions closed during fiscal 2012 and 2013. mobile and consumer revenue increased $ 25.9 million , including a $ 19.2 million increase driven by transactional volume growth in our connected mobile services , and an $ 8.3 million increase in professional services to support the custom design and implementation of next-generation mobile solutions in automobiles , handsets and other consumer electronics . as a percentage of total revenue , professional services and hosting revenue increased from 40.8 % to 44.9 % . this increase was driven by our healthcare acquisitions in fiscal 2012 and 2013 , which have a higher proportion of on-demand hosting revenue . the increase also includes the continuing shift toward on-demand and ratable pricing models in our handset and other consumer electronics sales in our mobile and consumer segment . maintenance and support revenue maintenance and support revenue primarily consists of technical support and maintenance services . the following table shows maintenance and support revenue , in dollars and as a percentage of total revenues ( dollars in millions ) : replace_table_token_5_th fiscal 2014 compared to fiscal 2013 maintenance and support revenue for fiscal 2014 increased $ 32.3 million , as compared to fiscal 2013. the increase was driven by strong maintenance renewals in all of our segments , including an increase of $ 11.5 million in imaging revenue , a $ 10.8 million increase in healthcare revenue driven by sales of dragon medical solutions , together with an increase of $ 8.7 million in enterprise revenue . fiscal 2013 compared to fiscal 2012 maintenance and support revenue for fiscal 2013 increased $ 32.4 million , as compared to fiscal 2012 , primarily driven by a $ 14.8 million increase in healthcare revenue resulting from growth in sales of our dragon medical solutions , a $ 7.9 million increase in enterprise revenue , driven by strong maintenance renewals and licenses bookings in prior periods , and a $ 5.4 million increase in imaging revenue . costs and expenses cost of product and licensing revenue cost of product and licensing revenue primarily consists of material and fulfillment costs , manufacturing and operations costs and third-party royalty expenses . the following table shows the cost of product and licensing revenue , in dollars and as a percentage of product and licensing revenue ( dollars in millions ) : replace_table_token_6_th fiscal 2014 compared to fiscal 2013 cost of product and licensing revenue for fiscal 2014 decreased $ 1.8 million , as compared to fiscal 2013 , primary driven by a $ 3.5 million reduction in imaging costs due to lower revenues . mobile and consumer costs decreased $ 1.4 million primarily 22 driven by lower sales of our dragon desktop consumer products .

results of operations total revenues the following tables show total revenues by product type and revenue by geographic location , based on the location of our customers , in dollars and percentage change ( dollars in millions ) : replace_table_token_2_th fiscal 2014 compared to fiscal 2013 the geographic split for fiscal 2014 was 73 % of total revenue in the united states and 27 % internationally , as compared to 72 % of total revenue in the united states and 28 % internationally for the same period last year . the increase in the proportion of revenue generated domestically was primarily driven by our recent acquisitions , which are primarily located in the united states . fiscal 2013 compared to fiscal 2012 the geographic split for fiscal 2013 was 72 % of total revenue in the united states and 28 % internationally , as compared to 71 % of total revenue in the united states and 29 % internationally for the same period last year . the increase in the proportion of revenue generated domestically was primarily driven by our recent acquisitions , which are primarily located in the united states . 20 product and licensing revenue product and licensing revenue primarily consists of sales and licenses of our technology . the following table shows product and licensing revenue , in dollars and as a percentage of total revenues ( dollars in millions ) : replace_table_token_3_th fiscal 2014 compared to fiscal 2013 product and licensing revenue for fiscal 2014 decreased 42.7 million , as compared to fiscal 2013. the decrease consisted of a $ 42.6 million decrease in mobile and consumer revenue , a $ 21.8 million decrease in enterprise revenue offset by an increase of $ 22.2 million in healthcare revenue .

the fenco credit agreement , among other things , requires fenco to maintain a minimum ebitda of not less than $ 6,100,000 for the period from september 1 , 2012 to march 31 , 2013. as of march 31 , 2013 , fenco was not in compliance with this financial covenant under story_separator_special_tag disclosure regarding private securities litigation reform act of 1995 this report contains certain forward-looking statements with respect to our future performance that involve risks and uncertainties . various factors could cause actual results to differ materially from those projected in such statements . these factors include , but are not limited to : the bankruptcy of fenco , concentration of sales to certain customers , changes in our relationship with any of our major customers , the increasing customer pressure for lower prices and more favorable payment and other terms , the increasing demands on our working capital , the significant strain on working capital associated with large remanufactured core inventory purchases from customers , our ability to obtain any additional financing we may seek or require , our ability to achieve positive cash flows from operations , potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal controls over financial reporting , lower revenues than anticipated from new and existing contracts , our failure to meet the financial covenants or the other obligations set forth in our credit agreements and the lenders ' refusal to waive any such defaults , any meaningful difference between projected production needs and ultimate sales to our customers , increases in interest rates , changes in the financial condition of any of our major customers , the impact of high gasoline prices , the potential for changes in consumer spending , consumer preferences and general economic conditions , increased competition in the automotive parts industry , including increased competition from chinese and other offshore manufacturers , difficulty in obtaining used cores and component parts or increases in the costs of those parts , political , criminal or economic instability in any of the foreign countries where we conduct operations , currency exchange fluctuations , unforeseen increases in operating costs , the strategic cooperation agreement , and other factors discussed herein and in our other filings with the sec . management overview we are a leading manufacturer , remanufacturer , and distributor of aftermarket automobile parts . we have two reportable segments , rotating electrical and undercar product line . within the rotating electrical segment , we manufacture and remanufacture alternators and starters for import and domestic cars , light trucks , heavy duty , agricultural and industrial applications . within the undercar product line segment , fenco remanufactures and distributes new and remanufactured steering components including rack and pinion , pumps and gears , brake calipers , master cylinders , and hub assembly and bearings for virtually all passenger and truck vehicles . the current population of vehicles in north america is approximately 247 million and the average age of these vehicles is approximately 10 years . we believe the market for replacement parts is primarily driven by the age of vehicles and the miles driven . while an aged vehicle population is favorable today , miles driven continues to fluctuate primarily based on fuel prices . the aftermarket for automobile parts is divided into two markets . the first market is the diy market , which is generally serviced by the large retail chain outlets . consumers who purchase parts from the diy channel generally install parts into their vehicles themselves . in most cases , this is a less expensive alternative than having the repair performed by a professional installer . the second market is the professional installer market , commonly known as the difm market . this market is serviced by the traditional warehouse distributors , the dealer networks , and the commercial divisions of retail chains . generally , the consumer in this channel is a professional parts installer . our products are distributed to both the diy and difm markets and are distributed predominantly throughout north america . we sell our products to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their oes program . demand and replacement rates for aftermarket remanufactured automobile parts generally increase with the age of vehicles and increases in miles driven . 20 historically , the largest share of our business was in the diy market . while that is still the case , our difm business is now a significant part of our business . in difficult economic times , we believe consumers are more likely to purchase lower cost replacement parts in both the diy and difm markets . we focus on supplying both these channels with the most cost efficient replacement parts for the consumer to purchase . within the rotating electrical segment , the difm market is an attractive opportunity for growth . we are positioned to benefit from this market opportunity in two ways : ( 1 ) our auto parts retail customers are expanding their efforts to target the difm market and ( 2 ) we sell our products under private label and our own brand names directly to suppliers that focus on professional installers . in addition , we sell our products to oe manufacturers for distribution to the professional installer both for warranty replacement and their general aftermarket channels . we have been successful in growing sales in our rotating electrical segment to this market . recent developments since our acquisition of fenco on may 6 , 2011 , we have been implementing our undercar product line turnaround plan and our top priority continued to be improvement of the financial performance of our undercar product line business . the implementation of our undercar product line turnaround plan has taken longer and cost more than initially anticipated . story_separator_special_tag non-core work in process is in various stages of production and is valued at the average cost of materials issued to the open work orders . historically , non-core work in process inventory has not been material compared to the total non-core inventory balance . finished goods cost includes the average cost of non-core raw materials and allocations of labor and variable and fixed overhead . the allocations of labor and variable and fixed overhead costs are determined based on the average actual use of the production facilities over the prior twelve months which approximates normal capacity . this method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production . in addition , we exclude certain unallocated overhead such as severance costs , duplicative facility overhead costs , and spoilage from the calculation and expense these unallocated overhead as period costs . for the fiscal years ended march 31 , 2013 , 2012 , and 2011 , costs of approximately $ 1,561,000 , $ 1,410,000 , and $ 1,378,000 , respectively , were considered unallocated overhead and thus excluded from the finished goods cost calculation and charged directly to cost of sales for our rotating electrical product line . 22 we record an allowance for potentially excess and obsolete inventory based upon recent sales history , the quantity of inventory on-hand , and a forecast of potential use of the inventory . we periodically review inventory to identify excess quantities and part numbers that are experiencing a reduction in demand . any part numbers with quantities identified during this process are reserved for at rates based upon management 's judgment , historical rates , and consideration of possible scrap and liquidation values which may be as high as 100 % of cost if no liquidation market exists for the part . the quantity thresholds and reserve rates are subjective and are based on management 's judgment and knowledge of current and projected industry demand . the reserve estimates may , therefore , be revised if there are changes in the overall market for our products or market changes that in management 's judgment , impact our ability to sell or liquidate potentially excess or obsolete inventory . we record vendor discounts as reductions of inventories that are recognized as reductions to cost of sales as the inventories are sold . inventory unreturned inventory unreturned represents our estimate , based on historical data and prospective information provided directly by the customer , of finished goods shipped to customers that we expect to be returned , under our general right of return policy , after the balance sheet date . because all cores are classified separately as long-term assets , the inventory unreturned balance includes only the added unit value of a finished good . the return rate is calculated based on expected returns within the normal operating cycle of one year . as such , the related amounts are classified in current assets . inventory unreturned is valued in the same manner as our finished goods inventory . long-term core inventory long-term core inventory consists of : used cores purchased from core brokers and held in inventory at our facilities , used cores returned by our customers and held in inventory at our facilities , used cores returned by end-users to customers but not yet returned to us which are classified as remanufactured cores until they are physically received by us , remanufactured cores held in finished goods inventory at our facilities ; and remanufactured cores held at customer locations as a part of the finished goods sold to the customer . for these remanufactured cores , we expect the finished good containing the remanufactured core to be returned under our general right of return policy or a similar used core to be returned to us by the customer , in each case , for credit . long-term core inventory is recorded at average historical purchase prices determined based on actual purchases of inventory on hand . the cost and market value of used cores for which sufficient recent purchases have occurred are deemed the same as the purchase price for purchases that are made in arm 's length transactions . long-term core inventory recorded at average historical purchase prices is primarily made up of used cores for newer products related to more recent automobile models or products for which there is a less liquid market . we must purchase these used cores from core brokers because our customers do not have a sufficient supply of these newer used cores available for the core exchange program . 23 used cores obtained in core broker transactions are valued based on average purchase price . the average purchase price of used cores for more recent automobile models is retained as the cost for these used cores in subsequent periods even as the source of these used cores shifts to our core exchange program . long-term core inventory is recorded at the lower of cost or market value . in the absence of sufficient recent purchases , we use core broker price lists to assess whether used core cost exceeds used core market value on an item by item basis . the primary reason for the insufficient recent purchases is that we obtain most of our used core inventory from the customer core exchange program . we classify all of our core inventories as long-term assets . the determination of the long-term classification is based on our view that the value of the cores is not consumed or realized in cash during our normal operating cycle , which is one year for most of the cores recorded in inventory . according to guidance provided under the fasb asc , current assets are defined as “ assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

results of operations the following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein . the acquisition of fenco on may 6 , 2011 has had a significant impact on the comparability of results as discussed below . as a result of this acquisition , we reassessed and revised our segment reporting to reflect two reportable segments , rotating electrical and undercar product line , based on the way we manage , evaluate and internally report our business activities . 29 the following table summarizes certain key operating data for the periods indicated : replace_table_token_4_th ( 1 ) finished goods inventory turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending non-core finished goods inventory values , for each fiscal year . we believe that this provides a useful measure of our ability to turn production into revenues . ( 2 ) return on equity is computed as net income for the fiscal year divided by shareholders ' equity at the beginning of the fiscal year and measures our ability to invest shareholders ' funds profitably . 30 fiscal 2013 compared to fiscal 2012 net sales and gross profit the following table summarizes net sales and gross profit by segment for fiscal 2013 and fiscal 2012 : replace_table_token_5_th net sales . our consolidated net sales for fiscal 2013 increased by $ 42,579,000 , or 11.7 % , to $ 406,266,000 compared to consolidated net sales for fiscal 2012 of $ 363,687,000 .

as of december 31 , 2014 , no shares of preferred stock were issued or outstanding , and the board of directors has not authorized or designated any rights , preferences , privileges and restrictions for any class of preferred stock . mandatorily redeemable convertible preferred stock prior to the completion of the company 's initial public offering , the company issued series a , series b , series c , series d and series e convertible preferred stock ( collectively , the “preferred stock” ) . the convertible preferred stock contained a provision that at any time after november 29 , 2017 and upon 30 day notice from the holders of 65 % of the outstanding preferred stock , such holders could compel the company to redeem , from any funds legally available , all or part of the preferred stock and any accumulated or declared but unpaid dividends thereon . the story_separator_special_tag you should read the following discussion and analysis together with the financial statements and the related notes to those statements included elsewhere in this report . this discussion contains forward-looking statements that involve risks and uncertainties . as a result of many factors , such as those set forth in the section of this report captioned “risk factors” and elsewhere in this report , our actual results may differ materially from those anticipated in these forward-looking statements . throughout this discussion , unless the context specifies or implies otherwise , the terms “nanostring” , “we” , “us” and “our” refer to nanostring technologies , inc. and its subsidiaries . overview we develop , manufacture and sell robust , intuitive products that unlock scientifically valuable and clinically actionable genomic information from minute amounts of tissue . our ncounter analysis system directly profiles hundreds of molecules simultaneously using a novel barcoding technology that is powerful enough for use in research , yet simple enough for use in clinical laboratories worldwide . we market systems and related consumables to researchers in academic , government , and biopharmaceutical laboratories for use in understanding fundamental biology and the molecular basis of diseases , such as cancer , and to clinical laboratories and medical centers for diagnostic use . as of december 31 , 2014 , we have an installed base of 264 systems , which our customers have used to publish more than 600 peer-reviewed papers . as researchers using our systems discover how genomic information can be used to improve clinical decision-making , these discoveries can be translated and validated as diagnostic tests based on our ncounter elements reagents or , in certain situations , by developing in vitro diagnostic assays . for example , our first molecular diagnostic product is the prosigna breast cancer assay , or prosigna , which provides an assessment of a patient 's risk of recurrence for breast cancer . more recently , we entered into our first companion diagnostic collaboration to develop an in vitro diagnostic test for a type of lymphoma , to be used to identify which patients are most likely to respond to a particular drug therapy . we derive a substantial majority of our revenue from the sale of our products to life science researchers , which consist of our ncounter instruments and related proprietary consumables , which we call codesets , ncounter elements reagents and master kits . after buying an ncounter analysis system , research customers purchase consumables from us for use in their experiments . our instruments are designed to work only with our consumable products . accordingly , as the installed base of our instruments grows , we expect recurring revenue from consumable sales to become an increasingly important driver of our operating results . we also derive revenue from processing fees related to proof-of-principle studies we conduct for potential customers and extended service contracts for our ncounter analysis systems . in 2013 , we began offering instruments and consumables for use in diagnostic testing . in september 2013 , we received 510 ( k ) clearance from the fda to market in the united states a version of prosigna providing an assessment of a patient 's risk of recurrence for breast cancer . in november 2013 , we began offering a version of the ncounter dx analysis system to high-complexity , clia-certified laboratories for research and diagnostics purposes . this flex configuration of the ncounter dx analysis system provides clinical laboratories a single platform with the flexibility to support both clinical testing , by running prosigna , and research , by processing translational research experiments using our research consumables . the ncounter elements reagents provide further flexibility by allowing laboratories to develop their own laboratory developed tests for gene expression , copy number variation and gene fusion signatures , which can be performed by a laboratory and may include genetic tests and other tests for rare conditions . in december 2013 , we commercially launched prosigna in the united states . national diagnostic laboratories , including laboratory corporation of america holdings and quest diagnostics , as well as laboratories at numerous cancer centers and major hospitals have chosen to add prosigna to their suites of breast cancer diagnostic tests . these laboratories collectively serve the pathology testing needs of a substantial portion of breast cancer patients throughout the united states . in september 2012 , we obtained a ce mark for prosigna , -54- our first diagnostic product , and , in early 2013 we commercially launched prosigna in europe and israel . to support the commercial launch of prosigna , we added a team of experienced oncology sales , marketing , market access and medical affairs professionals , resulting in increased operating expenses . in february 2015 , we combined our two separate sales teams into a single organization selling our entire suite of products , targeted primarily toward major academic medical centers and biopharmaceutical companies . we expect prosigna sales growth to be dependent on the installation of more systems , inclusion of prosigna in important breast cancer treatment guidelines and reimbursement by third-party payors becoming more broadly available . story_separator_special_tag although the price of prosigna and our additional future diagnostic products will depend on many factors , including whether and how much third-party payors will reimburse laboratories for conducting such tests , we expect that the gross margin for our diagnostic kits will be higher than for our research consumables . we sell prosigna kits to our lab customers , who will be responsible for providing the testing service and contracting and billing payors . prosigna kits are sold to clinical laboratories on a fixed dollars-per-kit basis , which does not expose us to direct third-party payor reimbursement risk . however , we provide customary volume discounts , and in some cases , introductory pricing during the period in which third-party payor reimbursement is being established . as a result , the average selling price per prosigna test is expected to be lower than list price . service revenue service revenue consists of fees associated with extended service contracts and conducting proof-of-principle studies . we include a one-year warranty with the sale of our instruments and offer extended service contracts , which are purchased by a majority of our customers . we selectively provide proof-of-principle studies to prospective customers in order to help them better understand the benefits of the ncounter analysis system . collaboration revenue collaboration revenue is primarily derived from our companion diagnostic development collaboration with celgene . as of december 31 , 2014 , we had received a total of $ 11.8 million from celgene , of which $ 2.9 million had been recorded as collaboration revenue , with the remainder recorded as deferred revenue , which will be -56- recognized as collaboration revenue over our remaining development performance period . collaboration revenue also includes revenue recognized under a smaller evaluation study being performed for a different biopharmaceutical company . revenue by geography we sell our products through our own sales forces in the united states , canada , singapore , israel and certain european countries . we sell through distributors in other parts of the world . as we have expanded our european direct sales force and entered into agreements with distributors of our products in europe , the middle east , asia pacific and south america , the amount of revenue generated outside of north america has generally increased , although there have been significant quarter-to-quarter fluctuations . in the future , we intend to expand our sales force and establish additional distributor relationships outside the united states to better access international markets . the following table reflects total revenue by geography based on the geographic location of our customers , distributors and collaborators . americas consists of the united states , canada , mexico and south america ; and asia pacific includes japan , china , south korea , singapore , malaysia , australia and new zealand . replace_table_token_3_th most of our revenue is denominated in u.s. dollars . our expenses are generally denominated in the currencies in which our operations are located , which is primarily in the united states . changes in foreign currency exchange rates have not materially affected us to date ; however , they may become material to us in the future as our operations outside of the united states expand . cost of product and service revenue cost of product and service revenue consists primarily of costs incurred in the production process , including costs of purchasing instruments from third-party contract manufacturers , consumable component materials and assembly labor and overhead , installation , warranty , service and packaging and delivery costs . in addition , cost of product and service revenue includes royalty costs for licensed technologies included in our products , provisions for slow-moving and obsolete inventory and stock-based compensation expense . we provide a one-year warranty on each ncounter analysis system sold and establish a reserve for warranty repairs based on historical warranty repair costs incurred . we expect the average unit costs of our instruments to decline in future periods as a result of our ongoing efforts to develop a lower-cost ncounter analysis system to expand our market opportunity among smaller research laboratories . we expect the unit costs of consumable products to decline as a result of our ongoing efforts to improve our manufacturing processes and expected increases in production volume and yields . although the unit costs of our custom codesets vary , they are generally higher as a percentage of the related revenue than our panels , in vitro diagnostic kits and ncounter elements reagents . operating expenses research and development research and development expenses consist primarily of salaries and benefits , occupancy , laboratory supplies , engineering services , consulting fees , costs associated with licensing molecular diagnostics rights and -57- clinical study expenses ( including the cost of tissue samples ) to support the regulatory approval or clearance of diagnostic products . we have made substantial investments in research and development since our inception . our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications . we believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods . given the relatively small size of our research and development staff and the limited number of active projects at any given time , we have found that , to date , it has been effective for us to manage our research and development activities on a departmental basis . accordingly , we do not require employees to report their time by project nor do we allocate our research and development costs to individual projects other than collaborations . research and development expense by functional area was as follows : replace_table_token_4_th our prosigna clinical studies generally employ a retrospective / prospective design , which means that we use samples that were previously collected from patients and for which the treatment regimen and ultimate patient outcome is known .

results of operations comparison of years ended december 31 , 2014 and 2013 revenue replace_table_token_6_th instruments , consumables and service revenue increased significantly for the year ended december 31 , 2014 due to the increased volume of instruments sold . the total growth in the annual installed base in 2014 was 43 % . distributor sales represented 32 % and 19 % of systems installed in 2014 and 2013 , respectively . the average 2014 sales price for direct sales was approximately 6 % greater than the average sales price to distributors in the same period . the increase in consumables revenue was primarily driven by growth in our installed base of instruments as the annualized pull-through remained over $ 100,000 per installed system in 2014 and 2013. the increase in service revenue was primarily related to an increase in the number of instruments covered by service contracts . cost of product and service revenue ; gross profit ; and gross margin replace_table_token_7_th the increase in cost of product and service revenue for 2014 was related to the increased volume of instruments , consumables , in vitro diagnostic kits and services sold . product and service gross margin was -61- approximately the same for both periods . although gross margin for instrument revenues in 2014 improved slightly by 1.7 percentage points over 2013 , this was largely offset by a 1.0 percentage point reduction in gross margin for consumables , in vitro diagnostic kits and service . research and development expense replace_table_token_8_th the increases in research and development expense in 2014 reflected a $ 4.1 million increase in personnel-related expenses primarily to support the advancement of our ncounter technology . in addition , there was a $ 1.5 million increase in engineering costs for development of the next generation of our ncounter system and an increase in costs to support the celgene collaboration agreement .

during the fiscal year ended september 30 , 2011 , we generated $ 218.9 million in net revenues , which is 1.9 % higher than the $ 214.8 million in net revenues generated in the fiscal year ended september 30 , 2010. the year-over-year increase in net revenues was generally due to an increase in our average selling price . during fiscal year 2011 , we continued to explore and capitalize on opportunities to generate additional sources of revenue through new product offerings . we have been primarily seeking to increase the market share of our cylindrical cells and high-power lithium battery cells for electric bicycles and other electric vehicles in china , while battery cell production for cell phones is expected to decrease proportionally while remaining the company 's core business . during the past fiscal year , we developed specially-designed cylindrical cells that we subsequently shipped to power a set of pure electric vehicles built by dongfeng-yulon , a joint venture between yulon group , taiwan 's largest automaker , and major chinese automaker dongfeng group , and delivered to the public transportation authority of the city of hangzhou , china . we also entered into a strategic cooperation program for electric vehicle development with haitec , a subsidiary of yulon group . in october 2011 , we initiated shipments of cylindrical cells to haitec to power its pure electric vehicles under this program . we also launched our first single battery and first battery module in late september 2011. both products have a capacity of 100ah and are for use in electric vehicles . the single battery consists of one large battery cell and the battery module consists of a number of 18650-type cells . we signed high-power lithium battery supply contracts with xds shenzhen , geoby , and suzhou noah for use in electric bicycles , whose market demand has been increasing . we also supplied high-power lithium battery cells and battery modules to domestic automakers such as chery and faw for use in their electric vehicles . we focused more on our polymer cells as well , as the market demand for this product has been increasing because of the increasing popularity of ultra-thin smartphones and tablet computers . 42 in addition , we continued to pursue opportunities to generate new sources of revenues and reduce costs of revenue . we continued to develop new products for use in high-end markets to increase our sales prices , and reduced manufacturing costs and purchase costs of raw materials . in the near-term , we anticipate continuing operating challenges due to a number of trends facing our business , including in particular declining demand for replacement battery cells and increasing competition from foreign and domestic battery cell manufacturers in china . these challenges may impede our primary strategy to increase our revenues and gross margin through product diversification and manufacturing efficiencies . in response , we will continue to take cost-cutting actions , including employee reductions . to that end , in september 2011 , we hired a new general manager and a new sales vice president for our shenzhen facility to report to our chief executive officer so as to strengthen management capability and to improve sales productivity . to help us finance and expand our operations , we had access to $ 242.4 million in short-term credit facilities and $ 31.3 million in long-term credit facilities as of september 30 , 2011. as of september 30 , 2011 , the principal outstanding amounts included short-term bank loans of $ 139.7 million under credit facilities , long-term bank loans of $ 23.5 million maturing within one year and long-term bank loans of $ 15.0 million maturing in over one year , and bills payable of $ 50.2 million under credit facilities , leaving $ 59.5 million of short-term funds available under our credit facilities for additional cash needs . in july 2008 , a $ 60.0 million shelf registration statement was declared effective by the sec , pursuant to which we raised $ 36.6 million in gross proceeds from sales of common stock and issued common stock warrants exercisable for up to $ 21.6 million in additional gross proceeds . none of these warrants were exercised before their expiration . this shelf registration statement has expired . we had a working capital deficiency , accumulated deficit from recurring net losses incurred for the current and prior years as at september 30 , 2011 and significant short-term debt obligations maturing in less than one year . these factors raise substantial doubts about our ability to continue as a going concern . accordingly , we have continued to develop a strategic plan to continue to generate a positive cash flow from operating activities for the fiscal years ending september 30 , 2012 and 2013. under this plan , we will continue to increase our presence in the oem market both domestically and internationally with more aggressive marketing strategies expand and secure our market base . we will also continue to implement reductions of both manufacturing costs and operating expenses to improve profit margins as well as reduce receivable turnover days through stronger credit controls . financial statement presentation net revenues . our net revenues represent the invoiced value of our products sold , net of value added taxes , or vat , sales returns , trade discounts and allowances . we are subject to vat , which is levied on most of our products at the rate of 17 % on the invoiced value of our products . provision for sales returns are recorded as a reduction of revenue in the same period that revenue is recognized . the provision for sales returns represents our best estimate of the amount of goods that will be returned from our customers based on historical sales returns data . cost of revenues . cost of revenues consists primarily of material costs , employee remuneration for staff engaged in production activity , share-based compensation , depreciation and related expenses that are directly attributable to the production of products . story_separator_special_tag for bak electronics , established in august 2005 , the same tax holiday was in effect for calendar years 2006 and 2007 , making bak electronics fully exempt from any enterprise income tax . following the tax holiday , a three-year 50 % reduction in bak electronics ' enterprise income tax rate commenced . pursuant to the transition period of the eit law , bak electronics ' income tax rates for calendar years 2010 and 2011 were 22 % and 24 % , respectively , and starting in calendar year 2012 it was expected to be subject to an income tax rate of 25 % . taking the 50 % reduction into account , bak electronics ' income tax rates are now 11 % and 24 % for calendar years 2010 and 2011 , respectively , with no change in its expected 2012 tax rate of 25 % . bak electronics did not incur any enterprise income tax for the calendar year 2011 due to the current tax losses carried forward from calendar year 2009 and 2010 . 44 shenzhen bak and bak electronics did not receive any tax benefit to their tax holiday and preferential tax rate for the fiscal year ended september 30 , 2011. bak tianjin is currently paying no enterprise income tax due to cumulative tax losses . our canadian , german , indian , and hong kong subsidiaries—bak canada , bak europe , bak india , and bak international—are subject to profits taxes in their respective countries at rates of 38 % , 25 % , 30 % , and 16.5 % respectively . however , because they do not have any assessable income derived from or arising in those countries , they have not paid any such tax . our effective tax expense rate was 5.6 % for the fiscal year ended september 30 , 2011 and the effective tax benefit rate was 9.1 % and 8.2 % for the fiscal years ended september 30 , 2010 and 2009 , respectively . pursuant to the provisional regulation of china on value added tax and its implementing rules , all entities and individuals that are engaged in the sale of goods , the provision of repairs and replacement services and the importation of goods in china are generally required to pay vat at a rate of 17.0 % of the gross sales proceeds received , less any deductible vat already paid or borne by the taxpayer . further , when exporting goods , the exporter is entitled to some or all of the refund of vat that it has already paid or borne . our imported raw materials that are used for manufacturing export products and are deposited in bonded warehouses are exempt from import vat . story_separator_special_tag research projects and $ 235,000 represented amortization of government subsidies received in relation to the additional cost of the land use rights of bak industrial park . no present or future obligation arises from the receipt of such government subsidies . 47 income tax expense / ( benefit ) . income tax expense was $ 1.3 million for the year ended september 30 , 2011 , as compared to income tax benefit of $ 3.4 million for fiscal year 2010. the change was the result of allowance of deferred tax assets during the year ended september 30 , 2011. net loss . as a result of the foregoing , we had a net loss of $ 24.5 million for the year ended september 30 , 2011 , compared to $ 32.8 million for the year ended september 30 , 2010. comparison of fiscal years ended september 30 , 2010 and september 30 , 2009 net revenues . net revenues were $ 214.8 million for the fiscal year ended september 30 , 2010 as compared to $ 211.1 million for the prior year , an increase of $ 3.6 million , or 1.7 % . the following table sets forth the breakdown of our net revenues by battery cell type . replace_table_token_11_th net revenues from sales of aluminum-case cells slightly increased to $ 112.6 million in the year ended september 30 , 2010 , from $ 111.7 million in fiscal year 2009 , an increase of $ 882,000 , or 0.8 % . this resulted from an increase in sales volume of 16.7 % driven by increased sales to the oem market in the prc , offset by a 13.7 % decrease in average selling price as we sold slow-moving inventories at discount to improve our operating cash flow . net revenues from sales of battery packs increased to $ 46.4 million in the year ended september 30 , 2010 , from $ 24.7 million in fiscal year 2009 , an increase of $ 21.7 million , or 87.8 % . this resulted from an increase in sales volume of 114.9 % from increased export and domestic market ( prc ) sales to new customers as some of our smaller competitors left the market , offset by a 12.6 % decrease in average selling price . net revenues from sales of cylindrical cells decreased to $ 43.2 million in the year ended september 30 , 2010 , from $ 55.3 million in fiscal year 2009 , a decrease of $ 12.2 million , or 22.0 % , due to a decrease in our average selling prices of 18.6 % due to implementing a temporary pricing competition strategy to maintain and increase our market share in the oem market , and a decrease in sales volume of 4.2 % as result of fierce competition . we sold $ 689,000 in steel-case cells in the year ended september 30 , 2010 as compared to $ 5.0 million in the year ended september 30 , 2009. this change was attributable primarily to our long-term strategic reduction and suspension of steel-case cell production in january 2009 which was designed to increase our production capacity of aluminum-case cells for sale to the oem market and to take advantage of the greater sales prospects and lower costs of aluminum-case cells .

results of operations the following table sets forth key components of our results of operations for the years indicated , both in dollars and as a percentage of our revenue . all amounts , other than percentages , are in thousands of u.s. dollars . replace_table_token_9_th 45 comparison of fiscal years ended september 30 , 2011 and september 30 , 2010 net revenues . net revenues were $ 218.9 million for the fiscal year ended september 30 , 2011 as compared to $ 214.8 million for the prior year , an increase of $ 4.1 million , or 1.9 % . the following table sets forth the breakdown of our net revenues by battery cell type . replace_table_token_10_th net revenues from sales of aluminum-case cells decreased to $ 94.4 million in the year ended september 30 , 2011 , from $ 112.6 million in fiscal year 2010 , a decrease of $ 18.2 million , or 16.2 % , resulting from a significant decrease of sales volume of 25.0 % as a result of the introduction of built-in high capacity polymer batteries being adopted by domestic oem customers , offset by an increase in our average price of 11.8 % . net revenues from sales of battery packs increased to $ 55.1 million in the year ended september 30 , 2011 , from $ 46.4 million in fiscal year 2010 , an increase of $ 8.7 million , or 18.8 % . this resulted from an increase in sales volume of 7.6 % from increased export and domestic market ( prc ) sales to new customers as some of our smaller competitors left the market and a 10.5 % increase in average selling price .

” the following generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. discussion of historical items in 2017 , and year-to-year comparisons between 2018 and 2017 , can be found in our annual report on form 10-k for the fiscal year ended december 31 , 2018 , filed with the sec on february 20 , 2019 , under part ii , item 7 , management 's discussion and analysis of financial condition and results of operations . executive summary full-year 2019 net earnings were $ 1.2 billion ( $ 3.07 per diluted share ) compared with net earnings of $ 2.0 billion ( $ 4.85 per diluted share ) for full-year 2018. international paper delivered solid earnings and outstanding cash generation in 2019. our performance demonstrates our ability to generate strong cash flow and the flexibility of the company to navigate well through a challenging global environment . while the u.s. economy remains healthy , during 2019 we managed through significant inventory headwinds and broader trade tensions that impacted our exports . against this backdrop , we focused on optimizing our full value chain by strengthening commercial offerings in faster growing packaging segments , running our manufacturing system well and leveraging the flexibility of our mill and converting system . we continued to grow value for our shareholders with returns above our cost of capital for a tenth consecutive year . our capital allocation choices were consistent with our framework . in 2019 , we returned $ 1.3 billion to shareholders through dividends of about $ 800 million and share repurchases of about $ 500 million . the company also increased its dividend for the tenth consecutive year , reinforcing our policy of a strong and sustainable dividend . we also repaid approximately $ 1 billion of debt during 2019 as part of our commitment to a strong balance sheet and to maintain an investment grade rating . we continued to invest strategically to strengthen our industrial packaging business . in our north american corrugated packaging business , we made targeted investments to enhance our capabilities and reinforce our strong position in the fastest growing segments . in our emea packaging business , we completed selective acquisitions to expand our converting network around the madrid , spain mill . lastly , in january 2020 , we monetized approximately 19 % of our investment in graphic packaging in exchange for $ 250 million . compared to 2018 , the company 's 2019 results reflect the impact of a challenging global environment , which resulted in price and mix being a headwind , mostly due to significant price pressure in export pulp and containerboard markets , as well as the price impact of index movements in our north american industrial packaging business . volume negatively impacted 2019 results due to challenging export markets . in particular , export containerboard volume was impacted by unusually high customer inventories at the start of 2019 which took most of the year to normalize . operations and costs were impacted by significant economic downtime , particularly in the first half of 2019 , due to lower export shipments and our ability to reduce inventories across our north american industrial packaging system due to improved supply chain operations . input costs were favorable for the full year , primarily from lower recovered fiber and energy costs . even though wood costs moderated in the second half of 2019 , they had a negative impact on earnings in 2019. equity earnings decreased in 2019 due to lower ilim earnings , driven by the challenging global pulp market dynamics . looking ahead to the first quarter 2020 , as compared to the fourth quarter of 2019 , in our industrial packaging business , we expect lower price and mix on the flow-through of prior price index movements . volume is expected to be seasonally lower in north america . operations and costs are expected to be negatively impacted by the non-repeat of a favorable inventory valuation adjustment recognized in the fourth quarter , as well as higher unabsorbed fixed costs associated with the riverdale mill conversion . maintenance outage expense is expected to be higher , and input costs are expected to be higher seasonally . in our global cellulose fibers business , we expect lower price and mix on the impact of prior price index movements . volume is expected to improve driven by higher fluff pulp shipments . operations and costs are expected to negatively impact earnings due to the non-repeat of favorable items recognized in the fourth quarter . maintenance outage expenses are expected to increase while input costs are expected to remain stable . in our printing papers business , flow-through of prior negative price movement is expected to be offset by improved geographic mix . volume is expected to be down mostly due to seasonally lower volumes in brazil . operations and costs are 19 expected to have a favorable impact on earnings mostly due to the non-repeat of an unfavorable inventory valuation adjustment recognized in the fourth quarter , as well as improved fixed cost absorption in north america . maintenance outage expenses are expected to increase while input costs should remain stable . lastly , we expect lower equity earnings from our ilim joint venture on the non-repeat of the fourth quarter foreign exchange gain . looking ahead to the full-year 2020 , we expect to generate solid cash flows despite earnings headwinds , by continuing to leverage the flexibility of the company to manage costs , capital spending and working capital . earnings are expected to be negatively impacted by price carryover from 2019 , as well as the impact of the january 2020 containerboard index movement . earnings are also expected to be negatively impacted by higher planned maintenance outage expense and costs related to the riverdale conversion , including unabsorbed fixed costs during the conversion process . we plan to offset anticipated inflation through deliberate improvement initiatives . story_separator_special_tag the benefits from higher average sales price , net of mix , were offset by lower sales volumes , higher input costs , higher maintenance outage costs and higher operating costs . liquidity and capital resources for the year ended december 31 , 2019 , international paper generated $ 3.6 billion of cash flow from operations compared with $ 3.2 billion in 2018 . capital spending for 2019 totaled $ 1.3 billion , or 98 % of depreciation and amortization expense . our liquidity position remains strong , supported by approximately $ 2.1 billion of credit facilities . we expect another year of solid cash generation in 2020 . furthermore , we intend to continue to make choices for the use cash that are consistent with our capital allocation framework to drive long-term value creation . these include maintaining a strong balance sheet and investment grade credit rating , returning meaningful cash to shareholders through dividends and share repurchases and making organic investments to maintain our world-class system and strengthen our packaging business . capital spending for 2020 is planned at approximately $ 1.0 billion , or about 74 % of depreciation and amortization , including approximately $ 250 million of strategic investments . under our share repurchase program most recently approved by our board of directors on october 9 , 2018 , which does not have an expiration date , approximately $ 1.75 billion aggregate amount of shares of common stock remains authorized for purchase under this program . we may continue to repurchase shares under such authorization in open market transactions ( including block trades ) , privately negotiated transactions or otherwise , subject to prevailing market conditions , our liquidity requirements , restrictions in our debt documents , applicable securities laws requirements and other factors . in addition , we pay regular quarterly cash 22 dividends and expect to continue to pay regular quarterly cash dividends in the foreseeable future . each quarterly dividend is subject to review and approval by our board of directors , and is subject to restrictions in our debt documents . results of operations while the operating results for international paper 's various business segments are driven by a number of business-specific factors , changes in international paper 's operating results are closely tied to changes in general economic conditions in north america , europe , russia , latin america , north africa and the middle east . ( and were closely tied to general economic conditions in india prior to the sale of our controlling interest in international paper appm limited , an india-based printing paper business , effective october 30 , 2019 ) . factors that impact the demand for our products include industrial non-durable goods production , consumer preferences , consumer spending , commercial printing and advertising activity , white-collar employment levels , and movements in currency exchange rates . product prices are affected by general economic trends , inventory levels , currency exchange rate movements and worldwide capacity utilization . in addition to these revenue-related factors , net earnings are impacted by various cost drivers , the more significant of which include changes in raw material costs , principally wood , recycled fiber and chemical costs ; energy costs ; freight costs ; mill outage costs ; salary and benefits costs , including pensions ; and manufacturing conversion costs . the following is a discussion of international paper 's consolidated results of operations for the year ended december 31 , 2019 , and the major factors affecting these results compared to 2018 . for the year ended december 31 , 2019 , international paper reported net sales of $ 22.4 billion , compared with $ 23.3 billion in 2018 . international net sales ( based on the location of the seller and including u.s. exports ) totaled $ 8.1 billion or 36 % of total sales in 2019 . this compares with international net sales of $ 8.8 billion in 2018 . full year 2019 net earnings attributable to international paper company totaled $ 1.2 billion ( $ 3.07 per diluted share ) , compared with net earnings of $ 2.0 billion ( $ 4.85 per diluted share ) in 2018 . amounts in 2018 include the results of discontinued operations . earnings from continuing operations attributable to international paper company after taxes in 2019 and 2018 were as follows : in millions 2019 2018 earnings from continuing operations attributable to international paper company $ 1,225 ( a ) $ 1,667 ( b ) ( a ) includes $ 515 million of net special items charges which included tax expense of $ 203 million related to a foreign deferred tax valuation allowance and $ 28 million of non-operating pension expense . ( b ) includes $ 166 million of net special items charges and $ 371 million of non-operating pension expense which included a pre-tax charge of $ 424 million ( $ 318 million after taxes ) for a settlement accounting charge associated with an annuity purchase and transfer of pension obligations for approximately 23,000 retirees . compared with 2018 , the benefits from lower input costs ( $ 59 million ) , lower maintenance outage costs ( $ 23 million ) , lower corporate and other costs ( $ 8 million ) and lower net interest expense ( $ 32 million ) were more than offset by lower average sales price and an unfavorable mix ( $ 122 million ) , lower sales volumes ( $ 89 million ) , higher operating costs ( $ 235 million ) and higher tax expense ( $ 26 million ) . in addition , 2019 results included lower equity earnings , net of taxes , relating to the company 's investments in ilim and gpip . see story_separator_special_tag href= '' https : //www.sec.gov/archives/edgar/data/0000051434/000005143420000011/ # s5884756fef9e91fc72d2d3b6f3de9170 '' style= '' font-family : arial ; font-size:10pt ; '' > item 8. financial statements and supplementary data for further discussion . description of business segments international paper 's business segments discussed below are consistent with the internal structure used to manage these businesses .

business segment results on pages 26 through 29 for a discussion of the impact of these factors by segment . discontinued operations 2018 : in 2018 , discontinued operations included an after-tax gain of $ 364 million on the transfer of the north american consumer packaging business and after-tax charges of $ 19 million for costs associated with the transfer . see note 8 divestitures and impairments on pages 56 through 58 of item 8. financial statements and supplementary data for further discussion . 23 income taxes a net income tax provision of $ 634 million was recorded for 2019 , including tax expense of $ 203 million related to a foreign deferred tax valuation allowance , a tax benefit of $ 53 million related to internal investment restructuring , tax expense of $ 9 million related to a non u.s. tax rate change , tax expense of $ 3 million related to foreign tax audits and a tax benefit of $ 3 million related to state income tax legislative changes . excluding these items , a $ 53 million net tax benefit for other special items and a $ 8 million tax benefit related to non-operating pension expense , the operational tax provision was $ 536 million , or 26 % of pre-tax earnings before equity earnings . a net income tax provision of $ 445 million was recorded for 2018 , including a tax benefit of $ 36 million to revise our 2017 estimated tax related to the enactment of the tax cuts and jobs act , tax expense of $ 25 million related to foreign tax audits , tax expense of $ 19 million related to an international investment restructuring and tax expense of $ 9 million related to state income tax legislative changes .

we use derivative instruments , including interest rate swaps that have indices related to the pricing of specific liabilities as part of our interest rate risk management strategy . as a matter of policy , we do not use highly leveraged derivative instruments for interest rate risk management . we use interest rate swaps to economically convert a portion of our fixed-rate debt into variable-rate debt . under the interest rate swap contracts , we agree with other parties to exchange , at specified intervals , the difference between fixed-rate and floating-rate interest amounts , which is calculated based on an agreed-upon notional amount . we use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations . we also execute cross-currency interest rate swaps to hedge interest payments on newly issued debt denominated in a different currency than the functional currency of the borrowing entity . substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment . hedges of net investments in non-u.s. operations . we have numerous investments outside the united states . the net assets of these subsidiaries are exposed to changes and volatility in currency exchange rates . we use local currency denominated debt to hedge our non-u.s. net investments against adverse movements in exchange rates . we designated our euro , pound sterling and swiss franc denominated borrowings as a net investment hedge of a portion of our overall european operations . the gains and losses on our net investment in these designated european operations are economically offset by losses and gains on our euro , pound sterling and swiss franc denominated borrowings . the change in the debt 's value , net of deferred taxes , is recorded in the currency translation adjustment component of accumulated other comprehensive earnings/ ( losses ) . income taxes : our provision for income taxes includes amounts payable or refundable for the current year , the effects of deferred taxes and impacts from uncertain tax positions . we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of our assets and liabilities , operating loss carryforwards and tax credit carryforwards . deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those differences are expected to reverse . the realization of certain deferred tax assets is dependent on generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods . deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion , or all , of the deferred tax assets will not be realized . when assessing the need for a valuation allowance , we consider any carryback potential , future reversals of existing taxable temporary differences ( including liabilities for unrecognized tax benefits ) , future taxable income and tax planning strategies . we recognize tax benefits in our financial statements from uncertain tax positions only if it is more likely than not that the tax position will be sustained based on the technical merits of the position . the amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon resolution . future changes related to the expected resolution of uncertain tax positions could affect tax expense in the period when the change occurs . 74 we monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment . in response to the united states tax reform legislation enacted on december 22 , 2017 ( “u.s . tax reform” ) , the u.s. securities and exchange commission ( “sec” ) issued guidance that allows us to record provisional amounts for the impacts of u.s. tax reform if the full accounting can not be completed before we file our 2017 financial statements . for provisions of the tax law where we are unable to make a reasonable estimate of the impact , the guidance allows us to continue to apply the historical tax provisions in computing our income tax liability and deferred tax assets and liabilities as of december 31 , 2017. the guidance also allows us to finalize accounting for the u.s. tax reform changes within one year of the december 22 , 2017 enactment date . see note 14 , income taxes , for additional information on how we recorded the impacts of the u.s. tax reform . new accounting pronouncements : in august 2017 , the financial accounting standards board ( “fasb” ) issued an accounting standards update ( “asu” ) to simplify the application of hedge accounting and increase the transparency of hedge results . the updated standard changes how companies can assess the effectiveness of their hedging relationships . for cash flow and net investment hedges as of the adoption date , the asu requires a modified retrospective transition approach . presentation and disclosure requirements related to this asu are required prospectively . the asu is effective for fiscal years beginning after december 15 , 2018 , with early adoption permitted . we intend to early adopt this standard in the first quarter of 2018 and we do not expect story_separator_special_tag in this form 10-k. our primary non-gaap financial measures are listed below and reflect how we evaluate our current and prior-year operating results . as new events or circumstances arise , these definitions could change . when our definitions change , we provide the updated definitions and present the related non-gaap historical results on a comparable basis ( 1 ) . story_separator_special_tag ( 5 ) non-gaap adjustments related to the 2014-2018 restructuring program reflect costs incurred that relate to the objectives of our program to transform our supply chain network and organizational structure . costs that do not meet the program objectives are not reflected in the non-gaap adjustments . refer to our annual report on form 10-k for the year ended december 31 , 2016 for more information on the 2012-2014 restructuring program . ( 6 ) during the third quarter of 2016 , we began to exclude unrealized gains and losses ( mark-to-market impacts ) from outstanding commodity and forecasted currency transaction derivatives from our non-gaap earnings measures until such time that the related exposures impact our operating results . since we purchase commodity and forecasted currency transaction contracts to mitigate price volatility primarily for inventory requirements in future periods , we made this adjustment to remove the volatility of these future inventory purchases on current operating results to facilitate comparisons of our underlying operating performance across periods . we also discontinued designating commodity and forecasted currency transaction derivatives for hedge accounting treatment . to facilitate comparisons of our underlying operating results , we have recast all historical non-gaap earnings measures to exclude the mark-to-market impacts . ( 7 ) historically , we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business . beginning in the third quarter of 2015 , we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of operating income following the deconsolidation of our coffee business . refer to note 1 , summary of significant accounting policies , in our annual report on form 10-k for the year ended december 31 , 2016 for more information . ( 8 ) during 2017 , we recorded benefits from the reversal of tax liabilities in connection with the resolution of a brazilian indirect tax matter and settlement of pre-acquisition cadbury tax matters . see note 12 , commitments and contingencies—tax matters , for additional information . ( 9 ) on november 20 , 2017 , dirk van de put succeeded irene rosenfeld as ceo of mondelēz international in advance of her retirement at the end of march 2018. in order to incent mr. van de put to join us , we provided him compensation with a total combined target value of $ 42.5 million to make him whole for incentive awards he forfeited or grants that were not made to him when he left his former employer . the compensation we granted took the form of cash , deferred stock units , performance share units and stock options . in connection with irene rosenfeld 's retirement , we made her outstanding grants of performance share units for the 2016-2018 and 2017-2019 performance cycles eligible for continued vesting and approved a $ 0.5 million salary for her service as chairman from january through march 2018. we refer to these elements of mr. van de put 's and ms. rosenfeld 's compensation arrangements together as “ceo transition remuneration.” we are excluding amounts we expense as ceo transition remuneration from our 2017 and future non-gaap results because those amounts are not part of our regular compensation program and are incremental to amounts we would have incurred as ongoing ceo compensation . as a result , in 2017 , we excluded amounts expensed for the cash payment to mr. van de put and partial vesting of his equity grants . in 2018 , we expect to exclude amounts paid for ms. rosenfeld 's service as chairman and partial vesting of mr. van de put 's and ms. rosenfeld 's equity grants . ( 10 ) on december 22 , 2017 , the united states enacted tax reform legislation that included a broad range of business tax provisions . as further detailed in note 14 , income taxes , our accounting for the new legislation is not complete and we have made reasonable estimates for some tax provisions . we exclude the discrete u.s. tax reform impacts from our adjusted eps as they do not reflect our ongoing tax obligations under u.s. tax reform . ( 11 ) we have excluded our proportionate share of our equity method investees ' unusual or infrequent items such as acquisition and divestiture related costs , restructuring program costs and discrete u.s. tax reform impacts , in order to provide investors with a comparable view of our performance across periods . although we have shareholder rights and board representation commensurate with our ownership interests in our equity method investees and review the underlying operating results and unusual or infrequent items with them each reporting period , we do not have direct control over their operations or resulting revenue and expenses . our use of equity method investment net earnings on an adjusted basis is not intended to imply that we have any such control . our gaap “diluted eps attributable to mondelēz international from continuing operations” includes all of the investees ' unusual and infrequent items . we believe that the presentation of these non-gaap financial measures , when considered together with our u.s. gaap financial measures and the reconciliations to the corresponding u.s. gaap financial measures , provides you with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures . because non-gaap financial measures vary among companies , the non-gaap financial measures presented in this report may not be comparable to similarly titled measures used by other companies .

organic net revenue : applying the definition of “organic net revenue” , the adjustments made to “net revenues” ( the most comparable u.s. gaap financial measure ) were to exclude the impact of currency , our historical venezuelan operations , the adjustment for deconsolidating our historical coffee business , an accounting calendar change , acquisitions and divestitures . we believe that organic net revenue reflects the underlying growth from the ongoing activities of our business and provides improved comparability of results . we also evaluate our organic net revenue growth from emerging markets and power brands , and these underlying measures are also reconciled to u.s. gaap below . replace_table_token_26_th ( 1 ) includes the historical results of our venezuelan subsidiaries prior to the december 31 , 2015 deconsolidation . refer to note 1 , summary of significant accounting policies – currency translation and highly inflationary accounting : venezuela , for more information . ( 2 ) includes our historical global coffee business prior to the july 2 , 2015 jde coffee business transactions . refer to note 2 , divestitures and acquisitions , and our non-gaap definitions appearing earlier in this section for more information . ( 3 ) each year we reevaluate our power brands and confirm the brands in which we will continue to make disproportionate investments . as such , we may make changes in our planned investments in primarily regional power brands following our annual review cycles . for 2017 , we made limited changes to our list of regional power brands and as such , we reclassified 2016 and 2015 power brand net revenues on a basis consistent with the current list of power brands .

our product portfolio of pumps , valves , seals , automation and aftermarket services supports global infrastructure industries , including oil and gas , chemical , power generation and water management , as well as general industrial markets where our products and services add value . through our manufacturing platform and global network of quick response centers ( `` qrcs '' ) , we offer a broad array of aftermarket equipment services , such as installation , advanced diagnostics , repair and retrofitting . we currently employ approximately 19,000 employees in more than 50 countries . our business model is significantly influenced by the capital spending of global infrastructure industries for the placement of new products into service and aftermarket services for existing operations . the worldwide installed base of our products is an important source of aftermarket revenue , where products are expected to ensure the maximum operating time of many key industrial processes . over the past several years , we have significantly invested in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products . the aftermarket portion of our business also helps provide business stability during various economic periods . the aftermarket business , which is primarily served by our network of 191 qrcs located around the globe , provides a variety of service offerings for our customers including spare parts , service solutions , product life cycle solutions and other value-added services . it is generally a higher margin business compared to our original equipment business and a key component of our profitable growth strategy . our operations are conducted through three business segments that are referenced throughout this management 's discussion and analysis of financial condition and results of operations ( `` md & a '' ) : engineered product division ( `` epd '' ) for long lead time , custom and other highly-engineered pumps and pump systems , mechanical seals , auxiliary systems and replacement parts and related services ; industrial product division ( `` ipd '' ) for pre-configured engineered pumps and pump systems and related products and services ; and flow control division ( `` fcd '' ) for engineered and industrial valves , control valves , actuators and controls and related services . our business segments share a focus on industrial flow control technology and have a high number of common customers . these segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage . our segments also benefit from our global footprint and our economies of scale in reducing administrative and overhead costs to serve customers more cost effectively . for example , our segment leadership reports to our chief operating officer ( `` coo '' ) and the segments share leadership for operational support functions , such as research and development , marketing and supply chain . the reputation of our product portfolio is built on more than 50 well-respected brand names such as worthington , idp , valtek , limitorque , durco , edward , anchor/darling and durametallic , which we believe to be one of the most comprehensive in the industry . our products and services are sold either directly or through designated channels to more than 10,000 companies , including some of the world 's leading engineering , procurement and construction ( `` epc '' ) firms , original equipment manufacturers , distributors and end users . we continue to build on our geographic breadth through our qrc network with the goal to be positioned as near to customers as possible for service and support in order to capture valuable aftermarket business . along with ensuring that we have the local capability to sell , install and service our equipment in remote regions , it is equally imperative to continuously 28 improve our global operations . we continue to expand our global supply chain capability to meet global customer demands and ensure the quality and timely delivery of our products . we continue to devote resources to improving the supply chain processes across our business segments to find areas of synergy and cost reduction and to improve our supply chain management capability to ensure it can meet global customer demands . we also remain focused on improving on-time delivery and quality , while managing warranty costs as a percentage of sales across our global operations , through the assistance of a focused continuous improvement process ( `` cip '' ) initiative . the goal of the cip initiative , which includes lean manufacturing , six sigma business management strategy and value engineering , is to maximize service fulfillment to customers through on-time delivery , reduced cycle time and quality at the highest internal productivity . in 2015 , we were challenged by broad-based capital spending declines , originating in the oil and gas industry , heightened pricing pressures and negative currency impacts caused by a stronger u.s. dollar . this was further compounded by economic and geo-political conditions in latin america , the middle east and china . in addition , we experienced lower than expected activity levels in our aftermarket business due to deferred spending of our customers ' repair and maintenance budgets . we expect that the current environment will persist into 2016 . to better align costs and improve long-term efficiency , we initiated realignment programs , inclusive of those associated with the sihi acquisition , to accelerate both short- and long-term strategic plans , including targeted manufacturing optimization through the consolidation of facilities , sg & a efficiency initiatives and transfer of activities from high-cost regions to lower-cost facilities . we currently estimate an approximate 18 % reduction in our global workforce from these realignment programs . story_separator_special_tag we believe the chemical industry in the near-term will continue to invest in north america capacity additions , maintenance and upgrades for optimization of existing assets and that developing regions will selectively invest in capital infrastructure to meet current and future indigenous demand . we believe our global presence and our localized aftermarket capabilities are well-positioned to serve the potential growth opportunities in this industry . power generation the power generation industry represented approximately 14 % and 12 % of our bookings in 2015 and 2014 , respectively . in 2015 , the power generation industry continued to experience some softness in capital spending in the mature regions driven by the uncertainty related to environmental regulations , as well as potential regulatory impacts to the overall civilian nuclear market . in the developing regions , capital investment remained in place driven by increased demand forecasts for electricity in countries such as china and india . global concerns about the environment continue to support an increase in desired future capacity from renewable energy sources . the majority of the active and planned construction throughout 2015 continued to utilize designs based on fossil fuels . natural gas increased its percentage of utilization driven by market prices for gas remaining low and relatively stable . with the potential of unconventional sources of gas , such as shale gas , the power generation industry is forecasting an increased use of this form of fuel for power generation plants . we believe the outlook for the power generation industry remains favorable . current legislative efforts to limit the emissions of carbon dioxide may have an adverse effect on investment plans depending on the potential requirements imposed and the timing of compliance by country . however , we believe that proposed methods of limiting carbon dioxide emissions offer business opportunities for our products and services . we believe the long-term fundamentals for the power generation industry remain solid based on projected increases in demand for electricity driven by global population growth , advancements of industrialization and growth of urbanization in developing markets . we also believe that our long-standing reputation in the power generation industry , our portfolio of offerings for the various generating methods , our advancements in serving the renewable energy market and carbon capture methodologies , as well as our global service and support structure , position us well for the future opportunities in this important industry . 30 water management the water management industry represented approximately 4 % and 3 % our bookings in 2015 and 2014 , respectively . water management industry activity level experienced some softness in 2015 despite worldwide demand for fresh water and water treatment continuing to create requirements for new facilities or for upgrades of existing systems , many of which require products that we offer , particularly pumps . the proportion of people living in regions that find it difficult to meet water requirements is expected to double by 2025. we believe that the persistent demand for fresh water during all economic cycles supports continued investments . general industries general industries represented , in the aggregate , approximately 24 % and 22 % of our bookings in 2015 and 2014 , respectively . general industries comprises a variety of different businesses , including mining and ore processing , pharmaceuticals , pulp and paper , food and beverage and other smaller applications , none of which individually represented more than 5 % of total bookings in 2015 and 2014 . general industries also includes sales to distributors , whose end customers operate in the industries we primarily serve . the outlook for this group of industries is heavily dependent upon the condition of global economies and consumer confidence levels . the long-term fundamentals of many of these industries remain sound , as many of the products produced by these industries are common staples of industrialized and urbanized economies . we believe that our specialty product offerings designed for these industries and our aftermarket service capabilities will provide continued business opportunities . our results of operations throughout this discussion of our results of operations , we discuss the impact of fluctuations in foreign currency exchange rates . we have calculated currency effects by translating current year results on a monthly basis at prior year exchange rates for the same periods . effective march 28 , 2013 , we and our joint venture partner agreed to exit our joint venture , audco india , limited ( “ ail ” ) , which manufactures integrated industrial valves in india . to effect the exit , in two separate transactions , we acquired 100 % ownership of ail 's plug valve manufacturing business in an asset purchase and sold our 50 % equity interest in ail to the joint venture partner . effective december 10 , 2013 , we acquired for inclusion in ipd , innovative mag-drive , llc ( `` innomag '' ) , a privately-owned , united states ( `` u.s. '' ) based company specializing in advanced sealless magnetic drive centrifugal pumps in the chemical and general industries . the results of operations of innomag and ail have been consolidated since the applicable acquisition dates . no pro forma information has been provided for these acquisitions due to immateriality . effective march 31 , 2014 , we sold our fcd naval oy ( `` naval '' ) business to a finnish valve manufacturer . the sale included naval 's manufacturing facility located in laitila , finland and a service and support center located in st. petersburg , russia . effective january 7 , 2015 , we acquired for inclusion in ipd , 100 % of sihi group b.v. ( `` sihi '' ) , a global provider of engineered vacuum and fluid pumps and related services .

flow control division segment results our second largest business segment is fcd , which designs , manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves , control valves , valve automation products , boiler controls and related services . fcd leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio . fcd has a total of 58 manufacturing facilities and qrcs in 25 countries around the world , with five of its 26 manufacturing operations located in the u.s. , 13 located in europe , seven located in asia pacific and one located in latin america . based on independent industry sources , we believe that fcd is the fourth largest industrial valve supplier on a global basis . replace_table_token_23_th bookings in 2015 decrease d $ 346.7 million , or 20.8 % , as compared with 2014 . the decrease included negative currency effects of approximately $ 107 million . the decrease in customer bookings was primarily driven by the general , chemical , and oil and gas industries . customer bookings decreased $ 136.2 million into europe , $ 129.8 million into asia pacific , $ 46.3 million into latin america and $ 37.3 million into north america . the decrease was driven by decreased customer original equipment bookings . of the $ 1.3 billion of bookings in 2015 , approximately 32 % were from oil and gas , 27 % from chemical , 24 % from general industries , 15 % from power generation and 2 % from water management . 39 bookings in 2014 increased $ 3.3 million , or 0.2 % , as compared with 2013. the increase included negative currency effects of approximately $ 6 million . the increase in customer bookings was primarily attributable to the power and chemical industries , partially offset by decreases in the oil and gas and general industries .

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 . we are also subject to financial covenants under our credit facility based on adjusted ebitdax ratios as further described above in liquidity and capital resources . in addition , adjusted ebitdax is widely used by professional research analysts and others in the valuation , comparison , and investment recommendations of companies in the oil and gas exploration and production industry . adjusted ebitdax should not be considered in isolation or as a substitute for net income , net cash provided by operating activities , or other profitability or liquidity measures prepared under gaap . because adjusted ebitdax excludes some , but not all items that affect net income and may vary among companies , the adjusted ebitdax amounts presented may not be comparable to similar metrics of other companies . 69 table of contents the following table presents a reconciliation of the gaap financial measure of net income to the non-gaap financial measure of adjusted ebitdax ( in thousands ) : year ended december 31 , 2020 2019 net income $ 103,528 $ 67,067 exploration 596 797 depreciation , depletion , and amortization 91,242 76,453 amortization of deferred financing costs — 248 abandonment and impairment of unproved properties 37,343 11,201 stock-based compensation ( 1 ) 6,156 6,886 severance costs ( 1 ) 1,337 751 merger transaction costs 6,676 — ( gain ) loss on property transactions , net 1,398 ( 1,177 ) interest expense , net 2,045 2,650 severance and ad valorem taxes adjustment ( 2 ) ( 16,291 ) — derivative ( gain ) loss ( 53,462 ) 37,145 derivative cash settlements 49,406 1,691 income tax benefit ( 60,547 ) — adjusted ebitdax $ 169,427 $ 203,712 _ ( 1 ) included as a portion of general and administrative expense in the accompanying consolidated statements of operations and comprehensive income ( “ statements of operations ” ) . ( 2 ) included as a portion of severance and ad valorem taxes in the accompanying statements of operations . critical accounting policies and estimates the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues , and expenses and related disclosure of contingent assets and liabilities . certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions , or if different assumptions had been used . we evaluate our estimates and assumptions on a regular basis story_separator_special_tag 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 . we are also subject to financial covenants under our credit facility based on adjusted ebitdax ratios as further described above in liquidity and capital resources . in addition , adjusted ebitdax is widely used by professional research analysts and others in the valuation , comparison , and investment recommendations of companies in the oil and gas exploration and production industry . adjusted ebitdax should not be considered in isolation or as a substitute for net income , net cash provided by operating activities , or other profitability or liquidity measures prepared under gaap . because adjusted ebitdax excludes some , but not all items that affect net income and may vary among companies , the adjusted ebitdax amounts presented may not be comparable to similar metrics of other companies . 69 table of contents the following table presents a reconciliation of the gaap financial measure of net income to the non-gaap financial measure of adjusted ebitdax ( in thousands ) : year ended december 31 , 2020 2019 net income $ 103,528 $ 67,067 exploration 596 797 depreciation , depletion , and amortization 91,242 76,453 amortization of deferred financing costs — 248 abandonment and impairment of unproved properties 37,343 11,201 stock-based compensation ( 1 ) 6,156 6,886 severance costs ( 1 ) 1,337 751 merger transaction costs 6,676 — ( gain ) loss on property transactions , net 1,398 ( 1,177 ) interest expense , net 2,045 2,650 severance and ad valorem taxes adjustment ( 2 ) ( 16,291 ) — derivative ( gain ) loss ( 53,462 ) 37,145 derivative cash settlements 49,406 1,691 income tax benefit ( 60,547 ) — adjusted ebitdax $ 169,427 $ 203,712 _ ( 1 ) included as a portion of general and administrative expense in the accompanying consolidated statements of operations and comprehensive income ( “ statements of operations ” ) . ( 2 ) included as a portion of severance and ad valorem taxes in the accompanying statements of operations . critical accounting policies and estimates the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues , and expenses and related disclosure of contingent assets and liabilities . certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions , or if different assumptions had been used . we evaluate our estimates and assumptions on a regular basis

results of operations the following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto contained in part ii , item 8 of this annual report on form 10-k. comparative results of operations for the period indicated are discussed below . the following table summarizes our product revenues , sales volumes , and average sales prices for the periods indicated : replace_table_token_11_th _ ( 1 ) crude oil sales excludes $ 1.7 million and $ 2.4 million of oil transportation revenues from third parties , which do not have associated sales volumes , for the years ended december 31 , 2020 and 2019 , respectively . ( 2 ) natural gas sales excludes $ 3.7 million and $ 3.7 million of gas gathering revenues from third parties , which do not have associated sales volumes , for the years ended december 31 , 2020 and 2019 , respectively . ( 3 ) determined using the ratio of 6 mcf of natural gas to 1 bbl of crude oil . ( 4 ) derivatives economically hedge the price we receive for crude oil and natural gas . for the year ended december 31 , 2020 , the derivative cash settlement gain for oil was $ 50.1 million , and the derivative cash settlement loss for natural gas contracts was $ 0.7 million . for the year ended december 31 , 2019 , the derivative cash settlement gain for oil and natural gas was $ 1.2 million and $ 0.5 million , respectively . please refer to part ii , item 8 , note 12 - derivatives for additional disclosures . product revenues decreased by 31 % to $ 212.7 million for the year ended december 31 , 2020 compared to $ 307.2 million for the year ended december 31 , 2019. the decrease was largely due to a $ 12.86 or 36 % decrease in oil equivalent pricing excluding the impact of derivatives , partially offset by an 8 % increase in sales volumes .

in such instances , determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment . the fair value is a reasonable point within the range that is most representative of fair value story_separator_special_tag ( dollars in thousands , except per share data ) operating environment : the united states economy continued to expand moderately in 2015 , as the gross domestic product ( “ gdp ” ) , the value of all goods and services produced in the nation , remained at an annual rate of 2.4 percent , compared to 2014. for the majority of 2015 the federal reserve board 's federal open market committee ( “ fomc ” ) kept the target federal funds rate at a range of 0 % to .25 % . at their december 2015 meeting , the fomc raised interest rates for the first time since december 2008 , when they unanimously voted to set the new target federal funds rate at a range of .25 % to .50 % , a 25 basis point increase . the fomc stated at this meeting that they expect economic conditions will evolve in a manner that will warrant only gradual increase in the federal funds rate and that the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data . the fomc continues to acknowledge the state of low inflation , indicating that it plans to carefully monitor actual and expected progress toward its 2 % inflation objective . the fomc also announced it is maintaining its policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities , and of rolling over maturing treasury securities at auction , anticipating it will do so until normalization of the federal funds rate is well underway . inflationary concerns continue to be relatively tame , as the consumer price index ( “ cpi ” ) at 0.7 percent for 2015 continued to be below the fomc 's benchmark of 2.0 percent . the cpi was 0.8 percent in 2014. moreover , the core personal consumption expenditure price index , which ignores food and energy , averaged 2.1 percent in 2015. employment conditions improved in 2015. the civilian labor force increased 1.7 million , while the number of people employed increased 2.5 million in 2015. as a result , the annual unemployment rate for the u.s. fell to 5.3 percent in 2015 from 6.2 percent in 2014. all sectors of employment , with the exception of the government sector , reported employment gains from the end of 2014. national , pennsylvania , new york and our market area 's non-seasonally-adjusted annual unemployment rates in 2015 and 2014 , are summarized as follows : replace_table_token_19_th employment conditions in 2015 improved for the commonwealth of pennsylvania as evidenced by a reduction in the unemployment rate to 5.1 percent in 2015 from 5.9 percent in 2014. similarly , the unemployment rate for new york state dropped to 5.3 percent in 2015 , from 6.3 percent in 2014. with respect to the markets we serve , the unemployment rate decreased in all of the eight counties in which we have branches or atm locations . the lowest unemployment rate in 2015 , for all of the counties we serve , was lehigh county at 5.3 percent . the marked improvements in unemployment rates could impact the rate of economic growth and may cause market interest rates to rise in the near term . with respect to the banking industry , net income for all federal deposit insurance corporation ( “ fdic ” ) -insured banks in 2015 totaled $ 164.2 billion , an increase of $ 10.6 billion or 6.9 percent from 2014. approximately 63.6 percent of all institutions reported higher net income in 2015 , while only 4.6 percent reported net losses . this is the lowest annual proportion of unprofitable institutions for the industry since 2004. loan loss provisions of $ 37.0 billion in 2015 were -59- $ 7.3 billion or 24.6 percent more than banks set aside in 2014. this is the first time in the last six years that loan loss provisions have been higher than the preceding year , and the total allocation for 2015 was the largest amount since 2012. net interest income increased for the second year in a row , by $ 9.4 billion or 2.2 percent . noninterest income was $ 5.5 billion or 2.2 percent above the level of 2014 , as servicing fee income increased by $ 1.5 billion or 16.8 percent . realized gains on sales of loans were $ 1.4 billion or 7.7 percent higher than a year ago . total noninterest expense decreased $ 5.5 billion or 1.3 percent comparing 2015 and 2014. the average return on average assets for 2015 was 1.04 percent , up from 1.02 percent in 2014. the united states economy continued on an upward path in 2015. this could affect interest rates which may adversely impact bank earnings as net interest margins compress from the inability of management to keep fund costs low . continuous expense control , sound balance sheet management and lower loan loss provisions could offset some of the negative impact of the reduction in net interest margins . review of financial position : total assets , loans and deposits were $ 1.8 billion , $ 1.3 billion and $ 1.5 billion , respectively , at december 31 , 2015. total assets , loans and deposits grew 4.4 percent , 10.8 percent and 2.1 percent , respectively , compared to 2014 year-end balances . story_separator_special_tag as a percentage of earning assets , average loans equaled 79.6 percent in 2015 , an increase from 76.0 percent in 2014. asset quality : we experienced a modest decrease in our asset quality as evidenced by an increase in nonperforming assets of $ 1.6 million or 14.5 percent to $ 12.5 million or 0.93 percent of loans , net of unearned income , and foreclosed assets at december 31 , 2015 , from $ 10.9 million or 0.90 percent of loans , net of unearned income , and foreclosed assets at the end of 2014. the increase resulted from a $ 2.1 million increase in nonaccrual loans , coupled with a $ 396 rise in foreclosed assets and offset partially by a decrease of $ 860 in accruing loans past due 90 days or more . for a further discussion of assets classified as nonperforming assets , refer to the note entitled , “ loans , net and the allowance for loan losses , ” in the notes to consolidated financial statements to this annual report . we maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans , as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date . the balance in the allowance for loan losses account is based on past events and current economic conditions . we employ the ffiec interagency policy statement , as amended , and gaap in assessing the adequacy of the allowance account . under gaap , the adequacy of the allowance account is determined based on the provisions of fasb accounting standards codification ( “ asc ” ) 310 for loans specifically identified to be individually evaluated for impairment and the requirements of fasb asc 450 , for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment . -61- the allowance for loan losses increased $ 2.7 million to $ 13.0 million at december 31 , 2015 , from $ 10.3 million at the end of 2014. the increase resulted from a provision for loan losses of $ 3.7 million exceeding net loans charged-off of $ 1.0 million . the allowance for loan losses , as a percentage of loans , net of unearned income , was 0.97 percent at the end of 2015 , compared to 0.85 percent at the end of 2014. the reduction in this ratio compared to that of years prior to the merger date , was a result of applying the accounting guidance for loans that we acquired in connection with the merger which provides that there is no carryover of the related allowance for credit losses attributable to those loans . however , the guidance does require a credit quality adjustment be established as of the merger date . for a further discussion of the credit quality adjustment for loans acquired in the merger , refer to the notes to the consolidated financial statements to this annual report . past due loans not satisfied through repossession , foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the allowance for loan losses account . any subsequent recoveries are credited to the allowance account . net loans charged-off decreased $ 774 to $ 1,063 in 2015 from $ 1,837 in 2014. net charge-offs , as a percentage of average loans outstanding , equaled 0.08 percent in 2015 and 0.15 percent in 2014. the allocated element of the allowance for loan losses account increased $ 2,614 to $ 12,952 at december 31 , 2015 , compared to $ 10,338 at december 31 , 2014.the specific portion of the allowance for loan losses decreased while the formula portions of the allowance for loan losses increased from the end of 2014. the specific portion of the allowance for impairment of loans individually evaluated under fasb asc 310 decreased $ 712 to $ 2,247 at december 31 , 2015 , from $ 2,959 at december 31 , 2014. however , the formula portion of the allowance for loans collectively evaluated for impairment under fasb asc 450 , increased $ 3,326 to $ 10,705 at december 31 , 2015 , from $ 7,379 at december 31 , 2014. the decrease in the specific portion of the allowance was a result of a decrease in the amount of impaired loans designated with a related allowance to $ 5,473 at december 31 , 2015 from $ 6,525 at year-end 2014. the increase in the formula portion was due to higher loan volume and the relatively unchanged overall loss factor . the unallocated element equaled $ 23 or 0.2 percent of the total allowance for loan losses at december 31 , 2015. as is inherent with all estimates , the allowance for loan losses methodology is subject to a certain level of imprecision as it provides reasonable , but not absolute , assurance that the allowance will be able to absorb probable losses , in their entirety , as of the financial statement date . factors , among others , including judgments made in identifying those loans considered impaired , appraisals of collateral values and measurements of certain qualitative factors , all cause this imprecision and support the establishment of the unallocated element . the coverage ratio , the allowance for loan losses account , as a percentage of nonperforming loans , is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans . the coverage ratio was 112.8 percent at december 31 , 2015 and 100.2 percent at december 31 , 2014. we believe that our allowance was adequate to absorb probable credit losses at december 31 , 2015. deposits : our deposit base is the primary source of funds to support our operations . we offer a variety of deposit products to meet the needs of our individual and commercial customers . total deposits grew $ 30.3 million or 2.1 percent to $ 1.5

review of financial performance : net income was $ 17.7 million or $ 2.36 per share in 2015 and $ 17.6 million or $ 2.34 per share in 2014. the results for 2015 include net gains on sale of investment securities of $ 1.2 million compared to $ 0.9 million during 2014. moreover as a result of our 2013 penseco merger , our financial performance was impacted in 2014 by recognizing acquisition related expenses totaling $ 1.7 million . return on average assets ( “ roaa ” ) and return on average equity ( “ roae ” ) were 1.02 percent and 7.13 percent for the year ended december 31 , 2015. roaa was 1.03 percent and roae was 7.29 percent for the year ended december 31 , 2014. tax-equivalent net interest income was $ 60.1 million in 2015 and $ 60.3 million in 2014. our net interest margin equaled 3.81 percent in 2015 and 3.86 percent in 2014. noninterest income totaled $ 15.7 million in 2015 and $ 15.3 million in 2014. noninterest expense was $ 46.8 million for the year ended december 31 , 2015 compared to $ 45.9 million for the year ended december 31 , 2014. our productivity is measured by the operating efficiency ratio , defined as noninterest expense less amortization of intangible assets divided by the total of tax-equivalent net interest income and noninterest income . our operating efficiency ratio was 60.1 percent in 2015. net interest income : for the year ended december 31 , tax-equivalent net interest income was $ 60.1 million in 2015 and $ 60.3 million in 2014. there was a positive volume variance that was more than offset by a negative rate variance . the growth in average earning assets exceeded that of interest-bearing liabilities , and resulted in additional tax-equivalent net interest income of $ 3.3 million .

the actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors , including , but not limited to , those which are not within our control . our strategy our strategy is evolving with the establishment of our commercial footprint in the management of chronic pain ; we seek to build a well-balanced , diversified , high-growth specialty pharmaceutical company . through our industry-leading commercialization infrastructure , bdsi is executing the commercialization of our existing products . as part of our corporate growth strategy , we have licensed , and will continue to explore opportunities to acquire or license additional products that meet the needs of patients living with debilitating chronic conditions and treated primarily by therapeutic specialists . as we gain access to these drugs and technologies , we will employ our commercialization experience to bring them to the marketplace . with a strong commitment to patient access and a focused business-development approach for transformative acquisitions or licensing opportunities , we will leverage our experience and apply it to developing new partnerships that enable us to commercialize novel products that can change the lives of people suffering from debilitating chronic conditions . our historical clinical and regulatory development strategy has focused primarily on our ability to use the u.s. food and drug administration , or the fda 's , 505 ( b ) ( 2 ) approval process to obtain more timely and efficient approval of new formulations of previously approved , active therapeutics incorporated into our drug-delivery technology . because the 505 ( b ) ( 2 ) approval process is designed to address new formulations of previously approved drugs , we believe it has the potential to be more cost efficient and expeditious , with less regulatory approval risk than other fda-approval approaches . our company we are a publicly listed company . our common stock is listed on the nasdaq capital market under the symbol “bdsi.” we were incorporated in the state of indiana in 1997 and reincorporated as a delaware-based corporation in 2002 . 2018 and beyond highlights on february 6 , 2018 , we announced that we had entered into a settlement agreement with teva that resolves our previously reported belbuca patent litigation against teva pending in the united states district court for the district of delaware . on may 7 , 2018 , we announced the appointment of herm cukier as our new chief executive officer and member of our board of directors , effective as of may 8 , 2018. on may 22 , 2018 , we announced the closing of the $ 50 million registered direct offering of newly designated series b stock . the offering closed on may 21 , 2018 , yielding net proceeds of $ 8048.0 million to bdsi . as part of the financing closing , broadfin managing partner kevin kotler joined our board , along with todd davis and peter greenleaf . furthermore , peter greenleaf has been named chairman of our board of directors . in addition , and effective as of the closing , thomas w. d'alonzo , barry i. feinberg , samuel p. sears , jr. and timothy c. tyson have each resigned and retired from the board . on july 20 , 2018 , we extended an offer to dr. thomas smith , as our chief medical officer and member of our executive leadership team effective july 30 , 2018. on august 2 , 2018 , in connection with our 2018 annual meeting of stockholders , our stockholders approved , among other matters , ( i ) amending our certificate of incorporation to increase the number of authorized shares of common stock from 75,000,000 to 125,000,000 ; and ( ii ) to ratify the issuance and sale of our series b preferred stock , par value $ .001 per share , and to approve the issuance of common stock issuable upon the conversion of the series b preferred stock as required by and in accordance with nasdaq marketplace rule 5635 ( d ) . on october 29 , 2018 , we announced the appointment of james vollins as general counsel and member of our executive leadership team effective november 5 , 2018. mr. vollins serves as our chief compliance officer and corporate secretary . we also announced the enhanced title of scott plesha to president and chief commercial officer of the company . 37 on november 9 , 2018 , we filed a shelf registration statement ( as amended on january 18 , 2019 ) which registered up to $ 150 million of our securities for potential future issuance and such registration statement was became effective on february 7 , 2019. on january 15 , 2019 , we announced the appointment of terry coelho as chief financial officer . ms. coelho will also serve as our principal financial officer and principal accounting officer . ms. coelho replaced ernest de paolantonio in these positions effective as of january 15 , 2019. mr. de paolantonio will remain at our company past such date in order to allow for an orderly transition . on february 4 , 2019 – we announced that a leading national managed care organization has moved belbuca into preferred status across all its commercial formularies from its previous position of not-covered effective february 1 , 2019. in addition , patients will no longer require a prior authorization to receive their belbuca script . this significant improvement in access for more than 7 million covered lives brings the total of americans with preferred access for belbuca to more than 115 million . our products and related trends our product portfolio currently consists of four products . as of the date of this report , three products are approved by the fda ; the fourth product , while we are not actively studying it at this time , we are evaluating further development opportunities . the three approved products utilize our patented bema thin film drug delivery technology . story_separator_special_tag however , on december 8 , 2017 , collegium provided us the required 90-day notice regarding termination of the license and development agreement for onsolis between us and collegium . the license and development agreement for onsolis between us and collegium formally ended on march 8 , 2018. previous efforts to extend our supply agreement with our original onsolis manufacturer aveva , who was subsequently acquired by apotex , were unsuccessful and the agreement expired . however , an alternate supplier was identified and data to support qualification of the new manufacturer was submitted to the fda in june 2018. on october 22 , 2018 , we received notification of fda 's approval of the regulatory submission and the new onsolis manufacturer . we are currently assessing options to commercialize onsolis including partnership or introducing onsolis utilizing the company 's existing pain sales force . buprenorphine extended release injection is an injectable , extended-release , microparticle formulation of buprenorphine for the treatment of opioid dependence and chronic pain , the rights to which were secured when we entered into a definitive development and exclusive license option agreement from evonik in october 2014. in 2015 , we completed initial development work and preclinical studies which have resulted in the identification of a formulation we believe can provide 30 days of continuous buprenorphine treatment . we submitted an ind for this product candidate to the fda in december 2016. subsequently , the agreement has terminated and the options granted therein have expired . we continue to evaluate whether or not to further advance this particular program . we expect to continue our development of pharmaceutical products and related drug delivery technologies , some of which will be funded by our commercialization agreements . we will continue to seek additional license agreements , which may include upfront payments . we anticipate that funding for the next several years will come primarily from earnings from sales of belbuca and bunavail , milestone payments and royalties from mylan and tty , potential sales of securities and collaborative development agreements , including those with pharmaceutical companies . we have , since our founding , received revenue in the form of : ( i ) product sales from our belbuca and bunavail products , ( ii ) contract revenue from endo related to an upfront , non-refundable payment for a license of our belbuca product in 2012 , ( iii ) payment from endo for certain patent-related milestones ( iv ) royalty revenue from mylan for sales of breakyl and onsolis , ( vi ) upfront non-refundable license and milestone payments from mylan in 2007 , 2008 , 2009 and 2012 ( vi ) contract revenue from endo related to two full database locks in 2014 , ( vii ) contract revenue from endo upon fda acceptance of the filed nda of our belbuca product in 2015 and subsequent regulatory approval , ( viii ) and sponsored research revenue from both endo and mylan . only the belbuca and bunavail product sales and breakyl royalty revenues have the potential to be repeating or predictable . readers are cautioned that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance . our prospects must be considered in light of the risks , expenses and difficulties normally encountered by companies that are involved in the commercialization of their products and related technologies , particularly companies in new and rapidly changing markets such as pharmaceuticals , drug delivery and biotechnology . we must maintain our relationships with our key commercial partners and address regulatory , legal and or commercial issues and risks that relate to our business from time to time , many of which could impact , perhaps negatively , our planned operations . we may not be able to appropriately address these risks and difficulties . critical accounting policies and estimates estimates the preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial 39 statements and the reported amounts of revenues and expenses during the period . actual results could differ from those estimates . we review all significant estimates affecting the consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance . significant estimates of our include : revenue recognition , sales allowances such as returns of product sold , government program rebates , customer coupon redemptions , wholesaler/pharmacy discounts , product service fees , rebates and chargebacks , sales bonuses , stock-based compensation , determination of fair values of assets and liabilities relating to business combinations , and deferred income taxes . impairment testing in accordance with generally accepted accounting principles , or gaap , goodwill impairment testing is performed at the reporting unit level annually , or more frequently if indicated by events or conditions . we performed an evaluation and determined that there is only one reporting unit . in performing a goodwill impairment test , gaap allows for either a qualitative or a quantitative assessment to be performed . if a qualitative evaluation determines that no impairment exists , then no further analysis is performed . if a qualitative evaluation is unable to determine whether impairment has occurred , a quantitative evaluation is performed . the quantitative impairment test first identifies potential impairments by comparing the fair value of the reporting unit with its carrying value . if the carrying value exceeds the fair value , an impairment charge is recorded based on that difference . the determination of goodwill impairment is highly subjective . it considers many factors both internal and external and is subject to significant changes from period to period .

results of operations for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 product sales . we recognized $ 51.4 million and $ 34.9 million in product sales during the years ended 2018 and 2017 , respectively , from our products belbuca and bunavail . the increase in 2018 over 2017 is a result of managed care wins and the expansion of our salesforce in 2018. product royalty revenues . we recognized $ 3.4 million and $ 5.1 million in product royalty revenue during the years ended 2018 and 2017 , respectively . the decrease in product royalty revenues in 2018 can be attributed to timing of breakyl sales from mylan and painkyl sales from tty . research and development reimbursements . we recognized $ 0.0 million and $ 0.8 million of reimbursable revenue during the years ended 2018 and 2017 , respectively , which relates to our former license agreement with collegium and composed of reimbursement to us for a pre-determined amount of the remaining expenses associated with the transfer of the manufacturing of onsolis . contract revenues . we recognized $ 0.8 million and $ 21.2 million in contract revenue during the years ended 2018 and 2017 , respectively . we recognized $ 1.0 million in contract revenue during the year ended december 31 , 2018 related to our license agreement with purdue , which was for the canadian commercial launch and related milestones . due to the termination of the purdue contract in march 2019 , the aforementioned contract revenue was offset by the reversal of $ 0.2 million in milestone revenue . contract revenue in 2017 includes $ 20 million from endo related to a patent extension that was previously recorded as deferred revenue because all or a portion of such $ 20 million was contingently refundable to endo if a third party generic product was introduced in the u.s.

overview we are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction , scoliosis and sports medicine product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions . we design , develop and commercialize innovative orthopedic implants and instruments to meet the specialized needs of pediatric surgeons and their patients , who we believe have been largely neglected by the orthopedic industry . we currently serve three of the largest categories in this market . we estimate that the portion of this market that we currently serve represents a $ 3.3 billion opportunity globally , including over $ 1.5 billion in the united states . we sell implants and instruments to our customers for use by pediatric orthopedic surgeons to treat orthopedic conditions in children . we provide our implants in sets that consist of a range of implant sizes and include the instruments necessary to perform the surgical procedure . in the united states and a few selected international markets , our customers typically expect us to have full sets of implants and instruments on site at each hospital but do not purchase the implants until they are used in surgery . accordingly , we must make an up-front investment in inventory of consigned implants and instruments before we can generate revenue from a particular hospital and we maintain substantial levels of inventory at any given time . in the international markets where we sell to stocking distributors , we transfer control of our products to the distributor when title passes upon shipment . we currently market 35 surgical systems that serve three of the largest categories within the pediatric orthopedic market : ( i ) trauma and deformity correction , ( ii ) scoliosis and ( iii ) sports medicine . we rely on a broad network of third parties to manufacture the components of our products , which we then inspect and package . we believe our innovative products promote improved surgical accuracy , increase consistency of outcomes and enhance surgeon confidence in achieving high standards of care . in the future , we expect to expand our product offering within these categories , as well as to address additional categories of the pediatric orthopedic market . the majority of our revenue has been generated in the united states , where we sell our products through a network of 36 independent sales agencies employing 171 sales representatives specifically focused on 73 pediatrics . these independent sales agents are trained by us , distribute our products and are compensated through sales-based commissions and performance bonuses . we do not sell our products through or participate in physician-owned distributorships , or pods . on june 4 , 2019 , we purchased all the issued and outstanding shares of stock of vilex in tennessee , inc. ( `` vilex '' ) and all the issued and outstanding units of membership interests in orthex , llc ( `` orthex '' ) for $ 60.2 million in total consideration , net of working capital adjustments . vilex and orthex are primarily manufacturers of foot and ankle surgical implants , including cannulated screws , fusion devices , surgical staples and bone plates , as well as orthex hexapod technology which is used to treat pediatrics congenital deformities and limb length discrepancies . on december 31 , 2019 , we divested substantially all of the assets relating to vilex 's adult product offerings to a wholly-owned subsidiary of squadron capital llc ( `` squadron '' ) in exchange for a $ 25.0 million reduction in a term note owed to squadron in connection with the initial acquisition . as part of the sale , we also executed an exclusive license arrangement with squadron providing for perpetual access to certain intellectual property and a mutual distribution agreement . on march 9 , 2020 , we purchased all the issued and outstanding membership interest of telos partners , llc ( `` telos '' ) for $ 3.3 million in total consideration . telos is a boutique regulatory consulting firm formed in colorado . on april 1 , 2020 , we purchased all the issued and outstanding membership interest of apifix , ltd. ( `` apifix '' ) for ( a ) $ 2.0 million in cash , and ( b ) 934,783 shares of the company 's common stock , $ 0.00025 par value per share , representing approximately $ 35.0 million ( based on a closing share price of $ 37.63 on april 1 , 2020. apifix , a corporation organized under the laws of israel , has developed a minimally invasive deformity correction system for patients with adolescent idiopathic scoliosis ( `` apifix system '' ) . in addition , we have also agreed to pay as part of the purchase price the following anniversary payments , subject to certain limitations and adjustments : ( i ) approximately $ 13.0 million on the second anniversary of the closing date , provided that such payment will be paid earlier if 150 clinical procedures using the apifix system are completed in the united states before such anniversary date , ( ii ) $ 8.0 million on the third anniversary of the closing date ; and ( iii ) $ 9.0 million on the fourth anniversary of the closing date . in addition , to the extent that the product of our revenues from the apifix system for the twelve months ended june 30 , 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years , we have agreed to pay the selling shareholders a system sales payment in the amount of such excess . the anniversary payments and system sales payment may each be made in cash or cash and common stock . story_separator_special_tag we anticipate that the current outbreak or continued spread of covid-19 , and the actions taken by governmental authorities and other third parties to contain the virus , may cause a global economic slowdown , and it is possible that it could cause a global recession . in the event of a recession , demand for our products would decline and our business would be adversely effected . during 2020 , we have experienced a reduction in revenue as a result of global delays in elective surgeries . liquidity although there is uncertainty related to the anticipated impact of the recent covid-19 outbreak on our future results , we believe our business model , our current cash reserves and the recent steps we have taken to strengthen our balance sheet , including our june 2020 and december 2019 equity offerings , leave us well-positioned to manage our business through this crisis as it continues to unfold . we believe our existing balances 75 of cash and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months . we continue to monitor the rapidly evolving situation and guidance from international and domestic authorities , including federal , state and local public health authorities and may take additional actions based on their recommendations . in these circumstances , there may be developments outside our control requiring us to adjust our operating plan . as such , given the dynamic nature of this situation , we can not reasonably estimate the impacts of covid-19 on our financial condition , results of operations or cash flows in the future . components of our results of operations revenue revenue in the united states is generated primarily from the sale of our implants and , to a much lesser extent , from the sale of our instruments . sales in the united states are primarily to hospital accounts through independent sales agencies . we recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied . this typically occurs when we transfer control of our products to the customer , generally upon implantation or when title passes upon shipment . the products are generally consigned to our independent sales agencies , and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis . on rare occasions , hospitals purchase products for their own inventory , and revenue is recognized when the hospital obtains control of the product , typically either upon shipment or delivery of the product dependent on the terms of the contract . pricing for each customer is dictated by a unique pricing agreement . outside of the united states , we sell our products directly to hospitals through independent sales agencies or to independent stocking distributors . generally , the distributors are allowed to return products , and some are thinly capitalized . based on our history of collections and returns from international customers , prior to 2019 , we concluded that collectibility was not reasonably assured at the time of delivery for certain customers who had not evidenced a consistent pattern of timely payment . accordingly , in the past we did not recognize international revenue and associated cost of revenue at the time title transfers for these customers for whom collectibility had not been deemed probable based on the customer 's history and ability to pay , but rather when cash had been received . until such payment , cost of revenue was recorded as inventories held by international distributors , net of adjustment for estimated unreturnable inventory , on our consolidated balance sheets . following a review of our collection history , we deemed collectibility was probable for all international stocking distributors effective january 1 , 2019. based on a history of reliable collections , we have concluded that a contract exists and revenue should be recognized when we transfer control of our products to the customer , generally when title passes upon shipment . additionally , based on our history of immaterial returns from international customers , we have historically estimated no reserve for returns . in early 2017 , we expanded operations and established legal entities in the united kingdom , australia and new zealand permitting us to sell under an agency model direct to local hospitals in these countries . we began selling direct to canada in september 2018 , belgium and the netherlands in january 2019 , italy in march 2020 and germany , switzerland and austria in january 2021. additionally , in march 2019 , we established an operating company in the netherlands in order to enhance our operations in europe.the products are generally consigned to our independent sales agencies , and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis . on rare occasions , hospitals purchase products for their own inventory , and revenue is recognized when the hospital obtains control of the product , typically either upon shipment or delivery of the product dependent on the terms of the contract . pricing for each customer is dictated by a unique pricing agreement . cost of revenue and gross profit our cost of revenue consists primarily of products purchased from third-party suppliers , inbound freight , excess and obsolete inventory adjustments and royalties . our implants and instruments are manufactured to our specifications by third-party suppliers . the majority of our implants and instruments are produced in the united states . we recognize cost of revenue for consigned implants at the time the implant is used in surgery and the related revenue is recognized . prior to their use in surgery , the cost of consigned implants is recorded as inventory in our balance sheet . the costs of instruments are typically capitalized and not included in cost of revenue unless sold as a set to our international stocking distributors or directly to hospitals .

results of operations comparison of the years ended december 31 , 2020 and 2019 the following table sets forth our results of operations for the years ended december 31 , 2020 and 2019 : replace_table_token_3_th revenue the following tables set forth our revenue by geography and product category for the years ended december 31 , 2020 and 2019 : replace_table_token_4_th replace_table_token_5_th 78 net revenue decreased $ 1.5 million , or 2 % , from $ 72.6 million for the year ended december 31 , 2019 to $ 71.1 million for the year ended december 31 , 2020. in december 2020 , the company recorded a $ 2.7 million revenue reduction due to the repurchase of inventory from a stocking distributor in germany , austria and switzerland that we converted to a sales agency . global suspension of elective surgeries as a result of the covid-19 pandemic adversely affected revenue . the domestic markets were primarily impacted during the second quarter and saw trends towards normalization for the balance of the year . international markets were impacted more severely and remained at less than historical levels throughout the year . trauma and deformity sales decreased $ 1.7 million , or 3 % , primarily driven by fewer elective deformity correction surgeries caused by the pandemic and specifically by decreased sales of our pediplates system and pedinail system . in december 2020 , the company recorded a $ 2.7 million revenue reduction due to the repurchase of inventory from a stocking distributor in germany , austria and switzerland that we converted to a sales agency . scoliosis systems decreased $ 0.7 million , or 3 % , primarily driven by lower sales of our response system and bandloc system . sports medicine / other increased $ 1.0 million , or 57 % due to the acquisition of telos .

[ appendix b to schedule 14a filed on august 23 , 2004 ] * 14.1 code of ethics and business conduct . [ form 10-k for the fiscal year ended may 31 , 2004 , exhibit 14.1 ] 21.1 subsidiaries of schmitt industries , inc. as of may 31 , 2011 . 23.1 consent of independent registered public accounting firm . 31.1 certification of principal executive officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 certification of principal financial officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 32.1 certification of principal executive officer and principal financial officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . † management contract or compensatory plan or arrangement required to be filed as an exhibit to this form 10-k. 44 story_separator_special_tag results of operations overview schmitt industries , inc. designs , manufactures and markets computer controlled vibration detection and balancing equipment ( the balancer segment ) to the worldwide machine tool industry and , through its wholly owned subsidiary , schmitt measurement systems , inc. , precision laser-based surface roughness measurement products , laser-based distance measurement products and ultrasonic measurement systems ( the measurement segment ) for a variety of industrial applications worldwide . the company sells and markets its products in europe through its wholly owned subsidiary , schmitt europe ltd. ( sel ) located in the united kingdom . the company is organized into two operating segments : the balancer segment and the measurement segment . for the year ended may 31 , 2011 ( fiscal 2011 ) , total sales increased $ 4.7 million , or 68.9 % , to $ 11.5 million from $ 6.8 million in the year ended may 31 , 2010 ( fiscal 2010 ) . balancer segment sales focus throughout the world on end-users , rebuilders and original equipment manufacturers of grinding machines with the target geographic markets in north america , south america , asia and europe . balancer sales increased $ 3.3 million , or 71.5 % , to $ 8.0 million in fiscal 2011 compared to $ 4.7 million in fiscal 2010. the fiscal 2011 increase in worldwide balancer sales is due to higher volumes of shipments as the worldwide automotive and manufacturing industries have begun to recover from the global economic downturn . the measurement segment product line consists of laser-based light-scatter , distance measurement and dimensional sizing products and remote tank monitoring products . total measurement sales increased $ 1.3 million , or 63.1 % , to $ 3.5 million in fiscal 2011 compared to $ 2.1 million in fiscal 2010. the increase is primarily due to higher volumes of shipments of distance measurement and dimensional sizing laser-based measurement products . the company has continued to closely monitor its expenses across the entire company . operating expenses have increased $ 1.0 million , or 21.7 % , to $ 5.8 million in fiscal 2011 from $ 4.8 million in fiscal 2010. general , administrative and sales expenses increased $ 1.1 million , or 26.6 % , in fiscal 2011 to $ 5.3 million as compared to $ 4.2 million in the prior fiscal year . research and development expenses decreased $ 80,000 , or 13.7 % , to $ 504,000 in fiscal 2011 from $ 585,000 in fiscal 2010. net loss was $ 205,000 , or $ 0.07 per fully diluted share , for the year ended may 31 , 2011 as compared to net loss of $ 1.7 million , or $ 0.59 per fully diluted share , for the year ended may 31 , 2010. acquisition on september 30 , 2009 , the company completed an asset purchase agreement ( the “agreement” ) with optical dimensions , a sole proprietorship , pursuant to which the company acquired all of the assets and assumed certain liabilities of optical dimensions , as a result , the company now owns and operates optical dimensions ' business , including its patented laser light scatter roughness measurement technology . the total purchase price for the acquisition was approximately $ 200,000 which includes the value of the shares issued and the cash paid . the agreement provided that the company pay cash of $ 100,000 and issue 24,642 shares of common stock of the company . the number of shares issued was equal to $ 100,000 in value based on the average closing price of the company 's common stock , as reported on the nasdaq national market , over the five-day period immediately prior to closing . critical accounting policies revenue recognition—the company recognizes revenue for sales and billing for freight charges upon delivery of the product to the customer at a fixed or determinable price with a reasonable assurance of collection , passage of title to the customer as indicated by shipping terms and fulfillment of all significant obligations , pursuant to the guidance provided by accounting standards codification topic 605. for sales to all customers , 17 including manufacturer representatives , distributors or their third-party customers , these criteria are met at the time product is shipped . when other significant obligations remain after products are delivered , revenue is recognized only after such obligations are fulfilled . in addition , judgments are required in evaluating the credit worthiness of our customers . credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured . story_separator_special_tag allowance for doubtful accounts—our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments . credit limits for all customers are established based upon several factors , including but not limited to financial condition and stability , payment history , published credit reports and use of credit references . on a monthly basis , management performs various analyses to evaluate accounts receivable balances to ensure recorded amounts reflect estimated net realizable value . this review includes accounts receivable agings , other operating trends and relevant business conditions , including general economic factors , as they relate to the company 's domestic and international customers . when a customer 's account balance becomes past due , we initiate dialogue with the customer to determine the cause . if it is determined that the customer will be unable to meet its financial obligation to us , such as in the case of a bankruptcy filing , we record a specific allowance to reduce the related receivable to the amount we expect to recover given all of the information presently available . inventories—as a designer and manufacturer of high technology systems , we are exposed to a number of economic and industry factors that could result in portions of our inventories becoming either obsolete or in excess of anticipated usage . these factors include , but are not limited to , technological changes in our markets , our ability to meet changing customer requirements , competitive pressures in products and prices , and the availability of key components from our suppliers . our policy is to record inventory write-downs when conditions exist that suggest our inventories may be in excess of anticipated demand for our products and market conditions . we regularly evaluate the ability to realize the value of our inventories based upon a combination of factors including the following : historical usage rates , forecasted sales or usage , product end of life dates , estimated current and future market values and new product introductions . purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure . when recorded , our write-downs are intended to reduce the carrying value of our inventories to their net realizable value and establish a new cost basis . deferred taxes—the company applies the asset and liability method in recording income taxes , under which deferred income tax assets and liabilities are determined , based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws . additionally , deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized . management continues to review the level of the valuation allowance on a quarterly basis . there can be no assurance that the company 's future operations will produce sufficient earnings so that the deferred tax assets can be fully utilized . intangible assets—there is a periodic review of intangible and other long-lived assets for impairment . this review consists of the analysis of events or changes in circumstances that would indicate the carrying amount of the assets may not be recoverable . recoverability is determined by comparing the forecasted future undiscounted net cash flows from the operations to which the assets relate , based on management 's best estimates using the appropriate assumptions and projections at the time , to the carrying amount of the assets . if the carrying value is determined to be in excess of future operating cash flows , the asset is considered impaired and a loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the assets . 18 recently issued accounting pronouncements refer to note 1 of the notes to consolidated financial statements for a discussion of recently issued accounting pronouncements . story_separator_special_tag decreased due primarily to higher sales and related gross profit offset by higher general , administrative and sales expenses during fiscal 2011. net loss decreased $ 443,000 to a net loss of $ 1.7 million , or $ 0.59 per diluted share , for fiscal 2010 as compared to net loss of $ 2.2 million , or $ 0.75 per diluted share , for fiscal 2009. net loss decreased due primarily to lower sales and related gross profit , offset by lower general , administrative and selling expenses , lower research and development expenses and a lower effective tax rate during fiscal 2010. liquidity and capital resources the company 's working capital increased $ 152,000 to $ 7.5 million as of may 31 , 2011 compared to $ 7.3 million as of may 31 , 2010. cash and cash equivalents decreased $ 785,000 to $ 2.8 million as of may 31 , 2011 from $ 3.5 million as of may 31 , 2010. cash used in operating activities was $ 559,000 in fiscal 2011 as compared to $ 417,000 in fiscal 2010. the increase is primarily due to decreases in net loss , income taxes receivable , and accounts payable , offset by increases in stock-based compensation , accounts receivable and inventories . at may 31 , 2011 , accounts receivable increased $ 687,000 to $ 1.8 million compared to $ 1.1 million as of may 31 , 2010. the increase in accounts receivable is due to the increase in sales during fiscal 2011. inventories increased $ 501,000 to $ 4.1 million as of may 31 , 2011 compared to $ 3.6 million at may 31 , 2010 due to higher purchasing levels necessary to support the higher sales volumes . at may 31 , 2011 , total current liabilities increased $ 204,000 to $ 1.4 million as compared to $ 1.2 million at may 31 , 2010. the increase is primarily due to increases in accounts payable associated with

discussion of operating results replace_table_token_3_th sales— sales in the balancer segment increased $ 3.3 million , or 71.5 % , to $ 8.0 million for fiscal 2011 compared to $ 4.7 million for fiscal 2010. this increase is primarily due to higher unit sales volumes in asia , north america and europe during the year . asia sales increased $ 1.8 million , or 93.5 % , in fiscal 2011 compared to fiscal 2010. north american sales increased $ 1.4 million , or 77.9 % , in fiscal 2011 compared to the prior year . european sales increased $ 108,000 , or 13.5 % , in fiscal 2011 compared to fiscal 2010. the increases across all geographies are primarily due to higher volumes of shipments as the worldwide automotive and industrial markets in these regions have begun to recover from the previous low levels due to the global economic downturn . sales in the measurement segment increased $ 1.3 million , or 63.1 % , to $ 3.5 million in fiscal 2011 compared to $ 2.1 million in fiscal 2010. sales of laser-based distance measurement and dimensional sizing products increased $ 1.1 million , or 67.1 % , primarily due to the higher volume of shipments in the current fiscal year resulting from the economic recovery in the commercial and industrial markets . sales of laser-based surface measurement products increased $ 160,000 , or 32.3 % , primarily due to the sale of a casi scatterometer and the september 30 , 2009 acquisition of optical dimensions which resulted in product sales of $ 202,000 during fiscal 2011. during fiscal 2011 , we started to ship our xact ultrasonic measurement product which resulted in $ 102,000 of revenues .

the business includes the management of funds of funds , and other investment funds , collectively referred to as the “ silvercrest funds ” . silvercrest l.p. has issued restricted stock units exercisable for 35,336 class b units which entitle the holders thereof to receive distributions from silvercrest l.p. to the same extent as if the underlying class b units were outstanding . net profits and net losses of silvercrest l.p. will be allocated , and distributions from silvercrest l.p. will be made , to its current partners pro rata in accordance with their respective partnership units ( and assuming the class b units underlying all restricted stock units are outstanding ) . the historical results of operations discussed in this management 's discussion and analysis of financial condition and results of operations include those of silvercrest l.p. and its subsidiaries . as the general partner of silvercrest l.p. , we control its business and affairs and , therefore , consolidate its financial position and results with ours . the interests of the limited partners ' collective 36 % partnership interest in silvercrest l.p. as of december 31 , 2019 are reflected in non-controlling interests in our consolidated financial statements . this item 7 generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this form 10-k can be found in “ management 's discussion and analysis of financial condition and results of operations ” in the company 's annual report on form 10-k for the fiscal year ended december 31 , 2018 filed with the sec on march 7 , 2019. key performance indicators when we review our performance , we focus on the indicators described below : replace_table_token_3_th ( 1 ) ebitda , a non-gaap measure of earnings , represents net income before provision for income taxes , interest income , interest expense , depreciation and amortization . we define adjusted ebitda as ebitda without giving effect to items , including but not limited to professional fees associated with acquisitions or financing transactions , gains on extinguishment of debt or other obligations related to acquisitions , losses on disposals or abandonment of assets and leaseholds , severance and other similar expenses , but including partner incentive allocations , prior to our initial public offering , as an expense . we use this non-gaap financial measure to assess the strength of our business . these adjustments and the non-gaap financial measures that are derived from them provide supplemental information to analyze our business from period to period . investors should consider these non-gaap financial measures in addition to , and not as a substitute for financial measures in accordance with gaap . see “ supplemental non-gaap financial information ” for a reconciliation of non-gaap financial measures . ( 2 ) adjusted ebitda margin , a non-gaap measure of earnings , is calculated by dividing adjusted ebitda by total revenue . ( 3 ) we have computed average assets under management by averaging assets under management at the beginning of the applicable period and assets under management at the end of the applicable period . 38 revenue we generate revenue from management and advisory fees , performance fees and family office services fees . our management and advisory fees are generated by managing assets on behalf of separate accounts and acting as investment adviser for various investment funds . our performance fees relate to assets managed in external investment strategies in which we have a revenue sharing arrangement and in funds in which we have no partnership interest . our management and advisory fees and family office services fees income is recognized through the course of the period in which these services are provided . income from performance fees is recorded at the conclusion of the contractual performance period when all contingencies are resolved . in certain arrangements , we are only entitled to receive performance fees and allocations when the return on assets under management exceeds certain benchmark returns or other performance targets . the discretionary investment management agreements for our separately managed accounts do not have a specified term . rather , each agreement may be terminated by either party at any time , unless otherwise agreed with the client , upon written notice of termination to the other party . the investment management agreements for our private funds are generally in effect from year to year , and may be terminated at the end of any year ( or , in certain cases , on the anniversary of execution of the agreement ) ( i ) by us upon 30 or 90 days ' prior written notice and ( ii ) after receiving the affirmative vote of a specified percentage of the investors in the private funds that are not affiliated with us , by the private fund on 60 or 90 days ' prior written notice . the investment management agreements for our private funds may also generally be terminated effective immediately by either party where the non-terminating party ( i ) commits a material breach of the terms subject , in certain cases , to a cure period , ( ii ) is found to have committed fraud , gross negligence or willful misconduct or ( iii ) becomes bankrupt , becomes insolvent or dissolves . each of our investment management agreements contains customary indemnification obligations from us to our clients . the tables below set forth the amount of assets under management , the percentage of management and advisory fees revenues , the amount of revenue recognized , and the average assets under management for discretionary managed accounts and for private funds for each period presented . discretionary managed accounts replace_table_token_4_th private funds replace_table_token_5_th our management and advisory fees are primarily driven by the level of our assets under management . our assets under management increase or decrease based on the net inflows or outflows of funds into our various investment strategies and the investment performance of our clients ' accounts . story_separator_special_tag 40 compensation and benefits expense our largest expense is compensation and benefits , which includes the salaries , bonuses , equity-based compensation and related benefits and payroll costs attributable to our principals and employees . our compensation methodology is intended to meet the following objectives : ( i ) support our overall business strategy ; ( ii ) attract , retain and motivate top-tier professionals within the investment management industry ; and ( iii ) align our employees ' interests with those of our equity owners . we have experienced , and expect to continue to experience , a general rise in compensation and benefits expense commensurate with growth in headcount and with the need to maintain competitive compensation levels . the components of our compensation and benefits expenses for the years ended december 31 , 2019 , 2018 and 2017 are as follows : replace_table_token_6_th ( 1 ) for the years ended december 31 , 2019 , 2018 and 2017 , $ 27,229 , $ 27,197 and $ 24,940 of partner incentive payments were included in cash compensation and benefits expense , respectively . during 2019 , 2016 and 2015 , silvercrest l.p. granted restricted stock units ( “ rsu ” ) to existing class b unit holders . during 2019 and 2018 , silvercrest l.p. granted non-qualified options ( “ nqo ” ) to an existing class b unit holder . information regarding restricted stock units can be found in note 16 . “ equity based compensation ” in the “ notes to consolidated financial statements ” in “ — item 8. financial statements and supplementary data ” of this filing . general and administrative expenses general and administrative expenses include occupancy-related costs , professional and outside services fees , office expenses , depreciation and amortization , sub-advisory fees and the costs associated with operating and maintaining our research , trading and portfolio accounting systems . our costs associated with operating and maintaining our research , trading and portfolio accounting systems and professional services expenses generally increase or decrease in relative proportion to the number of employees retained by us and the overall size and scale of our business operations . sub-advisory fees will fluctuate based on the level of management fees from funds that utilize sub-advisors . other income other income is derived primarily from investment income arising from our investments in various private investment funds that were established as part of our investment strategies . we expect the investment components of other income , in the aggregate , to fluctuate based on market conditions and the success of our investment strategies . performance fees earned from those investment funds in which we have a partnership interest have been earned over the past few years as a result of the achievement of various high water marks depending on the investment fund . these performance fees are recorded based on the equity method of accounting . the majority of our performance fees over the past few years have been earned from our fixed income-related funds . non-controlling interests we are the general partner of silvercrest l.p. and control its business and affairs and , therefore , consolidate its financial results with ours . in light of the limited partners ' interest in silvercrest l.p. , we reflect their partnership interests as non-controlling interests in our consolidated financial statements . provision for income tax we are subject to taxes applicable to c-corporations . our effective tax rate , and the absolute dollar amount of our tax expense , will be offset by the benefits of the tax receivable agreement entered into with our class b stockholders . 41 acquisitions on april 12 , 2019 , we entered into an asset purchase agreement ( the “ purchase agreement ” ) with cortina asset management , llc , a wisconsin limited liability company ( “ cortina ” ) , and certain interest holders of cortina ( the “ principals ” ) to acquire , directly or through a designated affiliate , substantially all of the assets of cortina relating to cortina 's business of providing investment management , investment advisory , and related services . subject to the terms and conditions set forth in the purchase agreement , we agreed to pay to cortina an aggregate maximum amount of $ 44.9 million , 80 % of which was agreed to be paid in cash at closing by us , and 20 % of which was agreed to be paid by us in the form of issuance and delivery to certain principals at closing of class b units in silvercrest l.p. , in each case subject to certain adjustments as described in the purchase agreement . in addition , the purchase agreement provides for up to an additional $ 26.2 million to be paid 80 % in cash with certain principals receiving the remaining 20 % in the form of class b units of silvercrest l.p. in potential earn-out payments over the next four years . on july 1 , 2019 , the acquisition was completed pursuant to the purchase agreement . at closing , the company paid to cortina an aggregate principal amount of $ 33.6 million in cash , and silvercrest l.p. paid an additional $ 9.0 million in the form of issuance and delivery to certain principals of 662,713 class b units in silvercrest l.p. of the $ 33.6 million paid in cash , $ 35.1 million represented consideration , partially offset by net closing credits due to the company for reimbursable expenses from cortina .

operating results revenue our revenues for the years ended december 31 , 2019 , 2018 and 2017 are set forth below : replace_table_token_7_th replace_table_token_8_th 42 the growth in our assets under management from january 1 , 201 7 to december 31 , 201 9 is described below : replace_table_token_9_th ( 1 ) less than 5 % of assets under management generate performance fees . replace_table_token_10_th 1 returns are based upon a time weighted rate of return of various fully discretionary equity portfolios with similar investment objectives , strategies and policies and other relevant criteria managed by silvercrest asset management group llc ( “ samg llc ” ) , a subsidiary of silvercrest . performance results are gross of fees and net of commission charges . an investor 's actual return will be reduced by the advisory fees and any other expenses it may incur in the management of the investment advisory account . samg llc 's standard advisory fees are described in part 2 of its form adv . actual fees and expenses will vary depending on a variety of factors , including the size of a particular account . returns greater than one year are shown as annualized compounded returns and include gains and accrued income and reinvestment of distributions . past performance is no guarantee of future results . this report contains no recommendations to buy or sell securities or a solicitation of an offer to buy or sell securities or investment services or adopt any investment position . this report is not intended to constitute investment advice and is based upon conditions in place during the period noted . market and economic views are subject to change without notice and may be untimely when presented here . readers are advised not to infer or assume that any securities , sectors or markets described were or will be profitable .

within the tables presented throughout this discussion , certain columns may not add due to the use of rounded numbers for disclosure purposes . percentages and earnings per share amounts presented are calculated from the underlying amounts . references to years throughout this discussion relate to our fiscal years , which end on september 30. company overview description of the company and business segments becton , dickinson and company ( “bd” ) is a global medical technology company engaged principally in the development , manufacture and sale of a broad range of medical supplies , devices , laboratory equipment and diagnostic products used by healthcare institutions , life science researchers , clinical laboratories , the pharmaceutical industry and the general public . our products are marketed in the united states and internationally through independent distribution channels and directly to end-users by bd and independent sales representatives . the commentary provided further below regarding bd 's financial results in 2014 , 2013 and 2012 reflects a structure that consists of three worldwide business segments — bd medical ( “medical” ) , bd diagnostics ( “diagnostics” ) and bd biosciences ( “biosciences” ) . effective october 1 , 2014 , bd 's organizational structure was realigned to better complement its customer-focused solutions strategy and is based on two principal business segments . the composition of the medical segment remains unchanged and the former diagnostics and biosciences segments have been combined into one segment , bd life sciences ( “life sciences” ) . bd 's financial reporting and business discussion will reflect the realigned structure in 2015. additional discussion regarding this organization realignment is provided in note 6 to the consolidated financial statements contained in item 8. financial statements and supplementary data . bd 's products are manufactured and sold worldwide . we organize our operations outside the united states as follows : europe ( which includes europe , the middle east and africa ) ; greater asia ( which includes asia , japan and asia pacific ) ; latin america ( which includes mexico and brazil ) and canada . we continue to pursue growth opportunities in emerging markets , which include the following geographic regions : eastern europe , the middle east , africa , latin america and asia pacific ( excluding japan ) . we are particularly focused on certain countries whose economic and healthcare sectors are growing rapidly , in particular , china , india , brazil and turkey . strategic objectives bd remains focused on delivering sustainable growth and shareholder value , while making appropriate investments for the future . bd management operates the business consistent with the following core strategies : to increase revenue growth by focusing on our core products , services and solutions that deliver greater benefits to patients , healthcare workers and researchers ; to increase investment in research and development for platform extensions and innovative new products ; to make significant investments in growing our operations in emerging markets ; 21 to improve operating effectiveness and balance sheet productivity ; to drive an efficient capital structure and strong shareholder returns . our strategy focuses on four specific areas within healthcare and life sciences : enabling safer , simpler and more effective parenteral drug delivery ; improving clinical outcomes through new , more accurate and faster diagnostics ; providing tools and technologies to the research community that facilitate the understanding of the cell , cellular diagnostics and cell therapy ; enhancing disease management in diabetes , women 's health and cancer , and infection control . we continue to strive to improve the efficiency of our capital structure and follow these guiding principles : to maintain an investment grade rating ; to ensure access to the debt market for strategic opportunities ; to optimize the cost of capital based on market conditions . in assessing the outcomes of these strategies as well as bd 's financial condition and operating performance , management generally reviews quarterly forecast data , monthly actual results , segment sales and other similar information . we also consider trends related to certain key financial data , including gross profit margin , selling and administrative expense , investment in research and development , return on invested capital , and cash flows . on october 5 , 2014 , we announced a definitive agreement under which bd will acquire 100 % of carefusion corporation ( “carefusion” ) for $ 58.00 per share in cash and stock , or a total of approximately $ 12.2 billion , to create a global leader in medication management and patient safety solutions . the transaction is expected to close in the first half of calendar year 2015. under the terms of the transaction , carefusion stockholders will receive $ 49.00 in cash , without interest , and 0.0777 of a share of bd for each share of carefusion . using bd 's closing price as of october 3 , 2014 of $ 115.84 would result in a total cost of $ 58.00 per carefusion share . the value of the consideration transferred for accounting purposes will ultimately be based on the closing share price of bd 's stock on the last trading day prior to the closing date of the transaction , and could materially change . carefusion will operate as part of our medical segment . additional discussion regarding this agreement is provided in note 17 to the consolidated financial statements contained in item 8. financial statements and supplementary data . summary of financial results worldwide revenues in 2014 of $ 8.446 billion increased 4.9 % from the prior year , compared with an increase of 4.5 % in 2013. the components of the total worldwide revenue growth in 2014 and 2013 were as follows : replace_table_token_6_th significant drivers of worldwide revenue growth in 2014 included new product sales and sales in emerging markets . strong medical segment revenue growth in 2014 was driven by emerging market and international safety sales , as well as by sales of insulin pen needles . story_separator_special_tag diagnostics revenues in 2013 also reflected new product launches , a favorable comparison to the prior year due to a stronger flu season in 2013 , and the timing of the kiestra acquisition . global sales of safety-engineered products in 2014 and 2013 were $ 1.1 billion and revenues were $ 1.0 billion in 2012. revenues from safety-engineered products in 2014 and 2013 reflected unfavorable impacts due to foreign currency translation of $ 7 million in both years . diagnostics operating income in 2014 was $ 585 million , or 21.6 % of diagnostics revenues , compared with $ 638 million , or 24.1 % of revenues , in 2013. diagnostics operating income in 2012 was $ 653 million , or 25.7 % of revenues . gross profit margin in the diagnostics segment was lower in 2014 compared with 2013 primarily due to the impact of unfavorable product mix , unfavorable foreign currency translation , costs associated with plant shutdowns and other various immaterial items . the segment 's gross profit margin decreased in 2013 compared with 2012 , reflecting legal settlement costs and unfavorable product mix . diagnostics gross profit margin in 2013 was also unfavorably impacted by amortization expense related to the jaguar plus platform , an in-process research and development project completed in the fourth quarter of 2012. selling and administrative expense as a percent of diagnostics revenues in 2014 of 22.8 % was flat compared with 2013. aggregate expenses in 2014 reflected the charge relating to the early termination of a distributor arrangement , as previously discussed , offset by favorable foreign currency and other various immaterial items . selling and administrative expense , as a percentage of segment revenues , increased by 120 basis points in 2013 from 21.6 % in 2012. aggregate expenses in 2013 reflected an increase in investments in emerging markets and higher expenses associated with the kiestra acquisition that occurred in the second quarter of 2012. these increases were partially offset by favorable foreign currency translation . research and development expense in 2014 decreased $ 2 million , or 2 % from 2013 and increased $ 1 million in 2013 , or 1 % , from 2012. r & d spending in 2013 reflected our continued investment in the development of new products and platforms , including the bd max ™ and new bd viper ™ platforms and test menus . biosciences segment biosciences revenues of $ 1.159 billion in 2014 increased 5.2 % over 2013 , and reflected an estimated impact of unfavorable foreign currency translation of 0.3 % . biosciences revenues of $ 1.102 billion in 2013 increased 2.0 % over 2012 , and reflected an estimated impact of unfavorable foreign currency translation of 1.6 % . biosciences revenue growth in 2014 was driven by double-digit growth of sales in emerging markets and also reflected strong clinical reagent sales in all regions , as well as solid instrument placements in both asia and the united states . biosciences revenue growth in 2013 was primarily driven by instrument and reagent sales in emerging markets , partially offset by declines in western europe . biosciences operating income in 2014 was $ 275 million , or 23.8 % of biosciences revenues , compared with $ 269 million , or 24.4 % , in 2013. biosciences operating income in 2012 was $ 262 million , or 24.2 % of revenues . gross profit margin in 2014 was lower as compared with 2013 , reflecting unfavorable pricing on certain product lines and unfavorable foreign currency translation , partially offset by other various immaterial items . gross profit margin was slightly higher in 2013 , compared with 2012 , primarily due to favorable product mix , partially offset by lower pricing on certain product lines . selling and administrative expense as a percentage of biosciences revenues in 2014 , 2013 and 2012 was 23.2 % , 25.0 % and 24.4 % , respectively . the decrease of selling and administrative expense as a percent of revenues in 2014 reflected the favorable impact of higher sales growth in the current year 's period . aggregate expenses in 2013 reflected continued investments in emerging markets , partially offset by favorable foreign currency translation . research and development spending in 2014 increased $ 22 million , or 21 % from 2013 , reflecting the $ 20 million asset write-off , as previously discussed , and costs associated with the fiscal year 2014 workforce reduction actions , also previously discussed . research and development spending in 2013 increased $ 6 million , or 6 % , from 2012 and reflected spending on new products and platforms , including next generation cell sorters and analyzers . 26 geographic revenues bd 's worldwide revenues by geography in fiscal years 2014 , 2013 and 2012 were as follows : replace_table_token_11_th u.s. revenue growth for our medical segment in 2014 and 2013 reflected continued strong sales of pen needles in the diabetes care unit . the pharmaceutical systems unit 's revenue growth in 2014 benefitted from the annualized impact of the safety syringes acquisition , which also aided u.s. revenue growth for this unit in 2013. u.s. diagnostics growth in 2014 and 2013 was unfavorably impacted by the continued decline in women 's health and cancer platform sales , as previously discussed , and this segment 's revenues in 2014 additionally reflected share losses relative to the bd probetec ™ and bd vipe r™ systems . u.s. biosciences revenue growth in 2014 was driven by solid growth in clinical reagents and instrument placements , reflecting continued stability in the u.s market . u.s. biosciences revenue growth in 2013 reflected slight growth in instrument placements . international revenues in 2014 reflected strong growth in all segments . emerging market revenues in 2014 of $ 2.123 billion represented an increase of 9.3 % over the prior year , including a 3.0 % unfavorable impact due to foreign currency translation , and accounted for approximately 25 % of our total revenues .

results of continuing operations comparisons of income from continuing operations between 2014 and 2013 , as well as between 2013 and 2012 , are affected by the following specified items that are reflected in our financial results : replace_table_token_7_th 23 replace_table_token_8_th ( a ) acquisition-related transaction costs incurred in connection with the gencell biosystems and pending carefusion acquisitions . these costs were recorded in selling and administrative expense . ( b ) non-cash charges primarily resulting from lump sum benefit payments made from bd 's u.s. supplemental pension plan . for further discussion , refer to note 8 to the consolidated financial statements contained in item 8. financial statements and supplementary data . ( c ) includes an $ 11 million charge recorded by our diagnostics segment in selling and administrative expense for contract termination costs that resulted from the early termination of a european distributor arrangement . also includes a $ 5 million charge in costs of products sold resulting from the adjustment to the carrying amount of an asset that is being held for sale , and a gain of $ 8 million in other income ( expense ) , net , resulting from the sale of a company in which we held a small equity ownership interest . 2014 specified items during 2014 , we initiated workforce reduction actions that affected a significant number of employees and resulted in a $ 36 million pre-tax charge associated with employee termination costs . for further discussion , refer to notes 6 and 8 to the consolidated financial statements contained in item 8. financial statements and supplementary data . the research and development expense charges include a $ 20 million pre-tax charge recorded by our biosciences segment for asset write-offs primarily resulting from the discontinuance of an instrument product development program . the asset write-offs were largely attributable to capitalized product software , but also included a lesser amount attributable to fixed assets .

during the year we rolled out an artificial intelligence powered chatbot within aiu named lucy that addresses questions from prospective students . we are experiencing efficiencies within our admissions function as a result of the chatbot and therefore are able to reallocate resources to student support functions for our continuing students . we also continue to research and develop different ways to use data analytics to expand the use of artificial intelligence across a student 's academic life cycle , from initial prospective student inquiry and starting classes to ongoing advising . our goal is to provide ongoing support to students whenever they need it while also providing a better user experience that is more personalized in nature . we expect to continue investing in technology initiatives and expect our capital expenditures to be approximately 2 % of revenue for 2020. machine learning and data analytics have also enhanced the functionality and effectiveness of our marketing outreach efforts to prospective students . as a result , our marketing efforts are more focused based on a students ' propensity to be successful in our academic programs . lastly , we are testing a new orientation framework which is designed to streamline navigation and content to increase the relevance to each student . finally , we are now working through the final regulatory approval with the department of education to acquire trident university international . we expect the transaction to close in early march 2020 depending on when the department of education adds trident 's programs to aiu 's authorization . we are working towards a smooth transition for trident into aiu and our focus will be on maintaining and further enhancing academic experiences for students from both universities . financial highlights revenue for the year ended december 31 , 2019 increased $ 46.4 million or 8.0 % as compared to the prior year , driven by revenue growth at both ctu and aiu as a result of the positive enrollment trends discussed above and approximately 4.2 % more revenue-earning days within aiu as compared to the prior year due to its academic calendar which varies each year . we reported operating income of $ 86.5 million as compared to operating income of $ 71.3 million for the prior year , an improvement of 21.3 % . this improvement was driven by revenue growth within our universities , operating and cost efficiencies and reduced operating losses at our closed campuses . lastly , we reported cash provided by operations for the current year of $ 73.1 million as compared to $ 57.0 million in the prior year . the current year cash usage included payments of $ 35.0 million for legal settlements as compared to $ 17.1 million in the prior year . revenue within our ctu segment increased $ 16.5 million or 4.4 % while aiu 's revenue increased by $ 30.5 million or 14.9 % driven by an increase in new and total student enrollments for both universities . operating income for ctu decreased $ 3.0 million or 2.7 % as compared to the prior year , with the decrease driven by $ 18.6 million of legal settlement expense related to the ftc matter . excluding this legal settlement , ctu 's operating income would have increased as compared to the prior year . operating income for aiu increased $ 8.2 million or 100.7 % as compared to the prior year and includes $ 11.4 million of legal settlement expense related to the ftc matter . excluding the impact of the legal settlement , the improvements in operating income were driven by the revenue growth within both universities partially offset with increased advertising and bad debt expenses . bad debt expense has been impacted by an increase in reserve rates as compared to the prior year . this increase is a result of the review of our analysis of historical student receivable collectability , which we update quarterly based on the most recent data available , along with current known factors which we believe could affect collectability of our student receivables , including the number of students that do not complete the financial aid process . within our corporate and other category , operating loss of $ 38.6 million improved 20.5 % compared to the prior year driven by the completion of our teach-out strategy in the prior year . with the closure of all of our teach-out campuses by the end of 2018 , we began reporting the losses associated with the closed campuses within corporate and other in 2019. all prior period results have been 39 recast to be comparable . for 2019 and through the termination of leases in 2021 for these closed campuses , the losses associated with our closed campuses will primarily consist of residual occupancy expenses as well as certain legal expenses , and we expect these amounts to decrease in 2020 and 2021. the current year operating loss for corporate and other was also impacted by increased stock compensation expenses and compliance and monitoring costs as compared to the prior year , while the prior year included a benefit for recovery of past claims of $ 2.5 million . the company believes it is useful to present non-gaap financial measures , which exclude certain significant and non-cash items , as a means to understand the performance of its operations . ( see tables below for a gaap to non-gaap reconciliation . ) story_separator_special_tag adjusted operating income was $ 134.3 million for the year as compared to $ 105.2 million in the prior year with the improvement primarily driven by the revenue growth within our universities , operating and cost efficiencies and reductions in operating losses at our closed campuses . adjusted operating income for the years ended december 31 , 2019 and 2018 is presented below ( dollars in thousands , unless otherwise noted ) : replace_table_token_8_th _ ( 1 ) lease expenses for vacated space include both fixed and variable lease costs offset with sublease income . ( 2 ) severance and related costs , net of cancellations , include charges related to significant restructuring actions during 2018 , which were primarily recorded within the university group . these restructuring charges do not regularly occur and are not considered part of ongoing operating results . ( 3 ) significant legal settlements relate to the ftc and oregon arbitrations matters recorded during 2019 and the multi-state ag and surrett matters which were recorded during 2018 . ( 4 ) the tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25.0 % . this tax rate is intended to reflect federal and state taxable jurisdictions as well as the nature of the adjustments . the non-deductible amount of $ 5.0 million of pre-tax adjustment for the year ended december 31 , 2018 related to the multi-state ag matter was not deductible for tax purposes and therefore does not include a tax effect . the positive operating results that we experienced for 2019 as compared to the prior year reflect our focus on student experiences , retention and academic outcomes . as a result of improved operating performance during 2019 , we are entering 2020 with good momentum which provides us with a platform to continue investing in student serving functions and technology initiatives . both ctu and aiu continue to execute well against our objective of sustainable and responsible growth , providing reaffirmation around our overall strategy of prioritizing student-serving processes and initiatives while giving us the financial and operating confidence to continue investing in our universities . 40 title iv programs a significant majority of our students rely on title iv programs to finance their education and therefore a significant proportion of our cash receipts come from title iv programs . as discussed throughout this annual report on form 10-k , our participation in title iv programs subjects us to extensive regulation . extensive resources and management time are devoted to monitoring compliance with this extensive regulatory framework . one area of particular focus has been the 90-10 rule , which limits our institutions ' cash receipts derived from title iv programs ( as calculated pursuant to the rule ) to 90 % . the 90-10 rule is discussed further in item 1 , “ business – student financial aid and related federal regulation – compliance with federal regulatory standards and effect of federal regulatory violations - ‘ 90-10 rule , ' ” and item 1a , “ risk factors – risks related to the highly regulated field in which we operate – our institutions could lose their eligibility to participate in federal student financial aid programs if the percentage of their revenues derived from those programs is too high. ” monitoring compliance with the 90-10 rule is challenging because we have substantially no control over the amount of title iv student loans and grants sought by or awarded to our students . we continue to implement various measures intended to reduce the percentage of our institution 's cash basis revenue attributable to title iv program funds , including emphasizing employer-paid and other direct-pay education programs such as our corporate partnerships , recruitment of international students , the use of externally funded scholarships and grants and counseling students to carefully evaluate the amount of necessary title iv program borrowing . another measure to maintain compliance is deferring the receipt of title iv program funds within the parameters permitted by ed cash management regulations , which aiu did in 2019. we also continue to consider other business strategies that may positively impact our compliance with the 90-10 rule . this includes enhanced focus on the acquisition of quality educational institutions and programs where the students are less dependent upon title iv programs to finance their education , committing additional resources to grow our corporate partnership program and enhancing our efforts to recruit international students . we can also consider adjusting tuition , but tuition adjustments adversely impact students and could adversely affect our enrollments . we will continue to monitor our compliance with the 90-10 rule . however , multiple legislative proposals have been introduced in congress that would revise the 90-10 rule to consider the earned tuition benefits provided to military personnel , including veterans , in the same manner as title iv funds for purposes of the rule and to revise the 90-10 rule to an 85-15 rule . if adopted , these proposals could impact our future compliance with the 90-10 rule . we encourage you to review item 1 , “ business , ” and item 1a , “ risk factors , ” to learn more about our highly regulated industry and related risks and uncertainties . 2020 outlook we are providing the outlook set forth below , subject to the key assumptions identified below . please see the gaap to non-gaap reconciliation for adjusted operating income and adjusted earnings per diluted share for further details . this outlook reflects our expectation of growth in new and total student enrollments at both universities for 2020. further , for the first quarter of 2020 , we expect growth in ctu 's new student enrollments as compared to the prior year quarter . aiu 's first quarter new student enrollments , however , are expected to decline due to 31 % less enrollment days in the first quarter of 2020 as compared to the prior

segment results of operations the summary of segment financial information below should be referenced in connection with a review of the following discussion of our segment results from operations for the years ended december 31 , 2019 and 2018 ( dollars in thousands ) , including comparisons of our year-over-year performance between these years . please refer to part ii item 7 , “ management 's discussion and analysis of financial condition and results of operation ” in our annual report on form 10-k for the year ended december 31 , 2018 for a discussion of our results for the year ended december 31 , 2017 , as well as the year-over-year comparison of our 2018 financial performance to 2017 . 45 replace_table_token_15_th ( 1 ) this category includes amounts that were historically reported within corporate and other prior to the segment change which occurred as of january 1 , 2019 . ( 2 ) an expense of $ 18.6 million was recorded within ctu related to the ftc settlement during 2019 . ( 3 ) an expense of $ 11.4 million was recorded within aiu related to the ftc settlement during 2019 . ( 4 ) an expense of $ 7.1 million was recorded within corporate and other for our closed campuses related to the oregon arbitrations matter during 2019 as compared to $ 14.6 million during 2018 related to the surrett and multi-state ag matters . replace_table_token_16_th 46 year ended december 31 , 2019 as compared to the year ended december 31 , 2018 ctu . current year revenue increased by 4.4 % or $ 16.5 million driven by new and total student enrollments growth during 2019. for the year , ctu experienced positive new student enrollment growth of 7.0 % and increased total student enrollments by 4.4 % as compared to the prior year end .

as a result of many factors , including those factors set forth in the ‘ ‘ risk factors '' section of this annual report on form 10-k , our actual results or timing of certain events could differ materially from the results or timing described in , or implied by , these forward-looking statements . overview we are a biopharmaceutical company focused on improving the lives of patients with genomically defined diseases driven by abnormal kinase activation . our approach is to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and to craft drug candidates that may provide significant and durable clinical responses for patients without adequate treatment options . this integrated biology and chemistry approach enables us to identify , characterize and design drug candidates to inhibit novel kinase targets that have been difficult to selectively inhibit . by focusing on diseases in genomically defined patient populations , we believe that we will have a more efficient development path with a greater likelihood of success . leveraging our novel target discovery engine , we have developed a robust small molecule drug pipeline in cancer and a rare genetic disease . our most advanced drug candidates are blu-285 , blu-554 and blu-667 . blu-285 is an orally available , potent and highly selective inhibitor that targets kit , including exon 17 mutations , and targets pdgfrα , including the d842v mutation . these mutations abnormally activate receptor tyrosine kinases that are drivers of cancer and proliferative disorders , including gastrointestinal stromal tumors , or gist , and systemic mastocytosis , or sm . we are currently evaluating blu-285 in an ongoing phase 1 clinical trial for defined subsets of patients with gist and an ongoing phase 1 clinical trial for advanced sm . gist is a rare disease that is a sarcoma , or tumor of bone or connective tissue , of the gastrointestinal tract , or gi tract , and sm is a rare disorder that causes an overproduction of mast cells and the accumulation of mast cells in the bone marrow and other organs , which can lead to a wide range of debilitating symptoms and organ dysfunction and failure . blu-554 is an orally available , potent and highly selective inhibitor that targets fgfr4 , a kinase that is aberrantly activated in a defined subset of patients with hepatocellular carcinoma , or hcc , the most common type of liver cancer . we are currently evaluating blu-554 in an ongoing phase 1 clinical trial in patients with advanced hcc . blu-667 targets ret , a receptor tyrosine kinase that is abnormally activated by mutations or translocations , and ret resistant mutants that we predict will arise from treatment with first generation therapies . ret is a driver of disease in non-small cell lung cancer , or nsclc , and cancers of the thyroid , including medullary thyroid carcinoma , or mtc , and our research suggests that ret may be a driver of disease in subsets of colon 86 cancer , breast cancer and other cancers . in december 2016 , the u.s. food and drug administration , or fda , approved our investigational new drug , or ind , application for blu-667 for the treatment of nsclc , thyroid cancer and other advanced solid tumors , and we expect to initiate a phase 1 clinical trial for blu-667 for the treatment of nsclc , mtc and other advanced solid tumors in the first half of 2017. in september 2015 , the fda granted orphan drug designation to blu-554 for the treatment of hcc , and in january 2016 , the fda granted orphan drug designation to blu-285 for the treatment of gist and sm . in addition , in october 2016 , the fda granted fast track designation to blu-285 for the treatment of patients with unresectable or metastatic gist that progressed following treatment with imatinib and a second tyrosine kinase inhibitor and for the treatment of patients with unresectable or metastatic gist with the pdgfrα d842v mutation regardless of prior therapy . we have worldwide development and commercialization rights to blu-285 , blu-554 and blu-667 . we also have initiated a discovery program targeting protein kinase camp-activated catalytic subunit alpha , or prkaca , fusions for the treatment of fibrolamellar carcinoma , or flc , a rare and distinct subtype of liver cancer that typically arises in young adults . prkaca fusions are the only known recurrent genomic events in flc and are considered to be the driver gene of the disease . currently , there are no approved therapies for flc , and surgery is the only available treatment option for some patients , but most patients inevitably progress . we will continue to leverage our discovery platform to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and craft drug candidates that potently and selectively target these kinases . we anticipate nominating at least one additional discovery program in 2017. in addition to our wholly-owned clinical and pre-clinical programs , we have leveraged our discovery platform to enter into collaboration programs with alexion pharma holding , or alexion , and f. hoffmann-la roche ltd and hoffmann-la roche inc. , which we refer to collectively as roche . since inception , our operations have focused on organizing and staffing our company , business planning , raising capital , establishing our intellectual property , building our discovery platform , including our proprietary compound library and new target discovery engine , identifying kinase drug targets and potential drug candidates , producing drug substance and drug product material for use in pre-clinical studies and clinical trials , conducting pre-clinical studies , including glp toxicology studies and commencing clinical development activities . we do not have any drugs approved for sale and have not generated any revenue from drug sales . to date , we have financed our operations primarily through public offerings of our common stock , private placements of our convertible preferred stock , collaborations and a debt financing . story_separator_special_tag there are numerous factors associated with the successful commercialization of any of our drug candidates , including future trial design and various regulatory requirements , many of which can not be determined with accuracy at this time based on our stage of development . in addition , future commercial and regulatory factors beyond our control will impact our clinical development programs and plans . a significant portion of our research and development expenses have been external expenses , which we track on a program‑by‑program basis following nomination as a development candidate . our internal research and development expenses are primarily personnel‑related expenses , including stock-based compensation expense . we do not track our internal research and development expenses on a program‑by‑program basis as they are deployed across multiple projects under development . the following table summarizes our external research and development expenses by program for the years ended december 31 , 2016 and 2015. pre‑development candidate expenses , unallocated expenses and internal research and development expenses have been classified separately . replace_table_token_8_th we expect that our research and development expenses will increase in future periods as we expand our operations and incur additional costs in connection with our clinical trials . these increases will likely include the costs related to the implementation and expansion of clinical trial sites and related patient enrollment , monitoring , program management and drug product and drug substance manufacturing expenses . in addition , we expect that our research and development expenses will increase in future periods as we incur additional costs in connection with research and development activities under our collaborations with alexion and roche and development activities for companion diagnostic tests , including our companion diagnostic tests with ventana and qiagen . 89 general and administrative expenses general and administrative expenses consist primarily of salaries and other related costs , including stock‑based compensation , for personnel in executive , finance , accounting , business development , legal and human resources functions . stock‑based compensation includes expense associated with stock‑based awards issued to non‑employees , including directors for non‑board related services . other significant costs include facility costs not otherwise included in research and development expenses , legal fees relating to patent and corporate matters and fees for accounting and consulting services . we expect that our general and administrative expenses will increase in the future to support continued research and development activities , including as we continue our existing clinical trials and initiate additional clinical trials , as well as pre-commercial development activities . these increases will likely include increased costs related to the hiring of additional personnel , legal , auditing and filing fees and general compliance and consulting expenses , among other expenses . we have incurred and will continue to incur additional costs associated with operating as a public company . other income ( expense ) other income ( expense ) consists primarily of income earned on cash equivalents and investments and the re‑measurement gain or loss associated with the change in the fair value of the convertible preferred stock warrant liability in periods prior to our ipo . interest expense interest expense consists primarily of interest expense on amounts outstanding under a loan and security agreement that we entered into with silicon valley bank in may 2013 and amortization of debt discount . critical accounting policies and estimates our management 's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements , which have been prepared in accordance with u.s. generally accepted accounting principles . the preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets , liabilities , revenues , and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements . we base our estimates on historical experience , known trends and events , and various other factors that are believed to be reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions . on an ongoing basis , we evaluate our judgments and estimates in light of changes in circumstances , facts and experience . the effects of material revisions in estimates , if any , will be reflected in the consolidated financial statements prospectively from the date of change in estimates . our critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our financial statements . management has determined that our most critical accounting policies are those relating to revenue recognition , accrued research and development expenses , available-for-sale investments and stock-based compensation . available-for-sale investments we classify marketable securities with a remaining maturity when purchased of greater than three months as available-for-sale . marketable securities with a remaining maturity date greater than one year are classified as non-current . available-for-sale securities are maintained by an investment manager and may consist of u.s. treasury securities and u.s. government agency securities . available-for-sale securities are carried at fair value with the unrealized gains and losses included in other comprehensive income ( loss ) as a component of stockholders ' equity until realized . any premium or discount arising at purchase is amortized and or accreted to interest income and or expense over the life of the instrument . realized gains and losses are determined using the specific identification method and are included in other income ( expense ) . if any adjustment to fair value reflects a decline in value of the investment , we consider all available evidence to evaluate the extent to which the decline is “ other-than-temporary ” and , if so , mark the investment to market through a charge to our statement of operations and comprehensive loss .

results of operations comparison of years ended december 31 , 2016 and 2015 the following table summarizes our results of operations for the years ended december 31 , 2016 and 2015 , together with the changes in those items in dollars and as a percentage : replace_table_token_10_th collaboration revenue collaboration revenue increased by $ 16.4 million from $ 11.4 million for the year ended december 31 , 2015 to $ 27.8 million for the year ended december 31 , 2016. collaboration revenue for the year ended december 31 , 2016 was related to the alexion and roche agreements . collaboration revenue under the alexion agreement began in march 2015 upon the execution of the alexion agreement , and we recorded $ 23.3 million in collaboration revenue under the alexion agreement for the year ended december 31 , 2016. the increase in collaboration revenue from the year ended december 31 , 2015 under the alexion agreement of $ 11.9 million was primarily related to increased reimbursable research and development costs , increased recognition of portions of the $ 15.0 million upfront payment and $ 1.8 million in milestone payments received from alexion and increased milestone payments recognized upon achievement during the year ended december 31 , 2016. we entered into the roche agreement in march 2016 and recorded $ 4.5 million in collaboration revenue under the roche agreement for the year ended december 31 , 2016. research and development expense research and development expense increased by $ 32.5 million from $ 48.6 million for the year ended december 31 , 2015 to $ 81.1 million for the year ended december 31 , 2016. the increase in research and development expense was primarily related to the following : · approximately $ 10.3 million in increased expenses for external clinical activities as we advanced two of our lead drug candidates , blu-285 and blu-554 , in phase 1 clinical trials ; · approximately $ 9.5 million in increased expenses

asu 2015-16 provides that the amendments in the update should be applied retrospectively to all periods presented , unless deemed impracticable , in which case , prospective application is permitted . the company is currently evaluating the impact this standard may have on its financial statements . in january 2016 , the fasb issued asu no . 2016-01 , `` financial instruments—overall ( subtopic 825-10 ) : recognition and measurement of financial assets and financial liabilities , `` which amends the guidance in u.s. generally accepted accounting principles on the classification and measurement of financial instruments . changes to the current guidance primarily affect the accounting for equity investments , financial liabilities under the fair value option , and the presentation and disclosure requirements for financial instruments . in addition , the asu clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities . the amendments in this asu are effective for fiscal years and interim periods beginning after december 15 , 2017 , and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective . early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income . the company is currently evaluating the impact this standard may have on its financial statements . 3. reverse merger on july 22 , 2016 , the company , synta and saffron merger sub , inc. , a wholly-owned subsidiary of synta ( `` merger sub `` ) , completed their merger transaction pursuant to which merger sub merged with and into the company with the company becoming a wholly-owned subsidiary of synta and the surviving corporation of the merger . each outstanding share of private madrigal common stock was converted into 0.1593 shares of common stock of the post-merger combined company . as a result , synta issued 7.3 million shares of common stock to the stockholders of private madrigal in exchange for common shares of private madrigal . for accounting purposes , the company is considered to be f-13 madrigal pharmaceuticals , inc. notes to consolidated financial statements ( continued ) 3. reverse merger ( continued ) acquiring synta in the merger . the company was determined to be the accounting acquirer based upon the terms of the merger agreement and other factors including : ( i ) madrigal security holders own approximately 64 % of the voting interests of the combined company immediately following the closing of the merger ; ( ii ) directors appointed by madrigal hold a majority of board seats in the combined company ; and ( iii ) madrigal management hold a majority of the key positions in the management of the combined company . as the accounting acquirer , the company 's assets and liabilities continue to be recorded at their historical carrying amounts and the historical operations that will be reflected in the financial statements will be those of the company . immediately prior to the closing of the merger , synta completed a one-for-35 reverse stock split . following the reverse stock split and the merger , the post-merger combined company had approximately 11.3 million shares outstanding and the former stockholders of the company owned approximately 64 % of the outstanding capital stock of the post-merger combined company . the impact of the recapitalization of the company has been retroactively applied to all periods presented . upon the closing of the merger transaction , the company incurred an expense for a success fee of $ 750 thousand in cash , plus settled $ 750 thousand for both parties in shares of the post-merger combined company 's common stock with a third party financial advisor . purchase price pursuant to the merger agreement , synta issued to madrigal stockholders a number of shares of synta common stock representing approximately 64 % of the outstanding shares of common stock of the combined company . the purchase price , which represents the consideration transferred to synta stockholders in the reverse merger is calculated based on the number of shares of common stock of the combined company that synta stockholders will own as of the closing of the merger , which consists of the following : number of shares of the combined company to be owned by synta stockholders ( 1 ) 4,032,734 multiplied by the fair value of synta common stock ( 2 ) $ 9.48 ​ ​ ​ ​ ​ purchase price ( in thousands ) $ 38,236 ​ ​ ​ ​ ​ ( 1 ) represents the number of shares of common stock of the combined company that synta stockholders owned as of the closing of the merger pursuant to the merger agreement , including restricted stock awards and common stock underlying story_separator_special_tag the risk factors in part i , item 1a of this annual report on form 10-k , the audited financial statements and accompanying notes , included elsewhere in this annual report on form 10-k , and this management 's discussion and analysis of financial condition and results of operations should be read together . in addition to historical information , this discussion and analysis contains forward-looking statements within the meaning of section 27a of the securities act , and section 21e of the exchange act . operating results are not necessarily indicative of results that may occur for the full fiscal year or any other future period . the term `` synta '' refers to synta pharmaceuticals corp. prior to the consummation of the merger described herein . story_separator_special_tag we do not track employee and facility related research and development costs by project , as we typically use our employee and infrastructure resources across multiple research and development programs . we believe that the allocation of such costs would be arbitrary and not be meaningful . our research and development expenses consist primarily of : salaries and related expense , including stock-based compensation ; external expenses paid to clinical trial sites , contract research organizations , laboratories , database software and consultants that conduct clinical trials ; expenses related to development and the production of nonclinical and clinical trial supplies , including fees paid to contract manufacturers ; expenses related to preclinical studies ; expenses related to compliance with drug development regulatory requirements ; and other allocated expenses , which include direct and allocated expenses for depreciation of equipment and other supplies . we expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we conduct our phase 2 clinical program , manufacturing and toxicology studies . product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development , primarily due to the increased size and duration of later- 53 stage clinical trials , additional drug manufacturing requirements , and later stage toxicology studies such as carcinogenicity studies . our research and development expenses have increased year over year in each of 2016 and 2017 and we expect that our research and development expenses will increase substantially in the future . the process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming . the probability of success for each product candidate is affected by numerous factors , including preclinical data , clinical data , competition , manufacturing capability and commercial viability . accordingly , we may never succeed in achieving marketing approval for any of our product candidates completion dates and costs for our clinical development programs as well as our research program can vary significantly for each current and future product candidate and are difficult to predict . as a result , we can not estimate with any degree of certainty the costs we will incur in connection with the development of our product candidates at this point in time . we expect that we will make determinations as to which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an ongoing basis in response to the scientific success of early research programs , results of ongoing and future clinical trials , our ability to enter into collaborative agreements with respect to programs or potential product candidates , as well as ongoing assessments as to each current or future product candidate 's commercial potential . general and administrative expenses general and administrative expenses consist primarily of salaries , benefits and stock-based compensation expenses for employees , management costs , costs associated with obtaining and maintaining our patent portfolio , professional fees for accounting , auditing , consulting and legal services , and allocated overhead expenses . we expect that our general and administrative expenses may increase in the future as we expand our operating activities , maintain and expand our patent portfolio and incur additional costs associated with being a public company and maintaining compliance with exchange listing and sec requirements . we expect these potential increases will likely include management costs , legal fees , accounting fees , directors ' and officers ' liability insurance premiums and expenses associated with investor relations . critical accounting policies and estimates our management 's discussion and analysis of our financial condition and results of operations are based on our 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 and liabilities , and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements . on an ongoing basis , we evaluate our estimates and judgments , including those related to accrued research and development expenses . we base our estimates on historical experience , known trends and events , and various other factors that are believed to be 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 materially from these estimates under different assumptions or conditions . research and development costs research and development costs are expensed as incurred . research and development costs are comprised of costs incurred in performing research and development activities , including internal costs ( including stock-based compensation ) , costs for consultants , and other costs associated with the company 's preclinical and clinical programs . in particular , madrigal has conducted safety studies in animals , optimized and implemented the api manufacturing , and conducted phase 1 & 2 clinical trials , all of which are considered research and development expenditures . 54 stock-based compensation we recognize stock-based compensation expense based on the grant date fair value of stock options granted to employees , officers and directors . we use the black-scholes option pricing model to determine the grant date fair value as our management believes it is the most appropriate valuation method for its option grants . the black-scholes model requires inputs for risk-free interest rate , dividend yield , volatility and expected lives of the options . certain of the employee stock options granted by us are structured to qualify as incentive stock options , or isos . under current tax regulations , we do not receive a tax deduction for the issuance , exercise or disposition of isos if the employee meets certain holding requirements . if the employee does not meet the holding requirements , a disqualifying disposition occurs ,

results of operations comparison years ended december 31 , 2017 and 2016 the following table provides comparative results of operations for the years ended december 31 , 2017 and 2016 ( in thousands ) : replace_table_token_4_th research and development expense comparison of years ended december 31 , 2017 and 2016 our research and development expenses were $ 24.4 million for the year ended december 31 , 2017 compared to $ 15.9 million for the year ended december 31 , 2016. research and development expenses increased by $ 8.5 million in the 2017 period due primarily to the expenses incurred to conduct and support the two phase 2 studies for mgl-3196 , which commenced in the fourth quarter of 2016 and the first quarter of 2017 , respectively . our increased research and development expenses include an $ 8.5 million increase in contract research organization costs directly associated with the two phase 2 studies . these increases were partially offset by lower stock based compensation expense in 2017 , due to the expense incurred in 2016 from the change in control bonus plan resulting from the merger . we expect our research and development expenses to increase over time as we advance our clinical and preclinical development . general and administrative expense comparison of years ended december 31 , 2017 and 2016 our general and administrative expenses were $ 7.7 million for the year ended december 31 , 2017 compared to $ 9.3 million for the year ended december 31 , 2016. general and administrative expenses 55 decreased by $ 1.6 million in the 2017 period due primarily to expenses incurred in 2016 from the merger , including $ 0.6 million from the change in control bonus plan and $ 2.1 million in other cost associated with the merger . these merger costs were partially offset by increases in 2017 from increased compensation expense and expenses related to operating as a public company .

discussions of fiscal 2018 items and year-to-year comparisons between fiscal 2019 and 2018 that are not included in this form 10-k can be found in “ management 's discussion and analysis of financial condition and results of operations ” in part ii , item 7 of our annual report on form 10-k for the fiscal year ended january 31 , 2019. overview splunk provides innovative software solutions that ingest data from different sources including systems , devices and interactions , and turn that data into meaningful business insights across the organization . our data-to-everything platform enables users to investigate , monitor , analyze and act on data regardless of format or source . data is produced by nearly every software application and electronic device across an organization and contains a real-time record of various activities , such as business transactions , customer and user behavior , and security threats . beyond an organization 's traditional information technology ( “ it ” ) and security infrastructure , data from the industrial internet , including industrial control systems , sensors , supervisory control and data acquisition ( “ scada ” ) systems , networks , manufacturing systems , smart meters and the internet of things ( “ iot ” ) , which includes consumer-oriented systems , such as electronic wearables , mobile devices , automobiles and medical devices are also continuously generating data . our data-to-everything platform helps organizations gain the value contained in data by delivering real-time information to enable operational decision making . we believe the market for products that deliver real-time business insights from data presents a substantial opportunity as data grows in volume and diversity , creating new risks , opportunities and challenges for organizations . since our inception , we have invested a substantial amount of resources developing our offerings to address this market . 43 our offerings are designed to deliver rapid return-on-investment for our customers . they generally do not require customization , long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications . prospective users can get started with our free online sandboxes that enable our customers to immediately try and experience splunk offerings . users that prefer to deploy the software on-premises can take advantage of our free 60-day trial of splunk enterprise and a 15-day free trial is available to users that prefer the core functionalities of splunk enterprise delivered as a cloud service . these users can sign up for splunk cloud and avoid the need to provision , deploy and manage internal infrastructure . alternatively , they can simply download and install the software , typically in a matter of hours , to connect to their relevant data sources . customers can also provision a compute instance on aws via a pre-built amazon machine image , which delivers a pre-configured virtual machine instance with our splunk enterprise software . we offer free development-test licenses for certain commercial customers , allowing users to explore new data and use cases in a non-production environment without incurring additional fees . we also offer support , training and professional services to our customers to assist in the deployment of our software . for splunk enterprise , we typically base our license fees on either the estimated daily data indexing capacity or the compute power our customers require . as described further below , over the last year , we have shifted our licensing model , and as of january 31 , 2020 , a substantial majority of our license revenues consist of revenues from term licenses , and to a much lesser extent , perpetual licenses , under which we generally recognize the license fee portion of these arrangements upfront . as a result , the timing of when we enter into large term and perpetual licenses may lead to fluctuations in our revenues and operating results because our expenses are largely fixed in the short-term . splunk cloud delivers the core capabilities of splunk enterprise as a scalable , reliable cloud service . we typically base our splunk cloud annual subscription fees on either the volume of data indexed per day including a fixed amount of data storage , or purchased infrastructure and data storage our customers require . we recognize the revenues associated with our cloud services ratably over the associated subscription term . splunk enterprise security ( “ es ” ) addresses emerging security threats and security information and event management ( “ siem ” ) use cases through monitoring , alerts and analytics . splunk it service intelligence ( “ itsi ” ) is a machine learning powered monitoring and analytics solution that correlates nearly any kind of data across it and the business to provide monitoring and troubleshooting support and predict problems before they have an impact . splunk phantom automates and orchestrates incident response workflows to take immediate action the moment an incident is detected . victorops is a cloud-based collaborative incident response system that delivers context-rich alerts , reducing the time required to react to and address incidents . signalfx is a cloud-based service that provides real-time monitoring and metrics for cloud infrastructure , microservices and applications observability , as well as application performance management ( “ apm ” ) for organizations . during fiscal 2020 , we rapidly shifted our revenue mix from sales of perpetual licenses to sales of term licenses and cloud subscriptions , and we have substantially completed our transition to a renewable model as of january 31 , 2020. as part of this transition , we discontinued offering new perpetual licenses effective november 1 , 2019. we have also shifted from generally invoicing our multi-year term license contracts upfront to invoicing on an annual basis . story_separator_special_tag 46 non-gaap financial measures and reconciliations to supplement our consolidated financial statements , which are prepared and presented in accordance with gaap , we provide investors with the following non-gaap financial measures : cost of revenues , gross margin , research and development expense , sales and marketing expense , general and administrative expense , operating income ( loss ) , operating margin , income tax provision ( benefit ) , net income ( loss ) , net income ( loss ) per share and free cash flow ( collectively the “ non-gaap financial measures ” ) . these non-gaap financial measures exclude all or a combination of the following ( as reflected in the following reconciliation tables ) : expenses related to stock-based compensation and related employer payroll tax , amortization of acquired intangible assets , adjustments related to a financing lease obligation , acquisition-related adjustments , including the partial release of the valuation allowance due to acquisitions , adjustments related to restructuring charges and facility exits , capitalized software development costs , a legal settlement charge and non-cash interest expense related to our convertible senior notes that were issued in the third quarter of fiscal 2019. the adjustments for the financing lease obligation are to reflect the expense we would have recorded if our build-to-suit lease arrangement had been deemed an operating lease instead of a financing lease and is calculated as the net of actual ground lease expense , depreciation and interest expense over estimated straight-line rent expense . the non-gaap financial measures are also adjusted for our estimated tax rate on non-gaap income ( loss ) . to determine the annual non-gaap tax rate , we evaluate a financial projection based on our non-gaap results . the annual non-gaap tax rate takes into account other factors including our current operating structure , our existing tax positions in various jurisdictions and key legislation in major jurisdictions where we operate . the non-gaap tax rate applied to fiscal 2020 was 20 % . we will provide updates to this rate on an annual basis , or more frequently if material changes occur . the applicable fiscal 2019 tax rates are noted in the reconciliations . in addition , our non-gaap financial measures include free cash flow , which represents operating cash flow less purchases of property and equipment . we consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated or used by the business . we exclude stock-based compensation expense because it is non-cash in nature and excluding this expense provides meaningful supplemental information regarding our operational performance and allows investors the ability to make more meaningful comparisons between our operating results and those of other companies . we exclude employer payroll tax expense related to employee stock plans in order for investors to see the full effect that excluding that stock-based compensation expense had on our operating results . these expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise , which may vary from period to period independent of the operating performance of our business . we also exclude amortization of acquired intangible assets , adjustments related to a financing lease obligation , acquisition-related adjustments , including the partial release of the valuation allowance due to our acquisitions , adjustments related to restructuring charges and facility exits , capitalized software development costs , a legal settlement charge and non-cash interest expense related to our convertible senior notes from our non-gaap financial measures because these expenses are considered by management to be outside of our core operating results . there are limitations in using non-gaap financial measures because the non-gaap financial measures are not prepared in accordance with gaap , may be different from non-gaap financial measures used by our competitors and exclude expenses that may have a material impact upon our reported financial results . further , stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees . the presentation of the non-gaap financial measures is not intended to be considered in isolation or as a substitute for , or superior to , the financial information prepared and presented in accordance with gaap . we use these non-gaap financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons . we believe that these non-gaap financial measures provide useful information about our operating results , enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in our financial and operational decision making . in addition , these non-gaap financial measures facilitate comparisons to competitors ' operating results . the non-gaap financial measures are meant to supplement and be viewed in conjunction with gaap financial measures . 47 the following table reconciles our net cash provided by ( used in ) operating activities to free cash flow : replace_table_token_5_th the following table reconciles our gaap to non-gaap financial measures for the fiscal year ended january 31 , 2020 : ( in thousands , except per share amounts ) gaap stock-based compensation and related employer payroll tax amortization of acquired intangible assets acquisition- related adjustments adjustments related to restructuring charges and facility exits capitalized software development costs legal settlement charge non-cash interest expense related to convertible senior notes income tax effects related to non-gaap adjustments ( 3 ) non-gaap cost of revenues $ 429,788 $ ( 46,478 ) $ ( 29,516 ) $ — $ — $ — $ — $ — $ — $ 353,794 gross margin 81.8 % 1.9 % 1.3 % — % — % — % — % — % — % 85.0 % research and development 619,800 ( 190,404 ) ( 697 ) ( 12 ) ( 5,628 ) 2,589 — — — 425,648 sales and marketing 1,263,873 ( 223,812 ) ( 8,324 ) ( 172 )

results of operations the following table sets forth our results of operations for the periods presented and as a percentage of our total revenues for those periods . the period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods . consolidated statements of operations data replace_table_token_6_th _ ( 1 ) calculated as a percentage of the associated revenues . 53 comparison of the fiscal years ended january 31 , 2020 , 2019 and 2018 revenues ( dollars in millions ) the increase in license revenues was primarily driven by our total number of customers , sales to existing customers and the number of large orders . maintenance and services revenues are primarily driven by sales of our maintenance agreements , sales of our cloud services , as well as sales of our professional services resulting from the growth of our installed customer base . fiscal 2020 - 2019 total revenues in creased $ 555.9 million , or 30.8 % , primarily due to the following : + in crease of $ 343.1 million , or 33.3 % , in license revenues + in crease of $ 212.8 million , or 27.5 % , in maintenance and services revenues + increase in the total number of orders greater than $ 1.0 million from 394 to 494 + increase in the total number of customers from over 17,500 to over 19,400 54 cost of revenues and gross margin ( dollars in millions ) fiscal 2020 - 2019 total cost of revenues increased $ 85.1 million or 24.7 % . license cost of revenues increased $ 1.6 million , or 7.1 % , due to an increase in amortization expense related to acquired intangible assets .

any adjustments to the carrying amount of the redeemable noncontrolling interest for changes in fair value prior to the story_separator_special_tag this section includes a discussion of our operations for the three fiscal years ended august 31 , 2014 , 2013 and 2012 . the following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition . the discussion should be read in conjunction with the consolidated financial statements and the related notes thereto in part ii , item 8 of this report and the selected financial data contained in part ii , item 6 of this report . business we are one of north america 's largest recyclers of ferrous and nonferrous scrap metal , a leading recycler of used and salvaged vehicles and a manufacturer of finished steel products . we operate in three reporting segments : the metals recycling business ( “ mrb ” ) , the auto parts business ( “ apb ” ) and the steel manufacturing business ( “ smb ” ) , which collectively provide an end-of-life cycle solution for a variety of products through our integrated businesses . we use operating income ( loss ) to measure our segment performance . restructuring charges and other exit-related costs are not allocated to the segment operating income ( loss ) because we do not include this information in our measurement of the segments ' performance . corporate expense consists primarily of unallocated expense for management and administrative services that benefit all three reporting segments . as a result of this unallocated expense , the operating income ( loss ) of each reporting segment does not reflect the operating income ( loss ) the reporting segment would report as a stand-alone business . for further information regarding our reporting segments , including financial information about geographic areas , see note 21 – segment information in the notes to the consolidated financial statements in part ii , item 8 of this report . mrb buys , collects , processes , recycles , sells and brokers ferrous scrap metal ( containing iron ) to foreign and domestic steel producers , including smb , and nonferrous scrap metal ( not containing iron ) to both foreign and domestic markets . mrb processes mixed and large pieces of scrap metal into smaller pieces by crushing , sorting , shearing , shredding and torching , resulting in scrap metal pieces of a size , density and metal content required by customers to meet their production needs . apb procures used and salvaged vehicles and sells serviceable used auto parts from these vehicles through its self-service auto parts stores . the remaining portions of the vehicles , primarily autobodies and major parts containing ferrous and nonferrous materials , are sold to metal recyclers , including mrb where geographically feasible . smb operates a steel mini-mill that produces a wide range of finished steel products . smb 's scrap metal requirements are sourced through mrb , which smb purchases at rates that approximate export market prices for shipments from the west coast of the u.s. smb uses its mini-mill near portland , oregon to melt recycled metal and other raw materials to produce finished steel products . smb also maintains a mill depot in southern california . our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials , including end-of-life vehicles , available to be processed at our facilities . our deep water port facilities on both the east and west coasts of the u.s. ( in everett , massachusetts ; providence , rhode island ; oakland , california ; portland , oregon ; and tacoma , washington ) and access to public deep water port facilities ( in kapolei , hawaii ; and salinas , puerto rico ) allow us to efficiently meet the global demand for recycled ferrous metal by shipping bulk cargoes to steel manufacturers located in asia , europe , africa , the middle east ( “ eame ” ) , and central america . our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers , foundries , aluminum sheet and ingot manufacturers , copper refineries and smelters , brass and bronze ingot manufacturers and wire and cable producers globally . we also transport both ferrous and nonferrous metals by truck , rail and barge in order to transfer scrap metal between our facilities for further processing , to load shipments at our export facilities and to meet regional domestic demand . key economic factors and trends affecting the industries in which we operate we sell recycled metals to the global steel industry for the production of finished steel . our financial results largely depend on supply of raw materials in the u.s. and western canada and demand for recycled metal in foreign and domestic markets and for finished steel products in the western u.s. and canada . changes in supply and demand conditions affect market prices for and volumes of recycled ferrous and nonferrous metal in global markets and for steel products in the western u.s. and canada and can have a significant impact on the results of operations for all three reporting segments . weak export demand and limited availability of raw materials has contributed to lower sales volumes for recycled metals in recent years . beginning in early fiscal 2012 , our markets were impacted by a slowdown of economic activity globally . macroeconomic uncertainty resulted in deteriorating market conditions for global steel manufacturers and volatile pricing swings with an overall downward trend in commodity prices and export selling prices of recycled materials . story_separator_special_tag our targeted annual improvement is approximately $ 7 million , with approximately 50 % of that amount expected to benefit the second half of fiscal 2015 and the full annual run rate achieved in fiscal 2016. net income from continuing operations attributable to ssi in fiscal 2014 was $ 5 million , or $ 0.19 per diluted share , compared to net loss attributable to ssi of $ 281 million , or $ ( 10.56 ) per diluted share , in the prior year . adjusted net income from continuing operations attributable to ssi , excluding restructuring charges and other exit-related costs and asset impairments , was $ 12 million , or $ 0.44 per diluted share , for fiscal 2014 , compared to adjusted net loss from continuing operations attributable to ssi of $ 2 million , or $ ( 0.07 ) per diluted share , in the prior year ( see the reconciliation of adjusted net income ( loss ) from continuing operations attributable to ssi in non-gaap financial measures at the end of item 7 ) . the following items summarize our consolidated financial performance for fiscal 2014 : revenues of $ 2.5 billion , compared to $ 2.6 billion in the prior year ; operating income of $ 20 million , compared to operating loss of $ 328 million in the prior year ; adjusted operating income of $ 29 million , an increase of $ 15 million , or 103 % , compared to the prior year ( see the reconciliation of adjusted consolidated operating income ( loss ) in non-gaap financial measures at the end of item 7 ) ; net income from continuing operations attributable to ssi of $ 5 million , or $ 0.19 per diluted share , compared to net loss of $ 281 million , or $ ( 10.56 ) per diluted share , in the prior year ; and adjusted net income from continuing operations attributable to ssi of $ 12 million , or $ 0.44 per diluted share , compared to adjusted net loss of $ 2 million , or $ ( 0.07 ) per diluted share , in the prior year ( see the reconciliation of adjusted net income ( loss ) from continuing operations attributable to ssi in non-gaap financial measures at the end of item 7 ) ; and net income attributable to ssi of $ 6 million , or $ 0.22 per diluted share , compared to net loss of $ 281 million , or $ ( 10.56 ) per diluted share , in the prior year . the following items summarize our consolidated cash flow and balance sheet information for fiscal 2014 : net cash provided by operating activities of $ 141 million , compared to $ 39 million in the prior year ; debt , net of cash , of $ 294 million , compared to $ 368 million as of the prior year-end ( see the reconciliation of debt , net of cash , in non-gaap financial measures at the end of item 7 ) ; and dividends paid of $ 20 million compared to $ 20 million in the prior year . the following items highlight the financial results for our operating segments for the year ended august 31 , 2014 : mrb revenues of $ 2.1 billion and operating income of $ 30 million , compared to revenues of $ 2.2 billion and operating loss of $ 312 million for the year ended august 31 , 2013 . adjusted operating income for mrb was $ 31 million in fiscal 2014 , compared to $ 23 million in fiscal 2013 ( see the reconciliation of adjusted mrb operating income ( loss ) in non-gaap financial measures at the end of item 7 ) ; apb revenues of $ 328 million and operating income of $ 21 million , compared to revenues of $ 313 million and operating income of $ 25 million for the year ended august 31 , 2013 ; and smb revenues of $ 389 million and operating income of $ 19 million , compared to revenues of $ 352 million and operating income of $ 7 million for the year ended august 31 , 2013 . 26 / schnitzer steel industries , inc. form 10-k 2014 schnitzer steel industries , inc. story_separator_special_tag million in connection with the q1'14 plan , which were substantially incurred in fiscal 2014. the remaining charges are expected to be incurred by the end of fiscal 2017. the vast majority of these charges require us to make cash payments . in addition to the restructuring charges recorded in connection with these initiatives , during fiscal 2014 we incurred other exit-related costs of $ 1 million consisting of asset impairments related to site closures . restructuring charges and other exit-related costs for the fiscal years ended august 31 , 2014 , 2013 and 2012 were comprised of the following ( in thousands ) : replace_table_token_11_th we do not include restructuring charges and other exit-related costs in the measurement of the performance of our operating segments . see note 12 - restructuring charges and other exit-related costs in the notes to the consolidated financial statements in part ii , item 8 of this report . fiscal 2013 compared with fiscal 2012 consolidated operating loss in fiscal 2013 was $ 328 million , which included a goodwill impairment charge of $ 321 million , other asset impairment charges of $ 13 million and restructuring charges of $ 8 million , compared to consolidated operating income of $ 54 million in fiscal 2012. adjusted consolidated operating income in fiscal 2013 , excluding the goodwill impairment charge , other asset impairment charges and the restructuring charges , was $ 14 million , a decrease of $ 45 million , or 76 % , compared to adjusted consolidated operating income of $ 59 million in fiscal 2012 ( see the reconciliation of adjusted consolidated operating 29 / schnitzer steel industries , inc. form 10-k 2014 schnitzer steel industries , inc. income ( loss ) in non-gaap financial measures

results of operations replace_table_token_10_th _ nm = not meaningful ( 1 ) mrb sells recycled ferrous metal to smb at rates per ton that approximate west coast u.s. export market prices . in addition , apb sells ferrous and nonferrous material to mrb at prices that approximate local market rates . these intercompany revenues and costs of goods sold are eliminated in consolidation . 27 / schnitzer steel industries , inc. form 10-k 2014 schnitzer steel industries , inc. ( 2 ) corporate expense consists primarily of unallocated expenses for services that benefit all three reporting segments . as a consequence of this unallocated expense , the operating income ( loss ) of each segment does not reflect the operating income ( loss ) the segment would report as a stand-alone business . ( 3 ) the joint ventures sell recycled metal to mrb at prices that approximate local market rates , which produces intercompany profit . this intercompany profit is eliminated while the products remain in inventory and is not recognized until the finished products are sold to third parties . ( 4 ) restructuring charges consist of expense for severance , contract termination and other restructuring costs that management does not include in its measurement of the performance of the operating segments . other exit-related costs consist of asset impairments related to site closures . ( 5 ) intercompany profits are not recognized until the finished products are sold to third parties ; therefore , intercompany profit is eliminated while the products remain in inventory .

the company operates in the united states story_separator_special_tag novacopper inc. ( an exploration-stage company ) management 's discussion & analysis for the fourth quarter and year ended november 30 , 2014 ( expressed in us dollars ) general this management 's discussion and analysis ( “md & a” ) of novacopper inc. ( “novacopper” or “the company” ) is dated february 5 , 2015 and provides an analysis of our audited financial results for the year ended november 30 , 2014 compared to the year ended november 30 , 2013. the following information should be read in conjunction with our november 30 , 2014 audited consolidated financial statements and related notes which were prepared in accordance with united states generally accepted accounting principles ( “u.s . gaap” ) . a summary of the u.s. gaap accounting policies are outlined in note 2 of the audited consolidated financial statements . all amounts are in united states dollars unless otherwise stated . scott petsel , p.geo. , an employee and the upper kobuk mineral projects manager , is a qualified person under national instrument 43-101 - standards of disclosure for mineral projects ( “ni 43-101” ) , and has approved the scientific and technical information in this md & a . novacopper 's shares are listed on the toronto stock exchange ( “tsx” ) and the nyse-mkt under the symbol “ncq” . additional information related to novacopper , including our annual report on form 10-k , is available on sedar at www.sedar.com and on edgar at www.sec.gov . description of business we are a base metals exploration company focused on exploring and developing the ambler mining district located in alaska , u.s.a. we conduct our operations through a wholly-owned subsidiary , novacopper us inc. ( “novacopper us” ) . our upper kobuk mineral projects , or ukmp projects , consist of : i ) the 100 % owned ambler lands which host the arctic copper-zinc-lead-gold-silver project ; and ii ) the bornite lands being explored under a collaborative long-term agreement with nana regional corporation , inc. ( “nana” ) , a regional alaska native corporation , which host the bornite carbonate-hosted copper project . we were formed in 2011 by novagold resources inc. ( “novagold” ) to hold the ukmp projects , and were spun-out to shareholders of novagold through a plan of arrangement effective april 30 , 2012. novagold shareholders received one novacopper common share for every six common shares of novagold held on the effective date of the plan of arrangement . property review our principal assets , the ukmp projects , are located in the ambler mining district in northwest alaska . our ukmp projects comprise approximately 352,943 acres ( 142,831 hectares ) consisting of the ambler and bornite lands . arctic project the ambler lands , which host a number of deposits , including the high-grade copper-zinc-lead-gold-silver arctic project , and other mineralized targets within a 100 kilometer long volcanogenic massive sulfide ( “vms” ) belt , are owned by novacopper us . the ambler lands are located in northwestern alaska and consist of 112,058 acres ( 45,348 hectares ) of federal patented mining claims and state of alaska mining claims , within which vms mineralization has been found . on january 11 , 2010 , novagold purchased 100 % of the ambler lands . as consideration , novagold issued 931,098 common shares with a fair value of $ 5.0 million and agreed to make two cash payments to the vendor of $ 12.0 million each in january 2011 and january 2012 for total consideration of $ 29.0 million . the january 2011 payment was made by novagold on january 7 , 2011 and the january 2012 payment was made in advance by novagold on august 5 , 2011. total fair value of the consideration was $ 26.5 million , including transaction costs associated with the acquisition of $ 0.1 million . the vendor retained a 1 % net smelter return royalty that the owner of the property can purchase at any time for a one-time payment of $ 10.0 million . 65 we have recorded the ambler lands as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies . as a result of the spin-out of novacopper from novagold , the interim consolidated financial statements have been presented under the continuity of interest basis of accounting whereby the amounts are based on the amounts originally recorded by novagold as if we had held the property from inception . bornite project on october 19 , 2011 , novacopper us and nana signed a collaborative agreement to explore and develop the ambler mining district . under the exploration agreement and option to lease ( the “nana agreement” ) , novacopper us acquired the exclusive right to explore the bornite property and lands deeded to nana through the alaska native claims settlement act ( “ancsa” ) , located adjacent to the arctic project , and the non-exclusive right to access and entry onto nana 's lands . the agreement establishes a framework for any future development of either the bornite project or the arctic project . both projects are included as part of a larger area of interest set forth in the nana agreement . as consideration , novacopper paid $ 4.0 million to nana upon signing the nana agreement and gave nana the right to appoint a member to novacopper 's board of directors within a five year period following our public listing on a stock exchange . nana has not exercised their right to appoint a board member at this time . upon the decision to proceed with development of a mine within the area of interest , nana has a 120 day one time right to purchase an ownership interest in the mine equal to between 16 % -25 % or retain a 15 % net proceeds royalty which is payable after novacopper has recovered certain historical costs , capital and cost of capital . story_separator_special_tag we expect the permitting process will continue and expect to be able to provide an update later in the first calendar quarter of 2015. in early september 2014 , we completed our 2014 re-logging program of approximately 13,000 meters in 37 historical drill holes at bornite . targeted historical holes were located within the near-surface ruby creek zone of the bornite deposit . this effort was a continuation of 2013 's program of re-sampling which targeted 33 drill holes comprising 11,067 meters of core originally drilled and only selectively sampled by kennecott between 1957 and 1975. the 2013 re-sampling program resulted in a significant increase in the amount of copper-bearing mineralization at bornite . the objectives of the 2014 re-logging/re-sampling program were threefold : 1 ) to identify additional low-grade ( < 1 % copper ) near-surface mineralized material which had not been previously sampled ; 2 ) to confirm and conduct a quality assurance/quality control program on the historical sample results ; and 3 ) to acquire a full geochemical data suite for the ruby creek zone which can be utilized in future geological modeling . the re-logging and re-sampling program has confirmed previously known higher-grade copper intervals ( > 1 % copper ) and extended the known near-surface lower-grade copper halo . of the 37 selectively sampled historic drill holes , 5 holes had new intervals of copper grading more than 0.5 % copper , and 21 holes contained newly sampled mineralization grading more than 0.2 % copper . it is anticipated that these results will add lower-grade mineralization to the company 's mineral inventory as well as reduce the strip ratio in a potential open pit by converting zero grade material to low-grade material . a formal resource update will not be undertaken at this time but the information gathered from our 2014 work program will be incorporated into future studies . 67 we also continued to maintain our weather station and stream gauges in the region to continue our environmental baseline data collection . in fiscal 2014 , we expended $ 2.5 million on the ukmps consisting of $ 1.2 million in wages and benefits , $ 0.4 million in project support expenses , $ 0.4 million in land maintenance and permit expenses , and $ 0.2 million in geochemistry expenses . outlook we plan to advance the arctic deposit to feasibility over a two to three year period for a total investment of approximately $ 20 million . we plan to invest approximately $ 8 to $ 10 million during the 2015 field season mainly for drilling the arctic in-pit resource from inferred to measured and indicated confidence levels to support the classification of resources and collect arctic in-pit geotechnical and metallurgical data . funds will also be utilized for environmental and engineering studies to gather information in preparation for a feasibility study . we will also complete sufficient work to demonstrate the viability of a mining operation at bornite , specifically with evaluating potential synergies between the two sites and potentially lengthening the mine life of the ukmp projects and the ambler mining district . during 2015 , we will also continue to focus efforts on supporting aidea in initiating the environmental impact statement process in permitting the amdiar which is anticipated to provide access to ukmp projects . with our emphasis on local hiring , we continue to work closely with nana on community relations and workforce development strategies . we do not currently generate operating cash flows . at november 30 , 2014 , we had cash and cash equivalents of $ 5.1 million and working capital of $ 4.8 million . at january 31 , 2015 , we had approximately $ 4.2 million of cash and cash equivalents . we will need to raise additional funds to continue operations and to support further exploration and development of our projects and administration expenses . based on the plan described above , we are likely to require financing within the next twelve months . future financings are anticipated through equity financing , debt financing , convertible debt , or other means . there is no assurance that we will be successful in obtaining additional financing , that sufficient funds will be available to us , or be available on favourable terms . story_separator_special_tag 2014 , we incurred $ 0.6 million of mineral property expenses mainly related to assaying costs incurred for the 2014 field program . our net loss for the fourth quarter of 2014 of $ 2.0 million is reduced from the fourth quarter net loss of 2013 of $ 4.9 million mainly due to lower salaries and general and administrative expenses and a high stock-based compensation charge in 2013 . 70 our properties are not yet in production ; consequently , we believe that our loss ( and consequent loss per common share ) is not a primary concern to investors in the company . liquidity and capital resources at november 30 , 2014 , we had $ 5.1 million in cash and cash equivalents . we expended $ 8.6 million on operating activities compared with $ 15.2 million for operating activities for the same period in 2013 , and expenditures of $ 19.9 million for operating activities for the same period in 2012. a majority of cash spent on operating activities during all periods was expended on mineral property expenses , salaries and general and administrative expenses , which also accounts for the corresponding decrease . as the exploration field season in the ambler district is between may and early october of each year , a significant portion of the mineral property expenses and operating activities are incurred during this time frame .

summary of results replace_table_token_6_th for the year ended november 30 , 2014 , we reported a net loss of $ 9.6 million ( or $ 0.17 basic and diluted loss per common share ) compared to a net loss of $ 24.4 million for the corresponding period in 2013 ( or $ 0.47 basic and diluted loss per common share ) and a net loss of $ 31.0 million for the corresponding period in 2012 ( or $ 0.67 basic and diluted loss per common share ) . this variance was primarily due to a decrease in mineral property expenses , stock-based compensation , and general and administration expenses for 2014 and 2013. this variance was primarily due to the type of exploration program undertaken during the 2014 field season . the significant reduction in mineral property expenses is related to the differing magnitude of the field programs at our ukmp projects in 2014 , 2013 and 2012. in 2014 , we completed a re-sampling and re-assaying program of approximately 13,000 meters of historical drill core . in 2013 , we completed an exploration drilling campaign at bornite of 8,142 meters and a re-sampling and re-assaying program comprising 11,067 meters of historical drill core , and in 2012 , we completed an exploration drilling program mainly at bornite of 17,209 meters . mineral property expenses consist of direct drilling , personnel , community , resource reporting and other exploration expenses , as well as indirect project support expenses such as fixed wing charters , helicopter support , fuel , and other camp operation costs .

6. motorola settlement on october 1 , 2010 , the company entered into a settlement agreement ( the “settlement agreement” ) with motorola , pursuant to which the parties settled the litigation filed by motorola against iridium satellite and iridium holdings in the circuit court of cook county , illinois , county department – chancery division ( captioned motorola , inc. vs. iridium satellite llc and iridium holdings llc story_separator_special_tag you should read the following discussion along with our consolidated financial statements and the consolidated financial statements of iridium holdings llc ( our predecessor entity ) included in this form 10-k. background we were initially formed in 2007 as ghl acquisition corp. , a special purpose acquisition company . we acquired all the outstanding equity in iridium holdings llc , or iridium holdings , in a transaction accounted for as a business combination on september 29 , 2009. we refer to this transaction as the acquisition . we refer to iridium holdings , together with its direct and indirect subsidiaries , as iridium . in accounting for the acquisition , ghl acquisition corp. was deemed the legal and accounting acquirer and iridium the legal and accounting acquiree . on september 29 , 2009 , we changed our name to iridium communications inc. story_separator_special_tag repayment period , interest payments are due on a semi-annual basis in april and october . interest expense incurred during the year ended december 31 , 2011 was $ 11.9 million . all interest costs incurred related to the credit facility are capitalized during the construction period of the assets ; accordingly we capitalized $ 11.9 million related to interest incurred in 2011. we pay interest on each semi-annual due date through a combination of a cash payment and a deemed additional loan . the $ 11.9 million in interest incurred during the year ended december 31 , 2011 consisted of $ 3.6 million payable in cash , of which $ 2.7 million was paid during the year and $ 0.9 million was accrued at year end , and $ 8.3 million payable by deemed loans , of which $ 6.3 million was paid during the year and $ 2.0 million was accrued at year end . the credit facility will mature seven years after the start of the principal repayment period . in addition , we are required to maintain minimum cash reserve levels for debt service , which are classified as restricted cash on the accompanying consolidated balance sheet . minimum debt service reserve levels are estimated as follows ( in millions ) : replace_table_token_9_th the required minimum debt service reserve level at december 31 , 2011 was $ 27.0 million . obligations under the credit facility are guaranteed by us and our subsidiaries that are obligors under the credit facility . our obligations are secured on a senior basis by a lien on substantially all of our assets and those of the other obligors . we may not prepay any borrowings prior to december 31 , 2015. if , on that date , a specified number of iridium next satellites have been successfully launched and we have adequate time and resources to complete the iridium next constellation on schedule , we may prepay the borrowings without penalty . in addition , following the completion of the iridium next constellation , we may prepay the borrowings without penalty . any amounts repaid may not be reborrowed . we must repay the loans in full upon ( i ) a delisting of our common stock , ( ii ) a change in control of our company or our ceasing to own 100 % of any of the other obligors or ( iii ) the sale of all or substantially all of our assets . we must apply all or a portion of specified capital raising proceeds , insurance proceeds and condemnation proceeds to the prepayment of the loans . the credit facility includes customary representations , events of default , covenants and conditions precedent to drawing of funds . 39 the financial covenants include : a minimum cash requirement ; a minimum debt to equity ratio level ; maximum capital expenditure levels ; minimum consolidated operational earnings before interest , taxes , depreciation and amortization levels ; minimum cash flow requirements from customers who have hosted payloads on our satellites ; minimum debt service reserve levels ; a minimum debt service coverage ratio level ; and maximum leverage levels . the covenants also place limitations on our ability and that of our subsidiaries to carry out mergers and acquisitions , dispose of assets , grant security interests , declare , make or pay dividends , enter into transactions with affiliates , fund payments under the fsd from our own resources , incur debt , or make loans , guarantees or indemnities . we were in compliance with all covenants as of december 31 , 2011. as of december 31 , 2011 , we had borrowed $ 417.1 million under the credit facility . the unused portion of the credit facility as of december 31 , 2011 was approximately $ 1.4 billion . we recognized the semi-annual commitment fee on the undrawn portion of the credit facility of $ 13.5 million , which is included in other income ( expense ) in the accompanying consolidated statement of operations for the year ended december 31 , 2011. settlement of motorola litigation on october 1 , 2010 , we entered into a settlement agreement with motorola , inc. , or motorola , pursuant to which the parties settled the litigation previously filed by motorola against iridium satellite llc , or iridium satellite , and iridium holdings in illinois . on the same date , the parties entered into a series of other agreements . story_separator_special_tag we recognize revenue for each element based on the specific characteristics of that element . we recognize revenue for the sale of prepaid airtime when services are rendered or if the likelihood of the redemption by the customer becomes remote . the likelihood of redemption is based on historical redemption patterns . if future results are not consistent with these historical patterns , and therefore actual usage results are not consistent with our estimates or assumptions , we may be exposed to changes to earned and unearned revenue that could be material . revenue associated with certain fixed-price engineering services arrangements is recorded when the services are rendered , typically on a proportional performance method of accounting based on the company 's estimate of total costs expected to complete the contract , and the related costs are expensed as incurred . we recognize revenue on cost-plus-fee arrangements to the extent of actual costs incurred plus an estimate of the applicable fees earned , where such estimated fees are determined using a proportional performance method calculation . if actual results are not consistent with our estimates or assumptions , we may be exposed to changes to earned and unearned revenue that could be material to our results of operations . 41 stock-based compensation we account for stock-based compensation , which consists of stock options and restricted stock units , based on the grant date estimated fair value . in the case of restricted stock units , grant date fair value is equal to the closing price of our common stock on the date of grant . in the case of stock options , grant date fair value is calculated using the black-scholes option pricing model . we recognize stock-based compensation on a straight-line basis over the requisite service period . the black-scholes option pricing model requires various judgmental assumptions , including expected volatility and expected term . if any of the assumptions used in the black-scholes option pricing model changes significantly , stock-based compensation expense may differ materially in the future from that recorded in the current period . in addition , we are required to estimate the expected forfeiture rate and only recognize expense for those awards expected to vest . we estimate the forfeiture rate based on historical experience . to the extent our actual forfeiture rate is different from our estimate , stock-based compensation expense is adjusted accordingly . warranty expenses we estimate a provision for product returns under our standard warranty policies when it is probable that a loss has been incurred . a warranty liability is maintained based on historical experience of warranty costs and expected occurrences of warranty claims on equipment . if actual results are not consistent with our estimates or assumptions , we may be exposed to changes to cost of subscriber equipment sales that could be material to our results of operations . income taxes we account for income taxes using the asset and liability approach . this approach requires that we recognize deferred tax assets and liabilities based on differences between the financial statement bases and tax bases of our assets and liabilities . significant judgment is required in the calculation of our tax provision and the resulting tax liabilities as well as the realizability of our deferred tax assets that arise from temporary differences between the tax and financial statement recognition . as part of our financial reporting process , we must assess the likelihood that our deferred tax assets can be recovered . a valuation allowance is established to reduce deferred tax assets to the amounts we expect to realize in the future . we also recognize tax assets related to uncertain tax positions only when we estimate that it is “more likely than not” that the position will be sustainable based on its technical merits . if actual results are not consistent with our estimates and assumptions , this may result in material changes to our income tax provision ( benefit ) . recoverability of long-lived assets we assess the recoverability of long-lived assets when indicators of impairment exist . we assess the possibility of impairment by comparing the carrying amounts of the assets to the estimated undiscounted future cash flows expected to be generated by those assets . if we determine that an asset is impaired , we estimate the impairment loss by determining the excess of the assets ' carrying amount over its estimated fair value . estimated fair value is based on market prices , when available , or various other valuation techniques . these techniques often include estimates and assumptions with respect to future cash flows and incremental borrowing rates . if actual results are not consistent with our estimates and assumptions , we may be exposed to impairment losses that could be material to our results of operations . property and equipment and intangible assets with finite lives are depreciated or amortized over their estimated useful lives . we apply judgment in determining the useful lives based on the various factors such as engineering data , our long-term strategy for using the assets , contractual terms related to the assets , laws or regulations that could impact the useful life of the assets and other economic factors . if actual results are not consistent with our estimates and assumptions , we may be exposed to changes to depreciation and amortization expense that could be material to our results of operations . recoverability of goodwill and intangible assets with indefinite lives goodwill we assess the recoverability of goodwill on an annual basis or when indicators of impairment exist . such events or circumstances could include significant changes in the business climate of our industry , operating performance indicators or competition . we operate in a single reporting unit . we assess the possibility of impairment by comparing the carrying amount of the reporting unit to its estimated fair value . we make assumptions and apply judgment in estimating the fair value of the reporting unit generally using a combination of an income and market approach .

overview of our business we are engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites . we are the second largest provider of satellite-based mobile voice and data communications services based on revenue , and the only commercial provider of communications services offering true global coverage . our satellite network provides communications services to regions of the world where existing wireless or wireline networks do not exist or are impaired , including extremely remote or rural land areas , airways , open-ocean , the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters . we provide voice and data communications services to businesses , the u.s. and foreign governments , non-governmental organizations and consumers using our constellation of in-orbit satellites and related ground infrastructure . we utilize an interlinked , mesh architecture to route traffic across the satellite constellation using radio frequency crosslinks . this unique architecture minimizes the need for ground facilities to support the constellation , which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence . we sell our products and services to commercial end-users through a wholesale distribution network , encompassing approximately 75 service providers , 174 value-added resellers , or vars , and 56 value-added manufacturers , who either sell directly to the end-user or indirectly through other service providers , vars or dealers . these distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications for our products and services targeting specific vertical markets .

see “ special note regarding forward-looking statements. ” our 65 actual results may differ substantially from those referred to herein due to a number of factors , including but not limited to risks described in the section entitled “ risk factors ” and elsewhere in this annual report . our predecessor , c3 jian , inc. , was incorporated under the laws of the state of california on november 4 , 2005. on february 26 , 2016 , as part of a reorganization transaction , c3 jian , inc. merged with a wholly owned subsidiary of c3j , and as part of this process , c3 jian , inc. was converted to a limited liability company organized under the laws of the state of california named c3 jian , llc . on may 9 , 2019 , c3j completed a reverse merger with ampliphi , where ceres merger sub , inc. , a wholly-owned subsidiary of ampliphi , merged with and into c3j . following the completion of the merger , and a $ 10.0 million concurrent private placement financing , the former c3j stockholders owned approximately 76 % of our common stock and the former ampliphi stockholders owned approximately 24 % of our common stock . immediately prior to the merger , ampliphi completed a 1-for-14 reverse stock split and changed its name to armata pharmaceuticals , inc. our common stock is traded on the nyse american exchange under the symbol “ armp. ” we are headquartered in marina del rey , ca , in a 35,500 square-foot research and development facility built for product development with capabilities spanning from bench to clinic . in addition to microbiology , synthetic biology , formulation , chemistry and analytical laboratories , the facility is equipped with two licensed gmp drug manufacturing suites enabling the production , testing and release of clinical material . statements contained in this annual report that are not statements of historical fact are forward-looking statements within the meaning of the u.s. private securities litigation reform act of 1995. such forward-looking statements include , without limitation , statements concerning product development plans , commercialization of our products , the expected market opportunity for our products , the use of bacteriophages and synthetic phages to kill bacterial pathogens , having resources sufficient to fund our operations into the second quarter of 2021 , future funding sources , general and administrative expenses , clinical trial and other research and development expenses , costs of manufacturing , costs relating to our intellectual property , capital expenditures , the expected benefits of our targeted phage therapies strategy , the potential market for our products , tax credits and carry-forwards , and litigation-related matters . words such as “ believe , ” “ anticipate , ” “ plan , ” “ expect , ” “ intend , ” “ will , ” “ goal , ” “ potential ” and similar expressions are intended to identify forward-looking statements , though not all forward-looking statements necessarily contain these identifying words . these statements are subject to risks and uncertainties . our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors , including those set forth below under item 1a , “ risk factors ” and elsewhere in this annual report on form 10-k. these forward-looking statements speak only as of the date on which they were made , and we undertake no obligation to update any forward-looking statements . overview we are a clinical-stage biotechnology company focused on the development of precisely targeted bacteriophage therapeutics for the treatment of antibiotic-resistant infections using our proprietary bacteriophage-based technology . bacteriophages or “ phages ” have a powerful and highly differentiated mechanism of action that enables binding to and killing specific bacteria , in contrast to traditional broad-spectrum antibiotics . we believe that phages represent a promising means to treat bacterial infections , especially those that have developed resistance to current standard of care therapies , including the so-called multidrug-resistant or “ superbug ” strains of bacteria . we are a leading developer of phage therapeutics , which are uniquely positioned to address the growing worldwide threat of antibiotic-resistant bacterial infections . we are combining our proprietary approach and expertise in identifying , characterizing and developing both naturally-occurring and engineered ( synthetic ) bacteriophages with our proprietary phage-specific good manufacturing practice compliance ( “ cgmp ” ) manufacturing capabilities to advance a broad pipeline of high-quality bacteriophage product candidates . we believe that synthetic phage , engineered using advances in sequencing and synthetic biology techniques , represent a promising means to advance phage therapy , including phage-based diagnostics and improving upon the ability of natural phage to treat bacterial infections , especially those that have developed resistance to current antibiotic therapies , including the multidrug-resistant or “ superbug ” bacterial pathogens . our phage product candidates aim to address areas of significant unmet clinical need , by targeting key antibiotic-resistant bacteria including those on the world health organization 's global priority pathogens list . 66 we are developing and advancing our second-generation phage product candidate for pseudomonas aeruginosa ( “ p. aeruginosa ” ) , known as ap-pa02 . we anticipate initiating a phase 1b/2 , multi-center , double-blind , randomized , placebo-controlled , single and multiple ascending dose study to evaluate the safety , tolerability , and preliminary efficacy of ap-pa02 in subjects with cystic fibrosis ( “ cf ” ) and chronic pulmonary p. aeruginosa infection in the first half of 2020. we are also developing a second-generation phage product candidate for staphylococcus aureus ( “ s. aureus ” ) , known as ap-sa02 , for the treatment of s. aureus bacteremia . story_separator_special_tag during the year ended december 31 , 2019 , the cash provided was primarily due to $ 3.0 million acquired in connection with the merger , offset in part by net capital equipment purchases of $ 0.1 million . during the year ended december 31 2018 , the cash provided was primarily due to a $ 9.6 million net maturity and sale of investment securities offset in part by $ 0.8 million in net capital equipment purchases . financing activities net cash of $ 9.0 million provided by financing activities for the year ended december 31 , 2019 was comprised of net cash proceeds of $ 10.0 million from a common stock sale coinciding with the merger , offset in part by a payment of $ 1.0 million in deferred consideration related to the time-based payment obligation in connection with the sgi asset acquisition . there was zero change to net cash related to financing activities for the year ended december 31 , 2018. liquidity , capital resources and financial condition we have prepared our consolidated financial statements on a going concern basis , which assumes that we will realize our assets and satisfy our liabilities in the normal course of business . however , we have incurred net losses since our inception and have negative operating cash flows . these circumstances raise substantial doubt about our ability to 69 continue as a going concern . the accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning our ability to continue as a going concern . while management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt , these plans are not entirely within its control and can not be assessed as being probable of occurring . the company may not be able to secure additional financing in a timely manner or on favorable terms , if at all . as of december 31 , 2019 , we had unrestricted cash and cash equivalents of $ 6.0 million . in february 2020 , we completed the first closing of the private placement and raised gross proceeds of $ 2.8 million . considering our current cash resources and the assumed proceeds from the second closing of the private placement with innoviva , management believes our cash resources will be sufficient to fund our planned operations into the second quarter of 2021. for the foreseeable future , our ability to continue its operations is dependent upon our ability to obtain additional capital . future capital requirements we will need to raise additional capital in the future to continue to fund our operations . our future funding requirements will depend on many factors , including : · the costs and timing of our research and development activities ; · the progress and cost of our clinical trials and other research and development activities ; · manufacturing costs associated with our targeted phage therapies strategy and other research and development activities ; · the terms and timing of any collaborative , licensing , acquisition or other arrangements that we may establish ; · whether and when we receive future australian tax rebates , if any ; · the costs and timing of seeking regulatory approvals ; · the costs of filing , prosecuting and enforcing any patent applications , claims , patents and other intellectual property rights ; and · the costs of potential lawsuits involving us or our product candidates . we may seek to raise capital through a variety of sources , including : · the public equity market ; · private equity financings ; · collaborative arrangements , government grants or strategic financings ; · licensing arrangements ; and · public or private debt . any additional fundraising efforts may divert our management team from their day to day activities , which may adversely affect our ability to develop and commercialize our product candidates . our ability to raise additional funds will depend , in part , on the success of our product development activities , including our targeted phage therapies strategy and any clinical trials we initiate , regulatory events , our ability to identify and enter into in-licensing or other strategic arrangements , and other events or conditions that may affect our value or prospects , as well as factors related to financial , economic and market conditions , many of which are beyond our control . we can not be certain that sufficient 70 funds will be available to us when required or on acceptable terms . if we are unable to secure additional funds on a timely basis or on acceptable terms , we may be required to defer , reduce or eliminate significant planned expenditures , restructure , curtail or eliminate some or all of our development programs or other operations , dispose of technology or assets , pursue an acquisition of our company by a third party at a price that may result in a loss on investment for our stockholders , enter into arrangements that may require us to relinquish rights to certain of our product candidates , technologies or potential markets , file for bankruptcy or cease operations altogether . any of these events could have a material adverse effect on our business , financial condition and results of operations . moreover , if we are unable to obtain additional funds on a timely basis , there will be substantial doubt about our ability to continue as a going concern and increased risk of insolvency and loss of investment by our stockholders . to the extent that additional capital is raised through the sale of equity or convertible debt securities , the issuance of such securities could result in dilution to our existing stockholders .

results of operations as a result of the merger , c3j was considered the accounting acquirer of ampliphi because c3j 's shareholders retained a majority control of ownership of the combined company subsequent to the merger ; therefore , the historical financial statements presented herein prior to the closing of the merger are the historical financial statements of c3j . comparison of year ended december 31 , 2019 and 2018 research and development research and development expenses for the year ended december 31 , 2019 and 2018 were $ 9.8 million and $ 8.4 million , respectively . the net increase of $ 1.4 million was primarily related to a $ 0.9 million increase in stock-based compensation expense , a $ 0.7 million increase in personnel expenses due to increased headcount , $ 0.5 million increase in lab supplies , $ 0.4 million increase of outside services , $ 0.2 million increase of rent and utilities expenses , offset by $ 1.3 million of tax rebate from the australian tax authorities . acquired in-process research and development acquired in-process research and development ( “ ipr & d ” ) expense of $ 6.8 million for the year ended december 31 , 2018 consists of the estimated fair value of the assets acquired and consideration given in connection with the acquisition of the synthetic phage assets . as the assets acquired were in the research and development phase and were determined to not have any alternative future use , it was expensed as acquired ipr & d . there was no such expense for the year ended december 31 , 2019 . 68 general and administrative general and administrative expenses for the year ended december 31 , 2019 and 2018 were $ 9.3 million and $ 2.5 million , respectively .

” general we report our results through five segments : assurant solutions , assurant specialty property , assurant health , assurant employee benefits , and corporate and other . the corporate and other segment includes activities of the holding company , financing and interest expenses , net realized gains ( losses ) on investments and investment income earned from short-term investments held . the corporate and other segment also includes the amortization of deferred gains associated with the sales of ffg and ltc , through reinsurance agreements as described below . the following discussion covers the twelve months ended december 31 , 2015 ( “ twelve months 2015 ” ) , twelve months ended december 31 , 2014 ( “ twelve months 2014 ” ) and twelve months ended december 31 , 2013 ( “ twelve months 2013 ” ) . please see the discussion that follows , for each of these segments , for a more detailed analysis of the fluctuations . executive summary consolidated net income decreased $ 329,352 , or 70 % , to $ 141,555 for twelve months 2015 from $ 470,907 for twelve months 2014. the decrease was primarily related to higher loss experience and adverse claims development on 2015 individual major medical policies , a reduction in the 2014 estimated recoveries from the affordable care act risk mitigation programs and $ 106,389 ( after-tax ) of exit and disposal costs , including premium deficiency reserve accruals , severance and retention costs , long-lived asset impairments and other costs associated with our exit from the health insurance market . assurant solutions net income decreased $ 21,765 , or 10 % , to $ 197,183 for twelve months 2015 from $ 218,948 for twelve months 2014. the decrease was primarily due to the previously disclosed loss of a domestic mobile tablet program and declining service contract volumes at certain north american retail clients . total revenues were relatively flat at $ 4,178,140 for twelve months 2015 compared with $ 4,179,360 for twelve months 2014. net earned premiums decreased $ 113,022 primarily due to foreign exchange volatility , the loss of a domestic mobile tablet program and the continued run-off of our credit insurance business . these items were partially offset by growth from our auto warranty business and from a large domestic service contract client . overall , we expect assurant solutions 2016 net income and net earned premiums and fees to increase from twelve months 2015 amounts . results are expected to improve in the second half of 2016 driven by new mobile programs , improved international profitability and additional expense initiatives . foreign exchange volatility , lower service contract revenue from legacy north american retail clients and continued run-off in credit insurance will impact results . assurant specialty property net income decreased $ 34,052 , or 10 % , to $ 307,705 for twelve months 2015 from $ 341,757 for twelve months 2014. the decrease is primarily due to the previously disclosed loss of client business and ongoing normalization in our lender-placed homeowners insurance business , partially offset by more favorable non-catastrophe loss experience and lower catastrophe reinsurance costs . the divestiture of american reliable insurance company ( `` aric '' ) also contributed to the decrease in net income . total revenues decreased $ 365,948 to $ 2,543,105 for twelve months 2015 from $ 2,909,053 for twelve months 2014. the decrease was primarily due to the divestiture of aric , combined with lower lender-placed homeowners insurance net earned premiums . the decline in lender-placed homeowners insurance net earned premiums is primarily due to a decline in placement rates , lower premium rates and previously disclosed loss of client business . these items were partially offset by an increase in fees and other income reflecting contributions from mortgage solutions businesses . the twelve months 2015 expense ratio increased 620 basis points compared with twelve months 2014. the increase was primarily due to lower net earned premiums and higher legal costs related to outstanding matters . in addition , growth in fee-based businesses , which have higher expense ratios than our insurance products , contributed to the increase . for 2016 , we expect assurant specialty property net income and net earned premiums to decrease compared with twelve months 2015 reflecting the ongoing normalization of lender-placed insurance business partially offset by increased efficiencies , including the implementation of new technology , and other expense savings initiatives . contributions from multi-family housing and mortgage solutions businesses are expected to partially offset the decline . in addition , catastrophe losses may affect overall results . 36 as previously announced , the company concluded a comprehensive review of strategic alternatives for its health business and expects to substantially complete the process to exit the health insurance market in 2016. during the remainder of the exit process , we expect to incur up to $ 50,000 of additional exit-related charges , as well as certain overhead expenses that are excluded from the premium deficiency reserve accrual . in addition , the company signed a definitive agreement to sell its assurant employee benefits segment to sun life . the transaction is expected to close by the end of first quarter 2016. for more information , see notes 3 and 4 of the notes to the consolidated financial statements included elsewhere in this report . critical factors affecting results our results depend on the appropriateness of our product pricing , underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims , returns on and values of invested assets and our ability to manage our expenses . factors affecting these items , including unemployment , difficult conditions in financial markets and the global economy , may have a material adverse effect on our results of operations or financial condition . for more information on these factors , see “ item 1a – risk factors. story_separator_special_tag rebate estimate calculations ; and the mlr is calculated using a rolling three years of experience while the gaap loss ratio represents the current year only . assurant health has estimated the 2015 impact of this regulation based on definitions and calculation methodologies outlined in the hhs regulations and guidance . the estimate was based on separate projection models for individual medical and small group business using projections of expected premiums , claims , and enrollment by state , legal entity and market for medical businesses subject to mlr requirements for the mlr reporting year . in addition , the projection models include quality improvement expenses , state assessments , taxes , and estimated impacts of the affordable care act risk mitigation programs ( commonly referred to as the `` 3r 's '' ) . the premium rebate is presented as a reduction of net earned premiums in the consolidated statement of operations and included in unearned premiums in the consolidated balance sheet . affordable care act risk mitigation programs beginning in 2014 , the affordable care act introduced new and significant premium stabilization programs . these programs , discussed in further detail below , are meant to mitigate the potential adverse impact to individual health insurers as a result of affordable care act provisions that became effective january 1 , 2014. a three-year ( 2014-2016 ) reinsurance program provides reimbursement to insurers for high cost individual business sold on or off the public marketplaces . the reinsurance entity established by hhs is funded by a per-member reinsurance fee assessed on all commercial medical plans , including self-insured group health plans . only affordable care act individual plans are eligible for recoveries if claims exceed a specified threshold , up to a reinsurance cap . reinsurance contributions associated with affordable care act individual plans are reported as a reduction in net earned premiums in the consolidated statements of operations , and estimated reinsurance recoveries are established as reinsurance recoverables in the consolidated balance sheets with an offsetting reduction in policyholder benefits in the consolidated statement of operations . reinsurance fee contributions for non-affordable care act business are reported in underwriting , general and administrative expenses in the consolidated statement of operations . 38 a permanent risk adjustment program transfers funds from insurers with lower risk populations to insurers with higher risk populations based on the relative risk scores of participants in affordable care act plans in the individual and small group markets , both on and off the public marketplaces . based on the risk of its members compared to the total risk of all members in the same state and market , considering data obtained from industry studies , the company estimates its year-to-date risk adjustment transfer amount . the company records a risk adjustment transfer receivable ( payable ) in premiums and accounts receivable ( unearned premium ) in the consolidated balance sheets , with an offsetting adjustment to net earned premiums in the consolidated statements of operations when the amounts are reasonably estimable and collection is reasonably assured . a three-year ( 2014-2016 ) risk corridor program limits insurer gains and losses by comparing allowable medical costs to a target amount as defined by hhs . this program applies to a subset of affordable care act eligible individual and small group products certified as qualified health plans . the public marketplace can only sell qualified health plans . in addition , carriers who sell qualified health plans on the public marketplace can also sell them off the public marketplace . variances from the target amount exceeding certain thresholds may result in amounts due to or due from hhs . during 2015 , the company participated in the federal insurance public marketplaces so the risk corridor program is applicable . however , as the current full funding for this program is unclear at this time , no accruals were established for any receivable amounts from this program for 2015 , so there was no impact on the company 's 2015 operations . the company does not anticipate any payables into this program for 2015. reserves reserves are established in accordance with gaap using generally accepted actuarial methods and reflect judgments about expected future claim payments . calculations incorporate assumptions about inflation rates , the incidence of incurred claims , the extent to which all claims have been reported , future claims processing , lags and expenses and future investment earnings , and numerous other factors . while the methods of making such estimates and establishing the related liabilities are periodically reviewed and updated , the calculation of reserves is not an exact process . reserves do not represent precise calculations of expected future claims , but instead represent our best estimates at a point in time of the ultimate costs of settlement and administration of a claim or group of claims , based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation . many of the factors affecting reserve adequacy are not directly quantifiable and not all future events can be anticipated when reserves are established . reserve estimates are refined as experience develops . adjustments to reserves , both positive and negative , are reflected in the consolidated statement of operations in the period in which such estimates are updated . because establishment of reserves is an inherently complex process involving significant judgment and estimates , there can be no certainty that ultimate losses will not exceed existing claim reserves . future loss development could require reserves to be increased , which could have a material adverse effect on our earnings in the periods in which such increases are made . see `` item 1a - risk factors - risks related to our company - our actual claims losses may exceed our reserves for claims , and this may require us to establish additional reserves that may materially affect our results of operations , profitability and capital '' for more detail on this risk .

results of operations assurant consolidated overview the table below presents information regarding our consolidated results of operations : 46 replace_table_token_14_th ( 1 ) includes amortization of dac and voba and underwriting , general and administrative expenses . year ended december 31 , 2015 compared to the year ended december 31 , 2014 net income decreased $ 329,352 , or 70 % , to $ 141,555 for twelve months 2015 from $ 470,907 for twelve months 2014. the decrease was primarily related to higher loss experience and adverse claims development on 2015 individual major medical policies , a reduction in the 2014 estimated recoveries from the affordable care act risk mitigation program and $ 106,389 ( after-tax ) of exit and disposal costs , including premium deficiency reserves , severance and retention costs , long-lived asset impairments and other costs associated with our exit from the health insurance market . for more information see note 3 of the notes to the consolidated financial statements included elsewhere in this report . year ended december 31 , 2014 compared to the year ended december 31 , 2013 net income decreased $ 18,000 , or 4 % , to $ 470,907 for twelve months 2014 from $ 488,907 for twelve months 2013. the decrease was primarily related to lower net income at assurant specialty property , a net loss at assurant health and a $ 19,400 ( after-tax ) loss associated with a divested business . please see note 4 to the consolidated financial statements for further information . these items were partially offset by improved results in our assurant solutions and assurant employee benefits segments , lower expenses in the corporate and other segment , an increase in net realized gains on investments and a favorable change in tax liabilities , including a $ 20,753 one-time tax benefit related to the conversion of the canadian branch operations of certain u.s. subsidiaries to foreign corporate entities .

the adoption of this amended guidance did not have a material effect on our consolidated financial statements . financial instruments : in the first quarter of 2019 , we adopted amended guidance that requires investments in equity securities , excluding equity method investments or investees that are consolidated , to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments . the amended guidance also simplifies the impairment assessments of equity investments without readily determinable fair value . the adoption of this amended story_separator_special_tag general management 's discussion and analysis of financial condition and results of operations , referred to as the financial review , is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of mckesson corporation ( “ mckesson , ” the “ company , ” or “ we ” and other similar pronouns ) together with its subsidiaries . this discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in item 8 of part ii of this annual report on form 10-k. the company 's fiscal year begins on april 1 and ends on march 31. unless otherwise noted , all references to a particular year shall mean the company 's fiscal year . certain statements in this report constitute forward-looking statements . see item 1 - business - forward-looking statements in part i of this annual report on form 10-k for additional factors relating to these statements ; also see item 1a - risk factors in part i of this annual report on form 10-k for a list of certain risk factors applicable to our business , financial condition and results of operations . we conduct our business through three reportable segments : u.s. pharmaceutical and specialty solutions , european pharmaceutical solutions and medical-surgical solutions . all remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in other . refer to financial note 28 , “ segments of business , ” to the consolidated financial statements appearing in this annual report on form 10-k for a description of these segments . 31 mckesson corporation financial review ( continued ) story_separator_special_tag business within other 2017 pre-tax gain of $ 3,947 million ( $ 3,018 million after-tax ) related to the 2017 contribution of the core mts business to the change healthcare joint venture ; and non-cash pre-tax goodwill impairment charge of $ 290 million ( $ 282 million after-tax ) related to our eis business within other . this impairment charge was generally not deductible for income tax purposes . 34 mckesson corporation financial review ( continued ) goodwill impairments : as a result of the 2019 annual goodwill impairment test , the estimated fair value of our reporting units excluding the cs and ps reporting units exceeded their carrying value . however , other risks , expenses and future developments , such as additional government actions , increased regulatory uncertainty and material changes in key market assumptions that we were unable to anticipate as of the testing date may require us to further revise the projected cash flows , which could adversely affect the fair value of our mckesson canada reporting unit in other in future periods . fiscal 2019 restructuring initiatives on april 25 , 2018 , the company announced a strategic growth initiative intended to drive long-term incremental profit growth and increase operational efficiency . the initiative consists of multiple growth priorities and plans to optimize the company 's operating models and cost structures primarily through the centralization and outsourcing of certain administrative functions and cost management . as part of the growth initiative , we committed to implement certain actions including a reduction in workforce , facility consolidation and store closures . we expect to record total pre-tax charges of approximately $ 140 million to $ 180 million , of which we recorded pre-tax charges of $ 135 million ( $ 122 million after-tax ) in 2019. this set of the initiatives will be substantially completed by the end of 2020. estimated remaining charges primarily consist of exit-related costs including contract termination costs . as previously announced on november 30 , 2018 , the company relocated its corporate headquarters from san francisco , california to irving , texas to improve efficiency , collaboration and cost competitiveness , effective april 1 , 2019. we anticipate that the relocation will be completed by january 2021. we expect to record total pre-tax charges of approximately $ 80 million to $ 130 million , of which pre-tax charges of $ 33 million ( $ 24 million after-tax ) were recorded in 2019 primarily representing employee severance . estimated remaining charges primarily consist of lease and other exit-related costs , employee retention and relocation expenses . during the fourth quarter of 2019 , the company committed to additional programs to continue our operating model and cost optimization efforts . we continue to implement centralization of certain functions and outsourcing through the expanded arrangement with a third-party vendor to achieve operational efficiency . the programs also include reorganization and consolidation of our business operations and related headcount reductions as well as the further closures of retail pharmacy stores in europe and facilities . we expect to incur total pre-tax charges of approximately $ 300 million to $ 350 million for these programs , which are expected to be completed by the end of 2021. in 2019 , pre-tax charges of $ 163 million ( $ 127 million after-tax ) were recorded , which primarily represent employee severance and accelerated depreciation expense . estimated remaining charges primarily consist of facility and other exit costs and employee-related costs . refer to financial note 3 , “ restructuring and asset impairment charges , ” to the accompanying consolidated financial statements appearing in this annual report on form 10-k for more information . story_separator_special_tag we made a payment of approximately $ 100 million related to this sale in 2017. refer to financial note 7 , “ discontinued operations , ” to the consolidated financial statements appearing in this annual report on form 10-k for additional information . net income attributable to noncontrolling interests : net income attributable to noncontrolling interests includes the annual recurring compensation that we are obligated to pay to the noncontrolling shareholders of mckesson europe under the domination and profit and loss transfer agreement ( the “ domination agreement ” ) . net income attributable to noncontrolling interests also includes third-party equity interests in our consolidated entities including clarusone and vantage . noncontrolling interests with redemption features , such as put rights , that are not solely within the company 's control are considered redeemable noncontrolling interests . redeemable noncontrolling interests are presented outside of stockholders ' equity on our consolidated balance sheet . refer to financial note 11 , “ redeemable noncontrolling interests and noncontrolling interests , ” to the consolidated financial statements appearing in this annual report on form 10-k for additional information . net income attributable to mckesson corporation : net income attributable to mckesson corporation was $ 34 million , $ 67 million and $ 5,070 million in 2019 , 2018 and 2017. diluted earnings per common share were $ 0.17 , $ 0.32 and $ 22.73 in 2019 , 2018 and 2017. weighted average diluted common shares outstanding : diluted earnings per common share was calculated based on a weighted average number of shares outstanding of 197 million , 209 million and 223 million for 2019 , 2018 and 2017. weighted average diluted common shares outstanding is affected by the exercise and settlement of share-based awards and the cumulative effect of share repurchases . revenues : replace_table_token_5_th u.s. pharmaceutical and specialty solutions u.s. pharmaceutical and specialty solutions revenues increased over the past two years primarily due to market growth , including expanded business with existing customers , growth of specialty pharmaceuticals and our business acquisitions , partially offset by loss of customers . market growth includes growing drug utilization , price increases and newly launched products , partially offset by price deflation associated with brand to generic drug conversions . european pharmaceutical solutions european pharmaceutical solutions revenues remained flat and increased 10 % in 2019 and 2018. this segment 's revenues increased 1 % and 5 % in 2019 and 2018 primarily due to market growth , with the difference due to the effects of foreign currency exchange fluctuations . revenues in 2019 were also unfavorably affected by the retail pharmacy closures and additional government reimbursement reductions in the u.k. , and the competitive environment in france . medical-surgical solutions medical-surgical solutions revenues increased over the past two years compared to the same periods a year ago primarily due to our 2019 acquisition of medical specialties distributors llc ( “ msd ” ) and market growth . 37 mckesson corporation financial review ( continued ) other revenues in other for 2019 and 2018 decreased 1 % and 3 % compared to the same periods a year ago . revenues in other for 2019 decreased primarily due to unfavorable effects of foreign currency exchange fluctuations of 2 % and the effect of government imposed generic price cuts and retail pharmacy closures related to our canadian business . in addition , revenues in other for 2019 were negatively impacted by the 2018 sale of our eis business . these decreases for 2019 are partially offset by growth in our canadian and mckesson prescription technology solutions ( “ mrxts ” ) businesses and the effects of acquisitions in canada . revenues in other for 2018 decreased primarily due to the 2017 contribution of the core mts business to the change healthcare joint venture , partially offset by market growth , the effects of acquisitions in canada and favorable effects of foreign currency exchange fluctuations of 2 % . segment operating profit , corporate expenses , net and interest expense : replace_table_token_6_th bp - basis points nm - not meaningful ( 1 ) segment operating profit includes gross profit , net of operating expenses , as well as other income , net , for our operating segments . ( 2 ) operating profit of our european pharmaceutical solutions segment for 2019 and 2018 include non-cash pre-tax goodwill impairment charges of $ 1,776 million and $ 1,283 million . this segment 's operating profit for 2019 and 2018 also includes non-cash pre-tax long-lived asset impairment charges of $ 210 million and $ 446 million . segment operating profit u.s. pharmaceutical and specialty solutions : operating profit increased for 2019 and 2018 primarily due to market growth including growth in our specialty business , partially offset by loss of customers . operating profit and operating profit margin for 2019 benefited from the net cash proceeds representing our share of antitrust legal settlements and higher lifo credits , partially offset by a $ 61 million pre-tax charge related to a customer bankruptcy . operating profit and operating profit margin for 2018 were favorably affected by procurement benefits , higher lifo credits and a pre-tax gain of $ 43 million recognized from the 2018 sale of an equity method investment , partially offset by competitive sell-side pricing environment and net cash proceeds representing our share of antitrust legal settlements received in 2017 . 38 mckesson corporation financial review ( continued ) european pharmaceutical solutions : operating profit and operating profit margin decreased for 2019 and 2018 primarily due to the goodwill impairment charges recorded in 2019 and 2018 . 2019 operating profit and operating profit margin also were negatively impacted by the effect of government reimbursement reductions and lower sales volume in the u.k. and the increased competition in france , partially offset by market growth . 2018 operating profit and operating profit margin were negatively impacted by the effect of government reimbursement reductions in the u.k. medical-surgical solutions : operating profit decreased for 2019 primarily due to higher restructuring charges , partially offset by market growth .

results of operations overview : replace_table_token_3_th bp - basis points nm - not meaningful 32 mckesson corporation financial review ( continued ) revenues : revenues increased in 2019 and 2018 primarily due to market growth , including expanded business with existing customers and our business acquisitions , partially offset by loss of customers within our u.s. pharmaceutical and specialty solutions segment . the increase in revenue for 2018 was also offset by the 2017 contribution of the majority of our mckesson technology solutions businesses ( “ core mts business ” ) to form the change healthcare joint venture . market growth includes growing drug utilization , price increases and newly launched products , partially offset by price deflation associated with brand to generic drug conversion . gross profit : gross profit and gross profit margin increased in 2019 compared to 2018. gross profit increased due to market growth , partially offset by loss of customers . the increase in gross profit and gross profit margin for 2019 was also due to the receipt of net cash proceeds representing our share of antitrust legal settlements of $ 202 million , higher last-in , first-out ( “ lifo ” ) credits and our business acquisitions . these increases in 2019 were partially offset by the incremental government reimbursement reductions in the united kingdom ( “ u.k. ” ) , government imposed generic price cuts in canada and the 2018 third quarter sale of our enterprise information solutions ( “ eis ” ) business . gross profit and gross profit margin decreased in 2018 compared to 2017. the decrease was primarily due to the 2017 contribution of the core mts business to the change healthcare joint venture , significant government reimbursement reductions in the u.k. , the competitive sell-side environment and weaker pharmaceutical manufacturer pricing trends . these decreases in 2018 were partially offset by market growth , procurement benefits realized through the joint sourcing entity , clarusone sourcing services llp ( “ clarusone ” ) , higher lifo credits and our business acquisitions .

patent costs —costs to secure and defend patents are expensed as incurred and are classified as selling , general and administrative expenses in the company 's consolidated statements of operations . impairment of long‑lived assets —long‑lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto appearing at the end of this annual report on form 10‑k . some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on form 10-k , including information with respect to our plans and strategy for our business and related financing , includes forward‑looking statements that involve risks and uncertainties . see “ special note regarding forward‑looking statements and industry data. ” because of many factors , including those factors set forth in the “ risk factors ” section of this annual report on form 10-k , our actual results could differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis . overview we are a biopharmaceutical company focused on the development and commercialization of therapeutics using our proprietary ampplify mucus-penetrating particle , or mpp , drug delivery technology , with an initial focus on the treatment of eye diseases . the innovative ampplify technology uses selectively‑sized nanoparticles that each have a proprietary coating . we believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus . we have applied the ampplify technology to loteprednol etabonate , or le , a corticosteroid designed for ocular applications , resulting in the approval in the august 2018 approval of inveltys ( loteprednol etabonate ophthalmic suspension ) 1 % , or inveltys , our topical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery , by the u.s. food and drug administration , or the fda , and the development of our lead product candidate , kpi‑121 0.25 % , for the temporary relief of the signs and symptoms of dry eye disease . we commercially launched inveltys in january 2019. kpi‑121 0.25 % is our product candidate for patients with dry eye disease utilizing a two‑week course of therapy . in january 2018 , we announced topline results from two completed phase 3 clinical trials , which we refer to as stride 1 and stride 2 ( stride - s hort t erm r elief i n d ry e ye ) , evaluating the safety and efficacy of kpi-121 0.25 % versus vehicle ( placebo ) in patients with dry eye disease . in stride 1 , statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia and the primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in the intent to treat , or itt , population ; in addition , statistical significance was also achieved in stride 1 for a second pre-specified primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in patients with more severe baseline ocular discomfort . in stride 2 , statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia , but statistical significance was not achieved for the primary symptom endpoint of ocular discomfort severity . kpi‑121 0.25 % was generally well tolerated in both stride 1 and stride 2 , with no clinically significant treatment‑related adverse events observed during the course of either trial , and with elevations in interocular pressure , or iop in both trials similar to placebo . in december 2018 , the fda accepted for filing our new drug application , or an nda , for kpi‑121 0.25 % , which the fda has granted a target action date under the prescription drug user fee act , or pdufa , of august 15 , 2019. based upon the recommendation of the fda , we also initiated an additional phase 3 clinical trial , stride 3 , in 103 the third quarter of 2018 evaluating kpi‑121 0.25 % for the temporary relief of the signs and symptoms of dry eye disease . we believe we have identified key factors that contributed to the differences observed in the results from stride 2 compared to those of stride 1 and the phase 2 trial , and that changes made to the inclusion/exclusion criteria of stride 3 based on these analyses will improve the probability of success . if approved , kpi-121 0.25 % could be the first fda-approved product for the temporary relief of the signs and symptoms of dry eye disease . inveltys is the first and only fda‑approved ocular corticosteroid product with a twice-a-day dosing regimen for the treatment of post‑operative inflammation and pain . other approved topical ocular corticosteroid products for this indication are dosed four times a day . in clinical trials , inveltys showed statistical significance in the primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo . we are evaluating opportunities for mpp nanosuspensions of le with less frequent daily dosing regimens for the temporary relief of signs and symptoms of dry eye disease and potential chronic treatment of dry eye disease . we also are evaluating compounds in our receptor tyrosine kinase inhibitor program , or rtki program , that inhibit the vascular endothelial growth factor , or vegf , pathway , for the potential treatment of a number of retinal diseases . story_separator_special_tag financial operations overview research and development expenses research and development expenses consist of costs associated with our research activities , including compensation and benefits for full‑time research and development employees , an allocation of facilities expenses , overhead expenses , payments to universities under our license agreements and other outside expenses . our research and development expenses include : · employee‑related expenses , including salaries , related benefits , travel and stock‑based compensation ; · expenses incurred for the preclinical and clinical development of our product candidates and under agreements with contract research organizations , or cros , including costs of manufacturing product candidates prior to receipt of regulatory approval ; · facilities , depreciation and other expenses , which include direct and allocated expenses for rent and maintenance of facilities and supplies ; and · payments made under our third‑party licensing agreements , including the annual minimum royalty and reimbursable expenses for defense of agreed upon patents under a license agreement with johns hopkins university , or jhu . 105 the following table summarizes our research and development expenses incurred during the years ended december 31 , 2018 and 2017 : replace_table_token_3_th we expense research and development costs as they are incurred . research and development costs that are paid in advance of performance are capitalized as a prepaid expense until incurred . we track outsourced development costs by development program but do not allocate personnel costs , payments made under our license agreements or other costs to specific product candidates or development programs . these costs are included in employee ‑ related costs and other research and development costs in the line items in the tables under “ results of operations ” . we expect our research and development expenses to increase for the foreseeable future as we advance our product candidate , kpi-121 0.25 % , toward regulatory approval , pursue other product candidates and conduct additional clinical trials . the process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time‑consuming . we may never succeed in obtaining marketing approval for any of our product candidates . the probability of success for each product candidate may be affected by numerous factors , including preclinical data , clinical data , competition , manufacturing capability and commercial viability . our research and development programs are at various stages of development . successful development and completion of clinical trials is uncertain and may not result in approved products . completion dates and completion costs can vary significantly for each product candidate and future product candidate and are difficult to predict . we will continue to make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to our ability to enter into collaborations with respect to each product candidate , the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of product candidates . we will need to raise additional capital and may seek collaborations in the future to advance our various product candidates . additional private or public financings may not be available to us on acceptable terms , or at all . our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy . selling , general and administrative expenses selling , general and administrative expenses consist primarily of salaries and related benefits , including stock‑based compensation , related to our commercial infrastructure and our executive , finance , legal , business development and support functions . other general and administrative expenses include travel expenses , professional fees for auditing , tax , consultants and legal services and allocated facility‑related costs not otherwise included in research and development expenses . we anticipate that our selling , general and administrative expenses will increase in the future if and as we increase our headcount to support our continued research activities and development of our product candidate s or additional product candidates and continue to build our commercial infrastructure to support the commercialization of inveltys or of any product candidates for which we obtain marketing approval , including kpi-121 0.25 % . in addition , we anticipate increased expenses related to supporting a larger organization and increase in selling expense related to inveltys . interest income interest income consists of interest earned on our cash balance held in a deposit account . 106 interest expense interest expense primarily consists of contractual coupon interest , amortization of debt discounts and debt issuance costs recognized on our debt facilities . loss on extinguishment of debt loss on extinguishment of debt primarily consists of unamortized debt issuance cost and a prepayment penalty on our debt facility entered into in 2014 , or our 2014 debt facility . change in fair value of warrant liability prior to our ipo , we issued warrants for the purchase of our series seed , series b and series c preferred stock . these warrants were financial instruments that were issuable for contingently redeemable securities and were classified as liabilities . upon the closing of our ipo , the underlying preferred stock was converted into common stock , the preferred stock warrants were converted into warrants for common stock , and the fair value of the warrant liability at that time was reclassified to additional paid‑in capital . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which we have prepared in accordance with u.s. generally accepted accounting principles . we believe that several accounting policies are important to understanding our historical and future performance . we refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate , and different estimates—which also would have been reasonable—could have been used .

results of operations comparison of the years ended december 31 , 2018 and 2017 the followi ng table summarizes the results of our operations for the years ended december 31 , 2018 and 2017 : replace_table_token_5_th research and development expenses replace_table_token_6_th research and development expenses were $ 29.3 million for the year ended december 31 , 2018 compared to $ 29.0 million for the year ended december 31 , 2017. significant changes within research and development were a $ 4.3 million decrease in kpi ‑ 121 development costs due to the decrease in external costs associated with the completion of our phase 3 clinical trials of stride 1 and stride 2 , our phase 3 clinical trials of kpi-121 0.25 % for the treatment of dry eye disease in 2017 , partially offset by costs incurred for stride 3 , our additional phase 3 clinical trial of kpi-121 0.25 % which began during the year ended december 31 2018 and the prescription drug user fee act ( pdufa ) fee paid in connection with the filing of our nda for kpi-121 0.25 % . employee-related costs increased by $ 4.8 million , comprised of a $ 3.4 million increase related to additional clinical and regulatory and quality operations headcount , overall merit increases and a $ 1.4 million increase in stock compensation expense from stock option grants . other 110 research and development costs decreased by $ 0.2 million primarily associated with an $ 0.5 million increase clinical consulting services and a $ 0.7 million reduction in facility costs related to research and development . selling , general and administrative expenses selling , general and administrative expenses were $ 35.4 million for the year ended december 31 , 2018 compared to $ 10.9 million for the year ended december 31 , 2017 , an increase of $ 24.6 million . this increase was primarily due to a $ 12.2

we expect that revenue will continue to increase and exceed expenses by month 7 of year 2. we project that we will sustain $ 15,105 in losses between the first month of year 2 and the last month of year 2. in year 3 , we project revenues of $ 460,000 and a profit of $ 105,884 between months 25-36. we make the following assumptions in our projections above for year 2 : * we will earn $ 20 cpm ( $ 0.02 every time a customer views an item of advertising ) . we are estimating approximately 2,000,000 impressions , or approximately 167,000 impression per month . * we will earn $ 0.3 every time a customer clicks on advertising . we are projecting 200,000 clicks , or less than 16,700 click per month . * when a customer fills in a form or take a survey or clicks through and purchases a product , we will earn revenue . we are estimating $ 1 per action . we expect that we will have approximately 50,000 completions per year , or approximately 4,200 completions per month . * we estimate that many calls outside north america will incur cost to the customer . we are estimating approximately 750,000 minutes which translates to approximately 2000 customers making 300 chargeable minutes per month . since we endeavor to provide this service as cheaply as possible to customers , we are only assuming $ 0.005 ( half a cent ) per minute profit . while going to make a phone call via our website , multiple advertisements will be posted to the same webpage the customer is using , which will include a combination of banners and videos on our website , their portal and the software phone . we have made our estimated projections ourselves . we believe that our estimates are reasonable . by way of comparison , according to http : //www.reelseo.com/video- advertising-vs-banners-cpms/ : * the average ad network inventory is : $ 0.60 to $ 1.10 cpm ; * the publisher sold display advertising is : $ 10 to $ 20 cpm ; and * video advertising is : $ 40 to $ 50 cpm we may never achieve the revenues we are projecting because the basis upon which we are making our revenue projections is subjective , and our reliance on third-party data which is more than two years old may be unreliable because the veracity of the third-party data can not be verified . while we will be focusing on video advertising , we may have display advertising and network inventory . year 1 will be spent on developing our products and services and we expect zero revenue during that period . in year 2 , we anticipate revenues of $ 153,750. we anticipate that we will start generating revenue in month 13 after we have completed the share sale outline . we expect that revenue will continue to increase and exceed expenses by month 19. we anticipate that we will sustain $ 15,105 in losses between months 13-24. in year 3 , we anticipate revenues of $ 460,000 and a profit of $ 105,884 between months 25-36 , and only at this point will our revenues exceed our costs . 16 we make the following assumptions in our projections above for year 2 : * we anticipate we will earn $ 20 cpm ( $ 0.02 every time a customer views an advertising ) on the basis of estimating 2 million impressions , which represents approximately 167,000 impression per month . * we anticipate we will earn $ 0.3 every time a customer clicks on advertising , on the basis of estimating 200,000 clicks or approximately 16,700 clicks per month . * when a customer fills in a form or takes a survey or clicks through and purchases a product , we will earn revenue . we are estimating a $ 1 per action and assuming that we will have 50,000 completions per year or approximately 4,200 completions per month . * we anticipate that many calls outside north america will incur cost to the customer . we are estimating 750,000 minutes , which is approximately 2000 customers making 300 chargeable minutes per month . since we are planning to provide this service as cheaply as possible to customers , we are only assuming $ 0.005 ( half a cent ) per minute profit . while going to make a phone call , a customer is likely to see multiple advertisements which will include a combination of banners and videos on the web site , the advertiser 's portal and our software phone . as well , people investigating our service , but not necessarily register , will earn us revenue because they will be viewing advertising . we can offer no assurance that we will be successful in developing and offering our products and services . any number of factors may impact our ability to develop our products and services , including our ability to obtain financing if and when necessary ; the availability of skilled personnel ; market acceptance of our products , if they are developed ; and our ability to gain market share . our business will fail if we can not successfully implement our business plan or if we can not develop or successfully market our products and services . since there is no minimum amount of shares that must be sold by the company , we may receive no proceeds or very minimal proceeds from the offering and potential investors may end up holding shares in a company that : * has not received enough proceeds from the offering to begin operations ; and * has no market for its shares . our independent registered public accountant has issued a going concern opinion . this means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital story_separator_special_tag we expect that revenue will continue to increase and exceed expenses by month 7 of year 2. we project that we will sustain $ 15,105 in losses between the first month of year 2 and the last month of year 2. in year 3 , we project revenues of $ 460,000 and a profit of $ 105,884 between months 25-36. we make the following assumptions in our projections above for year 2 : * we will earn $ 20 cpm ( $ 0.02 every time a customer views an item of advertising ) . we are estimating approximately 2,000,000 impressions , or approximately 167,000 impression per month . * we will earn $ 0.3 every time a customer clicks on advertising . we are projecting 200,000 clicks , or less than 16,700 click per month . * when a customer fills in a form or take a survey or clicks through and purchases a product , we will earn revenue . we are estimating $ 1 per action . we expect that we will have approximately 50,000 completions per year , or approximately 4,200 completions per month . * we estimate that many calls outside north america will incur cost to the customer . we are estimating approximately 750,000 minutes which translates to approximately 2000 customers making 300 chargeable minutes per month . since we endeavor to provide this service as cheaply as possible to customers , we are only assuming $ 0.005 ( half a cent ) per minute profit . while going to make a phone call via our website , multiple advertisements will be posted to the same webpage the customer is using , which will include a combination of banners and videos on our website , their portal and the software phone . we have made our estimated projections ourselves . we believe that our estimates are reasonable . by way of comparison , according to http : //www.reelseo.com/video- advertising-vs-banners-cpms/ : * the average ad network inventory is : $ 0.60 to $ 1.10 cpm ; * the publisher sold display advertising is : $ 10 to $ 20 cpm ; and * video advertising is : $ 40 to $ 50 cpm we may never achieve the revenues we are projecting because the basis upon which we are making our revenue projections is subjective , and our reliance on third-party data which is more than two years old may be unreliable because the veracity of the third-party data can not be verified . while we will be focusing on video advertising , we may have display advertising and network inventory . year 1 will be spent on developing our products and services and we expect zero revenue during that period . in year 2 , we anticipate revenues of $ 153,750. we anticipate that we will start generating revenue in month 13 after we have completed the share sale outline . we expect that revenue will continue to increase and exceed expenses by month 19. we anticipate that we will sustain $ 15,105 in losses between months 13-24. in year 3 , we anticipate revenues of $ 460,000 and a profit of $ 105,884 between months 25-36 , and only at this point will our revenues exceed our costs . 16 we make the following assumptions in our projections above for year 2 : * we anticipate we will earn $ 20 cpm ( $ 0.02 every time a customer views an advertising ) on the basis of estimating 2 million impressions , which represents approximately 167,000 impression per month . * we anticipate we will earn $ 0.3 every time a customer clicks on advertising , on the basis of estimating 200,000 clicks or approximately 16,700 clicks per month . * when a customer fills in a form or takes a survey or clicks through and purchases a product , we will earn revenue . we are estimating a $ 1 per action and assuming that we will have 50,000 completions per year or approximately 4,200 completions per month . * we anticipate that many calls outside north america will incur cost to the customer . we are estimating 750,000 minutes , which is approximately 2000 customers making 300 chargeable minutes per month . since we are planning to provide this service as cheaply as possible to customers , we are only assuming $ 0.005 ( half a cent ) per minute profit . while going to make a phone call , a customer is likely to see multiple advertisements which will include a combination of banners and videos on the web site , the advertiser 's portal and our software phone . as well , people investigating our service , but not necessarily register , will earn us revenue because they will be viewing advertising . we can offer no assurance that we will be successful in developing and offering our products and services . any number of factors may impact our ability to develop our products and services , including our ability to obtain financing if and when necessary ; the availability of skilled personnel ; market acceptance of our products , if they are developed ; and our ability to gain market share . our business will fail if we can not successfully implement our business plan or if we can not develop or successfully market our products and services . since there is no minimum amount of shares that must be sold by the company , we may receive no proceeds or very minimal proceeds from the offering and potential investors may end up holding shares in a company that : * has not received enough proceeds from the offering to begin operations ; and * has no market for its shares . our independent registered public accountant has issued a going concern opinion . this means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital

results of operations years ended september 30 , 2013 and 2012 we did not earn any revenues during the years ended september 30 , 2013 and 2012. we incurred operating expenses in the amount of $ 16,466 and $ 29,775 for the years ended september 30 , 2013 and 2012 , respectively . operating expenses for the year ended september 30 , 2013 , were comprised of $ 9,925 in professional fees and $ 6,541 of general and administrative expenses . operating expenses for the year ended september 30 , 2012 , were comprised primarily of $ 13,413 of professional fees and office and $ 16,362 of general and administrative expenses . since inception we have incurred operating expenses of $ 73,424. from inception ( march 11 , 2010 ) through the year ended september 30 , 2013 we had no revenues and a net loss of $ 73,424. the following table provides selected financial data about our company for the years ended september 30 , 2013 and 2012. replace_table_token_1_th going concern we are a development stage company and currently has no operations . our independent auditor has issued an audit opinion for first american group inc. , which includes a statement raising substantial doubt as to our ability to continue as a going concern . liquidity and capital resources at september 30 , 2013 , we had a cash balance of $ 2,022. management believes this amount will satisfy our cash requirements for the next twelve months or until such time that additional proceeds are raised . we plan to satisfy our future cash requirements - primarily the working capital required for the development of our course guides and marketing campaign and to offset legal and accounting fees - by additional equity financing . this will likely be in the form of private placements of common stock .

forward-looking statements are not historical facts , but instead represent only our beliefs , assumptions , expectations , estimates , forecasts and projections regarding future events , many of which , by their nature , are inherently uncertain and outside our control . these statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results . by identifying these statements for you in this manner , we are alerting you to the possibility that our actual results and financial condition may differ , possibly materially , from the anticipated results and financial condition indicated in these forward-looking statements . important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include , among others , those discussed under the section heading “ risk factors ” in part i , item 1a of this form 10-k. factors that may affect the outcome of the forward-looking statements include , among other things , leadership changes , our ability to attract , integrate , develop , manage and retain qualified consultants and senior leaders ; our ability to prevent our consultants from taking our clients with them to another firm ; our ability to maintain our professional reputation and brand name ; the fact that our net revenue may be affected by adverse economic conditions ; our clients ' ability to restrict us from recruiting their employees ; the aggressive competition we face ; our heavy reliance on information management systems ; the fact that we face the risk of liability in the services we perform ; the fact that data security , data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business ; social , political , regulatory and legal risks in markets where we operate ; the impact of foreign currency exchange rate fluctuations ; the fact that we may not be able to align our cost structure with net revenue ; unfavorable tax law changes and tax authority rulings ; our ability to realize our tax losses ; the timing of the establishment or reversal of valuation allowance on deferred tax assets ; any impairment of our goodwill , other intangible assets and other long-lived assets ; our ability to execute and integrate future acquisitions ; the fact that we have anti-takeover provisions that make an acquisition of us difficult and expensive ; our ability to access additional credit ; and the increased cybersecurity requirements , vulnerabilities , threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems , networks , solutions , services and data . we undertake no obligation to update publicly any forward-looking statements , whether as a result of new information , future events or otherwise . we undertake no obligation to update publicly any forward-looking statements , whether as a result of new information , future events or otherwise . executive overview our business we are a leadership advisory firm providing executive search and consulting services . we help our clients build leadership teams by facilitating the recruitment , management and development of senior executives . we believe focusing on top-level services offers us several advantages that include access to and influence with key decision makers , increased potential for recurring search consulting engagements , higher fees per search , enhanced brand visibility and a leveraged global footprint , which create added barriers to entry for potential competitors . working at the top of client organizations also allows us to attract and retain high-caliber consultants . in addition to executive search , we provide consulting services including executive leadership assessment , leadership , team and board development , succession planning , talent strategy , people performance , inter-team collaboration , culture shaping and organizational transformation . we provide our services to a broad range of clients through the expertise of over 400 consultants located in major cities around the world . our executive search services are provided on a retained basis . revenue before reimbursements of out-of-pocket expenses ( “ net revenue ” ) consists of retainers and indirect expenses billed to clients . typically , we are paid a retainer for our executive search services equal to approximately one-third of the estimated first-year compensation for the position to be filled . in addition , if the actual compensation of a placed candidate exceeds the estimated compensation , we often are authorized to bill the client for one-third of the excess . indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search . key performance indicators we manage and assess our performance through various means , with primary financial and operational measures including net revenue , operating income , operating margin , adjusted ebitda ( non-gaap ) and adjusted ebitda margin ( non-gaap ) . 17 executive search and heidrick consulting performance is also measured using consultant headcount . specific to executive search , confirmation trends , consultant productivity and average revenue per search are used to measure performance . revenue is driven by market conditions and a combination of the number of executive search engagements and leadership consulting and culture shaping projects and the average revenue per search or project . with the exception of compensation expense , incremental increases in revenue do not necessarily result in proportionate increases in costs , particularly operating and administrative expenses , thus creating the potential to improve operating margins . the number of consultants , confirmation trends , number of searches or projects completed , productivity levels and the average revenue per search or project will vary from quarter to quarter , affecting net revenue and operating margin . our compensation model at the executive search consultant level , there are fixed and variable components of compensation . individuals are rewarded for their performance based on a system that directly ties a portion of their compensation to the amount of net revenue for which they are responsible . story_separator_special_tag our 2019 first quarter guidance is based upon , among other things , management 's assumptions for the anticipated volume of new executive search confirmations and leadership consulting and culture shaping projects , the current backlog , consultant productivity , consultant retention , the seasonality of our business and average currency rates from december 2018. our 2019 first quarter guidance is subject to a number of risks and uncertainties , including those disclosed under `` item 1a - risk factors '' and in this `` management 's discussion and analysis of financial condition and results of operations '' included in this form 10-k. as such , actual results could vary from these projections . 19 story_separator_special_tag interest income was $ 1.1 million in 2018 , a $ 0.7 million increase from net interest income of $ 0.4 million in 2017. other , net was income of $ 0.5 million in 2018 , compared to expense of $ 3.3 million in 2017. other , net results improved primarily due to her majesty 's revenue and customs ( `` hmrc '' ) employee benefit tax settlement of $ 2.4 million in 2017 , as well as the positive impact of foreign exchange rate fluctuations of $ 1.2 million . income taxes . see note 17 , income taxes . executive search americas the americas segment reported net revenue of $ 405.3 million in 2018 , an increase of 19.3 % from $ 339.8 million in 2017. the increase in net revenue was driven by a 14.4 % increase in the number of executive search confirmations , compared to the prior year , as well as an increase in average revenue per executive search . the net impact of the new revenue recognition standard increased revenue by approximately $ 4.1 million . all industry practice groups contributed to the increased net revenue . foreign 23 exchange fluctuations negatively impacted net revenue by $ 0.7 million , or 0.2 % . there were 179 partner and principal consultants as of december 31 , 2018 , compared to 163 as of december 31 , 2017. salaries and employee benefits expense increased $ 45.7 million , or 21.1 % , from 2017. fixed compensation increased $ 14.6 million primarily due to talent acquisition and retention costs , stock compensation , and retirement and benefits , partially offset by a decrease in the deferred compensation plan due to market fluctuations . variable compensation increased $ 31.1 million primarily due to higher bonus accruals for consultant performance . the impact of the new revenue recognition standard increased salaries and benefits expense by approximately $ 2.9 million . general and administrative expenses decreased $ 1.0 million , or 2.0 % , from 2017 primarily due to a decrease in communications , bad debt , and office occupancy , partially offset by increases in professional services , and internal travel . restructuring charges were $ 0.8 million for the year ended december 31 , 2017. these charges included approximately $ 0.6 million in severance-related charges and $ 0.2 million in professional fees and other expenses . operating income was $ 96.9 million in 2018 , an increase of $ 21.5 million , compared to $ 75.3 million in 2017. excluding the impact of restructuring charges in 2017 , operating income increased $ 20.8 million from $ 76.1 million in 2017 to $ 96.9 million in 2018. europe europe reported net revenue of $ 145.3 million in 2018 , an increase of 16.0 % from $ 125.3 million in 2017. the increase in net revenue was due to a 13.1 % increase in the number of executive search confirmations compared to the prior year and the amrop acquisition . the net impact of the new revenue recognition standard increased revenue by approximately $ 1.0 million . all industry practice groups contributed to net revenue growth . foreign exchange rate fluctuations positively impacted net revenue by $ 4.7 million , or 3.3 % . there were 101 partner and principal consultants as of december 31 , 2018 , compared to 103 as of december 31 , 2017. salaries and employee benefits expense increased $ 14.5 million , or 15.9 % , from 2017. fixed compensation increased $ 5.7 million primarily due increases in base salaries and payroll taxes and retirement and benefits , partially offset by a decrease in separation costs . base salaries , payroll taxes , and retirement and benefits increased due to additional headcount as a result of the amrop acquisition . variable compensation increased $ 8.8 million due to higher bonus accruals for consultant performance . the impact of the new revenue recognition standard increased salaries and benefits expense by approximately $ 0.7 million . general and administrative expense increased $ 3.7 million , or 12.1 % from 2017 primarily due to ongoing general and administrative expenses related to the amrop acquisition , professional fees , and office occupancy . restructuring charges were $ 3.9 million for the year ended december 31 , 2017. these charges included approximately $ 3.9 million in severance-related charges and $ 0.1 million in in office-related charges . the europe segment reported operating income of $ 5.8 million in 2018 compared to less than $ 0.1 million in 2017. excluding the impact of restructuring charges in 2017 , operating income increased $ 1.8 million from $ 4.0 million in 2017 to $ 5.8 million in 2018. asia pacific asia pacific reported net revenue of $ 102.3 million in 2018 , an increase of 17.7 % compared to $ 86.9 million in 2017. the increase in net revenue was due to a 5.5 % increase in the number of executive search confirmations and an increase in average revenue per executive search . the net impact of the new revenue recognition standard increased revenue by approximately $ 3.0 million . all industry practice groups contributed to the increase in net revenue , with the exception of the education and social enterprises practice group . foreign exchange rate fluctuations negatively impacted net revenue by $ 0.7 million , or 0.7 % .

results of operations the following table summarizes , for the periods indicated , the results of operations ( in thousands , except per share data ) : replace_table_token_7_th ( 1 ) includes impairment charges of $ 50.7 million related to heidrick consulting in 2017 . ( 2 ) includes restructuring charges of $ 15.7 million in 2017. these charges consist of $ 13.1 million of employee-related costs associated with severance arrangements , $ 2.3 million in professional fees and other expenses and $ 0.3 million in real estate related expenses . 20 the following table summarizes , for the periods indicated , our results of operations as a percentage of revenue before reimbursements ( net revenue ) : replace_table_token_8_th note : totals and subtotals may not equal the sum of individual line items due to rounding . we operate our executive search business in the americas , europe ( which includes africa ) and asia pacific ( which includes the middle east ) , and we operate our heidrick consulting business globally ( see note 18 , segment information ) . 21 the following table sets forth , for the periods indicated , our revenue and operating income by segment ( in thousands ) : replace_table_token_9_th ( 1 ) operating income for the americas includes $ 0.8 million of restructuring charges in 2017 . ( 2 ) operating income for europe includes $ 4.0 million of restructuring charges in 2017 . ( 3 ) operating income for asia pacific includes $ 2.0 million of restructuring charges in 2017 . ( 4 ) operating loss for heidrick consulting includes $ 50.7 million of impairment charges and $ 3.4 million of restructuring charges in 2017 . ( 5 ) operating loss for global operations support includes $ 5.5 million of restructuring charges in 2017. year ended december 31 , 2018 compared to year ended december 31 , 2017 total revenue .

changes in internal control over financial reporting there have been no changes in our internal control over financial story_separator_special_tag the following management 's discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes . some statements and information contained in this management 's discussion and analysis of financial condition and results of operations are not historical facts but are forward-looking statements . for a discussion of these forward-looking statements , and of important factors that could cause results to differ materially from the forward-looking statements contained in this report , see item 1 of part i , “business—forward-looking statements , ” and item 1a of part i , “risk factors.” overview we provide software solutions and related engineering services to companies that develop smart , connected devices . a smart , connected device is a dedicated purpose computing device that typically has a display , runs an operating system ( e.g. , microsoft ® windows ® embedded compact ) and may be connected to a network via a wired or wireless connection . examples of smart devices include set-top boxes , home gateways , point-of-sale terminals , kiosks , voting machines , gaming platforms , tablets , handheld data collection devices , personal media players , smart phones and devices targeted at automotive applications . we focus on smart devices that utilize embedded versions of the microsoft windows family of operating systems , specifically windows embedded compact , windows embedded standard and windows mobile™ as well as devices running other popular operating systems such as android , linux , and qnx . we have been providing software solutions to the smart device marketplace since our inception . our customers include world class original equipment manufacturers ( “oems” ) , original design manufacturers ( “odms” ) and enterprises , as well as silicon vendors ( “svs” ) and peripheral vendors which purchase our software solutions for purposes of facilitating processor and peripheral sales to the aforementioned customer categories . in the case of enterprises , our customers include those which develop , market and distribute smart devices on their own behalf as well as those that purchase devices from oems or odms and require additional device software or testing . the software solutions we provide are utilized and deployed throughout various phases of our customers ' device life cycle , including design , development , customization , quality assurance and deployment . critical accounting judgments use of estimates the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the united states requires us to make estimates and assumptions that affect the amounts reported and disclosed in our financial statements and the accompanying notes . actual results could differ materially from these estimates . on an ongoing basis , we evaluate our estimates , including those related to the allowance for doubtful accounts , percentage of completion on fixed-price service contracts , fair values of financial instruments , deferred tax asset allowances , useful lives and fair value of intangible assets and property and equipment , fair values of stock-based awards , income tax accruals , fair values of acquired assets and liabilities and the fair value of contingent purchase consideration , among other estimates . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable , the results of which form the basis for making judgments about the carrying value of our assets and liabilities . revenue recognition we recognize revenue from software and engineering service sales when the following four revenue recognition criteria are met : persuasive evidence of an arrangement exists ; delivery has occurred or services have been rendered ; the selling price is fixed or determinable ; and collectability is reasonably assured . contracts and customer purchase orders are generally used to determine the existence of an arrangement . shipping documents 25 and time records are generally used to verify delivery . we assess whether the selling price is fixed or determinable based on the contract and or customer purchase order and payment terms associated with the transaction and whether the sales price is subject to refund or adjustment . we assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis , as well as the customer 's payment history . periodically , we will begin work on engineering service engagements prior to having a signed contract and , in some cases , the contract is signed in a quarter after which service delivery costs are incurred . we do not defer costs associated with such engagements before we have received a signed contract . we recognize software revenue upon shipment provided that no significant obligations remain on our part , substantive acceptance conditions , if any , have been met and the other revenue recognition criteria have been met . service revenue from time and materials contracts , and training service agreements , is recognized as services are performed . fixed-price service agreements , and certain time and materials service agreements with capped fee structures , are accounted for using the percentage-of-completion method . we use the percentage-of-completion method of accounting because we believe it is the most accurate method to recognize revenue based on the nature and scope of these engineering service contracts ; we believe it is a better measure of periodic income results than other methods and better matches revenue recognized with the costs incurred . percentage of completion is measured based primarily on input measures such as hours incurred to date compared to total estimated hours to complete , with consideration given to output measures , such as contract milestones , when applicable . significant judgment is required when estimating total hours and progress to completion on these arrangements which determines the amount of revenue we recognize as well as whether a loss is recognized if one is expected to be incurred for the remainder of the project . story_separator_special_tag if this evaluation indicates that the value of the intangible asset may be impaired , we make an assessment of the recoverability of the net carrying value of the asset over its remaining useful life . if this assessment indicates that the intangible asset is not recoverable , based on the estimated undiscounted future cash flows of the technology over the remaining useful life , we reduce the net carrying value of the related intangible asset to fair value . any such impairment charge could be significant and could have a material adverse effect on our reported financial results . during the fourth quarter of 2011 , we recognized an impairment charge of $ 518,000 related to technology acquired from testquest in 2008. we evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable . our annual testing date is december 31. we test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units . if the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired , a second step is performed to compute the amount of impairment as the difference between the estimated fair value of the reporting unit and the carrying value . we estimate the fair value of the reporting units using discounted cash flows . forecasts of future cash flow are based on our best 27 estimate of future net sales , gross margins , and operating expenses . certain estimates of discounted cash flows involve businesses and geographies with limited financial history and developing revenue models . changes in these forecasts could significantly change the amount of impairment recorded , if any . stock-based compensation our stock-based compensation expense for stock options is estimated at the grant date based on the stock award 's fair value as calculated by the black-scholes-merton ( “bsm” ) option-pricing model and is recognized as expense over the requisite service period . the bsm model requires various highly judgmental assumptions including expected volatility and option life . if any of the assumptions used in the bsm model change significantly , stock-based compensation expense may differ materially in the future from that recorded in the current period . restricted stock units ( “rsus” ) and restricted stock awards ( “rsas” ) are measured based on the fair market values of the underlying stock on the dates of grant as determined based on the number of shares granted and the quoted price of our common stock on the date of grant . in addition , we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest . we estimate the forfeiture rate based on historical experience . to the extent our actual forfeiture rate is different from our estimates , stock-based compensation expense is adjusted accordingly . incentive compensation we make certain estimates , judgments and assumptions regarding the likelihood of attainment , and the level thereof , of bonuses payable under our annual incentive compensation programs . we accrue bonuses and recognize the resulting expense when the bonus is judged to be reasonably likely to be earned as of year-end and is estimable . the amount accrued , and expense recognized , is the estimated portion of the bonus earned on a year-to-date basis less any amounts previously accrued . these estimates , judgments and assumptions are made quarterly based on available information and take into consideration our year-to-date actual results and expected results for the remainder of the year . because we consider estimated future results in assessing the likelihood of attainment , significant judgment is required . if actual results differ materially from our estimates , the amount of bonus expense recorded in a particular quarter could be significantly over or under estimated . taxes as part of the process of preparing our consolidated financial statements , we are required to estimate income taxes in each of the countries and other jurisdictions in which we operate . this process involves estimating our current tax expense together with assessing temporary differences resulting from the differing treatment of items for tax and accounting purposes . these differences result in deferred tax assets and liabilities . net operating losses and tax credits , to the extent not already utilized to offset taxable income or income taxes , also give rise to deferred tax assets . we must then assess the likelihood that any deferred tax assets will be realized from future taxable income , and , to the extent we believe that recovery is not likely , we must establish a valuation allowance . significant judgment is required in determining our provision for income taxes , deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets . beginning in 2002 and through the third quarter of 2010 , we maintained a full valuation allowance against our deferred tax assets . in the fourth quarter of 2010 , we determined that it was more likely than not that we would generate sufficient future taxable income to realize a portion of our net operating loss carryforwards , and recorded a portion of our deferred tax assets related to such estimated future taxable income . we estimate the valuation allowance related to our deferred tax assets on a quarterly basis . our sales may be subject to other taxes , particularly withholding taxes , due to our sales to customers in countries other than the united states . the tax regulations governing withholding taxes are complex , causing us to have to make assumptions about the appropriate tax treatment . further , we make sales in many jurisdictions across the united states , where tax regulations are increasingly becoming more aggressive and complex .

results of operations the following table presents certain financial data as a percentage of total revenue for the periods indicated . our historical operating results are not necessarily indicative of the results for any future period . replace_table_token_6_th comparison of the years ended december 31 , 2011 and 2010 acquisition of mpc data limited on september 11 , 2011 we completed the acquisition of mpc data limited ( “mpc” ) , a united kingdom-based provider of embedded software engineering services . the acquisition is part of our overall growth strategy and is designed to capitalize on the growing market for smart , connected devices by expanding both the breadth of services offered and the geographies that we serve . as the acquisition took place late in the third quarter of 2011 , the impact on our results of operations was relatively insignificant for the year in total . where applicable , the mpc-related impacts have been noted in the following commentary . revenue our revenue is generated from the sale of software , both our own proprietary software and third-party software that we resell , and the sale of engineering services . total revenue was $ 96.8 million in both 2011 and 2010. a $ 2.2 million decline in sales of microsoft operating systems in 2011 was offset by increases in our sale of adobe flash products , engineering services revenue , and proprietary software revenue . our revenue mix has been shifting to customers located outside of north america as we have expanded our sales and development presence in locales outside north america . before 2011 , our operations outside of north america consisted principally of operations in taiwan , as well as relatively minor sales and or support presences in china , india , japan , korea , and the united kingdom . during 2011 we expanded our sales teams across asia , our development presence in china and acquired the operations of mpc in the united kingdom .

107 story_separator_special_tag forward-looking statements this annual report on form 10-k contains `` forward-looking statements '' within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 , as amended ( the `` exchange act '' ) . these forward-looking statements reflect our current estimates , expectations and projections about our future results , performance , prospects and opportunities . forward-looking statements include , among other things , the information concerning our planned capital expenditures by segment for 2019 , possible future results of operations , business and growth strategies , financing plans , expectations that regulatory developments or other matters will or will not have a material adverse effect on our business or financial condition , our competitive position and the effects of competition , the projected growth of the industry in which we operate , and the benefits and synergies to be obtained from our completed and any future acquisitions , statements of management 's goals and objectives , and other similar expressions concerning matters that are not historical facts . words such as `` may , '' `` will , '' `` should , '' `` could , '' `` would , '' `` predicts , '' `` potential , '' `` continue , '' `` expects , '' `` anticipates , '' `` future , '' `` intends , '' `` plans , '' `` believes , '' `` estimates , '' `` appears , '' `` projects '' and similar expressions , as well as statements in future tense , identify forward-looking statements . forward-looking statements should not be read as a guarantee of future performance or results , and will not necessarily be accurate indications of the times at , or by , which such performance or results will be achieved . forward-looking information is based on information available at the time and or management 's good faith belief with respect to future events , and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements . important factors that , individually or in the aggregate , could cause such differences include , but are not limited to : volatility in our refining margins or fuel gross profit as a result of changes in the prices of crude oil , other feedstocks and refined petroleum products ; our ability to execute our strategy of growth through acquisitions and capital projects and changes in the expected value of and benefits derived therefrom , including any inability to successfully integrate acquisitions , realize expected synergies or achieve operational efficiency and effectiveness ; acquired assets may suffer a diminishment in fair value , which may require us to record a write-down or impairment ; reliability of our operating assets ; actions of our competitors and customers ; changes in , or the failure to comply with , the extensive government regulations applicable to our industry segments ; changes in interpretations , assumptions and expectations regarding the tax cuts and jobs act , including additional guidance that may be issued by federal and state taxing authorities ; diminution in value of long-lived assets may result in an impairment in the carrying value of the assets on our balance sheet and a resultant loss recognized in the statement of operations ; general economic and business conditions affecting the southern , southwestern and western united states , particularly levels of spending related to travel and tourism ; volatility under our derivative instruments ; deterioration of creditworthiness or overall financial condition of a material counterparty ( or counterparties ) ; unanticipated increases in cost or scope of , or significant delays in the completion of , our capital improvement and periodic turnaround projects ; risks and uncertainties with respect to the quantities and costs of refined petroleum products supplied to our pipelines and or held in our terminals ; operating hazards , natural disasters , casualty losses and other matters beyond our control ; increases in our debt levels or costs ; changes in our ability to continue to access the credit markets ; compliance , or failure to comply , with restrictive and financial covenants in our various debt agreements ; the inability of our subsidiaries to freely make dividends , loans or other cash distributions to us ; seasonality ; 56 management 's discussion and analysis acts of terrorism ( including cyber-terrorism ) aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks ; disruption , failure , or cybersecurity breaches affecting or targeting our it systems and controls , our infrastructure , or the infrastructure of our cloud-based it service providers ; changes in the cost or availability of transportation for feedstocks and refined products ; and other factors discussed under item 1a , risk factors and item 7 , management 's discussion and analysis of financial condition and results of operations and in our other filings with the sec . in light of these risks , uncertainties and assumptions , our actual results of operations and execution of our business strategy could differ materially from those expressed in , or implied by , the forward-looking statements , and you should not place undue reliance upon them . in addition , past financial and or operating performance is not necessarily a reliable indicator of future performance , and you should not use our historical performance to anticipate future results or period trends . we can give no assurances that any of the events anticipated by any forward-looking statements will occur or , if any of them do , what impact they will have on our results of operations and financial condition . all forward-looking statements included in this report are based on information available to us on the date of this report . we undertake no obligation to revise or update any forward-looking statements as a result of new information , future events or otherwise . story_separator_special_tag the krotz springs refinery has the capability to process substantial volumes of light sweet , crude oils to produce a high percentage of refined light products . the crude oil and product slate flexibility of the el dorado refinery allows us to take advantage of changes in the crude oil and product markets ; therefore , we anticipate that the quantities and varieties of crude oil processed and products manufactured at the el dorado refinery by processing a variety of feedstocks into a number of refined product types will continue to vary . while there is variability in the crude slate and the product output at the el dorado refinery , we compare our per barrel refined product margin to the gulf coast 5-3-2 crack spread because we believe it to be the most closely aligned benchmark . a widening of the wti cushing less wti midland spread will favorably influence the operating margin for our refineries . alternatively , a narrowing of this differential will have an adverse effect on our operating margins . global product prices are influenced by the price of brent crude which is a global benchmark crude . global product prices influence product prices in the u.s. as a result , our refineries are influenced by the spread between brent crude and wti midland . the brent less wti midland spread represents the differential between the average per barrel price of brent crude oil and the average per barrel price of wti cushing crude oil . a widening of the spread between brent and wti cushing will favorably influence our refineries ' operating margins . also , the krotz springs refinery is influenced by the spread between brent crude and lls . the brent less lls spread represents the differential between the average per barrel price of brent crude oil and the average per barrel price of lls crude oil . a discount in lls relative to brent will favorably influence the krotz springs refinery operating margin . the cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our retail segment depends on numerous factors beyond our control , including the supply of , and demand for , crude oil , gasoline and other refined petroleum products which , in turn , depend on , among other factors , changes in domestic and foreign economies , weather conditions , domestic and foreign political affairs , production levels , the availability of imports , the marketing of competitive fuels and government regulation . our retail merchandise sales are driven by convenience , customer service , competitive pricing and branding . motor fuel margin is sales less the delivered cost of fuel and motor fuel taxes , measured on a cents per gallon basis . our motor fuel margins are impacted by local supply , demand , weather , competitor pricing and product brand . as part of our overall business strategy , we regularly evaluate opportunities to expand our portfolio of businesses and may at any time be discussing or negotiating a transaction that , if consummated , could have a material effect on our business , financial condition , liquidity or results of operations . logistics overview our logistics segment gathers , transports and stores crude oil and markets , distributes , transports and stores refined products in select regions of the southeastern united states and west texas for our refining segment and third parties . it is comprised of the consolidated balance sheet and results of operations of delek logistics partners , lp ( `` delek logistics '' , nyse : dkl ) , where we owned a 61.4 % limited partner interest ( at december 31 , 2018 ) in delek logistics and a 94.6 % interest in the entity that owns the entire 2.0 % general partner interest in delek logistics and all of the incentive distribution rights . delek logistics was formed by delek in 2012 to own , operate , acquire and construct crude oil and refined products logistics and marketing assets . a substantial majority of delek logistics ' assets are currently integral to our refining and marketing operations . the logistics segment 's pipelines and transportation business owns or leases capacity on approximately 400 miles of crude oil transportation pipelines , approximately 450 miles of refined product pipelines , an approximately 600 -mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 9.6 million barrels of active shell capacity . our logistics segment owns and operates nine light product terminals and markets light products using third-party terminals . retail overview as of december 31 , 2018 , delek 's retail segment includes the operations of 279 owned and leased convenience store sites located primarily in central and west texas and new mexico which were acquired in connection with the delek/alon merger . our convenience stores typically offer various grades of gasoline and diesel under the alon brand name and food products , food service , tobacco products , non-alcoholic and alcoholic beverages , general merchandise as well as money orders to the public , primarily under the 7-eleven and alon brand names pursuant to a license agreement with 7-eleven , inc. which gives us a perpetual license to use the 7-eleven trademark , service name and trade name in west texas and a majority of the counties in new mexico in connection with our retail store operations . in november 2018 , we terminated the license agreement with 7-eleven , inc. and the terms of such termination require the removal of all 7-eleven branding on a store-by-store basis by the earlier of 58 management 's discussion and analysis december 31 , 2021 or the date upon which our last 7-eleven store is de-identified or closed . merchandise sales at our convenience store sites will continue to be sold under the 7-eleven brand name until 7-eleven branding is removed pursuant to the termination .

results of operations consolidated results of operations — comparison of the year ended december 31 , 2018 versus the year ended december 31 , 2017 and the year ended december 31 , 2017 versus the year ended december 31 , 2016 net income 2018 vs. 2017 consolidated net income for the year ended december 31 , 2018 was $ 374.9 million compared to $ 322.6 million for the year ended december 31 , 2017 . consolidated net income attributable to delek for the year ended december 31 , 2018 was $ 340.1 million , or $ 4.11 per basic share , compared to $ 288.8 million , or $ 4.04 per basic share , for the year ended december 31 , 2017 . explanations for significant drivers impacting net income as compared to the comparable period of the prior year are discussed in the sections below . 2017 vs. 2016 consolidated net income for the year ended december 31 , 2017 was $ 322.6 million compared to a net loss of $ 133.4 million for the year ended december 31 , 2016 . consolidated net income attributable to delek for the year ended december 31 , 2017 was $ 288.8 million , or $ 4.04 per basic share , compared to a net loss of $ 153.7 million , or $ 2.49 per basic share , for the year ended december 31 , 2016 . explanations for significant drivers impacting net income as compared to the comparable period of the prior year are discussed in the sections below . net revenues 2018 vs. 2017 we generated net revenues of $ 10,233.1 million and $ 7,267.1 million during the years ended december 31 , 2018 and 2017 , respectively , an increase of $ 2,966.0 million , or 40.8 % .

there was no outstanding balance under the credit facility at june 24 , 2003 when it expired . the company is currently in discussions with several banks regarding a new credit facility . there have been no borrowings since july 13 , 2001 , and during the fiscal year the company maintained an average cash balance of approximately $ 5.0 million . management believes that operational cash requirements will continue to be funded internally through the next fiscal year based on the cash balance of $ 7.7 million at june 30 , 2003 and the positive cash projections for fiscal year 2004. during fiscal year 2004 , the company anticipates spending approximately $ 700,000 to continue refurbishing the orlando , florida facility and for the purchase of new machinery and equipment . in order to improve productivity and efficiency , the company consolidated into approximately 90,000 square feet during fiscal year 2003. this consolidation also included outsourcing of certain activities and the disposition of excess equipment and machinery , the majority of which was fully depreciated . in addition , the company disposed of excess and obsolete raw materials inventory which was fully reserved . during fiscal year 2001 , the company reduced its operating costs by eliminating 105 employees or 35 % of the total number of employees . termination benefits associated with the reductions were approximately $ 1,418,000. annual compensation savings associated with these actions were $ 4,300,000. all employee termination benefits related to the fiscal year 2001 reductions in workforce were paid by october 31 , 2001. page 9 of 56 during fiscal year 2002 , the company reduced its operating costs by eliminating approximately 35 employees or 25 % of the total remaining employees . annual compensation savings associated with these actions were approximately $ 2,200,000. the employee termination benefits associated with the reductions were approximately $ 272,000. all termination benefits related to the fiscal year 2002 reductions in workforce were paid in fiscal year 2002. in april 2002 , the company announced that dr. james c. garrett , president and chief executive officer , would leave the company at the end of june 2002. severance costs of approximately $ 255,000 , which includes one year of salary and health benefits , were recorded in june 2002 and included in accrued expenses and other . these costs were paid during fiscal year 2003. in july 2002 , the company further reduced its operating costs by eliminating 15 employees or 11 % of the remaining employees . the employee termination benefits associated with the reductions were approximately $ 197,000. annual compensation savings associated with these actions were approximately $ 1,200,000. during the first quarter of fiscal year 2003 , retention agreements were implemented in order to temporarily retain 11 key employees whose jobs would be outsourced due to the consolidation of the workforce into a smaller space . severance payments and retention bonuses were earned as the employees were terminated based on the employees remaining with the company through completion dates ranging from november 2002 through march 2003. as of march 31 , 2003 , all of these employees left the company and severance payments and retention bonuses totaling $ 100,000 were paid . management 's plans to improve future profitability include : ( 1 ) a continuation of both direct and indirect cost reduction initiatives and improvement of operating performance , ( 2 ) an aggressive focus on obtaining follow-on awards to existing business , and ( 3 ) the implementation of strategies to procure new business . other than as stated above , the company has no other material commitments for capital expenditures . management believes that with the funds available under its projected cash flow , the company will have sufficient resources to meet planned operating commitments through the next fiscal year . on august 23 , 2002 , the board of directors approved a plan to repurchase up to $ 1.5 million of common stock . no purchases were made as of june 30 , 2003. on august 21 , 2003 , it was announced that the company and cubic corporation ( “cubic” ) signed a definitive agreement and plan of merger . under the terms of the agreement cda acquisition corporation ( “cda” ) , a wholly owned subsidiary of cubic , will make a tender offer for all of the outstanding shares of ecc common stock at a price of $ 5.25 per share , which will , if completed , result in an aggregate consideration to ecc 's stockholders of approximately $ 42.3 million . the offer commenced on august 27 , 2003 and will expire , if not extended by cda , at midnight , eastern time on september 24 , 2003. the tender offer , if successful , will be followed by a merger , of cda into ecc , with ecc being the surviving corporation and a wholly owned subsidiary of cubic . page 10 of 56 the board of directors of ecc has unanimously approved the transaction and is recommending that stockholders tender their shares of ecc common stock to cda in the tender offer . in addition , certain stockholders , including warren lichtenstein and steel partners ii , l.p. , holding approximately 36.6 percent of the outstanding common stock of ecc have agreed to tender their shares to cda in the tender offer . the tender offer is subject to certain customary conditions , including the tender of at least a majority of ecc 's common stock on a fully diluted basis . ( 3 ) story_separator_special_tag disclosure requirements of sfas 123 to require prominent disclosure of the method of accounting for stock based compensation and the effect of the method on reported results . the disclosure requirements have been included in the following table ( in thousands , except per share data ) : replace_table_token_3_th certain factors that may affect future operating results the following important factors , among others , could cause story_separator_special_tag there was no outstanding balance under the credit facility at june 24 , 2003 when it expired . the company is currently in discussions with several banks regarding a new credit facility . there have been no borrowings since july 13 , 2001 , and during the fiscal year the company maintained an average cash balance of approximately $ 5.0 million . management believes that operational cash requirements will continue to be funded internally through the next fiscal year based on the cash balance of $ 7.7 million at june 30 , 2003 and the positive cash projections for fiscal year 2004. during fiscal year 2004 , the company anticipates spending approximately $ 700,000 to continue refurbishing the orlando , florida facility and for the purchase of new machinery and equipment . in order to improve productivity and efficiency , the company consolidated into approximately 90,000 square feet during fiscal year 2003. this consolidation also included outsourcing of certain activities and the disposition of excess equipment and machinery , the majority of which was fully depreciated . in addition , the company disposed of excess and obsolete raw materials inventory which was fully reserved . during fiscal year 2001 , the company reduced its operating costs by eliminating 105 employees or 35 % of the total number of employees . termination benefits associated with the reductions were approximately $ 1,418,000. annual compensation savings associated with these actions were $ 4,300,000. all employee termination benefits related to the fiscal year 2001 reductions in workforce were paid by october 31 , 2001. page 9 of 56 during fiscal year 2002 , the company reduced its operating costs by eliminating approximately 35 employees or 25 % of the total remaining employees . annual compensation savings associated with these actions were approximately $ 2,200,000. the employee termination benefits associated with the reductions were approximately $ 272,000. all termination benefits related to the fiscal year 2002 reductions in workforce were paid in fiscal year 2002. in april 2002 , the company announced that dr. james c. garrett , president and chief executive officer , would leave the company at the end of june 2002. severance costs of approximately $ 255,000 , which includes one year of salary and health benefits , were recorded in june 2002 and included in accrued expenses and other . these costs were paid during fiscal year 2003. in july 2002 , the company further reduced its operating costs by eliminating 15 employees or 11 % of the remaining employees . the employee termination benefits associated with the reductions were approximately $ 197,000. annual compensation savings associated with these actions were approximately $ 1,200,000. during the first quarter of fiscal year 2003 , retention agreements were implemented in order to temporarily retain 11 key employees whose jobs would be outsourced due to the consolidation of the workforce into a smaller space . severance payments and retention bonuses were earned as the employees were terminated based on the employees remaining with the company through completion dates ranging from november 2002 through march 2003. as of march 31 , 2003 , all of these employees left the company and severance payments and retention bonuses totaling $ 100,000 were paid . management 's plans to improve future profitability include : ( 1 ) a continuation of both direct and indirect cost reduction initiatives and improvement of operating performance , ( 2 ) an aggressive focus on obtaining follow-on awards to existing business , and ( 3 ) the implementation of strategies to procure new business . other than as stated above , the company has no other material commitments for capital expenditures . management believes that with the funds available under its projected cash flow , the company will have sufficient resources to meet planned operating commitments through the next fiscal year . on august 23 , 2002 , the board of directors approved a plan to repurchase up to $ 1.5 million of common stock . no purchases were made as of june 30 , 2003. on august 21 , 2003 , it was announced that the company and cubic corporation ( “cubic” ) signed a definitive agreement and plan of merger . under the terms of the agreement cda acquisition corporation ( “cda” ) , a wholly owned subsidiary of cubic , will make a tender offer for all of the outstanding shares of ecc common stock at a price of $ 5.25 per share , which will , if completed , result in an aggregate consideration to ecc 's stockholders of approximately $ 42.3 million . the offer commenced on august 27 , 2003 and will expire , if not extended by cda , at midnight , eastern time on september 24 , 2003. the tender offer , if successful , will be followed by a merger , of cda into ecc , with ecc being the surviving corporation and a wholly owned subsidiary of cubic . page 10 of 56 the board of directors of ecc has unanimously approved the transaction and is recommending that stockholders tender their shares of ecc common stock to cda in the tender offer . in addition , certain stockholders , including warren lichtenstein and steel partners ii , l.p. , holding approximately 36.6 percent of the outstanding common stock of ecc have agreed to tender their shares to cda in the tender offer . the tender offer is subject to certain customary conditions , including the tender of at least a majority of ecc 's common stock on a fully diluted basis . ( 3 ) story_separator_special_tag disclosure requirements of sfas 123 to require prominent disclosure of the method of accounting for stock based compensation and the effect of the method on reported results . the disclosure requirements have been included in the following table ( in thousands , except per share data ) : replace_table_token_3_th certain factors that may affect future operating results the following important factors , among others , could cause

results of operations 2003 compared with 2002 net sales decreased $ 1.4 million ( 4 % ) in fiscal year 2003 compared to fiscal year 2002. this decrease is primarily due to lower sales from the multi-year javelin epbst contract which is in its final year of production as well as lower volume on the c-17 and cctt programs . these decreases were partially offset by higher est-2000 and simnet sales . gross margin as a percentage of sales was 33 % in fiscal year 2003 compared to 34 % in fiscal year 2002. selling , general and administrative expenses decreased $ 545,000 ( 8 % ) in fiscal year 2003 compared to fiscal year 2002 , due primarily to reduced salaries and bonuses resulting from staffing reductions . independent research and development ( ir & d ) expense decreased $ 471,000 ( 29 % ) in fiscal year 2003 compared to fiscal year 2002 primarily due to decreased projects related to the est-2000 product . deferred tax assets increased $ 4.6 million in fiscal year 2003 compared to fiscal year 2002 due primarily to an assessment of the ultimate realization of these assets based on historical and projected financial performance . as a result of the assessment , the tax valuation allowance was reversed in fiscal 2003 resulting in an income tax benefit in the company 's consolidated statements of operations .

he loaned money to orient paper hb for working capital purposes over a period of time story_separator_special_tag the following discussion of the financial condition and results of operation of the company should be read in conjunction with the selected financial data , the financial statements , and the notes to those statements that are included elsewhere in this annual report . story_separator_special_tag text-indent : 27.5pt '' > we launched the new 360,000 tonnes/year corrugating medium pm6 in december 2011. we are in the process of ramping up the new production line pm6 . for the year of 2012 , we sold 175,758 tonnes of corrugating medium produced by the new production line . quantities sold from the commencement to december 2012 are as follows . 35 offset printing paper revenue from offset printing paper amounted to $ 49,100,091 ( or 33.88 % of total offset printing paper and corrugating medium paper revenue ) for the year ended december 31 , 2012 , which represents a $ 49,384,251 ( or 50.14 % ) decrease from the offset printing paper revenue of $ 98,484,342 for the comparable period in 2011. we sold 67,564 tonnes of offset printing paper in the year ended december 31 , 2012 compared to 122,320 tonnes of offset printing paper in the comparable period in year 2011 , a decrease of 54,756 tonnes or 44.76 % . we believe that the factors contributing to the decrease in both total quantity and dollar amount sold in the year ended december 31 , 2012 include ( 1 ) a softening demand for printing paper in our region , possibly due to a slowdown of the economy , ( 2 ) the decrease in asp for offset printing paper products from $ 805/tonne in the year ended december 31 , 2011 to $ 727/tonne in the year ended december 31 , 2012 , representing a decrease of 9.69 % , ( 3 ) the suspension of offset printing paper trading activities due to shrinking profit margin since january 2012 , as explained above , and ( 4 ) production interruption in the second and third quarters of 2012 because of the water treatment plant malfunction and the installation of new boilers . gross revenue from trading of offset printing paper finished goods is $ 121,618 ( or 157 tonnes ) for the year ended december 31 , 2012 , representing 0.25 % of total sales revenue of offset print paper for the current year , while gross revenue from trading of offset printing paper finished goods was $ 25,625,731 ( or 31,795 tonnes ) for the previous year in 2011 and accounted for 26.02 % of the gross revenue of offset printing paper for 2011. revenue of digital photo paper revenue generated from selling digital photo paper was $ 6,188,014 ( or 4.09 % of total revenue ) for the year ended december 31 , 2012 , a decrease of $ 2,061,186 or 24.99 % from $ 8,249,200 ( or 5.47 % of total revenue ) for the year ended december 31 , 2011. when comparing to the year ended december 31 , 2011 , the asp of our digital photo paper decreased from $ 4,026/tonne to $ 3,858/tonne . we sold 1,604 tonnes of digital photo paper in the year ended december 31 , 2012 , as compared to 2,049 tonnes in the same period a year ago . as there are increasingly more residential buildings and residents living in the surrounding areas of our digital photo paper plant , we have been under increasing pressure since october 2012 by local residents and from government urban planning officials to minimize our operations during night time , which resulted in a curtailment of our production schedule . digital photo paper produced in the fourth quarter of 2012 was 229.07 tonnes , versus 486.31 tonnes in the comparable quarter in 2011 , representing a 52.90 % quarterly decline . besides the reduced production in the fourth quarter of 2012 , the 21.72 % year-over-year decline in quantity sold and the 4.17 % year-over-year decline in asp , which appears to be a result of softening customer demand due to the slowdown in the economy . we believe the market demand and the asp may not fully recover until the first half of year 2013 , or until fundamental changes in the prc domestic economy take place . we currently produce glossy and semi-matte photo paper in various weights ( from 120g/m 2 to 260g/m 2 ) . because of the depressed domestic economy , we believe there will still be market pricing pressure on digital photo paper in the near future . digital photo paper products ' monthly asps , monthly sales quantity ( in tonnes ) and monthly sales revenue for the 24 months from january 2011 to december 2012 are summarized as follows : 36 cost of sales corrugating medium paper and offset printing paper total cost of sales for corrugating medium paper and offset printing paper for the year ended december 31 , 2012 was $ 119,312,122 , an increase of $ 7,005,486 or 6.24 % from $ 112,306,636 for the comparable period in 2011. the net increase in total corrugating medium and offset printing paper cost of sales in 2012 appears to be primarily due to the increase in the total quantity of paper sold in 2012 ( 322,064 tonnes ) versus in 2011 ( 230,494 tonnes ) . as explained above , total sales revenue ( excluding revenue from sales of digital photo paper ) increased from $ 142,498,116 in the year ended december 31 , 2011 to $ 144,928,792 in the comparable period in year 2012 , representing a 1.71 % year-over-year increase . cost of sales for total corrugating medium paper amounted to $ 78,139,499 for the year ended december 31 , 2012 , as compared to $ 31,466,151 for the previous year in 2011. the $ 46,673,348 increase in corrugating medium paper cost of sales was further offset by a reduction in offset printing paper cost of sales . story_separator_special_tag in comparison , the gross profit margins of corrugating medium paper and offset printing paper for the year of 2011 were 28.46 % and 17.94 % , respectively . 39 monthly gross profit margins on the sales of our corrugating medium paper and offset printing paper for the 24-month period ending december 31 , 2012 are as follows : digital photo paper gross profit from the sales of digital photo paper for the year ended december 31 , 2012 amounted to $ 1,439,577 or 23.26 % as a percentage of total digital photo paper sales , compared with $ 2,758,595 , or 33.44 % as a percentage to total digital photo paper sales in the last year . the decline of gross profit margin is a direct result of both lower production quantity ( and in terms of quantity sold , 21.72 % less than the same period in 2011 ) and a lower asp ( 4.17 % lower than the asp in the same period of previous year ) . the low asp of digital photo paper reflects the contraction of the domestic consumption and business activities ( including commercial advertising ) since the beginning of year 2012. we believe that the chinese economy may not fully recover to the pre-2012 level at least until the first half of 2013. selling , general and administrative expenses selling , general and administrative expenses for the year ended december 31 , 2012 were $ 3,360,520 , an increase of $ 842,990 or 33.48 % from $ 2,517,530 for the previous year of 2011. the increase was mainly attributable to ( 1 ) the fair value of the issuance of 109,584 shares of common stock to certain of our directors and officers in january 2012 as compensation for their services to the company , which was recorded as a one-time compensation expense of $ 378,065 during the first quarter of 2012 , ( 2 ) the increase of insurance expense ( mainly the directors & officers liability insurance ) in year 2012 for $ 118,069 , ( 3 ) a decrease in gain on foreign currency transaction in 2012 for $ 151,907 , ( 4 ) additional building depreciation ( for the three new dormitory buildings in the headquarters compound ) and land use rights amortization ( for the land acquired in april 2012 ) of $ 114,291 in year 2012 , ( 5 ) a reversal of prior-period accumulated over-provisions in december 2011 of employee prc statutory fringe benefit in the amount of $ 123,869 , ( 6 ) new lease expenses of $ 107,978 in land lease in wei county for the fourth quarter of 2012 , ( 7 ) an increase of $ 93,513 in the 2012 repairs and maintenance over the amount for the previous year , and ( 8 ) a 2012 year-over-year increase of $ 68,028 in salaries and wages for non-office employees . for the year ended december 31 , 2012 the expenses incurred or accrued for legal and accounting/auditing fees amounted to $ 642,205 , as compared to $ 1,054,403 during previous year in 2011. income from operations operating income for the year ended december 31 , 2012 was $ 20,978,666 , a decrease of $ 9,132,679 or 30.33 % from $ 30,111,345 for the previous year in 2011. in addition to the changes in gross profit and selling , general and administrative expenses , which collectively account for $ 6,736,818 in the 2012 year-to-year decrease in income from operation , the difference also reflects the following gain and losses for the year ended december 31 , 2012 : ( 1 ) a $ 2,762,349 loss on impairment of assets associated with the company 's plan to renovate its 150,000 tonnes/year corrugating medium pm1 and to rebuild it with a new capacity of 250,000 tonnes/year and the resulting provision for loss on the retirement and demolition of certain pm1 equipments in year 2013 , and ( 2 ) a $ 45,288 gain from net proceeds of the disposal of other production equipments . for the year ended december 31 , 2011 , the company recognized a loss in the amount of $ 321,200 for the disposal of various production equipments and the demolition of an old employee cafeteria building . 40 net income net income was $ 14,672,663 for the year ended december 31 , 2012 , a decrease of $ 6,976,001 or 32.22 % from $ 21,648,664 for the previous year in 2011. in addition to the changes described above , the decrease is also attributable to a year-over-year increase in interest expense in the amount of $ 171,942 in the year ended december 31 , 2012. such increase in interest expense was due to an increase of short-term borrowing from $ 2,833,619 as of december 31 , 2011 to $ 3,962,844 as of december 31 , 2012. accounts receivable net accounts receivable decreased by $ 984,361 ( or 25.76 % ) to $ 2,836,335 as of december 31 , 2012 , compared to $ 3,820,696 as of december 31 , 2011 due to more cash-on-delivery customers accounts for the sales of corrugating medium paper . we usually collect accounts receivable within 30 days of delivery and completion of sales . inventories inventories consist of raw materials ( accounting for 91.27 % of total value of ending inventory as of december 31 , 2012 ) and finished goods . as of december 31 , 2012 , the recorded value of inventory increased by 50.92 % to $ 15,104,101 from $ 10,007,928 as of december 31 , 2011. the largest change came from the inventory item of recycled paperboard , which is the main raw material for the production of corrugating medium paper and was stated at $ 11,274,383 as of december 31 , 2012. the balance of recycled paperboard on december 31 , 2012 was higher than the balance at december 31 , 2011 by $ 5,628,934 due to the additional needs for raw material by the new pm6 corrugating medium paper production .

results of operations revenue for the year ended december 31 , 2012 was $ 151,116,806 , an increase of $ 369,490 or 0.25 % from $ 150,747,316 for the previous year . revenue of offset printing paper and corrugating medium paper revenue from sales of offset printing paper and corrugating medium paper for the year ended december 31 , 2012 was $ 144,928,792 , an increase of $ 2,430,676 or 1.71 % from $ 142,498,116 for previous year in 2011. the increase was the result of a number of favorable and unfavorable factors , including : ( 1 ) an increase in sales of corrugating medium paper as we ramp up the production of the new 360,000 tonnes/year production line pm6 during year 2012 , ( 2 ) decreases in average selling prices ( “ asps ” ) of 7.37 % and 9.69 % for corrugating medium and offset printing paper , respectively , during the year ended december 31 , 2012 compared to the previous year , ( 3 ) a decrease in revenue caused by the suspension of trading activities of offset printing paper since january 2012 , and ( 4 ) production interruptions in the second and third quarters of 2012 due to the malfunctioning water treatment plant and installation of new boilers . total offset printing and corrugating medium paper sold during the year ended december 31 , 2012 amounted to 322,064 tonnes , an increase of 91,570 tonnes or 39.73 % , compared to 230,494 tonnes sold in the comparable period in the previous year . despite the increased contribution in tonnage sold by the new pm6 in 2012 as further explained below , we sold only 157 tonnes of offset printing paper finished goods that we purchased from other manufacturers for a revenue of $ 121,618 during the year ended december 31 , 2012. in january 2012 , we suspended all of our trading due to downward pricing pressure that squeezes trading profit margin .

as of december 31 , 2020 , we served approximately 60,000 online stores across industries in approximately 155 countries . we provide a comprehensive platform for launching and scaling an ecommerce operation , including store design , catalog management , hosting , checkout , order management , reporting , and pre-integration into third-party services like payments , shipping , and accounting . all our stores run on a single code base and share a global , multi-tenant architecture purpose built for security , high performance , and innovation . our platform serves stores in a wide variety of sizes , product categories , and purchase types , including b2c and b2b . our customers include avery dennison , ben & jerry 's , burrow , sc johnson , skullcandy , and sony . we offer access to our platform on a subscription basis . we serve customers with subscription plans tailored to their size and feature needs . for our larger customers , our enterprise plan offers our full feature set at a monthly subscription price tailored to each business . for smbs , bigcommerce essentials offers three retail plans : standard , plus , and pro , priced at $ 29.95 , $ 79.95 , and $ 299.95 per month , respectively . our essentials plans include gmv thresholds with programmatic upgrades built in as merchants exceed each plan 's threshold . partners are essential to our open strategy . we believe we possess one of the deepest and broadest ecosystems of integrated technology solutions in the ecommerce industry . we strategically partner with , rather than compete against , the leading providers in adjacent categories , including payments , shipping , pos , cms , crm , and erp . we focus our research and development investments in our core product to create a best-of-breed ecommerce platform and co-market and co-sell with our strategic technology partners to enhance the breadth of the product offering to our customers . as a result , we earn high-margin revenue share from a subset of our strategic technology partners , which complements the high gross margin of our core ecommerce platform . our business has achieved significant growth since our inception . we had total revenues of $ 152.4 million , $ 112.1 million and $ 91.9 million in 2020 , 2019 and 2018 , respectively . we plan to continue to invest in our “ open saas ” strategy , building new partnerships and continuing to develop a platform that offers best-of-breed functionality with the cost-effectiveness of multi-tenant saas . as we work to develop and deliver this platform for our customers , we will also invest and grow our business by acquiring additional customers to our platform , growing our revenue with existing customers , and expanding our presence in new segments and geographies . as a result of the global travel restrictions and stay-at-home or similar orders in effect due to the covid-19 pandemic , our sales and marketing , research and development , and general and administrative expenses declined as a percentage of revenue in the year ended december 31 , 2020. on august 4 , 2020 , we completed our ipo , in which we issued and sold 7,877,500 shares of our series 1 common stock , including 1,027,500 shares of series 1 common stock that were sold pursuant to the exercise in full of the underwriters ' option to purchase additional shares of series 1 common stock at $ 24.00 per share . the ipo resulted in net proceeds of $ 171.1 million after deducting underwriting discounts and commissions and other offering costs . our 2017 and 2020 term loans converted to series 1 common stock in connection with the ipo , resulting in a $ 53.9 million reduction of our outstanding long-term debt . on november 12 , 2020 , we completed our secondary offering , in which we issued and sold 1,000,000 shares of our series 1 common stock at $ 68.00 per share . the secondary offering resulted in net proceeds of $ 65.1 million after deducting underwriting discounts , commissions and other offering costs . existing stockholders sold an additional 4,750,000 shares of series 1 common stock , including 750,000 shares of series 1 common stock that were sold pursuant to the exercise in full of the underwriters ' option to purchase additional shares of series 1 common stock at $ 68.00 per share . we did not receive any proceeds from the sale of shares by the selling stockholders in the secondary offering . additionally , upon completion of the secondary offering , we fully repaid approximately $ 22 million of our outstanding indebtedness under our credit facility . key factors affecting our performance we believe our future performance will depend on many factors , including the following : 33 continued growth of ecommerce domestically and globally ecommerce is rapidly transforming global b2c and b2b commerce . b2c ecommerce was nonexistent in the early-1990s and grew to approximately 10 % of all global retail spending in 2017 , according to emarketer . emarketer estimates that it will take just six years for this percentage to more than double to 21 % of global retail spending in 2023. the rapid growth in ecommerce is prompting companies to adopt ecommerce platforms like bigcommerce to create compelling branded ecommerce stores and power cross-channel connections to online marketplaces , social networks , and offline pos systems . we believe we have a substantial opportunity to serve a larger number of customers as ecommerce continues to grow around the world by extending into new and emerging segments within ecommerce . the following segments are significant areas of potential growth and strategic focus for us : headless commerce . this refers to businesses whose technology strategy is to decouple their front-end customer experience technology from their back-end commerce platform . in terms of online strategy , these companies are typically brand- , marketing- , or experience-led . we serve headless use cases better than most of our competitors due to years of investment in our platform apis and integration capabilities . story_separator_special_tag we intend to grow partner-sourced revenue by expanding the value and scope of existing partnerships , selling and marketing partner solutions to our customer base , and acquiring and cultivating new , high-value relationships . partner referrals of customers are increasingly becoming an efficient customer acquisition strategy for us as we expand our programs for cross-marketing and cross-selling with our partners . realizing operating leverage from our investments we have made significant investments in our saas platform and our global infrastructure , which we believe will yield future operating leverage and profit margin expansion . research and development has historically been one of our largest operating expense categories . by opening and expanding a lower-cost engineering center in kyiv , ukraine , we are increasing development capacity while also driving leverage in engineering cost as a percentage of total revenue . in addition , we believe we will achieve operating leverage in marketing by continuing to emphasize lower-cost inbound techniques and growth in customer referrals from our technology and agency partners , especially as our revenue mix continues to shift to our enterprise plans . we believe we will be able to run our business more efficiently as we continue to grow our revenue and gain further operating scale . duration and durability of covid-19 's impact on partner and services revenue ecommerce sales in our major markets have increased significantly due to the widespread closure of physical stores and behavioral changes associated with social distancing . this increase in sales has bolstered our partner and services revenue , driven predominantly by increases in our partner revenue share streams . we anticipate that our performance will be affected by the duration of covid-19 's impact on physical stores and consumer preferences and the resulting increase in ecommerce sales . additionally , we expect the widespread availability of treatment options to impact the trend toward ecommerce , which , in turn , may have a significant impact on our performance . we believe we are well-positioned to continue to benefit from the macro-economic shift to ecommerce that covid-19 has accelerated , but revenue may be more variable in the near-term as a result . key business metrics we review the following key business metrics to measure our performance , identify trends affecting our business , formulate business plans , and make strategic decisions . increases or decreases in our key business metrics may not correspond with increases or decreases in our revenue . annual revenue run-rate we calculate annual revenue run-rate ( “ arr ” ) at the end of each month as the sum of : ( 1 ) the product of the current month 's monthly recurring revenue ( “ mrr ” ) multiplied by twelve ( to prospectively annualize subscription revenue ) , and ( 2 ) the trailing twelve-month partner and services revenue , including non-recurring services revenue , such as one-time partner integration fees and store-launch services . mrr includes bigcommerce platform subscription fees and invoiced growth adjustments as customers ' businesses grow past contracted order thresholds after a threshold has been met . it also includes recurring professional services revenue , such as recurring technical account management services and product training services . accounts with greater than $ 2,000 acv we track the total number of accounts with annual contract value ( “ acv ” ) greater than $ 2,000 ( the “ acv threshold ” ) as of the end of a monthly billing period . to define this $ 2,000 acv cohort , we include only subscription plan revenue and exclude partner and services revenue and recurring services revenue . we consider all stores added and subtracted as of the end of the monthly billing period . this metric includes accounts that may have either one single store above the acv threshold or multiple stores that together exceed the acv threshold . accordingly , this cohort would include : ( 1 ) customers on enterprise plans , ( 2 ) customers on pro plans , and ( 3 ) customers with multiple plans that together exceed the acv threshold . average revenue per account we calculate average revenue per account ( “ arpa ” ) at the end of a period by including customer-billed revenue and an allocation of partner and services revenue . we bill customers for subscription solutions and professional services , and we include both in arpa for the reported period . 35 for example , arpa as of march 31 , 2019 includes all subscription solutions and professional services billed between january 1 , 2019 and march 31 , 2019. we allocate partner revenue primarily based on each customer 's share of gmv processed through that partner 's solution . for partner revenue that is not directly linked to customer usage of a partner 's solution , we allocate such revenue based on each customer 's share of total platform gmv . each account 's partner revenue allocation is calculated by taking the account 's trailing twelve-month partner revenue , then dividing by twelve to create a monthly average to apply to the applicable period in order to normalize arpa for season ality . enterprise account metrics to measure the effectiveness of our ability to execute against our growth strategy , particularly within the mid-market and enterprise business segments , we calculate arr attributable to enterprise accounts . we define enterprise accounts as accounts with at least one unique enterprise plan subscription ( “ enterprise accounts ” ) . these accounts may have more than one enterprise plan or a combination of enterprise plans and essentials plans . the chart below illustrates certain of our key business metrics as of the years ended december 31 , 2020 , 2019 and 2018. replace_table_token_6_th net revenue retention we use net revenue retention ( “ nrr ” ) to evaluate our ability to maintain and expand our revenue with our account base of customers exceeding the acv threshold over time .

results of operations the following table summarizes our historical consolidated statement of operations data . the period-to-period comparison of operating results is not necessarily indicative of results for future periods . replace_table_token_7_th ( 1 ) includes stock-based compensation expense as follows : replace_table_token_8_th ( 1 ) includes depreciation and amortization as follows : replace_table_token_9_th 38 revenue by geographic region the composition of our revenue by geographic region during the years ended december 31 , 2020 and 2019 , and years ended december 31 , 2019 and 2018 were as follows : replace_table_token_10_th comparison of years ended december 31 , 2020 and 2019 , and the years ended december 31 , 2019 and 2018 revenue the following table presents the components of our revenue for each of the periods indicated : replace_table_token_11_th revenue increased $ 40.3 million , or 35.9 % , to $ 152.4 million for the year ended december 31 , 2020 from $ 112.1 million for the year ended december 31 , 2019 , as a result of increases in both subscription solutions and partner and services revenue . subscription solutions revenue increased $ 21.0 million , or 25.4 % , to $ 103.7 million for the year ended december 31 , 2020 from $ 82.7 million for the year ended december 31 , 2019 , primarily due to combined growth in domestic and international retail , mid-market and enterprise subscription sales as well as improved retention of our underlying customer base . partner and services revenue increased $ 19.2 million , or 65.4 % , to $ 48.7 million for the year ended december 31 , 2020 from $ 29.4 million for the year ended december 31 , 2019 , primarily as a result of increases in revenue-sharing activity with our technology partners and improved monetization of partner revenue share .

our drug candidates , including antibodies , antibody-drug conjugates and other protein-based therapeutics , are derived from a broad set of complementary technologies which have the ability to engage the human immune system and or directly inhibit tumors to treat specific types of cancer or other diseases . our latest stage drug candidate , glembatumumab vedotin ( also referred to as cdx-011 ) is a targeted antibody-drug conjugate in a randomized , phase 2b study for the treatment of triple negative breast cancer and a phase 2 study for the treatment of metastatic melanoma . varlilumab ( also referred to as cdx-1127 ) is an immune modulating antibody that is designed to enhance a patient 's immune response against cancer . we established proof of principle in a phase 1 study with varlilumab , which supported the initiation of combination studies in various indications . cdx-3379 , a human monoclonal antibody designed to block the activity of erbb3 ( her3 ) , is in phase 2 development in combination with cetuximab for the treatment of head and neck squamous cell carcinoma . we also have a number of earlier stage drug candidates in clinical development , including cdx-014 , an antibody-drug conjugate targeting renal and ovarian cancers ; cdx-1140 , a human monoclonal antibody targeted to cd40 , a key activator of immune response ; cdx-301 , an immune cell mobilizing agent and dendritic cell growth factor ; and cdx-1401 , a targeted immunotherapeutic aimed at antigen presenting cells , or apcs , for cancer indications . our drug candidates address market opportunities for which we believe current therapies are inadequate or non-existent . we are building a fully integrated , commercial-stage biopharmaceutical company that develops important therapies for patients with unmet medical needs . our program assets provide us with the strategic options to either retain full economic rights to our innovative therapies or seek favorable economic terms through advantageous commercial partnerships . this approach allows us to maximize the overall value of our technology and product portfolio while best ensuring the expeditious development of each individual product . the following table reflects celldex-sponsored clinical studies that we are actively pursuing at this time . all programs are currently fully owned by celldex . replace_table_token_9_th ( 1 ) checkpoint inhibitor ; ( 2 ) bms collaboration we also routinely work with external parties , such as government agencies , to collaboratively advance our drug candidates . the following pipeline reflects clinical trials of our drug candidates being actively pursued by outside organizations . in addition to the studies listed below , we also have an 62 investigator initiated research ( iir ) program with six studies ongoing with our drug candidates and additional studies currently under consideration . product ( generic ) indication/field status sponsor glembatumumab vedotin uveal melanoma phase 2 nci ( crada ) glembatumumab vedotin squamous cell lung cancer phase 2 precog , llc cdx-1401/cdx-301 malignant melanoma phase 2 nci ( crada ) cdx-1401/tecentriq®/sgi-110 ovarian cancer phase 1 nci ( crada ) varlilumab/opdivo® b-cell malignancies phase 2 nci ( crada ) the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties . completion of clinical trials may take several years or more , and the length of time generally varies substantially according to the type , complexity , novelty and intended use of a drug candidate . it is not unusual for the clinical development of these types of drug candidates to each take five years or more , and for total development costs to exceed $ 100 million for each drug candidate . we estimate that clinical trials of the type we generally conduct are typically completed over the following timelines : clinical phase estimated completion period phase 1 1 - 2 years phase 2 1 - 5 years phase 3 1 - 5 years the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol , including , among others , the following : the number of patients that ultimately participate in the trial ; the duration of patient follow-up that seems appropriate in view of results ; the number of clinical sites included in the trials ; the length of time required to enroll suitable patient subjects ; and the efficacy and safety profile of the drug candidate . we test potential drug candidates in numerous preclinical studies for safety , toxicology and immunogenicity . we may then conduct multiple clinical trials for each drug candidate . as we obtain results from trials , we may elect to discontinue or delay clinical trials for certain drug candidates in order to focus our resources on more promising drug candidates . an element of our business strategy is to pursue the research and development of a broad portfolio of drug candidates . this is intended to allow us to diversify the risks associated with our research and development expenditures . to the extent we are unable to maintain a broad range of drug candidates , our dependence on the success of one or a few drug candidates increases . regulatory approval is required before we can market our drug candidates as therapeutic products . in order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval , the regulatory agency must conclude that our clinical data are safe and effective . historically , the results from preclinical testing and early clinical trials ( through phase 2 ) have often not been predictive of results obtained in later clinical trials . a number of new drugs and biologics have shown promising results in early clinical trials but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals . 63 furthermore , our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our drug candidates . story_separator_special_tag clinical trial study sites were opened to enrollment across the u.s. , canada , australia and the european union . the metric protocol was amended in late 2014 based on feedback from clinical investigators conducting the study that the eligibility criteria for study entry were limiting their ability to enroll patients they felt were clinically appropriate . in addition , we had spoken to country-specific members of the european medicines agency , or ema , and believed an opportunity existed to expand the study into the eu . the amendment expanded patient entry criteria to position it for the possibility of full marketing approval with global regulators , including the ema , and to support improved enrollment in the study . the primary endpoint of the study is pfs , defined as the time from randomization to the earlier of disease progression or death due to any cause . pfs is an established endpoint for full approval registration studies in this patient population in both the u.s. and the eu . the sample size ( n=300 ) and the secondary endpoint of os remained unchanged . since implementation of these changes , both the fda and central european regulatory authorities have reviewed the protocol design , and we believe the metric study could potentially support marketing approval in both the u.s. and europe dependent upon data results and review . enrollment ( n=327 ) in metric was completed in august 2017. the study calls for 203 progression events for evaluation of the primary endpoint , which will be assessed based on an independent , central reading of patient scans . the sum of the data , including the secondary endpoints of response rate , os , dor and safety , will be important in assessing clinical benefit . based on the current rate of progression events in the study , the company projects that topline primary endpoint data should be available in the second quarter of 2018. efforts to ensure delivery of manufactured drug that is ready for commercialization and a companion diagnostic are underway . while we have made and continue to make progress on these fronts , we have made the decision to stage some of the more costly work in these areas to begin after we have received results from the study . while this step will extend the timeline to complete our regulatory submissions , we believe this is the most prudent use of our funds as we seek to advance our pipeline overall . assuming positive data , we plan to work with the fda on a regulatory strategy that would support submitting a biologics license application ( bla ) in the second half of 2019. treatment of metastatic melanoma : glembatumumab vedotin has been evaluated for the treatment of unresectable stage iii or iv metastatic melanoma in two studies including a single-arm phase 1/2 open-label study and an ongoing multi-cohort phase 2 study . results from the phase 1/2 study were published in the journal of clinical oncology in september 2014. the most recent data for glembatumumab vedotin in metastatic melanoma are from the ongoing phase 2 study . this study currently includes four single arm cohorts : ( 1 ) a single-agent cohort ( enrollment completed ; data presented at asco 2017 ) , ( 2 ) a combination cohort with varlilumab ( enrollment completed ; data presented at sitc 2017 ) , ( 3 ) a combination cohort with an approved 66 checkpoint inhibitor ( i.e. , opdivo® or keytruda® ) following progression on the checkpoint inhibitor alone ( enrollment completed ; follow-up continues ) , and ( 4 ) a combination cohort with cdx-301 ( enrollment ongoing ) . the primary endpoint for each cohort is orr , except the fourth cohort which is assessing safety and tolerability in anticipation of additional combinations . secondary endpoints include analyses of pfs , dor , os , retrospective investigation of whether the anticancer activity of glembatumumab vedotin is dependent upon the degree of gpnmb expression in tumor tissue and safety of both the monotherapy and combination regimens . we presented mature data from the single-agent cohort in an oral presentation at the american society of clinical oncology ( asco ) annual meeting in june 2017. the cohort enrolled 62 evaluable patients with unresectable stage iv melanoma . all patients had been heavily pre-treated ( median prior therapies = 3 ; range 1-8 ) and had progressed during or after checkpoint inhibitor therapy , and almost all patients had received both ipilimumab ( n=58 ; 94 % ) and anti-pd-1/anti-pd-l1 ( n=58 ; 94 % ) therapy . twelve patients presented with braf mutation , and fifteen had prior treatment with braf or braf/mek targeted agents . median os for all patients was 9.0 months ( 95 % ci : 6.1 , 13.0 ) . the primary endpoint of the cohort ( threshold of 6 or more objective responses in 52 evaluable patients ) was exceeded . 7 of 62 ( 11 % ) patients experienced a confirmed response . one patient experienced a complete response ( cr ) , and six patients experienced partial responses ( pr ) . an additional three patients also experienced single timepoint prs . the median dor was 6.0 months . a 52 % disease control rate ( patients without progression for greater than three months ) was demonstrated , and median pfs for all patients was 4.4 months . consistent with previous studies in melanoma and breast cancer , early development of rash was associated with greater clinical benefit , including more prolonged pfs and os . the safety profile was consistent with prior studies of glembatumumab vedotin with rash , neutropenia and neuropathy experienced as the most significant adverse events . pre-treatment tumor tissue was available for 59 patients . all samples were gpnmb positive , and 78 % of patients had tumors with 100 % of their epithelial cells expressing gpnmb .

results of operations year ended december 31 , 2017 compared with year ended december 31 , 2016 replace_table_token_13_th net loss the $ 35.5 million decrease in net loss for the year ended december 31 , 2017 , as compared to the year ended december 31 , 2016 , was primarily the result of a decrease in research and development expenses and general and administrative expenses and increases in contract revenues . the non-cash income tax benefit impacting net loss was partially offset by the non-cash in-process research and development impairment charge . revenue the $ 1.0 million increase in product development and licensing agreements revenue for the year ended december 31 , 2017 , as compared to the year ended december 31 , 2016 , was primarily due to an increase in reimbursable clinical trial expenses related to our bms agreement . the $ 5.0 million increase in contracts and grants revenue for the year ended december 31 , 2017 , as compared to the year ended december 31 , 2016 , was primarily related to our international aids vaccine initiative and frontier biotechnologies , inc. agreements executed in 2017 . 77 research and development expense research and development expenses consist primarily of ( i ) personnel expenses , ( ii ) laboratory supply expenses relating to the development of our technology , ( iii ) facility expenses , ( iv ) license fees and ( v ) product development expenses associated with our drug candidates as follows : replace_table_token_14_th personnel expenses primarily include salary , benefits , stock-based compensation and payroll taxes . the $ 0.4 million increase in personnel expenses for the year ended december 31 , 2017 , as compared to the year ended december 31 , 2016 , was primarily due to an increase in salaries expense and headcount related to the kolltan acquisition partially offset by lower stock-based compensation expenses . we expect personnel expenses to remain relatively consistent over the next twelve months , although there may be fluctuations on a quarterly basis .

the trust has utilized extended amortization provisions story_separator_special_tag the following management discussion and analysis ( “ md & a ” ) is intended to help the reader understand the consolidated results of operations and financial condition of universal stainless & alloy products , inc. and its wholly-owned subsidiaries ( collectively , “ we , ” “ us , ” “ our , ” or the “ company ” ) . this md & a should be read in conjunction with our consolidated financial statements and accompanying notes included in this form 10-k. when reviewing the discussion , you should keep in mind the substantial risks and uncertainties that characterize our business . in particular , we encourage you to review the risk and uncertainties described under item 1a. , “ risk factors , ” of this form 10-k. these risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends . forward-looking statements are statements that attempt to project or anticipate future developments in our business ; we encourage you to review the discussion of forward-looking statements under “ cautionary statement for purposes of the “ safe harbor ” provisions of the private securities litigation reform act of 1995 , ” at the beginning of this report . these statements , like all statements in this report , speak only as of the date of this report ( unless another date is indicated ) , and we undertake no obligation to update or revise the statements in light of future developments . unless otherwise specified , any reference to a “ year ” is to the year ended december 31. business overview we manufacture and market semi-finished and finished specialty steel products , including stainless steel , nickel alloys , tool steel and certain other premium alloyed steels . our manufacturing process involves melting , remelting , heat treating , hot and cold rolling , forging , machining and cold drawing of semi-finished and finished specialty steels . our products are sold to rerollers , forgers , service centers , original equipment manufacturers and wire redrawers . our customers further process our products for use in a variety of industries , including the aerospace , power generation , oil and gas and general industrial markets . we also perform conversion services on materials supplied by customers . during the year ended december 31 , 2013 , we experienced lower demand for our products compared to the prior year as our shipments were negatively impacted by unfavorable market conditions , as customers in all of our end markets continued to destock their inventory levels . these business conditions , as well as lower raw material prices and shorter lead times , gave reason for our customers to delay orders , especially over the last quarter of 2013 , when seasonality also played a role . during 2013 , we shipped 73.0 million pounds compared to 95.6 million pounds over the same period last year , a decrease of approximately 24 % , and as such , our corresponding sales revenue was down $ 70.2 million , or 28 % . these market conditions also had an unfavorable impact on our gross margin as well as our operating margin compared to 2012. we responded to these conditions by flexing down our operating levels , in particular , our melting levels at both our bridgeville and north jackson operations , especially during the third quarter of 2013. in addition to lower operating levels negatively impacting our margins , lower raw material prices caused a misalignment with steel surcharges as we were selling higher cost inventory melted in early 2013 and prior throughout the year as a result of longer manufacturing cycles . we also made a conscious decision to maintain our newly trained workforce at our north jackson facility as we continued to focus our efforts on gaining additional customer acceptances for our new products being produced from this location in anticipation of improved 2014 business conditions . although 2013 was a challenging year for the metals industry , we made several positive strides throughout 2013 . 1. in april 2013 , we were awarded our first contract with rolls royce , which officially began on january 1 , 2014 ; however , we did make our initial shipment in december 2013. this is a five-year contract that required an extensive effort to meet demanding requirements for qualifying our entire manufacturing system , including vacuum induction melting ( “ vim ” ) and forge production at north jackson . 2. in august 2013 , we announced the early signing of a new five-year labor contract with our hourly workforce at our bridgeville facility as we maintain a productive relationship with our workforce . 3. in october 2013 , we announced a long-term agreement with haynes international , inc. ( “ haynes ” ) whereby we will provide vim capacity as well as forging services on a conversion basis to haynes . 4. throughout 2013 , we achieved customer approvals and developed new products for major customers in our aerospace , power generation and oil and gas markets as we introduced 15 new products in 2013 , defined by grade and shape . 5. during 2013 , we generated $ 28.6 million in cash flow from operating activities primarily by focusing our efforts to reduce inventory levels in response to market conditions . in addition , we lowered our capital expenditures and in turn , repaid $ 16.9 million in debt while improving our debt to capitalization to 31.4 % from 35.1 % at the end of 2012. we amended our credit facility in november 2013 which also provides us with sufficient working capital to meet our cash requirements moving into 2014 . 6. lastly , we attained a number of industry certifications in 2013 , and nine altogether since 2012 , as we moved toward the more technically advanced and higher margin products that we anticipated with our acquisition of our north jackson facility . story_separator_special_tag based upon the maturity date of our current debt facilit y , we expect that our annual deferred financing amortization from 2014 to 2016 to be approximately $ 639,000 and $ 107,000 in 2017 . other income : i n august 2011 , we entered into an escrow agreement with the sellers of the north jackson facility , pursuant to which $ 2.5 million of the purchase price of the north jackson facility was placed in escrow until certain claims under the purchase agreement were resolved . during the year ended december 31 , 2013 , we entered into a settlement agreement with the sellers of the north jackson facility , whereby we received $ 425,000 as a final settlement of certain claims under the escrow agreement . the settlement was recognized as a gain during the year ended december 31 , 2013 , which was included as a component of other income on the consolidated statement of operations . income tax ( benefit ) provision : our effective tax rate for the year s ended december 31 , 2013 and 2012 was 38.1 % and 30.2 % , respectively . during 2013 , we recorded a tax valuation allowance of approximately $ 1.0 million against certain new york state deferred tax assets , which negatively impacted our effective tax rate . these deferred tax assets have no expiration date and will be applied against future tax liabilities for income apportioned to new york state ; however , at this time we do not believe we will generate sufficient taxable income to utilize all tax credits generated . our 2013 effective tax rate benefited from approximately $ 1.0 million of research and development tax credits that we generated for 2012 and 2013. our 2012 effective tax rate benefited from prior year s ' research and development tax credits claimed on amended federal income tax returns and a change in state income tax apportionment . net ( loss ) income : our net ( loss ) income decreased from $ 14.6 million , or $ 2.02 per diluted share , for the year ended december 31 , 2012 to $ ( 4.1 ) million , or $ ( 0.58 ) per diluted share , for the year ended december 31 , 2013 for the reasons stated above . 13 2012 story_separator_special_tag inline ; font-style : italic ; font-size:10pt ; '' > capital resources including off-balance sheet arrangements . we do not maintain off-balance sheet arrangements , nor do we participate in non-exchange traded contracts requiring fair value accounting treatment , or material related-party transaction arrangements . i n august 2011 , we entered into a credit agreement ( the “ credit agreement ” ) with a syndication of banks which provides for a senior secured revolving credit facility ( the “ revolver ” ) and a senior secured term loan facility ( the “ term loan ” and together with the revolver , the “ facilities ” ) . pnc bank , national association serves as administrative agent with respect to the facilities . in march 2012 , we entered into the first ame ndment to credit agreement and in march 2013 , we entered into the second amendment to credit agreement ( together with the credit agreement , the first amendment to credit agreement , the “ amended credit agreement ” ) . the amended credit agreement provides for a $ 105.0 million revolver and a $ 20.0 million term loan . the first amendment to credit agreement extended the expiration date from august 2016 to march 2017 , provided additional availability under the facilities and reduced our fees and interest rates . the second amendment to credit agreement provided additional flexibility under the credit agreement 's financial covenants . on november 7 , 2013 we entered into the third amendment to credit agreement ( the “ third amendment ” ) , which provides additional flexibility under the amended credit agreement 's financial covenants as well as institute d a borrowing base under the revolver . the changes to our financial covenants were effective as of september 30 , 2013. under the third amendment , our loan availability under the revolver is calculated monthly based upon our accounts receivable and inventory balances , with advance rates of 80 % on qualified accounts ( as defined in the third amendment ) and 60 % on qualified inventory ( as defined in the third amendment ) . the facilities are collateralized by substantially all of the assets of the company and its subsidiaries , except that no real property other than the north jackson facility is collateral under the facilities . universal stainless & alloy products , inc. , dunkirk specialty steel , llc and north jackson specialty steel , llc are co-borrowers under the facilities . the co-borrowers ' obligations under the facilities have been guaranteed by usap holdings , inc. in conjunction with the entrance into the credit agreement and subsequent amendments , we recorded deferred financing cost s of $ 1.2 16 million , $ 348,000 and $ 1.4 million during the years ended december 31 , 2013 , 2012 and 2011 , respectively . these financing costs are included on the consolidated balance sheets as a component of other long-term assets and are being amortized over the life of the related financial instrument using the straight-line method , which approximates the effective interest method . at any time prior to august 18 , 2015 , we may make up to two requests to increase the maximum aggregate principal amount of borrowings under the revolver by at least $ 10.0 million , with the maximum aggregate principal amount of borrowings under the revolver not to exceed $ 130.0 million . we are required to pay a commitment fee of 0.25 % based on the daily unused portion of the revolver .

results as compared to 2011 replace_table_token_10_th replace_table_token_11_th net sales : net sales for 201 2 de creased slightly by $ 1 . 6 million as compared to 201 1 . the de crease was largely due to a 5 % de crease in tonnage shipped , offset by base price increases and a change in product mix . shipments of power generation products , oil & gas products and service center plate de creased 24 . 0 % , 13.0 % and 9.5 % , respectively , over 201 1 . these de cr eases were partially offset by 6.1 % and 17.3 % increases in aerospace products and conversion services shipments , respectively , in 201 2 when compared to 2011 . 14 gross margin : cost of products sold as a percentage of net sales increased slightly from 81 . 2 % in 2011 to 83.6 % in 2012. the increase in this percentage is largely attributable to increased infrastructure costs , such as overhead and depreciation , incurred in 2012. we placed a substantial amount of fixed assets in service over 2011 and 2012 , primarily at our north jackson facility , which significantly increased our depreciation expense . the higher depreciation expense , coupled with developing production at our north jackson facility , had a negative impact on our 2012 gross margin . selling and administrative expenses : s & a expense for 2012 of $ 17 .7 million was consistent with 2011 expense of $ 17.8 million . on a percentage of sales basis , s & a expenses , which includes severance expense increased from 7.0 % of sales in 2011 to 7 . 1 % of sales in 201 2 .

financial information about the dairy and opti medical operating segments and about a product line and out-licensing arrangements remaining from our pharmaceutical business is combined and presented in an “ other ” category because they do not meet the quantitative or qualitative thresholds for reportable segments . see note 15 to the consolidated financial statements for the year ended december 31 , 2012 included in this annual report on form 10-k for financial information about our segments , including geographic information , and about our product and service categories . items that are not allocated to our operating segments are as follows : a portion of corporate support function and personnel-related expenses ; certain manufacturing costs ; corporate research and development expenses that do not align with one of our existing business or service categories ; the difference between estimated and actual share-based compensation expense ; and certain foreign currency exchange gains and losses . in our segment disclosure , these amounts are shown under the caption “ unallocated amounts. ” the following is a discussion of the strategic and operating factors that we believe have the most significant effect on the performance of our business . companion animal group cag offers a set of discrete products and services as described below . however , our strategy is to provide these products and services as integrated diagnostic and information management solutions to veterinary practices that collectively create more value for the customer than the value derived from individual products and services , and that provide strong incentives for the customer to adopt full idexx solutions and to remain long-term users of our products and services . the breadth and complementary nature of our products and services permit us to offer integrated disease-management diagnostic solutions that leverage the advantages of both point-of-care and outside laboratory testing , facilitate the flow of medical and business information in the veterinary practice and between the veterinary practice and its clients , and provide us with scale in sales and distribution . our objective is to provide veterinarians with the tools and services to enhance the pet owner experience with veterinary medical care , while also growing veterinary practice revenues and improving staff efficiencies . instruments and consumables . within the idexx vetlab ® instrument line of business , we seek to provide veterinarians with an integrated set of instruments that , individually and together , provide superior diagnostic information and performance features , enabling veterinarians to practice better medicine and improve practice efficiency and , in doing so , achieve their practice economic objectives , including growth and profitability . we derive substantial revenues and margins from the sale of consumables that are used in these instruments and the multi-year consumable revenue stream is significantly more valuable than the placement of the instrument . additionally , we offer extended maintenance agreements in connection with the sale of our instruments . during the early stage of an instrument 's life cycle , we derive relatively greater revenues from instrument placements , while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placement revenues begin to decline . instrument sales have significantly lower gross margins than sales of consumables , and therefore the mix of instrument and consumable sales in a particular period will impact our gross margins in this line of business . in the early stage of an instrument 's life cycle , placements are made primarily through sales transactions . as the market for the product matures , an increasing percentage of placements are made in transactions , sometimes referred to as “ reagent rentals ” , in which instruments are placed at customer sites at little or no cost in exchange for a long-term customer commitment to purchase instrument consumables . 31 our catalyst dx ® analyzer is our latest g eneration chemistry analyzer , which was launched in 2008. we place our catalyst dx ® analyzer through sales , leases , rental and other programs . in addition , we continue to place vettest ® instruments through sales , lease , rental and other programs , with substantially all of our revenues from that product line currently derived from consumable sales . as of december 31 , 2012 , these two chemistry analyzers provided for a combined active installed base of approximately 33,000 units . a substantial portion of 2012 catalyst dx ® analyzer placements were to customers who had been using instruments from one of our competitors , sometimes referred to as competitive accounts . generally , placement of an instrument with a competitive account is more attractive as the entire consumable stream associated with that placement represents incremental revenue , whereas the consumable stream associated with a catalyst dx ® placement at a vettest ® customer substitutes a catalyst dx ® consumable stream for a vettest ® consumable stream . nonetheless , we have found that the consumables revenues increase when a customer upgrades from a vettest ® analyzer to a catalyst dx ® analyzer due to the superior capability and flexibility of the catalyst dx ® , which leads to additional testing by the customer . the procyte dx ® analyzer is our latest generation hematology analyzer , which we launched in the third quarter of 2010. in addition we sell the lasercyte ® analyzer and vetautoread analyzer . as of december 31 , 2012 these three hematology analyzers provided for a combined active installed base of approximately 24,000 units . a substantial portion of procyte dx ® analyzer placements continue to be made at veterinary clinics that elect to upgrade from their lasercyte ® analyzer to a procyte dx ® analyzer . story_separator_special_tag in 2012 , we began to place procyte dx ® analyzers containing a more advanced and research focused user interface with customers in the bioresearch market . profitability of our reference laboratory diagnostic and consulting services business is largely the result of our ability to achieve efficiencies from both volume and operational improvements . start-up laboratories that we open typically will operate at a loss until testing volumes achieve sufficient scale . acquired laboratories frequently operate less profitably than our existing laboratories and acquired laboratories may not achieve the profitability of our existing laboratory network for several years until we complete the implementation of operating improvements and efficiencies . therefore , in the short term , new and acquired reference laboratories generally will have a negative effect on the operating margin of the reference laboratory diagnostic and consulting services line of business . practice management and digital imaging systems and services . our strategy in the practice management systems line of business is to provide superior integrated information solutions , backed by superior customer support and education , to allow the veterinarian to practice better medicine and achieve the practice 's business objectives , including superior client experience , staff efficiency and practice profitability . we differentiate our practice management systems through enhanced functionality , ease of use and connectivity with in-house and reference laboratory test results . pet health network pro on-line client communication tools and services complement the entire idexx product offering by educating pet owners and building loyalty through engaging the pet owner before , during and after the visit thereby driving more patient visits . our strategy in digital radiography is to offer a convenient system that provides superior image quality and software capability that enables sharing of these images with clients virtually anywhere and enhanced diagnostic features and customer workflow , backed by the same customer support provided for our other products and services in cag . 33 water our strategy in the water testing business is to develop , manufacture , market and sell proprietary products with superior performance , supported by exceptional customer service . our customers primarily consist of water utilities , government laboratories and private certified laboratories that highly value strong relationships and customer support . sales of water testing products outside of the u.s. represented 51 % of total water product sales in 2012 , and we expect that future growth in this business will be significantly dependent on our ability to increase international sales . growth also will be dependent on our ability to enhance and broaden our product line . most water microbiological testing is driven by regulation , and , in many countries , a test may not be used for compliance testing unless it has been approved by the applicable regulatory body . as a result , we maintain an active regulatory program that involves applying for regulatory approvals in a number of countries , primarily in europe . livestock and poultry diagnostics we develop , manufacture , market and sell a broad range of tests for various cattle , swine and poultry diseases and conditions , and have active research and development and in-licensing programs in this area . our strategy is to offer proprietary tests with superior performance characteristics , with demand for tests primarily created by government programs to control or eradicate disease and disease outbreaks , and to a lesser degree disease and reproductive management programs initiated by livestock and poultry producers . disease outbreaks are episodic and unpredictable , and certain diseases that are prevalent at one time may be substantially contained or eradicated at a later time . in response to outbreaks , testing initiatives may lead to exceptional demand for certain products in certain periods . conversely , successful eradication programs may result in significantly decreased demand for certain products . in addition , increases in government funding may lead to increased demand for certain products and budgetary constraints may lead to decreased demand for certain products . the performance of this business , therefore , can fluctuate . in 2012 , lpd revenues declined approximately 4 % , resulting primarily from lower sales of bovine test products due to the changes in european union testing requirements and declines in certain government programs . in 2012 , approximately 88 % of our sales in this business were from markets outside of the u.s. , most notably europe . the performance of the business is particularly subject to the various risks that are associated with doing business internationally . see “ part i , item 1a . risk factors. ” other dairy . our strategy in the dairy testing business is to develop , manufacture and sell antibiotic residue and contaminant testing products that satisfy applicable regulatory requirements for testing of milk by processors and producers and provide reliable field performance . the manufacture of these testing products leverages , almost exclusively , the snap ® platform as well as the production equipment of our rapid assay business , incorporating customized reagents for antibiotic and contaminant detection . the majority of our sales in this business are international . to successfully increase sales of dairy testing products , we believe that we need to increase penetration in the processor and producer segments of the dairy market , and to develop product line enhancements and extensions . in 2012 , approximately 86 % of our sales in this business were from markets outside of the u.s. , most notably china and europe . the performance of the business is particularly subject to the various risks that are associated with doing business internationally . see “ part i , item 1a . risk factors. ” opti medical systems . our strategy in the opti medical systems business for the human market is to develop , manufacture , and sell electrolyte and blood gas analyzers and related consumable products for the medical point-of-care diagnostics market worldwide , with a focus on small to mid-sized hospitals .

results of operations and trends effects of certain factors on results of operations distributor purchasing and inventories . the instrument consumables and rapid assay products in our cag segment are sold in the u.s. and certain other geographies by third party distributors , who purchase products from us and sell them to veterinary practices , which are the end users . as a result , distributor purchasing dynamics have an impact on our reported sales of these products . distributor purchasing dynamics may be affected by many factors and in a given period may not be directly related to underlying end-user demand for our products . consequently , reported results may reflect fluctuations in inventory levels held at distributors and not necessarily reflect changes in underlying end-user demand . therefore , we believe it is important to track distributor sales to end users and to distinguish between the impact of end-user demand and the impact of distributor purchasing dynamics on reported revenue . where growth rates are affected by changes in end-user demand , we refer to this as the impact of practice-level sales on growth . where growth rates are affected by distributor purchasing dynamics , we refer to this as the impact of changes in distributors ' inventories on growth . if during the current year , distributors ' inventories grew by less than those inventories grew in the comparable period of the prior year , then changes in distributors ' inventories have an unfavorable impact on our reported sales growth in the current period . conversely , if during the current year , distributors ' inventories grew by more than those inventories grew in the comparable period of the prior year , then changes in distributors ' inventories have a favorable impact on our reported sales growth in the current period .

closed on approximately $ 200.0 million of secured financing with a weighted average interest rate of 5.02 % per annum maturing in 2021. closed on a $ 200.0 million term loan that matures on june 30 , 2017. amended the company 's line of credit to increase the borrowing capacity from $ 100 million to $ 380 million and extended the maturity date to september 18 , 2015. raised the annual dividend to $ 1.50 per share in 2011 , up from $ 1.20 per share in 2010. overview and outlook occupancy in the company 's properties as well as its ability to increase rental rates directly affects revenues . the company 's revenue streams are predominantly derived from customers renting its sites on a long-term basis . the company has approximately 95,100 annual sites , approximately 9,000 seasonal sites , which are leased to customers generally for three to six months , and approximately 9,700 transient sites , occupied by customers who lease sites on a short-term basis . the revenue from seasonal and transient sites is generally higher during the first and third quarters . the company expects to service over 100,000 customers at its transient sites and the company considers this revenue stream to be its most volatile as it is subject to weather conditions , gas prices , and other factors affecting the marginal rv customer 's vacation and travel preferences . finally , the company has approximately 24,300 sites designated as right-to-use sites , which are primarily utilized to service the approximately 105,000 customers who have right-to-use contracts . the company also has interests in properties containing approximately 3,100 sites for which revenue is classified as equity in income from unconsolidated joint ventures in the consolidated statements of operations . replace_table_token_13_th ( 1 ) includes approximately 3,000 sites rented on an annual basis . ( 2 ) joint venture income is included in equity in income of unconsolidated joint ventures . 33 a significant portion of the company 's rental agreements on community sites are directly or indirectly tied to published cpi statistics that are issued during june through september each year . the company currently expects its 2012 core community base rental income to increase approximately 2.3 % as compared to 2011. the company has already notified 75 % of its community site customers of rent increases reflecting this revenue growth . the company believes that the disruption in the site-built housing market is contributing to the low new home sales volumes it is experiencing as potential customers are not able to sell their existing site-built homes . customers have also become more price sensitive , which is reflected in an increase in used home sale volumes . in this environment , the company believes that customer demand for rentals , which do not require a down payment , is high . the company is adapting to this by renting its vacant new homes . this may represent an attractive source of occupancy if the company can convert renters to new homebuyers in the future . the company is also focusing on smaller , more energy efficient and more affordable homes in its manufactured home properties . the company 's manufactured home rental operations have been increasing since 2007. for the year ended december 31 , 2011 , occupied manufactured home rentals increased to 4,423 , or 387.7 % , from 907 for the year ended december 31 , 2007. net operating income increased to approximately $ 23.1 million in 2011 from approximately $ 5.9 million in 2007. the company believes that unlike the home sales business , at this time the company competes effectively with other types of rentals ( i.e . apartments ) . the company is currently evaluating whether it wants to continue to invest in additional rental units . in the company 's resort properties , the company continues to work on extending customer stays . the company has had success lengthening customer stays . the company has introduced low-cost membership products that focus on the installed base of almost eight million rv owners . such products may include right-to-use contracts that entitle the customer to use certain properties ( the “agreements” ) . the company is offering a zone park pass ( “zpp” ) , which can be purchased for one to four zones of the united states and requires annual payments of $ 499. this replaces high cost products that were sold at properties after tours and lengthy sales presentations . the company historically incurred significant costs to generate leads , conduct tours and make the sales presentations . a single zone pass requires no upfront payment while passes for additional zones require modest upfront payments . for the year ended december 31 , 2011 , the company sold approximately 7,500 zpp 's . existing customers may be offered an upgrade agreement from time-to-time . the upgrade agreement is currently distinguishable from a new agreement that a customer would enter into by ( 1 ) increased length of consecutive stay by 50 % ( i.e . up to 21 days ) ; ( 2 ) ability to make earlier advance reservations ; ( 3 ) discounts on rental units and ( 4 ) access to additional properties , which may include discounts at non-membership rv properties . each upgrade requires a nonrefundable upfront payment . the company may finance the nonrefundable upfront payment under any agreement . 34 property acquisitions , joint ventures and dispositions the following chart lists the properties or portfolios acquired , invested in , or sold since january 1 , 2010 : replace_table_token_14_th since january 1 , 2010 the gross investment in real estate increased from $ 2,538 million to $ 4,079 million as of december 31 , 2011 , due primarily to the aforementioned acquisitions and dispositions of properties during the period . markets the following table identifies the company 's largest markets by number of sites and provides information regarding the company 's properties ( excluding five properties owned through joint ventures ) . story_separator_special_tag the values of above-and below-market leases are amortized and recorded as either an increase ( in the case of below-market leases ) or a decrease ( in the case of above-market leases ) to rental income over the remaining term of the associated lease . the value associated with in-place leases is amortized over the expected term , which includes an estimated probability of lease renewal . the company accounts for its properties held for disposition in accordance with the codification sub-topic “impairment or disposal of long lived assets” ( “fasb asc 360-10-35” ) . the company periodically evaluates its long-lived assets to be held and used , including its investments in real estate , for impairment indicators . the company 's judgments regarding the existence of impairment indicators are based on factors such as operational performance , market conditions and legal factors . future events could occur which would cause the company to conclude that impairment indicators exist and an impairment loss is warranted . for long-lived assets to be held and used , if an impairment indicator exists , the company compares the expected future undiscounted cash flows against the carrying amount of that asset . if the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset , the company would record an impairment loss if the estimated fair value is less than the carrying amount of the asset . for properties to be disposed of , an impairment loss is recognized when the fair value of the property , less the estimated cost to sell , is less than the carrying amount of the property measured at the time the company has made a decision to dispose of the property , has a commitment to sell the property and or is actively marketing the property for sale . a property to be disposed of is reported at the lower of its carrying amount or its estimated fair value , less costs to sell . subsequent to the date that a property is held for disposition , depreciation expense is not recorded in accordance with fasb asc 360-10-35. accordingly , the results of operations for all assets sold or held for sale have been classified as discontinued operations in all periods presented . revenue recognition the company accounts for leases with its customers as operating leases . rental income is recognized over the term of the respective lease or the length of a customer 's stay , the majority of which are for a term of not 37 greater than one year . the company will reserve for receivables when it believes the ultimate collection is less than probable . the company 's provision for uncollectible rents receivable was approximately $ 4.4 million and $ 3.0 million as of december 31 , 2011 and december 31 , 2010 , respectively . the company accounts for the upfront payment related to the entry or upgrade of right-to-use contracts in accordance with the codification topic “revenue recognition” ( “fasb asc 605” ) . a right-to-use contract gives the customer the right to a set schedule of usage at a specified group of properties . customers may choose to upgrade their contracts to increase their usage and the number of properties they may access . a contract requires the customer to make annual payments during the term of the contract and may require an upfront nonrefundable payment . the stated term of a right-to-use contract is at least one year and the customer may renew his contract by continuing to make the annual payments . the company will recognize the upfront non-refundable payments over the estimated customer life which , based on historical attrition rates , the company has estimated to be from one to 31 years . for example , the company has currently estimated that 7.9 % of customers who enter a new right-to-use contract will terminate their contract after five years . therefore , the upfront nonrefundable payments from 7.9 % of the contracts entered in any particular period are amortized on a straight-line basis over a period of five years as five years is the estimated customer life for 7.9 % of the company 's customers who enter a contract . the historical attrition rates for upgrade contracts are lower than for new contracts , and therefore , the nonrefundable upfront payments for upgrade contracts are amortized at a different rate than for new contracts . the decision to recognize this revenue in accordance with fasb asc 605 was made after corresponding during september and october of 2008 with the office of the chief accountant at the sec . right-to-use annual payments by customers under the terms of the right-to-use contracts are deferred and recognized ratably over the one-year period in which the services are provided . income from home sales is recognized when the earnings process is complete . the earnings process is complete when the home has been delivered , the purchaser has accepted the home and title has transferred . stock-based compensation the company accounts for stock-based compensation in accordance with the codification topic “stock compensation” ( “fasb asc 718” ) . the company uses the black-scholes-merton formula to estimate the value of stock options granted to employees , consultants and directors . non-controlling interests in december 2007 , the fasb issued the codification topic “consolidation , ” an amendment of accounting research bulletin no . 51 ( “fasb asc 810” ) . fasb asc 810 seeks to improve uniformity and transparency in reporting of the net income attributable to non-controlling interests in the consolidated financial statements of the reporting entity . the statement requires , among other provisions , the disclosure , clear labeling and presentation of non-controlling interests in the consolidated balance sheets and consolidated statements of operations . per fasb asc 810 , a non-controlling interest is the portion of equity ( net assets ) in a subsidiary not attributable , directly or indirectly , to a parent .

results of operations comparison of year ended december 31 , 2011 to year ended december 31 , 2010 the following table summarizes certain financial and statistical data for the property operations for all properties owned and operated for the same period in both years ( “core portfolio” ) and the total portfolio for the years ended december 31 , 2011 and 2010 ( amounts in thousands ) . the core portfolio may change from time-to-time depending on acquisitions , dispositions and significant transactions or unique situations . the core portfolio in this comparison of the year ended december 31 , 2011 to december 31 , 2010 includes all properties acquired on or prior to december 31 , 2009 and which were owned and operated by the company during the years ended december 31 , 2011 and december 31 , 2010. growth percentages exclude the impact of gaap deferrals of up-front payments from right-to-use contracts entered and related commissions . replace_table_token_16_th property operating revenues the 1.3 % increase in the core portfolio property operating revenues primarily reflects ( i ) a 2.2 % increase in rates in community base rental income and a 0.6 % increase in occupancy ( ii ) a 0.6 % increase in revenues in core resort base income , as described in the table below and ( iii ) a decrease of 8.4 % in right-to-use contracts . the reduction in entry of right-to-use contracts is due to the company 's introduction of low-cost membership products in 2010 and the phase-out of memberships with higher initial upfront payments . resort base rental income is comprised of the following ( amounts in thousands ) : replace_table_token_17_th 41 property operating expenses the 0.3 % decrease in property operating expenses in the core portfolio reflects ( i ) a 0.4 % increase in property operating and maintenance expenses and ( ii ) and a 11.0 % decrease in sales and marketing expenses .

- 58 - connectone bancorp , inc. and subsidiaries notes to consolidated financial statements note 2. authoritative accounting guidance – ( continued ) asu 2018-14 , “ compensation—retirement benefits—defined benefit plans—general ( subtopic 715-20 ) : disclosure framework—changes to the disclosure requirements for defined benefit plans . ” these amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans . asu 2018-14 is effective for fiscal years ending after december 15 , 2020. we believe the adoption of this standard will not have a significant impact on our consolidated financial statements . asu 2018-13 , “ fair value measurement ( topic 820 ) : disclosure framework—changes to the disclosure requirements for fair value measurement . ” the amendments in this update modify disclosure requirements on fair value measurements by removing , modifying and adding certain disclosure requirements . the amendments primarily pertain to level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively . asu 2018-13 is effective for fiscal years , and interim periods within those fiscal years , beginning after december 15 , 2019. we believe the adoption of this standard will not have a significant impact on our consolidated financial statements . asu no . 2017-04 , “ intangibles – goodwill and other ( topic 350 ) . ” asu 2017-04 aims to simplify the subsequent measurement of goodwill story_separator_special_tag the purpose of this analysis is to provide the reader with information relevant to understanding and assessing the company 's results of operations for each of the past three years and financial condition for each of the past two years . in order to fully appreciate this analysis , the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under item 8 of this report , and statistical data presented in this document . cautionary statement concerning forward-looking statements see item 1 of this annual report on form 10-k for information regarding forward-looking statements . critical accounting policies and estimates management 's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with u.s. generally accepted accounting principles . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . note 1 to our audited consolidated financial statements contains a summary of our significant accounting policies . management believes our policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters . changes in these judgments , assumptions or estimates could materially impact results of operations . this critical policy and its application are periodically reviewed with the audit committee and our board of directors . allowance for loan losses and related provision the allowance for loan losses represents management 's estimate of probable incurred loan losses inherent in the loan portfolio . determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans , estimated probable incurred losses on pools of homogeneous loans based on historical loss experience , and consideration of current economic trends and conditions , all of which may be susceptible to significant change . the loan portfolio also represents the largest asset type on the company 's consolidated statements of condition . the evaluation of the adequacy of the allowance for loan losses includes , among other factors , an analysis of historical loss rates by loan category applied to current loan totals . however , actual loan losses may be higher or lower than historical trends , which vary . actual losses on specified problem loans , which also are provided for in the evaluation , may vary from estimated loss percentages , which are established based upon a limited number of potential loss classifications . the allowance for loan losses is established through a provision for loan losses charged to expense . management believes that the current allowance for loan losses will be adequate to absorb probable incurred loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the originated loan portfolio . the evaluation takes into consideration such factors as changes in the nature and size of the portfolio , overall portfolio quality , and specific problem loans and current economic conditions which may affect our borrowers ' ability to pay . the evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts . loss estimates for specified problem loans are also detailed . various regulatory agencies , as an integral part of their examination process , periodically review our allowance for loan losses . such agencies may require us to make additional provisions for loan losses based upon information available to them at the time of their examination . all of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change . to the extent actual outcomes differ from management estimates , additional provisions for loan losses may be required that could materially adversely impact earnings in future periods . additional information can be found in note 1 of the notes to consolidated financial statements . income taxes the objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity 's financial statements or tax returns . judgment is required in assessing the future tax consequences of events that have been recognized in the company 's consolidated financial statements or tax returns . story_separator_special_tag million , or 30.0 % , to $ 5.7 million from $ 8.2 million in 2017. the decrease was primarily the result of a $ 1.6 million decrease in net gains on sale of investment securities and a $ 0.6 million decrease in net gains on sale of loans held-for-sale . noninterest income for the full-year 2017 decreased by $ 1.7 million , or 17.3 % , to $ 8.2 million from $ 9.9 million in 2016. the decrease was primarily the result of a $ 2.6 million decrease in net gains on sale of investment securities , partly offset by an increase in boli income of $ 0.6 million and higher gains of the sale of loans held-for-sale of $ 0.5 million , primarily related to the sale of approximately $ 50 million of non-relationship multifamily loans which resulted in a gain on sale of approximately $ 550 thousand . - 32 - noninterest expense noninterest expenses for the full-year 2018 decreased by $ 8.0 million , or 10.2 % , to $ 70.7 million from $ 78.8 million in 2017. included in noninterest expense in 2017 was a $ 15.6 million valuation allowance for loans held-for-sale related to the company 's taxi medallion loans . excluding the valuation allowance , noninterest expenses increased $ 7.6 million , or 12.0 % , from 2017. the balance of the increase was attributable to an increased level of business and staff resulting from organic growth . salaries and employee benefits increased by $ 4.7 million , professional and consulting increased by $ 0.7 million and other expenses increased by $ 1.5 million . additionally , $ 1.3 million in merger expenses were incurred in 2018 as a result of the greater hudson bank merger . noninterest expenses for the full-year 2017 increased by $ 20.3 million , or 34.6 % to $ 78.8 million from $ 58.5 million in 2016. the increase was primarily attributable to an increase of $ 15.6 million in the valuation allowance for loans held-for-sale related to the company 's taxi medallion loans . the balance of the increase was attributable to an increased level of business and staff resulting from organic growth . salaries and employee benefits increased by $ 4.0 million , fdic insurance increased by $ 0.5 million and data processing increased by $ 0.4 million . income taxes income tax expense was $ 10.8 million for the full-year 2018 compared to $ 25.3 million for the full-year 2017 and $ 11.8 million for the full-year 2016. tax expense for 2017 included a $ 5.6 million charge to adjust the value of deferred tax assets to reflect the lower corporate tax rate , resulting from the tax cut and jobs act of 2017 ( “the act” ) . the lower level of income tax expense in 2018 when compared to 2017 was primarily attributable to the reduction of the federal statutory rate resulting from the act . the higher level of income tax expense in 2017 when compared to 2016 was mainly attributable to the aforementioned $ 5.6 million charge , in addition to increased pretax income . the effective tax rates were 15.2 % in 2018 , 36.9 % in 2017 and 27.5 % for 2016. excluding the effect of the $ 5.6 million charge , the effective tax rate in 2017 was 28.8 % . for a more detailed description of income taxes see note 12 of the notes to consolidated financial statements . financial condition overview at december 31 , 2018 , the company 's total assets were $ 5.5 billion , an increase of $ 354 million from december 31 , 2017. total loans ( including loans held-for-sale ) were $ 4.5 billion , an increase of $ 345 million from december 31 , 2017. deposits were $ 4.1 billion , an increase of $ 297 million from december 31 , 2017. at december 31 , 2017 , the company 's total assets were $ 5.1 billion , an increase of $ 682 million from december 31 , 2016. total loans ( including loans held-for-sale ) were $ 4.2 billion , an increase of $ 642 million from december 31 , 2016. deposits were $ 3.8 billion , an increase of $ 451 million from december 31 , 2016. loan portfolio the bank 's lending activities are generally oriented to small-to-medium sized businesses , high net worth individuals , professional practices and consumer and retail clients living and working in the bank 's market area of bergen , union , morris , essex , hudson , mercer and monmouth counties , new jersey , as well as nyc 's five boroughs , and long island through its melville , new york office . the bank has not made loans to borrowers outside of the united states . the bank believes that its strategy of high-quality client service , competitive rate structures and selective marketing have enabled it to gain market share . commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the bank , marketable securities held by or under the control of the bank , business assets including accounts receivable , inventory and equipment and liens on commercial and residential real estate . commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties . commercial real estate loans include loans secured by first liens on completed commercial properties , including multi-family properties , to purchase or refinance such properties . residential mortgages include loans secured by first liens on residential real estate , and are generally made to existing clients of the bank to purchase or refinance primary and secondary residences . home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences . consumer loans are made to individuals who qualify for auto loans , cash reserve , credit cards and installment loans .

operating results overview net income for the year ended december 31 , 2018 was $ 60.4 million , an increase of $ 17.1 million , or 39.6 % , compared to net income of $ 43.2 million for 2017. diluted earnings per share were $ 1.86 for 2018 , a 38.8 % increase from $ 1.34 for 2017. the change in net income from 2017 to 2018 was attributable to the following : · increased net interest income of $ 12.1 million primarily due to organic growth . · increased provision for loan losses of $ 15.1 million primarily due to $ 17.0 million increase in specific reserves ( then concurrently charged-off ) within the taxi medallion loan portfolio , offset by a decrease in provision on the remaining loan portfolio due to slower loan growth . · decrease in noninterest income of $ 2.5 million primarily resulting from lower net gains on the sale of investment securities ( $ 1.6 million ) and lower net gains on the sale of loans held-for-sale in 2018 ( $ 0.6 million ) . · decrease in noninterest expense of approximately $ 8.0 million primarily due to a $ 15.6 million increase in valuation allowance for loans held-for-sale related to the company 's taxi medallion loans in 2017 , offset by increase in salaries and employee benefits ( $ 4.7 million ) , merger expenses ( $ 1.3 million ) and other expenses ( $ 1.5 million ) .

( 223 ) other ( 21 ) 35 7 other operating activities defined benefit plans - funding ( 152 ) ( 302 ) ( 136 ) other assets ( 30 ) ( 71 ) 15 other liabilities ( 9 ) 76 ( 26 ) net cash provided by operating activities 776 1,840 1,413 cash flows from investing activities expenditures for property , plant and equipment ( 661 ) ( 1,009 ) ( 907 ) proceeds from the sale of certain non-core generation facilities 381 proceeds from the sale of the long island generation business 124 proceeds from the sale of the maine hydroelectric generation business 38 81 expenditures for intangible assets ( 57 ) ( 82 ) ( story_separator_special_tag · `` overview '' provides a description of ku and its business strategy . `` financial and operational developments '' includes a review of net income and discusses certain events that are important to understanding ku 's results of operations and financial condition . · `` results of operations '' provides a summary of ku 's earnings and a description of key factors expected to impact future earnings . this section ends with `` statement of income analysis , '' which includes explanations of significant changes in principal items on ku 's statements of income , comparing 2011 , 2010 and 2009 . · `` financial condition - liquidity and capital resources '' provides an analysis of ku 's liquidity position and credit profile . this section also includes a discussion of rating agency decisions and capital expenditure projections . · `` financial condition - risk management '' provides an explanation of ku 's risk management programs relating to market and credit risk . · `` application of critical accounting policies '' provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of ku and that require its management to make significant estimates , assumptions and other judgments of matters inherently uncertain . overview introduction ku , headquartered in lexington , kentucky , is a regulated utility engaged in the generation , transmission , distribution and sale of electric energy , in kentucky , virginia and tennessee . ku and its affiliate , lg & e , are wholly owned subsidiaries of lke . lke , a limited liability company , became a wholly owned subsidiary of ppl when ppl acquired all of lke 's interests from e.on us investments corp. on november 1 , 2010. following the acquisition , both ku and lg & e continue operating as subsidiaries of lke , which is now an intermediary holding company in ppl 's group of companies . refer to `` item 1. business - background '' for a description of ku 's business . business strategy ku 's overall strategy is to provide reliable , safe and competitively priced energy to its customers . a key objective for ku is to maintain a strong credit profile through managing financing costs and access to credit markets . ku continually focuses on maintaining an appropriate capital structure and liquidity position . successor and predecessor financial presentation ku 's financial statements and related financial and operating data include the periods before and after ppl 's acquisition of lke on november 1 , 2010 , and have been segregated to present pre-acquisition activity as the predecessor and post-acquisition activity as the successor . predecessor activity covers the time period prior to november 1 , 2010. successor activity covers the time period after october 31 , 2010. certain accounting and presentation methods were changed to acceptable alternatives to conform to ppl 's accounting policies , which are discussed in note 1 to the financial statements . the cost bases of certain assets and liabilities were changed as of november 1 , 2010 , as a result of the application of push-down basis of accounting , which was used to record the fair value adjustments of assets and liabilities at the acquisition date . consequently , the financial position , results of operations and cash flows for the successor periods are not comparable to the predecessor periods ; however , the core operations of ku have not changed as a result of the acquisition . 174 financial and operational developments net income replace_table_token_133_th the operating results for 2011 and 2010 include the effect of ku 's base rate increases , which became effective august 1 , 2010 , partially offset by net cost increases , which have not yet been reflected in the rates charged by ku . retail sales volumes increased during 2010 compared with 2009 as a result of increased consumption primarily due to increased heating degree days during the first and third quarters of 2010 and increased cooling degree days during the second and third quarters of 2010. see `` results of operations '' below for further discussion and analysis of the results of operations . tc2 ku and lg & e constructed a 732 mw summer capacity coal-fired unit , tc2 , which is jointly owned by ku ( 60.75 % ) and lg & e ( 14.25 % ) , together with the illinois municipal electric agency and the indiana municipal power agency ( combined 25 % ) . with limited exceptions , ku and lg & e took care , custody and control of tc2 in january 2011. ku and lg & e and the construction contractor further amended the construction agreement to provide that the contractor will complete certain actions to identify and complete any necessary modifications to allow operation of tc2 on all fuels in accordance with initial specifications prior to certain dates , and amending the provisions relating to liquidated damages . a number of remaining issues regarding these matters are still under discussion with the contractor . see notes 8 and 15 to the financial statements for additional information . story_separator_special_tag see note 6 to the financial statements for additional information . storm recovery in december 2009 , a major snowstorm hit ku 's virginia service area causing approximately 30,000 customer outages . during the normal 2009 virginia annual information filing ( aif ) , ku requested that the vscc establish a regulatory asset and defer for future recovery $ 6 million in incremental operation and maintenance expenses related to the storm restoration . in march 2011 , the vscc staff issued its report on ku 's 2009 aif stating that it considered this storm damage to be extraordinary , non-recurring and material to ku . the staff report also recommended establishing a regulatory asset for these costs , with recovery over a five-year period upon approval in the next base rate case . in march 2011 , a regulatory asset of $ 6 million was established for actual costs incurred . in june 2011 , the vscc issued an order approving the recommendations contained in the staff report . ku received approval in its 2011 base rate case to recover this regulatory asset over a five-year period ending october 2016. in september 2009 , the kpsc approved the deferral of $ 57 million of costs associated with a severe ice storm that occurred in january 2009 and a wind storm that occurred in february 2009. additionally , in december 2008 , the kpsc approved the deferral of $ 2 million of costs associated with high winds from the remnants of hurricane ike in september 2008. ku received approval in its 2010 base rate case to recover these regulatory assets over a ten-year period beginning august 2010. virginia rate case in april 2011 , ku filed an application with the vscc requesting an annual increase in electric base rates for its virginia jurisdictional customers of $ 9 million , or 14 % . in september 2011 , a settlement stipulation was reached between ku and the vscc staff and filed with the vscc for consideration . in october 2011 , the vscc approved the stipulation with two modifications that were accepted by ku . the vscc issued an order closing the proceeding in october 2011. the approved 176 revenue increase was $ 7 million annually , based on a return on equity of 10.3 % , with new base rates effective november 1 , 2011. story_separator_special_tag to $ 4 million , higher labor costs of $ 1 million , and higher property and public liability insurance costs of $ 2 million . bad debt costs increased in 2010 compared with 2009 , due to higher billed revenues and a higher net charge-off percentage , partially offset by higher late payment charges . depreciation changes in depreciation were due to the following : replace_table_token_140_th 179 taxes , other than income taxes , other than income increased by $ 9 million in 2011 compared with 2010 primarily due to a $ 5 million state coal tax credit that was applied to 2010 property taxes . the remaining increase was due to higher assessments , primarily from significant property additions . interest expense the changes in interest expense were due to : replace_table_token_141_th ( a ) interest rates on the first mortgage bonds issued in november 2010 were lower than the rates on the loans from the fidelia corporations in place through october 2010 . ( b ) ku 's long-term debt principal balance was $ 169 million higher as of december 31 , 2010 compared with december 31 , 2009 and did not change from december 31 , 2010 to december 31 , 2011. the higher interest expense in 2011 was the result of higher long-term debt balances for the last two months of 2010. replace_table_token_142_th financial condition liquidity and capital resources ku expects to continue to have adequate liquidity available through operating cash flows , cash and cash equivalents and its credit facilities . ku currently has no plans to access capital markets in 2012. ku 's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including , but not limited to : · changes in market prices for electricity ; · changes in commodity prices that may increase the cost of producing power or decrease the amount ku receives from selling power ; · operational and credit risks associated with selling and marketing products in the wholesale power markets ; · unusual or extreme weather that may damage ku 's transmission and distribution facilities or affect energy sales to customers ; · reliance on transmission and distribution facilities that ku does not own or control to deliver its electricity and natural gas ; · unavailability of generating units ( due to unscheduled or longer-than-anticipated generation outages , weather and natural disasters ) and the resulting loss of revenues and additional costs of replacement electricity ; · the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses ; · costs of compliance with existing and new environmental laws ; · any adverse outcome of legal proceedings and investigations with respect to ku 's current and past business activities ; · deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly ; and · a downgrade in ku 's credit ratings that could adversely affect its ability to access capital and increase the cost of credit facilities and any new debt . see `` item 1a . risk factors '' for further discussion of risks and uncertainties affecting ku 's cash flows . at december 31 , ku had the following : 180 replace_table_token_143_th the changes in ku 's cash and cash equivalents position resulted from : replace_table_token_144_th auction rate securities at december 31 , 2011 , ku 's tax-exempt revenue bonds that are in the form of auction rate securities and total $ 96 million continue to experience failed auctions . therefore , the interest rate continues to be set by a formula pursuant to the relevant indentures .

results of operations as previously noted , ku 's results for the time periods after october 31 , 2010 are on a basis of accounting different from its results for time periods prior to november 1 , 2010. when discussing ku 's results of operations material differences resulting from the different basis of accounting will be isolated for purposes of comparability . see `` overview - successor and predecessor financial presentation '' for further information . the utility business is affected by seasonal weather . as a result , operating revenues ( and associated operating expenses ) are not generated evenly throughout the year . revenue and earnings are generally higher during the first and third quarters and lower during the second quarter due to weather . the following table summarizes the significant components of net income for 2011 , 2010 , and 2009 and the changes therein : replace_table_token_134_th the changes in the components of net income between these periods were due to the following factors . replace_table_token_135_th · see `` statement of income analysis - margin - changes in non-gaap financial measures '' for an explanation of margin . · other operation and maintenance increased in 2011 compared with 2010 , primarily due to $ 19 million of higher steam costs , the result of increase scope of scheduled outages including those at ghent and green river plants , along with higher variable costs from increased generation . other operation and maintenance increased in 2010 compared with 2009 , primarily due to higher administrative and general costs of $ 13 million , higher steam costs of $ 6 million and higher transmission operation costs of $ 5 million . administrative and general costs increased due to higher bad debt costs , higher labor costs and higher property and public liability insurance costs . · depreciation expense was $ 25 million higher in 2011 compared with 2010 , due to tc2 commencing dispatch in january 2011 .

we have established a large installed base of food processing equipment as well as airport equipment and have built a strong global presence with manufacturing , sourcing , sales and service organizations located on six continents to support equipment that has been delivered to more than 100 countries . our strategy for growth is to grow our technology advantage , grow in emerging markets , grow beyond the sale and grow margins . during 2011 , we made significant progress in some of these key areas and faced challenges in others . revenue grew by 9 % , driven by strong performance in our jbt aerotech segment . we advanced our technology advantage in key areas and continued to build our presence and capabilities in asia . our aftermarket revenue grew by 9 % . however , economic weakness in parts of europe , a major flood in bangkok , political unrest in north africa and the middle east , and softness in the north american poultry market all negatively impacted our jbt foodtech segment . additionally , the currency exchange effects resulting from a strong swedish krona and brazilian real negatively impacted the margins in our freezer and fruit processing businesses . in response to these challenges , we have taken decisive actions that will support our long-term growth strategy . we have shifted production of certain freezer product lines out of sweden to the u.s. and china . moving some high-capacity freezer production to the u.s. locates it closer to many of our major customers , reducing costs and increasing responsiveness . establishing lower-capacity freezer production in china expands our presence in a key emerging market . the shift is part of a cost reduction plan we announced in january 2012 that supports our strategy to grow margins by lowering costs in jbt foodtech across the developed world . the cost reduction plan consists primarily of a workforce reduction of approximately 115 positions and is expected to be completed in the first half of 2012. we recognized a pre-tax charge of $ 10.3 million in connection with the plan in the fourth quarter of 2011 and expect to reduce costs by about $ 9 million ( pre-tax ) annually by 2013. we continue to be confident in our ability to generate cash flow , which is why on october 27 , 2011 , our board of directors authorized a repurchase of up to $ 30 million of jbt common shares through december 31 , 2014. as we evaluate our operating results , we consider performance indicators like segment revenue and operating profit in addition to the level of inbound orders and order backlog . 25 story_separator_special_tag block ; margin-left : 0pt ; margin-right : 0pt '' > 2010 compared with 2009 jbt foodtech 's revenue increased by $ 5.0 million in 2010 compared to 2009. the increase in revenue was driven primarily by a favorable impact of foreign currency translation , resulting in $ 6.6 million of higher revenue . despite smaller order sizes relative to prior year , sales of freezing and chilling products and protein processing products in all geographic regions increased by $ 34.6 million . however , this increase was offset by an unfavorable year-over-year comparison of sales of large orders of fruit processing products and in-container processing products . during 2009 , we sold $ 38.5 million of large orders of fruit processing products and in-container processing products received in 2008 and the early part of 2009. jbt foodtech 's operating profit increased by $ 3.4 million in 2010 compared to 2009. operating profit margin increased from 10.2 % to 10.7 % . the increase in operating profit was driven primarily by an improvement in gross profit margin , which resulted in $ 7.3 million of higher profit . gross profit margin improved due to higher proportion of higher margin smaller sized projects and aftermarket sales as well as lower expenses related to retirement benefits and non-recurring costs . a slight decrease in sales volume resulted in $ 0.5 million of lower profit . additionally , higher selling , general and administrative , and research and development costs resulted in $ 3.4 million of lower profit . jbt aerotech 2011 compared with 2010 jbt aerotech 's revenue increased by $ 56.2 million in 2011 compared to 2010 as a result of improved market conditions and the conversion of the strong year-end 2010 order backlog into revenue . revenue from gate equipment products increased by $ 25.5 million as a result of higher sales of land-based air conditioning units to the u.s. navy and passenger boarding bridges to domestic airports . revenue from automated systems increased by $ 13.3 million as a result of large projects completed during the year . revenue from ground support equipment products increased by $ 6.3 million primarily as a result of higher sales of aircraft tow tractors to european and other international customers . jbt aerotech 's operating profit increased by $ 7.4 million in 2011 compared to 2010. operating profit margin increased from 8.1 % to 8.8 % as a result of better leverage of fixed costs . higher sales volume resulted in an increase in profit of $ 11.1 million . gross profit margin remained relatively unchanged . the increase in operating profit was partially offset by $ 0.6 million of higher marketing expenditures , $ 1.5 million of higher general and administrative costs and $ 1.7 million of higher development costs related to new gate equipment products . 2010 compared with 2009 jbt aerotech 's revenue increased by $ 30.5 million in 2010 compared to 2009. the increase in revenue was a result of higher demand for our ground support equipment and gate equipment products . revenue from ground support equipment sales increased by $ 26.6 million , while revenue from gate equipment product sales increased by $ 23.8 million . these increases in revenue were partially offset by lower sales of halvorsen loaders due to completion of a u.s. air force production contract . story_separator_special_tag we have $ 75 million of 6.66 % senior unsecured notes . the senior unsecured notes are due on july 31 , 2015 and require us to make semiannual interest payments . our credit agreement and notes include restrictive covenants that , if not met , could lead to a renegotiation of our credit lines , requirement to repay our borrowings and or a significant increase in our cost of financing . at december 31 , 2010 , we were in compliance with all covenants of our contractual obligations as shown in the following table : replace_table_token_11_th ( 1 ) interest coverage ratio is a comparison of the trailing twelve months consolidated ebitda , defined as net income plus interest expense plus income tax expense plus depreciation and amortization plus non-cash expenses and extraordinary , unusual and non-recurring items , to trailing twelve months interest expense . ( 2 ) leverage ratio is a comparison of the total indebtedness , defined as total debt plus guarantees of indebtedness of others plus obligations under financial letters of credit issued against the credit facility , to the trailing twelve month consolidated ebitda , as defined above . ( 3 ) capital expenditures are limited to $ 30 million plus 50 % of the unutilized amount from prior year . ( 4 ) restricted payments include all payments to shareholders such as dividends and share repurchases . we expect to remain in compliance with all restrictive covenants in the foreseeable future . however , there can be no assurance that continued or increased volatility in the global economic conditions will not impair our ability to meet our restrictive covenants , or the volatility in the capital and credit markets will not impair our ability to access these markets on terms acceptable to us or at all . 30 as part of our strategy to grow where the world is growing fastest , we are expanding our operations in china and india . due to greater restrictions on cash management in these regions , we have established credit facilities to fund some of the working capital requirements . in july 2011 , one of our wholly owned subsidiaries entered into two short term credit facilities that allow us to borrow up to $ 6 million in china . as of december 31 , 2011 , we had $ 1.4 million borrowed under this credit facility . in june 2011 , one of our wholly owned subsidiaries entered into a short term credit facility that allows us to borrow up to indian rupee ( rs ) 38 million , or approximately $ 0.8 million . as of december 31 , 2011 , we had $ 0.6 million borrowed under this credit facility . defined benefit pension plans we have defined benefit pension plans that cover certain domestic and international employees . our largest single pension plan is the u.s. qualified plan . at december 31 , 2011 , this plan accounted for 86 % of our consolidated defined benefit pension plans ' projected benefit obligation ( “ pbo ” ) and 96 % of the related plans ' assets . due to a decrease in the discount rate used to value the pbo , the obligation increased by $ 30.0 million while the assets experienced a loss of 1.5 % . outlook we expect nominal growth across most product lines as market conditions in europe and north america remain uncertain , while emerging markets continue to grow . however , we expect the strategic actions implemented in 2011 to drive margin expansion in 2012. on february 28 , 2012 , the board of directors approved a quarterly cash dividend of $ 0.07 per share of outstanding common stock , or approximately $ 2.0 million . the dividend will be paid on march 28 , 2012 to stockholders of record at the close of business on march 14 , 2012. we estimate that we will contribute $ 11.9 million in 2012 to our pension and other postretirement benefit plans , primarily reflecting discretionary contributions to our u.s. qualified pension plan . we anticipate spending a total of $ 16 to $ 19 million on construction of a new jbt foodtech plant in lakeland , florida to replace our existing plant in the same area . we expect it to be operational by the end of 2013. we continue to evaluate acquisitions in the normal course of business which we expect to fund with cash generated from operations or borrowings under our credit agreements . contractual obligations and off-balance sheet arrangements the following is a summary of our contractual obligations at december 31 , 2011 : replace_table_token_12_th ( a ) our available long-term debt is dependent upon our compliance with covenants described in the previous section . any violations of covenants or other events of default , which are not waived or cured , could have a material impact on our ability to maintain our committed financial arrangements . ( b ) in the normal course of business , we enter into agreements with our suppliers to purchase raw materials or services . these agreements include a requirement that our supplier provide products or services to our specifications and require us to make a firm purchase commitment to our supplier . as substantially all of these commitments are associated with purchases made to fulfill our customers ' orders , the costs associated with these agreements will ultimately be reflected in cost of sales on our consolidated statements of income . ( c ) this amount primarily reflects discretionary contributions to our u.s. qualified pension plan . required contributions for future years depend on factors that can not be determined at this time . 31 the following is a summary of other off-balance sheet arrangements at december 31 , 2011 : replace_table_token_13_th to provide required security regarding our performance on certain contracts , we provide letters of credit , surety bonds and bank guarantees , for which we are contingently liable .

consolidated results of operations replace_table_token_5_th 2011 compared with 2010 total revenue increased by $ 75.4 million in 2011 compared to 2010. the increase in revenue was driven by $ 27.7 million of higher product sales , $ 12.3 million of higher aftermarket parts and services sales and $ 25.3 million of higher revenue due to the favorable impact of foreign currency translation . operating income decreased by $ 13.9 million in 2011 compared to 2010 , while operating income margin decreased from 7.6 % to 5.6 % . the decrease in operating income resulted from the following : · gross profit remained unchanged but decreased by $ 6.9 million in constant currency . gross profit decreased by $ 20.2 million due to lower gross profit margin , which resulted from the strengthening of the swedish krona and brazilian real , higher costs in certain jbt foodtech product lines and an unfavorable mix of products sold as compared to the prior year . this decrease was partially offset by $ 13.3 million of higher profit due to higher sales volume in the jbt aerotech segment . · selling , general and administrative expenses increased by $ 5.1 million , but only by $ 0.5 million in constant currencies , and decreased as a percentage of revenue from 16.8 % to 16.0 % . · research and development expense increased by $ 1.0 million , primarily due to expenditures on developing new gate equipment products . · restructuring expense was $ 7.9 million higher than in prior year .

replace_table_token_23_th replace_table_token_24_th replace_table_token_25_th 46 deferred income taxes at december 31 , 2020 and 2019 were comprised of the following : replace_table_token_26_th replace_table_token_27_th 47 under fasb asc topic 740 , the company established two reserves for uncertain tax positions based upon management 's story_separator_special_tag overview our profitability is primarily attributable to the sale of water . gross water sales comprised 86.8 % o f total operating revenues for the year ended december 31 , 2020. our profitability is also attributed to the various contract operations , water , sewer and internal slp plans and other services we provide . water sales are subject to seasonal fluctuations , particularly during summer when water demand may vary with rainfall and temperature . in the event temperatures during the typically warmer months are cooler than expected , or rainfall is greater than expected , the demand for water may decrease and our revenues may be adversely affected . we believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives . our contract operations and other services provide a revenue stream that is not affected by changes in weather patterns . while water sales are our primary source of revenues , we continue to seek growth opportunities to provide wastewater services in delaware and the surrounding areas . we also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations , wastewater management services , and design , construction and engineering services . we plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers . our anticipated growth in these areas is subject to changes in residential and commercial construction , which may be affected by interest rates , inflation and general housing and economic market conditions . we anticipate continued growth in our non-regulated division due to our water , sewer , and internal slp plans . covid-19 pandemic in march 2020 , the world health organization classified the coronavirus , or covid-19 , outbreak as a pandemic . subsequently on march 13 , 2020 , the president of the united states declared the covid-19 outbreak a national emergency . the emergence of covid-19 around the world presents risks to the company , not all of which the company is able to fully evaluate or even to foresee at the current time . while the covid-19 pandemic did not materially adversely affect the company 's financial results and business operations for the year ended december 31 , 2020 , economic and health conditions in the united states and across most of the globe have continued to change rapidly . the full impact of the covid-19 outbreak continues to evolve as of the date of this report . management is actively monitoring the situation and impacts on its operations , suppliers , industry , and workforce . the covid-19 pandemic may affect the company 's operations in future periods . the company maintains essential utility services and is following social distancing and remote work directives , however prolonged workforce disruptions may negatively impact performance of services or require use of emergency personnel . due to the covid-19 pandemic causing hardships for many utility customers , state government agencies issued executive orders in march 2020 requiring utility companies to take a number of steps to support their customers and communities , including prohibiting service disconnections for non-payment and prohibiting late fees . in july 2020 , the state of delaware lifted its executive orders placing a moratorium on service disconnections for non-payment , with a provision requiring utilities to offer payment arrangements extending at least four months to customers . after properly notifying customers , artesian reinstated its late fee process in september 2020 and began administering service disconnections in october 2020 for its delaware customers . the state of maryland and the commonwealth of pennsylvania lifted their executive orders placing moratoriums on service disconnections for non-payment effective november 2020. the state of maryland requires utilities to offer payment arrangements extending twelve months . the depsc and the mdpsc issued orders authorizing utilities deferred regulatory treatment for incremental costs related to covid-19 . given the changing nature of the covid-19 outbreak and the responses to curb its spread , management can not predict the full impact of the covid-19 pandemic on the company 's results of operations . the ultimate extent of the effects of the covid-19 pandemic on the company is highly uncertain and will depend on future developments , and such effects could exist for an extended period of time even after the pandemic ends . water division artesian water , artesian water maryland and artesian water pennsylvania provide water service to residential , commercial , industrial , governmental , municipal and utility customers . increases in the number of customers contribute to increases , or help to offset any intermittent decreases , in our operating revenue . as of december 31 , 2020 , we had approximately 90,300 metered water customers in delaware , an increase of approximately 2,500 compared to december 31 , 2019. the number of metered water customers in maryland totaled approximately 2,500 as of december 31 , 2020 , a slight increase compared to december 31 , 2019. the number of metered water customers in pennsylvania remained consistent compared to december 31 , 2019. for the year ended december 31 , 2020 , approximately 8.2 billion gallons of water were distributed in our delaware systems and approximately 135.0 million gallons of water were distributed in our maryland systems . 18 wastewater division artesian wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in delaware in july 2005. artesian wastewater maryland was incorporated on june 3 , 2008 and is able to provide regulated wastewater services to customers in maryland . it is not currently providing these services in maryland . story_separator_special_tag we believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another . on september 27 , 2016 , artesian wastewater entered into a wastewater services agreement with a large industrial customer for artesian wastewater to provide treatment and disposal services for sanitary wastewater discharged from this customer 's properties located in sussex county , delaware upon completion of a pipeline to transfer the sanitary wastewater . the pipeline was completed in the second quarter of 2017. the transfer of sanitary wastewater began in the second quarter of 2019. on january 27 , 2017 , artesian wastewater entered into a second wastewater agreement with this customer for artesian wastewater to provide disposal services for approximately 1.5 mgd of treated industrial process wastewater upon completion of an approximately eight mile pipeline that will transfer the wastewater from this customer 's properties to a 90 million gallon storage lagoon at artesian 's sussex regional recharge facility . we will use the reclaimed wastewater for spray irrigation on agricultural land in the area . we received an operations permit in march 2020. we will begin operating this facility once this customer receives their process wastewater treatment operating permit . the general need for increased capital investment in our water and wastewater systems is due to a combination of population growth , more protective water quality standards and aging infrastructure . our planned and budgeted capital improvements over the next three years includes projects for water infrastructure improvements and expansion in both delaware and maryland and wastewater infrastructure improvements and expansion in delaware . the depsc and mdpsc have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers . in our non-regulated division , we continue pursuing opportunities to expand our contract operations . through artesian utility , we will seek to expand our contract design , engineering and construction services of water and wastewater facilities for developers , municipalities and other utilities . we also anticipate continued growth due to our water , sewer and internal slp plans . artesian development owns two nine-acre parcels of land , located in sussex county , delaware , which will allow for construction of a water treatment facility and wastewater treatment facility . artesian storm water was formed to expand contract work related to the design , installation , maintenance and repair services associated with existing or proposed storm water management systems in delaware and the surrounding areas . 20 critical accounting policies and estimates critical accounting policies and estimates are those we believe are most important to portraying the financial condition and results of operations and also require significant estimates , assumptions or other judgments by management . the following provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the company . changes in the estimates , assumptions or other judgments included within these accounting policies could result in a significant change to the financial statements in any quarterly or annual period . we consider the following policies to be the most critical in understanding the judgment that is involved in preparing our consolidated financial statements . senior management has discussed the selection and development of our critical accounting policies and estimates with the audit committee of the board of directors . all additions to utility plant are recorded at cost . business combinations pursuant to asc topic 805 may result in a purchase price allocation and the acquired assets are required to be evaluated by the applicable regulatory agency . cost includes direct labor , materials , afudc ( see description in note 1-utility plant ) and indirect charges for items such as transportation , supervision , pension , medical , and other fringe benefits related to employees engaged in construction activities . when depreciable units of utility plant are retired , the historical costs of plant retired is charged to accumulated depreciation . any cost associated with retirement , less any salvage value or proceeds received , is charged to the regulated retirement liability . maintenance , repairs , and replacement of minor items of utility plant are charged to expense as incurred . we record water service revenue , including amounts billed to customers , on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period . as actual usage amounts are received , adjustments are made to the unbilled estimates in the next billing cycle based on the actual results . estimates are made on an individual customer basis , using one of three methods : the previous year 's consumption in the same period , the previous billing period 's consumption , or averaging . while actual usage for individual customers may differ materially from the estimate , we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption . we record accounts receivable at the invoiced amounts . an allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions . we mitigate our exposure to credit losses by discontinuing services in the event of non-payment ; accordingly , the related allowance for doubtful accounts and associated bad debt expense has not been significant . however , the company experienced longer receivable cycles throughout 2020 related to temporary executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment , resulting in an adjustment to increase the reserve for bad debt . account balances are written off against the allowance when it is probable the receivable will not be recovered .

results of operations 2020 compared to 2019 operating revenues revenues totaled $ 88.1 million for the year ended december 31 , 2020 , $ 4.5 million , or 5.4 % , more than revenues for the year ended december 31 , 2019 . water sales revenue increased $ 2.9 million , or 3.9 % , for the year ended december 31 , 2020 from the corresponding period in 2019 , primarily due to an increase in residential consumption revenue , partially offset by a decrease in non-residential consumption revenue . in addition , water sales revenue increased due to an increase in distribution system improvement charges , or dsic , revenue . also , fixed fee revenue increased related to customer growth . we realized 86.8 % and 88.1 % of our total operating revenue for the years ended december 31 , 2020 and december 31 , 2019 , respectively , from the sale of water . other utility operating revenue increased approximately $ 1.6 million , or 32.7 % , for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. the increase is primarily due to an increase in industrial wastewater service revenue , related to the minimum required volume of wastewater under contract . in addition , there was an increase in wastewater revenue from customer growth . this increase is partially offset by a decrease in service and finance charges , related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment . non-utility operating revenue increased approximately $ 0.1 million , or 1.4 % , for the year ended december 31 , 2020 compared to the same period in 2019. the increase is primarily due to an increase in slp plan revenue , partially offset by a decrease in contract revenue .

when measuring for possible impairment , future cash flows were discounted at a rate that was consistent with a weighted average cost of capital for a story_separator_special_tag overview quantum corporation ( “ quantum ” , the “ company ” , “ us ” or “ we ” ) , founded in 1980 , is a leading global storage company specializing in backup , recovery and archive solutions . combining focused expertise , customer-driven innovation and platform independence , we provide a comprehensive , integrated range of disk , tape and software solutions supported by our sales and service organization . we work closely with a broad network of distributors , value-added resellers ( “ vars ” ) , direct marketing resellers , original equipment manufacturers ( “ oems ” ) and other suppliers to solve customers ' data protection , retention and management challenges . our stock is traded on the new york stock exchange ( “ nyse ” ) under the symbol “ qtm. ” we offer a comprehensive range of solutions in the data storage market providing performance and value to organizations of all sizes . we believe our combination of expertise , innovation and platform independence allows us to solve customers ' data protection and retention issues more easily , effectively and securely . our open systems solutions are designed to provide significant storage efficiencies and cost savings while minimizing risk and protecting customers ' prior investments . in addition , we have the global scale and scope to support our worldwide customer base . as a pioneer in disk-based data protection , we have a broad portfolio of disk system solutions featuring deduplication and replication technology . we have products spanning from entry-level autoloaders to enterprise libraries , and are a supplier of tape drives and media . our data management software provides technology for shared workflow applications and multi-tiered archiving in high-performance , large-scale storage environments . we offer a full range of service with support available in more than 100 countries . business we earn our revenue from the sale of products , systems and services through our sales force and an array of channel partners to reach end user customers , which range in size from small businesses to multinational enterprises . our products are sold under both the quantum brand name and the names of various oem customers . we have a broad portfolio of disk systems , software solutions , tape automation systems , tape drives and other devices and media . our data management software provides technology for shared workflow applications and multi-tiered archiving in high-performance , large-scale storage environments . the majority of our disk systems and tape automation systems include software features that provide disk and tape integration capabilities with our core deduplication and replication technologies . in addition , our service offerings include a broad range of coverage options to provide the level of support for the widest possible range of information technology ( “ it ” ) environments . we have been transforming the company into a systems and solutions provider over the past few years , introducing offerings in the significant growth markets of disk and software backup and archive and introducing strategic enhancements and offerings in the tape automation market while continuing to provide service and support to new and existing customers . we have worked to improve revenue momentum , especially through our partners , and to continue improving operating performance . for fiscal 2011 , we were focused on increasing disk systems and software solutions revenue , gaining share in the open systems tape automation market and delivering new technology in order to extend our ability to grow by continuing to extend and improve our product portfolio , expanding our position with the var channel and further investing in our technology platform . during fiscal 2011 , we continued to invest in our technology platform which resulted in a number of new product introductions and upgrades that extended and improved our product offerings , as well as development efforts on new products and features that will be released in the future . new product introductions and upgrades in fiscal 2011 included the dxi8500 disk system for enterprise solutions , the dxi6700 for midrange customers and the entry-level dxi4500 family in addition to the dxi 2.0 software release . we also introduced the scalar i6000 tape automation solution for enterprise environments , the entry-level scalar i40 and i80 , stornext 4.0 and version 4.0 of the quantum vision software as well as additional upgrades and enhancements to our disk systems , software solutions and tape automation systems . in the past year and a half we have refreshed the majority of our primary product lines , expanding our offerings for end user customers . 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 . story_separator_special_tag revenue from sales of branded products increased 7 % in fiscal 2011 compared to fiscal 2010 also primarily due to increased sales of disk systems and software solutions . a primary goal for fiscal 2011 was to grow revenue from disk systems and software solutions . we introduced new disk products and upgrades to both disk systems and to software solutions in fiscal 2011. we have also worked to expand engagement with our channel partners to increase sales of disk systems and software solutions . revenue from disk systems and software solutions increased 33 % to $ 110.7 million in fiscal 2011 compared to fiscal 2010 , primarily due to increased midrange disk product sales . midrange disk systems revenue nearly tripled from fiscal 2010 primarily due to the addition of revenue from our dxi6700 product family and increased sales of the dxi6500 product family . in addition , stornext software revenue also continued to increase compared to prior years . as a result of these revenue increases , disk systems and software solutions comprised a greater proportion of both product revenue and total revenue in fiscal 2011 compared to fiscal 2010. tape automation systems sales decreased $ 9.8 million , or 4 % , in fiscal 2011 compared to fiscal 2010. this decrease was primarily due to expected declines in oem revenues from our decision to exit portions of this market in prior years as well as declining demand in the overall tape automation market . we had a smaller decrease in branded tape automation systems revenue due to declines in enterprise and midrange product sales mostly offset by increased entry-level product sales from the addition of the scalar i40 and i80 products . product revenue from devices , including tape drives and removable hard drives , and non-royalty media sales decreased 15 % to $ 92.1 million primarily due to anticipated decreases in sales of older oem device technologies that reached , or are nearing , end of life . we continue to be strategic with media sales and have chosen to not pursue opportunities that do not provide sufficient margins . media revenues were approximately the same as fiscal 2010. fiscal 2010 compared to fiscal 2009 product revenue from oem sales decreased $ 72.0 million , while revenue from branded products decreased $ 28.4 million . the product revenue decrease was most pronounced in our tape automation systems and to a lesser extent from devices and media products . we had a modest decrease in our disk systems and software solutions revenue . revenue from disk systems and software solutions decreased $ 4.1 million to $ 83.5 million in fiscal 2010 compared to fiscal 2009 due to decreased oem deduplication software revenue which was partially offset by increases in branded disk systems and software solutions revenue . our focus on expanding disk systems and software solutions revenue was reflected in increased sales of our branded dxi-series products , including dxi7500 revenues and the addition of revenue from our dxi6500 product family . in addition , stornext software revenue increased in fiscal 2010. tape automation system sales decreased $ 53.9 million to $ 264.0 million in fiscal 2010 compared to fiscal 2009. this decrease was primarily due to the decline in demand resulting from the global recession and to a lesser extent from our decision to exit portions of the entry-level automation market in fiscal 2010 and prior years . over half of the decrease was attributable to reduced revenue from oem customers in fiscal 2010 . 28 devices and media product revenues decreased $ 42.4 million to $ 108.6 million largely due to decreased sales of midrange and , to a lesser extent , entry-level drives sold to oems as our older tape drives reach their end of life . we continued to place emphasis on sales of non-royalty media that bring higher margins and to not pursue volume sales at lower margins , resulting in lower overall revenue from non-royalty media products . service revenue service revenue includes revenue from sales of hardware service contracts , product repair , installation and professional services . hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time , or both . service revenue decreased 3 % to $ 151.1 million in fiscal 2011 compared to fiscal 2010 primarily due to planned decreases in oem product repair services and , to a lesser extent , reduced hardware service contracts from our oem customers . oem service revenue decreases are due to many of our device products that have reached , or are nearing , end of service life . service revenue from our branded products was approximately the same as fiscal 2010. service revenue decreased $ 8.2 million to $ 156.5 million in fiscal 2010 compared to fiscal 2009 primarily due to reduced service revenues from oem customers . although service revenue related to our branded products increased slightly in fiscal 2010 , this increase was tempered in the first of half of fiscal 2010 due to several changes in customer trends during this period . these included customers renewing their service contracts for shorter periods , choosing lower cost and slower response time service levels and waiting longer periods after a contract lapsed to renew . it appears these changed trends for the first half of fiscal 2010 were in response to the recession and reduced it budgets . royalty revenue royalty revenue declined 7 % , or $ 4.6 million , in fiscal 2011 due to expected decreases of maturing dlt media unit sales by media licensees . these decreases were partially offset by increased royalties from lto media in fiscal 2011. royalty revenue declined $ 19.0 million to $ 68.8 million in fiscal 2010 primarily due to $ 11.0 million in royalty revenue recorded in connection with a settlement agreement in fiscal 2009 that was not repeated .

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 . 26 our gross margin percentage increased 100 basis points in fiscal 2011 to 42.1 % largely from decreased intangible amortization and also due to the continued shift in sales mix toward higher margin products and services .

our valuation allowance assessment includes an evaluation of our history of generating taxable income and estimates of future taxable income , including when applicable the use of appropriate tax planning strategies . assets and liabilities are story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the discussion under “ organization and significant accounting policies ” ( refer to note 1 ) , which describes key estimates and assumptions we make in the preparation of our consolidated financial statements ; the cautionary language that appears under the title `` forward looking statements '' immediately following the ; “ item 1. business , ” which describes our operations ; and “ item 1a . risk factors , ” which describes key risks associated with our operations and markets in which we operate . a reference to a “ note ” in this section refers to the accompanying notes to consolidated financial statements . overview and highlights we are a comprehensive provider of clinical communication and collaboration solutions for enterprises . we offer a suite of unified clinical communication and collaboration solutions that include call center operations , clinical alerting and notifications , one-way and advanced two-way wireless messaging services , mobile communications and public safety response . our customers rely on spok for workflow improvement , secure texting , paging services , contact center optimization and public safety response . our product offerings are capable of addressing a customer 's mission clinical communications needs . we develop , sell and support enterprise-wide systems for healthcare and other organizations needing to automate , centralize and standardize their approach to clinical communications . our solutions can be found in prominent hospitals , large government agencies , leading public safety institutions , colleges and universities , large hotels , resorts and casinos , and well-known manufacturers . our primary market has been the healthcare industry , particularly hospitals . we have identified hospitals with 200 or more beds as the primary targets for our software and wireless solutions . 27 revenue generated by wireless messaging services ( including voice mail , personalized greetings , message storage and retrieval ) and equipment loss and or maintenance protection to both one-way and two-way messaging subscribers is presented as wireless revenue in our statements of operations . revenue generated by the sale of our software solutions , which includes software license , professional services ( installation , consulting and training ) , equipment procured by us from third parties ( to be used in conjunction with our software ) and post-contract support ( on-going maintenance ) , is presented as software revenue in our statements of operations . our software is licensed to end users under an industry standard software license agreement . 2019 highlights total revenue declined by 5.4 % or $ 9.2 million during 2019 compared to 2018 , primarily as a result of the continued and expected decline in wireless revenue along with a decrease in license revenues . the rate of decline in wireless revenues continues to trend favorably over the last several years as we saw the lowest level of erosion in the last five years , declining at a rate of only 6.5 % . in the fourth quarter of 2019 , we recognized non-cash pre-tax goodwill impairment charges of $ 8.8 million . excluding the goodwill impairment , our operating expenses decreased by 3.1 % or $ 5.4 million during 2019 compared to 2018 , driven primarily by savings in cost of revenue and general and administrative . while we continued investment in our development of spok go , we anticipate costs will begin to normalize in 2020. we saw growth in development costs decline from 30.8 % between 2017 and 2018 to 12.6 % from 2018 to 2019. we anticipate the rate of growth will continue to decline through 2020 as we balance the mix of staffing and outside service resources with internal development needs . we made significant progress in our development efforts related to spok go and expect to have a product ready for public release in 2020. we returned approximately $ 16.4 million of capital to stockholders in the form of cash dividends and share repurchases . 2018 highlights total revenue declined by 1.0 % or $ 1.7 million during 2018 compared to 2017 , primarily as a result of moderate growth in software revenue , offset by the continued and expected decline in wireless revenue . this represents a $ 6.7 million improvement in the decrease of consolidated revenues period over period as compared to the year ended december 31 , 2017 and brings us closer to consolidated revenue growth as we continue our transition into a software company . the anticipated rate of decline in wireless revenues has trended favorably over the last several years continuing in 2018 as we saw the lowest level of erosion in the last five years , declining at a rate of only 6.8 % . our operating expenses increased by 7.6 % or $ 12.2 million during 2018 compared to 2017 , driven primarily by our continued investment in the development of spok go and the related research and development costs . we returned approximately $ 23.6 million of capital to stockholders in the form of cash dividends and share repurchases . wireless revenue wireless revenue consists of two primary components : paging revenue and product and other revenue . paging revenue consists primarily of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service credits . product and other revenue reflects system sales , the sale of devices and charges for paging devices that are not returned and are net of anticipated credits . our core offering includes subscriptions to one-way or two-way messaging services for a periodic ( monthly , quarterly , semiannual , or annual ) service fee . story_separator_special_tag we have a centralized marketing function , which is focused on supporting our products and vertical sales efforts by strengthening our brand , generating sales leads and facilitating the sales process . these marketing functions are accomplished through targeted email campaigns , webinars , regional and national user conferences , monthly newsletters and participation at industry trade shows . expenses consist largely of payroll and related expenses , commissions and other costs such as travel and advertising costs . general and administrative . these are expenses associated with information technology and administrative functions which includes finance and accounting , human resources and executive management . this classification consists primarily of payroll and related expenses , outside service expenses , taxes , licenses and permit expenses , and facility rent expenses . 29 story_separator_special_tag style= '' line-height:120 % ; padding-bottom:10px ; padding-top:10px ; text-align : justify ; font-size:10pt ; '' > for the years ended december 31 , 2018 and 2017 , we reclassified $ 3.6 million and $ 2.3 million from outside services to facility rent and office costs , respectively , to conform to current period presentation . these costs primarily related to software and other technology costs . general and administrative expense decreased for the year ended december 31 , 2019 compared to december 31 , 2018 primarily due to a decrease in payroll and related , stock-based compensation , and bad debt expense . the decrease in payroll and related expenses is primarily due to a decrease in headcount , benefit related costs , and expenses related to the resignation of a named executive officer ( `` neo '' ) . the decrease in stock-based compensation is largely due to forfeitures related to the previously mentioned neo resignation for the year ended december 31 , 2019 when compared to the same period in 2018. the decrease in facility rent and office costs is related to the decrease in telephone and computer hardware and software costs . the decrease in bad debt expense is primarily related to a return to normal operating expectations as compared to 2018 and to a lesser extent , improvements in our collections . in 2018 a change in methodology was implemented , meant to provide additional coverage for our exposure to potentially uncollectible accounts receivable , which resulted in an increase in bad debt expense for the year ended december 31 , 2018 which was not incurred during the year ended december 31 , 2019 . general and administrative expense increased for the year ended december 31 , 2018 compared to december 31 , 2017 primarily due to an increase in benefits expenses due to higher medical benefit costs incurred across our employee base , stock compensation , outside services and bad debt . the increase in stock based compensation is largely related to additional grants made during the year ended december 31 , 2018 which replace awards that vested on december 31 , 2017 but were amortized at 50 % of the original award due to anticipated forfeitures related to unmet performance obligations . the increase in bad debt is related to providing for our estimated exposure to potentially uncollectible accounts receivable . depreciation , amortization and accretion . for the year ended december 31 , 2019 compared to the same period in 2018 depreciation , amortization and accretion expenses decreased by $ 1.5 million primarily due to certain paging assets becoming fully depreciated in 2018 and continued efforts to reduce capital expenditures . the decrease of $ 0.9 million in depreciation , amortization and accretion expenses for the year ended december 31 , 2018 compared to the same period in 2017 was due primarily to various assets becoming fully depreciated during 2018. goodwill impairment . in the fourth quarter of 2019 , we recognized non-cash pre-tax goodwill impairment charges of $ 8.8 million . the goodwill impairment relates to impairment charges recognized in the fourth quarter of 2019 as a result of the company 's annual goodwill impairment testing and , in our belief , does not reflect management 's confidence in the future value of our business . despite the impairment of goodwill , our outlook for the business continues to remain strong . we believe the launch of spok go is set to meet a significant need in the healthcare marketplace and will create significant value for shareholders in the coming years . refer to note 1 , `` organization and significant accounting policies '' , and note 6 , `` goodwill and intangible assets , net '' , for further discussion . 34 interest income , other income ( expense ) , and income tax ( benefit ) expense interest income . interest income increased slightly for the year ended december 31 , 2019 , compared to the same periods in 2018 and 2017 , respectively , primarily due to interest earned on the company 's cash balances and short term investments due to increased investments in short-term treasury bonds . other income ( expense ) . for the year ended december 31 , 2019 compared to the same period in 2018 , other income ( expense ) increased by $ 1.4 million primarily as a result of various immaterial expenses incurred in 2018 that were not subsequently incurred during 2019 and an increase in gains on foreign currency . the decrease of $ 0.8 million in other income ( expense ) for the year ended december 31 , 2018 compared to the same period in 2017 was primarily a result of legal and other expenses related to the lawsuit previously reported in the 2017 annual report and our quarterly report on form 10-q for the quarterly period ended march 31 , 2018. benefit from ( provision for ) income taxes . the effects of foreign taxes are immaterial for all periods presented .

results of operations the following table is a summary of our consolidated statements of operations for the years ended december 31 , 2019 , 2018 and 2017 : replace_table_token_4_th 30 revenue the table below details total revenue for the periods stated : replace_table_token_5_th the decrease in wireless revenue during 2019 compared to both 2018 and 2017 , respectively , reflects the decrease in demand for our wireless services . wireless revenue is generally based upon the number of units in service and the monthly average revenue per user ( `` arpu '' ) . on a consolidated basis arpu is affected by several factors , including the mix of units in service and the pricing of the various components of our services . the number of units in service changes based on subscribers added , referred to as gross placements , less subscriber cancellations , or disconnects . arpu for the years ended december 31 , 2019 , 2018 and 2017 was $ 7.34 , $ 7.39 and $ 7.51 , respectively , while total units in service were 0.9 million for the year ended december 31 , 2019 , 1.0 million for the year ended december 31 , 2018 and 1.0 million for the year ended december 31 , 2017 . while demand for wireless services continues to decline , it has done so at a slower rate for each of the periods presented . while we are encouraged that this trend will continue in future periods , we believe that demand will continue to decline for the foreseeable future in line with recent and historical trends . as our wireless products and services are replaced with other competing technologies , such as the shift from narrow band wireless service offerings to broad band technology services , our wireless revenue will continue to decrease .

dividends consisting of shares of class a common stock may be paid only as follows : ( i ) shares of class a common stock may be paid only story_separator_special_tag overview we are a premier , full-service wealth management firm focused on providing financial advisory and related family office services to ultra-high net worth individuals and endowments , foundations and other institutional investors . in addition to a wide range of investment capabilities , we offer a full suite of complementary and customized family office services for families seeking a 37 comprehensive oversight of their financial affairs . during the twelve months ended december 31 , 2013 , our assets under management grew 40.2 % from $ 11.2 billion to $ 15.7 billion . as part of the reorganization of silvercrest l.p. that occurred in connection with our initial public offering , silvercrest became the general partner of silvercrest l.p , our operating company . the business includes the management of funds of funds , and other investment funds , collectively referred to as the “ silvercrest funds ” . in addition , the partnership units of all continuing partners of silvercrest l.p. were converted to class b units that have equal economic rights to our shares of class a co mmon stock . silvercrest l.p. has issued deferred equity units exercisable for 175,298 class b units which entitle the holders thereof to receive distributions from silvercrest l.p. to the same extent as if the underlying class b units were outstanding . net profits and net losses of silvercrest l.p. will be allocated , and distributions from silvercrest l.p. will be made , to its current partners pro rata in accordance with their respective partnership units ( and assuming the class b units underlying all deferred equity units are outstanding ) . the historical results of operations discussed in this management 's discussion and analysis of financial condition and results of operations include those of silvercrest l.p. and its subsidiaries . following the completion of the reorganization of silvercrest l.p. , as the general partner of silvercrest l.p. , we control its business and affairs and , therefore , consolidate its financial results with ours . the interests of the limited partners ' collective 38.0 % partnership in terest in silvercrest l.p. as of december 31 , 2013 and for the period from july 1 , 2013 through december 31 , 2013 , are reflected in non-controlling interests in our consolidated financial statements . as a result of the reorganization being completed at the end of the second quarter of 2013 , the accompanying consolidated statement of financial position as of december 31 , 2012 and the results of operations and cash flows for the years ended december 31 , 2012 and 2011 are those of silvercrest l.p. for the year ended december 31 , 2013 , our net income , after amounts attributable to non-controlling interests , represents , on a weighted average basis , approximately 49.8 % of silvercrest l.p. 's net income . key performance indicators when we review our performance , we focus on the indicators described below : replace_table_token_7_th ( 1 ) ebitda , a non -gaap measure of earnings , represents net income before provision for income taxes , interest income , interest expense , depreciation and amortization . we define adjusted ebitda as ebitda without giving effect to items including but not limited to professional fees associated with acquisitions or financing transactions , gains on extinguishment of debt or other obligations related to acquisitions , losses on disposals or abandonment of assets and leaseholds , severance and other similar expenses , but including partner incentive allocations , prior to our initial public offering , as an expense . we use this non-gaap financial measure to assess the strength of our business . these adjustments and the non -gaap financial measures that are derived from them provide supplemental information to analyze our business from period to period . investors should consider these non-gaap financial measures in addition to , and not as a substitute for financial measures in accordance with gaap . ( 2 ) adjusted ebitda margin is calculated by dividing adjusted ebitda by total revenue . ( 3 ) we have computed average assets under management by averaging assets under management at the beginning of the applicable period and assets under management at the end of the applicable period . revenue we generate revenue from management and advisory fees , performance fees , and family office services fees . our management and advisory fees are generated by managing assets on behalf of separate accounts and acting as investment adviser for various investment funds . our performance fees relate to assets managed in external investment strategies in which we have a revenue sharing arrangement and in funds in which we have no partnership interest . our management and advisory fees and family office services fees income is recognized through the course of the period in which these services are provided . income from performance fees is recorded at the conclusion of the contractual performance period when all contingencies are resolved . in certain arrangements , we are only entitled to receive performance fees and allocations when the return on assets under management exceeds certain benchmark returns or other performance targets . 38 the discretionary investment management agreements for our separately managed accounts do not have a specified term . rather , each agreement may be terminated by either party at any time , unless otherwise agreed with the client , upon written notice of termination to the other party . story_separator_special_tag our family office services capabilities enable us to provide comprehensive and integrated services to our clients . our dedicated group of tax and financial planning professionals provide financial planning , tax planning and preparation , partnership accounting and fund administration and consolidated wealth reporting among other services . family office services income fluctuates based on both the number of clients for whom we perform these services and the level of agreed-upon fees , most of which are flat fees . therefore , non-discretionary assets under management , which are associated with family office services , do not typically serve as the basis for the amount of family office services revenue that is recognized . we have experienced a steady increase in family office services fees over the past few years as more of our separately managed accounts relationships have taken advantage of these services . we have also been successful in attracting new clients who have engaged us primarily for our family office services . expenses our expenses consist primarily of compensation and benefits expenses , as well as general and administrative expense including rent , professional services fees , data-related costs and sub-advisory fees . these expenses may fluctuate due to a number of factors , including the following : · variations in the level of total compensation expense due to , among other things , bonuses , awards of equity to our employees and partners of silvercrest l.p. , changes in our employee count and mix , and competitive factors ; and · the level of management fees from funds that utilize sub -advisors will affect the amount of sub- advisory fees . our professional services fees have increased as a result of being a public company . compensation and benefits expense our largest expense is compensation and benefits , which includes the salaries , bonuses , equity-based compensation and related benefits and payroll costs attributable to our principals and employees . our compensation methodology is intended to meet the following objectives : ( i ) support our overall business strategy ; ( ii ) attract , retain and motivate top-tier professionals within the investment management industry ; and ( iii ) align our employees ' interests with those of our equity owners . we have experienced , and expect to continue to experience , a general rise in compensation and benefits expense commensurate with growth in headcount and with the need to maintain competitive compensation levels . following the consummation of our initial public offering , we account for partner incentive distributions as an expense in our statement of operations . accordingly , this has the effect of increasing compensation expense relative to the amounts that have been recorded historically in our financial statements . 40 the components of our compensation expenses for the years ended december 31 , 2013 , 2012 and 2011 are as follows : replace_table_token_10_th ( 1 ) for the year ended december 31 , 2013 , $ 8,236 of partner incentive payments was included in cash compensation and benefits expense . ( 2 ) cash distributions on the portion of unvested deferred equity units that are subject to forfeiture are expensed when paid . the portion of unvested deferred equity units that can be settled in cash are classified as liability awards . on february 29 , 2012 , february 28 , 2011 and february 24 , 2010 , silvercrest l.p. and silvercrest gp llc , our predecessor , granted equity-based compensation awards to certain of their principals based on the fair value of the equity interests of silvercrest l.p. and silvercrest gp llc . each grant included a deferred equity unit and performance unit , subject to forfeiture and acceleration of vesting . as a result of the reorganization of silvercrest l.p. and the initial public offering , each 100 deferred equity units represent the unsecured right to receive 100 class b units of silvercrest l.p. , subject to vesting over a four-year period beginning on the first anniversary of the date of grant . each deferred equity unit , whether vested or unvested , entitles the holder to receive distributions from silvercrest l.p. as if such holder held such unit . upon each vesting date , a holder may receive the number of units vested or a combination of the equivalent cash value of some of the units and units , but in no event may the holder receive more than 50 % of the aggregate value of the vested units in cash . to the extent that holders elect to receive up to 50 % of the aggregate value of the vested units in cash , we could have less cash to utilize . we have accounted for the distributions on the portion of the deferred equity units that are subject to forfeiture as compensation expense . equity-based compensation expense will be recognized on the february 29 , 2012 , february 28 , 2011 and february 24 , 2010 grant dates of the deferred equity unit and performance unit awards through february 29 , 2016 , february 28 , 2015 and february 24 , 2014 , respectively . each performance unit represents the right to receive one class b unit of silvercrest l.p. for each two units of silvercrest l.p. issued upon vesting of the deferred equity units awarded to the employee , in each case subject to the achievement of defined performance goals . although performance units will only vest upon the achievement of the performance goals , they are expensed over the same vesting period as the deferred equity units with wh ich they are associated because there is an explicit service period . general and administrative expenses general and administrative expenses include occupancy-related costs , professional and outside services fees , office expenses , depreciation and amortization , sub-advisory fees and the costs associated with operating and maintaining our research , trading and portfolio accounting systems .

operating results revenue our revenues for the years ended december 31 , 2013 , 2012 and 2011 are set forth below : replace_table_token_11_th replace_table_token_12_th the growth in our assets under management from january 1 , 2011 to december 31 , 2013 is described below : replace_table_token_13_th ( 1 ) less than 5 % of assets under management generate performance fees . 42 year ended december 31 , 2013 versus year ended december 31 , 2012 our total revenue increased by $ 8.4 million , or 16.2 % , to $ 60.1 million for year ended december 31 , 2013 , from $ 51.7 million for year ended december 31 , 2012. this increase was driven primarily by growth in our management and advisory fees as a result of increased assets under management . assets under management increased by $ 4.5 billion , or 40.2 % , to $ 15.7 billion at december 31 , 2013 from $ 11.2 billion at december 31 , 2012. compared to the year ended december 31 , 2012 , there was a decrease of $ 1.3 billion of client inflows , a decrease of $ 3.1 billion in client outflows , and an increase of $ 1.7 billion in market appreciation . our market appreciation during the year ended december 31 , 2013 constituted a 20.5 % rate of increase in our total assets under management compared to december 31 , 2012. our growth in assets under management for the year ended december 31 , 2013 was attributable to an increase of $ 2.1 billion and $ 2.5 billion in discretionary and non-discretionary assets under management , respectively , primarily related to the ten-sixty asset management , llc acquisition . the growth in our discretionary assets under management was primarily driven by an increase in separately managed accounts .

we sometimes identify forward-looking statements with such words as “may , ” “expect , ” “intend , ” “anticipate , ” “plan , ” “believe , ” “seek , ” “estimate , ” “outlook , ” “trends , ” “future benefits , ” “strategies , ” “goals” and similar words concerning future events . the forward-looking statements contained herein , include , without limitation , statements concerning future revenue sources and concentration , gross profit margins , selling and marketing expenses , research and development expenses , general and administrative expenses , capital resources , additional financings or borrowings and additional losses and are subject to risks and uncertainties including those discussed below and elsewhere in this annual report on form 10-k that could cause actual results to differ materially from the results contemplated by these forward-looking statements . we also urge you to carefully review the risk factors set forth in “item 1a – risk factors.” overview we are a leading specialty retailer and direct marketer of vitamins , minerals , herbs , supplements , sports nutrition and other health and wellness products . we are second in overall sales among national vitamin , mineral and supplement specialty retailers , and offer the greatest variety of products with over 8,500 skus offered in our stores with an additional 11,500 skus available for our direct sales orders , versus 1,900 skus offered by our leading competitor . in addition , we operate the largest retail stores among the leading retailers in the vms industry , which average 3,600 square feet , and are at least double that of our two leading competitors . as of march 15 , 2008 , we operated 348 stores located in 32 states and the district of columbia and sell direct to consumers through our nationally circulated catalog and our web sites , www.vitaminshoppe.com , and www.bodytech.com . we target the dedicated , well-informed vms consumer and differentiate ourselves by providing our customers with an extensive selection of high quality products sold at competitive prices and value-added customer service . within our selection of over 20,000 skus , we offer over 400 national brands , including our best value vitamin shoppe and bodytech proprietary brands . our broad product offering enables us to provide our customers with a selection of products that is not readily available at other specialty vms retailers , supermarkets , chain drug stores or mass merchants , which we believe drives customer traffic and creates a loyal customer base . our company began as a single store in new york , new york in 1977. our vitamin shoppe branded products were introduced in 1989. we were acquired in november 2002 by bsmb and other investors . trends and other factors affecting our business our performance is affected by trends that affect the vms industry , including demographic , health and lifestyle preferences . changes in these trends and other factors , which we may not foresee , may also impact our business . for example , our industry is subject to potential regulatory actions , such as the ban on ephedra , and other legal matters that affect the viability of a given product . volatile consumer trends , such as those described in the following paragraph , as well as the overall impact on consumer spending , can dramatically affect purchasing patterns . our business allows us to respond to changing industry trends by introducing new products and adjusting our product mix and sales incentives . we will continue to diversify our product lines to offer items less susceptible to the effects of economic conditions and not as readily substitutable , such as teas , lotions and spring water . sales of weight management products are generally more sensitive to consumer trends , resulting in higher volatility than our other products . our sales of weight management products have been significantly influenced by the rapid increase and subsequent decline of products such as products containing ephedra , low carb products and cortislim ® . as a result of the ban of products containing ephedra by the fda in april 2004 , we added new weight management products to our weight management category , such as low-carb products , ephedra substitute products , and cortislim ® , , to offset the loss of ephedra product sales . however , the combined demand for low carb products and cortislim ® began to decline in the fourth quarter of 2004 , which we believe was due to a change in demand for low carb products and the wider availability of cortislim ® in the marketplace . accordingly , we launched new weight management products in fiscal 2005 , and continued to launch them into fiscal 2007 , leading to an increase in sales of weight management products , while consistently experiencing a decrease in sales of low carb products since the beginning of fiscal 2006 , compared to fiscal 2005. moreover , as the rate of obesity increases and as the general public becomes increasingly more health conscious , we expect the demand for weight management products , albeit volatile , to continue to be strong in the near term . accordingly , we will continue to offer the highest quality products available in this segment . 22 in addition to the weight management product lines , we intend to continue our focus in meeting the demands of an increasingly aging population , the effects of increasing costs of traditional healthcare and a rapidly growing fitness conscious public . we believe that the aging of the population provides us with an area of opportunity . the u.s. census bureau reports that the number of individuals in the 65 and over age group is expected to double in the next 25 years . the increase in the population of this age group , coupled with the need for increased supplementation as digestive abilities wane , provides us with an enhanced sales opportunity . for example , anti-degenerative supplements , such as chondroitin sulfate , have demonstrated consistent increases in sales growth . story_separator_special_tag we have evaluated the current level of inventory considering historical trends and other factors , and based on our evaluation , have recorded adjustments to reflect inventory at net realizable value . these adjustments are estimates , which could vary significantly from actual results if future economic conditions , customer demand or competition differ from expectations . these estimates require us to make assessments about the future demand for our products in order to categorize the status of such inventory items as slow moving , obsolete or in excess of need . these future estimates are subject to the ongoing accuracy of management 's forecasts of market conditions , industry trends and competition . we are also subject to volatile changes in specific product demand as a result of unfavorable publicity , government regulation and rapid changes in demand for new and improved products or services . at december 29 , 2007 and december 30 , 2006 , obsolescence reserves were $ 1.3 million and $ 1.3 million , respectively . effective december 26 , 2004 ( the beginning of fiscal 2005 ) , we implemented a change in accounting for costs included in inventory . the change relates to capitalizing freight on internally transferred merchandise , rent for the distribution center and costs associated with our buying department and distribution facility , including payroll . these costs were previously expensed as incurred in cost of goods sold and are now treated as inventory product costs which are expensed as inventory is sold . freight on internally transferred merchandise , rent for the distribution center and costs associated with our buying department and the distribution facility are includable in inventory because they directly relate to the acquisition of goods for resale by us . we have determined that it is preferable to capitalize such costs into inventory because it better represents the costs incurred to prepare inventory for sale to the end user , shows better comparability with other retailers and will improve the management and planning of inventory . as a result , we recorded the cumulative effect of accounting change of $ 2.3 million ( net of tax provision of $ 1.6 million ) upon adoption . long-lived assets . we evaluate long-lived assets , including fixed assets and intangible assets with finite useful lives , periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable . if the sum of our estimated undiscounted future cash flows is less than the carrying value , we recognize an impairment loss , measured as the amount by which the carrying value exceeds the fair value of the asset . these estimates of cash flow require significant management judgment and certain assumptions about future volume , sales and expense growth rates , devaluation and inflation . as such , these estimates may differ from actual cash flows . for the periods presented we had no impairments of our long-lived assets . goodwill and other intangible assets . on an annual basis , or whenever impairment indicators exist , we perform a valuation of the goodwill and indefinite lived intangible assets . judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business . future events could cause us to conclude that impairment indicators exist , and therefore that goodwill and other intangible assets are impaired . to the extent that the fair value associated with the goodwill and indefinite-lived intangible assets is less than the recorded value , we write down the value of the asset . the valuation of the goodwill and indefinite-lived intangible assets is affected by , among other things , our business plan for the future , and estimated results of future operations . changes in the business plan or operating results that are different than the estimates used to develop the valuation of the assets result in an impact on their valuation . deferred sales . our healthy awards program allows customers to earn points toward free merchandise based on the volume of purchases . points are earned each year under our healthy awards program and are redeemable within the first three months of the following year or they expire . we defer sales on transactions based on estimated redemptions , which are based on historical redemption data as well as marketing efforts within the current period , and record a liability for points being earned within the current period . net changes to deferred sales were $ 0.3 million , $ 0.4 million , and $ 1.0 million for the years ended december 29 , 2007 , december 30 , 2006 and december 31 , 2005 , respectively . the balance for the deferred sales liability was $ 11.2 million and $ 11.5 million at december 29 , 2007 , and december 30 , 2006 , respectively . stock-based compensation . effective january 1 , 2006 , we adopted the fair value method of recording stock-based compensation in accordance with sfas no . 123 ( r ) , “share-based payment” ( “sfas no . 123 ( r ) ” ) , an amendment of fasb statements no . 123 , which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors . under the fair value recognition provisions of sfas no . 123r , stock-based compensation cost is measured at the grant date 24 based on the value of the award and is recognized as expense over the vesting period . determining the fair value of stock-based awards at the grant date requires considerable judgment , including estimating expected volatility , expected term and risk-free rate . our expected volatility is based on the volatility levels over the past 6.25 years ( our expected holding period ) from the average volatility of similar actively traded companies . the expected holding period of the option is calculated using the simplified method using the vesting term of 4 years and the contractual term of 10 years .

results of operations the information presented below is for the fiscal years ended december 29 , 2007 , december 30 , 2006 , and december 31 , 2005 and was derived from our audited consolidated financial statements , which , in the opinion of management , includes all adjustments necessary for a fair presentation of our financial position and operating results for such periods and as of such dates . the following table summarizes our results of operations for the fiscal years ended december 29 , 2007 , december 30 , 2006 , and december 31 , 2005 as a percentage of net sales : replace_table_token_10_th the net sales results presented for the years ended december 29 , 2007 , and december 30 , 2006 , are each based on a 52-week period ( “fiscal 2007 , ” and “fiscal 2006” ) , while the net sales results for the year ended december 31 , 2005 , are based on a 53-week period ( “fiscal 2005” ) . comparison of fiscal 2007 with fiscal 2006 net sales net sales increased $ 51.8 million , or 10.7 % , to $ 537.9 million for fiscal 2007 compared to $ 486.0 million for fiscal 2006. the increase was the result of an increase in our comparable store sales , as well as sales from our new non-comparable stores , which were offset by a decrease in our direct sales . retail net sales from our retail stores increased $ 54.5 million , or 13.4 % , to $ 462.0 million for fiscal 2007 compared to $ 407.5 million for fiscal 2006. we operated 341 stores as of december 29 , 2007 compared to 306 stores as of december 30 , 2006. our overall store sales increased due to non-comparable store sales of $ 29.2 million , as well as an increase in comparable store sales growth of $ 25.3 million , or 6.2 % ( comparable store sales include only those stores open more than 410 days and align with fiscal 2006 ) .

the difference between income recognition on a full accrual basis and cash basis , for notes receivable that are not considered impaired , is story_separator_special_tag cautionary statement regarding forward looking statements this form 10-k may contain forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 ( the “exchange act” ) , as amended , which are not historical facts but rather are based on current expectations , estimates and projections about our business and industry , our beliefs and assumptions . words such as “believes , ” “anticipates , ” “plans , ” “expects , ” “will , ” “goal , ” and similar expressions are intended to identify forward-looking statements . the inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved . we undertake no obligation to publicly update or revise any forward-looking statements , whether as a result of new information , future events or otherwise . such forward-looking information is also subject to various risks and uncertainties . such risks and uncertainties include , but are not limited to , risks arising from our providing services exclusively to the health care industry , primarily providers of long-term care ; credit and collection risks associated with this industry ; one client accounting for approximately 9 % of revenues for the year then ended december 31 , 2011 ; our claims experience related to workers ' compensation and general liability insurance ; the effects of changes in , or interpretations of laws and regulations governing the industry , our workforce and services provided , including state and local regulations pertaining to the taxability of our services ; and the risk factors described in part i in this report under “government regulation of clients , ” “competition” and “service agreements/collections , ” and under item ia “risk factors.” many of our clients ' revenues are highly contingent on medicare , medicaid and other payors ' reimbursement funding rates , which congress and related agencies have affected through the enactment of a number of major laws and regulations during the past decade , including the march 2010 enactment of the patient protection and affordable care act and the health care and education reconciliation act of 2010. most recently , in july 2011 , the united states center for medicare services ( “cms” ) 17 issued final rulings which , among other things , reduce ( effective october 1 , 2011 ) medicare payments to nursing centers by 11.1 % and change the reimbursement for the provision of group rehabilitation therapy services to medicare beneficiaries . currently , the u.s. congress is considering further changes or revising legislation relating to health care in the united states which , among other initiatives , may impose cost containment measures impacting our clients . these enacted laws , proposed laws and forthcoming regulations have significantly altered , or threaten to alter , overall government reimbursement funding rates and mechanisms . the overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the liquidity of our clients , resulting in their inability to make payments to us on agreed upon payment terms . these factors , in addition to delays in payments from clients , have resulted in , and could continue to result in , significant additional bad debts in the near future . additionally , our operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs , materials , supplies and equipment used in performing services could not be passed on to our clients . in addition , we believe that to improve our financial performance we must continue to obtain service agreements with new clients , provide new services to existing clients , achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operational levels . furthermore , we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies . story_separator_special_tag respective products . although we endeavor to pass on such increases in labor and supplies costs to our clients , the inability or delay in procuring service billing increases to reflect these additional costs would negatively impact our profit margins . as a result of the current economic crisis , many states have significant budget deficits . state medicaid programs are experiencing increased demand , and with lower revenues than projected , they have fewer resources to support their medicaid programs . in addition , comprehensive health care legislation under the patient protection and affordable care act and the health care and education reconciliation act of 2010 ( together , the “act” ) was signed into law in march 2010. the act will significantly impact the governmental healthcare programs in which our clients participate , and reimbursements received thereunder from governmental or third-party payors . in july 2011 , centers for medicare and medicaid services ( “cms” ) issued a final rule that will reduce medicare payments to nursing centers by 11.1 % and change the reimbursement for the provision of group rehabilitation therapy services to medicare beneficiaries . this new rule was effective as of october 1 , 2011. furthermore , in the coming year and beyond , new proposals or additional changes in existing regulations could be made to the act which could directly impact the governmental reimbursement programs in which our clients participate . as a result , some state medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases . a few states have indicated it is possible they will run out of cash to pay medicaid providers , including nursing homes . any negative changes in our clients ' reimbursements may negatively impact our results of operations . story_separator_special_tag when we evaluate that there is an uncertainty associated with the collectability of amounts due from a client , we record a bad debt provision based upon our initial estimate of ultimate collectability . we revise such provision as additional information is available which we believe enables us to have a more accurate estimate of the collectability of an account . some of our clients may experience liquidity problems because of governmental funding or operational issues . such liquidity problems may cause them to not pay us as agreed upon or necessitate them filing for bankruptcy protection . in the event of additional clients filing for bankruptcy protection , we would increase our bad debt provision during the reporting period when such filing occurs . therefore , if more clients file for bankruptcy protection or if we have to increase our current provision related to existing bankruptcies , our bad debt provision may increase from our last two years ' average of .3 % , as a percentage of consolidated revenues . the workers ' compensation and general liability insurance expense as a percentage of revenue remained essentially unchanged in 2011 as compared to 2010. although we recognized decreases in certain of our segment key indicators , as noted below , the net increase in consolidated cost of services in comparing the 2011 versus 2010 , resulted primarily from the increase in dietary supplies as percentage of consolidated revenues . 22 reportable segments cost of services provided for housekeeping , as a percentage of housekeeping revenues , for 2011 decreased slightly to 90.3 % compared to 90.6 % in 2010. cost of services provided for dietary , as a percentage of dietary revenues for 2011 , decreased slightly to 95.0 % from 95.7 % in 2010. the following table provides a comparison of the primary cost of services provided-key indicators , as a percentage of the respective segment 's revenues that we manage on a reportable segment basis in evaluating our financial performance : replace_table_token_8_th the decrease in housekeeping labor and other labor costs , as a percentage of housekeeping revenues , resulted primarily from efficiencies recognized in managing labor at the facility level . we can realize volatility in housekeeping labor and other labor costs from time to time as a result of inefficient management of labor in respect to adhering to established labor and other labor costs benchmarks at various operational levels , or the timing of passing through to clients , changes in wage rates as a result of legislative or collective bargaining actions . although we believe these factors were controlled effectively in 2011 in comparison to 2010 , ineffective control of these factors in the future would result in unfavorable volatility in our labor and other labor costs . the increase in housekeeping supplies , as a percentage of housekeeping revenues , resulted primarily from an increase in the number of clients where we provide an expanded amount of housekeeping supplies under the terms of our service agreements as compared to what we have historically provided to our client base . we do realize volatility in the costs of supplies utilized in providing our housekeeping services but we work to mitigate any vendor price increases through efficiencies in managing such costs . our supplies ' costs are impacted by commodity pricing factors , which in many cases are unpredictable and outside of our control . although we endeavor to pass on to clients such increased costs , from time to time , sporadic unanticipated increases in the costs of certain supply items due to economic conditions may result in a timing delay in obtaining such increases from our clients . additionally , if the increase is a result of a temporary market condition or change in availability of the specific commodity , and trends indicate it will not continue , we may not be able to pass such temporary increase on to our clients until the time of our next scheduled annual service billing review . the decrease in dietary labor and other labor costs , as a percentage of dietary revenues , resulted from efficiencies in managing these costs at the facility level . as noted above in the housekeeping labor and other labor costs discussion , our ability to control volatility in labor and other labor costs is directly related to our efficient management of labor at the various dietary operational levels in respect to established staffing benchmarks , as well as procuring on a timely basis increases from clients to reflect increased labor and other labor costs . we believe dietary 's labor and other labor costs can be effectively controlled in future periods by addressing such volatility factors effectively . dietary supplies , as a percentage of dietary revenues , remained consistent in 2011 as compared to 2010. dietary supplies , to a much greater extent than housekeeping supplies , are impacted by commodity pricing factors , which in many cases are unpredictable and outside of our control . although we endeavor to pass on to clients such increased costs , from time to time , sporadic unanticipated increases in the costs of certain supply items due to market economic conditions may result in a timing delay in passing on such increases to our clients . it is this type of spike in dietary supplies ' costs that could most adversely affect dietary 's operating performance . the adverse effect would be realized if we delay in passing on such costs to our clients or in instances where we may not be able 23 to pass such increase on to our clients until the time of our next scheduled service billing review . we endeavor to mitigate the impact of unanticipated increase in such supplies ' costs thought consolidation of vendors , which increases our ability to obtain reduced pricing . consolidated selling , general and administrative expense replace_table_token_9_th ( a ) selling , general and administrative expense excluding the change in the market value of the deferred compensation fund .

results of operations the following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements including the changes in certain key items in comparing financial statements period to period . we also intend to provide the primary factors that accounted for those changes , as well as a summary of how certain accounting principles affect our financial statements . in addition , we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations . this discussion should be read in conjunction with our financial statements as of december 31 , 2011 and the year then ended and the notes accompanying those financial statements contained herein under item 8. as disclosed in note 2 of the notes to the consolidated financial statements , contract environmental services , inc. ( “ces ' ) was acquired may 1 , 2009. the ces results of operations , for the period may 1 , 2009 to december 31 , 2009 are included in our 2009 consolidated results of operations and financial information presented below . such impact , when material and quantifiable , is discussed where we believe it would contribute to the reader 's understanding of our financial statements . during 2011 , we acquired a small regional provider of housekeeping and laundry services , which are included in our 2011 consolidated results of operations and financial information , for the period september 1 , 2011 to december 31 , 2011 , presented below . the impact of this acquisition did not have a material impact on the overall operations of company 's financial results from a consolidated or segment perspective .

item 11. executive compensation the information called for by this item will be set forth in our proxy statement and is incorporated herein by story_separator_special_tag story_separator_special_tag style= '' margin-top:12pt ; margin-bottom:0pt ; font-size:10pt ; font-family : times new roman '' > in july 2020 , we entered into another amendment to the 2014 credit facility , which added an additional lender and provided for an increase of $ 50.0 million to the revolving credit facility and a $ 50.0 million term loan . the incremental commitments were provided under the same terms as the existing commitments under the 2014 credit facility . during july 2020 , we drew down the additional available term loan of $ 50.0 million and repaid the $ 150.0 million outstanding revolving credit facility . as of december 31 , 2020 , we had $ 200.0 million of term loans outstanding under the 2014 credit facility and an additional $ 200.0 million undrawn revolving credit facility available . 2019 credit facility on december 31 , 2019 , we entered into a senior secured revolving credit facility ( the “2019 credit facility” ) with a second lender . the 2019 credit facility allowed for the drawdown of up to $ 250.0 million . as of december 31 , 2019 we had $ 250.0 million outstanding under the 2019 credit facility , and $ 125.0 million of the proceeds were required to be maintained in a specified collateral account , which was reported in restricted cash , noncurrent in the consolidated balance sheet . 102 during june 2020 , a portion of the proceeds drawn down under the 2014 credit facility were used to pay off the $ 250.0 million outstanding , balance of the revolving loan commitment under the 2019 credit facility , thus releasing the 50 % restricted cash collateral previously required . as of december 31 , 2020 , the 2019 credit facility was terminated and there were no amounts outstanding . contractual obligations and commitments the following table summarizes our contractual obligations and commitments as of december 31 , 2020 ( in thousands ) : replace_table_token_16_th ( 1 ) the contractual commitment amounts under operating leases in the table above are primarily related to facility and equipment leases . operating lease commitments are reflected net of $ 150.3 million of sublease income from tenants in certain of our leased facilities . refer to note 8 . leases in our consolidated financial statements included elsewhere in this annual report on form 10-k for additional information . ( 2 ) noncancelable purchase commitments primarily relate to purchase commitments for third-party cloud hosting services and represents only contracts which are enforceable and legally binding . obligations under contracts that we can cancel without a significant penalty are not included in the table above . refer to note 9. commitments and contingencies in our consolidated financial statements included elsewhere in this annual report on form 10-k for additional information . ( 3 ) includes principal payments on our outstanding senior secured revolving credit facility , which bears floating interest rates of libor plus 2.75 % per annum . refer to note 7. debt in our consolidated financial statements included elsewhere in this annual report on form 10-k for additional information . the contractual obligations and commitments in the table above are associated with agreements that are enforceable and legally binding . deferred revenue and customer deposits deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer . the portion of deferred revenue that is anticipated to be recognized as revenue during the succeeding twelve-month period is recorded as deferred revenue and the remaining portion is recorded as deferred revenue , noncurrent . customer deposits consist of payments received for anticipated revenue generating activities in advance of the start of the contractual term or for the portion of a contract term that is subject to cancellation and refund . the portion of customer deposits that is anticipated to be recognized as revenue during the succeeding twelve-month period is recorded as customer deposits and the remaining portion is recorded as customer deposits , noncurrent . our deferred revenue and deferred revenue , noncurrent as of december 31 , 2020 was $ 189.5 million and $ 50.5 million , respectively . our customer deposits and customer deposits , noncurrent as of december 31 , 2020 was $ 210.3 million and $ 81.5 million , respectively . our total deferred revenue and deferred revenue , noncurrent as of december 31 , 2019 was $ 186.1 million and $ 77.0 million , respectively . our total customer deposits and customer deposits , noncurrent as of december 31 , 2019 was $ 364.1 million and $ 167.5 million , respectively . 103 off-balance sheet arrangements we did not have , during the periods presented , any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships , including entities sometimes referred to as structured finance or special purpose entities , that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes . critical accounting policies and estimates our consolidated financial statements and the accompanying notes thereto included elsewhere in this annual report on form 10-k are prepared in accordance with gaap . the preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue , costs and expenses , and related disclosures . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . actual results could differ significantly from our estimates . to the extent that there are differences between our estimates and actual results , our future financial statement presentation , financial condition , results of operations , and cash flows will be affected . we believe that the accounting policies described below involve a significant degree of judgment and complexity . story_separator_special_tag we include the estimated amount of variable consideration that we expect to receive to the extent it is probable that a significant revenue reversal will not occur . any amounts received in the form of performance bonuses were not material in the periods presented . stock-based compensation we account for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of gaap , which require compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service period . we determine the fair value of stock-based awards granted or modified on the grant date or modification date using appropriate valuation techniques . service-based vesting we grant stock option awards and rsus , that vest only based upon the satisfaction of a service condition . for stock option awards , we use the black-scholes option pricing model to determine the fair value of the stock options granted . the black-scholes option pricing model requires the input of highly subjective assumptions , including the fair value of the underlying common stock , the expected term of the option , the expected volatility of the price of the common stock , risk-free interest rates , and the expected dividend yield of the common stock . the assumptions used to determine the fair value of the option awards represent management 's best estimates . these estimates involve inherent uncertainties and the application of our judgment . for rsus , we determine the grant-date fair value of the rsus as the fair value of our common stock on the grant date . we record stock-based compensation expense for stock options and rsus that vest only based upon the satisfaction of a service condition on a straight-line basis over the requisite service period , which is generally four years . we recognize forfeitures as they occur . performance-based vesting we grant awards , including rsus that vest upon the satisfaction of both a service condition and a performance condition . the performance-based vesting condition for the rsus granted prior to our direct listing was satisfied upon the occurrence of the direct listing . the stock-based compensation expense related to such rsus is recognized using the accelerated attribution method from the grant date . the service-based vesting period for these awards varies across service providers and is up to five years . income taxes we estimate our current tax expense together with assessing temporary differences resulting from differing treatment of items not currently deductible for tax purposes . these differences result in deferred tax assets and liabilities on our consolidated balance sheets , which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse . in general , deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized . accordingly , the realization of our deferred tax assets are dependent on future taxable income against which these deductions , losses , and credits can be utilized . we evaluate the realizability of our deferred tax assets and recognize a valuation allowance when it is more likely than not that a future benefit on such deferred tax assets will not be realized . changes in the valuation allowance , when recorded , would be included in our consolidated statements of operations . our judgment is required in determining the valuation allowance recorded against our net deferred tax assets . 106 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 consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon settlement . we recognize interest and penalties related to uncertain tax positions in our provision ( benefit ) for income taxes . recent accounting pronouncements for information on recently issued accounting pronouncements , refer to note 2. significant accounting policies in our consolidated financial statements included elsewhere in this annual report on form 10-k. item 7a . qualitative and quantitative disclosures about market risk we are exposed to market risks in the ordinary course of our business , which primarily relate to fluctuations in interest rates , foreign exchange , and inflation . interest rate risk our cash , cash equivalents , and restricted cash consist of cash , certificates of deposit , and money market funds . our investment policy and strategy are focused on the preservation of capital and supporting our liquidity requirements . we have not entered into investments for trading or speculative purposes . due to the short-term nature of the financial instruments , we have not been exposed to , nor do we anticipate being exposed to , material risks due to changes in interest rates . a hypothetical 10 % change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements . as of december 31 , 2020 , we had $ 200.0 million in variable rate term loans outstanding that are scheduled to mature in june 2023. an immediate 10 % change in libor would not have a material impact on our debt-related obligations , financial position or results of operations . foreign currency exchange risk our contracts with customers are primarily denominated in u.s. dollars , with a small amount denominated in foreign currencies . our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations , which are primarily in the united states , united kingdom , and other european countries .

financial condition and results of operations — credit facilities . ” additionally , during the year ended december 31 , 2020 , we sold 206,500,523 shares of our class a common stock at $ 4.65 per share for net proceeds of approximately $ 942.5 million , which is net of issuance costs of $ 17.7 million , and received proceeds of $ 298.8 million from the exercise of 120,617,527 options . our future capital requirements will depend on many factors , including , but not limited to the rate of our growth , our ability to attract and retain customers and their willingness and ability to pay for our products and services , and the timing and extent of spending to support our efforts to market and develop our products . further , we may enter into future arrangements to acquire or invest in businesses , products , services , strategic partnerships , and technologies . as such , we may be required to seek additional equity or debt financing . in the event that additional financing is required from outside sources , we may not be able to raise it on terms acceptable to us or at all . if 100 additional funds are not available to us on acceptable terms , or at all , our business , financial condition , and results of operations could be adversely affected . the following table summarizes our cash flows for the periods indicated ( in thousands ) : replace_table_token_15_th operating activities net cash used in operating activities was $ 296.6 million for the year ended december 31 , 2020. the factors affecting our operating cash flows during this period were our net loss of $ 1.2 billion and changes in net operating assets and liabilities of $ 454.1 million , offset by non-cash charges of $ 1.3 billion . the non-cash charges primarily consisted of $ 1.3 billion in stock-based compensation expense , $ 35.0

under these agreements , we have paid deposits , which in many cases are non-refundable , in consideration for the right , but not the obligation , to f- 9 purchase land or lots at a future point in time with predetermined terms . lot option and escrow deposits are included in prepaid expenses and other assets on the consolidated balance sheet . model homes and sales facilities costs related to our model homes and sales facilities are treated in one of three ways depending on their nature . costs directly attributable to story_separator_special_tag the following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our company , business , operations and present business environment and is provided as a supplement to , and should be read in conjunction with , our consolidated financial statements and the related notes to those statements included elsewhere in this form 10-k. in addition to historical financial information , the following discussion and analysis contains forward-looking statements that involve risks , uncertainties and assumptions . our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those discussed under “ risk factors ” and elsewhere in this annual report on form 10-k. we use certain non-gaap financial measures that we believe are important for purposes of comparison to prior periods . this information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends . some of the numbers included herein have been rounded for the convenience of presentation . in july 2019 , the financial accounting standards board ( which we refer to as “ fasb ” ) issued accounting standards update 2019-07 , “ codification updates to sec sections-amendments to sec paragraphs pursuant to sec final rule releases no . 33-10532 , disclosure update and simplification '' , which made changes meant to simplify certain disclosures in financial condition and results of operations , particularly by eliminating year-to-year comparisons between prior periods previously disclosed . this section of this form 10-k generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this form 10-k can be found in “ management 's discussion and analysis of financial condition and results of operations ” in part ii , item 7 of the company 's annual report on form 10-k for the fiscal year ended december 31 , 2018 . 38 business overview we are engaged in the development , design , construction , marketing and sale of single-family attached and detached homes in metropolitan areas in 17 states . in many of our projects , in addition to building homes , we are responsible for the entitlement and development of the underlying land . we build and sell homes under our century communities and wade jurney homes brands . our century communities brand targets a wide range of buyer profiles including : first time , first and second time move up , and lifestyle homebuyers , and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections . our wade jurney homes brand targets first time homebuyers , primarily sells homes through retail studios and the internet , and provides no option or upgrade selections . our homebuilding operations are organized into the following five reportable segments : west , mountain , texas , southeast , and wade jurney homes . additionally , our indirect wholly-owned subsidiaries , inspire home loans , inc. , parkway title , llc , and ihl home insurance agency , llc , which provide mortgage , title and insurance services , respectively , to our home buyers have been identified as our financial services segment . on february 6 , 2020 , in order to better align with our century brand we announced the rebranding of our wade jurney homes brand to century complete . we believe this rebranding will assist in showcasing the value proposition to potential buyers . the newly positioned century complete brand will operate similarly to wade jurney homes , adopting its business strategy and continuing to provide comparable offerings . we build and sell an extensive range of home types across a variety of price points . results of operations – years ended december 31 , 2019 and 2018 the year ended december 31 , 2019 was characterized by decreasing mortgage rates , low unemployment , and a low supply of inventory in most of our markets . in particular , all of our markets exhibit a low supply of inventory at affordable price points . to that end , during 2019 we continued to invest in our exposure to more affordable price point offerings including through both our century communities and wade jurney homes brands . this was evident in the decrease in our average sales price of homes delivered of $ 310,200 in 2019 as compared to $ 346,000 during 2018. during 2019 we experienced a 31.2 % increase in the number of homes delivered to 8,000 homes . the increase in the number of homes delivered was partly attributable to the acquisition of wade jurney homes in june 2018. the increase in homes delivered , offset by the decrease in our average sales price , resulted in an increase in our home sales revenues of 17.6 % to $ 2.5 billion . for the year ended december 31 , 2019 , we generated income before income tax of $ 132.6 million and net income of $ 113.0 million . subject to deteriorating market conditions , we believe our operations are well positioned for future growth as a result of the markets in which we operate , our product offerings which span the home buying segment , our focus on affordable price points , as well as current and future inventories of attractive land positions . story_separator_special_tag ) increases in information 43 technology expenses , rent expense and insurance costs . the increases are primarily a result of increased scale of our operations . other income ( expense ) for the year ended december 31 , 2019 , other expense increased to $ 5.2 million from $ 0.9 million for the same period in 2018. the increase was primarily related to estimated costs associated with claiming federal energy credits . income tax expense our income tax expense for the year ended december 31 , 2019 was $ 19.6 million or 14.8 % of income before income tax as compared to $ 32.1 million or 25.0 % of income before income tax for the year ended december 31 , 2018. the decrease in the effective income tax rate during the year ended december 31 , 2019 is primarily a result of a $ 17.3 million benefit associated with the energy efficient home credit under irs §45l ( which we refer to as “ federal energy credits ” ) . the federal energy credits provide eligible contractors a federal income tax credit of $ 2,000 for each home delivered that meets the energy saving and certification requirements under the statute . the federal energy credits had previously expired and were not available to be claimed for any home which was delivered after december 31 , 2017. however , on december 20 , 2019 , an extension of the federal energy credits was enacted into law , which extended the availability of the credit to homes delivered during the years ended december 31 , 2018 , 2019 and 2020. of the $ 17.3 million benefit recognized during the year ended december 31 , 2019 , approximately $ 6.9 million , $ 6.1 million and $ 4.3 million were related to homes closed during the years ended 2019 , 2018 and 2017 and prior , respectively . segment assets ( dollars in thousands ) replace_table_token_6_th replace_table_token_7_th of our total lots owned and controlled as of december 31 , 2019 , 48.1 % were owned and 51.9 % were controlled , as compared to 55.4 % owned and 44.6 % controlled as of december 31 , 2018. total assets increased by $ 245.7 million , or 10.9 % , to $ 2.5 billion at december 31 , 2019 , as compared to $ 2.3 billion at december 31 , 2018. the increase is primarily driven by investments in inventory during the period within our homebuilding operations and an increase in mortgage loans originated and closed in our financial services segment . ‎ 44 other homebuilding operating data replace_table_token_8_th net new home contracts ( new home contracts net of cancellations ) for the year ended december 31 , 2019 increased by 2,204 homes , or 39.0 % , to 7,861 , as compared to 5,657 for the year ended december 31 , 2018. the increase in our net new home contracts was primarily driven by our acquisition of wjh as well as increases in the west and texas due to increases in absorptions . our overall monthly “ absorption rate ” ( the rate at which home orders are contracted , net of cancelations ) for the years ended december 31 , 2019 and 2018 by segment is included in the table below : replace_table_token_9_th our absorption rate increased from 3.2 per month for the year ended december 31 , 2018 to 3.8 per month during the year ended december 31 , 2019. replace_table_token_10_th our selling communities decreased by 5 communities to 117 communities at december 31 , 2019 , as compared to 122 communities at december 31 , 2018. wade jurney homes does not sell from traditional model homes , and therefore , we do not calculate selling communities for this segment . ‎ 45 replace_table_token_11_th backlog reflects the number of homes , net of cancellations experienced during the period , for which we have entered into a sales contract with a customer but for which we have not yet delivered the home . at december 31 , 2019 , we had 2,070 homes in backlog with a total value of $ 637.8 million , which represents a decrease of 5.1 % and 4.7 % , respectively , as compared to 2,181 homes in backlog with a total value of $ 669.5 million at december 31 , 2018. the decrease in backlog and backlog value is primarily attributable to our continued focus toward affordable product offerings . average sales price remained relatively consistent from december 31 , 2019 to december 31 , 2018. supplemental pro forma information  we completed significant acquisitions in 2018 and 2017 that are not included in our results of operations for the years ended december 31 , 2018 and 2017 , and to aid readers with year over year comparability for the entire business , we are including limited supplemental pro forma information below for those periods . the supplemental pro forma information below for the years ended december 31 , 2018 and 2017 give effect to the results of the acquisitions of wjh , ucp and sundquist homes . the effect of the wjh , ucp and sundquist homes acquisition are reflected as though the acquisition date was as of january 1 , 2017. the pro forma information is for informational purposes only and supplements our consolidated financial statements prepared in accordance with us gaap . we believe that the pro forma information is useful as it provides additional information given the significant impact of these acquisitions , and a reflection of how the combined business performed year over year that is not readily discernible from the actual year over year comparison . the pro forma information below does not purport to reflect the results of operations that would have occurred had the acquisition of wjh , ucp and sundquist homes occurred on january 1 , 2017 , nor does the pro forma information purport to represent the results of operations of the company for any future dates or periods .

results of operations by segment replace_table_token_3_th west in our west segment , for the year ended december 31 , 2019 , our income before income tax increased by $ 4.6 million to $ 43.0 million . our income before income tax included no purchase accounting adjustments during the year ended december 31 , 2019 and $ 14.3 million during the year ended december 31 , 2018. during the year ended december 31 , 2019 , we delivered 1,029 homes with an average sales price of $ 519.3 thousand and generated $ 534.4 million in home sales revenue in the west . the decrease in average sales price of homes delivered was primarily due to our shift towards more affordable product offerings .   mountain in our mountain segment , for the year ended december 31 , 2019 , our income before income tax increased by $ 0.2 million to $ 89.2 million , as compared to $ 89.0 million for the same period in 2018 , primarily due to nominal increases in number of homes delivered and average sales price of homes delivered .  texas in our texas segment , for the year ended december 31 , 2019 , our income before income tax increased by $ 12.2 million to $ 25.9 million as compared to $ 13.7 million for the same period in 2018. this increase is primarily related to a 31 % increase in the number of homes delivered in 2019 , partially offset by a decrease in the average sales price of homes delivered as we continued our shift towards more affordable product offerings .

overview since our founding over 36 years ago , we have grown to be one of the largest providers of wire and cable and related services to the u.s. market . today , we serve approximately 6,000 customers . our products are used in mro activities and related projects , as well as for larger-scale projects in the utility , industrial and infrastructure markets and a diverse range of industrial applications including communications , energy , engineering and construction , general manufacturing , mining , construction , oilfield services , infrastructure , petrochemical , transportation , utility , wastewater treatment , marine construction and marine transportation . our revenue is driven in part by the level of capital spending within the end-markets we serve . because many of these end-markets defer capital expenditures during periods of economic downturns , our business has experienced cyclicality from time to time . we believe that our revenue will continue to be impacted by fluctuations in capital spending and by our ability to drive demand through our sales and marketing initiatives and the continued development and marketing of our private branded products , such as lifeguard . the recent economic uncertainty and volatility in commodity prices have impacted sales and the level of demand . this has had and will continue to have an impact on our performance , until economic conditions stabilize . our direct costs will continue to be influenced significantly by the prices we pay our suppliers to procure the products we distribute to our customers . changes in these costs may result , for example , from increases or decreases in raw material costs , changes in our relationships with suppliers or changes in vendor rebates . our operating expenses will continue to be affected by our investment in sales , marketing and customer support personnel and commissions paid to our sales force for revenue and profit generated . some of our operating expenses are related to our fixed infrastructure , including rent , utilities , administrative salaries , maintenance , insurance and supplies . to meet our customers ' needs for an extensive product offering and short delivery times , we will need to continue to maintain adequate inventory levels . our ability to obtain this inventory will depend , in part , on our relationships with suppliers . critical accounting policies and estimates critical accounting policies are those that both are important to the accurate portrayal of a company 's financial condition and results of operations , and require subjective or complex judgments , often as a result of the need to make estimates about the effect of matters that are inherently uncertain . in order to prepare financial statements that conform to accounting principles generally accepted in the united states , commonly referred to as gaap , we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes . certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations . we have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations . actual results in these areas could differ materially from management 's estimates under different assumptions and conditions . allowance for doubtful accounts we maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments . we perform periodic credit evaluations of our customers and typically do not require collateral . consistent with industry practices , we require payment from most customers within 30 days of the invoice date . we have an estimation procedure , based on historical data , current economic conditions and recent changes in the aging of the receivables , which we use to record reserves throughout the year . in the last five years , write-offs against our allowance for doubtful accounts have averaged $ 0.1 million per year . a 20 % change in our estimate at december 31 , 2011 would have resulted in a change in income before income taxes of less than $ 0.1 million . 15 reserve for returns and allowances we estimate the gross profit impact of returns and allowances for previously recorded sales . this reserve is calculated on historical and statistical returns and allowances data and adjusted as trends in the variables change . a 20 % change in our estimate at december 31 , 2011 would have resulted in a change in income before income taxes of $ 0.1 million . inventories inventories are valued at the lower of cost , using the average cost method , or market . we continually monitor our inventory levels at each of our distribution centers . our reserve for inventory obsolescence is based on the age of the inventory , movements of our inventory over the prior twelve months and the experience of our purchasing and sales departments in estimating demand for the product in the succeeding year . our inventories are generally not susceptible to technological obsolescence . a 20 % change in our estimate at december 31 , 2011 would have resulted in a change in income before income taxes of $ 0.6 million . intangible assets the company 's intangible assets , excluding goodwill , represent purchased trade names , customer relationships , and non-compete agreements . trade names are not being amortized and are treated as indefinite lived assets . trade names are tested for recoverability on an annual basis in october of each year . this test was performed in october 2011 and no impairment was deemed necessary . the company assigns useful lives to its intangible assets based on the periods over which it expects the assets to contribute directly or indirectly to the future cash flows of the company . story_separator_special_tag greater rate than mro sales , as sales within our growth initiatives remained more resilient to difficult early year economic conditions as projects in these areas were already in progress and had been previously funded . project bookings and backlog for our growth initiatives in 2010 remained strong as a result of our continued penetration into these markets . gross profit replace_table_token_10_th gross profit increased 18.2 % to $ 62.6 million in 2010 from $ 53.0 million in 2009. the increase in gross profit was attributed to the acquisition as the contribution from the hwc legacy business remained flat due to more customers earning rebates and increased freight expenses . gross profit as a percentage of sales ( gross margin ) decreased due to the competitive market place , sales mix and increased customer rebates and freight expenses . operating expenses replace_table_token_11_th note : due to rounding , numbers may not add up to total operating expenses . salaries and commissions . salaries and commissions increased primarily due to the additional personnel from the acquisition . other operating expenses . other operating expenses increased due to the additional operations of the acquired businesses and acquisition costs of $ 0.9 million , which the company did not incur in 2009. these additional expenses were partially offset by ongoing cost control initiatives from hwc 's legacy business . depreciation and amortization . the depreciation and amortization increase is attributable to the assets acquired in the acquisition . 20 operating expenses as a percentage of sales remained flat at 15.4 % in 2010 and 2009. interest expense interest expense increased 62.3 % , or $ 0.3 million , to $ 0.8 million in 2010 from $ 0.5 million in 2009 due to higher debt levels as the acquisition was funded entirely from the company 's loan agreement . average debt was $ 33.5 million in 2010 compared to $ 20.8 million in 2009. the average effective interest rate increased to 2.2 % in 2010 from 1.8 % in 2009. this increase was primarily due to the higher base spreads over libor under a september 2009 amendment to our loan agreement and an increase in the applicable libor spread as a result of the higher debt-to-ebitda ratio caused by the acquisition . income tax expense income tax expense increased $ 0.3 million , or 6.2 % , to $ 5.5 million in 2010 as our income before income taxes increased 6.9 % . the effective income tax rate decreased to 39.1 % in 2010 from 39.4 % in 2009. the effective income tax rate was lower in 2010 due to 2009 reflecting a deferred tax adjustment relating to prior periods which increased the effective income tax rate in 2009. this decrease was partially offset by the effect of nondeductible expenses incurred in 2010 associated with the acquisition . net income we achieved net income of $ 8.6 million in 2010 compared to $ 8.0 million in 2009 , an increase of 7.3 % . impact of inflation and commodity prices our results of operations are affected by changes in the inflation rate and commodity prices . moreover , because copper , petrochemical and steel products are components of the wire and cable and related hardware we sell , fluctuations in the costs of these and other commodities have historically affected our operating results . copper prices have decreased from an average price per pound of $ 4.39 in the first quarter of 2011 to a low of $ 3.40 per pound in the fourth quarter of 2011. the impact of decreasing copper prices on our sales and net income during 2011 can not be isolated , as product mix changes and volatile economic demand also impacted performance . to the extent commodity prices decline , the net realizable value of our existing inventory could also decline , and our gross profit could be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our inventory . if we turn our inventory approximately four times a year , the impact of changes in copper and steel prices in any particular quarter would primarily affect the results of the succeeding calendar quarter . if we are unable to pass on to our customers future cost increases due to inflation or rising commodity prices , our operating results could be adversely affected . liquidity and capital resources our primary capital needs are for working capital obligations , capital expenditures , dividend payments and other general corporate purposes , including acquisitions and the stock repurchase program . our primary sources of working capital are cash from operations supplemented by bank borrowings . liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash . we assess our liquidity in terms of our ability to generate cash to fund our operating activities . significant factors which could affect liquidity include the following : · the adequacy of available bank lines of credit ; · the ability to attract long-term capital with satisfactory terms ; · cash flows generated from operating activities ; · capital expenditures ; · payment of dividends ; · acquisitions ; and · additional stock repurchases 21 comparison of years ended december 31 , 2011 and 2010 our net cash provided by operating activities was $ 14.3 million in 2011 compared to $ 19.3 million in 2010. our net income increased by $ 11.1 million or 128.3 % to $ 19.7 in 2011 million from $ 8.6 million in 2010. changes in our operating assets and liabilities resulted in cash used in operating activities of $ 8.8 million in 2011. trade accounts payable decreased $ 9.9 million primarily due to payment in early 2011 of $ 4.9 million of vendor invoices under dispute at december 31 , 2010 and a planned slow down of inventory purchases for our legacy business in december 2011. inventory increased $ 2.8 million as a result of the acquired businesses .

results of operations the following discussion compares our results of operations for the years ended december 31 , 2011 , 2010 and 2009. the following table shows , for the periods indicated , information derived from our consolidated statements of income , expressed as a percentage of sales for the period presented . replace_table_token_5_th note : due to rounding , numbers may not add up to total operating expenses , operating income or income before income taxes . comparison of years ended december 31 , 2011 and 2010 sales replace_table_token_6_th our sales for 2011 increased 28.5 % to $ 396.4 million from $ 308.5 million in the fiscal year 2010. the primary reasons for this increase were the contribution from the acquired businesses , improved demand for our products due to recovering economic conditions and the increase in the price of copper , a component in our products , which rose approximately 17 % during 2011. we estimate sales in our core repair and replacement sector , also referred to as maintenance , repair and operations ( “ mro ” ) , increased approximately 8 % -10 % as a result of improved economic conditions . sales within our five internal growth initiatives encompassing emission controls , engineering & construction , industrials , lifeguard ( and other private branded products ) and utility power generation increased approximately 30 % as project activity in these areas remained strong due to ongoing market penetration and previously booked backlog . gross profit replace_table_token_7_th 18 gross profit increased 42.0 % to $ 88.9 million in 2011 from $ 62.6 million in 2010. the increase in gross profit was attributed to an increase in our legacy business and the contribution from the acquired businesses .

the carrying amount of amortizable intangible assets and the related accumulated amortization were as follows : replace_table_token_25_th intangible asset amortization expense for the years ended december 31 , 2017 , story_separator_special_tag management 's discussion and analysis of financial condition and results of operations as well as other sections of this annual report on form 10-k contain forward-looking statements . the private securities litigation reform act of 1995 provides a safe harbor for forward-looking statements . forward-looking statements are not historical facts , but instead represent only our beliefs , assumptions , expectations , estimates , forecasts and projections regarding future events , many of which , by their nature , are inherently uncertain and outside our control . these statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results . by identifying these statements for you in this manner , we are alerting you to the possibility that our actual results and financial condition may differ , possibly materially , from the anticipated results and financial condition indicated in these forward-looking statements . important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include , among others , those discussed under the section heading “ risk factors ” in part i , item 1a of this form 10-k. factors that may affect the outcome of the forward-looking statements include , among other things , leadership changes , our ability to attract , integrate , manage and retain qualified consultants and senior leaders ; our ability to develop and maintain strong , long-term relationships with our clients ; fluctuations in the global and local economies and our ability to execute successfully our strategies ; social or political instability in markets where we operate , the impact of the u.k. referendum to leave the european union ( brexit ) ; the impact of foreign currency exchange rate fluctuations ; unfavorable tax law changes and tax authority rulings ; price competition ; the ability to forecast , on a quarterly basis , variable compensation accruals that ultimately are determined based on the achievement of annual results ; our ability to realize our tax losses ; the timing of the establishment or reversal of valuation allowance on deferred tax assets ; the mix of profit and loss by country ; our ability to integrate future acquisitions ; our reliance on information management systems ; any impairment of our goodwill , other intangible assets and other long-lived assets ; and the ability to align our cost structure and headcount with net revenue . we undertake no obligation to update publicly any forward-looking statements , whether as a result of new information , future events or otherwise . executive overview our business we are a leadership advisory firm providing executive search , leadership consulting and culture shaping services . we help our clients build leadership teams by facilitating the recruitment , management and development of senior executives . we believe focusing on top-level services offers us several advantages that include access to and influence with key decision makers , increased potential for recurring search consulting engagements , higher fees per search , enhanced brand visibility , and a leveraged global footprint , which create added barriers to entry for potential competitors . working at the top of client organizations also allows us to attract and retain high-caliber consultants . in addition to executive search , we provide leadership consulting expertise and culture shaping services including executive leadership assessment ; leadership , team and board development ; succession planning ; talent strategy ; people performance ; inter-team collaboration ; and organizational transformation . we have announced the combination of our leadership consulting and culture shaping businesses to create heidrick consulting , a comprehensive offering of the firm 's advisory services . we anticipate that our leadership consulting and culture shaping reportable segments will be combined into one reportable segment , heidrick consulting , during the first quarter of 2018. we provide our services to a broad range of clients through the expertise of over 380 consultants located in major cities around the world . our executive search services are provided on a retained basis . revenue before reimbursements of out-of-pocket expenses ( “ net revenue ” ) consists of retainers and indirect expenses billed to clients . typically , we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled . in addition , if the actual compensation of a placed candidate exceeds the estimated compensation , we often are authorized to bill the client for one-third of the excess . indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search . 18 key performance indicators we manage and assess heidrick & struggles ' performance through various means , with the primary financial and operational measures including net revenue , operating income , operating margin , adjusted ebitda ( non-gaap ) , and adjusted ebitda margin ( non-gaap ) . executive search and leadership consulting performance is also measured using consultant headcount . specific to executive search , confirmation trends , consultant productivity and average revenue per search are used to measure performance . revenue is driven by market conditions and a combination of the number of executive search engagements and leadership consulting and culture shaping projects and the average revenue per search or project . with the exception of compensation expense , incremental increases in revenue do not necessarily result in proportionate increases in costs , particularly operating and administrative expenses , thus potentially improving operating margins . the number of consultants , confirmation trends , number of searches or projects completed , productivity levels and the average revenue per search or project will vary from quarter to quarter , affecting net revenue and operating margin . our compensation model at the executive search consultant level there are fixed and variable components of compensation . story_separator_special_tag the number of consultants was 163 as of december 31 , 2017 , compared to 158 as of december 31 , 2016. salaries and employee benefits expense increased $ 16.5 million from 2016. fixed compensation increased $ 4.4 million primarily due to higher base salaries and payroll taxes of $ 3.8 million , higher separation costs of $ 0.5 million and higher stock compensation expense of $ 0.5 million , partially offset by a decrease in deferred compensation of $ 1.1 million . variable compensation increased $ 12.1 million primarily due to higher bonus accruals for consultant performance . general and administrative expenses increased $ 1.6 million primarily due to increased professional service fees and office occupancy expenses , partially offset by lower hiring fees and temporary labor . the americas incurred approximately $ 0.8 million in restructuring charges for the year ended december 31 , 2017. these charges include approximately $ 0.6 million in severance related charges and $ 0.2 million in professional fees and other expenses . operating income was $ 81.5 million in 2017 , an increase of $ 7.7 million compared to $ 73.9 million in 2016. excluding the impact of restructuring charges , the americas segment reported operating income of $ 82.3 million . europe europe reported net revenue of $ 125.3 million in 2017 , an increase of 15.3 % from $ 108.8 million in 2016. the increase in net revenue was driven by a 6.2 % increase in the number of executive search confirmations as compared to the prior year and an increase in consultant headcount . our acquisition of jca group in august 2016 also contributed to the year-over-year growth in net revenue . excluding the impact of exchange rate fluctuations , which negatively impacted results by $ 1.0 million , or 0.8 % , net revenue increased $ 17.6 million , or 16.2 % . all industry practice groups contributed to net revenue growth with the exception of the global technology & services practice group . the number of consultants was 103 as of december 31 , 2017 as compared to 95 as of december 31 , 2016. salaries and employee benefits expense increased $ 15.7 million from 2016. fixed compensation increased $ 6.9 million primarily due to compensation expense associated with the jca acquisition in august 2016 , increases in legacy base salaries and payroll taxes and the hmrc employee benefit tax settlement , net of reimbursements , of $ 1.5 million . variable compensation increased $ 8.7 million due to higher bonus accruals for consultant performance . general and administrative expense increased $ 1.7 million from 2016 primarily due to ongoing general and administrative expenses related to the jca group acquisition including increased amortization and accretion of $ 0.7 million . europe incurred approximately $ 3.9 million in restructuring charges for the year ended december 31 , 2017. these charges include approximately $ 3.9 million in severance related charges and $ 0.1 million in in office related charges . the europe segment reported operating income of $ 2.0 million in 2017 , a decrease of $ 4.8 million compared to $ 6.8 million in 2016. excluding the impact of restructuring charges , the europe segment reported operating income of $ 6.0 million . 24 asia pacific asia pacific reported net revenue of $ 86.9 million in 2017 , an increase of 1.9 % compared to $ 85.3 million in 2016. the life sciences , industrial , and financial services practice groups contributed to the increase in net revenue . excluding the impact of exchange rate fluctuations , which positively impacted results by $ 0.4 million , or 0.4 % , net revenue increased $ 1.2 million , or 1.4 % . the number of consultants was 80 as of december 31 , 2017 , compared to 82 as of december 31 , 2016. salaries and employee benefits expense increased $ 3.2 million . fixed compensation increased by $ 0.1 million due to increases in retirement and benefits expense , partially offset by lower base salaries and payroll taxes . variable compensation increased $ 3.1 million due to higher bonus accruals for consultant performance . general and administrative expenses decreased $ 1.0 million , primarily due to lower office occupancy expenses , internal travel costs , and taxes and licenses . asia pacific incurred approximately $ 2.0 million in restructuring charges for the year ended december 31 , 2017. these charges include approximately $ 1.8 million in severance related charges , $ 0.1 million in office related charges and $ 0.1 million in professional fees and other expenses . the asia pacific segment reported operating income of $ 2.1 million in 2017 , a decrease of $ 2.7 million compared to $ 4.8 million in 2016. excluding the impact of restructuring charges , the asia pacific segment reported operating income of $ 4.2 million . leadership consulting the leadership consulting segment reported net revenue of $ 41.2 million in 2017 , an increase of 6.2 % compared to $ 38.8 million in 2016. the increase in net revenue was driven by a full year of results from our acquisitions of dsi and philosophy ib . excluding the impact of exchange rate fluctuations , which negatively impacted results by $ 1.0 million , or 2.3 % , net revenues increased $ 3.4 million , or 8.8 % . there were 19 leadership consulting consultants at december 31 , 2017 , compared to 22 at december 31 , 2016. salaries and employee benefits expense increased $ 4.8 million compared to the prior year . fixed compensation increased $ 4.0 million primarily due the acquisitions of dsi and philosophy ib , partially offset by lower separation expenses and lower amortization of minimum guarantees . variable compensation increased $ 0.8 million due to higher bonus accruals for consultant performance . general and administrative expenses decreased $ 0.8 million primarily as a result of decreases in litigation expense , professional fees and internal travel costs , partially offset by increases in office occupancy costs and the use of external third-party consultants to complete client work .

results of operations the following table summarizes , for the periods indicated , the results of operations ( in thousands ) : replace_table_token_7_th 20 the following table summarizes , for the periods indicated , our results of operations as a percentage of revenue before reimbursements ( net revenue ) : replace_table_token_8_th note : totals and subtotals may not equal the sum of individual line items due to rounding . we operate our executive search services in the americas ; europe ( which includes africa ) ; and asia pacific ( which includes the middle east ) and operate our leadership consulting and culture shaping businesses as separate segments ( see note 17 , segment information ) . 21 the following table sets forth , for the periods indicated , our revenue and operating income by segment ( in thousands ) : replace_table_token_9_th ( 1 ) operating income for the americas includes $ 0.8 million of restructuring charges in 2017 . ( 2 ) operating income for europe includes $ 4.0 million of restructuring charges in 2017 . ( 3 ) operating income for asia pacific includes $ 2.0 million of restructuring charges in 2017 . ( 4 ) operating loss for leadership consulting includes $ 11.6 million of impairment charges and $ 0.9 million of restructuring charges in 2017 . ( 5 ) operating loss for culture shaping includes $ 39.2 million of impairment charges and $ 2.5 million of restructuring charges in 2017 . ( 6 ) operating loss for global operations support includes $ 5.5 million of restructuring charges in 2017. year ended december 31 , 2017 compared to year ended december 31 , 2016 total revenue . consolidated total revenue increased $ 39.2 million , or 6.5 % , to $ 640.1 million in 2017 from $ 600.9 million in 2016. the increase in total revenue was primarily due to the increase in revenue before reimbursements ( net revenue ) . revenue before reimbursements ( net revenue ) .

specifically , any unvested phantom units held by mr. slifka on december 31 , 2013 will vest only if the partnership makes cumulative distributions on all units of the partnership outstanding during the 20 consecutive quarters ending december 31 , 2013 in an amount equal to or exceeding the minimum quarterly distribution ( as defined in the partnership 's agreement of limited partnership ) on all such units . any phantom units granted on february 5 , 2009 that have not story_separator_special_tag the following discussion and analysis of financial condition and results of operations of global partners lp should be read in conjunction with the historical consolidated financial statements of global partners lp and the notes thereto included elsewhere in this report . overview general we are one of the largest distributors of gasoline ( including gasoline blendstocks such as ethanol and naphtha ) , distillates ( such as home heating oil , diesel and kerosene ) , residual oil and renewable fuels to wholesalers , retailers and commercial customers in the new england states and new york . we are a major multi-brand gasoline distributor and have a portfolio of approximately 1,000 owned , leased and or supplied gasoline stations primarily in the northeast . we are a leader in the logistics of transporting and marketing crude oil and other products from the mid-continent region of the united states and canada to the east coast and , commencing february 2013 , the west coast ( see `` items 1. and 2. business and properties—recent developments '' for a further discussion ) . we are also a distributor of natural gas . we purchase refined petroleum products , renewable fuels and crude oil primarily from domestic and foreign refiners and ethanol producers , crude oil producers , major and independent oil companies and trading companies , and we sell these products in three reporting segments : ( i ) wholesale , ( ii ) gasoline distribution and station operations and ( iii ) commercial which are discussed below . collectively , we sold approximately $ 17.5 billion of refined petroleum products , renewable fuels , crude oil and natural gas for the year ended december 31 , 2012. in addition , we had other revenues of approximately $ 124.1 million , primarily from convenience store sales at our directly operated stores and gasoline station rental income . as of december 31 , 2012 , we owned , leased or maintained dedicated storage facilities at 25 refined petroleum product bulk terminals , each with the capacity of more than 50,000 barrels , including 23 located throughout the northeast , that are supplied primarily by marine transport , pipeline , rail and or truck and that collectively have approximately 10.5 million barrels of storage capacity . additionally , we have storage capacity at our albany , new york terminal to store crude oil and at select locations to store renewable fuels . in columbus , north dakota we constructed a 100,000 barrel tank and truck offloading facility as part of the development of a hub for the gathering , storage , rail transloading , transportation and marketing of crude oil and other products . we also have throughput and exchange agreements at numerous bulk terminals and inland storage facilities . in addition , we have storage agreements at several of our terminals granting storage rights to third parties for which we receive a fee . like most independent marketers , we base our pricing on spot prices , fixed prices or indexed prices and routinely use the nymex , cme and ice or other counterparties to hedge the risk inherent in buying and selling commodities . through the use of regulated exchanges or derivatives , we seek to maintain a position that is substantially balanced between purchased volumes and sales volumes or future delivery obligations . wholesale we own , control or have access to one of the largest terminal networks of refined petroleum products and renewable fuels in the northeast . we also engage in the logistics of gathering , storage , transportation and marketing of refined petroleum products , renewable fuels and crude oil . our strategically located terminal assets , logistics capabilities , transloading facilities and access to railroad and barge transportation provide a `` virtual pipeline '' solution for the transportation of crude oil , renewable fuels and other products from the mid-continent region of the united states and canada to the east and west coasts . gasoline distribution and station operations as of december 31 , 2012 , we had a portfolio of approximately 1,000 owned , leased and or supplied gasoline stations primarily in the northeast . 48 in september 2010 , we completed the acquisition from exxonmobil corporation of 190 retail gasoline stations , together with the rights to ( i ) supply mobil-branded fuel to those stations as well as an additional 31 existing locations in massachusetts , new hampshire and rhode island , and ( ii ) expand supply opportunities for mobil-branded and exxon-branded fuel in certain other new england states . this acquisition expanded our wholesale supply business and added vertical integration to our transportation fuel business in new england . on march 1 , 2012 , we acquired alliance , a gasoline distributor and operator of gasoline stations and convenience stores . as of the date of the acquisition , alliance 's portfolio included approximately 540 gasoline stations in the northeast , of which it owned or held under long-term lease approximately 250 stations , and had supply contracts for the remaining stations . the alliance acquisition expanded our geographic footprint for gasoline stations to include connecticut , new jersey , new york , pennsylvania , maine and vermont . alliance is a top-tier distributor of multiple brands , including exxon , mobil , shell , sunoco , citgo and gulf . prior to the closing of the acquisition , alliance was wholly owned by ae holdings which is approximately 95 % owned by members of the slifka family . see note 3 of notes to consolidated financial statements for additional information . story_separator_special_tag however , we have elected to present segment disclosures for the commercial operating segment as we believe such disclosures are meaningful to the user of our financial information . outlook this section identifies certain risks and certain economic or industry-wide factors that may affect our financial performance and results of operations in the future , both in the short-term and in the long-term . our results of operations and financial condition depend , in part , upon the following : our business is influenced by the overall forward market for refined petroleum products , renewable fuels and crude oil , and increases and or decreases in the prices of these products may adversely impact our financial condition , results of operations and cash available for distribution to our unitholders and the amount of borrowing available for working capital under our credit agreement results from our purchasing , storing , terminalling , transporting and selling operations are influenced by prices for these products , pricing volatility and the market for such products . prices in the overall forward market for these products may affect our financial condition , results of operations and cash available for distribution to our unitholders . our margins can be significantly impacted by the forward product pricing curve , often referred to as the futures market . we typically hedge our exposure to petroleum product and renewable fuel price moves with futures contracts and , to a lesser extent , swaps . in markets where futures prices are higher than current prices , referred to as contango , we may use our storage capacity to improve our margins by storing products we have purchased at lower prices in the current market for delivery to customers at higher prices in the future . in markets where futures prices are lower than current prices , referred to as backwardation , inventories can depreciate in value and hedging costs are more expensive . for this reason , we attempt to reduce our inventories in order to minimize these effects . when prices for the products we sell rise , some of our customers may have insufficient credit to purchase supply from us at their historical purchase volumes , and their customers , in turn , may adopt conservation measures which reduce consumption , thereby reducing demand for product . furthermore , when prices increase rapidly and dramatically , we may be unable to promptly pass our additional costs on to our customers , resulting in lower margins for us which could adversely affect our results of operations . higher prices for the products we sell may ( 1 ) diminish our access to trade credit support and or cause it to become more expensive and ( 2 ) decrease the amount of borrowings available for working capital under our credit agreement as a result of total available commitments , borrowing base limitations and advance rates thereunder . when prices for the products we sell decline , our exposure to risk of loss in the event of nonperformance by our customers of our forward contracts may be increased as they and or their customers may breach their contracts and purchase the products we sell at the then lower retail market price . a significant decrease in the price for crude oil could adversely affect the economics of the domestic crude oil production for the product which , in turn , could have an adverse effect on our crude oil logistics activities and sales . 50 we commit substantial resources to pursuing acquisitions , although there is no certainty that we will successfully complete any acquisitions or receive the economic results we anticipate from completed acquisitions . consistent with our business strategy , we are continuously engaged in discussions with potential sellers of terminalling , storage , logistics and or marketing assets , including gasoline stations , and related businesses . our growth largely depends on our ability to make accretive acquisitions . we may be unable to make such accretive acquisitions for a number of reasons , including , but not limited to , the following : ( 1 ) we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts ; ( 2 ) we are unable to raise financing for such acquisitions on economically acceptable terms ; or ( 3 ) we are outbid by competitors . in addition , we may consummate acquisitions that at the time of consummation we believe will be accretive but that ultimately may not be accretive . if any of these events were to occur , our future growth would be limited . we can give no assurance that our acquisition efforts will be successful or that any such acquisition will be completed on terms that are favorable to us . the condition of credit markets may adversely affect our liquidity . in the recent past , world financial markets experienced a severe reduction in the availability of credit . possible negative impacts in the future could include a decrease in the availability of borrowings under our credit agreement , increased counterparty credit risk on our derivatives contracts and our contractual counterparties requiring us to provide collateral . in addition , we could experience a tightening of trade credit from our suppliers . we depend upon rail and marine transportation services for a substantial portion of our logistics business in transporting the products we sell . a disruption in rail and marine transportation services could have an adverse effect on our financial condition , results of operations and cash available for distribution to our unitholders . hurricanes , flooding and other severe weather conditions could cause a disruption in rail and marine transportation services that could affect the flow of service . in addition , labor disputes between the railroads and their union employees and labor renegotiations , or a work stoppage at railroads , could also disrupt rail service . these events could result in service disruptions and increased cost which could also adversely affect our financial condition , results of operations and cash available for distribution to our unitholders .

events that impacted results during the year ended december 31 , 2012 , we experienced the following events : in our gasoline distribution and station operations segment , our sales , volume and net product margin significantly increased due primarily to our acquisition of alliance , as well as a full year of sales of mobil-branded fuel to mobil sub-jobbers and to the getty realty agreements . in our wholesale segment , our continued expansion into crude oil logistics , including the gathering , storage , transportation and marketing of crude oil , improved our wholesale segment net product margin . we believe our wholesale gasoline business was negatively impacted by a challenging futures market , which increased our hedging costs for 2012 , and less favorable buying opportunities which reduced our wholesale gasoline net product margin . we believe our wholesale distillate business was negatively impacted due to less favorable buying opportunities and warmer weather in 2012 compared to 2011. the price for heating oil at december 31 , 2012 compared to the price at december 31 , 2011 increased by 4 % . we believe heating oil conservation and conversions to natural gas continued during 2012. temperatures for 2012 were 16 % warmer than normal and 7 % warmer than 2011 which negatively affected demand for our weather-related products during the year . in connection with the acquisition of alliance , we had one-time acquisition costs of approximately $ 4.0 million for 2012. our interest expense increased by 17 % for 2012 , due primarily to additional borrowings associated with the acquisition of alliance . in our gasoline distribution and station operations segment , declining gasoline prices typically improve our gasoline net product margins and rising gasoline prices typically compress our gasoline net product margins .

a company 's internal control over financial reporting includes those policies and procedures that ( 1 ) pertain to the maintenance of records that , in reasonable detail , accurately and fairly reflect the transactions and dispositions of the assets of the company ; ( 2 ) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles , and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company ; and ( 3 ) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition , use , or disposition story_separator_special_tag the following includes a discussion of our results of operations and cash flows for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 , on both a consolidated basis and on a segment basis . for a discussion of our financial results and cash flows for the year ended december 31 , 2019 compared with the year ended december 31 , 2018 , see management 's discussion and analysis of financial condition and results of operations in our annual report on form 10-k for the year ended december 31 , 2019 . this discussion should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this annual report on form 10-k. for additional information related to our segments , see note 20 - segment and related information , to the consolidated financial statements . non-gaap financial measure the following discussion includes financial information prepared in accordance with gaap , as well as another financial measure , gross margin , that is considered a “ non-gaap financial measure. ” generally , a non-gaap financial measure is a numerical measure of a company 's financial performance , financial position or cash flows that excludes ( or includes ) amounts that are included in ( or excluded from ) the most directly comparable measure calculated and presented in accordance with gaap . we define gross margin as revenues less cost of sales as presented in our consolidated statements of income . the following discussion includes a reconciliation of gross margin to operating revenues , the most directly comparable gaap measure . management believes that gross margin provides a useful measure for investors and other financial statement users to analyze our financial performance in that it excludes the effect on total revenues caused by volatility in energy costs and associated regulatory mechanisms . this information is intended to enhance an investor 's overall understanding of results . under our various state regulatory mechanisms , as detailed below , our supply costs are generally collected from customers . in addition , gross margin is used by us to determine whether we are collecting the appropriate amount of energy costs from customers to allow recovery of operating costs , as well as to analyze how changes in loads ( due to weather , economic or other conditions ) , rates and other factors impact our results of operations . our gross margin measure may not be comparable to that of other companies ' presentations or more useful than the gaap information provided elsewhere in this report . overview northwestern corporation , doing business as northwestern energy , provides electricity and or natural gas to approximately 743,000 customers in montana , south dakota nebraska , and yellowstone national park . as you read this discussion and analysis , refer to our consolidated statements of income , which present the results of our operations for 2020 , 2019 and 2018. following is a discussion of our strategy and significant trends . we are working to deliver safe , reliable and innovative energy solutions that create value for customers , communities , employees and investors . this includes bridging our history as a regulated utility safely providing low-cost and reliable service with our future as a globally-aware company offering a broader array of services performed by highly-adaptable and skilled employees . we seek to deliver value to our customers by providing high reliability and customer service , and an environmentally sustainable generation mix at an affordable price . we are focused on delivering long-term shareholder value through : infrastructure investment focused on a stronger and smarter grid to improve the customer experience , while enhancing grid reliability and safety . this includes automation in distribution and substations that enables the use of changing technology . integrating supply resources that balance reliability , cost , capacity , and sustainability considerations with more predictable long-term commodity prices . continually improving our operating efficiency . financial discipline is essential to earning our authorized return on invested capital and maintaining a strong balance sheet , stable cash flows , and quality credit ratings . 33 we expect to pursue these investment opportunities and manage our business in a manner that allows us to be flexible in adjusting to changing economic conditions by adjusting the timing and scale of the projects . in 2020 , approximately 65 percent of our customers ' retail electric needs originated from carbon-free resources , which is more than two times better than the total u.s electric power industry . as part of our continued efforts in environmental stewardship , we recently established our carbon reduction vision for montana , committing to reduce the carbon intensity of our montana electric energy portfolio 90 percent by 2045 , as compared with our 2010 carbon intensity baseline . over the last decade , we have already reduced the carbon intensity of our energy generation in montana by more than 50 percent . our vision for the future builds on the progress we have already made . already , the foundation of our energy generation is our hydroelectric system , which is 100 percent carbon free and is readily available capacity . for us , wind generation is a close second and continues to grow . story_separator_special_tag 2021 impact - we expect to continue to experience a reduction in our commercial and industrial sales volumes , offset in part by an increase in usage by residential customers through the second quarter of 2021. electric resource planning - montana we are currently 630 mw short of our peak needs and we cover the shortfall through market purchases . absent resource additions , we forecast that our portfolio will be 725 mw short by 2025 , considering expiring contracts and a modest increase in customer demand . we issued an all-source competitive solicitation request in february 2020 for up to 280 mws of peaking and flexible capacity to be available for commercial operation in early 2023 ( the february 2020 request for proposal ( rfp ) ) . further , we expect additional all-source competitive solicitation requests will be forthcoming , beginning in late 2021 or 2022. initial bids for the february 2020 rfp were received in july 2020. bid submissions were evaluated by an independent party . we are reviewing analyses from the independent administrator and expect to announce the selection of multiple projects during the first quarter of 2021. bids were submitted on our behalf for generating facilities providing long-duration flexible capacity in excess of 200 mws . we anticipate that at least one of our projects will be among those selected resulting in owned capacity generation investment in excess of $ 200 million over the next 3 years , assuming we receive approval from the mpsc . 36 significant infrastructure investments and initiatives our estimated capital expenditures for the next five years , including our electric and natural gas transmission and distribution and electric generation infrastructure investment plan , are as follows ( in millions ) : electric supply resource plans - our energy resource plans discussed above identify portfolio resource requirements including investments resulting from a completed competitive solicitation process in south dakota . the capital projections above include approximately $ 40 million related to completion of the 60 mw flexible natural gas plant near huron , south dakota expected to be in service by late 2021 and approximately $ 60 million for a 30-40 mw flexible natural gas plant near aberdeen , south dakota , which is expected to be in service in early 2024. see discussion of the `` february 2020 rfp '' under significant trends and regulation above for details on our current montana all-source competitive solicitation process . potential generation capital related to this need is not included in the projections above . natural gas production assets - we own natural gas production and gathering system assets in montana as a part of an overall strategy to provide rate stability and customer value through the addition of regulated assets that are not subject to market forces . our estimated capital expenditure requirements above do not include estimates for incremental natural gas reserve acquisitions , or other investment opportunities that may arise . distribution and transmission modernization and maintenance - the primary goals of our infrastructure investment are to reverse the trend in aging infrastructure , maintain reliability , proactively manage safety , build capacity into the system , and prepare our network for the adoption of new technologies . we are taking a proactive and pragmatic approach to replacing these assets while also evaluating the implementation of additional technologies to prepare the overall system for smart grid applications . in 2021 through 2024 , we expect to install automated metering infrastructure in montana at a cost ranging from approximately $ 100 million to $ 110 million , which is reflected in the five year capital forecast above . financing - we anticipate financing our ongoing maintenance and capital programs with a combination of cash flows from operations , first mortgage bonds and equity issuances . we anticipate initiating a 3-year $ 200 million at-the-market ( atm ) offering during 2021 and begin issuing equity under that program . the atm issuances will be sized to maintain and protect our current credit ratings . capital investment in response to our montana electric supply resource planning would be incremental to these amounts . financing plans are subject to change , depending on capital expenditures , regulatory outcomes , internal cash generation , market conditions and other factors . 37 results of operations our consolidated results include the results of our divisions and subsidiaries constituting each of our business segments . the overall consolidated discussion is followed by a detailed discussion of gross margin by segment . factors affecting results of operations our revenues may fluctuate substantially with changes in supply costs , which are generally collected in rates from customers . in addition , various regulatory agencies approve the prices for electric and natural gas utility service within their respective jurisdictions and regulate our ability to recover costs from customers . revenues are also impacted by customer growth and usage , the latter of which is primarily affected by weather . very cold winters increase demand for natural gas and to a lesser extent , electricity , while warmer than normal summers increase demand for electricity , especially among our residential and commercial customers . we measure this effect using degree-days , which is the difference between the average daily actual temperature and a baseline temperature of 65 degrees . heating degree-days result when the average daily temperature is less than the baseline . cooling degree-days result when the average daily temperature is greater than the baseline . the statistical weather information in our regulated segments represents a comparison of this data . 38 story_separator_special_tag roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % '' > consolidated operating , general and administrative expenses were $ 297.1 million in 2020 , as compared with $ 318.2 million in 2019. primary components of the change include the following ( in millions ) : replace_table_token_12_th consolidated operating , general and administrative expense decreased $ 21.1 million , including a $ 22.7 million decrease from items impacting net income and a $ 1.6 million increase from items offset within net income .

overall consolidated results year ended december 31 , 2020 compared with year ended december 31 , 2019 consolidated net income in 2020 was $ 155.2 million as compared with $ 202.1 million in 2019 , a decrease of $ 46.9 million . as described in more detail below , this decrease was primarily due to an income tax benefit in 2019 , lower gross margin in 2020 due to warmer winter weather , impacts of the covid-19 pandemic , disallowed electric supply costs and higher depreciation expense , offset in part by a decrease in operating , general and administrative expenses . consolidated operating revenues in 2020 were $ 1,198.7 million as compared with $ 1,257.9 million , a decrease of $ 59.2 million . this decrease was primarily due to lower volumes from warmer winter weather and impacts of the covid-19 pandemic , partly offset by customer growth . consolidated gross margin in 2020 was $ 892.5 million as compared with $ 939.9 million in 2019 , a decrease of $ 47.4 million , or 5.0 percent . replace_table_token_8_th ( 1 ) non-gaap financial measure . see `` non-gaap financial measure '' above . replace_table_token_9_th ( 1 ) non-gaap financial measure . see `` non-gaap financial measure '' above . 39 primary components of the change in gross margin include the following ( in millions ) : replace_table_token_10_th ( 1 ) non-gaap financial measure . see `` non-gaap financial measure '' above . consolidated gross margin decreased $ 47.4 million , including a $ 48.5 million decrease from items impacting net income and a $ 1.1 million increase from items offset within net income . the change in consolidated gross margin for items impacting net income includes the following : a decrease in electric retail volumes due to warmer winter weather in montana and south dakota and lower industrial demand unrelated to the covid-19 pandemic , partly offset by customer growth and warmer summer weather .

milestone payments are recognized as story_separator_special_tag the following discussion is intended to assist you in understanding our financial condition and results of operations and should be read in conjunction with the financial statements and related notes included elsewhere in this annual report on form 10-k. many of the amounts and percentages in this section have been rounded for convenience of presentation , but actual recorded amounts have been used in computations . accordingly , some information may appear not to compute accurately . overview i.d . systems , inc. ( “ ids ” , and together with its subsidiaries , “ i.d . systems , ” the “ company , ” “ we , ” “ our , ” or “ us ” ) develops , markets and sells wireless machine-to-machine ( “ m2m ” ) solutions for managing and securing high-value enterprise assets . these assets include industrial vehicles , such as forklifts and airport ground support equipment ; rental vehicles ; and transportation assets , such as dry van trailers , refrigerated trailers , railcars and containers . our patented wireless asset management systems utilize radio frequency identification ( rfid ) , wi-fi , satellite or cellular communications , and sensor technology to address the needs of organizations to control , track , monitor and analyze their assets . our solutions enable our customers to achieve tangible economic benefits by making timely , informed decisions that increase the safety , security , revenue , productivity and efficiency of their operations . we have focused our business activities on three primary business solutions : ( i ) industrial truck asset management , ( ii ) transportation asset management , and ( iii ) connected vehicle solutions . our solution for industrial truck asset management allows our customers to reduce operating risks including unsafe activity , facility equipment and goods damage , operational costs and capital expenditures and to comply with certain safety regulations by accurately and reliably measuring and controlling fleet activity . this solution also enhances security at industrial facilities and areas of critical infrastructure , such as airports , by controlling access to , and restricting the use of , vehicles and equipment . our solution for transportation asset management allows our customers to increase revenue per asset deployed , reduce fleet size , and improve the monitoring and control of sensitive cargo . our solutions for connected vehicles include unique internet-of-things ( “ iot ” ) projects similar to projects we have delivered to avis budget group . these engineering programs help our customers transform their operations . for avis budget group , our rental fleet management platform assists rental car companies in generating higher revenue by more accurately tracking vehicle data , such as fuel consumption and odometer readings , and improving customer service by expediting the rental and return processes . in addition , our wireless solution for “ car sharing ” enables rental car companies to establish a network of vehicles positioned strategically around cities or on corporate campuses , control vehicles remotely , manage member reservations by smart phone or internet , and charge members for vehicle use by the hour . we sell our solutions to both executive , division and site-level management within the enterprise . we also utilize channel partners such as independent dealers and original equipment manufacturers ( oems ) who may opt for us to white label our product . typically , our initial system deployment serves as a basis for potential expansion across the customer 's organization . we work closely with customers to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments . post-implementation , we consult with our customers to further extend and customize the benefits to the enterprise by delivering enhanced analytics capabilities . we market and sell our solutions to a wide range of customers in the commercial and government sectors . our customers operate in diverse markets , such as automotive manufacturing , heavy industry , retail and wholesale distribution , transportation , aviation , aerospace and defense , homeland security and vehicle rental . we have incurred net losses of approximately $ 10.0 million , $ 6.4 million and $ 3.9 million for the years ended december 31 , 2015 , 2016 and 2017 respectively , and have incurred additional net losses since inception . as of december 31 , 2017 , we had cash , cash equivalents and marketable securities of $ 16.9 million , working capital of $ 10.1 million , and an accumulated deficit of $ 95.4 million . our primary sources of cash are cash flows from operating activities and the company 's holdings of cash , cash equivalents and investments from the sale of common stock . to date , the company has not generated sufficient cash flow solely from operating activities to fund our operations . during the year ended december 31 , 2017 , we generated revenues of $ 41.0 million with wal-mart stores , inc. accounting for 16 % of our revenues . during the year ended december 31 , 2016 , we generated revenues of $ 36.8 million with wal-mart stores , inc. accounting for 18 % of our revenues . during the year ended december 31 , 2015 , we generated revenues of $ 41.8 million with wal-mart stores , inc. accounting for 23 % of our revenues . on july 17 , 2017 , we closed an underwritten public offering consisting of 2,608,695 shares of common stock at a price per share of $ 5.75. in addition , the underwriters of the public offering exercised in full their option to purchase an additional 391,304 shares of common stock . including this option exercise , the aggregate gross proceeds from the offering of a total of 2,999,999 shares of common stock , before deducting discounts and commissions and offering expenses , were approximately $ 17.3 million . net proceeds from the public offering were approximately $ 16.1 million . story_separator_special_tag critical accounting policies and estimates we have adopted various accounting policies that govern the application of accounting principles generally accepted in the united states in the preparation of our financial statements . our significant accounting policies are described in note 2 to our consolidated financial statements included in this annual report on form 10-k. certain accounting policies involve significant judgments and assumptions by our management that can have a material impact on the carrying value of certain assets and liabilities . we consider such accounting policies to be our critical accounting policies . the judgments and assumptions used by our management in these critical accounting policies are based on historical experience and other factors that our management believes to be reasonable under the circumstances . because of the nature of these judgments and assumptions , actual results could differ significantly from these judgments and estimates , which could have a material impact on the carrying values of our assets and liabilities and our results of operations . our critical accounting policies are described below . 37 revenue recognition we derive revenue from : ( i ) sales of our wireless asset management systems and spare parts ; ( ii ) remotely hosted saas agreements and post-contract maintenance and support agreements ; ( iii ) services , which includes training and technical support ; and ( iv ) periodically , leasing arrangements . our industrial truck and connected vehicle wireless asset management systems consist of on-asset hardware , communication infrastructure , saas , and hosting infrastructure . revenue derived from the sale of our industrial truck and connected vehicle wireless asset management systems is allocated to each element based upon vendor specific objective evidence ( vsoe ) of the fair value or best estimate of selling price ( “ besp ” ) of the element . vsoe of the fair value is based upon the price charged when the element is sold separately . besp is determined based on the overall pricing objectives taking into consideration market conditions and entity specific factors . revenue is recognized as each element is delivered based on the allocation of arrangement consideration to each element based upon vsoe or besp , and when there are no undelivered elements that are essential to the functionality of the delivered elements . the company 's system is typically implemented by the customer or a third party and , as a result , revenue is recognized when title and risk of loss passes to the customer , which usually is upon delivery of the system , persuasive evidence of an arrangement exists , sales price is fixed and determinable , collectability is reasonably assured and contractual obligations have been satisfied . in some instances , we are also responsible for providing installation services . the installation services , which could be performed by third parties , are considered another element in a multi-element deliverable and revenue for installation services is recognized at the time the installation is provided . training and technical support revenue are recognized at time of performance . we recognize revenues from the sale of transportation asset management systems and spare parts when persuasive evidence of an arrangement exists , delivery has occurred , the price is fixed or determinable , and collectability is reasonably assured . these criteria include requirements that the delivery of future products or services under the arrangement is not required for the delivered items to serve their intended purpose . the company has determined that the revenue derived from the sale of transportation asset management systems does not have stand-alone value to the customer separate from the saas services provided and , therefore , the arrangements constitute a single unit of accounting . under the applicable accounting guidance , all of the company 's billings for equipment and the related cost are deferred , recorded , and classified as a current and long-term liability and a current and long-term asset , respectively . deferred revenue and cost are recognized over the service contract life , ranging from one to five years , beginning at the time that a customer acknowledges acceptance of the equipment and service . the customer service contracts typically range from one to five years . the service revenue for our transportation asset monitoring equipment relates to charges for monthly messaging usage and value-added features charges . the usage fee is a monthly fixed charge based on the expected utilization according to the rate plan chosen by the customer . service revenue generally commences upon equipment installation and customer acceptance and is recognized over the period such services are provided . revenue from remote transportation asset monitoring equipment activation fees are deferred and amortized over the life of the contract . spare parts sales are reflected in product revenues and recognized on the date of customer receipt of the part . we also enter into remotely hosted saas agreements and post-contract maintenance and support agreements for our wireless asset management systems . revenue is recognized over the service periods and the cost of providing these services is expensed as incurred . deferred revenue also includes prepayment of extended maintenance , hosting and support contracts . under certain customer contracts , we invoice progress billings once certain milestones are met . the milestone terms vary by customer and can include the receipt of the customer purchase order , delivery , installation and launch . as the systems are delivered , and services are performed , and all of the criteria for revenue recognition are satisfied , we recognize revenue . if the amount of revenue recognized for financial reporting purposes is greater than the amount invoiced , an unbilled receivable is recorded . if the amount invoiced is greater than the amount of revenue recognized for financial reporting purposes , deferred revenue is recorded . sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations .

results of operations the following table sets forth certain items related to our statement of operations as a percentage of revenues for the periods indicated and should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. our results reflect the operations of keytroller from july 31 , 2017 , the effective date of the keytroller acquisition . a detailed discussion of the material changes in our operating results is set forth below . replace_table_token_5_th 41 year ended december 31 , 2017 compared to year ended december 31 , 2016 the following table sets forth our revenues by product line for the periods indicated : replace_table_token_6_th revenues . revenues increased by approximately $ 4.1 million , or 11.2 % , to $ 41.0 million in 2017 from $ 36.8 million in 2016. the increase in revenue is attributable to an increase in total industrial truck asset management and connected vehicles revenue of approximately $ 5.7 million to $ 26.7 million in 2017 from $ 21.0 million in 2016 , partially offset by a decrease in total transportation asset management revenue of approximately $ 1.6 million to $ 14.3 million in 2017 from $ 15.8 million in 2016. revenues from products increased by approximately $ 2.2 million , or 10.2 % , to $ 23.6 million in 2017 from $ 21.4 million in 2016. industrial truck asset management and connected vehicles product revenue increased by approximately $ 3.2 million to $ 17.5 million in 2017 from $ 14.3 million in 2016. the increase in industrial truck asset management and connected vehicles product revenue resulted principally from increased product sales of approximately $ 3.5 million in product sales from keytroller .

we plan to continue to develop and commercialize products both within fortress and our subsidiaries , which are sometimes referred to herein as the “ fortress companies ” . in addition to our internal development programs , we plan to leverage our biopharmaceutical business expertise and drug development capabilities to help the fortress companies innovate , develop and commercialize products . additionally , we will provide funding and management services to each of the fortress companies and , from time to time , we and the fortress companies will seek licensing , partnerships , joint ventures and or public and private financings to accelerate and provide additional funding to support their research and development programs . 28 2015 activity avenue therapeutics , inc. in february 2015 , we purchased an exclusive license to an intravenous ( “ iv ” ) formulation of tramadol for the u.s. market from revogenex ireland limited ( “ revogenex ” ) . tramadol is a centrally acting synthetic opioid analgesic for moderate to moderately severe pain and is available as immediate release or extended-release tablets in the united states . we transferred the iv tramadol license and rights to avenue in 2015 ( see note 6 of notes to consolidated financial statements ) . checkpoint therapeutics , inc. we formed checkpoint , an innovative , immuno-oncology biopharmaceutical company , in november 2014. in march 2015 , checkpoint licensed a portfolio of fully human immuno-oncology targeted antibodies generated in the laboratory of dr. wayne marasco , m.d. , ph.d. , a professor in the department of cancer immunology and aids at the dana-farber cancer institute ( “ dana-farber ” ) . the portfolio includes antibodies targeting programmed-death ligand 1 ( “ pd-l1 ” ) , glucocorticoid-induced tnfr-related protein ( “ gitr ” ) and carbonic anhydrase 9 ( “ caix ” ) ( together , the “ dana-farber antibodies ” ) . checkpoint plans to develop these novel immuno-oncology and checkpoint inhibitor antibodies on their own and in combination with each other , as data suggests that combinations of these targets can work synergistically together . additionally , effective march 2015 , we assigned our license from neupharma , inc. ( “ neupharma ” ) for a small molecule inhibitor of epidermal growth factor receptor ( “ egfr ” ) mutations to checkpoint ( see note 6 of notes to consolidated financial statements ) . in connection with the license agreement with dana-farber , checkpoint entered into a collaboration agreement with tg therapeutics , inc. ( “ tgtx ” ) to develop and commercialize the anti-pd-l1 and anti-gitr antibody research programs in the field of hematological malignancies . further , in connection with the neupharma license , checkpoint entered into an option agreement with tgtx for a global collaboration in connection with the future development of the certain licensed compounds . michael weiss , our executive vice chairman , strategic development is also the executive chairman , interim president and chief executive officer and a stockholder of tgtx . checkpoint retains the right to develop and commercialize these antibodies in the field of solid tumors . both programs are currently in pre-clinical development . on september 15 , 2015 , checkpoint entered into a sponsored research agreement with neupharma to identify additional inhibitors with differing profiles from the licensed products . under the terms of the agreement , checkpoint will pay neupharma for specific sponsored research projects . in december 2015 , checkpoint licensed the exclusive worldwide rights to develop and commercialize ck-102 ( formerly cep-9722 ) , a poly ( adp-ribose ) polymerase ( “ parp ” ) inhibitor , from teva pharmaceutical industries ltd. , through its subsidiary , cephalon , inc. ck-102 is an oral , small molecule selective inhibitor of parp-1 and parp-2 enzymes in early clinical development for solid tumors . checkpoint plans to develop ck-102 as both a monotherapy and in combination with other anti-cancer agents , including checkpoint 's novel immuno-oncology and checkpoint inhibitor antibodies currently in development . checkpoint expects clinical trials to start in the first half of 2016 for their egfr inhibitor and the second half of 2016 for their parp inhibitor and one or more of the dana-farber antibodies . also in december 2015 , checkpoint closed on gross proceeds of $ 57.8 million , before commissions and expenses , in a series of private placement equity financings . net proceeds from this offering was approximately $ 51.5 million . mustang bio , inc. in march 2015 , we formed mustang to develop immunotherapies based on chimeric antigen receptor t-cells ( “ car-t ” ) , which it licensed from city of hope ( “ coh ” ) . in connection with the license agreement , mustang also entered into a sponsored research agreement with coh in which mustang will fund continued research at coh related to car-t ( see note 6 of notes to consolidated financial statements ) . journey medical corporation in march 2015 , jmc , our dermatology focused subsidiary , entered into a license and supply agreement to acquire rights to distribute a dermatological product for the treatment of acne ( see note 7 of notes to consolidated financial statements ) . in october 2015 , jmc entered into a co-promote agreement to sell a 2 % topical lotion , dermasorb hc , for the treatment of corticosteroid-responsive dermatoses . in january 2016 , jmc entered into a product license and supply agreement with a third party . to distribute a topical cream to promote wound healing for surgical treatments such as cryosurgery , mohs surgery and biopsies . also in january 2016 , jmc entered into a distribution agreement with a third party to distribute an emollient for the treatment of eczema . 29 helocyte , inc. helocyte , formerly diavax , was formed to develop novel immunotherapies for the prevention and treatment of cytomegalovirus ( “ cmv ” ) , a common virus that affects people of all ages . story_separator_special_tag as such , fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability . the accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories : level 1 : quoted prices in active markets for identical assets or liabilities . level 2 : observable inputs other than level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace . level 3 : unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models , discounted cash flow methodologies , or similar techniques , as well as instruments for which the determination of fair value requires significant judgment or estimation . the fair value hierarchy also requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value . assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement . the requirement to assess the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability . certain of our financial instruments are not measured at fair value on a recurring basis , but are recorded at amounts that approximate their fair value due to their liquid or short-term nature , such as accounts payable , accrued expenses and other current liabilities . we have various processes and controls in place to ensure that fair value is reasonably estimated . while we believe our valuation methods are appropriate and consistent with other market participants , the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date . the decision to elect the fair value option , which is irrevocable once elected , is determined on an instrument by instrument basis and applied to an entire instrument . the net gains or losses , if any , on an investment for which the fair value option has been elected are recognized as a change in fair value of investments on the consolidated statements of operations . 31 story_separator_special_tag the development of mannac for $ 1.3 million , our license for egfr inhibitors for $ 1.0 million ( which was transferred to checkpoint in march 2015 ) , and helocyte 's purchase of $ 0.2 million to develop novel immunotherapies for the prevention and treatment of cmv from coh . general and administrative expenses increased $ 11.2 million , or 107 % , from $ 10.4 million in the year ended december 31 , 2014 to $ 21.6 million in the year ended december 31 , 2015 , largely due to a $ 2.7 million increase in costs related to the development of a sales and marketing infrastructure for jmc and $ 2.0 million of professional expenses related to our business development activity , including $ 0.9 million of legal expenses pertaining to due diligence and activities related to the financing and formation of our subsidiaries . in addition , salaries and benefits increased by $ 1.8 million as a result of headcount increases related to business development . lastly , stock-based compensation expense increased by $ 4.0 million , primarily due to $ 2.2 million of expense for warrants for fortress companies ' common stock issued to our president and chief executive officer and executive vice chairman , strategic development , $ 0.5 million of expense related to the modification of a restricted stock grant to a former member of our board of directors , as well as an increase in expense related to restricted stock units granted to new employees in 2015 . 33 during the year ended december 31 , 2015 , interest expense primarily relates to interest and amortization of deferred financing cost on the promissory note for $ 10 million to national securities corporation 's nsc biotech venture fund i llc ( the “ nsc note ” ) of approximately $ 1.0 million . while during the same period in 2014 , we incurred $ 0.8 million of expense in connection with our loan with hercules technology growth capital , inc. ( the “ hercules note ” ) of which $ 0.3 related to the early payment penalty . the decrease in interest income in 2015 compared to 2014 was primarily due to on average lower cash balances for the period . the change in the fair value of investments primarily relates to the decrease in value of our investment in cb pharma of approximately $ 1.7 million in 2015. net loss attributable to the non-controlling interests of $ 5.5 million relates to the share of loss in checkpoint , mustang , avenue , jmc and coronado so for the year ended december 31 , 2015. comparison of years ended december 31 , 2014 and 2013 replace_table_token_4_th research and development expenses decreased $ 15.4 million , or 60 % , from $ 25.7 million in the year ended december 31 , 2013 to $ 10.2 million in the year ended december 31 , 2014. this decrease was primarily due to a $ 9.6 million reduction in tso product development costs related to the wind down of phase 2 of the trust-i trial and reduced development activities . in addition , personnel costs decreased by $ 3.6 million , which was primarily composed of reductions of $ 1.7 million in salary , benefits as a result of a reduction in headcount , bonus and travel expense and $ 1.9 million in stock-based compensation expense , primarily due to a decrease in headcount as well as a reduction in the unvested mark-to-market value of our non-employee option grants .

results of operations general for the year ended december 31 , 2015 , we generated $ 0.6 million of revenues in connection with checkpoint 's collaboration agreement with tgtx and $ 0.3 million in connection with jmc 's co-promote agreement to sell a 2 % topical lotion , dermasorb hc , for the treatment of corticosteroid-responsive dermatoses . at december 31 , 2015 , we had an accumulated deficit of $ 190.2 million primarily as a result of research and development expenses , purchases of in-process research and development and general and administrative expenses . while we may in the future generate revenue from a variety of sources , including license fees , milestone payments , research and development payments in connection with strategic partnerships and or product sales , our current product candidates are at an early stage of development and may never be successfully developed or commercialized . accordingly , we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues . research and development expenses research and development costs primarily consist of personnel related expenses , including salaries , benefits , travel , and other related expenses , stock-based compensation , payments made to third parties for license and milestone costs related to in-licensed products and technology , payments made to third party contract research organizations for preclinical and clinical studies , investigative sites for clinical trials , consultants , the cost of acquiring and manufacturing clinical trial materials , costs associated with regulatory filings and patents , laboratory costs and other supplies . also included in research and development is the total purchase price for the licenses acquired during the period recorded in research and development . for the years ended december 31 , 2015 , 2014 and 2013 , direct , external development costs incurred for our tso product development program were $ 3.0 million , $ 2.6 million , and $ 12.2 million , respectively .

part ii of this form 10-k , and to provide an understanding of our consolidated results of operations , financial condition and changes in financial condition . our md & a is organized as follows : business description key indicators of financial condition industry trends and financial strategies application of critical accounting policies and estimates results of operations liquidity , capital resources and financial position accounting matters forward-looking statements business description medavant is an information technology company that facilitates the exchange of medical claim information among doctors , hospitals , medical laboratories , pharmacies , and insurance payers . medavant also enables the electronic transmission of laboratory results and prescription orders . with medavant , the transactions are secure , faster , more accurate , and more economical . we operate two separately managed reportable segments : transaction services and laboratory communications . a description of these segments , their primary services and our source of revenue , in each , are : transaction services processing claims . the primary tool our customers use to process claims is a real-time web portal called mymedavant , powered by our phoenix platform . it offers standard and premium services with features such as verifying a patient 's insurance , enrolling with payers , tracking a claim 's progress with the payer and retrieving reports from payers . on average , we processed approximately 3/4 million revenue-related transactions a day in 2006. providers pay for claims processing based on either a flat monthly fee or a per-transaction fee . operating a ppo . our ppo is called the national preferred provider network ( “nppn tm ” or “nppn” ) and is accessed by more than seven million patients , 450,000 physicians , 4,000 acute care facilities and 65,000 ancillary care providers . we generate revenue primarily by charging participating payers a percentage of the savings they receive through nppn . because we operate a ppo , we can offer payers discounts on claims when a patient uses an out-of-network provider and we can negotiate non-discounted claims for payers . providing electronic prescription management . medavant 's prescribe tm is a desktop and online application providers use to send new prescriptions and refill requests to more than 42,000 pharmacies across the nation . providers pay a flat fee monthly , and pharmacy partners pay either a flat monthly fee or a per transaction fee based on transaction types . laboratory communications printing technology . our intelligent printing technology is integrated into printers for labs to purchase and install in physician offices . this allows for the secure transmittal of laboratory reports . laboratories also purchase support , maintenance and monitoring programs to manage printers that have our integrated technology . pilot . this patent-pending , web-enabled device sits in a provider 's office and is used to transfer lab reports in virtually any format to a printer , a personal computer or a hand-held device . it integrates with most practice management systems and usually saves the provider the cost of a dedicated phone line . labs either purchase pilot devices with an annual support program or they subscribe to pilot with a program that includes support services . fleet management system , ( “fms” ) . labs use this online tool to monitor printers in provider offices and receive alerts for routine problems such as a printer being out of paper or having a paper jam . fms can also be used to monitor printer inventory and schedule regular maintenance . labs pay a monthly fee per printer to use fms . 21 key indicators of financial condition in the fall of 2005 , the current management team began improving efficiencies by reducing staff , renegotiating vendor contracts , eliminating unprofitable non-core products , and closing smaller offices . the drive for efficiency continued through 2006 and consequently , gross profit is a key indicator of our financial condition . by focusing in 2006 on achieving greater efficiencies and building the foundation for future opportunities and strategies , medavant was able to see significant improvement in its gross profit . to that end , we hit an important technology milestone in 2006 by moving all transactions to the phoenix platform and setting the stage for greater operating margins now and in the future . because of its scalability , we can easily multiply our current transaction volume without many additional resources . additionally , by storing all our data in one repository , we can continue to streamline operations and explore new opportunities because we access data with more efficiency and greater speed . see the “advanced technology” under industry trends below for more details on how our technology affects our financial condition . in an effort to create additional cost savings opportunities , we outsourced many of our ppo operations to ppoone , a fiserv company . this agreement , announced in november 2006 , is expected to improve operational efficiencies and generate an estimated annual savings in excess of $ 800,000 by reducing our selling , general and administrative expenses . these savings will be partially offset by a smaller direct cost during 2007 and forward . we also unveiled our premium revenue cycle management service in october 2006. providers pay an additional fee for the premium service ; however , it will be 2007 before the revenue it generates is evident in our consolidated financial statements . see liquidity , capital resources and financial position for a discussion of our going concern opinion and management 's plan to address such issues . industry trends and financial strategies we have identified the following trends in the healthcare industry and outlined our financial strategy in each : acquisitions advanced technology reduced payments to providers shifting responsibility for medical care increasing demand for data and analytics acquisitions the most observable trend in healthcare is the consolidation of technology companies and payers . in 2006 , for example , the carlyle group acquired multiplan and phcs . mckesson announced their intention to acquire per-se . per-se purchased ndc health the previous year . story_separator_special_tag reduced payments to providers in an annual survey of fee schedules , physicians practice journal found that the average physician reimbursement from commercial payers and medicare fell in 2006 , with payment levels averaging 17 % below those of 2002 and 36 % below those of 2004. the article attributed this decline to consolidation in the insurance industry because the dwindling number of payers means providers lose leverage in negotiations . a plan to cut medicare payments in 2007 was deterred by congress , however rate cuts may take effect in 2008. in 23 the next eight years , medicare physician payments are slated to be cut by approximately 40 percent , while practice costs increase nearly 20 percent , according to the american medical association . we address these trends by offering tools for providers to manage their revenue cycle saving them time and money . real-time services on our web portal , ( “mymedavant” ) , allow providers to verify a patient 's insurance eligibility , inquire about a claim 's status at the payer , request referrals to other providers and inquire about referral status . knowing that information up-front allows providers to avoid delays in their revenue cycles . in october 2006 , we introduced a premium service on mymedavant which gives providers more advanced tools to manage their businesses . using premium service , providers can correct and resubmit rejected claims online , create letters to appeal decisions from payers , automatically run reports to identify issues before they cause revenue problems and manage their office workflow . premium services are more expensive than our standard services , but providers can recoup these costs by reducing the time their staff spends managing data . we created an online calculator to demonstrate to providers how automating their business functions could save both time and money . giving providers a choice of services is part of our strategy . in addition to choosing between standard or premium services for claim submission and processing , providers can choose between a payment plan with a flat monthly fee or a per-transaction fee . shifting responsibility for medical care consumer-driven healthcare is an unknown player in today 's healthcare environment . if widely accepted , it will change the relationship between payers and providers . if high-deductible health plans become common , at the point of service the provider will need to know whether the patient has met their deductible , otherwise the doctor may incur credit risk by billing the patient later . consequently , some payers are developing real-time adjudication programs which will let the provider know immediately how much the payer will pay for the provider 's services rendered . we believe it will be some time before payers offer that service in real-time , however , should it become a reality , there will be less need for the claims processing portion of our business . our strategy , in light of this , is to add new products to differentiate ourselves based on the quality of our product . by automating revenue cycle processes that would not be included in a payer 's real-time adjudication program , we can drive the transaction economics that are critical to our customers ' success , thereby improving gross margin and operating income . increased demand for data and analytics our customers ' reactions to the premium services on mymedavant indicate that there is at least as great , if not greater , value in the business intelligence we provide related to the transactions we process as there is in the process itself . we believe that providing actionable data and related products and services is an untapped , yet desirable , demand that we believe we can meet . more of our resources will be focused on leveraging this area in 2007. application of critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of our consolidated 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 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 , but we believe that any variation in results would not have a material effect on our financial condition . we evaluate our estimates on an ongoing basis . we believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements . for a detailed discussion on the application of these and other accounting policies , see note 1 in the notes to consolidated financial statements beginning on page f-7 . revenue recognition — revenue is derived from our transaction services and laboratory communication 24 solutions segments . our transaction services segment provides transaction and value-added services principally between healthcare providers , insurance companies , physicians and pharmacies . such transactions and services include electronic claims submission and reporting , insurance eligibility verification , claims status inquiries , referral management , electronic remittance advice , patient statement processing , encounters and cost savings services for payers including claims repricing and bill negotiation . through our laboratory communication solutions segment , we sell , rent and service intelligent remote reporting devices and provide lab results reporting through our software products . transaction services revenues are derived from insurance payers , pharmacies and submitters ( physicians and other entities including billing services , practice management software vendors and claims aggregators ) .

results of operations year ended december 31 , 2006 , compared to year ended december 31 , 2005 net revenues . consolidated net revenues for 2006 decreased $ 12.1 million , or 16 % , to $ 65.5 million from consolidated net revenues of $ 77.6 million in 2005. net revenues classified by our reportable segments are as follows : replace_table_token_2_th net revenues in our transaction services segment for 2006 decreased by $ 12.1 million , or 18 % , as compared to 2005. much of this decrease is due to reductions or eliminations of certain products that we determined were not profitable or are not part of our future strategy . these products accounted for $ 3.4 million of the decrease and include patient statements , planserv and payerserv and an outsourcing arrangement . we also lost $ 3.9 million of revenue from certain customers due to increased competition . additionally , the remaining decrease in revenue is a result of lost customer volume due to pricing pressure , from greater competition and increased direct customers ' connectivity to payers , which was partially offset by additional net revenue of $ 0.2 million due to our acquisitions of mrl . in 2006 , approximately 82 % of our consolidated revenues came from our transaction services segment compared to 85 % from this segment in 2005. laboratory communication solutions segment net revenues in 2006 were consistent with 2005. we experienced a drop in revenue from our largest customer , which was offset by an increase from our second-largest customer purchasing our pilot product . additionally , during 2006 , we eliminated certain revenue streams with little to no margins and replaced it with a new service contract with our largest customer . 26 cost of sales .

we incurred losses totaling $ 9.3 million , $ 42.8 million , and $ 13.9 million in 2012 , 2011 , and 2010 , respectively , from sales and fair value write-downs attributable to declining valuations as evidenced by new appraisals and from changes in our sales strategies . o to ensure that we maximize the story_separator_special_tag management 's discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations of porter bancorp , inc. and its wholly owned subsidiary , pbi bank . porter bancorp , inc. is a louisville , kentucky-based bank holding company which operates 18 full-service banking offices in twelve counties through its wholly-owned subsidiary , pbi bank . our markets include metropolitan louisville in jefferson county and the surrounding counties of henry and bullitt , and extend south along the interstate 65 corridor to tennessee . we serve south central kentucky and southern kentucky from banking offices in butler , green , hart , edmonson , barren , warren , ohio , and daviess counties . we also have an office in lexington , the second largest city in kentucky . the bank is both a traditional community bank with a wide range of commercial and personal banking products and an online bank which delivers competitive deposit products and services through an on-line banking division operating under the name of ascencia . historically , we have focused on commercial and commercial real estate lending , both in markets where we have banking offices and other growing markets in our region . commercial , commercial real estate and real estate construction loans accounted for 58.6 % of our total loan portfolio as of december 31 , 2012 , and 60.5 % as of december 31 , 2011. commercial lending generally produces higher yields than residential lending , but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring . overview the following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other schedules presented elsewhere in the report . for the year ended december 31 , 2012 , we reported a net loss of $ 32.9 million compared with net loss of $ 107.3 million for the year ended december 31 , 2011. after deductions for dividends on preferred stock , accretion on preferred stock , and allocating losses to participating securities , the net loss to common shareholders was $ 33.4 million for the year ended december 31 , 2012 , compared with net loss to common shareholders of $ 105.2 million for the year ended december 31 , 2011. basic and diluted loss per common share were $ ( 2.85 ) for the year ended december 31 , 2012 , compared with loss per common share of $ ( 8.98 ) for 2011. our financial performance in 2012 continued to be negatively impacted by the bank 's high level of nonperforming loans and other real estate owned . asset quality remediation , capital restoration , and lowering the risk profile of the company are our major objectives for 2013. non-performing loans were 10.52 % of total loans , and nonperforming assets stood at 11.89 % of total assets at december 31 , 2012. we remain diligent in the management of our portfolio and are striving to improve credit quality by working throughout our markets with our clients to balance selective new customer acquisition , customer service for our existing clients and prudent risk management . significant developments for the year ended december 31 , 2012 were : ● john t. taylor joined the management team in july as president of porter bancorp and ceo of pbi bank . mr. taylor is a seasoned banking veteran with deep and broad experience in our kentucky markets , community banking , and problem asset resolution . additionally , john r. davis joined the management team in august and was appointed chief credit officer of pbi bank with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization . ● in october 2012 , pbi bank entered into a new consent order with the fdic and kdfi . under the new order , the bank agreed to maintain the capital levels required by the june 2011 order and also agreed should the capital levels not be reached , and if directed in writing by the fdic , the bank would develop a plan to immediately raise sufficient capital , or to sell or merge itself into another fdic insured institution . the new consent order also requires the bank to continue to adhere to the plans implemented in response to the june 2011 consent order , and includes the substantive provisions of the june 2011 order . ● in order to comply with the capital requirements of the consent order , management and the board of directors are evaluating appropriate strategies for increasing the company 's capital . these include , among other things , a possible public offering or private placement of common stock to new and existing shareholders . we have engaged sandler o'neill & partners , lp to act as our financial advisor and to assist our board in this evaluation and to assist in evaluating our options for the redemption of our series a preferred stock issued to the us treasury in 2008 under the capital purchase program . 26 ● total assets decreased 20.1 % to $ 1.2 billion at december 31 , 2012 compared with $ 1.5 billion at the 2011 year-end . ● loans decreased 20.9 % to $ 899.1 million compared with $ 1.1 billion at december 31 , 2011 . story_separator_special_tag net loss to common shareholders of $ 33.4 million , for the year ended december 31 , 2012 , compares with net loss to common shareholders of $ 105.2 million for year ended december 31 , 2011. during the year ended december 31 , 2011 , we recorded a net loss to common shareholders of $ 105.2 million . this loss was attributable to a $ 23.8 million goodwill impairment charge , the establishment of a $ 31.7 million valuation allowance on our deferred tax assets , oreo expense of $ 47.5 million related to valuation adjustments reflecting our change in strategy related to certain oreo properties , fair value write-downs related to new appraisals received for properties in the portfolio during 2011 , net loss on the sale of oreo properties , and increase in carrying costs associated with carrying these higher levels of assets . we also recorded a provision for loan losses expense of $ 62.6 million due to the continued decline in credit trends within our portfolio . in june 2011 , the bank entered into a consent order with the fdic and kdfi in which the bank agreed , among other things , to improve asset quality , reduce loan concentrations , and maintain a minimum tier 1 leverage ratio of 9 % and a minimum total risk based capital ratio of 12 % . the consent order was included in our current report on 8-k filed on june 30 , 2011. in october 2012 , the bank entered into a new consent order with the fdic and kdfi , again agreeing to maintain a minimum tier 1 leverage ratio of 9 % and a minimum total risk based capital ratio of 12 % . the bank also agreed that if it should be unable to reach the required capital levels , and if directed in writing by the fdic , then the bank would within 30 days develop , adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the bank to fully meet the capital requirements . we expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan submitted by the bank in december 2012. the new consent order also requires the bank to continue to adhere to the plans implemented in response to the june 2011 consent order , and includes the substantive provisions of the june 2011 consent order . the new consent order was included in our current report on 8-k filed on september 19 , 2012. as of december 31 , 2012 , the capital ratios required by the consent order were not met . in order to meet these capital requirements , the board of directors and management are continuing to evaluate strategies to achieve the following objectives : ● increasing capital through a possible public offering or private placement of common stock to new and existing shareholders . we have engaged sandler o'neill & partners , lp to act as our financial advisor and to assist our board in this evaluation and to assist in evaluating our options for the redemption of our series a preferred stock issued to the us treasury in 2008 under the capital purchase program . ● continuing to operate the company and bank in a safe and sound manner . this strategy will require us to reduce our lending concentrations , remediate non-performing loans , and reduce other noninterest expense through the disposition of oreo . ● continuing with succession planning and adding resources to the management team . john t. taylor was named president and ceo for pbi bank and appointed to our board of directors in july 2012. additionally , john r. davis was appointed chief credit officer of pbi bank in august 2012 , with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization . ● evaluating our internal processes and procedures , distribution of labor , and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment . to this end , we believe the opportunity exists for the centralization of key processes which will lead to improved execution and cost savings . ● executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk . o we have reduced the size of our loan portfolio significantly from $ 1.3 billion at december 31 , 2010 to $ 1.1 billion at december 31 , 2011 , and $ 899.1 million at december 31 , 2012. we have significantly improved our staffing in the commercial lending area which is now led by john r. davis , who joined the management team in august 2012 and now serves as chief credit officer . 28 o our consent order calls for us to reduce our construction and development loans to not more than 75 % of total risk-based capital . we were not in compliance at december 31 , 2012 with construction and development loans representing 82 % of total risk-based capital . these loans totaled $ 70.3 million , or 82 % of total risk-based capital , at december 31 , 2012 and $ 101.5 million , or 85 % of total risk-based capital , at december 31 , 2011. o our consent order also requires us to reduce non-owner occupied commercial real estate loans , construction and development loans , and multi-family residential real estate loans as a group , to not more than 250 % of total risk-based capital .

results of operations the following table summarizes components of income and expense and the change in those components for 2012 compared with 2011 : replace_table_token_5_th net loss of $ 32.9 million for the year ended december 31 , 2012 , decreased $ 74.4 million from net loss of $ 107.3 million for 2011. net loss to common shareholders of $ 33.4 million for the year ended december 31 , 2012 , decreased $ 71.7 million from net loss to common shareholders of $ 105.2 million for 2011. this decrease in net loss was attributable primarily to lower provision for loan losses expense , decreased non-interest expense associated with our oreo , and higher net gain on sales of securities , partially offset by lower net interest income . in addition , the 2011 results included a one-time goodwill impairment charge of $ 23.8 million . 31 the following table summarizes components of income and expense and the change in those components for 2011 compared with 2010 : replace_table_token_6_th net loss of $ 107.3 million for the year ended december 31 , 2011 , increased $ 102.9 million from net loss of $ 4.4 million for 2010. net loss to common shareholders of $ 105.2 million for the year ended december 31 , 2011 , increased $ 99.0 million from net loss to common shareholders of $ 6.2 million for 2010. this decrease in earnings was attributable primarily to a one-time goodwill impairment charge of $ 23.8 million , establishment of a deferred tax asset valuation allowance of $ 31.7 million , increased provision for loan losses expense , and non-interest expenses associated with our oreo . goodwill was determined to be impaired during the second quarter of 2011 as the result of operating losses and a significant drop in value of our common stock which trades on nasdaq . the deferred tax asset is dependent on future levels of income .

ii of this annual report . performance overview the company recorded net income of $ 11.26 million for 2017 , net income of $ 9.64 million for 2016 , and net income of $ 7.11 million for 2015. the basic and diluted income per share was $ 0.89 for 2017 , $ 0.76 for 2016 , and $ 0.56 for 2015. when comparing 201 7 to 2016 and 2015 , earnings were significantly improved due to increases in net interest income and noninterest income , partially offset by increase in provision for credit losses and noninterest expenses . total assets were $ 1.394 billion at december 31 , 2017 , a $ 233.6 million , or 20.1 % , increase when compared to the $ 1.160 billion at december 31 , 2016. the primary factor contributing to the increase was the acquisition of three branches in the second quarter of 2017 which contributed $ 192.7 million of assets at december 31 , 2017. absent the branch acquisition , total assets have increased $ 40.9 million since december 31 , 2016 which primarily resulted from increases in both gross loans of $ 113.9 million and investment securities of $ 33.2 million . total deposits increased $ 205.3 million , or 20.6 % , to $ 1.203 billion at december 31 , 2017. the increase was the direct result of the deposits acquired in the branch purchase which had a balance of $ 187.0 million at december 31 , 2017. excluding the acquisition , deposits increased $ 18.3 million . total stockholders ' equity increased $ 9.5 million , or 6.1 % , to $ 163.7 million , or 11.75 % of total assets at december 31 , 2017. critical accounting policies the company 's consolidated financial statements are prepared in accordance with gaap and follow general practices within the industries in which it operates . application of these principles requires management to make estimates , assumptions , and judgments that affect the amounts reported in the financial statements and accompanying notes . these estimates , assumptions , and judgments are based on information available as of the date of the financial statements ; accordingly , as this information changes , the financial statements could reflect different estimates , assumptions , and judgments . certain policies inherently have a greater reliance on the use of estimates , assumptions , and judgments and as such have a greater possibility of producing results that could be materially different than originally reported . estimates , assumptions , and judgments are necessary when assets and liabilities are required to be recorded at fair value , when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established , or when an asset or liability needs to be recorded contingent upon a future event . carrying assets and liabilities at fair value inherently results in more financial statement volatility . the fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices , collateral value or are provided by other third-party sources , when available . the most significant accounting policies that the company follows are presented in note 1 to the consolidated financial statements . these policies , along with the disclosures presented in the notes to the financial statements and in this discussion , provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined . based on the valuation techniques used and the sensitivity of financial statement amounts to the methods , assumptions , and estimates underlying those amounts , management has determined that the accounting policies with respect to the allowance for credit losses , goodwill and other intangible assets , deferred tax assets , and fair value are critical accounting policies . these policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments , and , as such , could be most subject to revision as new information becomes available . the allowance for credit losses represents management 's estimate of credit losses inherent in the loan portfolio as of the balance sheet date . determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans , estimated losses on pools of homogeneous loans based on historical loss experience , and consideration of current economic trends and conditions , all of which may be susceptible to significant change . the loan portfolio also represents the largest asset type on the consolidated balance sheets . note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses . a discussion of the factors driving changes in the amount of the allowance for credit losses is included in the asset quality - provision for credit losses and risk management section below . goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired . other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract , asset or liability . goodwill and other intangible assets are required to be recorded at fair value at inception . determining fair value is subjective , requiring the use of estimates , assumptions and management judgment . goodwill and other intangible assets with indefinite lives are tested at least annually for impairment , usually during the third quarter , or on an interim basis if circumstances dictate . intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing . story_separator_special_tag on a tax-equivalent basis , total interest income was $ 48.0 million for 2017 compared to $ 40.9 million for 2016. the increase in interest income for 2017 compared to 2016 was primarily due to the increase in the average balance of loans coupled with a higher yield on taxable investment securities . interest income on taxable investment securities increased $ 652 thousand or 20.4 % in 2017 compared to 2016. in addition , interest-bearing deposits increased due to three fed fund rate hikes of 25bps during 2017. for 2017 compared to 2016 , average loans increased $ 158.0 million and the yield earned on loans decreased 6 basis points . the increased volume of loans and the higher yield on loans purchased in the branch acquisition during the second quarter of 2017 , outweighed the decline in the yield on originated loans resulting in an increase in tax-equivalent interest income of $ 6.5 million . also impacting interest income is the accretion of acquisition accounting adjustments from the branch acquisition for loans of $ 420 thousand which is accounted for using a level yield method . in addition , the accretion on certificates of deposits acquired from the branch purchase , decreased interest expense by $ 86 thousand . excluding average nonaccrual loans , the yield on loans would have been 4.49 % , 4.59 % and 4.79 % for 2017 , 2016 , and 2015 , respectively . 34 on a tax-equivalent basis , total interest income was $ 40.9 million for 2016 compared to $ 39.0 million for 2015. the increase in interest income for 2016 compared to 2015 was primarily due to the increase in the average balance of loans coupled with an increase in the fed funds rate at the end of 2016 of 25bps . interest income on taxable securities decreased $ 407 thousand or 11.3 % in 2016 compared to 2015 due to a decrease in the average balance of $ 35.9 million which was used to fund loan growth . for 2016 compared to 2015 , average loans increased $ 77.4 million and the yield earned on loans decreased 19 basis points . the increased volume of loans outweighed the decline in the yield resulting in an increase in interest income of $ 2.1 million . as a percentage of total average earning assets , loans , investment securities , and interest-bearing deposits were 80.9 % , 16.6 % , and 2.5 % , respectively , for 2017 which reflected an increase in higher-yielding earning assets when compared to 2016. the comparable percentages for 2016 were 76.4 % , 18.2 % , and 5.4 % , respectively , and for 2015 were 72.2 % , 22.4 % , and 5.4 % , respectively . when comparing 2017 to 2016 , the overall increase in average balances of earning assets produced $ 7.1 million more in interest income and the decrease in yields on loans were offset by higher yields on taxable investment securities and interest-bearing deposits which produced $ 129 thousand more in interest income , as seen in the rate/volume variance analysis below . when comparing 2016 to 2015 , the overall increase in average balances of earning assets produced $ 3.0 million more in interest income and the decrease in yields on earning assets produced $ 1.1 million less in interest income , as seen in the rate/volume variance analysis below . the following table sets forth the average balance of the components of average earning assets as a percentage of total average earning assets for the year ended december 31. replace_table_token_13_th interest expense was $ 2.3 million for 2017 compared to $ 2.4 million for 2016. the decline in interest expense for 2017 was primarily due to lower expense on certificates of deposit and other time deposits . interest expense on certificates of deposit and other time deposits declined $ 398 thousand in 2017 when compared to 2016 , the result of a decrease of $ 4.5 million in average balances and a decline of 13 basis points on rates paid on these deposits . the decrease in average certificates of deposits and other time deposits reflected the lower rates due to the bank not increasing these rates in conjunction with a rising interest rate environment . the decrease in average certificates of deposit and other time deposits was mostly transitioned to non-interest bearing and money market and savings deposits which reflected average increases of $ 54.9 million and $ 74.6 million , respectively . interest expense was $ 2.4 million for 2016 compared to $ 3.3 million for 2015. the decline in interest expense for 2016 was primarily due to lower expense on certificates of deposit and other time deposits . interest expense on certificates of deposit and other time deposits declined $ 959 thousand in 2016 when compared to 2015 , the result of a decrease of $ 37.3 million in average balances and a decline of 23 basis points on rates paid on these deposits . the decrease in average certificates of deposit and other time deposits reflected the lower rates due to current market conditions . the decrease in average certificates of deposit and other time deposits was mostly transitioned to non-interest bearing and money market and savings deposits which reflected average increases of $ 30.2 million and $ 21.6 million , respectively . during 2017 , lower rates on interest-bearing liabilities produced $ 218 thousand less in interest expense and increased volume produced $ 88 thousand more in interest expense , as shown in the table below . in 2016 , lower rates on interest-bearing liabilities produced $ 690 thousand less in interest expense and decreased volume produced $ 253 thousand less in interest expense . 35 the following rate/volume variance analysis identifies the portion of the changes in tax-equivalent net interest income attributable to changes in volume of average balances or to changes in the yield on earning assets and rates paid on interest-bearing liabilities .

review of financial condition asset and liability composition , capital resources , asset quality , market risk , interest sensitivity and liquidity are all factors that affect our financial condition . the following sections discuss each of these factors . assets interest-bearing deposits with other banks and federal funds sold the company invests excess cash balances ( i.e. , the excess cash remaining after funding loans and investing in securities with deposits and borrowings ) in interest-bearing accounts and federal funds sold offered by our correspondent banks . these liquid investments are maintained at a level that management believes is necessary to meet current liquidity needs . total interest-bearing deposits with other banks and federal funds sold decreased $ 51.1 million from $ 61.3 million at december 31 , 2016 to $ 10.3 million at december 31 , 2017. this significant decrease was the direct result of funding a significant volume of new loans which closed late in the fourth quarter . average interest-bearing deposits with other banks and federal funds sold decreased $ 27.4 million in 2017 and increased $ 1.8 million in 2016. the decrease in 2017 was due to higher period-end and average balances on loans which absorbed the excess liquidity in both average interest-bearing deposits with other banks and average balances on deposits . the increase in 2016 was due to higher period-end and average balances on deposits which resulted in excess liquidity for funding future loan growth . 37 investment securities the investment portfolio is structured to provide us with liquidity and also plays an important role in the overall management of interest rate risk . investment securities available for sale are stated at estimated fair value based on quoted prices and may be sold as part of the asset/liability management strategy or which may be sold in response to changing interest rates .

such forward-looking statements are identified by use of forward-looking words such as `` anticipates '' , `` believes '' , `` plans '' , `` estimates '' , `` expects '' , and `` intends '' or words or phrases of similar expression . these forward-looking statements are subject to management decisions and various assumptions , risks and uncertainties , including , but not limited to : the potential effects of natural disasters affecting our suppliers or trading partners ; the effects of labor strikes ; weather conditions that may affect sales ; volatility in fuel , utility , transportation and security costs ; changes in global or regional political or economic conditions , including changes in governmental and central bank policies ; changes in business conditions in the furniture industry , including changes in consumer spending patterns and demand for home furnishings ; effects of our brand awareness and marketing programs , including changes in demand for our existing and new products ; our ability to locate new design center sites and or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers ; competitive factors , including changes in products or marketing efforts of others ; pricing pressures ; fluctuations in interest rates and the cost , availability and quality of raw materials ; the effects of terrorist attacks or conflicts or wars involving the united states or its allies or trading partners ; those matters discussed in items 1a and 7a of this annual report and in our sec filings ; and our future decisions . accordingly , actual circumstances and results could differ materially from those contemplated by the forward-looking statements . critical accounting policies our consolidated financial statements have been prepared in conformity with u.s. generally accepted accounting principles that require , in some cases , that certain estimates and assumptions be made that affect the amounts and disclosures reported in those financial statements and the related accompanying notes . estimates are based on currently known facts and circumstances , prior experience and other assumptions believed to be reasonable . we use our best judgment in valuing these estimates and may , as warranted , solicit external advice . actual results could differ from these estimates , assumptions and judgments , and these differences could be material . the following critical accounting policies , some of which are impacted significantly by estimates , assumptions and judgments , affect our consolidated financial statements . inventories – inventories ( finished goods , work in process and raw materials ) are stated at the lower of cost , determined on a first-in , first-out basis , or market . cost is determined based solely on those charges incurred in the acquisition and production of the related inventory ( i.e . material , labor and manufacturing overhead costs ) . we estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-downs , taking into account future demand and market conditions . if actual demand or market conditions in the future are less favorable than those estimated , additional inventory write-downs may be required . revenue recognition – revenue is recognized when all of the following have occurred : persuasive evidence of a sales arrangement exists ( e.g . a wholesale purchase order or retail sales invoice ) ; the sales arrangement specifies a fixed or determinable sales price ; title and risk of ownership has passed to the customer ; no specific performance obligations remain ; product is shipped or services are provided to the customer ; collectability is reasonably assured . as such , revenue recognition generally occurs upon the shipment of goods to independent retailers or , in the case of ethan allen operated retail design centers , upon delivery to the customer . if a shipping charge is billed to customers , this is included in revenue . recorded sales provide for estimated returns and allowances . we permit our customers to return defective products and incorrect shipments , and terms we offer are standard for the industry . 22 ethan allen interiors inc. and subsidiaries allowance for doubtful accounts – we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments . the allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis . judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends . actual losses could differ from those estimates . retail design center acquisitions - we account for the acquisition of retail design centers and related assets with the purchase method . accounting for these transactions as purchase business combinations requires the allocation of purchase price paid to the assets acquired and liabilities assumed based on their fair values as of the date of the acquisition . the amount paid in excess of the fair value of net assets acquired is accounted for as goodwill . impairment of long-lived assets and goodwill – goodwill and other indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth quarter of each fiscal year , and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible asset may exceed its fair value . when testing goodwill for impairment , we may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than not ( that is , a likelihood of more than 50 percent ) that the fair value of a reporting unit is less than its carrying amount , including goodwill . alternatively , we may bypass this qualitative assessment for some or all of our reporting units and determine whether the carrying value exceeds the fair value using a quantitative assessment as described below . story_separator_special_tag although we believe that the insurance reserves are adequate , the reserve estimates are based on historical experience , which may not be indicative of current and future losses . in addition , the actuarial calculations used to estimate insurance reserves are based on numerous assumptions , some of which are subjective . we adjust insurance reserves , as needed , in the event that future loss experience differs from historical loss patterns . other loss reserves – we have a number of other potential loss exposures incurred in the ordinary course of business such as environmental claims , product liability , litigation , tax liabilities , restructuring charges , and the recoverability of deferred income tax benefits . establishing loss reserves for these matters requires the use of estimates and judgment with regard to maximum risk exposure and ultimate liability or realization . as a result , these estimates are often developed with our counsel , or other appropriate advisors , and are based on our current understanding of the underlying facts and circumstances . because of uncertainties related to the ultimate outcome of these issues or the possibilities of changes in the underlying facts and circumstances , additional charges related to these issues could be required in the future . 24 ethan allen interiors inc. and subsidiaries results of operations for the year ended june 30 , 2015 , our net sales were $ 754.6 million , and gross profit was $ 411.2 million , both increasing 1.1 % compared to fiscal 2014. operating income decreased 5.3 % over the prior fiscal year , and earnings per diluted share was $ 1.27 , which was 13.6 % below the year ended june 30 , 2014. net cash provided by operating activities was $ 55.1 million , a $ 4.8 million decrease over the prior fiscal year . our wholesale division operating income grew $ 9.2 million , while the retail division 's operating income was down $ 8.8 million from the prior fiscal year . our liquidity continues to be strong , enabling us to reduce our debt by $ 53.3 million and increase our dividend payments during the fiscal year by 18.2 % to $ 13.3 million , and repurchase $ 16.5 million of our common stock . at june 30 , 2015 we had total cash and securities of $ 86.4 million , and working capital of $ 129.7 million . net sales for our wholesale business segment for fiscal 2015 grew 3.5 % over the prior fiscal year , while net sales for our retail segment decreased 0.2 % over the same period . total written orders booked by our retail segment increased 3.9 % for fiscal 2015 compared to fiscal 2014 , and comparable design center written orders increased 4.4 % . net sales for the fourth quarter of fiscal 2015 compared to the prior year increased 0.2 % in wholesale and decreased 2.3 % in our retail segment , while total written orders booked by our retail segment increased 11.2 % over the same period . backlogs at june 30 2015 compared to one year earlier are up 41.8 % and 18.6 % by our wholesale and retail segments respectively . during fiscal 2015 our retail segment had significantly more clearance sales than in the prior year period as we sold off floor samples at a discount to make room for the first two phases of new product introductions , which impacted both retail sales and gross margin . we anticipate these clearance sales to continue during the first half of fiscal 2016 as we make room for the third phase of the product refresh that began in the first half of fiscal 2015. we continue to make investments to strengthen the level of service , professionalism , interior design competence , efficiency , and effectiveness of the retail network design center personnel . we believe that over time , we will continue to benefit from ( i ) continuous repositioning and opening of new design centers in our retail network , ( ii ) frequent new product introductions , ( iii ) new and innovative marketing promotions and effective use of targeted advertising media , and ( iv ) continued use of the latest technology coupled with personal service from our interior design professionals . we believe our network of professionally trained interior design professionals differentiates us significantly from others in our industry . our manufacturing and logistics operations gained efficiency by adding capacity in north carolina and adding new technology to our operations . we estimate our manufacturing facilities are currently operating at approximately 71 % of capacity based on their current shifts and staffing . we believe we have sufficient scalable capacity that can support strong sales growth while maintaining control over cost , quality and service to our customers . story_separator_special_tag serif '' > year-over-year , written orders for the company operated design centers increased 1.0 % and comparable design centers written business increased 3.0 % . gross profit for fiscal 2014 increased to $ 406.5 million from $ 398.3 million in fiscal 2013. the $ 8.1 million increase in gross profit was primarily attributable to the increase in wholesale net sales of 4.4 % or $ 19.2 million . our consolidated gross margin decreased to 54.4 % for fiscal 2014 from 54.6 % in fiscal 2013 as a result , primarily , of the lower mix of retail net sales to consolidated net sales in the current year ( 77.8 % ) compared to the prior fiscal year ( 79.3 % ) . operating expenses decreased $ 1.1 million or 0.3 % to $ 336.9 million or 45.1 % of net sales in fiscal 2014 from $ 337.9 million or 46.3 % of net sales in fiscal 2013. the decrease in current year expenses is primarily due to operating efficiencies , partly offset by higher variable costs on increased sales .

business results : our revenues are comprised of ( i ) wholesale sales to independently operated and company operated retail design centers and ( ii ) retail sales of company operated design centers . see note 15 to our consolidated financial statements for the year ended june 30 , 2015 included under item 8 of this annual report . 25 ethan allen interiors inc. and subsidiaries the components of consolidated revenues and operating income ( loss ) are as follows ( in millions ) : replace_table_token_8_th ( 1 ) represents the change in wholesale profit contained in ethan allen operated design center inventory existing at the end of the period . fiscal 2015 compared to fiscal 2014 consolidated revenue for the fiscal year ended june 30 , 2015 was $ 754.6 million compared to $ 746.7 million for fiscal 2014. there was year-over-year sales growth in the wholesale segment and a slight decline in the retail segment . the increase in the wholesale segment in the current fiscal year was primarily due to higher shipments internationally and to our retail segment . wholesale revenue for fiscal 2015 increased by $ 15.8 million , or 3.5 % , to $ 469.4 million from $ 453.6 million in the prior fiscal year . the year-over-year increase was attributable to increased sales to both our company operated design centers and independent retailers worldwide . orders similarly increased 7.7 % during the same period . the number of total design centers globally as of june 30 , 2015 was 299 , which increased by four from june 30 , 2014. the independently operated retail network , net of relocations , increased by three design centers to 155 at june 30 , 2015 including a net increase of five locations to 75 in china .

our allowance for doubtful accounts was $ 0 at both december 31 , 2020 and 2019. as of december 31 , 2020 , our long-lived assets were geographically located as follows : replace_table_token_29_th note 7 – retirement savings plan we have a qualified retirement plan under the provisions of section 401 ( k ) of the internal revenue code covering all u.s. employees . participants in this plan may contribute between 1 % and 60 % of their eligible pay on a pretax basis , up to the annual internal revenue service dollar limits . the company will make matching contributions in an amount equal to 50 % of the participant 's deferral contributions , not to exceed $ 500 . all contributions , including the company match , are vested immediately . our matching contributions to the plan were $ 3 thousand in each of 2020 and 2019. note 8 – paycheck protection program loan the company received a loan from silicon valley bank in the aggregate principal amount of $ 186 thousand pursuant to the paycheck protection program ( the “ ppp ” ) under the coronavirus aid , relief , and economic security act ( the “ cares act ” ) , which was enacted march 27 , 2020. the loan is evidenced by a promissory note , dated april 21 , 2020 , issued by us to the lender , which matures on april 20 , 2022 , and bears interest at a rate of 1.00 % per annum , payable monthly following an initial deferral period as specified under the ppp . we may prepay the note at any time prior to maturity with no prepayment penalties . proceeds from the loan were used to fund designated expenses , including certain payroll costs , group health care benefits and other permitted expenses , in accordance with the ppp . under the terms of the ppp , up to the entire amount of principal and accrued interest may be forgiven to the extent loan proceeds are used for qualifying expenses as described in the cares act and applicable implementing guidance issued by the u.s. small business administration under the ppp . the full amount of the loan principal and interest was forgiven in february 2021 . 50 interlink electronics , inc. notes to consolidated financial statements – continued note 9 – related party transactions qualstar corporation ( otcmkts : qbak ) qualstar corporation ( otcmkts : qbak ) ( “ qualstar ” ) is a related party . steven n. bronson , our chairman of the board , president and chief executive officer , is also the president and chief executive officer and director of qualstar . ryan j. hoffman , our chief financial officer , is also the chief financial officer of qualstar . mr. bronson , together with bkf capital group , inc. ( otcmkts : bkfg ) which he controls , has a controlling interest in both interlink and qualstar . we have a facilities agreement with qualstar to allow qualstar to use of a portion of our irvine , california office facility , for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity . qualstar also has a facilities agreement with us to allow us to use of a portion of its camarillo , california office and warehouse facility , for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity . in addition , we have various consulting agreements with qualstar for certain of our respective employees and or independent contractors that provide certain operational , sales , marketing , general and administrative services to the other entity . interlink and qualstar also agree to reimburse , or be reimbursed by , one another for expenses paid by one company on behalf of the other . transactions with qualstar are as follows : story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included later in this annual report on form 10-k. in addition to historical financial information , the following discussion contains forward-looking statements that reflect our plans , estimates , beliefs and expectations that involve risks and uncertainties . our actual results and the timing of events could differ materially from those discussed in these forward-looking statements . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on form 10-k , particularly in “ risk factors ” and “ special note regarding forward-looking statements. ” overview interlink electronics , inc. designs , develops , manufactures and sells a range of force-sensing technologies that incorporate our proprietary materials technology , firmware and software into a portfolio of standard products and custom solutions . these include sensor components , subassemblies , modules and products that support effective , efficient cursor control and novel three-dimensional user inputs . our hmi technology platforms are deployed in a wide range of markets including consumer electronics , automotive , industrial , and medical . the application of our hmi technology platforms includes vehicle entry , vehicle multi-media control interface , rugged touch controls , presence detection , collision detection , speed and torque controls , biological monitoring and others . interlink has been a leader in the printed electronics industry for 30 years with the commercialization of our patented fsr® technology that has enabled rugged and reliable hmi solutions . our solutions have focused on handheld user input , menu navigation , cursor control , and other intuitive interface technologies for the world 's top electronics manufacturers . story_separator_special_tag if we require additional cash , we may attempt to raise additional capital through equity , equity-linked or debt financing arrangements . if we raise additional funds by issuing equity or equity-linked securities , the ownership of our existing stockholders will be diluted . if we raise additional financing by the incurrence of indebtedness , we could be subject to fixed payment obligations and could also be subject to restrictive covenants , such as limitations on our ability to incur additional debt , and other operating restrictions that could adversely impact our ability to conduct our business . if we are unable to raise additional needed funds , we may also take measures to reduce expenses to offset any shortfall . 29 cash flow analysis our cash flows from operating , investing and financing activities are summarized as follows : replace_table_token_7_th net cash provided by operating activities for the year ended december 31 , 2020 , the $ 39 thousand in net cash provided by operating activities was attributable to net income of $ 113 thousand , adjusted for non-cash charges of $ 532 thousand , and cash used in changes in operating assets and liabilities of $ 606 thousand . for the year ended december 31 , 2019 , the $ 2 thousand in net cash provided by operating activities was primarily attributable to non-cash charges and cash used in changes in operating assets and liabilities that offset the net loss . net loss of $ 457 thousand , plus adjustments for non-cash charges of $ 518 thousand , including the non-cash charges related to lease accounting , resulted in a net increase in cash of $ 61 thousand . net changes in operating assets and liabilities of $ 59 thousand that decreased cash was primarily due to the timing of shipments and payments during the period . accounts receivable increased from $ 730 thousand at december 31 , 2019 to $ 1,113 thousand at december 31 , 2020 due to higher shipments during the fourth quarter of 2020 compared to the fourth quarter of 2019. many of our customers pay promptly and accounts receivable is generally related to the most recent shipments . inventories decreased from $ 927 thousand at december 31 , 2019 to $ 866 thousand at december 31 , 2020. inventory balances fluctuate depending on the timing of materials purchases and product shipments . prepaid expenses and other current assets increased from $ 330 thousand at december 31 , 2019 to $ 392 thousand at december 31 , 2020. accounts payable and accrued liabilities increased from $ 520 thousand at december 31 , 2019 to $ 578 thousand at december 31 , 2020 primarily due to the timing of payment for purchases of materials and other services provided . net cash used in investing activities net cash used in investing activities of $ 90 thousand for the year ended december 31 , 2020 consisted primarily of legal costs related to securing patents on new products and processes developed thereunder . net cash used in investing activities of $ 233 thousand for the year ended december 31 , 2019 consisted of $ 141 thousand for capital expenditures for the expansion of our r & d center in singapore and $ 92 thousand related to securing patents . net cash provided by ( used in ) financing activities net cash provided by financing activities of $ 186 thousand for the year ended december 31 , 2020 related to our ppp loan . net cash used in financing activities of $ 6 thousand for the year ended december 31 , 2019 related to repurchase of shares of our common stock . 30 transactions with related parties for a discussion of transactions with related parties , see note 9 , related party transactions , of the notes to the consolidated financial statements appearing elsewhere in this annual report on form 10-k. off-balance sheet arrangements as of december 31 , 2020 and 2019 , we did not have any relationships with unconsolidated entities or financial partnerships , such as entities often referred to as structured finance or special purpose entities , which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes . as such , we are not exposed to any financing , liquidity , market or credit risk that could arise if we had engaged in such relationships . critical accounting policies and estimates we prepare our consolidated financial statements in accordance with generally accepted accounting principles in the united states ( “ gaap ” ) . the preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue , costs and expenses , and related disclosures . we evaluate our estimates and assumptions on an ongoing basis . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . actual results could differ significantly from the estimates made by our management . to the extent that there are differences between our estimates and actual results , our future financial statements presentation , financial condition , results of operations , and cash flows will be affected . we believe that the assumptions and estimates associated with revenue recognition , inventory valuation , accounts receivable , stock-based compensation expense and income taxes have the greatest potential impact on our consolidated financial statements . therefore , we consider these to be our critical accounting policies and estimates . for further information on all of our significant accounting policies , see the notes to our consolidated financial statements .

results of operations the following table sets forth certain consolidated statements of operations data for the periods indicated . the percentages in the tables are based on net revenues . replace_table_token_1_th impact of covid-19 on results of operations the covid-19 pandemic has adversely affected our operating results for the year ended december 31 , 2020 , with the impact of the pandemic being more significant in the second half of 2020. covid-19 has resulted in many of our customers delaying orders or cancelling them altogether due to disruptions in their supply chain and reduced demand for their products . revenues were lower in 2020 because of a significant reduction of shipments to our largest medical customer , which could not install the devices that use our products in hospitals due to covid-19 restrictions . this medical customer accounted for 15.5 % of revenue in 2020 and 36.8 % of revenue in 2019 , and thus its reduction in purchases resulted in a significant decline in revenue for 2020 when compared to the prior year . we experienced a similar decline in sales to other customers due to disruptions in their businesses . to mitigate the effects of covid-19 on our business , we have been working with key customers to reach agreement on the timing for shipment of products on orders previously delayed or cancelled . this has allowed us to accelerate into 2020 the shipment of certain orders previously delayed for shipment in 2021. these efforts have helped us to reduce the amount of lost revenue for 2020 from the pandemic . while the impact of covid-19 is by no means over , orders for our products have begun to stabilize and we do not anticipate further significant declines in product sales to continue .

the change in cash provided by operations for the years ended december 31 , 2017 , 2016 and 2015 , is primarily the result of changes in revenues and expenses as discussed in “ results of operations. ” cash generated from operations is expected to fluctuate in the future . changes in cash for investing activities are primarily attributable to acquisitions and dispositions of properties . nnn typically uses proceeds from its credit facility to fund the acquisition of its properties . 28 nnn 's financing activities for the year ended december 31 , 2017 , included the following significant transactions : $ 287,500,000 paid to fully redeem nnn 's 6.625 % series d cumulative redeemable preferred stock ( the `` series d preferred stock '' ) in february , $ 394,722,000 in net proceeds from the issuance of the 3.500 % notes payable in september , $ 250,000,000 in repayment of the 6.875 % notes payable in october , $ 9,391,000 in net proceeds from the issuance of 229,696 shares of common stock in connection with the dividend reinvestment and stock purchase plan ( “ drip ” ) , $ 243,822,000 in net proceeds from the issuance of 5,821,366 shares of common stock in connection with the at-the-market ( `` atm '' ) equity program , $ 3,598,000 in dividends paid to holders of the depositary shares of nnn 's series d preferred stock , $ 16,387,000 in dividends paid to holders of the depositary shares of nnn 's 5.700 % series e cumulative redeemable preferred stock ( the `` series e preferred stock '' ) , $ 17,940,000 in dividends paid to holders of the depositary shares of nnn 's 5.200 % series f cumulative redeemable preferred stock ( the `` series f preferred stock '' ) , and $ 277,120,000 in dividends paid to common stockholders . financing strategy . nnn 's financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements , maintaining its investment grade credit rating , staggering debt maturities and providing value to nnn 's stockholders . nnn generally utilizes debt and equity security offerings , bank borrowings , proceeds from the disposition of certain properties , and to a lesser extent , internally generated funds to meet its capital needs . nnn typically funds its short-term liquidity requirements , including investments in additional properties , with cash from its credit facility . as of december 31 , 2017 , there was $ 120,500,000 outstanding balance and $ 779,500,000 was available for future borrowings under the credit facility , excluding undrawn letters of credit totaling $ 230,000 . as of december 31 , 2017 , nnn 's ratio of total debt to total gross assets ( before accumulated depreciation and amortization ) was approximately 35 percent and the ratio of secured indebtedness to total gross assets was less than one percent . the ratio of total debt to total market capitalization was approximately 27 percent . certain financial agreements to which nnn is a party contain covenants that limit nnn 's ability to incur additional debt under certain circumstances . the organizational documents of nnn do not limit the absolute amount or percentage of indebtedness that nnn may incur . additionally , nnn may change its financing strategy . contractual obligations and commercial commitments . the information in the following table summarizes nnn 's contractual obligations and commercial commitments outstanding as of december 31 , 2017 . the table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of december 31 , 2017 . replace_table_token_17_th ( 1 ) includes only principal amounts outstanding under mortgages payable and notes payable and excludes unamortized mortgage premiums , note discounts and note costs . ( 2 ) interest calculation based on stated rate of the principal amount . 29 in addition to the contractual obligations outlined above , nnn has committed to fund construction commitments on 27 properties . the improvements on such properties are estimated to be completed within 12 months on such properties . these construction commitments , at december 31 , 2017 , are outlined in the table below ( dollars in thousands ) : total commitment ( 1 ) $ 129,925 amount funded 67,719 remaining commitment 62,206 ( 1 ) includes land , construction costs , tenant improvements , lease costs and capitalized interest as of december 31 , 2017 , nnn did not have any other material contractual cash obligations , such as purchase obligations , financing lease obligations or other long-term liabilities other than those reflected in the table . in addition to items reflected in the table , nnn has issued preferred stock with cumulative preferential cash distributions , as described below under “ dividends. ” management anticipates satisfying these obligations with a combination of nnn 's cash provided from operations , current capital resources on hand , its credit facility , debt or equity financings and asset dispositions . generally the properties are leased under long-term net leases , which require the tenant to pay all property taxes and assessments , to maintain the interior and exterior of the property , and to carry property and liability insurance coverage . therefore , management anticipates that capital demands to meet obligations with respect to these properties will be modest for the foreseeable future and can be met with funds from operations and working capital . certain properties are subject to leases under which nnn retains responsibility for specific costs and expenses associated with the property . management anticipates the costs associated with these properties , nnn 's vacant properties or those properties that become vacant will also be met with funds from operations and working capital . nnn may be required to borrow under its credit facility or use other sources of capital in the event of significant capital expenditures or major repairs . the story_separator_special_tag the change in cash provided by operations for the years ended december 31 , 2017 , 2016 and 2015 , is primarily the result of changes in revenues and expenses as discussed in “ results of operations. ” cash generated from operations is expected to fluctuate in the future . changes in cash for investing activities are primarily attributable to acquisitions and dispositions of properties . nnn typically uses proceeds from its credit facility to fund the acquisition of its properties . 28 nnn 's financing activities for the year ended december 31 , 2017 , included the following significant transactions : $ 287,500,000 paid to fully redeem nnn 's 6.625 % series d cumulative redeemable preferred stock ( the `` series d preferred stock '' ) in february , $ 394,722,000 in net proceeds from the issuance of the 3.500 % notes payable in september , $ 250,000,000 in repayment of the 6.875 % notes payable in october , $ 9,391,000 in net proceeds from the issuance of 229,696 shares of common stock in connection with the dividend reinvestment and stock purchase plan ( “ drip ” ) , $ 243,822,000 in net proceeds from the issuance of 5,821,366 shares of common stock in connection with the at-the-market ( `` atm '' ) equity program , $ 3,598,000 in dividends paid to holders of the depositary shares of nnn 's series d preferred stock , $ 16,387,000 in dividends paid to holders of the depositary shares of nnn 's 5.700 % series e cumulative redeemable preferred stock ( the `` series e preferred stock '' ) , $ 17,940,000 in dividends paid to holders of the depositary shares of nnn 's 5.200 % series f cumulative redeemable preferred stock ( the `` series f preferred stock '' ) , and $ 277,120,000 in dividends paid to common stockholders . financing strategy . nnn 's financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements , maintaining its investment grade credit rating , staggering debt maturities and providing value to nnn 's stockholders . nnn generally utilizes debt and equity security offerings , bank borrowings , proceeds from the disposition of certain properties , and to a lesser extent , internally generated funds to meet its capital needs . nnn typically funds its short-term liquidity requirements , including investments in additional properties , with cash from its credit facility . as of december 31 , 2017 , there was $ 120,500,000 outstanding balance and $ 779,500,000 was available for future borrowings under the credit facility , excluding undrawn letters of credit totaling $ 230,000 . as of december 31 , 2017 , nnn 's ratio of total debt to total gross assets ( before accumulated depreciation and amortization ) was approximately 35 percent and the ratio of secured indebtedness to total gross assets was less than one percent . the ratio of total debt to total market capitalization was approximately 27 percent . certain financial agreements to which nnn is a party contain covenants that limit nnn 's ability to incur additional debt under certain circumstances . the organizational documents of nnn do not limit the absolute amount or percentage of indebtedness that nnn may incur . additionally , nnn may change its financing strategy . contractual obligations and commercial commitments . the information in the following table summarizes nnn 's contractual obligations and commercial commitments outstanding as of december 31 , 2017 . the table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of december 31 , 2017 . replace_table_token_17_th ( 1 ) includes only principal amounts outstanding under mortgages payable and notes payable and excludes unamortized mortgage premiums , note discounts and note costs . ( 2 ) interest calculation based on stated rate of the principal amount . 29 in addition to the contractual obligations outlined above , nnn has committed to fund construction commitments on 27 properties . the improvements on such properties are estimated to be completed within 12 months on such properties . these construction commitments , at december 31 , 2017 , are outlined in the table below ( dollars in thousands ) : total commitment ( 1 ) $ 129,925 amount funded 67,719 remaining commitment 62,206 ( 1 ) includes land , construction costs , tenant improvements , lease costs and capitalized interest as of december 31 , 2017 , nnn did not have any other material contractual cash obligations , such as purchase obligations , financing lease obligations or other long-term liabilities other than those reflected in the table . in addition to items reflected in the table , nnn has issued preferred stock with cumulative preferential cash distributions , as described below under “ dividends. ” management anticipates satisfying these obligations with a combination of nnn 's cash provided from operations , current capital resources on hand , its credit facility , debt or equity financings and asset dispositions . generally the properties are leased under long-term net leases , which require the tenant to pay all property taxes and assessments , to maintain the interior and exterior of the property , and to carry property and liability insurance coverage . therefore , management anticipates that capital demands to meet obligations with respect to these properties will be modest for the foreseeable future and can be met with funds from operations and working capital . certain properties are subject to leases under which nnn retains responsibility for specific costs and expenses associated with the property . management anticipates the costs associated with these properties , nnn 's vacant properties or those properties that become vacant will also be met with funds from operations and working capital . nnn may be required to borrow under its credit facility or use other sources of capital in the event of significant capital expenditures or major repairs . the

results of operations property analysis general . the following table summarizes the property portfolio as of december 31 : replace_table_token_7_th the following table summarizes the lease expirations , assuming none of the tenants exercise renewal options , of the property portfolio for each of the next 10 years and then thereafter in the aggregate as of december 31 , 2017 : replace_table_token_8_th ( 1 ) based on the annualized base rent for all leases in place as of december 31 , 2017 . ( 2 ) approximate square feet . 22 the following table summarizes the diversification of the property portfolio based on the top 10 lines of trade : replace_table_token_9_th ( 1 ) based on annualized base rent for all leases in place as of december 31 of the respective year . the following table summarizes the diversification of the property portfolio by state as of december 31 , 2017 : replace_table_token_10_th ( 1 ) based on annualized base rent for all leases in place as of december 31 , 2017 . property acquisitions . the following table summarizes the property acquisitions for each of the years ended december 31 ( dollars in thousands ) : replace_table_token_11_th ( 1 ) includes dollars invested in projects under construction or tenant improvements for each respective year . 23 nnn typically funds property acquisitions either through borrowings under nnn 's unsecured revolving credit facility ( the `` credit facility '' ) or by issuing its debt or equity securities in the capital markets . property dispositions . the following table summarizes the properties sold by nnn for each of the years ended december 31 ( dollars in thousands ) : replace_table_token_12_th nnn typically uses the proceeds from a property disposition to either pay down the credit facility or reinvest in real estate . analysis of revenue general .

as discussed in note 12 – “ subsequent events , ” the company closed on the acquisition of one of the properties on march 10 , 2017 in the amount of approximately $ 4.3 million using funds from the revolving credit facility . upon the satisfaction of customary closing conditions , the company expects to close the acquisition of the remaining property for approximately $ 1.1 million during the second quarter of 2017. the company is leasing the property that closed in march 2017 to the noms tenant and will lease the remaining property when acquired to the noms tenant both using a triple-net lease structure with an initial term of 11 years with four additional five-year renewal options . the acquisition of the remaining building will be funded using borrowings from the company story_separator_special_tag the following discussion should be read in conjunction with our financial statements , including the notes to those statements , included elsewhere in this report , and the section entitled “ cautionary statement regarding forward-looking statements ” in this report . as discussed in more detail in the section entitled “ cautionary statement regarding forward-looking statements , ” this discussion contains forward-looking statements which involve risks and uncertainties . our actual results may differ materially from the results discussed in the forward-looking statements . background global medical reit inc. ( the “ company , ” “ us , ” “ we , ” “ our ” ) was incorporated in the state of nevada on march 18 , 2011 and re-domiciled into a maryland corporation , effective january 6 , 2014. our principal investment strategy is to develop and manage a portfolio of real estate assets in the healthcare industry , which includes surgery centers , specialty hospitals , and outpatient treatment centers . we formed our operating partnership in march 2016 and contributed all of our then-owned healthcare facilities to the operating partnership in exchange for common units of limited partnership interest in the operating partnership . we own global medical reit gp , llc , a delaware limited liability company , which is the sole general partner of our operating partnership . we intend to conduct all future acquisition activity and operations through our operating partnership . initial public offering on july 1 , 2016 , the company closed its initial public offering and issued 13,043,479 shares of its common stock at a price of $ 10.00 per share resulting in gross proceeds of $ 130,434,790. after deducting underwriting discounts and commissions , advisory fees , and other offering expenses , the company received net proceeds from the offering of $ 120,773,630. additionally , on july 11 , 2016 , the underwriters exercised their over-allotment option in full , resulting in the issuance by the company of an additional 1,956,521 shares of the company 's common stock at a price of $ 10.00 per share for gross proceeds of $ 19,565,210. after deducting underwriting discounts and expenses , advisory fees , and other offering expenses , the company received net proceeds from the over-allotment option shares of $ 18,195,645. total shares issued by the company in the initial public offering , including over-allotment option shares , were 15,000,000 shares and the total net proceeds received were $ 137,288,016 , which represented gross proceeds received of $ 138,969,275 net of $ 1,681,259 in costs directly attributable to the initial public offering that were deferred and paid . in connection with the company 's initial public offering , the company 's common stock was listed on the new york stock exchange under the ticker symbol “ gmre. ” amended management agreement upon completion of the company 's initial public offering on july 1 , 2016 , the company and the advisor entered into an amended and restated management agreement , pursuant to which the advisor manages the operations and investment activities of the company . 2016 equity incentive plan prior to the completion of the initial public offering on july 1 , 2016 , the board approved and adopted the 2016 equity incentive plan . the purposes of the 2016 equity incentive plan are to attract and retain qualified persons upon whom , in large measure , our sustained progress , growth and profitability depend , to motivate the participants to achieve long-term company goals and to more closely align the participants ' interests with those of our other stockholders by providing them with a proprietary interest in our growth and performance . a n aggregate of 414,504 long term incentive plan ( “ ltip ” ) units were granted during the year ended december 31 , 2016 pursuant to the 2016 equity incentive plan . in addition , an aggregate of 817,893 additional shares are available for future issuance under our 2016 equity incentive plan . as disclosed in note 12 – “ subsequent events , ” on february 28 , 2017 , the company 's board approved the recommendations of the compensation committee of the board with respect to the granting of 2017 annual performance-based ltip awards and long-term performance-based incentive ltip awards to the executive officers of the company and other employees of the advisor who perform services for the company . critical accounting policies the preparation of financial statements in conformity with gaap requires our management to use judgment in the application of accounting policies , including making estimates and assumptions . we base estimates on the best information available to us at the time , our experience and on various other assumptions believed to be reasonable under the circumstances . these estimates affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods . if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different , it is possible that different accounting would have been applied , resulting in a different presentation of our financial statements . from time to time , we re-evaluate our estimates and assumptions . story_separator_special_tag if an impairment indicator exists , we compare the expected future undiscounted cash flows against the carrying amount of an asset . if the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset , we would record an impairment loss for the difference between the estimated fair value and the carrying amount of the asset . revenue recognition the company 's operations currently consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations . these leases are accounted for as operating leases . for operating leases with contingent rental escalators revenue is recorded based on the contractual cash rental payments due during the period . revenue from leases with fixed annual rental escalators are recognized on a straight-line basis over the initial lease term , subject to a collectability assessment . if the company determines that collectability of rents is not reasonably assured , future revenue recognition is limited to amounts contractually owed and paid , and , when appropriate , an allowance for estimated losses is established . the company consistently assesses the need for an allowance for doubtful accounts , including an allowance for operating lease straight-line rent receivables , for estimated losses resulting from tenant defaults , or the inability of tenants to make contractual rent and tenant recovery payments . the company also monitors the liquidity and creditworthiness of its tenants and operators on a continuous basis . this evaluation considers industry and economic conditions , property performance , credit enhancements and other factors . for operating lease straight-line rent amounts , the company 's assessment is based on amounts estimated to be recoverable over the term of the lease . as of december 31 , 2016 and december 31 , 2015 no allowance was recorded as it was not deemed necessary . fair value of financial instruments fair value is a market-based measurement and should be determined based on the assumptions that market participants would use in pricing an asset or liability . in accordance with asc topic 820 , the valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date . a financial instrument 's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement . the three levels are defined as follows : level 1-inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets ; level 2-inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets , and inputs that are observable for the asset or liability , either directly or indirectly , for substantially the full term of the financial instrument ; and level 3-inputs to the valuation methodology are unobservable and significant to the fair value measurement . the company considers the carrying values of cash and cash equivalents , escrow deposits , accounts and other receivables , and accounts payable and accrued expenses to approximate the fair value for these financial instruments because of the short period of time since origination or the short period of time between origination of the instruments and their expected realization . due to the short-term nature of these instruments , level 1 and level 2 inputs are utilized to estimate the fair value of these financial instruments . the fair values determined related to the company 's transactions that are accounted for as business combinations primarily utilizes level 2 inputs since there is heavy reliance on market observable data such as rent comparables , sales comparables , and broker indications . although some level 3 inputs are utilized they are minor in comparison to the level 2 date used for the primary assumptions as it relates to business combination valuations . 19 stock-based compensation the company expenses the fair value of unit awards in accordance with the fair value recognition requirements of asc topic 718 , compensation-stock compensation , and asc topic 505 , equity . under asc topic 718 , the company 's independent directors are deemed to be employees and therefore compensation expense for these units is recognized based on the price of $ 10.00 per unit , the closing share price for the company 's common stock at the closing date of the initial public offering on july 1 , 2016 , ratably over the 12-month service period , using the straight line method . under asc topic 505 , the employees of the advisor and its affiliates are deemed to be non-employees of the company and therefore compensation expense for these units is recognized using the share price of the company 's common stock at the end of the reporting period , ratably over the 41-month or 53-month service period , respectively , depending on the grant terms , using the straight line method . trends which may influence results of operations we believe the following trends in the healthcare real estate market positively affect the acquisition , ownership , development and management of healthcare real estate : · growing healthcare expenditures ; · an aging population ; · a continuing shift towards outpatient care ; · implementation of the affordable care act ; · physician practice group and hospital consolidation ; · healthcare industry employment growth ; · expected monetization and modernization of healthcare real estate ; · a highly fragmented healthcare real estate market ; and · a limited new supply of healthcare real estate . we believe the following trends in the healthcare real estate market may negatively impact our lease revenues and the ability to make distributions to our shareholders : · changes in demand for and methods of delivering healthcare services ; · changes in third party reimbursement methods and policies ; and · increased scrutiny of billing , referral and other practices by u.s. federal and state authorities .

consolidated results of operations the major factor that resulted in variances in our results of operations for each revenue and expense category for the year ended december 31 , 2016 compared to the year ended december 31 , 2015 is due to the fact that as of december 31 , 2016 our portfolio consisted of facilities from a total of 14 acquisitions , whereas as of december 31 , 2015 only four of the 14 acquisitions had occurred . as of december 31 , 2016 the company had facilities in its portfolio from the following acquisitions : · healthsouth facilities ( acquired december 20 , 2016 ) · ellijay facilities ( acquired december 16 , 2016 ) · carson city facilities ( acquired october 31 , 2016 ) · sandusky facilities ( acquired october 7 , 2016 ) · watertown ( acquired september 30 , 2016 ) · east orange ( acquired september 29 , 2016 ) · reading ( acquired july 20 , 2016 ) · melbourne ( acquired march 31 , 2016 ) · westland ( acquired march 31 , 2016 ) · plano ( acquired january 28 , 2016 ) · tennessee facilities ( acquired december 31 , 2015 ) · west mifflin ( acquired september 25 , 2015 ) · asheville ( acquired september 19 , 2014 ) · omaha ( acquired june 5 , 2014 ) as of december 31 , 2015 the company had facilities in its portfolio from the following acquisitions : · tennessee facilities ( acquired december 31 , 2015 ) · west mifflin ( acquired september 25 , 2015 ) · asheville ( acquired september 19 , 2014 ) · omaha ( acquired june 5 , 2014 ) revenues total revenue for the year ended december 31 , 2016 was $ 8,210,330 , compared to $ 2,061,667 for the year ended december 31 , 2015 , an increase of $ 6,148,663. the increase is the result of rental revenue derived from the base rental receipts from the ten additional facilities that we acquired during the current year as well as from the recognition

the borrowing base is also subject to change in the event ( 1 ) lone pine or any of its subsidiaries issue senior unsecured notes , in which case the borrowing base will immediately be reduced by an amount equal to 25 % of the stated principal amount of such issued senior unsecured notes , excluding any senior unsecured notes that lone pine or any of its subsidiaries may issue to refinance then-existing senior notes , or ( 2 ) lpr canada sells oil and natural gas properties included in the borrowing base having a fair market value in excess of 10 % of the borrowing base then in effect . the borrowing base is subject to other automatic adjustments under the credit facility . a story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes contained elsewhere in this form 10-k. all expectations , forecasts , assumptions and beliefs about our future financial results , condition , operations , strategic plans and performance are forward-looking statements , as described in more detail under `` cautionary note regarding forward-looking statements . '' our actual results may differ materially because of a number of risks and uncertainties . see part i , `` item 1a . risk factors '' for additional information regarding known material risks . unless the context otherwise requires , all operating data presented in this form 10-k on a per unit basis is calculated based on net sales volumes , all references to `` dollars , '' `` $ `` or `` cdn $ `` in this form 10-k are to canadian dollars , and all references to `` u.s. dollars '' or `` us $ `` are to united states dollars . story_separator_special_tag february 2012 , lpr canada completed the senior notes offering . the net proceeds of approximately $ 192 million were used to partially repay borrowings outstanding under our bank credit facility . the senior notes are guaranteed by lone pine and all of lone pine 's wholly-owned subsidiaries ( other than lpr canada ) . recent trends and outlook for 2012 beginning in the second half of 2008 and continuing throughout 2011 , canada , the united states and other industrialized countries experienced a significant economic slowdown . during the same time period , north american natural gas supply increased as a result of increased domestic unconventional natural gas development and associated natural gas from oil development . in the second half of 2008 , oil and natural gas prices declined dramatically . while oil and ngl prices have steadily improved since the first quarter of 2009 , north american natural gas prices have remained at low levels and declined further in late 2011 as a result of increased supply and weak domestic demand in the united states . we do not expect natural gas prices to improve significantly in 2012. as a result , we plan to focus our capital expenditures in 2012 primarily on light oil opportunities . capital budget for 2012 we have established a capital budget of approximately $ 200 million to $ 220 million for 2012 and plan to focus our drilling program almost entirely on our light oil opportunities in the evi area . we have elected to pursue a 2012 capital program designed to maintain financial flexibility , while focusing on high margin light oil projects . we plan to fund our 2012 capital budget primarily through cash flow from operating activities , as well as borrowings under our bank credit facility . we plan to allocate approximately $ 165 million , or approximately 80 % , of our total capital budget to light oil development in the evi area . we plan to drill and complete up to 48 gross ( 48 net ) horizontal wells in the evi area in 2012 and to continue to advance development through further downspacing and additional infill drilling . we expect to complete the planned drilling program in the evi area with the two-rig program that we currently have in place . we also intend to continue to expand our facilities in the evi area to accommodate the growing crude oil volumes in the area and continue investment in our operated waterflood pilot project that we initiated in 2011. given the current disparity between oil and natural gas prices , we intend to allocate minimal capital towards our natural gas properties at this time . since we have no significant near term lease expiries or drilling obligations on our natural gas assets , we plan to focus almost exclusively on light oil projects while north american natural gas prices continue to trade at multi-year lows . should natural gas prices recover through 2012 , we expect to be able to alter our spending plans and allocate capital to our drill-ready natural gas projects . our 2012 capital budget is detailed below . ( in millions ) drilling and completion light oil $ 150.0 - $ 160.0 natural gas 10.0 - 10.0 total $ 160.0 - $ 170.0 equipment and facilities 20.0 - 25.0 land maintenance and general and administrative expenses 20.0 - 25.0 total capital $ 200.0 - $ 220.0 56 acquisitions and divestitures in 2011 , we increased our evi land position to 64,320 gross ( 57,382 net ) acres through purchases at crown land sales . the acquired acreage represents a significant addition to our existing contiguous land holdings in the evi field and our future light oil drilling inventory . in april 2011 , we acquired certain natural gas properties located in the narraway/ojay fields for $ 74.4 million . this acquisition increased our working interests in certain properties already owned and operated by lpr canada in the narraway field from approximately 50 % to 100 % and provided us with additional capacity in gathering systems and a gas plant in the narraway field . in addition , this acquisition increased our acreage position by approximately 85,100 gross ( 35,700 net ) acres . story_separator_special_tag as of march 20 , 2012 , we had a delivery commitment of approximately 21,000 mmbtu/d of natural gas , which provides for a price equal to the greater of ( 1 ) the nymex henry hub price less us $ 1.49 and ( 2 ) us $ 1.00 per mmbtu to a buyer through october 31 , 2014 , unless the nymex henry hub price exceeds us $ 6.50 per mmbtu , at which point we share the amount of the excess equally with the buyer . accordingly , when the nymex henry hub price trades above us $ 6.50 per mmbtu , our reported differentials will widen , as was the case in 2008. conversely , the contract guarantees a floor price of us $ 1.00 per mmbtu after deducting us $ 1.49 from the nymex henry hub price and our reported differential would narrow in this case . ngl realizations ngl realizations , which are generally evaluated as a percentage of the nymex wti price , are primarily driven by the relative composition of liquids . ngls are primarily composed of five marketable components , which , ordered from lightest to heaviest , are : ( 1 ) methane , ( 2 ) ethane , ( 3 ) propane , ( 4 ) butanes and ( 5 ) pentanes . the heavier liquid components normally realize higher prices than the lighter components . our ngl realizations were higher in 2011 and 2010 compared to 2009 because of the divestiture of oil and natural gas assets in april 2010 , which resulted in a shift in our portfolio toward heavier , more valuable gas liquids components . production costs in evaluating our operations , we frequently monitor and assess our production expenses on a per unit of production basis , or `` per mcfe . '' this measure allows us to better evaluate our operating efficiency as production levels change . 59 production costs are the costs incurred in the operation of producing our oil , natural gas and ngls and are primarily comprised of lease operating expense ( including workover costs ) , production and property taxes and transportation and processing costs . in general , lease operating expense and workover costs represent the components of production costs over which we have management control , while production and property taxes are primarily driven by the assessed valuation of our property and equipment by the taxing authorities . transportation and processing costs are comprised of pipeline transportation costs ( primarily incurred to deliver natural gas to consuming regions in order to achieve a higher sales price ) and processing costs , which include the cost of separating ngls from the natural gas stream and compressing the residual natural gas to a pressure adequate to meet pipeline requirements . certain components of lease operating expense are also impacted by energy and field services costs . for example , we incur power costs in connection with various production-related activities , such as pumping to recover oil and natural gas , and we purchase products , such as methanol , to prevent the freezing of gas lines . although these costs are highly correlated with production volumes , they are also influenced by commodity prices . certain items , however , such as direct labor and materials and supplies , generally remain fixed across broad sales volume ranges , but can fluctuate depending on activities performed during a specific period . for instance , repairs to our pumping equipment or surface facilities result in increased expenses in periods during which they are performed . adjusted ebitda and adjusted discretionary cash flow we also evaluate our performance using a non-gaap financial measure , adjusted ebitda , which is calculated as net earnings ( loss ) plus interest expense , income tax expense ( benefit ) , dd & a , ceiling test write-downs of oil and natural gas properties , accretion of asset retirement obligations ( `` aro '' ) , unrealized losses ( gains ) on derivative instruments and foreign currency exchange ( gains ) losses . adjusted ebitda also excludes the equity-accounted for portion of stock-based compensation expense , as these amounts will be settled in shares of our common stock rather than cash payments . by eliminating these items , we believe the result is a useful measure across time in evaluating our fundamental core operating performance . our management also uses adjusted ebitda to manage our business , including in preparing our annual operating budget and financial projections . we believe that adjusted ebitda is also useful to investors because similar measures are frequently used by securities analysts , investors and other interested parties in their evaluation of companies in similar industries . as indicated , adjusted ebitda does not include interest expense on borrowed money , dd & a expense on capital assets or the payment of income taxes , which are all necessary elements of our operations . because adjusted ebitda does not account for these and other expenses , its utility as a measure of our operating performance has material limitations . because of these limitations , our management does not view adjusted ebitda in isolation and also uses other measurements , such as net earnings ( loss ) and revenues , to measure operating performance . in addition to reporting cash provided by operating activities as defined under gaap , we also present adjusted discretionary cash flow , which is a non-gaap liquidity measure . adjusted discretionary cash flow consists of cash provided by operating activities before changes in working capital items . management uses adjusted discretionary cash flow as a measure of liquidity and believes it provides useful information to investors because it assesses cash flow from operating activities for each period before changes in working capital , which fluctuates due to the timing of collections of receivables and the settlements of liabilities . this measure does not represent the residual cash flow available for discretionary expenditures , since we have mandatory debt service requirements and other non-discretionary expenditures that are not deducted from the measure .

overview we are an independent oil and gas exploration , development and production company with operations in canada . our reserves , producing properties and exploration prospects are located in the provinces of alberta , british columbia and quebec and the northwest territories . we were incorporated under the laws of the state of delaware on september 30 , 2010 , and prior to our ipo on june 1 , 2011 , we were a wholly-owned subsidiary of forest . our predecessor , lpr canada , was acquired by forest in 1996 and transferred to us prior to completion of our ipo . upon completion of our ipo , forest retained the controlling interest in us , owning 82 % of the outstanding shares of our common stock . on september 30 , 2011 , forest distributed all of the outstanding shares of our common stock that it owned to its shareholders . as a result of the distribution , forest has no remaining ownership interest in us . degolyer and macnaughton , our independent reserves engineers , estimated our proved reserves to be approximately 401 bcfe as of december 31 , 2011 , of which approximately 26 % was oil and natural gas liquids , approximately 74 % was natural gas and approximately 53 % was classified as proved developed reserves . as of december 31 , 2011 , we had approximately 151 gross ( 125 net ) proved undeveloped drilling locations and approximately 1.1 million gross ( 0.8 million net ) acres of land ( approximately 79 % of which was undeveloped ) . financial and other information disclosed herein relating to the time prior to our inception ( september 30 , 2010 ) reflects the financial position , results of operations , cash flows or other information , as the case may be , of our predecessor , lpr canada .

the 2009 equity plan was originally adopted by the stockholders of the company on may 8 , 2009. on october 29 , 2009 , the stockholders of the company approved an amendment to the 2009 equity story_separator_special_tag the following management 's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors , including those set forth under “ cautionary note regarding forward-looking statements ” and under “ risk factors ” herein . overview neostem , inc. ( “ we , ” “ neostem ” or the “ company ” ) is a leader in the emerging cellular therapy industry . we are pursuing the preservation and enhancement of human health globally through the development of cell based therapeutics that prevent , treat or cure disease by repairing and replacing damaged or aged tissue , cells and organs and restoring their normal function . we believe that cell therapy will play a large role in changing the natural history of diseases as more breakthrough therapies are developed , ultimately lessening the overall burden of disease on patients and their families as well as the economic burden that these diseases impose upon modern society . our business includes the development of novel proprietary cell therapy products as well as a revenue generating contract development and manufacturing service business that we not only leverage for the development of our therapeutics but anticipate will benefit from the advancement in the regenerative medicine industry . the combination of our own therapeutic development business and a revenue-generating service provider business provides the company with unique capabilities for cost effective in-house product development and immediate revenue and cash flow generation . we are developing therapies to address ischemia through our cd34 cell program . ischemia occurs when the supply of oxygenated blood in the body is restricted . we seek to reverse this restriction through the development and formation of new blood vessels . amr-001 is our most clinically advanced product candidate in our cd34 cell program and is being developed to treat damaged heart muscle following an acute myocardial infarction ( heart attack ) ( `` ami '' ) . in december 2013 , the company completed enrollment in its preserve ami study . preserve ami is a randomized , double-blinded , placebo-controlled phase 2 clinical trial testing amr-001 , an autologous ( donor and recipient are the same ) adult stem cell product for the treatment of patients with left ventricular dysfunction following acute st segment elevation myocardial infarction ( stemi ) . with infusion of the target population of 160 patients complete , the last patient primary endpoint follow-up for this study is expected in june 2014 followed by data lock and analysis with a submission for a possible presentation of the study at the american heart association 's scientific sessions to be held november 15-19 , 2014. if approved by food and drug administration ( the `` fda `` ) and or other worldwide regulatory agencies following successful completion of further trials , amr-001 would address a significant medical need for which there is currently no effective treatment , potentially improving longevity and quality of life for those suffering a stemi , and positioning the company to capture a meaningful share of this worldwide market . we also expect to initiate a phase 2 clinical trial for chronic heart failure in europe in 2014 and are conducting preclinical studies in traumatic brain injury for which we expect data in the second half of 2014. another platform technology we are developing utilizes t regulatory cells ( `` tregs '' ) to treat diseases caused by imbalances in the immune system . in collaborating with becton-dickinson and the university of california , san francisco , we are utilizing this technology platform of our majority-owned subsidiary , athelos corporation ( `` athelos '' ) , to restore immune balance by enhancing treg cell number and function . tregs are a natural part of the human immune system and regulate the activity of t effector cells , the cells that are responsible for protecting the body from viruses and other foreign antigen exposure . when tregs function properly , only foreign materials are attacked by t effector cells . in autoimmune disease it is thought that deficient treg activity permits the t effector cells to attack the body 's own tissues . we plan to initiate a phase 2 study of treg based therapeutics to treat type 1 diabetes in 2014. we also plan to initiate a phase 1 study in canada of treg based therapeutics in support of a steroid resistant asthma indication in 2014. pre-clinical assets include our vsel tm ( very small embryonic like ) technology regenerative medicine platform . regenerative medicine holds the promise of improving clinical outcomes and reducing overall healthcare costs . we are working on a department of defense funded study of vsels tm for the treatment of chronic wounds . other preclinical work with vsels tm includes exploring macular degeneration as a target indication . progenitor cell therapy , llc ( `` pct '' ) is a contract manufacturer that generates revenue . this wholly owned subsidiary , which we acquired in 2011 , is an industry leader in providing high quality manufacturing capabilities and support to developers of cell-based therapies to enable them to improve efficiencies and profitability and reduce capital investment for their own development activities . since its inception more than 15 years ago , pct has provided pre-clinical and clinical current good manufacturing practice ( “ cgmp ” ) development and manufacturing services to more than 100 clients . pct has experience advancing regenerative medicine product candidates from product inception through rigorous quality standards all the way through 50 index to human testing , biologic license application ( `` bla '' ) filing and fda product approval . story_separator_special_tag the changes in estimated fair value is based on the company 's updates of the discounted cash flow model each year using a probability-weighted income approach , taking into account revised assumptions of the market opportunity and development costs , as well as the impact of the time progression through the preserve ami phase 2 trial . for the year ended december 31 , 2013 interest expense was $ 0.3 million compared with $ 1.6 million for the year ended december 31 , 2012 . interest expense in the prior year period was primarily due to the amortization of debt discount related to the series e preferred stock , which was fully redeemed in october 2012. discontinued operations regenerative medicine - china segment in 2009 , we operated our regenerative medicine-china business in the people 's republic of china ( “ china ” or “ prc ” ) through our former subsidiary , a wholly foreign owned entity ( “ wfoe ” ) and entered into contractual arrangements with certain variable interest entities ( “ vies ” ) . foreign companies have commonly used vie structures to operate in the prc , and while such structures are not uncommon , they had drawn greater scrutiny from the local chinese business community in the prc who urged the prc state council to restrict the use of these structures . in addition , in december 2011 , china 's ministry of health announced its intention to more tightly regulate stem cell clinical trials and stem cell therapeutic treatments in the prc , which created uncertainty regarding the ultimate regulatory environment in the prc . accordingly , we took steps to restrict , and ultimately eliminate our regenerative medicine business in the prc in the first quarter of 2012. as a result of these steps , we discontinued our operations in our regenerative medicine-china business . we determined that any liability arising from the activities of the wfoe and the vies will likely be limited to the net assets currently held by each entity . the operations and cash flows for the regenerative medicine - china business in 2012 were reported in discontinued operations . for the year ended december 31 , 2012 , the loss from discontinued operations was $ 1.7 million , and included a $ 1.1 million loss on exit of segment . pharmaceutical manufacturing - china segment on november 13 , 2012 , we completed the divestiture ( the “ erye sale ” ) of our 51 % interest ( the “ erye interest ” ) in suzhou erye pharmaceuticals company ltd. , a sino-foreign equity joint venture with limited liability organized under the laws of the prc primarily engaged in the manufacture of generic antibiotics ( “ erye ” ) , to suzhou erye economy & trading co. , ltd. , a limited liability company organized under the laws of the prc ( “ eet ” ) , and highacheive holdings limited , a limited liability company organized under the laws of the british virgin islands ( “ highacheive ” and together with eet , each a “ purchaser ” and collectively the “ purchasers ” ) . the erye sale was consummated pursuant to the terms and conditions of the equity purchase agreement , dated as of june 18 , 2012 ( as amended , the “ equity purchase agreement ” ) , by and among neostem , china biopharmaceuticals holdings , inc. , then a wholly-owned subsidiary of neostem ( “ cbh ” ) , eet , highacheive , fullbright finance limited , a limited liability company organized under the laws of the british virgin islands ( “ fullbright ” ) , and erye . pursuant to the equity purchase agreement , the aggregate purchase price paid to us by the purchasers for the erye interest consisted of ( i ) $ 12.3 million in cash , ( ii ) the return to us of 104,000 shares of neostem common stock and ( iii ) the cancellation of 117,000 options and 64,000 warrants 53 index to purchase our common stock . the fair value of the shares was based on our closing price on the date of sale , and was recorded as treasury stock in our balance sheet . the fair values of the canceled options and warrants were based on the black-scholes values on the date of sale , and were recorded against additional paid in capital in the accompanying balance sheet . this transaction resulted in a loss on exit of segment of $ 3.4 million , which was recorded in the fourth quarter of 2012. the operations and cash flows of the pharmaceutical manufacturing - china business were eliminated from ongoing operations with the sale of the company 's 51 % interest in erye . the operating results of the pharmaceutical manufacturing - china business for the year ended december 31 , 2012 were classified as discontinued operations . for the year ended december 31 , 2012 , the loss from discontinued operations was $ 28.5 million . noncontrolling interests in connection with accounting for our 51 % interest in erye , which is reported in discontinued operations , we account for the 49 % minority shareholder share of erye 's net income or loss with a charge to noncontrolling interests . for the year ended december 31 , 2012 , erye 's minority shareholders ' share of net income totaled approximately $ 12.3 million . on november 13 , 2012 , we completed the divestiture of our 51 % interest in erye . in march 2011 , we acquired rights to use patents under licenses from becton , dickinson and company ( `` bd '' ) in exchange for a 19.9 % interest in our athelos subsidiary . pursuant to the stock purchase agreement signed in march 2011 , bd 's ownership will be diluted based on new investment in athelos ( subject to certain anti-dilution provisions ) .

results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 net loss for the year ended december 31 , 2013 was approximately $ 39.5 million compared to $ 66.4 million for the year ended december 31 , 2012 . our net losses from continuing operations for the years ended december 31 , 2013 and 2012 were approximately $ 39.5 million and $ 36.1 million , respectively . the loss from discontinued operations - net for the year ended december 31 , 2012 was approximately $ 30.3 million , and represents the operations of our former regenerative medicine – china segment which was deconsolidated in the first quarter of 2012 , and the operations of our former pharmaceutical manufacturing - china segment , which related to the sale of our 51 % interest in suzhou erye pharmaceuticals company ltd. ( `` suzhu erye '' ) , in the fourth quarter of 2012. revenues for the year ended december 31 , 2013 , total revenues were approximately $ 14.7 million compared to $ 14.3 million for the year ended december 31 , 2012 , representing an increase of $ 0.3 million , or 2 % . revenues were comprised of the following ( in thousands ) : replace_table_token_4_th clinical services , representing process development and clinical manufacturing services provided at pct to its various clients , were approximately $ 9.1 million for the year ended december 31 , 2013 compared to $ 8.0 million for the year ended december 31 , 2012 , representing an increase of approximately $ 1.1 million or 14 % . the increase was primarily due to $ 2.3 million of higher clinical manufacturing revenue ( which is recognized as services are rendered ) , which was partially offset by $ 1.2 million lower process development revenue ( such revenue being recognized on a `` completed contract '' basis ) .

the company cautions that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations , including without limitation the following : ( i ) the company 's plans , strategies , objectives , expectations , and intentions are subject to change at any time at the company 's discretion ; ( ii ) the company 's plans and results of operations will be affected by its ability to maintain and manage its growth ; ( iii ) the company 's ability to meet short-term and long-term liquidity demands , including servicing the company 's debt and meeting the company 's operating and capital needs , conditions in the credit and equity markets , and changes in interest rates on the company 's debt , including the ability of the company 's customers and the counterparty to the company 's interest rate hedges to meet their obligations ; ( iv ) interruptions to operations and increased expenses at its facilities resulting from changes in mining methods or conditions , inclement weather conditions , natural disasters , accidents , it systems failures or disruptions , including due to cybersecurity incidents , or regulatory requirements ; ( v ) increased coal , petroleum coke , diesel , natural gas , electricity , transportation and freight costs ; ( vi ) unanticipated delays , difficulties in financing , or cost overruns in completing , modernization and expansion and development projects ; ( vii ) the company 's ability to expand its lime and limestone operations through acquisitions of businesses with related or similar operations , including obtaining financing for such acquisitions , and to successfully integrate acquired operations and sell the increased 22 production at acceptable prices ; ( viii ) inadequate demand and or prices for the company 's lime and limestone products due to the state of the u.s. economy , recessionary pressures in particular industries , including highway , road and building related construction , steel , and oil and gas services , effects of governmental fiscal and budgetary constraints and legislative impasses , and inability to continue to increase or maintain prices for the company 's products ; ( ix ) uncertainties of development , production , pipeline capacity and prices with respect to the company 's natural gas interests , including the absence of drilling activities on the company 's o & g properties , unitization of existing wells , inability to explore for new reserves , declines in production rates and plugging and abandoning of existing wells ; ( x ) ongoing and possible new regulations , investigations , enforcement actions and costs , legal expenses , penalties , fines , assessments , litigation , judgments and settlements , taxes and disruptions and limitations of operations , including those related to climate change and health and safety and those that could impact the company 's ability to continue or renew its operating permits ; and ( xi ) other risks and uncertainties set forth in this report or indicated from time to time in the company 's filings with the sec , including the company 's quarterly reports on form 10-q . overview . general . we have identified two business segments based on the distinctness of their activities and products : lime and limestone operations and natural gas interests . all operations are in the united states . in evaluating the operating results of our segments , management primarily reviews revenues and gross profit . we do not allocate corporate overhead or interest costs to our business segments . our lime and limestone operations represent our principal business . our natural gas interests consist of royalty and non-operating working interests under the o & g lease and the drillsite agreement with two separate operators related to our johnson county , texas property , located in the barnett shale formation , on which texas lime conducts its lime and limestone operations . our principal management decisions related to our natural gas interests involve whether to participate as a non-operating working interest owner by contributing our proportional costs for drilling proposed wells or workovers of existing wells under the o & g lease and the drillsite agreement . while we intend to continue to participate in future natural gas wells drilled and workovers of existing wells on our o & g properties , if any , we are not in the business of drilling for or producing natural gas , and have no personnel expert in that field . revenues from our lime and limestone operations decreased 2.6 % in 2013 compared to 2012. the decreased sales volumes of our lime and limestone products , which accounted for a revenue decrease of approximately 3.8 % for 2013 compared to 2012 , resulted principally from reduced sales volumes to our steel customers , partially offset by increased sales volumes to our construction and environmental customers , although we had reduced demand from our construction customers in the fourth quarter 2013 due to inclement weather conditions compared to favorable weather conditions in the fourth quarter 2012. this decrease in sales volumes was partially offset by average product price increases of approximately 1.2 % for our lime and limestone products in 2013 compared to 2012. revenues from our natural gas interests decreased $ 1.4 million , or 19.1 % , to $ 5.8 million in 2013 from $ 7.1 million in 2012 primarily due to decreased production volumes resulting from the normal declines in production rates on the company 's existing natural gas wells . the decrease in revenues from our natural gas interests in 2013 resulted from lower production volumes in 2013 ( approximately 21.2 % ) , partially offset by price increases in 2013 ( approximately 2.1 % ) . story_separator_special_tag prices for coal , petroleum coke , diesel , electricity , transportation and freight have generally increased over the past few years . domestic coal and petroleum coke are also being exported , increasing competition and prices for the domestic supply . in addition , our freight costs , including diesel prices , to deliver our products can be high relative to the value of our products and have increased significantly in recent years . we have been able to mitigate to some degree the adverse impact of these energy cost increases by varying the mixes of fuel used in our kilns , and by passing on some of our increased costs to our customers through higher prices and or surcharges on certain products . we have not engaged in any significant hedging activity in an effort to control our energy costs , but may do so in the future . we have financed our modernization and expansion and development projects and acquisitions through a combination of debt financing and cash flows from operations . we must generate sufficient cash flows to cover ongoing capital , including possible modernization and expansion and development projects , and debt service needs . our revolving credit facility matures june 1 , 2015 , and the remainder of our long-term debt becomes due at the end of 2015. absent a significant acquisition opportunity arising , we anticipate funding our capital requirements , including our possible modernization and development projects , continuing to service our debt and paying cash dividends from our cash on hand and cash flows from operations . for us to increase our profitability in our lime and limestone operations in the face of our increased fixed and variable costs , we must improve our revenues and control our operational and selling , general and administrative expenses . to maintain or improve our gross profit margins , we are focusing on maintaining , and increasing where possible , our lime and limestone prices to offset our increased costs , which is a challenging task in these difficult economic times . in addition , we will continue to explore ways to expand our operations and production capacity through major development projects , including the possible modernization of our st. clair plant , and acquisitions as conditions warrant or opportunities arise . we continue to believe the enhanced production capacity resulting from our modernization and expansion and development projects at texas and arkansas , our acquisitions and the operational strategies we have implemented have allowed us to increase production capacity , improve product quality , better serve existing customers , attract new customers and control our costs . there can be no assurance , however , that demand and prices for our lime and limestone products will be sufficient to fully utilize our additional production capacity and cover our additional depreciation , depletion and other fixed costs ; that our production will not be adversely affected by weather , maintenance , accident or other operational issues ; that we can successfully invest in improvements to our existing facilities ; that our results will not be adversely affected by continued increases in fuel , electricity , transportation 25 and freight costs or new environmental , health and safety or other regulatory requirements ; or that our revenues , gross profit , net income and cash flows can be maintained or improved . natural gas interests . in 2004 , we entered into the o & g lease with eog with respect to oil and gas rights on our cleburne , texas property , located in the barnett shale formation . pursuant to the o & g lease , we have royalty interests ranging from 15.4 % to 20 % in oil and gas produced from any successful wells drilled on the leased property and an option to participate in any well drilled on the leased property as a 20 % non-operating working interest owner . our overall average revenue interest is 34.7 % in the 33 wells drilled under the o & g lease that are currently producing . in november 2006 , we also entered into a drillsite agreement with xto that has an oil and gas lease covering approximately 538 acres of land contiguous to our johnson county , texas property . pursuant to this agreement , we have a 3 % royalty interest and an optional 12.5 % non-operating working interest , resulting in a 12.4 % interest in revenues in the six xto wells drilled and producing from a padsite located on our property . eight new wells were drilled in the fourth quarter 2009 and first quarter 2010 pursuant to the o & g lease , five of which were completed as producing wells during the fourth quarter 2010 , and three of which were completed as producing wells in late june 2011. in addition , two wells were drilled in the first quarter 2010 and completed as producing wells in the third quarter 2010 pursuant to the drillsite agreement . no new wells have been drilled since 2010 or are currently being drilled . we can not predict the number of additional wells that ultimately will be drilled on the o & g properties , if any , or their results . the pricing of natural gas sales is primarily determined by supply and demand in the marketplace and can fluctuate considerably . the prices that the company receives for its natural gas production is also affected by the amount of natural gas liquids included in the natural gas and the prices for those liquids which is also subject to supply and demand factors . prices of both natural gas and natural gas liquids declined dramatically in recent years due to increased supply , although prices for natural gas have risen recently due to cold winter weather conditions . critical accounting policies .

results of operations . the following table sets forth certain financial information expressed as a percentage of revenues for the periods indicated : replace_table_token_7_th 2013 vs. 2012 revenues for 2013 decreased to $ 133.8 million from $ 138.5 million in 2012 , a decrease of $ 4.8 million , or 3.4 % . revenues from our lime and limestone operations for 2013 decreased $ 3.4 million , or 2.6 % , to $ 128.0 million from $ 131.4 million in 2012. the decrease in revenues from our lime and limestone operations was primarily due to decreased sales volumes of our lime and limestone products , principally to our steel customers , partially offset by increased sales volumes to the company 's construction and environmental customers and a slight increase in prices realized for the company 's lime and limestone products in 2013 , compared to 2012. revenues from our natural gas interests for 2013 decreased $ 1.4 million , or 19.1 % , to $ 5.8 million from $ 7.1 million in 2012. the decrease in revenues from our natural gas interests resulted from the normal declines in production rates on existing wells , partially offset by slightly higher prices . our gross profit decreased to $ 30.8 million for 2013 from $ 33.4 million for 2012 , a decrease of $ 2.6 million , or 7.9 % . gross profit from our lime and limestone operations for 2013 was $ 27.9 million , compared to $ 29.5 million in 2012 , a decrease of $ 1.6 million , or 5.4 % . the decrease in gross profit for our lime and limestone operations in 2013 compared to 2012 resulted primarily from the decreased revenues discussed above and additional cost of revenues in the fourth quarter 2013 due to inclement weather conditions discussed above , partially offset by the reduced stripping costs in 2013 discussed above .

throughout this form 10-k when we refer to the “ financial statements , ” we are referring to the “ consolidated financial statements , ” unless the context indicates otherwise . overview yum china holdings , inc. is the largest restaurant company in china in terms of system sales , with $ 8.8 billion of revenues and 9,200 restaurants as of year-end 2019. our growing restaurant base consists of our flagship kfc and pizza hut brands , as well as emerging brands such as little sheep , coffii & joy , east dawning and taco bell . we have the exclusive right to operate and sublicense the kfc , pizza hut and , subject to achieving certain agreed upon milestones , taco bell brands in china ( excluding hong kong , taiwan and macau ) , and own the intellectual property of the little sheep , coffii & joy and east dawning concepts outright . we were the first major global restaurant brand to enter china in 1987 and with over 30 years of operations , we have developed deep operating experience in the china market . we have since grown to become one of china 's largest restaurant developers with locations in over 1,300 cities as of december 31 , 2019. we believe that there is significant opportunity to expand within china , and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities . kfc is the leading and the largest qsr brand in china in terms of system sales . as of december 31 , 2019 , kfc operated over 6,500 restaurants in more than 1,300 cities across china . kfc primarily competes with western qsr brands in china , such as mcdonald 's , dicos and burger king , among which we believe kfc has an approximate two-to-one lead over its nearest competitor in terms of store count as of the end of 2019. during the first quarter of 2018 , the company completed the acquisition of an additional 36 % interest in an unconsolidated affiliate that operates kfc stores in wuxi , china ( “ wuxi kfc ” ) , increasing our equity interest to 83 % and allowing the company to consolidate the entity . pizza hut is the leading and the largest cdr brand in china in terms of system sales and number of restaurants . as of december 31 , 2019 , pizza hut operated over 2,200 restaurants in over 500 cities . measured by number of restaurants , we believe pizza hut has an approximate five-to-one lead over its nearest cdr competitor in china as of the end of 2019. we have two reportable segments : kfc and pizza hut . our remaining operating segments , including the operations of little sheep , east dawning , taco bell , daojia , newly developed coffii & joy and our e-commerce business , with the latter two becoming operating segments starting from the first quarter of 2019 , are combined and referred to as all other segments , as those operating segments are insignificant both individually and in the aggregate . segment financial information for prior years has been recast to align with this change in segment reporting . there was no impact to the consolidated financial statements of the company as a result of this change . additional details on our reportable operating segments are included in note17 . 60 2019 form 10-k we intend for this md & a to provide the reader with information that will assist in understanding our results of operations , including metrics that management uses to assess the company 's performance . throughout this md & a , we discuss the following performance metrics : the company provides certain percentage changes excluding the impact of foreign currency translation ( “ f/x ” ) . these amounts are derived by translating current year results at prior year average exchange rates . we believe the elimination of the f/x impact provides better year-to-year comparability without the distortion of foreign currency fluctuations . system sales growth reflects the results of all restaurants regardless of ownership , including company-owned , franchise and unconsolidated affiliate restaurants that operate our concepts , except for sales from non-company-owned restaurants , for which we do not receive a sales-based royalty . sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the company at a rate of approximately 6 % of system sales . franchise and unconsolidated affiliate restaurant sales are not included in company sales in the consolidated statements of income ; however , the franchise fees are included in the company 's revenues . we believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers , company and franchise same-store sales as well as net unit growth . effective january 1 , 2018 , the company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the company system that have been open prior to the first day of our prior fiscal year . we refer to these as our “ base ” stores . previously , same-store sales growth represented the estimated percentage change in sales of all restaurants in the company system that have been open for one year or more , and the base stores changed on a rolling basis from month to month . this revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores . prior years have been adjusted accordingly . company restaurant profit ( “ restaurant profit ” ) is defined as company sales less expenses incurred directly by our company-owned restaurants in generating company sales . company restaurant margin percentage is defined as restaurant profit divided by company sales . story_separator_special_tag in 2018 , the increase in g & a expenses , excluding the impact of f/x , was driven by higher compensation cost mainly due to merit increases . operating profit in both 2019 and 2018 , the increase in operating profit , excluding the impact of f/x , was primarily driven by the increase in restaurant profit , partially offset by higher g & a expenses . pizza hut during 2019 , we continued to make progress with the pizza hut revitalization program . the revitalization strategy of pizza hut focuses on fixing the fundamentals , including investments in product upgrades and enhancing digital capabilities through expanding the user base while strengthening delivery core capabilities and enhancing asset portfolio to drive growth . pizza hut loyalty program members exceeded 70 million at year-end 2019 and contributed 51 % of system sales at pizza hut in the fourth quarter of 2019. delivery sales accounted for 26 % of company sales at pizza hut in 2019 with store and city coverage of 91 % and 97 % , respectively , at the end of 2019. replace_table_token_18_th replace_table_token_19_th 69 2019 form 10-k replace_table_token_20_th replace_table_token_21_th replace_table_token_22_th company sales and restaurant profit the changes in company sales and restaurant profit were as follows : replace_table_token_23_th replace_table_token_24_th in 2019 , the increase in company sales and restaurant profit , excluding the impact of f/x , was primarily driven by same-store sales growth , store portfolio actions , labor efficiency , commodity deflation of 2 % , and savings in utilities and other restaurant operating costs , partially offset by higher promotion costs and wage inflation of 5 % . in 2018 , the decrease in company sales , excluding the impact of f/x , was primarily driven by same-store sales decline , partially offset by net unit growth . the decrease in restaurant profit , excluding the impact of f/x , was primarily driven by higher promotion and product upgrade costs , wage inflation of 6 % and same-store sales decline , partially offset by labor efficiency and net unit growth . 70 2019 form 10-k g & a expenses in 2019 , the increase in g & a expenses , excluding the impact of f/x , was primarily driven by higher compensation costs due to higher performance-based compensation and merit increases , and lower government incentives received , partially offset by lower shared cost allocation associated with store development activities . in 2018 , the decrease in g & a expenses , excluding the impact of f/x , was primarily driven by higher government incentives received and lower performance-based compensation , partially offset by higher compensation costs due to merit increases . operating profit in 2019 , the increase in operating profit , excluding the impact of f/x , was primarily driven by the increase in restaurant profit and lower closure and store impairment expenses , partially offset by higher g & a expenses . in 2018 , the decrease in operating profit , excluding the impact of f/x , was primarily driven by the decrease in restaurant profit , partially offset by lower closure and impairment expenses primarily due to lapping the impact of the pizza hut business integration during 2017 , and lower g & a expenses . all other segments all other segments reflects the results of little sheep , coffii & joy , east dawning , taco bell , daojia and our e-commerce business . replace_table_token_25_th 71 2019 form 10-k company sales in 2019 , the increase in company sales , excluding the impact of f/x , was primarily driven by higher sales generated from our e-commerce business and the launch of the coffii & joy concept . in 2018 , the decreases in company sales , excluding the impact of f/x , were primarily driven by unit closures and refranchising of little sheep units . other revenue and other operating costs and expenses in both 2019 and 2018 , the increase in other revenue and other operating costs and expenses , excluding the impact of f/x , was primarily driven by inter-segment revenue transactions generated from our e-commerce business and daojia . g & a expenses in 2019 , g & a expenses increased mainly due to an increase of g & a expenses incurred by little sheep , partially offset by a decrease of g & a expenses incurred by daojia . in 2018 , g & a expenses increased mainly due to g & a expenses incurred by daojia . operating loss in 2019 , the increase in operating loss , excluding the impact of f/x , was primarily due to the operating loss incurred by little sheep and coffii & joy , partially offset by the improvement in operating results of our other operating segments . in 2018 , the increase in operating loss , excluding the impact of f/x , was primarily due to an increase of operating loss of daojia and a decrease of operating profit of little sheep . corporate & unallocated replace_table_token_26_th 72 2019 form 10-k ( a ) primarily includes revenues and associated expenses of transactions with franchisees and unconsolidated affiliates derived from the company 's central procurement model whereby the company centrally purchases all food and paper products from suppliers then sells and delivers to all restaurants , including franchisees and unconsolidated affiliates . amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the transactions are corporate revenues and expenses in nature . revenues from transactions with franchisees and unconsolidated affiliates in 2019 , the increase in revenues from transactions with franchisees and unconsolidated affiliates , excluding the impact of f/x , was mainly driven by system sales growth of franchisees and unconsolidated affiliates and an increase in the selling prices of food and paper products due to commodity inflation , partially offset by the impact from the acquisition of wuxi kfc .

results of operations summary all comparisons within this summary are versus the same period a year ago . all system sales growth , same-store sales growth , operating profit and net income comparisons exclude the impact of foreign currency . refer to item 1. business for a discussion on the seasonality of our operations . in 2017 , the company 's total revenues increased 10 % , or 12 % excluding the impact of f/x , attributable to solid sales performance at kfc with same-store sales growth of 5 % and 1 % same-store sales growth at pizza hut . the increase was also attributable to the increase in revenues from transactions with franchisees and unconsolidated affiliates , new-unit openings of 691 or 6 % net unit growth , bringing total store count to 7,983 across more than 1,200 cities . the increase in operating profit , excluding the impact of f/x , was driven by strong sales and margin expansion , which was also aided by the impact of retail tax structure reform . net income for 2017 decreased 20 % and , excluding the estimated one-time income tax charge of $ 164 million recorded in the fourth quarter 2017 related to the tax act , increased 24 % , excluding f/x . in 2018 , the company 's total revenues increased 8 % , or 6 % excluding the impact of f/x , attributable to solid sales performance at kfc with same-store sales growth of 2 % . the increase was also attributable to new-unit openings of 819 or 6 % net unit growth , bringing total store count to 8,484 across more than 1,200 cities . the increase in operating profit , excluding the impact of f/x , was driven by strong sales , a gain recognized from re-measurement of our previously held equity interest in wuxi kfc at fair value upon acquisition , g & a expenses savings and productivity improvements , partially offset by wage and commodity inflation , and higher investment in product upgrades and promotions .

the story_separator_special_tag you should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in part ii , item 8 , “financial statements and supplementary data” of this annual report on form 10-k. in addition to our historical consolidated financial information , the following discussion contains forward-looking statements that reflect our plans , estimates , and beliefs . our actual results could differ materially from those discussed in the forward-looking statements . see the “note about forward-looking statements” for additional information . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on form 10-k , particularly in part i , item 1a , “risk factors.” overview chegg is the leading student-first connected learning platform , empowering students to take control of their education to save time , save money and get smarter . we are driven by our passion to help students become active consumers in the educational process . our integrated platform , which we call the student hub , offers products and services that students need throughout the college lifecycle , from choosing a college through graduation and beyond . our student graph builds on the information generated through students ' and other participants ' use of our platform to increasingly enrich the experience for participants as it grows in scale and power the student hub . by helping students learn more in less time and at a lower cost , we help them improve the overall return on investment in education . during 2013 , nearly 7.0 million students used our platform and approximately 1.3 million students used our mobile applications . we have an extensive print textbook and etextbook library available for rent and sale . our chegg study service helps students solve problems and master challenging concepts on their own . we also offer free services to students , such as helping high school students find colleges and scholarship opportunities and helping college students decide which courses to take and find supplemental materials . these and other free services we offer are designed to round out the student hub as a one-stop destination for critical student needs . during 2013 , students completed 3.8 million transactions on our platform , we rented or sold over 5.5 million print textbooks and etextbooks and approximately 464,000 students subscribed to our proprietary chegg study service . our internships service , co-branded with internships.com , allows students to connect to over 70,000 internships from top companies , bringing students and employers together in one centralized location , helping students and young professionals find the right internship to jump start their career . we intend to expand our user base to reach students beyond college , including graduate and professional school students and other lifelong learners . we partner with other key constituents in the education ecosystem , such as publishers , colleges and brands , to provide a comprehensive , student-first connected learning platform . we currently source print textbooks , etextbooks and supplemental materials directly or indirectly from thousands of publishers in the united states , including pearson , cengage learning , mcgraw hill , wiley and macmillan . we are working to become the 45 digital distribution platform of choice for these publishers . we also partner with approximately 875 colleges in the united states to help them achieve greater efficiency in student recruiting by offering connections to interested students . we offer leading brands compelling marketing solutions for reaching the college demographic . as we continue to grow our platform , we believe it will become increasingly valuable to the education ecosystem and benefit publishers , content providers , colleges , educators and brands as they connect to our student user base . our digital platform is experiencing rapid growth . in 2013 , 2012 and 2011 , we generated net revenues of $ 255.6 million , $ 213.3 million and $ 172.0 million , respectively . during the same periods , we had net losses of $ 55.9 million , $ 49.0 million and $ 37.6 million , respectively . we plan to continue to invest in the long-term growth of the company , particularly further investment in the technology that powers the student hub and the student graph and in the development of products and services that serve students . as a result of our investment philosophy , we can not assure you that our newer products and services , or any other products and services we may introduce or acquire , will be integrated effectively into our business , achieve or sustain profitability or achieve market acceptance at levels sufficient to justify our investment . our strategy for achieving and maintaining profitability is centered upon our ability to expand the number of students using our products and services and increase student engagement with our connected learning platform . for the foreseeable future we expect to continue to invest in our print textbook business as a means of expanding student acquisition and generating operating cash flow . to deepen student engagement we will continue to invest in the expansion of our non-print products and digital services to provide a more compelling and personalized solution . we believe this expanded and deeper penetration of the student demographic will allow us to drive growth in our enrollment and brand marketing services . in addition , we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that , together with increased contributions of higher margin non-print products and digital services , will enable us to accomplish profitability and become cash-flow positive for the long-term . story_separator_special_tag for non-print products and digital services , students typically pay to access etextbooks for the academic term or subscribe for other services such as chegg study on a monthly or annual basis , while colleges subscribe to our enrollment marketing services and brands pay us depending on the nature of the campaign . while none of these offerings individually has amounted to more than 10 % of our net revenues to date , in the aggregate these offerings amounted to 21 % of net revenues in 2013 , up from less than 1 % in 2010. seasonality of our business a substantial majority of our revenue is recognized ratably over the term the student rents our textbooks or has access to our non-print products and digital services . this generally results in our highest revenue in the fourth quarter as it reflects more days of the academic year and our lowest revenue in the second quarter as colleges conclude their academic year for summer and there are fewer days of rentals . the variable expenses associated with our shipments of textbooks and marketing activities are highest in the first and third quarters as shipping and other fulfillment costs and marketing expenses are expensed when incurred , generally at the beginning of academic terms . as a result of these factors , the most concentrated periods for our revenue and expenses do not necessarily coincide , and comparisons of our quarterly operating results on a sequential basis may not provide meaningful insight into our overall financial performance . 47 components of results of operations net revenues we derive our revenue from the rental or sale of print textbooks and from non-print products and digital services , net of allowances for refunds or charge backs from our payment processors , who process payments from credit cards , debit cards and paypal . we primarily generate revenue from the rental of print textbooks and to a lesser extent , through the sales of print textbooks through our website purchased by us on a just-in-time basis . rental revenue is recognized ratably over the term of the rental period , generally two to five months . revenue from selling textbooks on a just-in-time basis is recognized upon shipment and has comprised less than 6 % of our consolidated revenues on average over the three years ended december 31 , 2013. our customers pay for the rental and sale of print textbooks on our website primarily by credit card , resulting in immediate settlement of our accounts receivable . net revenues from the rental or sale of print textbooks represented 79 % , 87 % and 93 % of our net revenues in 2013 , 2012 and 2011 , respectively , reflecting increasing growth in our non-print products and digital services business . we also generate revenue from non-print products and digital services that include etextbooks , supplemental materials and our chegg study service that we offer to students , enrollment marketing services that we offer to colleges and advertising services that we offer to brands . non-print products and digital services are offered to students through monthly or annual subscriptions or memberships , and we recognize revenue ratably over the subscription or membership period . we generally offer memberships to our chegg study service for $ 14.95 per month and $ 74.95 per year but may change our pricing for this service in the future . as with the revenue from print textbooks rentals , revenue from etextbooks is recognized ratably over the contractual period , generally two to five months or at time of the sale , and our customers pay for these services through payment processors , resulting in immediate settlement of our accounts receivable . for additional information about these products and services and other services that we offer to students for free , such as our courses service and college admissions and scholarship services , see “business—the student hub.” marketing services include enrollment marketing services and brand advertising , which we offer either on a subscription or on an a la carte basis . enrollment marketing services connect colleges and graduate schools with students seeking admission or scholarship opportunities at these institutions . brand advertising offers brands unique ways to connect with students . revenue is recognized ratably or as earned over the subscription service period , generally one year . revenue from enrollment marketing services or brand advertising delivered on an a la carte basis , without a subscription , is recognized when delivery of the respective lead or service has occurred . for these services , we bill the customer at the inception , over the term of the customer arrangement or as the services are performed . upon satisfactory assessment of creditworthiness , we generally grant credit to our enrollment marketing services and brand advertising customers with normal credit terms , typically 30 days . deferred revenue primarily consists of advance payments from students related to rentals , subscriptions and memberships that have not been recognized and marketing services that have yet to be performed . deferred revenue is recognized as revenue ratably over the term or when the services are provided and all other revenue recognition criteria have been met . cost of revenues our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and services . cost of revenues related to print textbooks include textbook depreciation expense , shipping and other fulfillment costs , the cost of textbooks sold , payment processing costs , write-offs and allowances related to the textbook library and all expenses associated with our distribution and customer service centers , including personnel and warehousing costs . the cost of textbooks sold , shipping and other fulfillment costs and payment processing expenses are recognized upon shipment , while textbook depreciation is recognized 48 under an accelerated method over the life of the textbook .

results of operations the following table summarizes our historical consolidated statements of operations ( in thousands ) : replace_table_token_3_th 51 the following table summarizes our historical consolidated statements of operations data as a percentage of net revenues for the periods shown : replace_table_token_4_th years ended december 31 , 2013 , 2012 and 2011 net revenues the following table sets forth our net revenues for the periods shown , in addition to detail of print textbooks and non-print products and digital services ( dollars in thousands ) : replace_table_token_5_th net revenues in 2013 increased $ 42.2 million , or 20 % , compared to 2012. the year-over-year increase in net revenues was the result of an 86 % increase in non-print products and digital services due to growth in new memberships for our chegg study service , growth in our enrollment marketing services as we reach more universities , and an increase in etextbook volumes . non-print products and digital services represented 21 % of net revenues during 2013 and 13 % of net revenues during 2012. the increase was also the result of a 16 % increase in print textbook rental volumes , partially offset by a reduction in price per rental unit . we anticipate that our non-print products and digital services will continue to grow at a rate greater than our overall revenue growth in future periods . net revenues in 2012 increased $ 41.3 million , or 24 % , compared to 2011. the increase in net revenues was due primarily to an increase in print textbook volumes of 22 % , resulting from an increase in rental units .

” our actual results may differ materially from those contained in or implied by any forward-looking statements . 31 company overview commercial vehicle group , inc. ( through its subsidiaries ) is a leading supplier of electrical wire harnesses , seating systems , and a full range of other cab related products for the global commercial vehicle markets , including the medium- and heavy-duty truck , medium-and heavy-construction vehicle , military , bus , agriculture , specialty transportation , mining , industrial equipment and off-road recreational markets . we have manufacturing operations in the united states , mexico , china , united kingdom , czech republic , ukraine , thailand , india and australia . our products are primarily sold in north america , europe , and the asia-pacific region . we are differentiated from automotive industry suppliers by our ability to manufacture low volume , customized products on a sequenced basis to meet the requirements of our customers . we believe our products are used by a majority of the north american md/hd truck and many medium- and heavy-duty construction vehicle original equipment manufacturers ( “ oems ” ) , and to a lesser extent other makers of industrial equipment . in february 2019 , the company announced a strategic reorganization of its operations into two reportable segments , the electrical systems segment and the global seating segment . the electrical systems segment , includes electrical wire harnesses and panel assemblies , trim systems and components ( `` trim '' ) , cab structures and sleeper boxes , mirrors , wipers and controls . the global seating segment , includes seats and seating systems ( `` seats '' ) , office seating , and aftermarket seats and components . this reorganization will allow the company to better focus its business along product lines , as opposed to end markets , which the company believes will enhance the effectiveness of seeking out growth opportunities and shareholder value . with respect to the electrical systems segment , we believe there may be opportunities to realize certain synergies amongst the products in this segment , especially with respect to electrical wire harnesses and panel assemblies , trim systems and components , and mirrors , wipers , and controls . with respect to the seating segment , we believe combining the seating operations would provide us opportunities to leverage resources and best practices in engineering , product development , and manufacturing , while eliminating redundancies and providing a global , more scalable platform for effective and efficient operations . business overview for the year ended december 31 , 2018 , approximately 46 % of our revenue was generated from sales to north american md/hd truck oems . our remaining revenue was primarily derived from sales to oems in the global construction equipment market , aftermarket , oe service organizations , military market and other specialty markets . demand for our products is driven to a significant degree by preferences of the end-user of the vehicle , particularly with respect to heavy-duty trucks . unlike the automotive industry , heavy-duty truck oems generally afford the end-user the ability to specify many of the component parts that will be used to manufacture the vehicle , including a wide variety of cab interior styles and colors , brand and type of seats , type of seat fabric and color , and specific interior styling . in addition , certain of our products are only utilized in heavy-duty trucks , such as our storage systems , sleeper boxes and privacy curtains . to the extent that demand for higher content vehicles increases or decreases , our revenues and gross profit will be impacted positively or negatively . we generally compete for new business at the beginning of the development of a new vehicle platform and upon the redesign of existing programs . new platform development generally begins one to three years before the marketing of such models by our customers . contract durations for commercial vehicle products generally extend for the entire life of the platform . several of the major truck makers have upgraded their truck platforms and we believe we have maintained our share of content in these platforms . we continue to pursue opportunities to expand our content . demand for our heavy-duty ( or `` class 8 '' ) truck products is generally dependent on the number of new heavy-duty trucks manufactured in north america , which in turn is a function of general economic conditions , interest rates , changes in government regulations , consumer spending , fuel costs , freight costs , fleet operators ' financial health and access to capital , used truck prices and our customers ' inventory levels . new heavy-duty truck demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy , which generates a significant portion of the freight tonnage hauled by commercial vehicles . according to a february 2019 report by act research , a publisher of industry market research , north american class 8 production levels are expected to increase to 335,000 units in 2019 , decrease to 243,000 units in 2020 , and then increase to 317,000 units in 2023. we believe the demand for north american class 8 vehicles in 2019 will be between 330,000 to 350,000 units . act research estimated that the average age of active north american class 8 trucks was 11.2 and 11.3 years in 2018 and 2017 , respectively . as vehicles age , their maintenance costs typically increase . act research forecasts that the vehicle age will decline as aging fleets are replaced . north american medium-duty ( or `` class 5-7 '' ) truck production steadily increased from 233,000 units in 2016 to 272,000 units in 2018. we believe the demand for class 5-7 vehicles in 2019 will be stable . according to a february 2019 report by act research , north american class 5-7 truck production is expected to gradually increase to 280,000 units in 2023 . 32 demand for our construction and agricultural equipment products is dependent on vehicle production . story_separator_special_tag moreover , results for the year ended december 31 , 2018 include a $ 4.2 million tax benefit recorded as an adjustment to the $ 4.0 million provisional tax expense accrued during the year ended december 31 , 2017 for the estimated impact of the deemed repatriation of accumulated untaxed earnings of the company 's foreign subsidiaries . the $ 4.2 million tax benefit is primarily attributable to foreign tax credits that were generated as a result of the deemed repatriation of accumulated untaxed earnings of the company 's foreign subsidiaries which were not provided for in the provisional $ 4.0 million tax expense recorded during the year ended december 31 , 2017 due to the lack of regulatory guidance on how certain provisions of the u.s. tax reform should be implemented . excluding the non-recurring impact of the u.s. tax reform , our provision for income taxes would have been $ 13.2 million for the year ended december 31 , 2018 compared to $ 4.2 million for the year ended december 31 , 2017. the year over year change 34 in tax provision , excluding the impact of the u.s. tax reform , was primarily attributable to the increase in worldwide pre-tax earnings during the year ended december 31 , 2018 and unfavorable impact of the new global intangible low-taxed income ( “ gilti ” ) rules enacted under the u.s. tax reform . for additional information regarding the income tax provision refer to note 9 to our consolidated financial statements in item 8 in this annual report on form 10-k. s egment r esults in the quarter ended december 31 , 2018 , we completed a strategic reorganization of our operations into two business segments , electrical systems and global seating . as a result of the strategic reorganization , we restated prior period segment information to conform to the current period segment presentation . see note 10 of the consolidated financial statements for more information . electrical systems segment results the table below sets forth certain electrical systems segment operating data for the periods indicated ( dollars are in thousands ) : replace_table_token_8_th revenues . the increase in electrical systems segment 2018 revenues is primarily a result of : a $ 63.0 million , or 33 % , increase in oem north american md/hd truck revenues ; a $ 11.0 million , or 13 % , increase in oem construction equipment revenues ; a $ 10.0 million , or 23 % , increase in aftermarket revenues ; a $ 3.6 million , or 4 % , increase in other revenue ; and a $ 9.2 million , or 41 % , decrease in oem recreational and specialty revenues . electrical systems segment 2018 revenues were favorably impacted by foreign currency exchange translation of $ 4.5 million , which is reflected in the changes in revenue above . gross profit . the increase in gross profit was primarily the result of the increase in sales volume . included in gross profit is cost of revenues , which increased $ 55.2 million , or 14.4 % , as a result of an increase in raw material and purchased component costs of $ 44.4 million , wages and benefits of $ 4.9 million and overhead expenses of $ 5.9 million . commodity and other material inflationary pressures and difficult labor markets adversely affected cost of revenues . cost control and cost recovery initiatives , including pricing adjustments , reduced the impact of these cost pressures on gross profit . the year ended december 31 , 2017 , included costs of approximately $ 10.0 million arising from a labor shortage in our north american wire harness business . also benefiting gross profit was the completion of facility restructuring in late 2017 which included $ 1.8 million in charges relating to facility restructuring and related costs . there were no facility restructuring and related costs in 2018. as a percentage of revenues , gross profit for the year ended december 31 , 2018 was 14.7 % compared to 12.0 % for the year ended december 31 , 2017 . selling , general and administrative expenses . electrical systems segment selling , general and administrative expenses decreased modestly in 2018 compared to 2017 , notwithstanding the increase in revenues , reflecting a focus on cost discipline . global seating segment results the table below sets forth certain global seating segment operating data for the periods indicated ( dollars are in thousands ) : replace_table_token_9_th revenues . the increase in global seating segment 2018 revenues is primarily a result of : 35 a $ 43.4 million , or 34 % , increase in oem north american md/hd truck revenues ; a $ 13.9 million , or 17 % , increase in oem construction equipment revenues ; a $ 7.2 million , or 9 % , increase in aftermarket revenues ; and a $ 3.5 million , or 9 % , increase in revenues other revenues . global seating segment 2018 revenues were favorably impacted by foreign currency exchange translation of $ 3.6 million , which is reflected in the changes in revenue above . gross profit . the increase in gross profit was primarily attributable to the increase in sales volume . included in gross profit is cost of revenues , which increased $ 54.5 million , or 18.9 % , as a result of an increase in raw material and purchased component costs of $ 41.9 million , wages and benefits of $ 4.8 million and overhead expenses of $ 7.7 million . commodity and other material inflationary pressures and difficult labor markets adversely affected cost of revenues . cost control and cost recovery initiatives , including pricing adjustments , reduced the impact of these cost pressures on gross profit . as a percentage of revenues , gross profit was 13.6 % for the year ended december 31 , 2018 compared to 12.4 % for the year ended december 31 , 2017 . selling , general and administrative expenses .

consolidated results the table below sets forth certain consolidated operating data for the periods indicated ( dollars are in thousands ) : replace_table_token_10_th revenues . the increase in consolidated revenues for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 primarily resulted from increased heavy-duty truck production volumes in north america and an improvement in the global construction equipment markets . more specifically , the increase resulted from : a $ 41.6 million , or 15 % , increase in oem north american md/hd truck revenues ; a $ 40.9 million , or 32 % , increase in construction equipment revenues ; a $ 4.6 million , or 4 % , increase in aftermarket revenues ; and a $ 6.0 million , or 4 % , increase in other revenues . 2017 revenues were favorably impacted by foreign currency exchange translation of $ 0.5 million , which is reflected in the change in revenue above . gross profit . the increase in gross profit is attributable to the increase in sales volume . cost of revenues increased $ 88.1 million , or 15.3 % , resulting from an increase in raw material and purchased component costs of $ 60.6 million , wages and benefits of $ 12.1 million and overhead expenses of $ 15.4 million . commodity and other material inflationary pressures and difficult labor markets adversely affected cost of revenues . the labor shortage in our north american wire harness business adversely impacted cost of revenue by approximately $ 10 million in 2017. additionally , 2017 results included $ 1.9 million in charges relating to facility restructuring and related costs compared to $ 3.4 million in the prior year period . as a percentage of revenues , gross profit was 12.1 % for the year ended december 31 , 2017 compared to 13.1 % for the year ended december 31 , 2016. selling , general and administrative expenses .